Executive Summary / Key Takeaways

• BRT Apartments Corp. is undergoing a strategic evolution, shifting from a joint venture-heavy structure to increased wholly-owned multi-family properties, aiming for greater control and balance sheet strength.
• Recent financial performance in Q1 2025 shows modest revenue growth driven by rental rate increases and a significant boost in loan interest income from new preferred equity investments, while expenses remain pressured by inflation, particularly insurance and real estate taxes.
• Management is prioritizing stabilizing occupancy in 2024 amidst market headwinds from new supply in key Sunbelt regions, while remaining patient on traditional acquisitions due to unfavorable market pricing relative to interest rates.
• Capital allocation is disciplined, with a focus on accretive share repurchases ($8.75 million available as of April 30, 2025) and exploring alternative investments like preferred equity, leveraging a balance sheet with no significant mortgage maturities until early 2026.
• The outlook anticipates a challenging operational environment in 2024, with potential for better growth in 2025 and 2026 as new supply is absorbed and market conditions potentially normalize, but risks remain from economic uncertainty, refinancing needs for significant debt maturities post-2025, and competitive pressures including technological gaps.

BRT's Evolving Identity and Market Position

BRT Apartments Corp. operates as a real estate investment trust primarily focused on the multi-family residential sector. While its history extends back decades, the company has been actively reshaping its identity since 2021, embarking on a strategic simplification aimed at consolidating ownership and control. This initiative has seen BRT take full ownership of a majority of its properties, moving away from a structure heavily reliant on unconsolidated joint ventures. This shift is intended to enhance operational efficiency and strengthen the balance sheet, providing a more direct path to value creation from its portfolio.

BRT's portfolio is concentrated in the Southeastern United States and Texas, regions known for population growth but also currently experiencing significant new multi-family supply. This geographic focus positions BRT to potentially benefit from long-term demographic trends, but also exposes it to localized market dynamics, including increased competition for tenants. The company operates in the mid-tier and affordable segments, offering a value proposition that differentiates it from larger competitors like Equity Residential (EQR), AvalonBay Communities (AVB), and Essex Property Trust (ESS), which often target premium or luxury markets.

Compared to these larger peers, BRT operates at a smaller scale, holding an estimated 1-2% aggregate market share in the U.S. multi-family REIT sector. While this smaller scale can sometimes translate to less bargaining power with suppliers compared to giants like EQR, BRT aims to leverage cost leadership and efficient scale within its specific niche markets. This involves streamlined maintenance processes and potentially benefiting from geographic monopolies in certain areas, which can lead to lower operating costs per unit. However, this focus on cost efficiency and affordability means BRT typically achieves lower rental rates per unit and revenue per square foot compared to competitors focused on higher-end properties.

In terms of technological differentiation, BRT currently maintains a more traditional approach compared to some competitors. While the company is exploring new technologies, such as those for self-guided and after-hour tours to enhance marketing and lead quality, there is no indication of a proprietary core technology that provides a significant, quantifiable competitive moat akin to specialized manufacturing processes or advanced AI-driven property management systems reportedly being adopted by some peers. The risk of competitors utilizing advanced technologies, such as AI, is acknowledged by BRT. This relative technological position could potentially lead to slower tenant processing times or less optimized operational workflows compared to more technologically advanced rivals, impacting efficiency and potentially limiting the ability to capture market share in segments where tech-enabled amenities or services are increasingly expected. The strategic intent behind exploring new technologies appears to be focused on improving leasing efficiency and lead quality rather than establishing a broad technological moat.

Recent Performance and Operational Realities

BRT's financial performance in the first quarter of 2025 reflects the current market environment and the impact of recent strategic actions. Total revenues increased to $24.1 million for the three months ended March 31, 2025, up from $23.4 million in the same period of 2024. This 3.0% increase was driven by two main factors: a modest 1.4% rise in rental and other revenue from real estate properties to $23.6 million, primarily attributable to net rental rate increases across approximately two-thirds of the portfolio and growth in ancillary income; and a significant surge in loan interest and other income, which jumped 363.8% to $487 thousand, largely due to interest generated from preferred equity investments originated in the fourth quarter of 2024.

On the expense side, total expenses saw a slight increase of 0.6% to $26.8 million. Real estate operating expenses saw a marginal decrease, benefiting from a reduction in the master insurance policy premium, though this was partially offset by inflationary pressures on real estate taxes and utilities. Interest expense rose by 2.8% to $5.7 million, mainly due to the financing of the Woodland Trails property in Q3 2024, somewhat mitigated by lower interest rates on junior subordinated debt. General and administrative expenses decreased, benefiting from a non-cash reduction in RSU amortization related to performance hurdles not expected to be met, despite an increase in professional fees. Depreciation and amortization also saw a slight increase.

The company's share of earnings from unconsolidated joint ventures increased notably, rising from $228 thousand in Q1 2024 to $413 thousand in Q1 2025. This improvement was attributed to a reduced loss at the Stono Oaks property, which is in lease-up and saw increased occupancy, as well as improved operating results at other multi-family properties within the joint venture portfolio.

Operationally, BRT, like many operators in its key markets, is contending with the impact of new supply. Management has acknowledged that this is expected to pressure occupancy and limit rent growth potential in 2024. While overall portfolio occupancy has remained relatively stable, specific properties, such as Alamo Ranch in San Antonio and Bells Bluff in Nashville, have faced challenges, contributing to muted NOI growth in prior periods. Addressing these property-level issues and stabilizing occupancy across the portfolio is a key operational priority for 2024. The inflationary environment continues to pose a challenge, particularly regarding non-controllable expenses like insurance and real estate taxes, which directly impact operating margins despite efforts to control costs elsewhere.

