10-K 1 form10k-56567.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended October 31, 2003 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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, Hackensack, New Jersey 07601 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 201-488-6400 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each Class on which registered ------------------- ------------------- None Not Applicable Securities registered pursuant to Section 12(g) of the Act: Shares of Beneficial Interest -------------------------------------------------------------------------------- (Title of class) 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 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 X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in this Form 10-K or any amendment to this Form 10-K (X) Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.) Yes No X The aggregate market value of the registrant's shares of beneficial interest held by non-affiliates of the registrant as of the last business day of the registrant's most recently completed second fiscal quarter was approximately $ 64.3 million. Excluded from this calculation are shares of the registrant owned or deemed to be beneficially owned by the trustees and executive officers of the registrant, including shares with respect to which the trustees and executive officers disclaim beneficial ownership. 3,155,576 shares of beneficial interest were issued and outstanding as of January 27, 2004. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Registrant's 2004 Annual Meeting of Shareholders to be held on April 7, 2004 are incorporated by reference in Part III of this Annual Report. FORWARD-LOOKING STATEMENTS Certain information included in this Annual Report contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The registrant cautions readers that forward-looking statements, including, without limitation, those relating to the registrant's investment policies and objectives; the financial performance of the registrant; the ability of the registrant to service its debt; the competitive conditions which affect the registrant's business; the ability of the registrant to obtain the necessary governmental approvals for the development, expansion or renovation of its properties, the impact of environmental conditions affecting the registrant's properties, and the registrant's liquidity and capital resources, are subject to certain risks and uncertainties. Actual results or outcomes may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors, including, without limitation, the registrant's future financial performance; the availability of capital; general market conditions; national and local economic conditions, particularly long-term interest rates; federal, state and local governmental regulations that affect the registrant; and the competitive environment in which the registrant operates, including, the availability of retail space and residential apartment units in the areas where the registrant's properties are located. In addition, the registrant's continued qualification as a real estate investment trust involves the application of highly technical and complex rules of the Internal Revenue Code. The forward-looking statements are made as of the date of this Annual Report and the registrant assumes no obligation to update the forward-looking statements or to update the reasons actual results could differ from those projected in such forward-looking statements. PART I ------ ITEM 1 BUSINESS (a) GENERAL BUSINESS First Real Estate Investment Trust of New Jersey ("FREIT") is an equity real estate investment trust ("REIT") organized in New Jersey in 1961. FREIT acquires, develops and holds real estate properties for long-term investment and not for resale. Its investment portfolio contains multi family residential properties, retail properties, undeveloped land and a 40% equity interest in Westwood Hills, LLC ("Westwood Hills"), a New Jersey Limited Liability Company, which owns a 210 unit apartment complex, and a 40% equity interest in Wayne PSC, LLC ("WaynePSC"), a New Jersey Limited Liability Company, which owns a 323,000 +/- sq. ft. Community Shopping Center. All but four of FREIT's properties are located in New Jersey. See the tables in "Item 2 Properties - Portfolio of Investments." FREIT's long-range investment policy is to review and evaluate potential real estate investment opportunities for acquisition that it believes will (i) complement its existing investment portfolio, (ii) generate increased income and distributions to shareholders, and (iii) increase the overall value of FREIT's portfolio. FREIT's investments may take the form of wholly owned fee interests or, if the circumstances warrant, on a joint venture basis with other parties provided FREIT would be able to maintain management control over the property. While FREIT's general investment policy is to hold and maintain its properties long-term, it may, from time-to-time, sell or trade certain properties in order to (i) obtain capital used or to be used to purchase, develop or renovate other properties which we believe will provide a higher rate of return and increase the value of our investment portfolio, and (ii) divest properties which FREIT has determined or determines are no longer compatible with our growth strategies and investment objectives for our real estate portfolio. Fiscal Year 2003 Developments (i) Financing ------------- FREIT (a) During November 2002, FREIT renegotiated the terms of the first mortgage note on FREIT's retail property in Patchogue, NY. The mortgage note, which had an outstanding principal balance of $6.9 million, was due on January 1, 2005, and carried a fixed interest rate of 7.375%. The principal balance was not increased, but the due date has been extended three years (3) to January 1, 2008 and the interest rate, subject to an Interest Rate Swap Contract, was reduced to a fixed rate of interest of 5.95%. (b) To create additional liquidity and lock in favorable long-term interest rates, FREIT took advantage of the Freddie Mac second mortgage program. This program allows add-ons to existing Freddie Mac first mortgages to the extent justified by increased values and cash flows. On August 20, 2003, FREIT placed add-on second mortgages on three of its residential properties. The second mortgage loans aggregated approximately $7 million bearing an average fixed rate of 5.2%. The due dates of the second mortgage loans are co-terminus with the underlying first mortgage loans. FREIT received net financing proceeds of approximately $6.9 million. AFFILIATES (a) On December 18, 2003, Westwood Hills placed a second mortgage in the amount of $3.4 million on its garden apartment property. The mortgage loan bears interest at the fixed rate of 6.18%, with payments based on a twenty five (25) year amortization schedule. The mortgage loan is due on January 1, 2014, co-terminus with the underlying first mortgage loan. The net proceeds of the second mortgage were distributed to Westwood Hills members, of which FREIT received approximately $1.4 million. (b) On June 30, 2003 WaynePSC re-financed its original $26.5 million first mortgage with a new $32.5 million mortgage loan. The term of the new loan will be for thirteen (13) years, with interest fixed at 6.04 %, and the loan will require interest only payments for the first three years and thereafter be amortized over a 25-year life. FREIT received $2.4 million of the net re-finance proceeds as a distribution from Wayne PSC. Because there is no amortization of the new loan over the first 36 months, debt service will be less than under the original loan during this period. (ii) ACQUISITION On July 31, 2003, Damascus Centre, LLC , an entity wholly owned by FREIT, acquired the Damascus Shopping Center in Damascus, MD. The Shopping Center is situated on 13 acres, and contains approximately 139,000 square feet of retail and office space. A Safeway supermarket is the anchor tenant. The total acquisition costs of $10.3 Million were financed in part by the assumption of an existing $2.6 Million first mortgage loan and the balance of $7.7 Million with equity capital. Included in the acquisition costs is an amount paid to an existing tenant to terminate its lease as of December 31, 2003. FREIT is considering offering an interest in this investment to an entity owned by employees of Hekemian & Co., Inc. ("Hekemian"), FREIT's managing agent. FREIT plans to demolish the existing buildings at the Damascus Shopping Center, with the exception of the freestanding McDonald's restaurant. A new Shopping Center will be constructed of approximately 145,000 SF, of which 58,000 SF is expected to be occupied by a new, prototype Safeway supermarket. A smaller building will be constructed on an out parcel on the property to accommodate the office tenants as well as some smaller, retail space. This plan to construct a new center is subject to obtaining all approvals and building permits from the various governing authorities. (iii) DEVELOPMENT Rockaway Township, NJ We own approximately 20 +/- acres of undeveloped land in Rockaway Township, NJ. Building plan approval and a water allocation has been received from Rockaway 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 from our institutional money market investments. Subject to the receipt of final water allocation and sewer approval from the NJ Department of Environmental Protection, construction is expected to commence during the summer of 2004 and is expected to last twelve to eighteen months. Approximately one (1) acre of the Rockaway land has been sub-divided and leased to a bank. Rent under the land lease commenced in December 2003. South Brunswick, NJ FREIT owns approximately 33 acres of land in South Brunswick (see "Item 2 Properties - Portfolio of Investments") that is zoned Industrial. FREIT has filed for site plan approval for the construction of a 500,000 sq. ft. industrial warehouse facility. (b) Financial Information about Segments FREIT has two reportable segments: Retail Properties and Residential Properties. These reportable segments have different customers and are managed separately because each requires different operating strategies and management expertise. Segment information for the three years ended October 31, 2003 is incorporated by reference to Note 14, "Segment Information" on pages F- 23 and F- 24 of the Consolidated Financial Statements (c) Narrative Description of Business FREIT was founded and organized for the principal purpose of acquiring, developing, and owning a portfolio of diverse income producing real estate properties. FREIT's developed properties include residential apartment communities and retail properties that consist of multi and single tenanted properties. Our properties are located in New Jersey, Maryland and on Long Island. We also currently own approximately 56.5 acres of unimproved land in New Jersey. See "Item 2 Properties - Portfolio of Investments." FREIT elected to be taxed as a REIT under the Internal Revenue Code. FREIT operates in such a manner as to qualify for taxation as a REIT in order to take advantage of certain favorable tax aspects of the REIT structure. Generally, a REIT will not be subject to federal income taxes on that portion of its ordinary income or capital gain that is currently distributed to its equity holders. As an equity REIT, we generally acquire interests in income producing properties to be held as long-term investments. FREIT's return on such investments is based on the income generated by such properties mainly in the form of rents. From time to time, FREIT has sold, and may sell again in the future, certain of its properties in order to (i) obtain capital used or to be used to purchase, develop or renovate other properties which we believe will provide a higher rate of return and increase the value of our investment portfolio, and (ii) divest properties which FREIT has determined or determines are no longer compatible with our growth strategies and investment objectives for our real estate portfolio. We do not hold any patents, trademarks or licenses. Portfolio of Real Estate Investments At October 31, 2003, FREIT's real estate holdings included (i) seven (7) apartment buildings or complexes containing 507 rentable units, (ii) seven (7) retail properties containing approximately 826,000 square feet of leasable space, including one (1) single tenant store, and (iii) three (3) parcels of undeveloped land consisting of approximately 56.5 acres. With the exception of the Olney Town Center which is subject to a land lease, and which is owned by S And A Commercial Limited Partnership ("S&A"), in which FREIT has a 75% ownership interest, FREIT and its Affiliates own all such properties in fee simple. See "Item 2 Properties - Portfolio of Investments" of this Annual Report for a description of FREIT's separate investment properties and certain other pertinent information with respect to such properties that is relevant to FREIT's business. In addition, FREIT holds a 40% membership interest in Westwood Hills, that owns an apartment complex containing 210 rentable units, and a 40% membership interest in WaynePSC that owns, effective November 1, 2002, a 323,000 +/- sq. ft. Community Shopping Center. See "Investment in Affiliates." Investment in Affiliates Westwood Hills, LLC FREIT owns a forty percent (40%) membership interest in Westwood Hills that owns and operates a 210-unit residential apartment complex located in Westwood, New Jersey. FREIT is the Managing Member of Westwood Hills. In December 1998, Westwood Hills refinanced its mortgage loan. In connection with the refinancing, Robert S. Hekemian, Chairman of the Board of FREIT and a member of Westwood Hills, provided a personal guarantee in certain limited circumstances. FREIT, and all other members of Westwood Hills, have indemnified Mr. Hekemian, to the extent of their percentage ownership interest in Westwood Hills, with respect to this guaranty. Wayne PSC, LLC FREIT owns a 40% membership in, and is the Managing Member of WaynePSC, that owns a 323,000 +/- sq, ft. community shopping center in Wayne, NJ. Hekemian is the managing agent of the above properties owned by the Affiliates. See "Management Agreement." See Fiscal Year 2003 Developments concerning financing of the Affiliate's properties. Employees On October 31, 2003 FREIT and its Affiliates had thirteen (13) full-time employees and four (4) part-time employees who work solely at the properties owned by FREIT or its Affiliates. The number of part-time employees varies seasonally. Mr. Robert S. Hekemian, Chairman of the Board and Chief Executive Officer, Mr. Donald W. Barney, President, Treasurer and Chief Financial Officer, and Mr. John A. Aiello, Esq., Secretary and Executive Secretary, are the executive officers of FREIT. Mr. Hekemian devotes approximately forty to fifty percent (40% - 50%) of his business activities to FREIT, Mr. Barney devotes approximately fifteen percent (15%) of his business activities to FREIT, and Mr. Aiello devotes approximately five percent (5%) of his business activities to FREIT. See "Item 4A - Executive Officers of FREIT." Hekemian has been retained by FREIT to manage FREIT's properties and is responsible for recruiting, on behalf of FREIT, the personnel required to perform all services related to the operation of FREIT's properties. See "Management Agreement." Management Agreement On April 10, 2002, FREIT and Hekemian executed a new Management Agreement whereby Hekemian would continue as Managing Agent for FREIT. The term of the Management Agreement runs from November 1, 2001 to October 31, 2003 and shall be automatically renewed for periods of two (2) years unless either party gives not less than six (6) months prior notice to the other of non-renewal. No non-renewal notice has been issued by either party. The April 10, 2002 Management Agreement replaces the Management Agreement dated December 20, 1961 as extended. The salient provisions of the new Management Agreement are as follows: FREIT continues to retain the Managing Agent as the exclusive management and leasing agent for properties which FREIT presently owns and for the Preakness Shopping Center acquired on November 1, 2002 by WaynePSC. However, FREIT may retain other managing agents to manage certain other properties hereafter acquired and to perform various other duties such as sales, acquisitions, and development with respect to any or all properties. The Managing Agent is no longer the exclusive advisor for FREIT to locate and recommend to FREIT investments, which the Managing Agent deems suitable for FREIT, and is no longer required to offer potential acquisition properties exclusively to FREIT before acquiring those properties for its own account. The new Management Agreement includes a detailed schedule of fees for those services, which the Managing Agent may be called upon to perform. The new Management Agreement provides for a termination fee in the event of a termination or non-renewal of the Management Agreement under certain circumstances. Pursuant to the terms of the new Management Agreement, FREIT pays Hekemian certain fees and commissions as compensation for its services. From time to time, FREIT engages Hekemian to provide certain additional services, such as consulting services related to development and financing activities of FREIT. Separate fee arrangements are negotiated between Hekemian and FREIT with respect to such additional services. See "First Real Estate Investment Trust of New Jersey Notes to Consolidated Financial Statements - Note 9." Mr. Hekemian, Chairman of the Board, Chief Executive Officer and a Trustee of FREIT, is the Chairman of the Board and Chief Executive Officer of Hekemian. Mr. Hekemian owns approximately .2% of all of the issued and outstanding shares of Hekemian. Real Estate Financing FREIT funds acquisition opportunities and the development of its real estate properties largely through debt financing, including mortgage loans against certain of its properties. At October 31, 2003, FREIT's aggregate outstanding mortgage debt was $76.9 million with an average interest cost on a weighted average basis of 6.577%. FREIT has mortgage loans against certain properties, which serve as collateral for such loans. See the tables in "Item 2 Properties - Portfolio of Investments" for the outstanding mortgage balances at October 31, 2003 with respect to each of these properties. FREIT is currently, and will continue to be for