Good day, and welcome to the BRT Apartments Corp. Fourth Quarter 2022 Earnings Call. All participants will be in listen-only mode. Please note this event is being recorded. I’d now like to turn the conference over to Trip Sullivan of Investor Relations. Please go ahead.

Thank you for joining us today for BRT Apartment's fourth quarter 2022 earnings conference call. On the call today are Jeffrey Gould, President and Chief Executive Officer; George Zweier, Chief Financial Officer; and Ryan Baltimore, Chief Operating Officer; as well as David Kalish, Senior Vice President. I would like to remind everyone that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management's current expectations, assumptions, and beliefs. Listeners should not place undue reliance on any forward-looking statements, and are encouraged to review the company's SEC filings, including its Form 10-K and Form 10-Q for a more complete discussion of risks and other factors that could affect these forward-looking statements. Except as required by law, BRT does not undertake any obligation to publicly update or revise any forward-looking statements. This call also includes a discussion of non-GAAP measures, including FFO, AFFO, NOI, combined portfolio NOI and information regarding our pro rata share of revenues, expenses, NOI, assets and liabilities of BRT's unconsolidated subsidiaries. All the non-GAAP information discussed today has certain limitations and should be used with caution and in conjunction with the GAAP data presented in our supplemental earnings release and in our reported filings with the SEC. Please see these reports and filings for the definitions of each non-GAAP measure. As a reminder, the company's supplemental information and earnings release have been posted on the Investor Relations section of BRT's website at www.brtapartments.com. I'd now like to turn the call over to President and CEO, Jeffrey Gould. Please, go ahead, Jeff.

Thank you, and welcome to the call. I'll have a few comments on our overall performance, the state of the company, and some insight on the market environment. Then I'll turn it over to George for some additional color around our results. I'll ask Ryan to come out at the end to discuss our 2023 guidance. I'm very pleased with what we've accomplished at BRT this year. We made significant progress on our strategic goals, such as growing the wholly owned portfolio, improving the balance sheet with most of our mortgage debt at fixed interest rates, driving NOI growth and creating value. The scale and importance of the transactions we completed in 2022 can't be emphasized enough. I'd like to thank our entire team for their contributions to our success. We remain in front of a number of long-term secular trends at BRT, with our portfolio positioned in markets that are experiencing population and job growth. Some concerns have been expressed this quarter within our industry about the impact of inflation on the cost of living, new supply in several markets, and the timing and ultimate scale of a recession, among others. These are real challenges for us and for the industry. But I've said this before, and it's worth repeating. BRT's management has been through many economic cycles and is ready to take advantage of appropriate opportunities. Patience has been a virtue in the last several quarters. Any transactions we contemplate must still meet our stringent underwriting standards, so you can expect we will remain deliberate in our growth plans. The same applies to any potential asset recycling we might pursue. Until recently, 'price discovery' has been the best term to describe what has been transpiring in the past several months. We are beginning to see some light at the end of the tunnel. The recent agreement by one of our joint ventures to sell Chatham Court in Dallas is a great example. When completed in the second quarter, that disposition should generate an IRR of 22% over a 7-year hold for us and net proceeds of approximately $19 million that we can redeploy later this year. In March, we entered into an agreement to acquire a 238-unit multifamily property built in 2019 in Richmond, Virginia for a purchase price of $62.5 million. The purchase price includes the assumption of approximately $32 million of mortgage debt, with an attractive rate of 3.34% and a maturity of 2061. We expect the transaction will be completed in the fourth quarter as we must seek lender approval of the mortgage debt assumption. In terms of capital allocation, our largest transactions in 2022 were related to the partner buyouts at 11 properties for approximately $106 million and the sale of our interest in four unconsolidated properties from net gains totaling approximately $65 million. We realized IRRs between 19% and 41% on these properties. While the increase in our wholly-owned portfolio provides more scale, it also allows us to fully control these properties and execute on our business plan for this portfolio, such as, if appropriate, opportunistic value-add investments. During 2022, we also allocated capital to providing a dividend increase of 8.7% to our stockholders to $0.25 per share and instituted a dividend reinvestment plan, allowing the purchase of shares at a 3% discount. As you've seen from our 2023 guidance, that increase still leaves our dividend to be well covered with a payout ratio as a percentage of AFFO in the range of 62% to 67%. We were very prudent and disciplined during the year with the execution of our ATM. We raised $9.9 million in total during 2022. Given where the stock traded most of the quarter and with no transactions, we did not utilize the ATM in the fourth quarter. Turning to the performance of our multifamily portfolio in the quarter. Average occupancy for the portfolio was 94.7% for the fourth quarter, which is down from 96.4% in the 2021 quarter, primarily due to the lack of movement among our tenants in the 2021 quarter. Average monthly rents for the combined portfolio in the fourth quarter of 2022 were up 9.2% compared to the 2021 quarter. For leases signed in the fourth quarter of 2022, we saw estimated spreads on new leases at 9.5%, renewal spreads of 9% and overall spreads of 9%. Through January and February this year, we have seen estimated spreads on new leases of 3.4%, renewal spreads of 8%, and overall spreads of 6%. Also, I would like to note that we believe we have minimal stress and affordability as our rent-to-income ratio for all new leases signed in the fourth quarter is 24%, which compares favorably with our peers. To conclude, the best way I can frame the outlook for 2023 is to say that our activities in 2022 and to date in 2023 have materially improved our ability to create long-term value for our stockholders. We have more of our portfolio under our direct control than ever before. Almost all of our mortgage debt is at a fixed rate with no debt maturities until 2025. Our patience and diligence have allowed us to be very selective on new opportunities, and we have an easier and more compelling value creation message to share with potential new investors. George, please take it from here.

