10-Q 1 form10q-43792_3802.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended January 31, 2002 Commission File No. 2-27018 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY -------------------------------------------------------------------------------- (exact name of registrant as specified in its charter) New Jersey 22-1697095 ----------------------------------------- -------------------------- (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 505 Main Street, P.O. Box 667, Hackensack, New Jersey 07602 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 201-488-6400 ------------ -------------------------------------------------------------------------------- Former name, former address and former fiscal year,if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes XX No -- -- -------------------------------------------------------------------------------- FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY ------------------------------------------------ INDEX ----- Part I: Financial Information Item 1: Unaudited Condensed Consolidated Financial Statements a.) Condensed Consolidated Balance Sheets as at January 31, 2002 and October 31, 2001 b.) Condensed Consolidated Statements of Income, Comprehensive Income and Undistributed Earnings for the Three Months Ended January 31, 2002 and 2001; c.) Condensed Consolidated Statements of Cash Flows for the Three Months Ended January 31, 2002 and 2001; d.) Notes to Condensed Consolidated Financial Statements. Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 3: Quantitative and Qualitative Disclosures of Market Risk. Item 1: Financial Statements FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, October 31, 2002 2001 ---- ---- (Unaudited) (See Note 1) ----------- ------------ (In Thousands of Dollars) ------------------------- ASSETS ------ Real estate and equipment, at cost, net of depreciation $76,547 $76,955 Investments in marketable securities -- 500 Cash and cash equivalents 13,392 13,187 Tenants' security accounts 807 873 Sundry receivables 2,544 2,512 Prepaid expenses and other assets 1,205 1,262 Deferred charges, net 1,170 1,206 ------- ------- $95,665 $96,495 Totals ====================== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Liabilities: Mortgages payable $69,093 $69,354 Accounts payable and accrued expenses 645 819 Cash distributions in excess of earnings and investment in affiliate 335 386 Dividends payable 936 1,497 Tenants' security deposits 1,153 1,219 Deferred revenue 271 322 ------- ------- Total liabilities 72,433 73,597 ------- ------- Minority interest 1,242 1,310 ------- ------- Commitments and contingencies Shareholders' equity: Shares of beneficial interest without par value: 4,000,000 shares authorized 3,119,576 shares issued and outstanding: 19,314 19,314 Undistributed earnings 2,676 2,274 ------- ------- Total shareholders' equity 21,990 21,588 ------- ------- Totals $95,665 $96,495 ======= =======
See Notes to Consolidated Financial Statements FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME AND UNDISTRIBUTED EARNINGS THREE MONTHS ENDED JANUARY 31, 2002 AND 2001 2002 2001 ---- ---- (In Thousands of Dollars, Except Per Share Amounts) INCOME Revenue: Rental income $4,037 $3,869 Reimbursements 745 656 Equity in income of affiliate 51 30 Net Investment Income 68 218 Sundry income 45 45 ------ ------ Totals 4,946 4,818 ------ ------ Expenses: Operating expenses 974 1,006 Management fees 209 175 Real estate taxes 605 579 Financing costs 1,216 1,378 Depreciation 552 548 Minority interest 47 10 ------ ------ Totals 3,603 3,696 ------ ------ Income before state income taxes 1,343 1,122 Provision for state income taxes 5 5 ------ ------ Net income $1,338 $1,117 ====== ====== ------------------------------------------------------------------------ Basic earnings per share $ 0.43 $ 0.36 Diluted earnings per share $ 0.42 $ 0.36 ------------------------------------------------------------------------ Basic weighted average shares outstanding 3,120 3,120 Diluted weighted average shares outstanding 3,188 3,120 ------------------------------------------------------------------------ COMPREHENSIVE INCOME -------------------- Net income $ 1,338 $ 1,117 Other comprehensive income - Unrealized gain on marketable securities -- 55 ------- ------- Comprehensive income $ 1,338 $ 1,172 ======= ======= UNDISTRIBUTED EARNINGS ---------------------- Balance, beginning of period $ 2,274 $ 1,879 Net income 1,338 1,117 Less dividends (936) (936) ------- ------- Balance, end of period $ 2,676 $ 2,060 ======= ======= Dividends per share $ 0.30 $ 0.30 ======= ======= See Notes to Consolidated Financial Statements FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARY CONDENSED CONSOLIDTED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED JANUARY 31, 2002 AND 2001