the foreseeable future, more highly leveraged than it has been in the past. This increased level of indebtedness also presents an increased risk of default on the obligations of FREIT and an increase in debt service requirements that could adversely affect the financial condition and results of operations of FREIT. A number of FREIT's mortgage loans are being amortized over a period that is greater than the terms of such loans; thereby requiring balloon payments at the expiration of the terms of such loans. FREIT has not established a cash reserve sinking fund with respect to such obligations and at this time does not expect to have sufficient funds from operations to make such balloon payments when due under the terms of such loans. See "Liquidity and Capital Resources" section of Item 7. FREIT is subject to the normal risks associated with debt financing, including the risk that FREIT's cash flow will be insufficient to meet required payments of principal and interest; the risk that indebtedness on its properties will not be able to be renewed, repaid or refinanced when due; or that the terms of any renewal or refinancing will not be as favorable as the terms of the indebtedness being replaced. If FREIT were unable to refinance its indebtedness on acceptable terms, or at all, FREIT might be forced to dispose of one or more of its properties on disadvantageous terms which might result in losses to FREIT. These losses could have a material adverse effect on FREIT and its ability to make distributions to shareholders and to pay amounts due on its debt. If a property is mortgaged to secure payment of indebtedness and FREIT is unable to meet mortgage payments, the mortgagee could foreclose upon the property, appoint a receiver and receive an assignment of rents and leases or pursue other remedies, all with a consequent loss of revenues and asset value to FREIT. Further, payment obligations on FREIT's mortgage loans will not be reduced if there is a decline in the economic performance of any of FREIT's properties. If any such decline in economic performance occurs, FREIT's revenues, earnings, and funds available for distribution to shareholders would be adversely affected. Neither the Declaration of Trust nor any policy statement formally adopted by FREIT's Board of Trustees limits either the total amount of indebtedness or the specified percentage of indebtedness (based on the total capitalization of FREIT), which may be incurred by FREIT. Accordingly, FREIT may incur in the future additional secured or unsecured indebtedness in furtherance of its business activities, including, if or when necessary, to refinance its existing debt. Future debt incurred by FREIT could bear interest at rates, which are higher than the rates on FREIT's existing debt. Future debt incurred by FREIT could also bear interest at a variable rate. Increases in interest rates would increase FREIT's variable interest costs (to the extent that the related indebtedness was not protected by interest rate protection arrangements), which could have a material adverse effect on FREIT and its ability to make distributions to shareholders and to pay amounts due on its debt or cause FREIT to be in default under its debt. Further, in the future, FREIT may not be able to, or may determine that it is not able to, obtain financing for property acquisitions or for capital expenditures to develop or improve its properties on terms which are acceptable to FREIT. In such event, FREIT might elect to defer certain projects unless alternative sources of capital were available, such as through an equity or debt offering by FREIT. Competitive Conditions FREIT is subject to normal competition with other investors to acquire real property and to profitably manage such property. Numerous other REIT(s), banks, insurance companies and pension funds, as well as corporate and individual developers and owners of real estate, compete with FREIT in seeking properties for acquisition and for tenants. Many of these competitors have significantly greater financial resources than FREIT. In addition, retailers at FREIT's retail properties face increasing competition from discount shopping centers, outlet malls, sales through catalogue offerings, discount shopping clubs, marketing and shopping through cable and computer sources, particularly over the Internet, and telemarketing. In many markets, the trade areas of FREIT's retail properties overlap with the trade areas of other shopping centers. Renovations and expansions at those competing shopping centers and malls could negatively affect FREIT's retail properties by encouraging shoppers to make their purchases at such new, expanded or renovated shopping centers and malls. Increased competition through these various sources could adversely affect the viability of FREIT's tenants, and any new retail real estate competition developed in the future could potentially have an adverse effect on the revenues of and earnings from FREIT's retail properties. (A) General Factors Affecting Investment in Retail and Apartment Complex Properties; Effect on Economic and Real Estate Conditions The revenues and value of FREIT's retail and residential apartment properties may be adversely affected by a number of factors, including, without limitation, the national economic climate; the regional economic climate (which may be adversely affected by plant closings, industry slow downs and other local business factors); local real estate conditions (such as an oversupply of retail space or apartment units); perceptions by retailers or shoppers of the security, safety, convenience and attractiveness of a shopping center; perception by residential tenants of the safety, convenience and attractiveness of an apartment building or complex; the proximity and the number of competing shopping centers and apartment complexes; the availability of recreational and other amenities and the willingness and ability of the owner to provide capable management and adequate maintenance. In addition, other factors may adversely affect the fair market value of a retail property or apartment building or complex without necessarily affecting the revenues, including changes in government regulations (such as limitations on development or on hours of operation) changes in tax laws or rates, and potential environmental or other legal liabilities. (B) Retail Shopping Center Properties' Dependence on Anchor Stores and Satellite Tenants FREIT believes that its revenues and earnings; its ability to meet its debt obligations; and its funds available for distribution to shareholders would be adversely affected if space in FREIT's multi-store shopping center properties could not be leased or if anchor store tenants or satellite tenants failed to meet their lease obligations. The success of FREIT's investment in its shopping center properties is largely dependent upon the success of its tenants. Unfavorable economic, demographic, or competitive conditions may adversely affect the financial condition of tenants and consequently the lease revenues from and the value of FREIT's investments in its shopping center properties. If the sales of stores operating in FREIT's shopping center properties were to decline due to deteriorating economic conditions, the tenants may be unable to pay their base rents or meet other lease charges and fees due to FREIT. In addition, any lease provisions providing for additional rent based on a percentage of sales could be rendered moot. In the event of default by a tenant, FREIT could suffer a loss of rent and experience extraordinary delays while incurring additional costs in enforcing its rights under the lease, which may or may not be recaptured by FREIT. As at October 31, 2003 the following table lists the ten largest retail tenants, which account for approximately 58.3% of FREIT's retail rental space and 50.1% of fixed retail rents. -------------------------------------------------------------------------------- Tenant Center Sq. Ft. -------------------------------------------------------------------------------- Burlington Coat Factory Westridge Square 85,992 K Mart Corporation Westwood Plaza 84,254 Pathmark Stores Inc. Patchoque 63,932 Giant Of Maryland Inc. Westridge Square 55,330 Stop & Shop Supermarket Co. Franklin Crossing 48,673 Safeway Stores Inc . Damascus Center 45,189 TJ MAXX Westwood Plaza 28,480 Westwood Cinema (Hoyts) (1) Westridge Square 27,336 Holiday Productions Olney Town Center 23,930 Damascus Rd Community Church Damascus Center 18,954 (1) Tenant's lease expires April 30, 2007. Total rent and expense reimbursements currently aggregate approximately $488,000 per year. FREIT and Tenant have agreed on the terms of a lease termination agreement whereby Tenant will pay FREIT a lump sum payment of approximately $1.8 million to terminate the lease. The transaction documentation is in the process of being executed by all parties. The mortgage lender has agreed to the termination agreement with the stipulation that the entire lump sum payment to be made by the Tenant be deposited in an interest bearing escrow account held for the benefit of the mortgage lender. Up to $750,000 will be disbursed to FREIT (a) in monthly installments of $31,595 over approximately twenty four (24) months, or (b) the balance of the un-disbursed $750,000 once the mortgage lender is provided with a Certificate of Occupancy ("C of O") covering all of the space vacated by the Tenant. The balance of the lease termination payment of approximately $1 million representing a Tenant Improvement ("TI") Reserve, will be disbursed to FREIT at the earlier of (a) in $250,000 increments as comparable amounts of TI's are incurred, or (b) when a C of O is obtained and the space vacated by the Tenant leased and re-occupied, or (c) when the mortgage loan has been re-paid. (C) Renewal of Leases and Reletting of Space There is no assurance that we will be able to retain tenants at our retail properties upon expiration of their leases. Upon expiration or termination of leases for space located in FREIT's retail properties, the premises may not be relet or the terms of reletting (including the cost of concessions to tenants) may not be as favorable as lease terms for the terminated lease. If FREIT were unable to promptly relet all or a substantial portion of this space or if the rental rates upon such reletting were significantly lower than current or expected rates, FREIT's revenues and earnings; FREIT's ability to service its debt; and FREIT's ability to make expected distributions to its shareholders, could be adversely affected. There are no leases, which FREIT considers material or significant in terms of any single property which expired during the fiscal year 2003 or which is scheduled to expire in the fiscal year 2004 with the exception of the Westridge Cinema (Hoyts) lease- See Above. D) Illiquidity of Real Estate Investments; Possibility that Value of FREIT's Interests may be less than its Investment Equity real estate investments are relatively illiquid. Accordingly, the ability of FREIT to vary its portfolio in response to changing economic, market or other conditions is limited. Also, FREIT's interest in its affiliates, Westwood Hills and WaynePSC, are subject to transfer constraints imposed by the operating agreements, which govern FREIT's investment in these affiliates. Even without such restrictions on the transfer of its interests, FREIT believes that there would be a limited market for its interests in these affiliates. If FREIT had to liquidate all or substantially all of its real estate holdings, the value of such assets would likely be diminished if a sale was required to be completed in a limited time frame. The proceeds to FREIT from any such sale of the assets in FREIT's real estate portfolio might be less than the fair market value of those assets. Impact of Governmental Laws and Regulations on Registrant's Business FREIT's properties are subject to various Federal, state and local laws, ordinances and regulations, including those relating to the environment and local rent control and zoning ordinances. (A) Environmental Matters Both Federal and state governments are concerned with the impact of real estate construction and development programs upon the environment. Environmental legislation affects the cost of selling real estate, the cost to develop real estate, and the risks associated with purchasing real estate. Under various federal, state and local environmental laws, statutes, ordinances, rules and regulations, an owner of real property may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, in or under such property, as well as certain other potential costs relating to hazardous or toxic substances (including government fines and penalties and damages for injuries to persons and adjacent property). Such laws often impose such liability without regard to whether the owners knew of, or were responsible for, the presence or disposal of such substances. Such liability may be imposed on the owner in connection with the activities of any operator of, or tenant at, the property. The cost of any required remediation, removal, fines or personal or property damages and the owner's liability therefore could exceed the value of the property and/or the aggregate assets of the owner. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. If FREIT incurred any such liability, it could reduce FREIT's revenues and ability to make distributions to its shareholders. A property can also be negatively impacted by either physical contamination or by virtue of an adverse effect upon value attributable to the migration of hazardous or toxic substances, or other contaminants that have or may have emanated from other properties. At this time, FREIT is aware of the following environmental matters affecting its properties: (i) Vacant Land Located in Rockaway Township, N.J. The property located in Rockaway Township contains wetlands. Pursuant to a Letter of Interpretation received from the NJDEP, FREIT has determined that the wetlands and associated transition areas will have no material impact on the future development of the property pursuant to the applicable laws and regulations of New Jersey. Under the current zoning ordinance, the property is zoned for multifamily residential use, with a small portion zoned for commercial use. FREIT has received approval from the Township for the construction of 129 garden apartment units. (ii) Westwood Plaza Shopping Center, Westwood, N.J. This property is in a HUD Flood Hazard Zone and serves as a local flood retention basin for part of Westwood, New Jersey. FREIT maintains flood insurance in the amount of $500,000 for the subject property which is the maximum available under the HUD Flood Program for the property. Any reconstruction of that portion of the property situated in the flood hazard zone is subject to regulations promulgated by the New Jersey Department of Environmental Protection ("NJDEP"), which could require extraordinary construction methods. (iii) Franklin Crossing, Franklin Lakes, N.J. The redeveloped Franklin Crossing shopping center was completed during the summer of 1997. Also in 1997, a historical discharge of hazardous materials was discovered at Franklin Crossing. The discharge was reported to the NJDEP in accordance with applicable regulations. FREIT completed the remediation required by the NJDEP. In November 1999, FREIT received a No Further Action Letter from the NJDEP concerning the contaminated soil at Franklin Crossing. Monitoring of the groundwater will continue pursuant to a memorandum of agreement filed with the NJDEP. (iv) Preakness Shopping Center, Wayne NJ a) Prior to its purchase by WaynePSC a Phase I and Phase II Environmental Assessment of the Preakness shopping center revealed soil ground water contamination with Percloroethylene (Dry Cleaning Fluid) caused by mishandling of this chemical by a former Dry Cleaner tenant. The seller of the center to WaynePSC, LLC is in the process of performing the remedial work in accordance with the requirements of the NJDEP. Additonally, the seller has escrowed the estimated cost of the remediation and has purchased a cap-cost insurance policy to covering any expenses over and above the estimated cost. (v) Other a) The State of New Jersey has adopted an underground fuel storage tank law and various regulations with respect to underground storage tanks. FREIT no longer has underground storage tanks on any of its properties. FREIT has conducted environmental audits for all of its properties except for its undeveloped land; retail properties in Franklin Lakes (Franklin Crossing) and Glen Rock, New Jersey; and residential apartment properties located in Lakewood, Palisades Park and Hasbrouck Heights, New Jersey. Except as noted in subparagraph (iii) above, the environmental reports secured by FREIT have not revealed any environmental conditions on its properties, which require remediation pursuant to any applicable Federal or state law or regulation. b) FREIT has determined that several of its properties contain lead based paint ("LBP"). FREIT is in compliance with all Federal, state and local requirements as they pertain to LBP. FREIT does not believe that the environmental conditions described in subparagraphs (i) - (iv) above will have a materially adverse effect upon the capital expenditures, revenues, earnings, financial condition or competitive position of FREIT. (B) Rent Control Ordinances Each of the apartment buildings or complexes owned by FREIT is subject to some form of rent control ordinance which limits the amount by which FREIT can increase the rent for renewed leases, and in some cases, limits the amount of rent which FREIT can charge for vacated units. Westwood Hills is not subject to any rent control law or regulation. (C) Zoning Ordinances Local zoning ordinances may prevent FREIT from developing its unimproved properties, or renovating, expanding or converting its existing properties, for their highest and best use as determined by FREIT's Board of Trustees, which could diminish the values of such properties. (D) Financial Information about Foreign and Domestic Operations and Export Sale FREIT does not engage in operations in foreign countries and it does not derive any portion of its revenues from customers in foreign countries. ITEM 2. PROPERTIES Portfolio of Investments: The following charts set forth certain information relating to each of FREIT's real estate investments in addition to the specific mortgages encumbering the properties.
