HamidEbrahimi/iStock via Getty Images

HamidEbrahimi/iStock via Getty Images

BRT Apartments Corp. (NYSE:BRT ) is strongly diversifying its portfolio in sunbelt markets, selling the underperforming assets, and slowly reducing joint venture property ownership. External trends work in favor of the company such as rising home prices, rising rental rates, and fewer homebuyers due to the rising inflation. These factors are intensified by good organic growth and high occupancy rates for BRT's multi-family properties. The company trades approximately 26% below its NAV and with a dividend yield of over 4%. For investors who want to get exposure to Southern state multi-family homes via a stable REIT with a great dividend yield, BRT could be the right choice.

BRT is focused on acquiring multifamily properties primarily in the Southeast United States and Texas. BRT's portfolio is diversified across the sunbelt region, home to the fastest-growing markets. They have a diverse portfolio of 33 properties in 11 states. However, the majority of the properties are owned by joint ventures and are concentrated in 4 states: Georgia, Texas, Alabama, and South Carolina. At the moment 99.9% of the company's revenue comes from rental income from real estate properties and a tiny fraction comes from other revenue which is interest collected on a loan receivable. This could increase in the future because in 2020 BRT had 4% revenue from this collected interest. (They sold this loan for 2021).

We are relatively close to Q4 results and the company will announce them on March 9, 2022. The EPS estimate is -$0.09 according to Yahoo Finance. That is not an issue since BRT is a REIT and the main factor is the FFO. The estimate for Q4 FFO is slightly lower than the Q3 results. FFO for the three months ended September 30, 2021, was $0.31 and the Q4 estimate is $0.3. These results and estimates reflect on the company's less interest expense for 2021 and, improved operating margins due to stronger rental income and occupancy. The multifamily property sector came back strong from the pandemic the net income attributable to common stockholders was $28.11 million for the three months ended September 30, 2021, compared to a net loss of $7.48 million for the three months ended September 30, 2020. In addition, this increase was due primarily to a $34.98 million, gain on the previously announced sale by an unconsolidated joint venture of the properties in Ocoee, Florida, and Lawrenceville, Georgia.

BRT also closed the deal and purchased a 402-unit multifamily property in West Nashville, TN. The company bought the remaining 41.9% interest in the joint venture that owns this multifamily complex. During the third quarter, BRT reduced the mortgage debt on its wholly-owned properties by $31.9 million. The management is actively adjusting its portfolio and selling underperforming assets. This happened to two properties in St. Louis, M. On November 4, 2021, BRT completed the previously announced sale of these assets. In addition, the management has entered into an amended credit facility with VNB New York. This will allow the company to borrow up to $35M and up to a potential $60M for the acquisition of multi-family properties. However, with the sale of two properties, this might not be used in the next quarter.

The apartment sector and COVID-related rental facilities such as labs, hospitals, and R&D facilities are one of the most attractive sectors in the last couple of months in my opinion. The company's AFFO has been on a constant rise since 2014 and even during the pandemic they could generate extensive returns in terms of rental income. FFO per share started to rise in 2021 and 2022 estimates are stable with $0.3 per share. The company is trading below its NAV by approximately 26%.

Comparing BRT to its peers we can hardly find a similar market cap competitor. The closest peer could be another multifamily REIT such as UMH Properties, Inc. (UMH) or Preferred Apartment Communities, Inc. (APTS) however, UMH has a market cap of over $1 billion. All of them are multifamily property REITs but APTS has offices as well, UMH is focused more on the Northeast region while BRT is on the Sunbelt region. We can make a comparison based on their EV/EBIDTA but BRT has a minus EBITDA so we only see that APTS could be a better choice with EV/EBITDA of 11.9 than UMH with over 27. This is why I would rather have a look at the price per TBV. Based on this factor (focusing on the trend, not on the actual numbers) APTS is on the rise making them more and more overvalued since December, UMH is declining and BRT just started to rise.

