SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-7172 BRT REALTY TRUST - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Massachusetts 13-2755856 - ------------------------------------------------------------------------------ (State or other jurisdiction (I.R.S. employer of incorporation or organization) identification no.) 60 Cutter Mill Road, Great Neck, New York 11021 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 516-466-3100 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ------------------------------------------------------------------------------- Shares of Beneficial New York Stock Exchange Interest, $3.00 Par Value Securities registered pursuant to Section 12(g) of the Act: NONE (Title of Class) Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in PART III of this Form 10-K or any amendment to this Form 10-K [ ] The aggregate market value of voting stock of the registrant held by non-affiliates was approximately $21,205,000 as of December 1, 1998. As of December 1, 1998 the registrant had 7,165,263 Shares of Beneficial Interest outstanding (excluding treasury shares). Documents Incorporated By Reference PART III Item 10 - Directors and Executive Officers To be included in of the Registrant the Proxy Statement to be filed pursuant Item 11 - Executive Compensation to Regulation 14A not later than Item 12 - Security Ownership of Certain January 28, 1999, Beneficial Owners and Management except for information concerning executive Item 13 - Certain Relationships and Related officers, which is Transactions included in Part I. PART IV - See Item 14. PART I Item l. Business. -------- General - ------- BRT Realty Trust ("BRT") is a real estate investment trust organized in 1972 under the laws of the Commonwealth of Massachusetts. Its primary business activity is to originate and hold for investment for its own account, senior real estate mortgage loans secured by income producing real property and, to a lesser extent, junior real estate mortgage loans secured by income producing real property and senior mortgage loans secured by undeveloped real property. BRT emphasizes loans with terms ranging from six months to three years to persons requiring short term funds for the acquisition of a property, for the purchase (normally at a discount) of a mortgage applicable to a property owned by the borrower, for rehabilitating a property or for converting a commercial property to residential use. BRT does not finance new construction. At September 30, 1998 BRT had $51,175,000 principal amount of loans outstanding, 79% of which were secured by properties located in New York City, Nassau, Suffolk and Westchester (New York) counties. The major portion of the mortgage loans originated and held by BRT bear interest at a floating rate related to the prime rate and the interest rate adjusts when the prime rate changes. Since borrowings BRT makes under its outstanding Credit Agreement (discussed below under the caption "Investment Policy") are related to prime or Libor, BRT minimizes interest rate fluctuation risks. Interest on mortgage loans held by BRT is payable monthly and BRT usually holds escrows, also paid monthly, for real estate taxes. BRT receives an origination fee on all mortgage loans it originates and an extension fee in connection with the extension of most loans. These fees are paid at the time a loan is funded or extended. Origination and extension fees are taken into income over the life of the commitment and/or the loan. If a loan is not taken by the borrower, the fee is recognized at the expiration of the commitment. A non-refundable processing fee is received on substantially all commitments. Commencing in April, 1998, BRT through BRT Funding Corp. (a wholly-owned subsidiary) started originating longer term senior real estate mortgage loans secured by income producing real property, primarily multi-family properties. These loans provide for a fixed rate of interest, have an initial five-year term and provide for amortization of principal over 20 to 25 years. The borrower is usually afforded the option to extend the loan for an additional five years. BRT Funding Corp. receives an origination fee and an additional fee when the loan is extended. BRT is exploring certain options among which are selling senior participations in these loans, or selling these loans entirely to other institutions. At September 30, 1998 $8,156,000 principal amount of these "conventional type" loans was outstanding representing approximately 16% of the outstanding loan balance. At September 30, 1998 BRT's mortgage portfolio consisted of 49 mortgage loans totaling $49,134,000 in aggregate principal amount (net of allowances of $2,041,000), representing 57% of BRT's total assets. At September 30, 1998 all outstanding loans were on an earning basis. Of the principal amount of loans outstanding at September 30, 1998, 96% represented first mortgage loans and 4% (2 loans) represented second mortgage and wrap-around loans. Substantially all of the mortgage loans originated by BRT in the year ended September 30, 1998 were first mortgage loans. In the year ended September 30, 1998, in addition to originating mortgage loans, BRT was engaged in managing its loan portfolio, supervising and maintaining real estate owned by BRT (real estate acquired by BRT in foreclosure actions or by deed in lieu of foreclosure) and leasing and selling real estate owned. Approximately, 20% of BRT's total assets at year ended September 30, 1998 or an aggregate of $16,886,000 (after valuation allowances) was represented by real estate assets. Approximately 15% of the BRT's net investment assets (either mortgages or real estate assets) related to cooperative apartments at September 30, 1998. With respect to real estate which BRT has taken back in foreclosure or deed in lieu thereof, it is BRT's policy to offer for sale all such real estate at prices which management believes represents fair value in the geographical area in which the property is located. If BRT's management determines that it will not, in the near term, be able to sell a specific parcel of real estate at an acceptable price, management may seek first mortgage financing secured by that specific parcel of real estate. In many instances, BRT, through an independent contractor, has caused a property to be renovated, engaged in leasing activities, negotiated and completed the sale of real estate owned, (if the selling price is deemed acceptable by management) and provided purchase money financing in connection with the sale of real estate owned. In the year ended September 30, 1998 BRT disposed of real estate, other than cooperative apartments, having an aggregate net book value of $3,442,000, for an aggregate consideration of $5,809,000 resulting in a gain on sale of $2,367,000. During the year ended September 30, 1998 BRT sold shares (and assigned the related proprietary leases) in cooperative apartments resulting in net proceeds of approximately $2,279,000. In the year ended September 30, 1998, BRT sold to an unrelated lending institution, on a non-recourse basis, its portfolio of mortgages receivable taken back in connection with the sale of cooperative apartments. The sale of these mortgages receivable, aggregating $1,542,000, resulted in a gain to BRT of $49,000. Investment Policy - ----------------- BRT's current investment policy emphasizes short-term senior real estate mortgage loans secured by first liens on income producing real property. Commencing in April, 1998, BRT expanded its investment policy by originating conventional senior real estate loans secured by income producing real property, primarily multi-family residential properties. From time-to-time, BRT will make a junior real estate loan secured by income producing real property and senior real estate mortgage loans secured by undeveloped real property. Junior mortgage loans are subordinate to one or more prior liens. Junior mortgage loans may be wrap-around loans which are subject to prior underlying mortgage indebtedness. In the case of a wrap-around mortgage loan, the principal amount on which interest payable is calculated is the outstanding balance under the prior existing mortgage loan plus the amount actually advanced under the wrap-around loan. The terms of a wrap-around loan normally requires that a borrower make principal and interest payments directly to BRT and BRT in turn pays the holder of the prior mortgage loan. It is not the present intent of BRT's management to cause BRT to invest in any mortgages secured by property located outside the United States and Puerto Rico. BRT has no fixed policy or limitation upon the amount or percentage of its assets which it may invest in a single mortgage loan. However, as a general business practice, BRT does not make loans to one borrower where the amount involved exceeds 10% of BRT's total assets. During the year ended September 30, 1998 the average loan originated was approximately $1,300,000. Loan approvals are based on a review of a loan application that is prepared and submitted by the borrower, site visits to the property by at least one of the officers of BRT or BRT Funding Corp., a title review of the underlying property, in-house property appraisals, a review of the financial statements of a prospective borrower, an engineering inspection, a Phase I environmental report, and final approval by a loan committee made up of the executive officers of BRT. BRT does not require a property appraisal by an independent appraiser. BRT uses its own capital for investing in mortgage loans. In addition it has arranged a credit facility to make funds available for real estate mortgage lending. In October 1996 BRT entered into a revolving credit facility with Credit Suisse First Boston Mortgage Capital LLC., which provides that BRT may borrow a maximum of $25,000,000 on a revolving basis, i.e., funds can be borrowed, repaid and borrowed again. The credit facility matured October 17, 1998 and BRT pursuant to the terms of the Credit Agreement extended the loan for a six month period, upon the payment of a 1/4 of 1% ($62,500) extension fee. BRT has the right to extend the Credit Agreement for an additional six months on 30-days prior notice and the payment of an additional extension fee of 1/4 of 1%. No new borrowings may be made during the second extension period. BRT has the right to reduce the availability under the Credit Agreement to $15,000,000 and First Boston has the right to lower the commitment to $20,000,000 under limited circumstances. BRT pays a commitment fee under the credit facility of 1/2 of 1% of the difference between the daily average outstanding loan balance and the commitment amount. If the loan balance is less than $14,000,000, $2,084 per month is added to the commitment fee. Borrowings under the Credit Agreement bear interest at the lower of Libor plus 3% or prime plus 1%, adjusted monthly. The loan is collateralized by specific receivables and BRT's equity in specific real property and the loan amount can never exceed 75% of the agreed upon collateral amount. At any time, BRT can substitute collateral for pledged collateral. The loan amount available at September 30, 1998 was $19,500,000. Most of BRT's subsidiaries have guaranteed the loan. BRT is required to maintain a $50,000,000 tangible net worth and the Credit Agreement also provides that its net worth minus the net worth of any non-guaranteeing subsidiary must exceed $40,000,000. The Credit Agreement prohibits BRT from obtaining recourse financing but it is permitted to obtain non-recourse mortgage financing. As of September 30, 1998 there was $5,500,000 outstanding under the Credit Agreement. The mortgage loans which BRT originates are not ordinarily insured or guaranteed. BRT will obtain a guarantee or "walk-away guarantee" from the principal or principals of the borrower for most loans originated. A "walk-away guarantee" provides in substance that the guarantee of the guarantor terminates if the borrower conveys the property to BRT, provided that at the time of conveyance interest and amortization payments to BRT are current, real estate taxes are current and outstanding bills related to the property's operations are current. The "walk-away guarantee" is intended to provide an incentive to the principal of a borrower to deed a property to BRT, thereby eliminating