2002 2001 -------- -------- (thousands of Dollars) Operating activities: Net Income $ 1,338 $ 1,117 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 604 601 Equity in income of affiliate (51) (30) Deferred revenue (51) (72) Minority interest 47 10 Changes in operating assets and liabilities: Tenants' security accounts 66 (10) Sundry receivables, prepaid expenses and other assets 9 (154) Accounts payable and accrued expenses (174) (18) Tenants' security deposits (66) 2 -------- -------- Net cash provided by operating activities 1,722 1,446 -------- -------- Investing activities: Capital expenditures (144) (173) Distributions from affiliate -- 64 Marketable security redeemed 500 -------- -------- Net cash provided by (used) in investing activities 356 (109) -------- -------- Financing activities: Repayment of mortgages (261) (209) Dividends Paid (1,497) (1,794) Distribution to Minority Interest (115) -------- -------- Net cash used in financing activities (1,873) (2,003) -------- -------- Net increase in cash and cash equivalents 205 (666) Cash and cash equivalents, beginning of period 13,187 2,925 -------- -------- Cash and cash equivalents, end of period $ 13,392 $ 2,259 ======== ======== Supplemental disclosure of cash flow data: Interest paid $ 1,185 $ 1,347 ======== ======== Income taxes paid $ 5 $ 5 ======== ======== Dividends declared but not paid $ 936 $ 936 ======== ========
See Notes to Consolidated Financial Statements. FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Basis of presentation: The accompanying condensed consolidated financial statements have been prepared without audit, in accordance with accounting principles generally accepted in the United States of America for interim financial statements and pursuant to the rules of the Securities and Exchange Commission. Accordingly, certain information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements have been omitted. It is the opinion of management that all adjustments considered necessary for a fair presentation have been included, and that all such adjustments are of a normal recurring nature. The consolidated results of operations for the three months ended January 31, 2002 are not necessarily indicative of the results to be expected for the full year. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in FREIT's Annual Report on Form 10-K for the year ended October 31, 2001. Note 2 - Investment in affiliate: FREIT is a 40% member of Westwood Hills, LLC ("WHLLC"), a limited liability company that is managed by Hekemian & Co., Inc. ("Hekemian"), a company which manages all of FREIT's properties and in which one of the trustees of FREIT is the chairman of the board. Certain other members of WHLLC are either trustees of FREIT, or their family members are trustees of FREIT or officers of Hekemian. WHLLC owns a residential apartment complex located in Westwood, New Jersey. Summarized unaudited financial information of WHLLC as of January 31, 2002 and October 31, 2001, and for the three months ended January 31, 2002 and 2001 is as follows: January 31, October 31, 2002 2001 -------- -------- (In thousands of dollars) Balance sheet data: Assets: Real estate and equipment, net $ 13,838 $ 13,806 Other 681 676 -------- -------- Total assets 14,519 14,482 ======== ======== Liabilities and members' deficiency: Liabilities: Mortgage payable $ 14,947 $ 14,996 Other 412 455 -------- -------- Total liabilities 15,359 15,451 -------- -------- Members' deficiency; FREIT (335) (386) Others (505) (583) -------- -------- Total members' deficiency (840) (969) -------- -------- Total liabilities and members' deficiency $ 14,519 $ 14,482 ======== ======== Three Months Ended January 31, ----------------------- 2002 2001 -------- -------- (In thousands of dollars) Income statement data: Rental revenue $ 784 $ 738 Expenses 657 662 -------- -------- Net income $ 127 $ 76 ======== ======== Note 3 - Earnings per share: The Trust has presented "basic" and "diluted" earnings per share in the accompanying statements of income in accordance with the provisions of Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128"). Basic earnings per share is calculated by dividing net income by the weighted average number of shares outstanding during each period. The calculation of diluted earnings per share is similar to that of basic earnings per share, except that the denominator is increased to include the number of additional shares that would have been outstanding if all potentially dilutive shares, such as those issuable upon the exercise of stock options