Residential Apartment Properties as of October 31, 2003: -------------------------------------------------------- ----------------------------------------------------------------------------------------------------- Depreciated Average Cost of Buildings Annual Mortgage and Year Occupancy Balance Equipment Property and Location Acquired No. of Units Rate ($000) ($000) ----------------------------------------------------------------------------------------------------- Lakewood Apts. 1962 40 94.8% None (1) $ 118 Lakewood, NJ Palisades Manor 1962 12 98.7% None (1) $ 44 Palisades Park, NJ Grandview Apts. Hasbrouck Heights, NJ 1964 20 94.6% None (1) $ 120 Height Manor Spring Lake Heights, NJ 1971 79 98.4% $3,476 $ 539 Hammel Gardens Maywood, NJ 1972 80 94.7% $5,080 $ 844 Steuben Arms 1975 100 97.5% $7,046 $ 1,291 River Edge, NJ Berdan Court Wayne, NJ 1965 176 95.8% $ 13,941 $ 1,690 Westwood Hills (2) 1994 210 95.8% $17,881 $13,404 Westwood, NJ ------------------------------------------------------------------------------------------------------
(1) Security for draws against FREIT's Credit Line. As of October 31, 2003 there were no draws outstanding. (2) FREIT owns a 40% equity interest in Westwood Hills. See Investment in Affiliates.
Retail Properties as of October 31, 2003: ----------------------------------------- --------------------------------------------------------------------------------------------------------------------- Average Depreciated Cost Leaseable Space- Annual Mortgage of Buildings and Year Approximate Occupancy Balance Equipment Property and Location Acquired Sq. Ft. Rate ($000) ($000) --------------------------------------------------------------------------------------------------------------------- Franklin Crossing 1966(2) 87,041 98.8% None (1) $ 9,656 Franklin Lakes, NJ Westwood Plaza 1988 173,854 90.6% $ 9,910 $ 11,537 Westwood, NJ Westridge Square 1992 256,620 93.1% $ 17,289 $ 21,431 Frederick, MD Pathmark Super Store 1997 63,962 100.0% $ 6,744 $ 9,614 Patchogue, NY Glen Rock, NJ (6) 1962 4,800 0.0% None (1) $ 108 Olney Town Center (3) 2000 98,848 92.7% $ 10,872 $ 14,426 Olney, MD Preakness Center (4) 2002 322,136 91.5% $ 32,000 $ 32,882 Wayne, NJ Damascus Center (5) 2003 139,878 87.9% $ 2,532 $ 9,893 Damascus. MD Rockaway Township, NJ (7) 1964/1963 1+/- Acre Land lease 0.0% None $ 114 ------------------------------------------------------------------------------------------------------------------
(1) Security for draws against FREIT's Credit Line. As at October 31, 2003 there were no draws outstanding. (2) The original 33,000 sq. ft. shopping center was replaced with a new 87,041 sq. ft. center that opened in October 1997. (3) FREIT owns a 75% equity interest in S & A which owns the center. (4) FREIT owns a 40% equity interest in WaynePSC which owns the center. (5) See "Fiscal Year 2003 Developments, Acquisitions". (6) All of the space has been leased to two tenants. The larger tenant (70 % of the space) began paying rent in November 2003 (7) Tenant began paying rent in December 2003. See "Fiscal Year 2003 Developments, Development."
Vacant Land as of October 31, 2003: ----------------------------------- Permitted Use per Local Acreage Per Location (1) Acquired Current Use Zoning Laws Parcel ---------------------------------------------------------------------------------------------------- Franklin Lakes, NJ 1966 None Residential 4.27 None Multi Family / Rockaway,Township NJ (2) 1964/1963 Retail 20 So. Brunswick, NJ (3) 1964 Principally leased Industrial 33 as farmland qualifying for state farmland assessment tax treatment ----------------------------------------------------------------------------------------------------
(1) All of the above land is unencumbered. (2) FREIT has received approval for the construction of 129 garden apartment units on this land. (3) FREIT has filed for site plan approval for the construction of a 500,000 sq. ft. industrial warehouse facility. See "Fiscal Year 2003 Developments, Development'" FREIT believes that it has a diversified portfolio of residential and retail properties. FREIT's business is not materially dependent upon any single tenant or any one of its properties. The following Table lists FREIT's properties that have contributed 15% or more of FREIT's total revenue in one (1) or more of the last three (3) fiscal years. Percent Contribution To Revenues -------------------------------- Fiscal Year Ended October 31, -------------------------------- 2003 2002 2001 ---- ---- ---- Westridge Square 19.8% 20.5% 19.1% Although FREIT's general investment policy is to hold properties as long-term investments, FREIT could selectively sell certain properties if it determines that any such sale is in FREIT's and its shareholders best interests. With respect to FREIT's future acquisition and development activities, FREIT will evaluate various real estate opportunities which FREIT believes would increase FREIT's revenues and earnings as well as compliment and increase the overall value of FREIT's existing investment portfolio. Except for the Pathmark supermarket super store located in Patchogue, Long Island, all of FREIT's and its Affiliate's (WaynePSC) retail properties have multiple tenants. FREIT and its Affiliate's retail shopping center properties have fifteen (15) anchor / major tenants, that account for approximately 57% of the space leased. The balance of the space is leased to one hundred forty (140) satellite tenants. The following table lists the anchor / major tenants at each center and the number of satellite tenants: ------------------------------------------------------------------------------ No. Of Net Leaseable Satellite Shopping Center Space Anchor/Major Tenants Tenants ------------------------------------------------------------------------------ Westridge Square. 254,970 Giant Supermarket 23 Frederick, MD Burlington Coat Factory Westridge Cinema (1) Franklin Crossing 87,868 Stop & Shop 17 Franklin, Lakes, NJ Westwood Plaza 173,875 Kmart Corp 19 Westwood, NJ TJMaxx Olney Town Center (2) 98,848 Holiday Productions (Cinema) 23 Olney, MD Craft Country Preakness Center (3) 322,136 Stop & Shop 42 Wayne, NJ Macy's CVS Annie Sez Clearview Theaters Damascus Center (4) 139,878 Safeway Stores 16 Damascus. MD Damascus Rd Comm. Church ------------------------------------------------------------------------------ (1) Lease being terminated. See "Retail Shopping Center Properties' Dependence on Anchor Stores and Satellite Tenants. (2) FREIT owns a 75% interest in S&A, which owns this center. (3) FREIT owns a 40% interest in WaynePSC which owns this center. (4) See "Fiscal Year 2003 Developments, Acquisitions". With respect to most of FREIT's retail properties, lease terms range from five (5) years to twenty-five (25) years with options which if exercised would extend the terms of such leases. The lease agreements generally contain clauses for reimbursement of real estate taxes, maintenance, insurance and certain other operating expenses of the properties. During the last three (3) completed fiscal years, FREIT's retail properties averaged a 95.6% occupancy rate with respect to FREIT's available leasable space Leases for FREIT's apartment buildings and complexes are usually one (1) year in duration. Even though the residential units are leased on a short-term basis, FREIT has averaged, during the last three (3) completed fiscal years, a 96.8% occupancy rate with respect to FREIT's available apartment units. FREIT does not believe that any seasonal factors materially affect FREIT's business operations and the leasing of its retail and apartment properties. FREIT does not lease space to any Federal, state or local government entity. FREIT believes that its properties are covered by adequate fire and property insurance provided by reputable companies and with commercially reasonable deductibles and limits. ITEM 3 LEGAL PROCEEDINGS There are no material pending legal proceedings to which FREIT is a party or of which any of its properties is the subject. There is, however, ordinary and routine litigation involving FREIT's business including various tenancy and related matters. Notwithstanding the environmental conditions disclosed in "Item 1(c) Description of Business - Impact of Governmental Laws and Regulations on Registrant's Business; Environmental Matters," there are no legal proceedings concerning environmental issues with respect to any property owned by FREIT. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Therewere no matters submitted to a vote of security holders during the fourth quarter of FREIT's 2003 fiscal year. ITEM 4A EXECUTIVE OFFICERS OF FREIT The executive officers of FREIT as of January 27, 2004 are listed below. Brief summaries of their business experience and certain other information with respect to each of them is set forth in the following table and in the information, which follows the table. As a result of Hekemian being responsible for managing the day-to-day operations of FREIT's properties, the executive officers are not required to devote a significant part of their business activities to their duties as executive officers of FREIT. See "Item 1(c) Narrative Description of Business - Management Agreement." Except for Mr. Aiello, Secretary, and Executive Secretary of FREIT, each of the executive officers is also a Trustee of FREIT. The executive officers of FREIT are as follows: Name Age Position ---- --- -------- Robert S. Hekemian 72 Chairman of the Board and Chief Executive Officer Donald W. Barney 63 President, Treasurer and Chief Financial Officer John A. Aiello, Esq. 54 Secretary and Executive Secretary Robert S. Hekemian has been active in the real estate industry for more than fifty (50) years. Mr. Hekemian has served as Chairman of the Board and Chief Executive Officer of FREIT since 1991, and as a Trustee since 1980. From 1981 to 1991, Mr. Hekemian was President of FREIT. Mr. Hekemian directly devotes approximately forty to fifty percent (40% - 50%) of his time to execute his duties as an executive officer of FREIT. Mr. Hekemian is also the Chairman of the Board and Chief Executive Officer of Hekemian. See "Item 1(c) Narrative Description of Business - Management Agreement." Mr. Hekemian is a director of the Pascack National Bank. Mr. Hekemian is also a director, partner and officer in numerous private real estate corporations and partnerships. Donald W. Barney has served as President of FREIT since 1993, as a Trustee since 1981, and was elected Treasurer and Chief Financial Officer in January 2003. Mr. Barney devotes approximately fifteen percent (15%) of his time to execute his duties as an executive officer of FREIT. Mr. Barney was associated with Union Camp Corporation, a diversified manufacturer of paper, packaging products, chemicals, and wood products, from 1969 through December 31, 1998, as Vice President and Treasurer. Mr. Barney was a director of Ramapo Financial Corporation until it was acquired, in May 1999 by another financial institution, and is a partner and director in several other private real estate investment companies, and a director of the Hilltop Community Bank.. John A. Aiello, Esq., an attorney, was elected to serve as the Executive Secretary of FREIT in August 2002, and as Secretary in January 2003. Mr. Aiello devotes approximately five percent (5%) of his time to execute his duties as an executive officer of FREIT. Beginning in 1974, Mr. Aiello has spent his entire career with the law firm of Giordano Halleran & Ciesla, P.C. ("GH&C"), with offices in Middletown and Trenton, NJ. Mr. Aiello is an officer and shareholder of GH&C. Mr. Aiello is Chairman of GH&C's Corporate and Securities Department, and his practice focuses on corporate law, corporate finance, securities, mergers, and acquisitions. PART II ------- ITEM 5 MARKET FOR FREIT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS Shares of Beneficial Interest Beneficial interests in FREIT are represented by shares without par value (the "Shares"). The Shares represent FREIT's only authorized, issued and outstanding class of equity. As of January 27, 2004, there were approximately 500 holders of record of the Shares. The Shares are traded in the over-the-counter market through use of the OTC Bulletin Board(R) Service (the "OTC Bulletin Board") provided by NASD, Inc. FREIT does not believe that an active United States public trading market exists for the Shares since historically only small volumes of the Shares are traded on a sporadic basis. The following table sets forth, at the end of the periods indicated, the Bid and Asked quotations for the Shares on the OTC Bulletin Board. Bid Asked --- ----- Fiscal Year Ended October 31, 2003 ---------------------------------- First Quarter $ 22 1/2 $ 32 Second Quarter $ 24 1/2 $ 25 3/4 Third Quarter $ 25 1/2 $ 26 1/4 Fourth Quarter $ 28 1/4 $ 36 Bid Asked --- ----- Fiscal Year Ended October 31, 2002 ---------------------------------- First Quarter $ 23 $ 21 1/2 Second Quarter $ 24 $ 21 1/2 Third Quarter $ 21 3/4 $ 21 Fourth Quarter $ 28 $ 24 The bid quotations set forth above for the Shares reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The source of the bid and asked quotations is Janney Montgomery Scott, Inc., members of the New York Stock Exchange and other national securities exchanges. Dividends The holders of Shares are entitled to receive distributions as may be declared by FREIT's Board of Trustees. Dividends may be declared from time to time by the Board of Trustees and may be paid in cash, property, or Shares. The Board of Trustees' present policy is to distribute annually at least ninety percent (90%) of FREIT's REIT taxable income as dividends to the holders of Shares in order to qualify as a REIT for Federal income tax purposes. Distributions are made on a quarterly basis. In fiscal 2003 and fiscal 2002, FREIT paid or declared aggregate total dividends of $1.80 and $1.72 per share, respectively, to the holders of Shares. See "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations - Distributions to Shareholders." Securities Authorized for Issuance Under Equity Compensation Plans See table included in "Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters". ITEM 6 SELECTED FINANCIAL DATA The selected consolidated financial data for FREIT for each of the five (5) fiscal years in the period ended October 31, 2003 are derived from financial statements that have been audited and reported upon by J.H. Cohn LLP, independent public accountants for FREIT. This data should be read in conjunction with "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report and with FREIT's consolidated financial statements and related notes included in this Annual Report.