Thank you, Jeff. Our results for the fourth quarter on a year-over-year basis continue to be driven by the positive impact from the partner buyouts and improved operating margins across the portfolio, offset by some expenses we incurred in the fourth quarter related to extreme winter conditions in the Southeast. The net loss attributable to common stockholders of $0.22 per diluted share was higher than the $0.08 loss per diluted share from a year ago, primarily due to increased depreciation from partner buyouts, a decline in joint venture income due to an insurance gain we recognized in the prior year, and increased borrowing costs on our subordinated debt and credit facility, offset by improved portfolio results. FFO was $0.40 per diluted share compared to $0.35 per diluted share a year ago, primarily due to an increase in net insurance gains and recoveries and a decline in the early extinguishment of debt, offset by increases in real estate operating expenses, the result of costs incurred related to the extreme weather conditions and increased interest expense on our floating-rate corporate debt. AFFO was $0.37 per diluted share compared to $0.41 per diluted share a year ago, primarily due to the same factors impacting FFO, excluding the net insurance gains and recoveries and the decline in the early extinguishment of debt. The expenses incurred due to extreme weather conditions that caused some damage to our properties were approximately $549,000, or $0.03 per share, and the increased borrowing costs represented approximately $367,000, or $0.02 per share. Our combined portfolio NOI was up 0.7% for the fourth quarter. That's a new measure for us. I want to take a moment to explain the rationale for providing this metric as we believe it provides additional transparency. With a substantial change in the composition of our consolidated and unconsolidated properties from 2021 to 2022, as we've completed partner buyouts and sold several joint venture properties in this period, true comparisons for the portfolio were difficult. What we've done in the supplemental is to break down the calculation, while still providing the combined and same-store NOI figures that we historically reported. As Ryan will discuss in a moment, combined portfolio NOI is the metric to which we will be guiding going forward. The big moving parts in the combined portfolio NOI increase of 0.7% for the fourth quarter over the same quarter a year ago, where revenue grew 8.5%, primarily due to increased rental rates across the portfolio. Expenses increased by 19.7%, primarily due to higher repairs and maintenance and real estate taxes. The expenses related to the extreme weather conditions I previously mentioned negatively impacted combined portfolio NOI by 3.5% on a year-over-year basis. Turning to the balance sheet. Available liquidity at year-end was $61.3 million, which is comprised of cash and availability under our credit facility. At year-end, our consolidated and unconsolidated mortgage debt had a weighted average interest rate of 3.99% and a weighted average remaining term to maturity of 7.2 years. During the fourth quarter, we paid off a $14.9 million loan maturing on our Silvana Oaks property with borrowings from our credit facility. Subsequent to quarter end, we paid off all of our borrowings on the credit facility and significantly reduced our variable rate debt exposure with a new $21.2 million mortgage on the Silvana Oaks property. This was a very attractive financing with a 10-year term and a fixed rate of 4.45%, which is 300 basis points lower than the debt we paid off on the credit facility. I would also add that this new loan is interest-only throughout its term. As of March 1, our available liquidity was $75.3 million, with full availability on our line. Debt-to-enterprise value as of December 31 was 62%. That's up slightly from the 61% a year ago. As Jeff noted earlier, with improved liquidity, lower variable rate debt exposure, and no debt maturities until 2025, the balance sheet is in a much better position than it was. Now I'll turn the call over to Ryan to discuss our guidance for 2023.