and warrants, were issued during the period. In computing diluted earnings per share for each of the three month periods ended January 31, 2002 and 2001, the assumed exercise of all of the Trust's outstanding stock options, adjusted for application of the treasury stock method, would have increased the weighted average number of shares outstanding as shown in the table below: 2002 2001 --------- --------- Basic weighted average shares outstanding 3,119,576 3,119,576 Shares arising from assumed exercise of stock options 68,301 --------- --------- Dilutive weighted average shares outstanding 3,187,877 3,119,576 ========= ========= Basic and diluted earnings per share, based on the weighted average number of shares outstanding during each period, are comprised of ordinary income. Note 4- Equity incentive plan: On September 10, 1998, the Board of Trustees approved the Trust's Equity Incentive Plan (the "Plan") which was ratified by the Trust's shareholders on April 7, 1999, whereby up to 460,000 of the Trust's shares of beneficial interest may be granted to key personnel in the form of stock options, restricted share awards and other share-based awards Upon ratification of the Plan on April 7,1999, the Trust issued 377,000 stock options which it had previously granted to key personnel on September 10, 1998. The fair value of the options on the date of grant was $15 per share. The options, all of which are outstanding at January 31, 2002, are exercisable through September 2008. In the opinion of management, if compensation cost for the stock options granted in 1999 had been determined based on the fair value of the options at the grant date under the provisions of SFAS 123 using the Black-Scholes option pricing model the Trust's pro forma net income and pro forma basic net income per share arising from such computation would not have differed materially from the corresponding historical amounts. Note 5- Share split: On September 26, 2001, the Board of Trustees approved a two-for-one share split in the form of a share dividend. In connection with the share dividend, the Board of Trustees also approved an increase in the authorized number of shares of beneficial interest from 1,790,000 to 4,000,000. Financial information contained herein, including the number of options, has been adjusted to retroactively reflect the impact of the split Note 6- Segment information: SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", established standards for reporting financial information about operating segments in interim and annual financial reports and provides for a "management approach" in identifying the reportable segments. The Trust has determined that it has two reportable segments: retail properties and residential properties. These reportable segments offer different products, have different types of customers, and are managed separately because each requires different operating strategies and management expertise. The retail segment contains six separate properties and the residential segment contains eight properties. The accounting policies of the segments are the same as those described in Note 1 in FREIT's Annual Report on Form 10-K. The chief operating decision-making group of the Trust's retail segment, residential segment and corporate/other is comprised of the Trust's Executive Committee of the Board of Trustees. The Trust assesses and measures segment operating results based on net operating income ("NOI"). NOI is based on operating revenue and expenses directly associated with the operations of the real estate properties, but excludes deferred rents (straight lining), depreciation, and financing costs. NOI is not a measure of operating results or cash flows from operating activities as measured by accounting principles generally accepted in the United States of America, and is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. Real estate rental revenue, operating expenses, NOI and recurring capital improvements for the reportable segments are summarized below and reconciled to consolidated net income for the three months ended January 31, 2002 and 2001. Asset information is not reported since the Trust does not use this measure to assess performance. Three Months Ended January 31, 2002 2001 ------ ------ (in thousands of dollars) Real estate revenue: Retail $3,033 $2,828 Residential 1,701 1,635 ------ ------ Totals 4,734 4,463 ------ ------ Real estate operating expenses: Retail 862 906 Residential 816 775 ------ ------ Totals 1,678 1,681 ------ ------ Net operating income: Retail 2,171 1,922 Residential 885 860 ------ ------ Totals $3,056 $2,782 ====== ====== Recurring capital improvements: Residential $ 90 $ 100 ====== ====== Three Months Ended January 31, 2002 2001 ------- ------- (in thousands of dollars) Reconciliation to consolidated net income: Segment NOI $ 3,056 $ 2,782 Deferred rents - straight-lining 93 107 Net investment income 68 218 Equity in income of affiliate 51 30 General and administrative expenses (115) (84) Depreciation (552) (548) Financing costs (1,216) (1,378) Minority interest (47) (10) ------- ------- Net Income $ 1,338 $ 1,117 ======= ======= Management's Discussion and Analysis of Financial Condition and Results of Operations. -------------------------------------------------------------------------------- Cautionary Statement Identifying Important Factors That Could Cause FREIT's Actual Results to Differ From Those Projected in Forward Looking Statements. Readers of this discussion are advised that the discussion should be read in conjunction with the condensed consolidated financial statements of FREIT (including related notes thereto) appearing elsewhere in this Form 10-Q, and in FREIT's most recently filed Form 10-K. Certain statements in this discussion may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect FREIT's current expectations regarding future results of operations, economic performance, financial condition and achievements of FREIT, and do not relate strictly to historical or current facts. FREIT has tried, wherever possible, to identify these forward-looking statements by using words such as "believe," "expect," "anticipate," "intend, " "plan," " estimate," or words of similar meaning. Although FREIT believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties, which may cause the actual results to differ materially from those projected. Such factors include, but are not limited to, the following: general economic and business conditions, which will, among other things, affect demand for rental space, the availability of prospective tenants, lease rents and the availability of financing; adverse changes in FREIT's real estate markets, including, among other things, competition with other real estate owners, risks of real estate development and acquisitions; governmental actions and initiatives; and environmental/safety requirements. Overview FREIT is an equity real estate investment trust ("REIT") that owns a portfolio of residential apartment and retail properties. Our revenues consist primarily of fixed rental income and additional rent in the form of expense reimbursements derived from its income producing retail properties. We also receive income from our 40% owned affiliate, Westwood Hills, which owns a residential apartment property. Our policy has been to acquire real property for long-term investment. Results of Operations: Quarters Ended January 31, 2002 and 2001 Revenues for the quarter increased by $128,000 or 2.7% to $4,946,000 from $4,818,000 for the prior year's quarter. The principle causes of the revenue increase is a $257,000 or 5.7% increase in revenues from real estate operations, offset by a $150,000 decline in net investment income (see discussions below). Net income increased 19.8% to $1,338,000 for the current quarter compared to $1,117,000 for the prior year's quarter. The increase in net income is a combination of higher revenues and lower expenses. The consolidated results of operations for the three months ended January 31, 2002 are not necessarily indicative of the results to be expected for the full year. RETAIL SEGMENT NOI as used in this discussion reflects operating revenue and expenses directly associated with the operations of the real estate properties, but excludes straight lining of rents, depreciation and financing costs (See Note 6 to the condensed consolidated financial statements). FREIT's retail properties consist of six (6) properties totaling approximately 685,000 sq. ft. Four are multi-tenanted shopping centers and two are single tenanted stores. Their operations are summarized below. Retail Segment Quarter Ended January 31, ------------------------- 2002 2001 ------ ------ (thousands of dollars) Rental Revenue $3,033 $2,828 Operating Expenses 862 906 ------ ------ Net Operating Income $2,171 $1,922 ====== ====== Rental revenue at FREIT's Retail properties for the quarter ended January 13, 2002 ("Current Quarter") increased by $205,000 or 7.2% over the quarter ended January 31, 2001 ("Prior Quarter"). The increase resulted from increased base rents, higher occupancy, and increased, one time, expense pass-reimbursements. Average occupancy for the Current Quarter was 97.4% compared 94.5% for the Prior Quarter Expenses: Adjusting for a $44,000 account receivable write-off during the Prior Quarter, expense levels were flat. Occupancy at Olney remains unchanged