BALANCE SHEET DATA: As At October 31, 2003 2002 2001 2000 1999 (in thousands) Total Assets $107,150 $ 96,032 $ 96,495 $ 96,781 $ 84,428 ========= ========= ======== ======== ======== Long-Term Obligations $ 76,890 $ 68,393 $ 69,354 $ 70,214 $ 60,071 ========= ========= ======== ======== ======== Shareholders' Equity $ 22,140 $ 21,903 $ 21,588 $ 21,144 $ 20,520 ========= ========= ======== ======== ======== Weighted average shares outstanding: Basic 3,134 3,120 3,120 3,120 3,120 ========= ========= ======== ======== ======== Diluted 3,261 3,233 3,133 3,120 3,120 ========= ========= ======== ======== ========
INCOME STATEMENT DATA: Year Ended October 31, 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- (in thousands, except per share amounts) REVENUES: Revenues from real estate operations $ 19,753 $ 18,626 $18,062 $16,610 $14,435 Net investment income 187 250 683 834 742 Equity in earnings (loss) of affiliates 250 269 190 173 (52) -------- -------- ------- -------- ------- 20,190 19,145 18,935 17,617 15,125 -------- -------- ------- -------- ------- EXPENSES: Real estate operations 6,755 6,056 6,107 5,306 4,800 Financing costs 4,802 4,873 5,356 5,165 4,620 General and administrative expenses 593 643 539 365 401 Depreciation 2,229 2,153 2,138 1,914 1,642 Minority interest 246 137 85 31 -------- -------- ------- -------- ------- 14,625 13,862 14,225 12,781 11,463 -------- -------- ------- -------- ------- Income from continuing operations 5,565 5,283 4,710 4,836 3,662 Income (loss) from discontinued operations - 398* (10) (77) 53 -------- -------- ------- -------- ------- Net income $ 5,565 $ 5,681 $ 4,700 $ 4,759 $ 3,715 ======== ======== ======= ======== ======= * Includes gain on disposal of $475,000. Basic earnings (loss) per share: Continuing operations $ 1.78 $ 1.69 $ 1.51 $ 1.55 $ 1.17 Discontinued operations - 0.13 - (0.02) 0.02 -------- -------- ------- -------- ------- $ 1.78 $ 1.82 $ 1.51 $ 1.53 $ 1.19 ======== ======== ======= ======== ======= Diluted earnings (loss) per share: Continuing operations $ 1.71 $ 1.63 $ 1.50 $ 1.55 $ 1.17 Discontinued operations - 0.12 - (0.02) 0.02 -------- -------- ------- -------- ------- $ 1.71 $ 1.75 $ 1.50 $ 1.53 $ 1.19 ======== ======== ======= ======== ======= Cash Dividends Declared Per Common Share $ 1.80 $ 1.72 $ 1.38 $ 1.33 $ 1.13 ======== ======== ======== ======== =======
ITEM 7 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 consolidated financial statements of FREIT (including related notes thereto) appearing elsewhere in this 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 our income producing retail properties. We also receive income from our 40% owned Affiliate, Westwood Hills, which owns a residential apartment property and beginning in fiscal 2003, we began receiving income from our 40% owned affiliate WaynePCS that owns the Preakness shopping center. Our policy has been to acquire real property for long-term investment. SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES Pursuant to the Securities and Exchange Commission ("SEC") disclosure guidance for "Critical Accounting Policies," the SEC defines Critical Accounting Policies as those that require the application of Management's most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, the preparation of which takes into account estimates based on judgments and assumptions that affect certain amounts and disclosures. Accordingly, actual results could differ from these estimates. The accounting policies and estimates used, which are outlined in Note 1 to our Consolidated Financial Statements which is presented elsewhere in this Annual Report, have been applied consistently as at October 31, 2003 and 2002, and for the years ended October 31, 2003, 2002 and 2001. We believe that the following accounting policies or estimates require the application of Management's most difficult, subjective, or complex judgments: Revenue Recognition: Base rents, additional rents based on tenants' sales volume and reimbursement of the tenants' share of certain operating expenses are generally recognized when due from tenants. The straight-line basis is used to recognize base rents under leases if they provide for varying rents over the lease terms. Straight-line rents represent unbilled rents receivable to the extent straight-line rents exceed current rents billed in accordance with lease agreements. Before FREIT can recognize revenue, it is required to assess, among other things, its collectibility. If we incorrectly determine the collectibility of revenue, our net income and assets could be overstated. Valuation of Long-Lived Assets: We periodically assess the carrying value of long-lived assets whenever we determine that events or changes in circumstances indicate that their carrying amount may not be recoverable. When FREIT determines that the carrying value of long-lived assets may be impaired, the measurement of any impairment is based on a projected discounted cash flows method determined by FREIT's management. While we believe that our discounted cash flow methods are reasonable, different assumptions regarding such cash flows may significantly affect the measurement of impairment. In October 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires the reporting of discontinued operations to include components of an entity that have either been disposed of or are classified as held for sale. FREIT has adopted SFAS No. 144. On August 9, 2002 FREIT sold its Camden, NJ property. FREIT has reclassified the net income (loss) from the operation of the property as Discontinued Operations for all periods presented. The adoption of SFAS No. 144 did not have an impact on net income, but only impacted the presentation of this property within the consolidated statements of income. The results of this reclassification can be seen in "ITEM 6 SELECTED FINANCIAL DATA" above and in the Consolidated Financial Statements of FREIT (including related notes thereto) appearing elsewhere in this Form 10-K. Since we consider net income from continuing operations (which excludes the operations of the Camden property) is the most significant element of net income, all references and comparisons refer to this item unless otherwise stated. All references to per share amounts are on a diluted basis (unless otherwise indicated),and refer to earnings per share from continuing operations. Results of Operations: Fiscal Years Ended October 31, 2003 and 2002 Revenues for the fiscal year ended October 31, 2003 ("Fiscal 2003") increased $1,045,000 or 5.5% over revenues for the fiscal year ended October 31, 2002 ("Fiscal 2002"). The components of the increase are summarized in this chart: ------------------- October 31, Increase (Decrease) ------------------- -------------------- Revenue Item 2003 2002 $ % ------------ ---- ---- - - (in thousands) ------------------------------- Real estate operations: Retail $ 13,186 $ 12,288 $ 898 7.3% Residential 6,567 6,338 229 3.6% ------------------- ----------------- Total real estate 19,753 18,626 1,127 6.1% Equity in income of affiliate 250 269 (19) -7.1% Investment income 187 250 (63) -25.2% -------- -------- ------------------- $ 20,190 $ 19,145 $1,045 5.5% ======== ======== ======== ======= The increases in income from real estate operations, as set forth below, accounted for all of the increased revenue. Income from continuing operations increased $282,000 (5.3%) to $5,565,000 for Fiscal 2003 compared to $5,283,000 for Fiscal 2002. SEGMENT INFORMATION The following table sets forth comparative operating data for FREIT's real estate segments:
Retail Residential Combined ------------------------------------- ------------------------------------ ----------------- Year Ended Year Ended Year Ended ---------------- ----------------------- Increase October 31, Increase (Decrease) October 31, (Decrease) October 31, ---------------- ------------------ ---------------------------- ---------------- 2003 2002 $ % 2003 2002 $ % 2003 2002 (in thousands) (in thousands) (in thousands) -------------------------- ---------------------------- ----------------- Rental income $ 9,779 $9,102 $ 677 7.4% $ 6,499 $ 6,261 $ 238 3.8% $16,278 $15,363 Percentage rent 117 117 - - 117 117 Reimbursements 3,076 2,664 412 15.5% - 3,076 2,664 Other 15 78 (63) -80.8% 68 77 (9) -11.7% 83 155 ------------------------------------- ------------------------------------ ------- ------- Total Revenue 12,987 11,961 1,026 8.6% 6,567 6,338 229 3.6% 19,554 18,299 Operating expenses 4,091 3,610 481 13.3% 2,664 2,445 219 9.0% 6,755 6,055 ------------------------------------ ------------------------------------ ------- ------- Net operating income $ 8,896 $8,351 $ 545 6.5% $ 3,903 $ 3,893 $ 10 0.3% 12,799 12,244 ===================================== ==================================== Average Occupancy % 93.1% 96.2% (3.1%) 96.3% 96.3% - ======== ====== =========== ======= ======= ====== Reconciliation to consolidated net income: Deferred rents - straight lining 199 326 Net investment income 187 250 Equity in income of affiliates 250 269 General and administrative expenses (593) (643) Depreciation (2,229) (2,153) Financing costs (4,802) (4,873) Minority interest (246) (137) ---------------- Net income from continuing operations 5,565 5,283 Discontinued operations 398 ---------------- Net income $ 5,565 $ 5,681 ================
The above table details the comparative net operating income ("NOI") for FREIT's Retail and Residential Segments, and reconciles the combined NOI to consolidated Net Income. 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. FREIT assesses and measures segment operating results based on NOI. NOI is not a measure of operating results or cash flow as measured by generally accepted accounting principles, 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. RETAIL SEGMENT During Fiscal 2003, revenues increased by $1,026,000 (8.6%) and NOI increased by $547,000 (6.6%) in spite of average occupancy declining 3.1% to 93.1% from 96.2% in Fiscal 2002. Revenues and NOI from same properties (those properties included for a full year in fiscal 2003 and 2002) for Fiscal 2003 increased by $761,000 (6.4%) and $387,000 (4.7%) respectively over Fiscal 2002. The balance of the revenue and NOI increase came from our Damascus Center that we acquired on July 31, 2003 (see "Fiscal Year 2003 Developments, Acquisitions"). The increases for Fiscal 2003 from same properties reflects higher rents from existing tenants and rents from new tenants not in occupancy during Fiscal 2002. The increased rents offset the decline in average occupancy, principally at our Westridge Square property with the vacancy created by the Westridge Cinema closing its theater (see below). This vacancy, if the space in not leased, will have a greater negative impact in the next fiscal year. Westridge Square: In February 2003 Westridge Cinema ("Tenant") closed its theater and ceased paying rent. Tenant's lease expires April 30, 2007. Total rent and expense reimbursements currently aggregate approximately $488,000 per year. FREIT and Tenant have agreed on the terms of a lease termination agreement whereby Tenant will pay FREIT a lump sum payment of approximately $1.8 million to terminate the lease. The transaction documentation is in the procees of being executed by all parties. The mortgage lender has agreed to the termination agreement with the stipulation that the entire lump sum payment to be made by the Tenant be deposited in an interest bearing escrow account held for the benefit of the mortgage lender. Up to $750,000 will be disbursed to FREIT (a) in monthly installments of $31,595 over approximately twenty four (24) months, beginning when all the documentation is signed, or (b) the balance of the un-disbursed $750,000 will be discussed once the mortgage lender is provided with a Certificate of Occupancy ("C of O") covering all of the space vacated by the Tenant. The balance of the lease termination payment of approximately $1 million representing a Tenant Improvement ("TI") Reserve, will be disbursed to FREIT at the earlier of (a) in $250,000 increments as comparable amounts of TI's are incurred, or (b) when a C of O is obtained and the space vacated by the Tenant leased and re-occupied, or (c) when the mortgage loan has been re-paid. ACQUISITION On July 31, 2003, Damascus Centre, LLC , an entity wholly owned by FREIT, acquired the Damascus Shopping Center in Damascus, MD. The shopping center is situated on 13 acres, and contains approximately 139,000 SF of retail and office space. A Safeway supermarket is the anchor tenant. The total acquisition costs of $10.3 Million were financed in part by the assumption of an existing $2.6 Million first mortgage loan and the balance of $7.7 Million with equity capital. Included in the acquisition costs is an amount paid to an existing tenant to terminate its lease as of December 31, 2003. FREIT is considering offering an interest in this investment to an entity owned by employees