BRT Realty Trust Is Still Cheap

| About: BRT Apartments (BRT)
This article is now exclusive for PRO subscribers.

On January 15, I wrote an article in my Non-Agency Mortgage REIT series in which I discussed BRT Realty Trust (NYSE:BRT) and suggested it was likely to appreciate in value. At the time, it was trading at $6.40 a share; Friday, it closed at $7.32 a share and the question before the house is whether there is potential for further appreciation. I believe that there is.

BRT is one of those complicated mortgage REITs that defies simple comparison with other companies. It really has three primary areas of activity; real estate ownership, a large construction project, and real estate lending. In recent months, it seems to have been migrating from the third line of business to the first line of business by aggressively acquiring real estate properties - primarily, apartment buildings.

The balance sheet tells the story. As the table below illustrates, BRT's gross assets now include $ 70 million in real estate loans, $82 million in cash, $70 million in its interest in the Newark project, and $186 million in owned real estate (of which $175 million is apartment buildings).

  Cash Loans Retail REO Land Newark Apart. Bldgs. Misc.
BRT Assets(in millions of dollars) 82 70 3 8 62 175 24

The Newark project is a complex mixed use project called Teachers' Village which includes apartments, retail buildings, and schools and is located in downtown Newark. I grew up in the New York area and have been an avid reader of Philip Roth; I am thus a bit hesitant to invest in anything associated with Newark. But the combination of a location very close to an Amtrak station and near an international airport and a mayor who is aggressively trying to rebuild a once proud and flourishing city has produced a promising situation. The project enjoys various tax and interest rate advantages and has attracted some powerful and sophisticated investor support from Goldman Sachs and Nicolas Berggruen. It could be a real home run but admittedly entails some risk.

BRT has also been acquiring buildings (primarily, multi-family residential) over the past couple of years. The book value of those building now reflects some depreciation and probably understates fair market value as the market for apartment buildings has been strengthening.

It appears that BRT is on the way to transitioning from being a mortgage REIT to being an apartment REIT. The apartment building market is one of the hottest areas in real estate right now and there is a lot of pent up demand in the form of 20 and 30 somethings living at home restively with their impatient parents.

BRT still faces challenges. It is still on the small side and probably has to grow in order to optimize its scale and reduce costs as a percentage of revenue. It will likely reinvest income rather than pay dividends for the next few years. This is a disadvantage for dividend investors and, as BRT is a stock in a sector looked at for dividend yield, it may lead to a depressed stock price for a while. BRT also faces some challenges with its project in Newark, although it has some strong tailwinds that should help the project succeed.

BRT's book value is $9.28 a share or a nice premium over its per share price of $7.32. Apartment REITs typically trade for at least twice book value and, while BRT is not going to achieve that valuation in the short term, the long term trend is promising. BRT has a large carry forward tax loss and so will not be compelled to pay dividends in the near future. I think that this is fortunate because BRT management can use the cash to make additional investments and ultimately enhance shareholder value. I am still long BRT and look for this stock to achieve substantial appreciation for patient investors in the next few years.

Disclosure: I am long BRT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.