Good morning. I'll be relying on the guidance tables and assumptions that we provided in both our earnings release and supplemental last night. As this is our initial outlook for the year, I want to preface my comments today with a reminder that these forecasts and assumptions are based on available data and trends as we have as of today, March 15, 2023. Let's start with the headline figure of AFFO of $1.50 to $1.61 per diluted share for 2023. That represents 2.3% growth at the midpoint when compared with full year 2022 results. For FFO, we're projecting a range of $1.08 to $1.19 per diluted share for 2023. We have outlined a number of assumptions to accompany these ranges, so let me walk through the big ones briefly. For ease of discussion, I'll generally refer to the midpoint of the ranges. First, I'd like to point out that except for the Chatham Court property disposition, these ranges do not include any additional acquisitions, dispositions, or capital markets activity. The proceeds from this disposition are expected to total $19 million when it closes in the second quarter. Although we have an acquisition under contract for a potential closing in the fourth quarter, that Jeff mentioned earlier, we have not assumed a redeployment of these proceeds in our guidance. This disposition decreases FFO per share by approximately $0.05 and AFFO per share by approximately $0.04 to $0.05 for the full year. We have also assumed very little increase in the share count as well with 19.23 million weighted average shares outstanding for the year. Second, we are assuming very little utilization of the credit facility with our only other meaningful variable-rate debt comprised of the junior subordinated notes at 200 basis points over LIBOR. Our interest rates we have assumed are based on the forward yield curve. Otherwise, our debt, as outlined in the supplemental, is fairly straightforward to model. Third, with the combined portfolio accounting for 28 properties and 7,707 units, the assumptions for this pool represent all of the multifamily properties. I'll break down those assumptions a bit further. The property revenue growth of 5.7% at the midpoint assumes a moderation of recent growth across the portfolio and some conservatism based on the current uncertain economic environment. Controllable operating expense growth of 5.6% at the midpoint is in line with what we have seen in the past few quarters. The real estate tax and insurance expense growth is where we're forecasting the biggest increase and impact on NOI growth, with real estate taxes assumed to be up 9.8% at the midpoint and insurance up 50.4% at the midpoint. I want to focus on the insurance in particular. We disclosed in our earnings release that we implemented a master insurance program effective in Q4. This program replaced policies at 17 properties that were scheduled to expire at various periods throughout 2023. In many cases, by greatly accelerating the renewals, we believe we will experience a much higher increase on a year-over-year basis. While insurance rates have been a hot topic through the earnings cycle, this acceleration is distorting the real rate of increase that we would have normally experienced had each policy expired and renewed during the year. We believe this was the right decision to make for the long term to be able to benefit from a greater number of properties within the coverage pool, which should ultimately result in a smoothing out of rate increases over time. These inputs bring us to a combined property NOI increase of 3.1% at the midpoint. To add a little more perspective, if we assume the 25% increase in insurance expenses, which would be consistent with what many of our peers reported, instead of the 50.4% we're anticipating, our combined property NOI would be in the range of 2.6% to 6% or 120 basis points higher at the midpoint. Lastly, I'll highlight that we provided ranges for recurring, value-add and nonrecurring capital expenditures for 2023. As a reminder, we define recurring CapEx as what is incurred at the properties to maintain their existing operations. We do not include replacements in this figure, which is different from other REITs. We have historically included and continued to include replacements in operating expense. During 2022, BRT's share of replacement costs, which flowed to real estate operating expenses on our P&L, was $2.5 million. Our expense growth assumptions in combined portfolio NOI include approximately $300 per unit of replacements. Our value-add expenditures are related to the units we continue to rehabilitate throughout our portfolio. During 2022, we rehabbed over 400 units with an investment of $2.9 million and achieved an estimated annualized ROI of approximately 47%. This program has been a source of incremental value creation for us in the past, and we anticipate it will continue to be one going forward. The nonrecurring CapEx assumptions include what we believe truly represent revenue-enhancing and major upgrades to properties. In summary, we believe we've outlined a solid case for continued growth in 2023 for BRT, and we look forward to reporting our progress to you throughout the year. That completes our prepared remarks. Operator, will you please open the call to questions?