of Hekemian, FREIT's managing agent. FREIT plans to demolish the existing buildings, with the exception of the freestanding McDonald's restaurant. A new shopping Center will be constructed of approximately 145,000 SF, of which 58,000 SF is expected to be occupied by a new, prototype Safeway supermarket. A smaller building will be constructed on an out parcel which will accommodate the office tenants as well as some smaller, retail space. This plan to construct a new center is subject to obtaining all approvals and building permits from the various governing authorities. Construction costs for the new center are estimated at approximately $13 million. Construction is expected to begin during the summer of 2005. RESIDENTIAL SEGMENT Residential revenue increased by $229,000 (3.6%) to $6,567,000 during Fiscal 2003 from $6,338,000 for Fiscal 2002. Average occupancy for both Fiscal 2003 and Fiscal 2002 remained unchanged at 96.3%. NOI increased marginally to $3,903,000 for Fiscal 2003 compared to $3,893,000 for Fiscal 2002. The increase in revenue during Fiscal 2003 was almost equally matched by increased expenses (snow removal and heating costs) brought on by the severe 2002/2003 winter. While the demand for apartments was weak at the start of Fiscal 2003, demand at our properties picked up as evidenced by average annual asking monthly rents increasing 4% to $1,098 from $1,056 during Fiscal 2002. As at October 31, 2003, average asking monthly rents were $1,117. Our residential revenue is principally composed of monthly apartment rental income. Total apartment rental income is a factor of occupancy and monthly apartment rents. A 1% decline in annual average occupancy, or a 1% decline in average rents, results in an annual $65,000 decline in revenues. In keeping with our policy of improving our apartments and maintaining their competitiveness, we invested $484,000 ($954 per apartment) in our capital program during Fiscal 2003. Since our apartment communities were constructed more than 25 years ago, we tend to spend more in any given year on maintenance and capital improvements than may be spent on newer properties. We own 20 +/- acres of undeveloped land in Rockaway, NJ, and have received building plan approval and a water allocation 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 from our institutional money market investment. Pending receipt of final water allocation and sewer approval from the NJ Department of Environmental Protection, we expect construction to commence by the summer of 2004. Through October 31, 2003 approximately $260,000 of pre-construction development costs have been expended and deferred. Approximately one (1) acre of the Rockaway land has been sub-divided and leased to a bank. Rent under the land lease commenced in December 2003. NET INVESTMENT INCOME Net investment income fell 25.2% to $187,000 during Fiscal 2003 compared to $250,000 during Fiscal 2002. Net investment income for the past two years was principally interest earned from our investments in money market funds. Earnings received from various sources over the past two fiscal are as follows: ----------------------------------------------------- Year Ended October 31, ---------------------- 2003 2002 -------- -------- ($000) Institutional Money Market $ 100 $ 236 Savings Money Market Account 70 8 Mortgage Loan 15 Related Party 4 Other 2 2 ----------------------------------------------------- Total $ 187 $ 250 ----------------------------------------------------- The lower interest rate environment during Fiscal 2003 compared to Fiscal 2002, coupled with lower average investment balances, due to the acquisition of the Damascus shopping center, accounted for the reduced investment income. Our average yield during Fiscal 2003 was approximately 1.6% compared to 1.9% during Fiscal 2002. (See "Financing Costs" below for offsetting benefits.) EQUITY IN INCOME OF AFFILIATES This represents income from Westwood Hills, which owns a 210 unit (family) garden apartment community in Westwood, NJ, and from WaynePSC, which owns the Preakness Shopping Center in Wayne, NJ. FREIT has a 40% equity ownership in each of these entities. Results of operations are as follows: Year Ended October 31, --------------- Net Income of 2003 2002 -------------------------------------- ($000) Westwood Hills, LLC $ 466 $ 672 Wayne PSC, LLC 158 ----------------------------------------------------- Total $ 624 $ 672 ===================================================== FREIT's Share of Net Income $ 250 $ 269 ====== ====== Net Income at Westwood Hills decreased 30.8% to $466,000 for Fiscal 2003 from $672,000 for Fiscal 2002. The reduction for Fiscal 2003 is largely due to two factors: 1) in spite of revenues increasing 2.9% over Fiscal 2002, the increase was insufficient to cover the 11.3% increase in expenses directly related to the severe winter of 2002/2003 and, 2) the financing costs relating to the $3.4 million second mortgage obtained in January 2003. FREIT received, as a distribution, approximately $1.4 million of the net financing proceeds from second mortgage loan. This financing will add approximately $170,000 of annual financing costs to Westwood Hills operations. While FREIT bears 40% of this additional financing cost, we believe this cost will be offset by the income FREIT will ultimately earn from investing its $1.4 million distribution. Income at the Preakness Shopping Center, before financing costs, was $2,319,000. Net Income for Fiscal 2003, however, was burdened by one-time re-financing costs of $457,000 related to the financing described below. On June 30, 2003, Wayne PSC refinanced its original $26.5 million first mortgage loan with a new $32.5 million mortgage loan. The term of the new loan is thirteen (13) years, with interest fixed at 6.04 %, and the loan will require interest only payments for the first three years and thereafter be amortized over a 25-year life. FREIT received $2.4 million of the net re-finance proceeds as a distribution from WaynePSC. FINANCING COSTS Financing costs are summarized as follows: ----------------------------------------------------- Year Ended October 31, ---------------------- 2003 2002 -------------------- ($000) Fixed rate mortgages: 1st Mortgages Existing $ 4,265 $ 4,447 New (Damascus) 59 2nd Mortgages 76 Floating rate mortgage 345 403 Other 57 23 ----------------------------------------------------- Total $ 4,802 $ 4,873 ===================================================== Financing costs for Fiscal 2003 decreased $71,000 (1.5%) to $4,802,000 from $4,873,000 for Fiscal 2002. 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 in Fiscal 2003 compared to Fiscal 2002. During November 2002, we renegotiated the terms of the first mortgage note on our retail property in Patchogue, NY. The mortgage note, which had an outstanding principal balance of $6.9 million, was due on January 1, 2005, and carried a fixed interest rate of 7.375%. The due date has been extended three years (3) and the interest rate was reduced to a fixed rate of interest of 5.95%. This interest rate reduction will reduce FREIT's interest costs and debt service requirements going forward. To create additional liquidity and lock in favorable long-term interest rates, FREIT took advantage of the Freddie Mac second mortgage program. This program allows add-ons to existing Freddie Mac first mortgages to the extent justified by increased values and cash flows. On August 20, 2003, FREIT placed add-on second mortgages on three of its residential properties (Berdan Court, Hammel Gardens and Steuben Arms). The second mortgage loans aggregated approximately $7 million bearing an average fixed rate of 5.2%. The due dates of the second mortgage loans are co-terminus with the underlying first mortgage loans with respect to the properties. FREIT received net financing proceeds of approximately $6.9 million from the add-on second mortgages. As a result of the second mortgage financing, and the first mortgage debt assumed from the acquisition of the Damascus shopping center, financing costs for the fiscal year ending October 31, 2004 are expected to increase and aggregate approximately $5.3 million. GENERAL AND ADMINISTRATIVE EXPENSES Our G & A expenses decreased to $593,000 from $643,000 ($482,000 before project abandonment costs of $161,000) during Fiscal 2002. The increase in Fiscal 2003 results principally from increased Officer's and Trustee's fees. DEPRECIATION Depreciation expense in Fiscal 2003 increased slightly to $2.229 million compared to $2.153 million in Fiscal 2002. Most of this increase is attributable to the acquisition of the Damascus shopping center and to capital improvements made to our properties during Fiscal 2003. Results of Operations: Fiscal Years Ended October 31, 2002 and 2001 Revenues for the year fiscal ended October 31, 2002 ("Fiscal 2002") increased $210,000 or 1.1% over revenues for the fiscal year ended October 31, 2001 ("Fiscal 2001) revenues. The components of the increase are summarized in this chart: Year Ended Increase October 31, (Decrease) ------------------- ------------------ (in thousands) -------------------------------- Revenue Item 2002 2001 $ % --------- -------- ------- ------- Real estate operations $ 18,626 $ 18,062 $ 564 3.1% Equity in income of affiliate 269 190 79 41.6% Investment income 250 683 (433) -63.4% -------- --------- ------- -------- $ 19,145 $ 18,935 $ 210 1.1% ======== ========= ======== ======== The increases in income from real estate operations, and from our equity in the earnings of our affiliate, were significantly offset by the reduction in net investment income. Income from continuing operations increased $573,000 (12.2%) to $5,283,000 for Fiscal 2002 compared to $4,710,000 for Fiscal 2001. RETAIL SEGMENT The following table sets forth comparative operating data for FREIT's Retail properties: Retail Segment Year Ended October 31, Increase (Decrease) ------------------ ------------------- 2002 2001 $ % Revenues (in thousands) ---------------------------- Minimum & percentage rents $ 9,219 $ 8,751 $ 468 5.3% Reimbursements 2,664 2,621 43 1.6% Other 78 150 (72) -48.0% ------------------------------------- Total revenue 11,961 11,522 439 3.8% Operating expenses 3,610 3,617 (7) -0.2% -------- ------- ---------------- Net operating income $ 8,351 $ 7,905 $ 446 5.6% ======== ======= ================ Average occupancy % 96.2% 95.8% 0.40% ======== ======= ======= Retail rental revenue increased by 3.8% for Fiscal 2002 to $11.9 million from $11.5 million for Fiscal 2001. Minimum and percentage rents, however, increased 5.3%. This increase results principally from higher average occupancy. The higher occupancy also added to the increase in expenses reimbursed by tenants. The higher revenues and lower operating expenses (principally because of the mild winter) resulted in net operating income increasing 5.6% to $8,351,000 for Fiscal 2002 compared to $7,905,000 for Fiscal 2001. Westwood Plaza Shopping Center, Westwood, NJ: On January 21, 2002 Kmart Corporation, a major tenant in our Westwood Shopping Center, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Kmart has since emerged from bankruptcy and has elected to keep and maintain its lease at the Westwood Plaza Shopping Center. As previously reported, Stop & Shop closed its 28,000 sq. ft. supermarket in Westwood Plaza Shopping Center and continued fulfilling its rental obligations with no plans to reopen the store. Effective July 31, 2002, FREIT and Stop & Shop reached a Lease Termination Agreement whereby, in return for the termination of this below-market-rent lease at no cost to FREIT, FREIT has agreed to not lease or allow this space or any other space in the Shopping Center to be used for a supermarket or for a store using more than 15,000 sq.ft. for the sale of food or food products for off-premises consumption. This use restriction shall expire on May 31, 2032, which corresponds with the expiration of the final option period contained in the Stop & Shop lease. This 28,000 sq.ft. space has been leased and is now occupied by TJMAX. Olney Expansion Olney is a 98,900 sq. ft. neighborhood shopping center. We planned an approximately 50,000 sq. ft. expansion and modernization subject to the 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. FREIT's Board of Trustees, based on the status of negotiations with certain current tenants, determined that is not likely the expansion will take place in the short-term, and that it would be more economical to defer the expansion / modernization to coincide with the expiration of particular current tenant leases in approximately seven years. Through July 31, 2002 approximately $270,000 had been expended and deferred for pre-construction development costs, building plans and building permits. The Board of Trustees decided to write-off as of July 2002, all costs that were not capable of being recaptured although some of these costs could be usable when the expansion is undertaken. These costs, which aggregated $190,000, were written off in July 2002. The charge was not included in the operations of the Retail Segment, but was charged to general expense, as it was not considered part of on-going operations. Occupancy at Olney remained unchanged at 92%, as the vacant space was kept vacant pending the expansion. This vacant space, approximately 7,600 sq. ft., became available for leasing. RESIDENTIAL SEGMENT Residential Segment Year Ended October 31, Increase (Decrease) ------------------ ------------------- 2002 2001 $ % (in thousands) --------------------------- Revenues Rents $ 6,261 $ 6,058 $ 203 3.4% Other 77 72 5 6.9% -------- ------- ------------------- Total revenue 6,338 6,130 208 3.4% -------- ------- ------------------- Operating expenses 2,445 2,495 (50) -2.0% -------- ------- ------ ---------- Net operating income $ 3,893 $ 3,635 $ 258 7.1% ======== ============================= Capital Improvements $ 378 $ 429 ($ 51) -11.9% Average occupancy % 96.8% 97.7% -0.9% ======== ======= ======= Residential revenue increased 3.4% to $6.3 million for Fiscal 2002 from $6.1 million for Fiscal 2001. The combination of increased revenues and reduced operating expenses helped raise net operating income 7.1% for Fiscal 2002 over Fiscal 2001. Revenue is principally composed of monthly apartment rental income. Total apartment rental income is a factor of occupancy and monthly apartment rents. For Fiscal 2002, annual average occupancy was 96.8% and annual average monthly apartment rents were $1,056. This compares to Fiscal 2001's annual average occupancy of 97.7% and annual average monthly rents of $1,008. This 4.7% increase in average monthly rents more than offset the slight decline in average occupancy. However, we are now feeling the effect of the slow economy. During the fourth quarter of Fiscal 2002 we experienced resistance to rent increases and increased vacancies. While average monthly rents at October 31, 2002 increased to $1,077, average occupancy fell to 95.3%. Furthermore, a 1% decline in annual average occupancy, or a 1% decline in average rents, results in an annual $65,400 decline in revenues. During Fiscal 2002 Residential operating expenses declined 2% compared to Fiscal 2001. The principal causes were lower utility and snow removal costs. As a percentage of revenue, operating costs were 38.6% during Fiscal 2002 compared to 40.7% during Fiscal 2001. Capital improvements during Fiscal 2002 decreased by $51,000 over Fiscal 2001. The decrease resulted from the completion of major apartment renovation programs at two of our apartment communities to maintain their competitiveness in their markets. Since our apartment communities were constructed more than 25 years ago, we tend to spend more in any given year on maintenance and capital improvements than may be spent on newer properties. Capital improvement programs are expected to accelerate over the next fiscal year. We own 20 +/- acres of undeveloped land in Rockaway, NJ, and have received building plan approval 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 from our institutional money market investment. Pending receipt of final water allocation and sewer approval from the NJ Department of Environmental Protection, we expect construction to commence by the summer of 2004. NET INVESTMENT INCOME Net investment income fell 63.4% to $250,000 for Fiscal 2002 compared to $683,000 for Fiscal 2001. Net investment income for Fiscal 2002 was principally interest earned from our investments in money market funds. This compares to investments we made during Fiscal 2001 government agency bonds. Earnings received from various sources over the past two fiscal are as follows: ----------------------------------------------------------- Year Ended October 31, ------------------------ 2002 2001 -------- ------- ($000) Government Agency Bonds and Institutional Money Market $ 236 $ 632 Savings Money Market Account 8 Related Party 4 48 Other 2 3 ----------------------------------------------------------- Total $ 250 $ 683 ----------------------------------------------------------- Because of the declining lower interest rate environment over Fiscal 2002 and Fiscal 2001 our government agency bond portfolio was redeemed during Fiscal 2001. As a result the yield on our investments fell to just under 2% during Fiscal 2002. The decline in yield resulted in the reduction in net investment income. (See "Financing Costs" below for offsetting benefits.) EQUITY IN INCOME OF AFFILIATES Westwood Hills, LLC FREIT's share of earnings of its 40% owned Affiliate, Westwood Hills, that owns a 210 unit apartment community in Westwood, NJ, increased 41.6% to $269,000 during Fiscal 2002 from $190,000 for Fiscal 2001. The increase is principally attributable to increased revenues and lower expenses resulting in net income at the Affiliate increasing to $672,000 for Fiscal 2002 compared to $476,000 for Fiscal 2001. During Fiscal 2002 average monthly rents increased 4.9% to $1,284 from $1,224 during Fiscal 2001. These increases more than offset a slight reduction in average occupancy to 96.8% during Fiscal 2002 compared to 97.4% during Fiscal 2001. WaynePSC, L.L.C. On November 1, 2002, WaynePSC, in which FREIT is the Managing Member, and has a 40% equity interest, acquired the Preakness Shopping Center ("Preakness"), in Wayne, NJ. Preakness, situated on 40 acres, is a 323,000 +/- sq. ft. Community Center that is anchored by Macy's and Stop & Shop. Its 40+ other tenants include well-known regional and national retail merchants such as Dress Barn, Starbucks, 9 West, Annie Sez, Radio Shack, Bath & Body Works, Mandee's, and Goodyear Tire. The center also includes branches of the First Union and Commerce Bank, and a multiplex Clearview Movie Theater. The total acquisition costs of $35.5 million were financed in part by a $26.5 million, 6% fixed interest rate, ten year first mortgage loan, and by $9 million of equity contributions provided pro rata by the Members of WaynePSC including $3.6 million contributed by FREIT. During Fiscal 2003 this investment is expected to add to FREIT's net income and cash flow. FINANCING COSTS Financing costs are summarized as follows: --------------------------------------------------------------------- Year Ended October 31, ---------------------------- 2002 2001 ---- ---- ($000) Fixed rate mortgages $ 4,447 $ 4,514 Floating rate mortgage 403 811 Other 23 31 --------------------------------------------------------------------- Total $ 4,873 $ 5,356 --------------------------------------------------------------------- Financing costs for Fiscal 2002 decreased $483,000 (9%) to $4,873,000 from $5,356,000 for Fiscal 2001. 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 during Fiscal 2002 compared to Fiscal 2001. During November 2002, we renegotiated the terms of the first mortgage note on our retail property in Patchogue, NY. The mortgage note, which had an outstanding principal balance of $6.9 million, was due on January 1, 2005, and carried a fixed interest rate of 7.375%. The due date was extended three years (3) and the interest rate was reduced to a fixed rate of interest of 5.95%. This interest rate reduction reduced FREIT's interest costs and debt service requirements going forward. GENERAL AND ADMINISTRATIVE EXPENSES Our G & A expenses increased to $643,000 for Fiscal 2002 from $539,000 for Fiscal 2001. Included in this year's expense were increased project abandonment costs, higher legal and professional fees and higher FREIT overhead charges, that accounted for much of the G & A increase. DEPRECIATION Depreciation expense during Fiscal 2002 increased slightly to $2.2 million compared to $2.1 million during Fiscal 2001. Most of this increase is primarily attributable to capital improvements made to our properties during Fiscal 2002. ___________ LIQUIDITY AND CAPITAL RESOURCES Our financial condition remains strong. Net cash provided by operating activities was $5.8 million for Fiscal 2003 compared to $7.4 million for Fiscal 2002. 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 October 31, 2003, we had cash and marketable securities totaling $12.9 million compared to $11.9 million at October 31, 2002. These funds are available for construction, property acquisitions, and general needs. As described in the segment analysis above, we are planning the construction of apartment rental units in Rockaway Township, NJ and the rebuilding of the Damascus Shopping Center, in Damascus, MD. The total capital required for these projects is estimated at $13.8 million and $13 million, respectively. 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 October 31, 2003, FREIT's aggregate outstanding mortgage debt was $76.9 million. Approximately $66.0 million bears a fixed weighted average interest rate of 7.187%, and an average life of approximately 7.9 years. Approximately $10.9 million of mortgage debt bears an interest rate equal to 200 basis points over LIBOR and resets every 30 days. The fixed rate mortgages are subject to repayment (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 --------------------------- 2007 $ 15.7 --------------------------- 2008 $ 15.9 --------------------------- 2010 $ 12.2 --------------------------- 2013 $ 8.0 --------------------------- 2014 $ 12.1 --------------------------- The following table shows the estimated fair value and carrying value of our long-term debt at October 31, 2003 and 2002: October 31, October 31, (In Millions) 2003 2002 ------------- ------------- ----------- Fair Value $80.8 $73.5 Carrying Value $76.9 $68.4 Fair values are estimated based on market interest rates at the end of each fiscal year 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 $3.3 million, and a one percent decrease would increase the fair value by $3.5 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 $109,000 annually. 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 - On June 20, 2002, we finalized the terms of and --------------------------- obtained a two-year $14 million revolving credit line with the Provident Bank. Draws against the credit line can be used for general corporate purposes, or for property acquisitions, construction activities, and Letters-of-Credit. Draws are secured by mortgages on FREIT's Franklin Crossing Shopping Center, Franklin Lakes NJ, retail space in Glen Rock, NJ, Lakewood Apartments, Lakewood, NJ, and Grandview Apartments, Hasbrouck Heights, NJ. Interest rates on draws will be at set at the time of each draw for 30, 60, or 90 day periods, based on our choice of the prime rate or at 175 basis points over the 30, 60, or 90 day LIBOR rates at the time of the draws. No draws have been made against this credit line. We plan to use the credit line opportunistically, for future acquisitions and/or development opportunities. FREIT's total capital commitments, including long term debt, are summarized as follows:
-------------------------------------------------------------------------------------- CAPITAL COMMITMENTS (IN THOUSANDS OF DOLLARS) -------------------------------------------------------------------------------------- Within 2 - 3 4 - 5 After 5 -------------------------------------------------------------------------------------- Contractual Obligations Total One Year Years Years Years -------------------------------------------------------------------------------------- Long-Term Debt Annual Amortization $ 13,044 $ 1,689 $ 3,697 $ 3,256 $ 4,401 Balloon Payments 63,846 - - 31,567 32,279 -------------------------------------------------------------------------------------- Total Long-Term Debt 76,890 1,689 3,698 34,823 36,680 -------------------------------------------------------------------------------------- Operating Leases -------------------------------------------------------------------------------------- Land Rent 5,711 76 152 152 5,331 -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- Total Capital Commitments $ 82,601 $ 1,765 $ 3,850 $ 34,975 $ 42,011 ======================================================================================
Distributions to Shareholders Since its inception in 1961, FREIT has elected to be treated as a REIT for Federal income tax purposes. In order to qualify as a REIT, we must satisfy a number of highly technical and complex operational requirements including that we must distribute to our shareholders at least 90% of our REIT taxable income. We anticipate making distributions to shareholders from operating cash flows, which are expected to increase from future growth in rental revenues. Although cash used to make distributions reduces amounts available for capital investment, we generally intend to distribute not less than the minimum of REIT taxable income necessary to satisfy the applicable REIT requirement as set forth in the Internal Revenue Code. With respect to the Jobs and Growth Tax Relief Reconciliation Act of 2003, the reduction of the tax rate on dividends does not apply to FREIT dividends. Since FREIT's policy is to pass on at least 90 percent of its taxable income to shareholders, FREIT's taxable income is untaxed at the Trust level. As a result FREIT's dividends will be taxed as ordinary income. It has been our policy to pay fixed quarterly dividends for the first three quarters of each fiscal year, and a final fourth quarter dividend based on the fiscal year's net income and taxable income. The Board has decided, to fix the dividend for the first three quarters of fiscal 2004 at $.40 per share. The following tables list the quarterly dividends paid or declared for the three most recent fiscal years and the percent the dividends were of taxable income. Per share amounts have been adjusted to reflect the one-for-one share dividend paid on October 18, 2001. -------------------------------------------------- Fiscal -------------------------------------------------- 2003 2002 2001 -------------------------------------------------- First Quarter $ 0.35 $ 0.30 $ 0.30 -------------------------------------------------- Second Quarter $ 0.35 $ 0.30 $ 0.30 -------------------------------------------------- Third Quarter $ 0.35 $ 0.30 $ 0.30 -------------------------------------------------- Fourth Quarter $ 0.75 $ 0.82 * $ 0.48 -------------------------------------------------- Total For Year $ 1.80 $ 1.72 $ 1.38 -------------------------------------------------- * Includes special $.15 dividend representing the gain on sale of Camden property. ------------------------------------------------------ ----------------------------------------------------------------- Dividends ($000) as a % of ---------------------------- Fiscal Per Total Taxable Taxable Year Share Dividends Income Income ----------------------------------------------------------------- 2003 $1.80 $ 5,667 $ 4,576 123.8% 2002 $1.72 $ 5,366 $ 5,258 102.1% 2001 $1.38 $ 4,305 $ 4,120 104.5% ----------------------------------------------------------------- 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. Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Liquidity and Capital Resources" and "Retail and Residential Segment" above. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and supplementary data of FREIT and of its Affiliates, Westwood Hills and WaynePSC, are submitted as a separate section of this Annual Report. See "Index to Consolidated Financial Statements" on page F-1 of this Annual Report. ITEM 9 CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. ITEM 9A: CONTROLS AND PROCEDURES As required by Rule 13a-15 under the Exchange Act, within the ninety (90) days prior to the filing date of this report, we carried out an evaluation of the effectiveness of the design and operation of FREIT's disclosure controls and procedures. This evaluation was carried out under the supervision and with participation of FREIT's management, including FREIT's Chairman and Chief Executive Officer and Chief Financial Officer, who concluded that FREIT's disclosure controls and procedures are effective. There have been no significant changes in FREIT's internal controls or in other factors, which could significantly affect internal controls subsequent to the date we carried out our evaluation. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in FREIT's reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in FREIT's reports filed under the Exchange Act is accumulated and communicated to management, including FREIT's Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. PART III Certain information required by Part III is incorporated by reference to FREIT's definitive proxy statement (the "Proxy Statement") to be filed with the Securities and Exchange Commission no later than 120 days after the end of FREIT's fiscal year covered by this Annual Report. Only those sections of the Proxy Statement that specifically address the items set forth in this Annual Report are incorporated by reference from the Proxy Statement into this Annual Report. ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information concerning FREIT's trustees required by this item is incorporated herein by reference to the sections titled "Election of Trustees" and "Compliance with Section 16(a) of the Securities Exchange Act" in FREIT's Proxy Statement for its Annual Meeting to be held in April 2004. The information concerning FREIT's executive officers required by this item is set forth in Item 4A of Part I of this Annual Report under the caption "Executive Officers of FREIT." ITEM 11: EXECUTIVE COMPENSATION The information pertaining to executive compensation required by this item is incorporated herein by reference to the section titled "Election of Trustees - Executive Compensation" in FREIT's Proxy Statement for its Annual Meeting to be held in April 2004. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by Item 403 of Regulation S-K to be included as part of this item is incorporated herein by reference to the section titled "Security Ownership of Certain Beneficial Owners and Management" in FREIT's Proxy Statement for its Annual Meeting to be held in April 2004. Securities Authorized for Issuance under Equity Compensation Plans The number of stock options outstanding under our equity compensation plans, the weighted average exercise price of outstanding options, and the number of securities remaining available for issuance, as of October 31, 2003, were as follows:
Number of securities remaining available for Number of securities future issuance under to be issued upon Weighted-average equity compensation exercise of exercise price of plans (excluding outstanding options, outstanding options, securities reflected in warrants and rights warrants and rights column (a)) ----------------------------------------------------------------------------------------------------------------- Plan category (a) (b) (c) Equity Compensation Plans 341,000 $15.00 83,000 approved by ----------------------------------------------------------------------------------------------------------------- security holders (1) Equity Compensation Plans 0 0 0 not approved by ----------------------------------------------------------------------------------------------------------------- security holders Total 341,000 $15.00 83,000 -----------------------------------------------------------------------------------------------------------------
(1) FREIT's Equity Incentive plan provides for the issuance of awards to officers, trustees, employees and consultants in the form of nonqualified options to acquired shares of beneficial interest restricted shares and other share based awards. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the section titled "Certain Relationships and Related Transactions" in FREIT's Proxy Statement for its Annual Meeting to be held in April 2004. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information required in response to this Item is incorporated by reference to the information contained in FREIT's Proxy Statement for its Annual Meeting to be held in April 2004 under the captions "Audit Fees," "AUDIT Related Fees," " Tax Fees" and "All Other Fees." PART IV ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements of Registrant and of Registrant's Affiliates, Westwood Hills and Wayne PSC: (i) Reports of Independent Public Accountants for Registrant and Registrant's Affiliates, J.H. Cohn LLP (ii) Consolidated Balance Sheets as of October 31, 2003 and 2002 (iii)Consolidated Statements of Income, Comprehensive Income, and Undistributed Earnings for the years ended October 31, 2003, 2002 and 2001 for Registrant and Statements of Income and Members' Deficiency for the years ended October 31, 2003, 2002 and 2001 for Westwood Hills, LLC, and Statement of Income, and Members' Equity for the year ended October 31, 2003 for WaynePSC, LLC. (iv) Consolidated Statements of Cash Flows for the years ended October 31, 2003, 2002 and 2001 (v) Notes to Consolidated Financial Statements Financial Statement Schedules: (i) Supplementary Income Statement Information. (ii) Real Estate and Accumulated Depreciation. Exhibits: See Index to Exhibits immediately following the Financial Statements. (b) Reports on Form 8-K: During the fourth quarter ended October 31, 2003, the following reports on Form 8-K were filed with the SEC: Form 8-K (Item 5. Other Events) date of earliest event reported August 13, 2003 the acquisition of the Damascus Shopping Center in Damascus, MD, on July 31, 2003. Form 8-K (Item 5. Other Events) date of earliest event reported September 17, 2003. Operating results for the nine (9) and three (3) months ended July 31, 2003. (c) Exhibits: See Index to Exhibits. (d) Financial Statement Schedules: See Index to Financial Statements and Financial Statement Schedules. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, FREIT 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 Dated: January 27, 2004 By: /s/ Robert S. Hekemian ----------------------------- Robert S. Hekemian, Chairman of the Board and Chief Executive Officer By: /s/ Donald W. Barney ------------------------------------- Donald W. Barney President, Treasurer and Chief Financial Officer FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (ITEMS 8 AND 14(a)) ------------------------------------------------- PAGE ---- (A) FINANCIAL STATEMENTS OF REGISTRANT: REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-3 CONSOLIDATED BALANCE SHEETS OCTOBER 31, 2003 AND 2002 F-4 CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME AND UNDISTRIBUTED EARNINGS YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001 F-5/6 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001 F-7/8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9/26 (B) FINANCIAL STATEMENTS OF AFFILIATES: (I) WESTWOOD HILLS, LLC: REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-27 BALANCE SHEETS OCTOBER 31, 2003 AND 2002 F-28 STATEMENTS OF INCOME AND MEMBERS' DEFICIENCY YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001 F-29 STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001 F-30 NOTES TO FINANCIAL STATEMENTS F-31/32 F-1 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (ITEMS 8 AND 14(a)) ------------------------------------------------- PAGE ---- (B) FINANCIAL STATEMENTS OF AFFILIATES (CONCLUDED): (II) WAYNE PSC, LLC: REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-33 BALANCE SHEET OCTOBER 31, 2003 F-34 STATEMENT OF INCOME AND MEMBERS' EQUITY YEAR ENDED OCTOBER 31, 2003 F-35 STATEMENT OF CASH FLOWS YEAR ENDED OCTOBER 31, 2003 F-36 NOTES TO FINANCIAL STATEMENTS F-37/39 (C) FINANCIAL STATEMENT SCHEDULES: X - SUPPLEMENTARY INCOME STATEMENT INFORMATION S-1 XI - REAL ESTATE AND ACCUMULATED DEPRECIATION S-2/3 Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto. * * * F-2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Trustees and Shareholders First Real Estate Investment Trust of New Jersey We have audited the accompanying consolidated balance sheets of FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES as of October 31, 2003 and 2002, and the related consolidated statements of income, comprehensive income, undistributed earnings and cash flows for each of the three years in the period ended October 31, 2003. These financial statements are the responsibility of FREIT's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Real Estate Investment Trust of New Jersey and Subsidiaries as of October 31, 2003 and 2002, and their results of operations and cash flows for each of the three years in the period ended October 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Our audits referred to above included the information in Schedules X and XI which present fairly, when read in conjunction with the consolidated financial statements, the information required to be set forth therein. /s/ J.H. Cohn LLP ------------- Roseland, New Jersey November 18, 2003 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, 2003 AND 2002
ASSETS 2003 2002 ------ ---- ---- (In Thousands of Dollars) Real estate and equipment, at cost, net of accumulated depreciation $ 84,414 $ 74,687 Investment in affiliate 1,255 3,600 Cash and cash equivalents 12,871 11,930 Tenants' security accounts 881 788 Sundry receivables 3,876 2,555 Prepaid expenses and other assets 1,839 1,306 Deferred charges, net 2,014 1,166 --------- --------- Totals $ 107,150 $ 96,032 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Liabilities: Mortgages payable $ 76,890 $ 68,393 Accounts payable and accrued expenses 1,369 778 Cash distributions in excess of investment in affiliate 1,570 317 Dividends payable 2,367 2,090 Tenants' security deposits 1,256 1,122 Deferred revenue 241 332 Interest rate swap contract 201 --------- --------- Total liabilities 83,894 73,032 --------- --------- Minority interest 1,116 1,097 --------- --------- Commitments and contingencies Shareholders' equity: Shares of beneficial interest without par value; 4,000,000 shares authorized; 3,155,576 and 3,119,576 shares issued and outstanding 19,854 19,314 Undistributed earnings 2,487 2,589 Accumulated other comprehensive loss (201) --------- --------- Total shareholders' equity 22,140 21,903 --------- --------- Totals $ 107,150 $ 96,032 ========= =========
See Notes to Consolidated Financial Statements. F-4 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME AND UNDISTRIBUTED EARNINGS YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
INCOME 2003 2002 2001 ------ ---- ---- ---- (In Thousands of Dollars, Except per Share Amounts) VRevenue: Rental income $ 16,593 $ 15,807 $ 15,224 Reimbursements 2,900 2,536 2,508 Equity in income of affiliates 250 269 190 Net investment income 187 250 683 Sundry income 260 283 330 -------- -------- -------- Totals 20,190 19,145 18,935 -------- -------- -------- Expenses: Operating expenses 3,973 3,490 3,592 Management fees 825 790 745 Real estate taxes 2,532 2,400 2,293 Interest 4,802 4,873 5,356 Depreciation 2,229 2,153 2,138 Minority interest 246 137 85 -------- -------- -------- Totals 14,607 13,843 14,209 -------- -------- -------- Income from continuing operations before state income taxes 5,583 5,302 4,726 Provision for state income taxes 18 19 16 -------- -------- -------- Income from continuing operations 5,565 5,283 4,710 -------- -------- -------- Discontinued operations: Loss from discontinued operations (77) (10) Gain on disposal 475 -------- -------- Income (loss) from discontinued operations 398 (10) -------- -------- Net income $ 5,565 $ 5,681 $ 4,700 ======== ======== ======== Basic earnings per share: Continuing operations $ 1.78 $ 1.69 $ 1.51 Discontinued operations .13 -------- -------- -------- Net income $ 1.78 $ 1.82 $ 1.51 ======== ======== ======== Diluted earnings per share: Continuing operations $ 1.71 $ 1.63 $ 1.50 Discontinued operations .12 -------- -------- -------- Net income $ 1.71 $ 1.75 $ 1.50 ======== ======== ======== Basic weighted average shares outstanding 3,134 3,120 3,120 ======== ======== ======== Diluted weighted average shares outstanding 3,261 3,233 3,133 ======== ======== ========
F-5 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME AND UNDISTRIBUTED EARNINGS YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
COMPREHENSIVE INCOME 2003 2002 2001 -------------------- ---- ---- ---- (In Thousands of Dollars, Except per Share Amounts) Net income $ 5,565 $ 5,681 $ 4,700 ------- ------- ------- Other comprehensive income (loss): Unrealized holding gains on marketable securities 49 Unrealized loss on interest rate swap contract (201) ------- ------- Other comprehensive income (loss) (201) 49 ------- ------- ------- Comprehensive income $ 5,364 $ 5,681 $ 4,749 ======= ======= ======= UNDISTRIBUTED EARNINGS ---------------------- Balance, beginning of year $ 2,589 $ 2,274 $ 1,879 Net income 5,565 5,681 4,700 Less dividends (5,667) (5,366) (4,305) ------- ------- ------- Balance, end of year $ 2,487 $ 2,589 $ 2,274 ======= ======= ======= Dividends per share $ 1.80 $ 1.72 $ 1.38 ======= ======= =======