the need for a foreclosure, in situations in which the borrower is not financially able or capable of operating the property and runs the risk of losing the property in a foreclosure. In the event of a default by the borrower on a mortgage loan, BRT will have to foreclose the mortgage or protect its investment through negotiations with the borrower and or other interested parties which may involve further cash outlays. During a mortgage foreclosure proceeding BRT will usually not receive interest payments under its mortgage. Foreclosure proceedings in certain jurisdictions, including New York State, can take a considerable period of time (up to two years in many instances). In addition, if the borrower files for protection under the federal bankruptcy laws during the foreclosure process, delays may be greater than two years. In the usual foreclosure proceeding, BRT will seek to have a receiver appointed by the Court to preserve the rental income stream and the maintenance of the property. At the conclusion of the foreclosure process (after the property is sold at auction to a third party purchaser or acquired by BRT) the amounts collected by the receiver, less costs and expenses of operating the property and the receiver's fees, are paid over to BRT. During the year ended September 30, 1998 there were no foreclosure proceedings commenced or pending. The mortgages securing BRT's mortgage loans may in certain circumstances be subordinate to mechanics' liens or governmental liens and in instances in which BRT invests in junior mortgage loans or wrap-around loans to liens of senior mortgages. At September 30, 1998 approximately 4% of BRT's real estate mortgages were represented by junior or wrap-around mortgage loans. In the event the underlying asset value is not sufficient to satisfy both the senior and junior lienholder, the junior lienholder could lose all or a portion of its investment. In certain cases, BRT may find it advisable to make additional payments in order to maintain the current status of prior liens or to discharge them entirely or to make working capital advances to support current operations. It is possible that the total amount which may be recovered in cases in which BRT holds a junior lien may be less than its total investment less allowances for possible losses. Current Loan Status - ------------------- As of September 30, 1998 BRT had 49 mortgage loans in its mortgage portfolio, totaling $51,175,000 in aggregate principal amount and $49,134,000 after allowances for possible losses. During the year ended September 30, 1998 $31,716,000 of mortgage loans were originated and $20,491,000 of outstanding loans were repaid. The three largest mortgage loans outstanding, at September 30, 1998 represent 3.7%, 3.6%, and 3.6%, respectively of the BRT's total assets. No other mortgage loan accounted for more than 3% of BRT's total assets at September 30, 1998. Information regarding BRT's mortgage loans outstanding at September 30, 1998: No. Prior of Total(1) Liens Loans -------- ----- ----- (Amounts in thousands) First Mortgage Loans: Long-term: Residential 11,117 14 Shopping centers 3,487 4 Hotel 750 1 Short-term (five years or less): Shopping centers/retail 8,856 9 Industrial buildings 7,593 3 Office buildings 7,351 4 Residential 8,756 10 (multiple family units) Hotel 1,008 1 Miscellaneous 242 1 Second Mortgage Loans and wraparound mortgages 2,015 9,334 2 ------ ----- - 51,175 9,334 49 (1) All loans outstanding at September 30, 1998 were earning interest. At the year ended September 30, 1998 BRT had an allowance for possible losses on its real estate mortgage loans of $2,041,000 compared to an allowance of $5,956,000 at September 30, 1997. In determining the allowance for possible loan losses, BRT takes into account numerous factors including a market evaluation of the underlying collateral, the underlying property's estimated cash flow during the projected holding period and estimated sales value computed by applying an expected capitalization rate to the stabilized net operating income of the specific property, less estimated selling costs. BRT also takes into account the extent of liquidity in the real estate industry, particularly in the New York metropolitan area, where approximately 79% of the portfolio is located. Management reviews the loan portfolio on a quarterly basis to determine if allowances are needed. When a mortgage loan is in default, BRT may acquire the underlying property through foreclosure or may take other legal action as is necessary to protect its investment. In negotiated workouts BRT seeks to acquire title to a property and in certain cases affords the borrower the opportunity to reacquire the property at a fixed price over a specified period of time. Real Estate Assets - ------------------ The only significant real property owned by BRT (significant meaning a property with a book value amounting to 10% or more of total assets) at September 30, 1998 was the following property located in Dover, Delaware: A 474,000 square foot enclosed facility (formerly a shopping mall) owned in fee, containing a combination of both office and retail space located on approximately 58 acres. The total site contains approximately 90 acres. The property is located on Route 113 approximately two miles from the Delaware state capital complex. In addition to the enclosed facility there are five free standing buildings on the property containing approximately 55,000 square feet of rentable space. BRT has converted the two "anchor" locations at this center to office space and has entered into a 10 year lease expiring December 31, 2004 (with options to renew totaling ten years) with a major insurance company for approximately 68,613 square feet of space, and a 10 year lease expiring March 31, 2005 (with options to renew totaling ten years) with a major bank for 79,000 square feet of space. Each of the two tenants at the "anchor" locations has an option to expand their space and a right to early termination. If the insurance company exercises its early termination right, which it can do at any time, the tenant must pay to BRT an amount equal to the rentals due to the lease expiration date, discounted to present value. The bank has an early termination right, during its sixth lease year. If the bank exercises its early termination right, it must pay to BRT a specified termination fee. No other tenant occupies ten percent or more of the rentable space at this facility. Although BRT does not have any specific proposal or plans to renovate, improve or develop the property, it will construct a new building on the property or renovate mall space at the property in order to lease to a qualified tenant. Tenants occupying outparcels at the property include an automotive center, a day care center, the Delaware National Guard and a credit union. There is no major retail tenant at the property. In the opinion of management the property is adequately covered by insurance. The occupancy rate of this property (including the five free standing buildings) since BRT acquired title in October 1993 and the effective annual rental per square foot is as follows: Fiscal Year End Base Rental per September 30, Occupancy Rate square foot occupied ------------- -------------- -------------------- 1994 (from Oct. 1993) 38% $5.07 1995 53% $5.08 1996 63% $6.38 1997 66% $5.61 1998 63% $6.56 The schedule of lease expirations for each of the next ten fiscal years for this property (including the five outparcels) is as follows: Fiscal year ended # of Tenants whose Total Area Annual Base %of Gross Annual September 30, leases expire* Covered Rental Base Rental ------------- -------------- ------- ------ ----------- 1999 18 42,997 $276,322 15.1 2000 12 42,016 528,771 28.9 2001 3 6,025 67,708 3.7 2002 2 3,700 20,000 1.1 2003 3 26,919 142,297 7.8 2004 1 4,990 58,028 3.2 2005 2 147,613 699,589 38.2 2006 0 - - - 2007 0 - - - 2008 0 - - - *All information provided assumes that the two major anchor tenants who occupy a total of 147,613 square feet do not exercise their right to terminate prior to lease expiration. The fiscal year ended September 30, 1999 includes all month to month tenants and tenants occupying space under short term leases. BRT has converted many tenants to month to month tenancies and entered into short term leases to provide it with the flexibility to assemble large blocks of space for larger users of space. BRT is actively marketing this property and has signed an exclusive agreement with a national real estate brokerage firm to sell this property. Accordingly, this property is held for sale and is not being depreciated for accounting purposes. The realty tax rate in Dover is based on applying four mil rates to the assessed valuation. Real estate taxes with respect to this property were $135,000 for the last tax year. In July 1995 two separate but related loans aggregating $9,250,000 were closed with respect to this property; one loan in principal amount of $6,000,000 is collateralized by a first mortgage on the building occupied by the insurance company (an additional $1,000,000 can be drawn down for tenant improvements if the insurance company exercises any of its expansion options) and the other loan in the principal amount of $3,250,000 is collateralized by the facility leased to the bank. Both loans are cross collateralized and are secured by a mortgage on the balance of the enclosed portion of the property. The loans mature on July 1, 2005, provide for a fixed interest rate of 8.07% and provide an amortization schedule intended to fully amortize the loan over the ten year period. The principal balance due on these mortgages at September 30, 1998 was $7,424,000. BRT may prepay this mortgage loan, in full or in part at any time provided that BRT pays a prepayment premium calculated to give the Lender a specified yield to maturity (discounted to present value). The following sets forth information concerning other real estate owned by BRT (such real estate not being significant) as of September 30, 1998: Rock Springs, Wyoming --------------------- A 151,105 square foot shopping center, consisting of 138,191 square feet of retail space (30 retail stores), 12,914 square feet of office space, a free standing restaurant and a free standing film kiosk. BRT holds a leasehold interest in this property subject to a first leasehold mortgage which matures on November 1, 2000 and provides for interest at the rate of 8.44% per annum. At September 30, 1998 there was a principal balance of $1,070,000 due on the leasehold mortgage and on the maturity date there will be $548,000 due thereon. The retail space was approximately 99% occupied and the office space was approximately 77% occupied at September 30, 1998. Cooperative Apartment Units --------------------------- At September 30, 1998, BRT owned 106 cooperative apartment units having a book value of $1,769,000 in 3 separate projects: one containing 5 units located in Nassau County, one containing 100 units located in Manhattan, and 1 unit located in Suffolk County, New York. Since the market for the sale of cooperative apartment units in New York City and Long Island has been very competitive, BRT's policy has been to lease the units owned by it with a number of selective units being held vacant for sale. At September 30, 1998, 93% of the units were occupied. During the year ended September 30, 1998 the sales market for cooperative units in the New York metropolitan area improved significantly and in the year ended September 30, 1998 BRT sold 413 cooperative apartment units, including the sale in bulk of 386 units. Competition - ----------- With respect to it's real estate lending activities, BRT competes for acceptable investments with other REITs, commercial banks, savings and loan associations, conduits, pension funds and mortgage banking firms. Competition for mortgage loans is highly competitive, with lenders competing on rate, fees, term and service. With respect to real estate acquired by foreclosure and held for sale, BRT competes for tenants and potential purchasers of such properties with owners of comparable real property in the areas in which the properties are located. With respect to the cooperative units owned by BRT, there is a great deal of competition for purchasers and, pending the sale of cooperative units, substantially all the units are