Our first question comes from Gaurav Mehta with E.F. Hutton.

I want to ask you on the transaction market. I was hoping if you could provide some color on pricing and then maybe some color on the acquisition that you have under contract, including your plans to fund the remaining amount outside of the $32 million of mortgage debt that you planning to assume?

Good morning, Gaurav. Generally speaking, the market is challenging. It's tough to make purchases due to significant pent-up demand from the last couple of years. We've received a lot of interest, particularly regarding the sale of one of our properties, which attracted incredible attention despite the difficult buying environment. Specifically, the acquisition we're excited about is likely priced in the low 4s, factoring in the cap rate and the positive leverage we're achieving. We have excellent financing from HUD that supports this from day one. To provide some context, the property sale we've mentioned is probably in the high 4s and is a 1986 construction project. Overall, compared to peak cap rates in the 3.5% to 4% range, we're currently seeing rates closer to 4.5% to 5%. We're getting more clarity as new transactions occur, though from the high cap rates, we might have increased by 50 to 100 basis points at most. There's considerable demand in the market. Regarding funding, we plan to utilize the cash from the Chatham sale, along with short-term access to our line of credit, which we intend to replace in some way through potential ATM or further sales. We're focused on managing our line and keeping costs low, and we will approach this carefully.

Okay. Maybe on the proceeds, the $19 million of proceeds from disposition. Do you guys plan to carry that on your cash balance until you acquire the property?

Yes. Like we said earlier, we have no outstanding line that we need to pay down. We are going to hold it as cash. We recognize that that's going to take the few months in between the sale and the new buy, which is going to not be ideal for us. But at the same time, it was an appropriate time to sell the Chatham property, and it's a short-term effect. So we're very comfortable with it. And yes, we will hold the cash.

Okay. I also wanted to ask you about the value add. You talked about 47% ROI in 2022. Is that the kind of return you guys expect to get in '23 as well?

Hi, Gaurav, this is Ryan. I think that that return will come down. That's partially due to the softening of the market in general. As we mentioned with our guidance, we are anticipating some moderation of rent growth that we've seen as well as some conservatism that we've built in with this economic backdrop right now. So we're not anticipating probably as high as that 47%, but we're generally looking in the 15% to 20% for the value add. So that's kind of our minimum metric there to even start that process.

Our next question comes from Aaron Hecht with JMP Securities.