at 92%, as the vacant space is being kept vacant pending the expansion (see below). Olney Expansion Olney is a 98,900 sq. ft. neighborhood shopping center. We are planning an approximately 59,000 sq. ft. expansion and modernization that is expected to add to revenues, net earnings, and value to FREIT's real estate portfolio. The expansion is subject to the expansion plans being approved by the required governmental agencies, satisfactory pre-leasing of the new expanded space, and the acceptance of current tenants to be relocated in the expanded center. The expansion and modernization costs are estimated at $11 million, including lost rents from relocation of tenants. Through 1/31/02 approximately $264,000 of pre-construction development costs have been expended and deferred. If all governmental approvals are received and tenant leasing acceptable, we expect to finance the expansion, in part, from construction financing and, in part, from funds available from our institutional money market investment. We continue to evaluate the economics of the timing of the expansion and may defer it to coincide with the expiration of particular leases. If we decide to defer the expansion, we will immediately make the space we have kept vacant available for leasing. RESIDENTIAL SEGMENT FREIT operates eight (8) multi-family apartment communities totaling 639 apartment units. The NOI of our residential properties is summarized below Residential Segment Quarter Ended January 31, 2002 2001 ------ ------ (thousands of dollars) Rental Revenue $1,701 $1,635 Operating Expenses 816 775 ------ ------ Net Operating Income $ 885 $ 860 ====== ====== Recurring Capital Improvements $ 90 $ 100 ====== ====== Residential revenue increased 4% to $1,701,000 from $1,635,000 last year. Revenue is principally composed of monthly apartment rental income. Total apartment rental income is a factor of occupancy and monthly apartment rents. For instance, at our current rental rates and occupancy levels at 1/31/02, a 1% decrease in average occupancy will cause an annual $72,000 reduction in revenues, while a 1% increase in occupancy will increase revenues by $68,000. A 1% rental rate increase or decrease over the 1/31/02 average rental rates will increase or decrease annual revenues by $68,000. Average occupancy (by apartment count) for the Current Quarter was 94.3% compared to 93.3% for the Prior Quarter. However, the recession has affected the apartment mix of the vacancies. The Current Quarter has experienced a larger number of higher rent apartments being vacant than during the Prior Quarter. This results in a larger dollar loss attributable to vacancies. This change is a product of the recession; which we feel will correct it self as the economy improves. During the Current Quarter operating expenses increased 5.3% over the Prior Quarter. As a percentage of revenue, operating expenses were 47.9% of revenue compared to 47.4% last year. Reductions in snow removal and utility costs, as a result of the mild winter being experienced, were offset by account receivable write-offs. We own 20 +/- acres of undeveloped land in Rockaway, NJ. Site plan approval has been received from the Township for the construction of 129 garden apartment units. Development costs are estimated at $13.8 million that we will finance, in part, from construction financing and, in part, from funds available in our institutional money funds. Construction is expected to commence during the summer of 2002 and is expected to last twelve to eighteen months. Through 1/31/02 approximately $280,000 of pre-construction development costs have been expended and deferred. NET INVESTMENT INCOME Net investment income is principally interest earned from our investments in Government Agency Bonds, and an Institutional Money Market fund, and from advances (now repaid) to related parties for the sale to them of a 25% interest in S&A Commercial Associates LP (which owns Olney). Earnings received from these sources for the quarters ended January 31, 2002 and 2001 are as follows: Quarters Ended --------------- January 31, --------------- 2002 2001 ---- ---- Government Agency Bonds And Institutional Money Market: Interest Income $ 68 $196 Related Party Loans 22 ---- ---- $ 68 $218 ==== ==== As a result of the lower interest rate environment over the course of the last fiscal year all of FREIT's higher yielding government agency bonds were called and the funds invested in an institutional money market account. Our annualized yield on these funds was 1.8% as of January 31, 2002. This interest rate yield reduction coupled with the repayment of the related party loan is expected to result in lower Net Investment Income over the