rented for terms of up to two years, although it is noted that the market for sale of cooperative apartment units improved significantly in 1998. At present, the apartment rental market in the areas in which BRT owns cooperative apartments is satisfactory. Employees - --------- BRT has 10 full-time employees, of which seven are engaged primarily in loan origination activities. In addition, it has entered into an agreement with REIT Management Corp. pursuant to which REIT Management acts as its advisor. At the present time, REIT Management, subject to supervision of BRT's Board of Trustees, administers BRT's portfolio of mortgages receivables, engages in negotiations in workout situations with respect to non-earning and delinquent loans and supervises and provides support services in litigation activities. REIT Management also supervises the maintenance, leasing, sale and/or financing of real estate owned by BRT. In addition, REIT Management participates in originating, investigating and evaluating investment opportunities. Reference is made to BRT's Proxy Statement to be filed pursuant to Regulation 14A for information concerning the amount and method of computing REIT Management's fee. In the years ended September 30, 1998 and 1997, BRT engaged entities, including entities affiliated with REIT Management, to manage properties acquired by BRT in foreclosure or deed in lieu of foreclosure. The management services include, among other things, rent billing and collection, accounting, maintenance, contractor negotiation, construction management, sales and leasing and mortgage brokerage. In management's judgment the fees paid to REIT Management and entities affiliated with REIT Management are competitive with or less than fees that would be charged for comparable services by unrelated entities. The management services diminished significantly from the fiscal year ended September 30, 1997 to the fiscal year ended September 30, 1998 as BRT disposed of properties and cooperative apartments that it acquired in foreclosure or by deed in lieu of foreclosure during the years 1990 to 1993. EXECUTIVE OFFICERS OF REGISTRANT -------------------------------- The following sets forth the executive officers of BRT. The business history of officers who are also Trustees will be provided in BRT's proxy statement to be filed pursuant to Regulation 14A not later than January 28, 1999. Name Office - ---- ------ Fredric H. Gould (*) Chairman of the Board and Chief Executive Officer Jeffrey A. Gould (*) President Simeon Brinberg Senior Vice President; Secretary Eugene J. Keely Vice President Matthew J. Gould (*) Senior Vice President David W. Kalish Senior Vice President, Finance George E. Zweier Vice President, Chief Financial Officer Mark H. Lundy Vice President Joshua D. Gleiber Vice President Seth Kobay Vice President; Treasurer (*)Fredric H. Gould is Jeffrey A. and Matthew J. Gould's father. Simeon Brinberg (age 65), has been Secretary of BRT since February, 1983 and Senior Vice President since November, 1988. From 1961 to September, 1988 he was a partner in the law firm of Bachner, Tally, Polevoy, Misher & Brinberg and its predecessor. In October, 1988 Mr. Brinberg became an officer of BRT and a Vice President of Georgetown Partners, Inc., the managing general partner of Gould Investors L.P. Gould Investors L.P. is primarily engaged in the ownership and operation of real estate properties held for investment. In June, 1989 he became a Vice President of One Liberty Properties, Inc., a real estate investment trust engaged in the ownership of "net leased" real property. Mr. Brinberg is a director of Witco Corporation. Eugene J. Keely (age 63) has been a Vice President of BRT since May 1983. Matthew J. Gould (age 39) has been President and Chief Operating Officer of One Liberty Properties, Inc. since June, 1989. He has been a Vice President of BRT since 1986 and became a Senior Vice President in March 1993. He is President of Georgetown Partners, Inc. since March 1996 and was a Vice President from 1986 to 1996. In addition, Mr Gould has been a Vice President of REIT Management Corp., BRT's advisor, since 1986, and a Vice President of Majestic Property Management Corp. and related entities engaged in real property management and leasing since 1986. David W. Kalish (age 51) was Vice President and Chief Financial Officer of BRT from June, 1990 until August, 1998. Since August, 1998, Mr. Kalish has been Senior Vice President, Finance of BRT. He has also been Vice President and Chief Financial Officer of One Liberty Properties, Inc. and Georgetown Partners, Inc. since June, 1990. For more than five years prior to June, 1990, Mr. Kalish, a certified public accountant, was a partner of Buchbinder Tunick & Company, and its predecessors. George E. Zweier (age 34) has been employed by BRT since June 1998 and was elected Vice President, Chief Financial Officer in August, 1998. For approximately five years prior to joining BRT, Mr. Zweier, a certified public accountant, was an accounting officer with the Bank of Tokyo - Mitsubishi Limited, in New York and for more than five years prior hereto he was an accounting and audit officer with the Dime Savings Bank of New York, Uniondale, New York. Mark H. Lundy (age 36) has been a Vice President of BRT since 1993. He has been Secretary of One Liberty Properties, Inc. since June, 1993 and a Vice President of Georgetown Partners, Inc. since July, 1990. Mr. Lundy is a member of the bars of New York and Washington, D.C. Joshua D. Gleiber (age 31) has been a Vice President of BRT since March 1996. From October 1991 to February 1996 Mr. Gleiber was employed by Euram Management Inc., a subsidiary of ABN AMRO Bank N.V., engaged in asset management of its commercial real estate owned portfolio. Seth Kobay (age 44) has been Vice President and Treasurer of BRT since March 1994. In addition, Mr. Kobay, a certified public accountant, has been the Vice President of Operations of Georgetown Partners, Inc. for more than the past five years. Item 2. Properties. ----------- BRT's executive offices are located at 60 Cutter Mill Road, Great Neck, New York, where it currently occupies approximately 12,000 square feet with Gould Investors L.P., REIT Management Corp., One Liberty Properties, Inc. and other related entities and an additional 1,762 square feet which is occupied by BRT Funding Corp., BRT's wholly-owned subsidiary. The building is owned by an affiliate of Gould Investors L.P. BRT contributed $71,000 to the annual rent of $287,000 paid by Gould Investors L.P., REIT Management Corp., One Liberty Properties, Inc., and related entities in the year ended September 30, 1998 and paid direct rental of $33,000 on the additional 1,762 square feet BRT Funding Corp. occupied from April 1, 1998 to the September 30, 1998. For a description of real estate acquired by BRT in foreclosure, see Item 1, Business; Real Estate Assets. Item 3. Legal Proceedings. ------------------ BRT is not a defendant in any material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders. --------------------------------------------------- There were no matters submitted during the fourth quarter of the year ended September 30, 1998 to a vote of BRT's security holders. PART II Item 5. Market for the Registrant's Common Equity and Related Matters ------------------------------------------------------------- The shares of Beneficial Interest ("Beneficial Shares") of BRT are listed on the New York Stock Exchange. The following table shows for the quarters indicated, the high and low sales prices of the Beneficial Shares on the New York Stock Exchange as reported on the Composite Tape. Fiscal Year Ended September 30, High Low ------------------------------- ---- --- 1998 ---- First Quarter 9 1/8 7 11/16 Second Quarter 8 5/8 7 5/8 Third Quarter 7 7/8 6 13/16 Fourth Quarter 8 3/8 5 13/16 1997 ---- First Quarter 6 5/8 5 7/8 Second Quarter 7 7/8 6 3/8 Third Quarter 7 3/4 6 5/8 Fourth Quarter 9 3/16 7 1/8 As of December 1, 1998 there were approximately 1,303 holders of record of BRT's Beneficial Shares. BRT did not declare any cash distributions to common shareholders during the years ended September 30, 1997 and 1998. BRT qualifies as a real estate investment trust for Federal income tax purposes. In order to maintain that status, it is required to distribute to its shareholders at least 95% of its annual taxable income. Management believes that as a result of accumulated tax losses BRT will not be required to make cash distributions to maintain its real estate investment trust status until its accumulated tax losses have been fully used or shall expire. Management does not expect that accumulated tax losses ($30,893 at December 31, 1997 and estimated to be $21,800 at December 31, 1998) will be fully used prior to the fiscal year ended September 30, 2000 and they do not begin to expire until 2006. The resumption of cash distributions and the amount and timing of future distributions, if any, will be at the discretion of the Board of Trustees and will depend upon BRT's financial condition, earnings, business plan, cash flow and other factors. The credit agreement with First Boston provides that prior to payment of cash distributions on Beneficial Shares advance notice must be given to First Boston and BRT must certify that payment of such distributions will not breach BRT's net worth covenant. Item 6. Selected Financial Information ------------------------------ The following table, not covered by the report of the independent auditors, sets forth selected historical financial data of BRT for each of the fiscal periods in the five years ended September 30, 1998. This table should be read in conjunction with the detailed information and financial statements of BRT appearing elsewhere herein. Fiscal Years Ended September 30, -------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands, except for per share amounts) Operating statement data: Total revenues $10,197 $17,155 $13,556 $16,637 $20,530 Provision for possible loan losses - - - 1,021 4,340 Provision for valuation adjustment - - - 178 993 Income (loss) before gain on sale of foreclosed properties held for sale and available-for-sale securities 4,241 6,646 1,776 (522) (1,312) Net income 13,588 7,333 2,246 2,974 195 Calculation of net income applicable to common shareholders: Net income 13,588 7,333 2,246 2,974 195 Less: distributions on preferred shares - - 203 270 270 Net income (loss) applicable to common shareholders 13,588 7,333 2,043 2,704 (75) Income (loss) per beneficial share: Basic 1.72 .86 .26 .37 (.01) Diluted 1.71 .86 .26 .35 (.01) Balance sheet data: Total assets 85,821 80,315 89,613 104,515 131,467 Earning real estate loans (1) 51,175 40,030 32,813 43,456 67,156 Non-earning real estate loans (1) - 3,835 5,905 7,154 10,268 Real estate assets (1) 17,235 24,706 48,438 53,389 55,376 Notes payable-credit facility 5,500 - - 22,900 66,192 Loans and mortgages Payable 8,494 11,562 25,391 20,756 6,671 Shareholders' equity 69,747 66,537 60,892 57,728 55,024 (1) Earning and non-earning loans and real estate owned are presented without deduction of the related allowance for possible losses or valuation allowance. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources BRT engages in the business of originating and holding for investment senior real estate mortgages, secured by income producing property and to a lesser extent junior real estate mortgage loans secured by income producing property and senior mortgage loans secured by unimproved real property. It's investment policy emphasizes short-term mortgage loans. Repayments of real estate loans in the amount of $33,314,000 are due during the twelve months ending September 30, 1999, including $3,070,000 of which is due on demand. The availability of mortgage financing secured by real property and the market for selling real estate is cyclical and presently the mortgage market is in an uncertain state and the market for selling real estate does not appear to be as active or as positive as it was in the prior year or two. Accordingly, BRT cannot project the portion of loans maturing during the next twelve months which will be paid or the portion of loans which will be extended for a fixed term or on a month to month basis. In October 1996 BRT entered into a $25,000,000 revolving credit facility with Credit Suisse First Boston Mortgage Capital LLC. Interest is charged on the outstanding principal balance at the lower of prime plus 1% or Libor plus 3% adjusted monthly and matured on October 17, 1998. BRT extended the facility to April 17, 1999, with a payment of $62,500, and has the right to extend the facility for one additional six-month period for a fee of .25%. BRT intends to extend the credit facility to October 17, 1999. The funds borrowed under this facility can be used for any corporate purpose, the primary of which is lending. Borrowings under the credit facility are secured by specific receivables and real estate assets held by BRT, and the credit agreement provides that the loan amount will never exceed 75% of the agreed value of the collateral. There was $5,500,000 outstanding under the credit facility at September 30, 1998. BRT intends to repay the amount due under the credit agreement on October 17, 1999 from a combination of cash generated from operations, loan repayments and if necessary, from the sale of mortgage receivables, and unsecured or secured borrowings. BRT's cash position at September 30, 1998 was more than adequate to repay the outstanding balance. During the twelve months ended September 30, 1998, BRT generated cash of $3,821,000 from operating activities, $11,385,000 from the sale of real estate owned, $24,233,000 from collections from real estate loans and $5,500,000 from borrowings under the First Boston credit facility. These funds in addition to cash on hand, were used primarily to fund real estate loans of $31,716,000, to payoff mortgages payable on real estate sold of $3,068,000, and to purchase 1,205,000 shares of beneficial interest of BRT at an approximate aggregate cost of $10,433,000. There will be no effect on BRT's liquidity relating to the year 2000 issue because during the last quarter of the 1997 fiscal year BRT acquired computer hardware and software to process its accounting and real estate management information. This computer software is capable of handling all issues relating to the year 2000. BRT has also reviewed the impact of the failure of its tenants or suppliers to be year 2000 compliant. Based upon its review and the nature of BRT's business, the inability of its tenants and/or suppliers to be year 2000 compliant will not have a material, adverse effect on BRT's business. BRT will satisfy its liquidity needs in the year ended September 30, 1999 from cash and liquid investments on hand, the credit facility with First Boston, interest and principal payments received on outstanding real estate loans and net cash flow generated from the operation and sale of real estate assets. Results of Operations - --------------------- 1998 vs. 1997 - ------------- Interest and fees on real estate loans increased to $5,267,000 for the year ended September 30, 1998 as compared to $4,877,000 for the year ended September 30, 1997. The increase of $390,000 was a result of interest earned on the origination of new loans and an increase in fees generated on these new loans. Payoffs and paydowns of various earning real estate loans offset these increases Operating income on real estate assets decreased by $4,486,000 to $4,104,000 for fiscal 1998 from $8,590,000 in the prior fiscal year. This decrease was the result of the loss of rental income upon the sale of properties during the fiscal year. In fiscal 1998 BRT sold three real estate properties. The 1997 fiscal year was favorably affected by revenues of $3,405,000 recognized from the recovery of previously provided allowances and write offs. There were no comparable revenue items in 1998. Other revenues, primarily investment income increased by $543,000 to $826,000 for the year ended September 30, 1998. This increase is primarily the result of higher average balances of cash and investments during the year. Interest expense on notes and loans payable increased by $27,000 from $150,000 for the year ended September 30, 1997 to $177,000 for fiscal 1998. This increase was a direct result of the use of the credit facility towards the end fiscal 1998. The Advisor's fee decreased to $519,000 for fiscal 1998 from $559,000 for fiscal 1997, a decrease of $40,000. This decrease was a result of a decrease in total invested assets, the basis on which the advisory fee is calculated. General and administrative expenses increased by $273,000 from $2,256,000 for the fiscal year ended September 30, 1997 to $2,529,000 for the fiscal year ended September 30, 1998. This increase is primarily the result of expenses incurred in the operations of the new subsidiary, BRT Funding Corp., primarily salaries for new employees. Operating expenses relating to real estate assets decreased to $2,374,000 for fiscal 1998 from $6,732,000 for the fiscal year ended September 30, 1997 a decrease of $4,358,000. This decrease was a result of the sale of foreclosed properties during the 1998 fiscal year. Depreciation and amortization decreased by $455,000 for the fiscal year ended September 30, 1998. This decrease was a direct result of the amortization of the remaining deferred mortgage costs associated with the sale of various real estate assets in fiscal 1997. Gain on sale of foreclosed properties and mortgage loans for fiscal 1998 was $8,090,000 as compared to $687,000 during fiscal 1997. It is the policy of BRT to offer for sale all foreclosed property at prices which management believes represents fair value in the geographic area in which the property is located. Gain on sale of available-for-sale securities was $1,257,000 for fiscal 1998. There was no comparable gain in fiscal 1997. 1997 vs. 1996 - ------------- Interest and fees on real estate loans increased to $4,877,000 for the year ended September 30, 1997 as compared to $4,516,000 for the year ended September 30, 1996. The increase of $361,000 was primarily a result of interest earned on the origination of new loans and the receipt of additional interest during the first half of fiscal 1997 of approximately $486,000 upon the payoff of two loans, one of which was non-earning. Payoffs and pay-downs of various earning real estate loans offset these increases. Operating income on real estate assets decreased by $95,000 to $8,590,000 for fiscal 1997 from $8,685,000 for the the prior fiscal year. This decrease was the result of the loss of rental income upon the sale of properties offset in part by an increase in occupancy and rental rates at various properties and the receipt of a real estate tax refund of approximately $106,000 on one property as a result of a successful tax appeal. During fiscal year ended September 30, 1997 BRT reversed previously provided allowances of $1,300,000 upon the payoff in full of two real estate loans and realized $2,105,000 from previously written off provisions. There were no comparable transactions during Fiscal 1996. Interest expense on notes and loans payable decreased by $984,000 from $1,134,000 for the year ended September 30, 1996 to $150,000 for fiscal 1997. This decrease was a direct result of the continued reduction and the eventual payoff in August 1996 of the outstanding debt under a restated credit agreement. The Advisor's fee decreased to $559,000 for fiscal 1997 from $615,000 for fiscal 1996, a decrease of $56,000. This decrease was a result of a decrease in total invested assets, the basis on which the advisory fee is calculated. General and administrative expenses decreased by $410,000 from $2,666,000 for the fiscal year ended September 30, 1996 to $2,256,000 for the fiscal year ended September 30, 1997. This decrease is primarily the result of the recognition during fiscal 1996 of approximately $187,000 of additional legal, accounting and investment-banking expenses incurred in connection with a potential transaction, which did not proceed beyond the negotiation stage. There was also a reduction in BRT's general overhead expenses. Operating expenses relating to real estate assets decreased to $6,732,000 for fiscal 1997 from $6,937,000 for the fiscal year ended September 30, 1996 a decrease of $205,000. This decrease was primarily a result of the sale of foreclosed properties. Depreciation and amortization increased by $384,000 for the fiscal year ended September 30, 1997. This increase was a direct result of the amortization of the remaining deferred mortgage costs associated with the sale of various real estate assets. Gain on sale of foreclosed properties for fiscal 1997 was $687,000 as compared to $470,000 during fiscal 1996. It is the policy of BRT to offer for sale all foreclosed property at prices which management believes represents fair value in the geographic area in which the property is located. Accounting Changes - ------------------ BRT has not completed its assessment of the impact the changes required under FASB Statement No. 131 will have for disclosing industry segments, the number of reportable segments or the way existing segments are defined. BRT does not believe that the implementation of Statement No. 131 will have a material impact on its financial statements. Item 7A - Market Risk Disclosure ---------------------- BRT has considered the effects of derivatives and exposures to market risk relating to interest rate, foreign currency exchange rate, commodity price and equity price risk. BRT has assessed the market risk for its variable rate debt and variable rate mortgage receivables and believes that a one-percent change in interest rates would have a $55,000 and $430,000 effect, respectively on income before taxes. Item 8. Financial Statements and Supplementary Data ------------------------------------------- This information appears in a separate section of this report following Part IV. Item 9. Changes in and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure -------------------- None. PART III Items 10, 11, 12 and 13 will be included in BRT's proxy statement to be filed pursuant to Regulation 14A not later than January 28, 1999. F-28 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ---------------------------------------------------------------- (a) 1. Financial Statements - The response is submitted in a separate section of this report following Part IV. 2. Financial Statement Schedules - The response is submitted in a separate section of this report following Part IV. 3. Exhibits: 3(a). Second Amended and Restated Declaration of BRT dated June 13, 1972. Incorporated by reference to Exhibit 3A to Form 10-K for the year ended September 30, 1984. 3(b). First Amendment to Second Amended and Restated Declaration of BRT dated August 20, 1986. Incorporated by reference to BRT's Registration Statement on Form S-2 (No. 33-8125). 3(c). Second Amendment to Second Amended and Restated Declaration of BRT dated March 2, 1987. Incorporated by reference to the BRT's Registration Statement on Form S-2 (No.33-12172). 3(d). Third Amendment to Second Amended and Restated Declaration of BRT dated March 2, 1988. Incorporated by reference to Exhibit 3D to Form 10-K for the year ended September 30, 1988. 3(e). By-laws-Incorporated by reference to BRT's Registration Statement on Form S-2 (No. 33-8125). 10(a). Advisory Agreement dated February 7, 1983 between the BRT and REIT Management Corp. Incorporated by reference to BRT's Registration Sta0tement on Form S-2 (No. 33-8125). 10(b). Credit Agreement with CS First Boston Mortgage Capital Corp. dated October 17, 1996. Incorporated by reference to Exhibit 7(c) to Form 8-K filed on October 24, 1996. 21. Subsidiaries - Each subsidiary is 100% owned by BRT. Exhibit 21 is filed with this Form 10-K. 27. Financial Data Schedule - Filed with electronic filing. (b) Reports on Form 8-K: BRT did not file any report on Form 8-K in the quarter ended September 30, 1998. (c) Exhibits - See Item 14(a) 3., above. (d) See Item 14(a) 2., above. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BRT REALTY TRUST Date: December 21, 1998 By: (S) Jeffrey A. Gould ---------------------- Jeffrey A. Gould President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Title Date (S) Fredric H. Gould Chairman of the Board December 21, 1998 - -------------------- Fredric H. Gould (Principal Executive Officer) (S) Jeffrey A. Gould President and Trustee December 21, 1998 - --------------------- Jeffrey A. Gould (S) Patrick J. Callan Trustee December 21, 1998 - --------------------- Patrick J. Callan (S) Arthur Hurand Trustee December 21, 1998 - ---------------- Arthur Hurand (S) Gary Hurand Trustee December 21,1998 - --------------- Gary Hurand (S) David Herold Trustee December 21,1998 - ---------------- David Herold (S) Herbert C. Lust Trustee December 21,1998 - ------------------- Herbert C. Lust II - ------------------ Trustee December__, 1998 Marshall Rose (S) George E. Zweier Vice President December 21,1998 - ------------------- George E. Zweier (Principal Financial and Accounting Officer) Annual Report on Form 10-K Item 8, Item 14(a)(1) and (2) Index to Consolidated Financial Statements and Consolidated Financial Statement Schedules The following consolidated financial statements of BRT Realty Trust are included in Item 8: Page No. -------- Report of Independent Auditors F-1 Consolidated Balance Sheets as of September 30, 1998 and 1997 F-2 Consolidated Statements of Income for the three years ended September 30, 1998, 1997 and 1996 F-3 Consolidated Statements of Shareholders' Equity for the three years ended September 30, 1998, 1997 and 1996 F-4 Consolidated Statements of Cash Flows for the three years ended September 30, 1998, 1997 and 1996 F-5-6 Notes to Consolidated Financial Statements F-7-20 Consolidated Financial Statement Schedules for the year ended September 30, 1998: III - Real Estate and Accumulated Depreciation F-21-22 IV - Mortgage Loans on Real Estate F-23-24 All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or the notes thereto. EXHIBIT 21 SUBSIDIARIES COMPANY STATE OF INCORPORATION - ------- ----------------------- Hoboken Front Corp. New Jersey Huntington-Park Corporation New York Forest Green Corporation New York Realty 49 Corp. New York TRB No. 1 Corp. New York TRB No. 2 Corp. New York TRB Cutter Mill Corp. New York Kew Gardens Realty Corp. New York Blue Realty Corp. Delaware 3581 Broadway Realty Corp. New York 620 West 172nd Street Realty Corp. New York Multiple Property Realty Corp. New York 119 Madison Avenue Realty Corp. New York TRB No. 3 Owners Corp. Wyoming 2190 Boston Post Road Realty Corp. New York TRB 96th Street Corp. New York Remson Point Realty Corp. New York TRB 13 Eighth Avenue Corp. New York Casa Wrap Holding Corp. Florida TRB Valley Corp. New York 76 Madison Avenue Realty Corp. New York 2211 Church Avenue Realty Corp. New York TRB Cruger Avenue Corp. New York TRB Fairway Office Center Corp. Kansas TRB East 33rd Street Corp. New York TRB Abbotts Corp. Pennsylvania TRB Greenpoint Avenue Realty Corp. New York TRB Seattle Inc. Washington BRT Funding Corp. New York REPORT OF INDEPENDENT AUDITORS To the Trustees and Shareholders BRT Realty Trust We have audited the accompanying consolidated balance sheets of BRT Realty Trust and subsidiaries (the "Trust") as of September 30, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended September 30, 1998. Our audits also included the consolidated financial statement schedules listed in the Index at Item 14(a). These consolidated financial statements and consolidated schedules are the responsibility of the Trust's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of BRT Realty Trust and subsidiaries at September 30, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. ERNST & YOUNG LLP New York, New York December 4, 1998 BRT REALTY TRUST AND SUBSIDIARIES Consolidated Balance Sheets (Amounts in thousands) ASSETS September 30, 1998 1997 ------------- ------------- Real estate loans - Notes 2, 4 and 5: Earning interest $ 51,175 $ 40,030 Not earning interest - 3,835 ---------- ----------- 51,175 43,865 Less allowance for possible losses 2,041 5,956 ---------- ----------- 49,134 37,909 ---------- ----------- Real estate assets - Notes 3 and 5: Foreclosed properties held for sale 16,622 23,160 Investment in real estate venture 613 1,546 ---------- ----------- 17,235 24,706 Less valuation allowance 349 349 ---------- ----------- 16,886 24,357 --------- ----------- Cash and cash equivalents 13,949 10,152 Securities available-for-sale at market 3,364 5,382 Other assets 2,488 2,515 ---------- ----------- TOTAL ASSETS $ 85,821 $ 80,315 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Note payable - Credit Facility - Note 5 $ 5,500 $ - Loans and mortgages payable - Note 5 8,494 11,562 Accounts payable and accrued liabilities including deposits of $1,085 and $1,524 2,080 2,216 ----------- ----------- Total liabilities 16,074 13,778 ----------- ----------- Commitments and contingencies - Notes 2, 3, 4, 5, 8 and 9 - - Shareholders' equity - Note 7: Preferred shares, $1 par value: Authorized 10,000 shares, none issued - - Shares of beneficial interest, $3 par value: Authorized number of shares, unlimited, issued - 8,888 and 8,886 shares 26,665 26,657 Additional paid-in capital, net of distributions of $5,171 81,521 81,517 Accumulated other comprehensive income - net unrealized gain on available-for-sale securities 769 726 Accumulated deficit (24,328) (37,916) ---------- --------- 84,627 70,984 Cost of 1,723 and 518 treasury shares of beneficial interest (14,880) (4,447) ---------- ---------- Total shareholders' equity 69,747 66,537 ---------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 85,821 $ 80,315 ========== ========= See accompanying notes to consolidated financial statements. BRT REALTY TRUST AND SUBSIDIARIES Consolidated Statements of Income (Amounts in thousands except per share amounts) Year Ended September 30, ------------------------ 1998 1997 1996 ------- ------ ------ Revenues: Interest and fees on real estate loans - Note 2 $ 5,267 $ 4,877 $ 4,516 Operating income relating to real estate owned 4,104 8,590 8,685 Previously provided allowances and write offs - 3,405 - Other, primarily investment income 826 283 355 --------- --------- --------- Total Revenues 10,197 17,155 13,556 ------- ------- -------- Expenses: Interest - note payable and loans payable - Note 5 177 150 1,134 Advisor's fees - Note 8 519 559 615 General and administrative - Note 8 2,529 2,256 2,666 Operating expenses relating to real estate owned including interest on mortgages payable of $933, $2,214 and $1,968 2,374 6,732 6,937 Amortization and depreciation 357 812 428 --------- -------- ---------- Total Expenses 5,956 10,509 11,780 -------- ------- ------- Income before gain on sale of foreclosed properties held for sale and available-for-sale securities 4,241 6,646 1,776 Net gain on sale of real estate loans and foreclosed properties held for sale 8,090 687 470 Net realized gain on available-for-sale securities 1,257 - - --------- ----------- ------------ Net Income $13,588 $ 7,333 $ 2,246 ======= ======= ======= Calculation of net income applicable to common shareholders: Net income $13,588 $ 7,333 $ 2,246 Less: distributions on preferred shares - - 203 ----------- ---------- -------- Net income applicable to common shareholders $13,588 $ 7,333 $ 2,043 ======= ======= ======= Income per share of Beneficial Interest: Basic earnings per share $ 1.72 $ .86 $ .26 ========= ========= ========= Diluted earnings per share $ 1.71 $ .86 $ .26 ========= ======== ======== Weighted average number of common shares outstanding: Basic 7,902,161 8,527,057 7,825,557 ========= ========= ========= Diluted 7,941,293 8,557,968 8,640,968 ========= ========= ========= See accompanying notes to consolidated financial statements. BRT REALTY TRUST AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity For the Years Ended September 30, 1996, 1997, and 1998 (Amounts in thousands) Accumulated Shares of Additional Other Accum- Preferred Beneficial Paid-In Comprehensive ulated Shares Interest Capital Income Deficit Total ------ -------- ------- ------ ------- ----- Balances, September 30, 1995 $ 1,030 $22,614 $83,914 $ - $(47,495) $60,063 Exercise of Stock Options - 1,202 206 - - 1,408 Conversion of 1,030 shares of preferred stock to shares of beneficial interest (1,030) 3,090 (2,060) - - - Distributions - Preferred Shares - - (203) - - (203) Net income - - - - 2,246 2,246 Other comprehensive income - unrealized gain on available- for-sale securities - - - 17 - 17 ------ Comprehensive income - - - - - 2,263 -------------------------------------------------------------------------------------------- Balances, September 30, 1996 - 26,906 81,857 17 (45,249) 63,531 Cancellation of 83 shares of beneficial interest - (249) (340) - - (589) Net income - - - - 7,333 7,333 Other comprehensive income - unrealized gain on available- for-sale securities - - - 709 - 709 -------- Comprehensive income - - - - - 8,042 ------------------------------------------------------------------------------------------- Balances, September 30, 1997 - 26,657 81,517 726 (37,916) 70,984 Exercise of Stock Options 8 4 12 Net income 13,588 13,588 Other comprehensive income - unrealized gain on available-for- sale securities (net of reclassification adjustment for gains included in net income of 1,257) 43 43 -------- Comprehensive income - - - - - 13,631 ------------------------------------------------------------------------------------------ Balances, September 30, 1998 $ - $26,665 $81,521 $ 769 $(24,328) $ 84,627 =========================================================================================== See accompanying notes to consolidated financial statements. BRT REALTY TRUST AND SUBSIDIARIES Consolidated Statements of Cash Flows (Amounts in thousands) Year Ended September 30, 1998 1997 1996 -------- --------- ----------- Cash flows from operating activities: Net income $ 13,588 $ 7,333 $ 2,246 Adjustments to reconcile net income to net cash provided by operating activities: Amortization and depreciation 357 812 428 Previously provided allowances - (1,300) - Net gain on sale of real estate and foreclosed property (8,090) (687) (470) Net gain on sale of available-for-sale securities (1,257) - - (Increase) decrease in interest receivable (218) (61) 240 Decrease in prepaid expenses 17 287 405 (Decrease) increase in accounts payable and accrued liabilities (644) 89 (301) Increase in deferred revenues 108 301 - Decrease (increase) in rent receivable - 219 (22) Decrease in escrow deposits 96 552 112 Decrease in deferred costs (107) (275) (613) Other (29) 99 117 ----------- --------- --------- Net cash provided by operating activities 3,821 7,369 2,142 ------------- ------------- ------------- Cash flows from investing activities: Collections from real estate loans 24,233 11,278 11,148 Proceeds from participating lenders - - 225 Additions to real estate loans (31,716) (15,353) (451) Repayments to participating lenders - (1,000) - Net costs capitalized to real estate owned (631) (854) (1,861) Proceeds from sale of real estate owned 11,385 22,961 5,724 . Decrease (increase) in deposits payable 308 (439) (443) Decrease (increase) in investments in U.S. Government obligations - 986 (986) Purchase of available-for-sale securities (347) (3,682) - Sale of available-for-sale securities 3,667 - 820 Proceeds from sale of partnership interest 1,679 - - Purchase of partnership interest (613) - - Other - (33) 163 ---------- --------- -------- Net cash provided by investing activities 7,965 13,864 14,339 ---------- ------------- ------------- Cash flows from financing activities: Bank repayments - - (22,900) Proceeds from note payable 5,500 - - Proceeds from mortgages payable - - 7,050 Payoff/paydown of loan and mortgages payable (3,068) (14,859) (3,179) Exercise of stock options 12 - 1,408 Repurchase of shares of beneficial interest, a portion of which were cancelled (10,433) (2,397) (304) Decrease in restricted cash - - 558 Other - (34) (290) ----------- ------------ ----------- Net cash used in financing activities (7,989) (17,290) (17,657) ------------ ----------- ----------- Net increase (decrease) in cash and cash equivalents 3,797 3,943 (1,176) Cash and cash equivalents at beginning of year 10,152 6,209 7,385 ---------- ------------- ------------- Cash and cash equivalents at end of year $ 13,949 $ 10,152 $ 6,209 ========== ============ =========== See accompanying notes to consolidated financial statements. BRT REALTY TRUST AND SUBSIDIARIES Consolidated Statements of Cash Flows (Amounts in thousands) (Continued) Year Ended September 30, 1998 1997 1996 ---------- --------- --------- Supplemental disclosures of cash flow information: Cash paid during the year for interest expense $ 1,141 $ 1,521 $ 2,715 ========= ========= ========= Supplemental schedule of noncash investing and financing activities: Transfer of nonearning