Put all these data together and with a rising price to TBV, constantly growing AFFO, stable FFO figures, and 26% below its NAV I am on the buy-side for BRT. Finviz analysts' mean target price estimate for BRT Apartments is $21.75. That is approximately 3% below the current market price but do not forget about the dividend as well when calculating total return. (More on that later)

Like a lot of REITs, the biggest risk is the rise of the cost of capital in the near future. BRT is not an exception. But the are some company-specific risks worth noting. Most of the company's multi-family properties are located in the Southeast and Texas which makes them susceptible to adverse developments in such markets. Properties owned by consolidated joint ventures generated approximately 23%, 20%, 15%, and 15% of BRT's revenues from properties located in Georgia, Texas, Alabama, and South Carolina. This means that the vast majority (almost two-thirds) of BRT's income comes from these 4 states. Accordingly, adverse developments in such markets, including economic developments, pandemics, or natural disasters (which are more and more common), could adversely impact the operations of these properties and therefore the cash flow.

They own 17 multi-family properties with three joint venture partners or their affiliates and may be adversely affected if they are unable to maintain a satisfactory working relationship with any one or more of these joint venture partners. Despite the company bought a property and now fully owns a 402-unit multi-family property in West Nashville there are several other properties left within joint ventures. 7 multi-family properties are owned with one joint venture partner or its affiliates, 6 multi-family properties are owned with a second joint venture partner and 4 properties are owned with a third joint venture partner or its affiliates. This concentration exposes the company to risks of adverse developments, and in particular, disputes or disagreements with such joint venture partners.

The multi-family properties, in general, compete with numerous housing alternatives, including other multi-family and single-family rental homes, owner-occupied single and multi-family homes. The company's ability to retain tenants and increase or maintain rents and occupancy levels could be adversely affected by several external factors such as rising mortgage rates, buying intentions, etc. A recent Redfin report indicates that 73% of home buyers and sellers in a Redfin-commissioned survey of Americans have said that inflation is influencing their future buying or selling plans. This can be a positive factor for BRT if those buyers keep renting instead.

BRT is a dividend payer but not a very impressive one in terms of dividend history and growth. The management had to cut the dividend in 2009 due to the recession and they reinstated the quarterly dividend in 2017. This was the year when the company restructured its portfolio and focused more on multi-family properties. Since then, the company has been paying consecutive dividends. BRT has no consecutive years of dividend increase yet, but the sector median is only 1 year so it would be foolish to expect a very high number. However, since 2017 the management announced 2 dividend increases the latest one in Q3 2021. I think if an income investor wants to get exposure to multifamily homes via a REIT BRT could be a good choice with a forward dividend yield of 4.30%. In addition, taking into consideration BRT's peers APTS might also be a good choice, with a dividend yield of 4.03%, (you can read my opinion about it) or UHM but they have a lower yield of only 3.1%.

The company has a healthy and safe payout ratio of approximately 74-76%. This suggests that there is no internal issue and there is room for potential increases in the future. The external factors can be more challenging such as the rising inflation and softer home price growth in 2022. Seeking Alpha estimates expect no change in dividends for 2022 but I think there might be a dividend raise in Q4 2022 with a moderate 2-3% based on previous years.

The table is created by the author. All figures are from the company's financial statements and SA Earnings Estimates.

The table is created by the author. All figures are from the company's financial statements and SA Earnings Estimates.

BRT Apartments is a well-run small-cap REIT with efficient management since only approximately one-tenth of the revenue is administrative cost. A strong balance sheet, actively well-adjusted property portfolio, and external home prices can make investors feel safe in BRT. However, their dividend history is not the most impressive one but since the transition to a pure multi-family REIT in 2017 the management maintained the dividend payments and in the future, I believe there is no sign they will decide otherwise. Based on these factors I am bullish on BRT.

This article was written by

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in BRT over the next 72 hours. 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.