- BRT Apartments Corp. owns, develops, and operates multi-family properties.
- BRT makes acquisitions, which are intended to offer annual returns of 8%. With 70% leverage, I would not expect stock returns of more than 26%.
- The Debt/Equity ratio indicates that the company is not only overvalued. In my view, the market is not taking into account the total amount of leverage.
- The most recent buyback programs explain why the share price spiked up.
BRT Apartments Corp. (BRT) appears to be overvalued as compared to peers. I don’t think the market is taking into account BRT’s debt/equity and the company’s PE ratio. Also, I don’t believe that the company’s stock returns can be 50% y/y for a long time. Given the company’s leverage and the acquisitions made, I would expect a maximum stock return of 26%. Taking into account this rationale, in the near future, BRT Apartments may be a target of short sellers.
35 years old real estate investment trust, BRT Apartments Corp. owns, develops, and operates multi-family properties.
The business strategy is based on the acquisition of multi-family properties including mortgage debt and the sale of properties. The company provided the following information about its multi-family apartments:
Generally, our multi-family properties are garden apartments, mid-rise or town home style properties that provide residents with amenities, such as a clubhouse, swimming pool, laundry facilities and cable television access. Residential leases are typically for a one-year term and may require security deposits equal to one month’s rent. Substantially all of the units at these properties are leased at market rates. Source: Prospectus
In my opinion, it will be very good on the part of investors if they identify the company’s expected annual returns. Using these figures, they may understand whether the company is overvalued or not. Read below that BRT Apartments seeks for acquisitions that offer annual returns of 7% to 8%:
In identifying opportunities that will achieve these goals, we seek acquisitions that will achieve an initial approximate 7% to 8% annual return on invested cash and an internal rate of return of approximately 10% to 16%. We have also focused, but have not limited ourselves to, acquiring properties located in the Southeast United States and Texas. Source: Prospectus
BRT Apartments uses a significant amount of leverage to acquire new properties. According to the most recent annual report, the company intends to leverage up to 70%. As a result, with annual returns of 7% to 8% and the amount of leverage (70%), I would expect returns of not more than 26% (8%*1/0.3). The lines below offer additional information on the company’s expected leverage:
Currently, approximately 30% to 40% of the purchase price is paid in cash and the balance is financed with mortgage debt. We believe that the use of leverage of up to 70% allows us the ability to earn a greater return on our investment than we would otherwise earn. Generally, the mortgage debt obtained in connection with an acquisition matures five to ten years thereafter, is interest only for one to five years after the acquisition, and provides for a fixed interest rate and for the amortization of the principal of such debt over 30 years. Source: Prospectus
The Stock Returns Are Not Sustainable
As shown in the table below, BRT Apartments Corp. owns a significant amount of properties in Texas. 32% of the total amount of sales come from Texas. Besides, 30% of the total amount of properties are located in Texas. In the light of this fact, I will use real estate figures from Texas.
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Disclosure: No Positions On BRT Apartments Corp.