BRT Apartments: Another Sunbelt Multi-Family REIT with Governance Issues

I didn't mean for this to be a mini-series, but as I was looking through ARL/TCI I remembered another REIT that I looked at years ago, BRT Apartments (BRT), that fits as an addition to the "sunbelt multi-family M&A craziness" themed basket.  BRT Apartments is primarily a class B, value-add, garden style apartment portfolio in the southeast and Texas (35 properties, ~9500 units, ~$1150/month rents, loosely similar to NXRT's portfolio).  

BRT also shares some similarities to TCI but thankfully is a little simpler, it owns both apartment buildings directly and through unconsolidated joint ventures which makes the accounting a bit challenging to untangle (typical REIT investors shun complexity), and it is also family owned with the Gould family owning ~25% of the stock.  The founder, Fredric Gould is 85 and still a member of the board, his two sons hold executive positions including one that is the CEO, and a cousin is also involved as an EVP.  The governance issues here don't seem as egregious as ARL/TCI but maybe on par with BRG.  The Gould family does have a shared services agreement with their family office that provides "investment advice and long-term planning" and other services to the company (sounds like something an internal REIT shouldn't need to outsource), which has averaged about $1.4MM in each of the last several years.  BRT also uses a property manager for some of their properties that is wholly owned by the Gould family.  The Gould's also previously managed the company via an external asset manager "REIT Management" but this is now technically an internally managed REIT.

While I haven't seen any press leaks regarding BRT running a sales process, I'm just going on the assumption that every smallish sunbelt apartment REIT is receiving inbound calls from bankers and private equity shops kicking the tires, effectively all are probably evaluating strategic alternatives.  I'm going to keep this one quick (BRT has a long history, was previously a lender to multi-family pre-GFC, foreclosed on properties, became the owner, etc, but now pretty clean, just sunbelt multi-family apartments), but if you break out the two baskets:

The left side is the 8 apartment complexes they own outright with the NOI being Q3 annualized numbers and the right side is the 27 apartment complexes they own through various joint ventures and their proportional NOI and mortgage debt as disclosed in their supplement package.  The quirk I'm a bit unsure of is for the unconsolidated properties I'm using a 5.0% cap rate just for complexity/limited disclosure of these JVs (there is minimal other obvious difference between the portfolios).  BRT has been trying and occasionally been successful buying out their joint venture partners and presumably a financial buyer would need a little extra juice to go through a similar process although it's not uncommon for non-100% interest in properties to trade.  The problem/lack of disclosure is in how these JVs are structured, for example BRT might own 80% of the joint venture's equity but their minority partner might get a preferred return and these terms are only disclosed at a very high level (if anyone is familiar with the details, please let me know):  

Joint Venture Arrangements

The arrangements with our multi-family property joint venture partners are deal specific and vary from transaction to transaction. Generally, these arrangements provide for us and our joint venture partner to receive net cash flow available for distribution and/or profits in the following order of priority (in certain cases, we are entitled to these distributions on a senior or preferential basis): (i) a preferred return of 9% to 10% on each party's unreturned capital contributions, until such preferred return has been paid in full; and (ii) the return in full of each party's capital contribution. Thereafter, distributions to, and profit sharing between, joint venture partners, is determined pursuant to the applicable agreement governing the relationship between the parties. Generally, as a result of allocation/distribution provisions of the applicable joint venture operating agreement, the allocation and distribution of cash and profits to BRT is less than that implied by BRT's percentage equity interest in the venture/property.

If you gross up the JVs (BRT owns ~67% of the equity on average), that works out to about a ~$171k/unit acquisition price, versus BRG at about ~$300k/unit, although BRG's rentals are a little more premium at $1400/month.  To spot check that math, they recently bought out their joint venture partner in a Nashville, TN complex for $165k/unit.

If my math isn't wildly off (it might be), shares are still reasonably undervalued using market cap rates despite jumping last week after the BRG buyout (I'm not alone in thinking BRT Apartments could be next).  At a certain point taking advantage of the public-to-private valuation arbitrage available in these apartment REITs outweighs the benefits of keeping it public to the Gould family.  Similar to BRG, since this is really a "will they or won't they sell" bet, I'm going to play the idea through call options, this time I just went out to June '22 and bought the at-the-money $22.50 strikes hoping this is a replay.

Other thoughts:

• They have used their ATM offering this year, which isn't exactly a sign they're shareholder friendly or think their shares trade at a huge discount as I suggest, but BRG did similar things with the preferred share exchanges there.  Some of the ATM issuances were before inflation talk really heated up and we saw a lot of activity in the space, but it is still worth mentioning as a negative.
• The Gould family also runs another REIT, One Liberty Properties (OLP), that's mostly an industrial net lease, attentions and salaries could potentially be repositioned there as that sector also has covid tailwinds.  At BRG they found a creative way to keep their jobs by spinning out the SFH rentals, here they could just all move over to their already established REIT.
• I also noticed the Gould family has created a cannabis investment firm, Rainbow Realty Group, could be the seeds of a future cannabis mREIT or other lending structure that have become popular ways to invest in cannabis on U.S. regulated exchanges (e.g., I noticed the old Fifth Street Asset Management (FSAM) team popped up at AFC Gamma (AFCG)).  Maybe cash out here and reinvest in that hot theme?

Disclosure: I own BRT June $22.50 call options (and ARL, BRG calls)