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BRT Apartments (NYSE:BRT) is building an attractive portfolio of multi-family properties, broadly concentrated in Sun Belt states. The Great Neck, New York-based internally managed REIT last declared a quarterly cash dividend of $0.25 per share, in line with its prior payout, for a 4.7% yield. This yield formed the basis of my investment, together with the inherent safety of the multifamily asset class in an era where REITs have increasingly become battleground stocks. REIT investors now have to navigate a post-pandemic world defined by the disruption to office REITs from working from home, discombobulation of mall REITs from eCommerce, and disturbance to highly levered mortgage REITs from a historic rise in Fed fund rates.
BRT’s quarterly cash dividend payouts have grown at an incredibly healthy pace over the last few years. The REIT’s three-year dividend compound annual growth rate stands at 5.27%, far ahead of the median growth for its sector. The yield has also pulled higher in recent months on the back of stock market angst over rising Fed fund rates from elevated inflation. I believe this has opened up an opportunity to build a position, even with multifamily set to experience some headwinds in 2023.
Growth Of AFFO As Consolidated Multifamily Portfolio Expands
BRT reported rental and other revenue of $21.70 million for its fiscal 2022 third quarter, up by $14 million from the year-ago quarter as the REIT moved to consolidate the operating results of properties from joint ventures where it had bought out its partner. The REIT’s balance sheet fully consists of fixed-rate mortgage debt with no near-term maturities until 2025. This has provided an invaluable hedge against the current rising rate environment and has acted to protect net income as REIT peers in other asset classes par back their payouts in response to compression of their gross levered yield. BRT’s management was upbeat during their earnings call and flagged this as providing them with the foundation to weather an increasingly uncertain macroeconomic backdrop.
Net income attributable to shareholders was $7.06 million, around $0.37 per share. Whilst this was down from $28.11 million, or $1.54 per share, in the year-ago quarter, this comp would benefit from a larger gain on the sale of an unconsolidated property. Core AFFO came in at $7.17 million, or $0.38 per share, and was a growth of 26.7% from the year-ago period. Higher operating margins across the REIT’s portfolio and its increased ownership in the 14 properties that were the subject of partner buyouts drove the bulk of the growth during the quarter.
As of the end of the quarter, the REIT’s wholly-owned portfolio consisted of 21 multifamily properties with 5,420 units. BRT also owned an interest in another eight properties totalling 2,781 units through unconsolidated entities. Average occupancy at 96.2% was broadly unchanged versus the year-ago period, as average monthly rents grew by 13% year-over-year to reach $1,301 per month. BRT realized a 16.1% spread on new leases and renewal spreads of 10.8% with strong rental demand and a still resilient economy continuing to drive healthy growth in leasing spreads.
A 4.7% Yield For The Long Haul
AFFO at $0.38 covers the monthly dividend, and this is repeated by FFO, which came in lower at $0.29 per share. Critically, the dividend looks safe with the REIT primed for growth as leasing spreads maintain double-digit growth and with the US economy forecasted to actually grow in 2023 by at least 1.4% just as inflation falls back to the Fed’s 2% target towards the end of the year. This has set the backdrop for the performance of the dividend this year.
Bears would of course highlight the strong historical growth of the REIT’s dividend as being positively impacted, like other REITs, by the previously low-interest rate environment. Further, whilst BRT’s current mortgage debt is fixed, it will have to take on new higher interest rate financing for any new acquisitions. Hence, leasing spreads will have to push higher to accommodate an increased financing cost base. This might prove difficult if forecasts for economic growth this year prove to be immature.
Fundamentally, the next year of elevated but falling inflation and still rising Fed fund rates represents a new and more intricately difficult dynamic for BRT that could demand some caution. Indeed, the REIT’s tangible book value per share stands at $13.60 to place the current price of the commons at a 55.7% premium to tangible book value per share. This premium is slighter ahead of its peer group median and reflects BRT’s historically strong growth rate, which now faces some macroeconomic headwinds. I’m bullish on the REIT and have been buying shares in recent weeks with the intention of holding these as a long-term position within my income portfolio.