Capital Allocation and Financial Strength

BRT maintains a disciplined approach to capital allocation, particularly in the current uncertain economic climate. As of April 30, 2025, the company reported available liquidity of $59.5 million, comprising $19.5 million in cash and cash equivalents and the full $40.0 million available under its credit facility.

The company's debt structure includes consolidated mortgage debt of $445.7 million at March 31, 2025, with a weighted average interest rate of 4.09% and a weighted average remaining term of 5.80 years. Unconsolidated joint ventures hold an additional $250.4 million in mortgage debt with a weighted average interest rate of 4.26% and a shorter remaining term of 3.60 years. BRT also has $37.4 million in junior subordinated notes outstanding, maturing in April 2036, bearing interest at three-month term SOFR plus 250 basis points (6.55% at March 31, 2025). While the consolidated debt has a relatively favorable weighted average term, the company faces significant balloon payments totaling $211.6 million (including the unconsolidated share) due through 2027. Management acknowledges that operating cash flow and available cash are insufficient to fully fund these maturities, potentially requiring refinancing, equity issuance, or asset dispositions, which could occur on unfavorable terms depending on market conditions.

In light of the challenging acquisition environment, characterized by a disconnect between cap rates and higher interest rates leading to negative leverage, BRT has been patient with external growth. Instead, it has strategically prioritized share repurchases as an accretive use of capital. In Q1 2025, the company repurchased 78,724 shares for $1.38 million, and an additional 63,356 shares for $1.00 million subsequent to quarter-end through April 11, 2025. The share repurchase program was notably replenished by $5.05 million and extended through December 31, 2026, on March 11, 2025, signaling continued confidence in this capital allocation strategy. As of April 30, 2025, approximately $8.75 million remained available under the program. Management views these buybacks favorably based on the company's valuation and AFFO yield.

Furthermore, BRT is exploring alternative investments in the multi-family space, such as preferred equity and bridge loans, as opportunities arise from owners facing financing or capital issues. The preferred equity investments originated in Q4 2024, contributing significantly to Q1 2025 loan interest income, exemplify this strategy. These investments, while unsecured and subordinate to mortgage debt at the property level, offer a structured return in a market where traditional acquisitions are less appealing.

The company declared a quarterly cash dividend of $0.25 per share payable in April 2025. The board evaluates the dividend quarterly based on various factors, including cash needs, prospects, debt maturities, and taxable income projections. Dividends paid in 2025 are anticipated to be treated as a return of capital for federal income tax purposes.

Outlook, Risks, and the Path Forward

BRT's outlook for 2024 anticipates a challenging operational environment, mirroring broader trends in the multi-family sector. The primary headwinds are expected to be the impact of new supply on rent growth and occupancy, particularly in certain Sunbelt markets, and persistent inflationary pressures on operating expenses. Management is focused on mitigating these challenges through diligent property management and prioritizing occupancy stabilization throughout the year.

Looking beyond 2024, management expresses optimism for potentially better growth opportunities in 2025 and 2026. This view is predicated on the expectation that the current wave of new supply will be absorbed and that the pace of new construction permitting has slowed, which should alleviate some market pressures over time. The company's patient approach to acquisitions in the current market is intended to position it to capitalize on more favorable transaction opportunities that may emerge as market conditions evolve, potentially from distressed sellers or as interest rates stabilize.

Despite the strategic positioning and long-term view, BRT faces several pertinent risks. The uncertain national economic environment, including the potential for inflation or recession, could further impact tenant demand, rental rates, and property values. The concentration of properties in the Southeast and Texas makes the portfolio susceptible to regional economic downturns or natural disasters. Controlling operating expenses, especially real estate taxes and insurance, remains a challenge due to factors largely outside the company's direct control. The need to refinance significant debt maturities starting in 2026 poses a financial risk, particularly if interest rates remain elevated or credit markets tighten. While BRT is not the direct obligor on the mortgage debt at unconsolidated joint ventures or properties with preferred equity investments, the loss of these assets due to foreclosure would materially impact the company's financial condition and results. Furthermore, the competitive landscape, including the potential for competitors to gain efficiencies or attract tenants through advanced technology, represents a long-term challenge.

BRT's strategy of portfolio simplification, disciplined capital allocation focused on accretive buybacks, and exploring alternative investments reflects a pragmatic response to the current market. While 2024 is expected to be challenging, the company's balance sheet strength, highlighted by no significant consolidated mortgage maturities until 2026, provides flexibility. The success of this strategy hinges on the ability to maintain operational performance in a competitive environment, manage upcoming debt maturities effectively, and capitalize on future investment opportunities as market dynamics shift.

Conclusion

BRT Apartments Corp. is navigating a transitional period defined by strategic portfolio consolidation and a disciplined response to a challenging multi-family market. The company's shift towards greater outright ownership aims to enhance control and long-term value. While recent performance shows revenue growth, driven by rental increases and new preferred equity investments, operational headwinds from new supply and inflation persist, necessitating a focus on occupancy stabilization in 2024. BRT's capital allocation strategy, prioritizing share repurchases over acquisitions in the current environment, underscores a patient approach, leveraging balance sheet strength and available liquidity.

The investment thesis for BRT is rooted in its ability to execute its simplification strategy, maintain operational performance in its target markets, and prudently manage its capital structure, particularly the significant debt maturities on the horizon. The outlook suggests potential for improved growth in 2025 and 2026, contingent on market absorption and economic conditions. Investors should closely monitor the company's progress in stabilizing operations, its approach to refinancing debt, and its ability to identify and execute accretive investment opportunities, whether through traditional acquisitions or alternative structures, as the market cycle evolves.