current fiscal year than the past year. (See "FINANCING COSTS" below for partial offsetting benefits.) EQUITY IN INCOME OF AFFILIATE FREIT's share of earnings of its 40% owned affiliate, Westwood Hills LLC, which owns a 210 unit apartment community in Westwood, NJ, increased 70% to $51,000 during the Current Quarter from $30,000 for the Prior Quarter. The increase is principally attributable to revenues increasing 6.2%, because of higher rents during the Current Quarter compared to the Prior Quarter, and expenses being .8% lower as a result of the mild winter. Average occupancy over for the Current Quarter and the Prior Quarter was unchanged at 97%. FINANCING COSTS Financing Costs for the Current Quarter decreased 11.8% to $1,216,000 from $1.378,000 for the Prior Quarter. The decrease is principally attributable to reduced interest costs resulting from lower mortgage balances from normal loan amortization and because of FREIT's $10.9 million floating rate mortgage (Olney) benefiting from the lower interest rate environment this year compared to last year. GENERAL ADMINISTRATIVE EXPENSES Our G & A expenses increased to $110,000 during the Current Quarter from $79,000 for the Prior Quarter. Professional fees accounted for the bulk of the increase. It is not expected that the Current Quarter level of these fees will recur over the course to this fiscal year. FUNDS FROM OPERATIONS ("FFO") FFO is considered by many as a standard measurement of a REIT's performance. We compute FFO as follows (in thousands of dollars): Quarter Ended ------------------------ January 31, 2002 2001 ---- ---- Net Income $ 1,338 $ 1,117 Depreciation - Real Estate 552 548 Amortization of Deferred Mtg. Costs 32 32 Deferred Rents (93) (107) Capital Improvements - Apartments (90) (100) Minority Interest 47 10 Other (11) 26 ------- ------- Total FFO $ 1,775 $ 1,526 ======= ======= FFO does not represent cash generated from operating activities in accordance with accounting principles generally accepted in the United States of America, and therefore should not be considered a substitute for net income as a measure of results of operations or for cash flow from operations as a measure of liquidity. Additionally, the application and calculation of FFO by certain other REITs may vary materially from that of FREIT's, and therefore FREIT's FFO and the FFO of other REITs may not be directly comparable. LIQUIDITY AND CAPITAL RESOURCES Our financial condition remains strong. Net Cash Provided By Operating Activities increased 19.1% during the Current Quarter to $1.7 million from $1.5 million for the Prior Quarter. We expect that cash provided by operating activities will be adequate to cover mandatory debt service payments, recurring capital improvements and dividends necessary to retain qualification as a REIT (90% of taxable income). As at 1/31/02 we had cash and cash equivalents totaling $13.4 million compared to $13.7 million at 10/31/01. These funds are available for construction, property acquisitions, and general needs. As described in the segment analysis above, we are planning the expansion of Olney and the construction of apartment rental units in Rockaway, NJ. The total capital required for these two projects is estimated at $25.8 million. We expect to finance these costs, in part, from construction and mortgage financing and, in part, from funds available in our institutional money market investment. At 1/31/02 FREIT's aggregate outstanding mortgage debt was $69.1 million, which is secured by properties with a net book value of approximately $63 million. Approximately $58.2 million bears a fixed weighted average interest rate of 7.512%, and an average life of approximately 9 years. Approximately $10.9 million of mortgage debt bears an interest rate equal to 175 basis points over LIBOR and resets at our option every 30, 60 or 90 days. This mortgage note is due at the end of March 2002 , but can be extended for one year. We have elected to extend the mortgage for one year.The fixed rate mortgages are subject to amortization schedules that are longer than the term of the mortgages. As such, balloon payments for all mortgage debt will be required as follows: Year $ Millions ---- ----- 2002 $ -- 2005 $ 17.5 2007 $ 15.7 2010 $ 9.2 2013 $ 17.5 The following table shows the estimated fair value and carrying value of our long-term debt at January 31, 2002 and October 31, 2001: January 31, October 31, (In Millions) 2002 2001 ------------- ---- ---- Fair Value $70.4 $71.7 Carrying Value $69.1 $69.3 Fair values are estimated based on market interest rates at January 31, 2002 and October 31, 2001 and on discounted cash flow analysis. Changes in assumptions or estimation