Rental rate growth has, obviously, been pretty strong here, but occupancy looks like it was down across both the consolidated and unconsolidated portfolio. Has that kind of been planned to drive the rate growth? Do you expect that occupancy to kind of level off now? Kind of give us some thoughts on how we should think about the occupancy side of the business going into '23? And what's implied in guidance?

Yes. I'll start and then Ryan can chime in as well. It's interesting to look at the year-over-year occupancy trends. During COVID, people were not moving, which caused significant disruption and a decrease in renewal activity. The primary reason for the year-over-year decline in occupancy is the comparison of COVID days to a period where there's more comfort in the environment. While seasonality affects occupancy quarterly, we anticipate an increase in occupancy during the spring and summer months as is typical. Ryan, do you have anything to add?

No, no. I think that's the main driver, as Jeff mentioned. And we generally, as we've spoken about in the past, try to keep occupancy in the mid-90s. As we get higher, we look to push rents to bring that back down to where we believe we can maximize the revenue. So this wasn't surprising to us by any means. I think that, as Jeff mentioned, we had an abnormally high occupancy during these winter months last year. So this was more in line with what we had seen in the past.

Does the strategy change at all given the economic conditions? Do you prioritize occupancy a little bit more than rate growth given the difficulties out there?

Yes, I would say we'd like to focus on around that 95%, give or take number. So when we see occupancy dropping a little bit, we would do something as far as lowering rents to continue that occupancy. We've seen that as a sweet spot for us. Generally speaking, when we see activity or lack of activity in a certain product, whether it be a 1-bedroom or a 2-bedroom in a specific apartment complex, we'll make adjustments accordingly to keep close to that 95% occupancy if possible.

Yes. And also just to add on that real quickly in terms of kind of what we mentioned with the guidance, part of that is built into that conservatism that we included. We definitely didn't anticipate pushing rents nearly as aggressively as it had happened in 2022. So I think that's all kind of built into our guidance assumption.

Okay. And then on the guidance, the expense growth, obviously, higher than we've seen from some groups across the space. And understandably, you did some work on the insurance side, which is a big increase. And then I think 9.8% growth on the property tax side was the disclosure. How much of that property tax increase or how much variability do you see in there, given I would think you have assumptions that are baked in, was there any recoveries in '22 that impact '23? And then maybe you could talk on the insurance side about the decision to do a master agreement because that was a pretty big increase?

Yes. So Aaron, let me start a little more generally. As far as guidance goes, look, it's our first time giving guidance. We wanted to be conservative. We want to be careful in this market. We've addressed this and said to ourselves that we think these are appropriate figures to use, and we're not surprised to hear you say that it's higher than some of our peers. But this is where we were comfortable giving guidance. As far as specifics, Ryan can answer some of the questions regarding specifically as to why we made this insurance change, which I think was a significant and positive thing for the company. Ryan, you can answer that?

Yes. To begin with the taxes, we collaborate with real estate tax consultants across all our properties. We establish our budget based on the municipalities where we expect tax increases according to the information we have at the moment. It's important to note that some markets are more aggressive than others, and reassessments occur every 3 or 5 years. This is integrated into our assumptions and our guidance. We aim to perform better if possible, but our approach is grounded in what we currently know. There is a possibility for variability in this area, but based on what we understand today, we are comfortable with our position. Regarding insurance, the significant increase I mentioned earlier is largely due to the timing of renewing policies that may have originally been set for midyear. As we concluded last year and transitioned from our partners, we recognized the direction of the insurance market and sought to exert greater control. We made the most of the opportunity before the year-end and before the new treaty renewals, allowing us to bring a substantial number of properties, 17 to be exact, entirely under our ownership. While this year indeed presents a notable increase, our intention is to stabilize this as we expand our portfolio and enhance our insurance program over time.

This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Gould for any closing remarks.

I just want to say thank you all for your time and continued interest in BRT. We're always available for any follow-up calls you may have, so please feel free to give us a ring. And that's pretty much it. So have a great day, and thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.