real estate loans to foreclosed properties at fair value $ - $ 13 $ 34 Note payable to Gould Investors L.P., a related party, incurred in connection with the purchase of marketable securities - - 1,794 Recognition of valuation allowance upon sale of real estate owned 3,915 1,779 332 Recognition of allowance for previously provided losses - 516 1,311 Purchase money mortgages from sale of real estate owned - 425 375 Transfer of foreclosed property to an investment in a real estate venture - 1,553 - Conversion of 1,030 shares of preferred stock to shares of beneficial interest - - 3,090 See accompanying notes to consolidated financial statements. BRT REALTY TRUST AND SUBSIDIARIES Notes to Consolidated Financial Statements (Amounts in Thousands Except Share Data) NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation; Basis of Preparation The consolidated financial statements include the accounts of BRT Realty Trust and its wholly-owned subsidiaries. Investments in less than majority-owned entities have been accounted for using the equity method. Material intercompany items and transactions have been eliminated. Many of the wholly-owned subsidiaries were organized to take title to various properties acquired by BRT Realty Trust. BRT Realty Trust and its subsidiaries are hereinafter referred to as the "Trust". Income Tax Status The Trust qualifies as a real estate investment trust under Sections 856-860 of the Internal Revenue Code. The Trustees may, at their option, elect to operate the Trust as a business trust not qualifying as a real estate investment trust. Income Recognition Income and expenses are recorded on the accrual basis of accounting for both financial reporting and income tax purposes. The Trust does not accrue interest or rental income on impaired loans or real estate owned where, in the judgment of management and the Trustees, collection of interest or rent according to the contractual terms is considered doubtful. Among the factors the Trust considers in making an evaluation of the amount of interest or rent that are collectable are the status of the loan or property, the financial condition of the borrower or tenant and anticipated future events. Loan discounts are amortized over the life of the real estate loan using the constant interest method. Loan commitment and extension fee income is deferred and recorded as income over the life of the commitment and loan. If a loan subsequently becomes nonearning, the unamortized portion of the fee is offset against the loan balance. Allowance for Possible Losses The Trust measures the impairment of its real estate loans based upon the fair value of the underlying collateral which is determined on an individual loan basis. In arriving at the fair value of the collateral, numerous factors are considered, including, market evaluations of the underlying collateral, operating cash flow from the property during the projected holding period, and estimated sales value computed by applying an expected capitalization rate to the stabilized net operating income of the specific property, less selling costs, discounted at market discount rates. If upon completion of the valuations, the fair value of the underlying collateral securing the impaired real estate loan is less than the recorded investment in the loan, an allowance is created with a corresponding charge to expense. Adjustments may be necessary in the event that effective interest rates, rent-up periods, future economic conditions including the terms and availability of long term permanent financing for the property, or other relevant factors vary significantly from those assumed in estimating the allowance for possible losses. The existing allowances will be either increased or decreased based upon future valuations, with a corresponding increase or reduction in the provision for loan losses. Real Estate Assets Foreclosed properties (real estate acquired by foreclosure or by a deed in lieu of foreclosure) are recorded at estimated fair value, net of foreclosure costs, at the time of foreclosure. In subsequent periods, individual foreclosed assets held for sale are valued at the lower of the recorded cost or estimated fair value, as described below, and if required, a valuation allowance is recognized. Assets acquired through foreclosure and held for sale, are not depreciated, while assets held long-term for the production of income are depreciated over their estimated useful lives. Costs incurred in connection with the foreclosure of the properties collateralizing the real estate loans and costs incurred to extend the life or improve the assets subsequent to foreclosure are capitalized. With respect to the operating properties, operating income and expenses are reflected in the statements of income. For residential apartment units acquired through foreclosure which are subject to an offering for the sale of units or cooperative shares, the net effect of income and expenses is applied to the basis of the asset to the extent that fair value is not exceeded. Valuation Allowance on Real Estate Assets The Trust reviews each real estate asset owned for which indicators of impairment are present to determine whether the carrying amount of the asset will be recovered. Recognition of impairment is required if the undiscounted cash flows estimated to be generated by the assets are less than the assets' carrying amount. Measurement is based upon the fair value of the asset. Real estate assets held for sale are valued at the lower of cost or fair value, less costs to sell, on an individual asset basis. Upon evaluating the property, many indicators of value are considered, including current and expected operating cash flow from the property during the projected holding period, costs necessary to extend the life or improve the asset, expected capitalization rates, projected stabilized net operating income, selling costs, and the ability to hold and dispose of such real estate owned in the ordinary course of business. Valuation adjustments may be necessary in the event that effective interest rates, rent-up periods, future economic conditions, and other relevant factors vary significantly from those assumed in valuing the property at the time of foreclosure. If future evaluations result in a diminution in the value of the property, the reduction will be recognized as a valuation allowance. If the value of the property subsequently increases, the valuation allowance will be reduced. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and short term investments: The carrying amounts reported in the balance sheet for these instruments approximate their fair values. Securities available-for-sale: Investment in securities are considered "available-for-sale", and are reported on the balance sheet based upon quoted market prices. Real estate loans: The earning mortgage loans of the Trust have either variable interest rate provisions, which are based upon a margin over the prime rate, or are currently fixed at effective interest rates which approximate market. At September 30, 1998 and 1997 these interest rates are reflective of current market conditions for these loans. Accordingly, the carrying amounts of the earning, non-impaired mortgage loans approximate their fair values. For earning loans which are impaired and non-earning loans, the Trust has valued such loans based upon the fair value of the underlying collateral. Accordingly, their carrying amounts are recorded at fair value. Notes, loans and mortgages payable: The Trust determined the estimated fair value of its debt by discounting future cash payments at their effective rates of interest, which approximate current market rates of interest for similar loans. Accordingly, there is no material difference between their carrying amounts and fair value. Per Share Data In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share. Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement No. 128 requirements. The 1997 and 1996 earnings per share amounts have been restated to comply with Statement of Financial Accounting Standards No. 128 Earnings Per Share. Cash Equivalents Cash equivalents consist of highly liquid investments, primarily money market type U.S. Government obligations, with maturities of three months or less when purchased. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Comprehensive Income In June 1997, the Financial Accounting Standard Board issued Statement No. 130, Reporting Comprehensive Income, which is effective for fiscal years beginning after December 15, 1997. Statement No. 130 establishes standards for reporting comprehensive income and its components in a full set of general-purpose financial statements and requires that all components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Trust elected early adoption of Statement No. 130 as of April 1, 1998. Segment Reporting In June, 1997 the Financial Accounting Standards Board issued Statement No. 131, Disclosure About Segments of an Enterprise and Related Information, which is effective for financial statements issued for periods beginning after December 15, 1997. Statement No. 131 requires disclosures about segments of an enterprise and related information regarding the different types of business activities in which an enterprise engages and the different economic environments in which it operates. The Trust does not believe that the implementation of Statement No. 131 will have a material impact on its financial statements. NOTE 2 - REAL ESTATE LOANS At September 30, 1998, information as to real estate loans, all of which are earning interest, is summarized as follows: First mortgage loans: Long-term: Residential $ 11,117 Shopping centers/retail 3,487 Hotel 750 Short-term (five years or less): Shopping centers/retail 8,856 Industrial buildings 7,593 Office buildings 7,351 Residential (multiple family units) 8,756 Hotel 1,008 Miscellaneous 242 Second mortgage loans and wraparound mortgages 2,015 ------- $ 51,175 ======== A summary of loans at September 30, 1997, all of which are earning except as noted is as follows: First mortgage loans $37,490 (of which $3,379 were not earning interest) Second mortgage loans 3,969 (of which $1 were not earning interest) Wraparound mortgages 2,406 (of which $455 were not earning interest) ---------- $43,865 At September 30, 1998 the Trust had no non-earning assets. Of the real estate loans not earning interest at September 30, 1997, $3,835 was deemed impaired, as it was probable that the Trust would be unable to collect all amounts due according to the contractual terms. During 1998 the entire amount was repaid. Allowances for possible losses were provided for all such non-earning loans. Of the real estate loans earning interest at September 30, 1998 and 1997, $5,489 and $6,248, respectively, were deemed impaired and all are subject to allowances for possible losses. For the years ended September 30, 1998, 1997 and 1996, respectively, an average $7,786, $15,470 and $18,547 of real estate loans were deemed impaired, on which $613, $1,827 and $1,464 of interest income was recognized. Loans originated by the Trust generally provide for interest rates, which are related to the prime or Treasury rate. The weighted average interest rate on earning loans was 11.60% and 11.31% at September 30, 1998 and 1997, respectively. Annual maturities of real estate loans receivable during the next five years reflect revised maturities as a result of debt restructurings and are summarized as follows: Years Ending September 30 Amount - ------------------------- --------- 1999 ................................................ $ 33,314 2000 ................................................ 6,811 2001................................................. 577 2002................................................. 643 2003 ................................................ 2,318 2004 and thereafter.................................. 