methods may significantly affect these fair value estimates. FREIT expects to re-finance the individual mortgages with new mortgages when their terms expire. To this extent we have exposure to interest rate risk on our fixed rate debt obligations. If interest rates, at the time any individual mortgage note is due, are higher than the current fixed interest rate, higher debt service may be required, and/or re-financing proceeds may be less than the amount of mortgage debt being retired. For example, a one percent interest rate increase would reduce the Fair Value of our debt by $3.1 million, and a one percent decrease would increase the Fair Value by $3.3 million. Additionally, we have exposure on our floating rate debt. A one percent change in rates, up or down, will decrease or increase income and cash flow by approximately $109,000. We believe that the values of our properties will be adequate to command re-financing proceeds equal to, or higher than the mortgage debt to be re-financed. We continually review our debt levels to determine if additional debt can prudentially be utilized for property acquisition additions to our real estate portfolio that will increase income and cash flow to shareholders. $14 Million Line of Credit - During the fourth quarter of last fiscal year FREIT -------------------------------- reached an agreement with a financial institution on the terms for a $14 million, two-year revolving line of credit. Interest rates on draws will be 175 basis points over our choice of the 30, 60, or 90-day LIBOR rate and will reset at the end of every rate renewal period. The line of credit will be secured by mortgages on several of our un-leveraged (debt free) properties. While we feel this line of credit will be formalized shortly, it is subject to the lenders satisfaction of appraisals, title searches, and environmental reports. While the line of credit may shortly be formalized, we do not expect to draw down on this line in the short term. We plan to use it opportunistically, for future acquisitions and/or development opportunities. INFLATION Inflation can impact the financial performance of FREIT in various ways. Our retail tenant leases normally provide that the tenants bear all or a portion of most operating expenses, which can reduce the impact of inflationary increases on FREIT. Apartment leases are normally for a one-year term, which may allow us to seek increased rents as leases renew or when new tenants are obtained. ACQUISITION FREIT has reached an agreement in principle with a group consisting primarily of Hekemian & Co., Inc. employees (i.e., the Hekemian Group) to become the Managing Member and acquire a 40% interest in a limited liability company formed to acquire a 320,000 square foot neighborhood shopping center in northern New Jersey. Total acquisition costs will approximate $33 million. The agreement in principle is subject to the execution of a definitive written agreement that is expected to be prepared and executed in the near term. The Hekemian Group is currently involved in the due-diligence analysis, and is reviewing acquisition financing alternatives. If the due-diligence review proves satisfactory, the purchase will close sometime during the first half of 2002. Depending on the mortgage acquisition-financing alternative selected, FREIT's 40% equity participation will be between $3.2 million and $4.2 million. These funds will be provided from FREIT's money market investments. Hekemian & Co., Inc. will be designated Managing Agent of the property. Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Liquidity and Capital Resources" above. PART II: Item 5 Other Matters FREIT has reached an agreement in principle with Hekemian & Co., Inc. for a new management agreement for a two-year period commencing retroactive to November 1, 2001 and ending October 31, 2003. The agreement designates Hekemian & Co., Inc. as the exclusive agent for the management of all of FREIT's properties, and as a non-exclusive agent for other activities such as leasing, debt placement, and identifying potential property acquisitions. Property management fees will be a percentage of certain revenues at each property, and fees for the non-exclusive activities are to be outlined in the agreement. It is anticipated that a formal written agreement will be executed prior to March 20, 2002 or any other extension of the termination date of the present agreement. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY ---------------------- (Registrant) Date: March 18, 2002 /s/ Robert S. Hekemian ---------------------- (Signature) Robert S. Hekemian. Chairman of the Board, Chief Executive Officer, Trustee, and Financial/Accounting Officer