7,512 ----------- Total $ 51,175 ========= The Trust's portfolio consists primarily of senior mortgage loans, secured by residential and commercial property, 79% of which are located principally in the New York metropolitan area. If a loan is not repaid at maturity, in addition to foreclosing on the property, the Trust may either extend the loan or consider the loan past due. The Trust analyzes each loan separately to determine the appropriateness of an extension. In analyzing each situation, management examines many aspects of the loan receivable, including the value of the collateral, the financial strength of the borrower, past payment history and plans of the owner of the property. Of the $33,314 of real estate loans receivable which mature in Fiscal 1999, $9,334 were extended during the fiscal year ended September 30, 1998. If all loans classified as non-earning were earning interest at their contractual rates for the years ended September 30, 1997 and 1996, interest income would have increased by $501 and $632 respectively. The Trust's interests in wraparound mortgages are subject to underlying mortgages aggregating $334 and $3,285 at September 30, 1998 and 1997 respectively. At September 30, 1998 the two largest real estate loans had principal balances outstanding of approximately $3,180 and $3,075, respectively. Of the total interest and fees earned on real estate loans during the fiscal year ended September 30, 1998, 1.5% and 8.2% related to these loans, respectively. Included in the Trust's portfolio, is a real estate loan collateralized by a 50% interest in a partnership in which the Chairman of the Board of Trustees of the Trust holds one-half of the other 50% partnership interest. The balance of the loan at September 30, 1998 and 1997 is $2,075 and $2,575, respectively. NOTE 3 - REAL ESTATE ASSETS A summary of foreclosed properties held for sale, for the year ended September 30, 1998 is as follows: Costs Sales September 30, 1997 Capitalized/ Collections/ Gain on September 30, 1998 # Properties Amount Amortization Other Sale # Properties Amount Residential units-shares of cooperative corporations 4 $5,404 $116 ($5,576) $1,849 3 $1,793 Shopping centers/retail 1 3,379 190 - - 1 3,569 Office 1 11,275 449 - - 1 11,724 Improved land 2 3,442 - (5,809) 2,367 - - Unimproved land 1 - - - - 1 - ---------------------------------------------------------------------------------------------- 9 23,500 755 (11,385) 4,216 6 17,086 Less:Valuation Allowance 349 349 Amortization 340 124 464 ----------------------------------------------------------------------------------------- 9 $22,811 $631 $(11,385) $4,216 6 $16,273 =============================================================================================== During the year ended September 30, 1998 the Trust continued to dispose of its shares of cooperative apartment units. Sales of these units which had a net book value totaling $2,279 included its entire interest in an apartment complex located in Nassau County. Gains of $1,849 were recognized on these sales. Also during fiscal 1998 the Trust received principal paydowns and sold its remaining portfolio of cooperative mortgage loans of which $1,448 were classified as owned real estate. Two other properties were disposed of during the year ended September 30, 1998. An office building with a book value of $1,135 was sold for a net gain of $164 and a residential building with a book value of $2,307 was sold for a gain of $2,203. Future minimum rentals to be received by the Trust, pursuant to noncancellable operating leases in excess of one year, from properties on which the Trust has title at September 30, 1998 are as follows: Years Ending September 30, Amount -------------------------- ------ 1999 .................................. $ 2,640 2000 .................................. 2,125 2001 .................................. 1,813 2002 .................................. 1,657 2003.................................... 1,546 NOTE 4 - ALLOWANCE FOR POSSIBLE LOSSES AND VALUATION ALLOWANCE ON REAL ESTATE OWNED The Trust was not required to record provisions for possible loan losses nor valuation adjustments on owned real estate during the years ended September 30, 1998 and 1997. The most recent provisions taken by the Trust were during the year ended September 30, 1995 in the total amount of $1,199. An analysis of the allowance for possible losses is as follows: Year Ended September 30, ------------------------ 1998 1997 1996 ---- ---- ---- Balance at beginning of year $ 5,956 $ 7,773 $ 9,084 Provision for possible loan losses - - - Previously provided allowances - (1,300) - Write-off of allowances (3,915) (517) (1,311) ---------- ----------- ---------- Balance at end of year $ 2,041 $ 5,956 $ 7,773 ========== =========== ========== The allowance for possible losses applies to assets aggregating $5,489 at September 30, 1998, $10,083 at September 30, 1997 and $17,023 at September 30, 1996. During the year ended September 30, 1997, $2,105 was realized from previously written off provisions. The allowance for possible losses consists of the following components: Year Ended September 30, 1998 1997 1996 ---- ---- ---- Excess of carrying value plus estimated cost to complete and market, over estimated selling price $ 1,404 $ 2,979 $ 1,595 Valuation adjustment 434 2,505 5,775 Estimated holding period costs 203 472 403 ----------- ------------ ------------- $ 2,041 $ 5,956 $ 7,773 =========== ============ ============= NOTE 5 - DEBT OBLIGATIONS Debt obligations consist of the following: September 30, ------------- 1998 1997 ---- ---- Note payable - credit facility $ 5,500 $ - ======== ======= Loans and mortgages payable $ 8,494 $11,562 ======== ======= In October 1996 the Trust entered into a $25,000 revolving credit facility ("Facility") with Credit Suisse First Boston Mortgage Capital LLC. (formerly CS First Boston Mortgage Capital Corp.). Interest is charged on the outstanding principal balance at the lower of LIBOR plus 3% or the prime lending rate plus 1%, adjusted monthly. The interest rate at September 30, 1998 was 8.66%. The Trust paid a commitment fee which amounted to $101 during the year ended September 30, 1998 and $97 during the year ended September 30, 1997. The Facility matured on October 17, 1998 with the right to extend for two additional six-month periods for a fee of .25% of the total facility with each extension. The first such extension option was exercised in October 1998 with the payment of a fee of $63. Borrowings under the Facility are secured by specific receivables and real estate assets held by the Trust. The Facility provides that the loan amount will never exceed 75% of the agreed value of the collateral. The Trust is required to maintain tangible net worth (as defined) of $50,000 and comply with certain other covenants all of which have been met. At September 30, 1998 the outstanding balance on the Facility was $5,500. There was no balance outstanding at September 30, 1997. Interest expense was $72 for the year ended September 30, 1998. At September 30, 1998 there are two outstanding non-recourse mortgages payable, both of which are secured by individual real estate owned properties with an aggregate carrying value of $14,829, net of amortization. The mortgages bear interest at rates of 8.44% and 8.07% and mature in 2000 and 2005, respectively. Scheduled principal repayments during the next five years and thereafter are as follows: Years Ending September 30,............... Amount -------------------------- ------ 1999.......................... $ 876 2000.......................... 970 2001 ......................... 1,397 2002. ............... ........... 849 2003 ........................... 920 2004 and thereafter.......... 3,482 --------- $ 8,494 ======= NOTE 6 - FEDERAL INCOME TAXES Cumulative taxable loss since inception is less than the cumulative loss reported for financial statement purposes principally because a portion of the allowance for possible losses has not yet been deducted for tax purposes. The taxable income is expected to be $3,000 less than the financial statement income during calendar 1998. At December 31, 1997, the Trust had available tax operating loss carryforwards of $30,893 of which $768 will expire in 2006, $13,605 will expire in 2007, $14,288 will expire in 2008, $1,634 will expire in 2009, $527 will expire in 2010 and $71 will expire in 2011. NOTE 7 - SHAREHOLDERS' EQUITY Distributions There were no distributions on the Trust's shares of beneficial interest declared during the years ended September 30, 1998, 1997 and 1996. Stock Options On December 8, 1995, the Board of Trustees granted, under the 1988 Stock Option Plan (Incentive/Nonstatutory Stock Option Plan), options to purchase the remaining 53,000 shares of beneficial interest available under this plan at $4.375 per share to various officers and employees of the Trust. The options are cumulatively exercisable at a rate of 25% per annum, for a period of five years commencing six months after the date of grant. During the fiscal year ended September 30, 1998, 2,500 of these options were exercised and another 2,500 were cancelled and became available for grant at that time. At September 30, 1998 options to purchase 36,000 shares are exercisable, none of which have been exercised. On December 6, 1996, the Board of Trustees adopted the BRT 1996 Stock Option Plan (Incentive/Nonstatutory Stock Option Plan), whereby a maximum of 450,000 shares of beneficial interest are reserved for issuance to the Trust's officers, employees, trustees and consultants or advisors to the Trust. Incentive stock options are granted at per share amounts at least equal to the fair value at the date of grant, whereas for nonstatutory stock options, the exercise price may be any amount determined by the Board, but not less than the par value of a share. Also on December 6, 1996, the Board of Trustees granted, under the 1996 Stock Option Plan options to purchase a total of 82,500 shares of beneficial interest at $6.00 per share to a number of officers, employees and consultants to the Trust. The options are cumulatively exercisable at a rate of 25% per annum, commencing after six months, and expire five years after the date of grant. During the fiscal year ended September 30, 1998, 5,000 options were cancelled and became available for grant at that time. At September 30, 1998 options to purchase 38,750 shares are exercisable, none of which have been exercised. In March and April 1998 the Board of Trustees granted, under the 1996 Stock Option Plan options to purchase 50,000 shares of beneficial interest at prices ranging from $7.3125 to $7.9375 per share to a number of directors, officers and employees of the Trust. The options are cumulatively exercisable at a rate of 25% per annum, commencing after two years, and expire ten years after the grant date. During fiscal 1998, 10,000 of these options were cancelled and became available for grant at that time. At September 30, 1998 none of these options were exercisable. The Trust elected Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and related Interpretations in accounting for its employee stock options. Under APB 25, no compensation expense is recognized because the exercise price of the Trust's employee stock options equals the market price of the underlying stock on the date of grant. The alternative fair value accounting provided for under FAS No. 123, "Accounting for Stock-Based Compensation", is not applicable because it requires use of option valuation models that were not developed for use in valuing employee stock options. Proforma information regarding net income and earnings per share is required by FAS No. 123, and has been determined as if the Trust had accounted for its employee stock options under the fair value method. The fair value for these options was estimated at the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions for the 1998, 1996 and 1995 grants, respectively: risk free interest rate of 5.64%, 6.02% and 5.54%, dividend yield of 0% in all three years, volatility factor of the expected market price of the Trust's common stock based on historical results of 0.188, 0.270 and 0.389; and an expected life for each option grant of 5 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price volatility. Because the Trust's employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate, management believes the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The Trust has elected not to present proforma information because the impact on the reported net income and earnings per share is immaterial. Changes in the number of shares under all option arrangements are summarized as follows: Year Ended September 30, ------------------------ 1998 1997 1996 -------------------------- Outstanding at beginning of period 135,500 53,000 447,000 Granted 50,000 82,500 53,000 Option price per share granted 7.3125-7.9375 $6.00 $4.375 Cancelled 17,500 - - Exercisable at end of period 74,750 47,125 3,250 Exercised 2,500 - 400,700 Expired 17,500 - 46,300 Outstanding at end of period 165,500 135,500 53,000 Option prices per share outstanding $4.375-$7.9375 $4.375-$6.00 $4.375 As of September 30, 1998 the outstanding options had a weighted average remaining contractual life of approximately 4.9 years and a weighted average exercise price of $5.92. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share: 1998 1997 1996 ------- ---- ---- Numerator: Net income $13,588 $7,333 $2,246 Distributions on preferred shares - - (203) Numerator for basic earnings per share - net income applicable _______ ______ ______ to common shareholders 13,588 7,333 2,043 Effect of diluted securities Preferred stock dividends - - 203 Numerator for diluted earnings per share - income available to common shareholders after ______ _____ _____ assumed conversion 13,588 7,333 2,246 Denominator: Denominator for basic earnings per share -weighted average shares 7,902,161 8,527,057 7,825,557 Effect of dilutive securites: Employee stock options 39,132 30,911 42,911 Preferred stock - - 772,500 --------- --------- -------- Dilutive potential common shares 39,132 30,911 815,411 Denominator for diluted earnings per share - adjusted weighted - average shares and assumed conversions 7,941,293 8,557,968 8,640,968 Basic earnings per share $ 1.72 $ .86 $ .26 Diluted earnings per share $ 1.71 $ .86 $ .26 Treasury Shares The Trust's Board of Trustees authorized the purchase from time to time of up to 1,614,000 shares of beneficial interest of the Trust. During 1998 1,205,000 shares have been purchased at an approximate cost of $10,433. As of September 30, 1998 the Trust owns 1,723,000 shares of beneficial interest of the Trust at an aggregate cost of $14,880. NOTE 8 - ADVISOR'S COMPENSATION AND CERTAIN TRANSACTIONS Certain of the Trust's officers and trustees are also officers, directors and the shareholder of REIT Management Corp. ("REIT"), to which the Trust pays advisory fees for administrative services and investment advice. The agreement, which expires on December 31, 2001, provides that directors and officers of REIT may serve as trustees, officers and employees of the Trust, but shall not be compensated for services rendered in such latter capacities. Advisory fees are charged to operations at a rate of 1% on real estate loans and 1/2 of 1% on other invested assets. Advisory fees amounted to $519, $559 and $615 for the years ended September 30, 1998, 1997, and 1996, respectively. The borrower may pay fees to REIT for services rendered in arranging and restructuring loans by the Trust. These fees, which are allowed by the advisory agreement, on loans arranged on behalf of the Trust and which are paid directly by the borrower to REIT amounted to $229 for the year ended September 30, 1998 and $155 for the year ended September 30, 1997. There were no such fees paid to REIT during the year ended September 30, 1996. REIT arranges for the management of certain foreclosed properties for the Trust under renewable year-to-year agreements. Management fees, legal fees and leasing, selling and financing commissions incurred and reimbursed to REIT or an other affiliated company for the years ended September 30, 1998, 1997 and 1996 aggregated $595, $655 and $776, respectively. The Chairman of the Board of Trustees of the Trust holds a similar position in One Liberty, Inc. a related party is an executive officer of the managing general partner and is a general partner of Gould Investors L.P. a related party. During the years ended September 30, 1998, 1997 and 1996, allocated general and administrative expenses charged to the Trust by Gould aggregated $622, $979 and $1,161, respectively. NOTE 9 - COMMITMENT In August 1984, the Board of Trustees approved a non-contributory pension plan covering eligible employees and officers. Contributions by the Trust are made through a money purchase plan, based upon a percent of qualified employees' total salaries. Pension expense approximated $105, $81 and $60 during the years ended September 30, 1998, 1997 and 1996, respectively. NOTE 10 - QUARTERLY FINANCIAL DATA (Unaudited) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Oct.-Dec. Jan.-March April-June July-Sept. For Year --------- ---------- ---------- ---------- -------- 1998 Revenues $ 2,446 $ 2,504 $ 2,539 $ 2,708 $ 10,197 Income before gain on sale of fore- closed properties held for sale $ 999 $ 1,051 $ 1,020 $ 1,171 $ 4.241 Net income $ 3,153 $ 3,608 $ 2,295 $ 4,532 $ 13,588 Per share $ .38 $ .45 $ .28 $ .62 $ 1.72 (a) (b) 1997 Revenues $ 3,936 $ 4,477 $ 3,462 $ 5,280 $17,155 Income before gain on sale of fore- closed properties held for sale $ 1,463 $ 1,784 $ 995 $ 2,404 $ 6,646 Net income $ 1,463 $ 1,784 $ 995 $ 3,091 $ 7,333 Per share $ .17 $ .21 $ .12 $ .37 $ .86 (a) (b) Per share earnings represent primary earnings per beneficial share. (a) Calculated on weighted average shares outstanding for the fiscal year. (b) Balances do not crossfoot due to rounding. NOTE 11 - SUBSEQUENT EVENT Between October 1, 1998 and November 20, 1998 the Trust sold available-for-sale securities with a book value of $690 for an approximate gain of $434. BRT REALTY TRUST SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION SEPTEMBER 30, 1998 (Amounts in Thousands) Gross Amount At Which Carried At Initial Cost To Company September 30, 1998 ----------------------- ------------------------- Buildings Costs Capitalized Buildings Encum- And Subsequent to Acquisition And Description brances Land Improvements Improvements Carrying Costs Land Improvements Total - ---------------------------------------------------------------------------------------------------------------------- Residential Manhattann, New York $ - $ - $ 919 $ 834 $ - $ - $1,753 $1,753 Islip, New York - - 40 - - - 40 40 Shopping Center/Retail Rock Springs, WY 1,070 600 2,483 458 28 600 2,969 3,569 Office Dover, DE 7,424 775 3,195 7,754 - 775 10,949 11,724 ------------------------------------------------------------------------------------------- TOTAL $ 8,494 $1,375 $6,637 $9,046 $28 $1,375 $15,711 $17,086 =========================================================================================== Depreciation Life For Accum. Date Of Date Latest Income Deprec. Construction Acquired Statement - ------------------------------------------------------------------------------------------------------ Residential Manhattann, New York $ - - Apr-90 - Islip, New York - - - - Shopping Center/Retail Rock Springs, WY 464 - Jan-92 21-35 Years Office Dover, DE - - Oct-93 - TOTAL $ 464 ========================= (a) (d) BRT REALTY TRUST SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION SEPTEMBER 30, 1998 (Amounts in Thousands) Notes to the schedule: (a) With respect to residential apartment units acquired through foreclosure which are subject to an offering for sale of units or cooperative shares, the net effect of income and expenses is applied to the basis of the asset to the extent that the realizable value is not exceeded. With respect to other operating properties, all operating income and expenses are reflected in the statements of income. (b) Total foreclosed properties held for sale $17,086 Less: Accumulated amortization 464 Valuation allowance 349 ------- Net foreclosed properties held for sale $16,273 ======= (c) Amortization of the Trust's leasehold interest is over the terms of the respective land leases. (d) Information not readily obtainable. (e) A reconciliation of real estate owned is as follows: Year Ended September 30, 1998 1997 1996 ---- ---- ---- Balance at beginning of year $22,811 $46,310 $50,248 Additions: Foreclosures - 13 34 Capitalization of expenses 755 854 1,861 Recognition of valuation allowance upon sale of property - 1,779 332 Recognition of valuation allowance upon relinquishment of property - - - ---------- ---------- ----------- 23,566 48,956 52,475 ---------- ---------- ----------- Deductions: Sales/conveyances 7,169 26,031 5,961 Relinquishment of real estate owned - - - Provision for valuation adjustment - - - Depreciation/amortization 124 114 204 --------- ---------- ------------ 7,293 26,145 6,165 -------- -------- ------------ Balance at end of year $16,273 $ 22,811 $46,310 ========= ======== ========== (f) The aggregate cost of investments in real estate assets for federal income tax purposes approximates book value. BRT REALTY TRUST SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE SEPTEMBER 30, 1998 (Amounts in Thousands) FINAL DESCRIPTION LOANS RATE DATE PERIODIC PAYMENT TERMS PRIOR LEINS - ------------------------------------------------------------------------------------------------------------------------------------ First mortgage loans: Long term: Cooperative Apartments - Islip, NY 1 9.0% Oct-02 Interest monthly, principal at maturity - Underlying Mortgage - Bronx, NY 1 Tbill + 2.25% Jan-00 Interest monthly, principal at maturity - Miscellaneous $0-$299 7 - $1,000-1,474 1 - Short term: Industrial Building, NY 1 Prime + 5.0% Apr-99 Interest and principal monthly - Office Building - Brooklyn, NY 1 Prime + 1.0% Mar-98 Interest monthly, principal at maturity - Condominium Apartments, NY, NY 1 Prime + 5.0% Jun-99 Interest monthly, principal at maturity - Industrial Building, NJ 1 Prime + 4.0% Jan-99 Interest monthly, principal at maturity - Industrial Building - Queens, NY 1 10.5% Oct-99 Interest and principal monthly - Office Building - Bernardsville, NJ 1 Prime + 5.0% Apr-99 Interest and principal monthly - Retail, Yonkers, NY 1 Prime + 5.0% Feb-99 - Miscellaneous $0-$299 3 - $300-$499 4 - $500-$999 6 - $1,000-$1,474 8 - Junior mortgage loans: Residential: Retail Building - New York, NY 1 Prime + 5.0% Mar-99 Interest monthly, principal at maturity 334 ====== ====== PRINCIPAL AMOUNT CARRYING OF LOANS SUBJECT FACE AMOUNT AMOUNT TO DELINQUENT DESCRIPTION OF MORTGAGES OF MORTGAGES PRINCIPAL OR INTEREST - ------------------------------------------------------------------------------------------------------- First mortgage loans: Long term: Cooperative Apartments - Islip, NY $2,143 $2,143 $ - Retail/Apartments, Brooklyn, NY 2,149 2,149 - Residential/Retail, New York, NY 2,244 2,244 - Underlying Mortgage - Bronx, NY 2,835 2,200 - Miscellaneous $0-$299 490 414 - $300-499 1,205 1,205 - $500-998 2,999 2,999 - $1,000-1,474 1,290 1,290 - Short term: Industrial Building, NY 1,922 1,922 - Office Building - Brooklyn, NY 2,074 2,074 - Condominium Apartments, NY, NY 2,174 2,174 - Industrial Building, NJ 2,600 2,600 - Industrial Building - Queens, NY 3,070 3,070 - Office Building - Bernardsville, NJ 3,075 3,075 - Retail, Yonkers, NY 3,180 3,180 - Miscellaneous $0-$299 493 105 - $300-$499 1,451 1,451 - $500-$999 4,903 4,903 - $1,000-$1,474 8,863 7,921 Junior mortgage loans: Residential: Miscellaneous $0-$1 1 1 - Wraparound mortgages: Retail Building - New York, NY 2,014 2,014 - ------- ------- --- Miscellaneous $51,175 $49,134 $ - ======= ======= ==== BRT REALTY TRUST SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE SEPTEMBER 30, 1998 (Amounts in Thousands) Notes to the schedule: (a) The following summary reconciles mortgages receivable at their carrying values: Year Ended September 30, 1998 1997 1996 --------- ---------- ---------- Balance at beginning of year $ 37,909 $ 30,945 $ 41,526 Additions: Advances under real estate loans 31,716 15,353 451 Repayments to participating lenders - 1,000 - Capitalization of earned interest income to loan balance in accordance with agreements - 177 - Previously provided allowances - 1,300 - Purchase money mortgages from sale of real estate owned - 425 375 --------- ---------- --------- 69,625 49,200 42,352 --------- ------------ ----------- Deductions: Collections of principal 20,491 11,278 11,148 Proceeds from participating lenders - - 225 Provision for possible loan losses - - - Investments transferred to foreclosed properties, net - 13 34 --------- ---------- --------- 20,491 11,291 11,407 --------- ---------- --------- Balance at end of year $ 49,134 $ 37,909 $ 30,945 ======== ======== ======== (b) The aggregate cost of investments in mortgage loans is the same for financial reporting purposes and Federal income tax purposes.