See Notes to Consolidated Financial Statements. F-6 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
2003 2002 2001 ---- ---- ---- (In Thousands of Dollars) Operating activities: Net income $ 5,565 $ 5,681 $ 4,700 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,229 2,153 2,138 Amortization 256 310 307 Equity in income of affiliates (250) (269) (190) Deferred revenue (91) 10 19 Minority interest 246 137 85 Write-off of development costs and abandoned property 190 114 Gain on disposal of discontinued operations (475) Changes in operating assets and liabilities: Tenants' security accounts (93) 85 (107) Sundry receivables, prepaid expenses and other assets (1,854) (87) (774) Deferred leasing and other charges (946) (167) Accounts payable and accrued expenses 591 (41) (35) Tenants' security deposits 134 (97) 146 -------- -------- -------- Net cash provided by operating activities 5,787 7,430 6,403 -------- -------- -------- Investing activities: Capital expenditures (2,023) (635) (1,132) Distributions from affiliates 3,848 200 224 Proceeds from disposal of discontinued operations 983 Proceeds from sale of marketable securities 500 9,000 Investment in affiliate (3,600) Good faith deposits (15) Acquisition of Damascus (7,323) -------- -------- -------- Net cash provided by (used in) investing activities (5,498) (2,552) 8,077 -------- -------- -------- Financing activities: Dividends paid (5,390) (4,773) (4,602) Received from sale of 25% minority interest in Olney 1,066 Proceeds from issuance of shares of beneficial interest 540 Capital contributions by minority interest 178 Distribution to minority interest (227) (350) Repayment of mortgages (1,132) (961) (860) Proceeds from second mortgages 7,019 Deferred mortgage costs (158) (51) -------- -------- -------- Net cash provided by (used in) financing activities 652 (6,135) (4,218) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 941 (1,257) 10,262 Cash and cash equivalents, beginning of year 11,930 13,187 2,925 -------- -------- -------- Cash and cash equivalents, end of year $ 12,871 $ 11,930 $ 13,187 ======== ======== ========
F-7 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
2003 2002 2001 ---- ---- ---- (In Thousands of Dollars) Supplemental disclosure of cash flow data: Interest paid $4,677 $4,759 $5,230 ====== ====== ====== Income taxes paid $ 18 $ 19 $ 16 ====== ====== ====== Supplemental schedule of noncash investing and financing activities: Dividends declared but not paid $2,367 $2,090 $1,497 ====== ====== ====== Damascus mortgage assumed $2,610 ======
See Notes to Consolidated Financial Statements. F-8 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Organization and significant accounting policies: Organization: First Real Estate Investment Trust of New Jersey ("FREIT") was organized November 1, 1961 as a New Jersey Business Trust. FREIT is engaged in owning residential and commercial income producing properties located primarily in New Jersey, Maryland and New York. FREIT has elected to be taxed as a Real Estate Investment Trust under the provisions of Sections 856-860 of the Internal Revenue Code, as amended. Accordingly, FREIT does not pay Federal income tax on income whenever income distributed to shareholders is equal to at least 90% of real estate investment trust taxable income. Further, FREIT pays no Federal income tax on capital gains distributed to shareholders. FREIT is subject to Federal income tax on undistributed taxable income and capital gains. FREIT may make an annual election under Section 858 of the Internal Revenue Code to apply part of the regular dividends paid in each respective subsequent year as a distribution for the immediately preceding year. For fiscal 2003, 2002 and 2001, FREIT made such an election. Principles of consolidation: The consolidated financial statements include the accounts of FREIT, its 75%-owned subsidiary, S and A Commercial Associates Limited Partnership ("S and A") and, subsequent to July 31, 2003, its wholly-owned subsidiary, Damascus Centre, LLC ("Damascus" - see Note 3). The consolidated financial statements include 100% of S and A's assets, liabilities, operations and cash flows with the 25% interest not owned by FREIT reflected as "minority interest", a group consisting principally of employees of Hekemian & Co., Inc. ("Hekemian"), and 100% of Damascus' assets, liabilities, operations and cash flows. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Investment in affiliates: FREIT's 40% investments in Westwood Hills, LLC ("WHLLC") and Wayne PSC, LLC ("WPSCLLC") are accounted for using the equity method. F-9 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Organization and significant accounting policies (continued): Cash and cash equivalents: Financial instruments which potentially subject FREIT to concentrations of credit risk consist primarily of cash and cash equivalents. FREIT considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. FREIT maintains its cash and cash equivalents in bank and other accounts, the balances of which, at times, may exceed Federally insured limits. At October 31, 2003, such cash and cash equivalent balances exceeded Federally insured limits by approximately $12,035,000. Exposure to credit risk is reduced by placing such deposits with high credit quality financial institutions. Depreciation: Real estate and equipment are depreciated on the straight-line method by annual charges to operations calculated to absorb costs of assets over their estimated useful lives. Impairment of long-lived assets: FREIT has adopted the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment of Long-Lived Assets" ("SFAS 144"). Under SFAS 144, impairment losses on long-lived assets, such as real estate and equipment, are recognized when events or changes in circumstances indicate that the undiscounted cash flows estimated to be generated by such assets are less than their carrying value and, accordingly, all or a portion of such carrying value may not be recoverable. Impairment losses are then measured by comparing the fair value of assets to their carrying amounts. Deferred charges: Deferred charges consist of mortgage costs and leasing commissions. Deferred mortgage costs are amortized on the straight-line method by annual charges to operations over the terms of the mortgages. Amortization of such costs is included in interest expense and approximated $125,000, $114,000 and $126,000 in 2003, 2002 and 2001, respectively. Deferred leasing commissions are amortized on the straight-line method over the terms of the applicable leases. Revenue recognition: Income from leases is recognized on a straight-line basis regardless of when payment is due. Lease agreements between FREIT and commercial tenants generally provide for additional rentals based on such factors as percentage of tenants' sales in excess of specified volumes, increases in real estate taxes, Consumer Price Indices and common area maintenance charges. These additional rentals are generally included in income when reported to FREIT, when billed to tenants or ratably over the appropriate period. F-10 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Organization and significant accounting policies (continued): Interest rate swap contract: FREIT utilizes derivative financial instruments to reduce interest rate risk. FREIT does not hold or issue derivative financial instruments for trading purposes. Effective November 1, 2002, FREIT adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments and hedging activities. As required by SFAS 133, FREIT recognizes all derivatives as either assets or liabilities in the consolidated balance sheet and measures those instruments at fair value. Changes in fair value of those instruments are reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. The accounting for gains and losses associated with changes in the fair value of the derivative and the effect on the consolidated financial statements depends on its hedge designation and whether the hedge is highly effective in achieving offsetting changes in the fair value of cash flows on the assets or liability hedged. Advertising: FREIT expenses the cost of advertising and promotions as incurred. Advertising costs charged to operations amounted to approximately $85,000, $115,000 and $47,000 in 2003, 2002 and 2001, respectively. Earnings per share: FREIT 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"). Stock-based compensation: In accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," FREIT will recognize compensation cost as a result of the issuance of stock options to employees, including directors, based on the excess, if any, of the fair value of the underlying shares at the date of grant or award (or at an appropriate subsequent measurement date) over the amount the employees must pay to acquire the shares (the "intrinsic value method"). However, FREIT will not be required to recognize compensation expense as a result of any grants to employees at an exercise price that is equal to or greater than fair value. FREIT will also make proforma disclosures, as required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), and Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation -Transition and Disclosures" ("SFAS 148"), of net income or loss as if a fair value based method of accounting for stock options had been applied if such amounts differ materially from the historical amounts. F-11 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Organization and significant accounting policies (concluded): Stock-based compensation (concluded): In accordance with the provisions of SFAS 123, all other issuances of shares of beneficial interest, options or other equity instruments to employees and nonemployees as the consideration for goods or services received by FREIT are accounted for based on the fair value of the equity instruments issued (unless the fair value of the consideration received can be more reliably measured). The fair value of any options or similar equity instruments issued will be estimated based on the Black-Scholes option-pricing model, which meets the criteria set forth in SFAS 123, and the assumption that all of the options or other equity instruments will ultimately vest. Such fair value is measured as of an appropriate date pursuant to EITF Issue No. 96-18 (generally, the earlier of the date the other party becomes committed to provide goods or services or the date performance by the other party is complete) and capitalized or expensed as if FREIT had paid cash for the goods or services. Recent accounting pronouncements: In December 2002, the Financial Accounting Standards Board (the "FASB") issued SFAS 148 which amends SFAS 123. SFAS 148 provides alternate methods of transition for a voluntary change from the intrinsic value method to the fair value method of accounting for stock-based employee compensation. However, management of FREIT does not expect to make such a change. In addition, SFAS 148 amends SFAS 123 to require more prominent annual and quarterly disclosures in the financial statements about the effects of using the intrinsic value method rather than the fair value method for stock-based compensation. The adoption of the provisions of SFAS 148 did not have a material impact on FREIT's consolidated financial statements. In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). The adoption of the provisions of SFAS 149 did not have a material impact on FREIT's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 requires that an issuer classify financial instruments that are within its scope as a liability. Many of those instruments were classified as equity under previous guidance. Most of the guidance in SFAS 150 was effective for all financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of the provisions of SFAS 150 did not have any impact on FREIT's consolidated financial statements. Reclassifications: Certain accounts in the 2002 and 2001 consolidated financial statements have been reclassified to conform with the current presentation. F-12 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2 - Investment in affiliates: WHLLC: FREIT is a 40% member of WHLLC, a limited liability company that is managed by 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 families or officers of Hekemian. WHLLC owns a residential apartment complex located in Westwood, New Jersey. Summarized financial information of WHLLC as of October 31, 2003 and 2002 and for each of the three years in the period ended October 31, 2003 is as follows:
2003 2002 ---- ---- (In Thousands of Dollars) Balance sheet data: Assets: Real estate and equipment, net $13,405 $13,673 Other 1,020 779 ------- ------- Total assets $14,425 $14,452 ======= ======= Liabilities and members' deficiency: Liabilities: Mortgage payable (A) $17,881 $14,794 Other 473 455 ------- ------- Total liabilities 18,354 15,249 ------- ------- Members' deficiency: FREIT (1,570) (317) Others (2,359) (480) ------- ------- Total members' deficiency (3,929) (797) ------- ------- Total liabilities and members' deficiency $14,425 $14,452 ======= =======
(A) The chairman of FREIT, who is also a member of WHLLC, has personally guaranteed the mortgage in certain limited circumstances. FREIT and the other members of WHLLC have indemnified the chairman to the extent of their ownership percentage in WHLLC with respect to this guarantee. 2003 2002 2001 ---- ---- ---- (In Thousands of Dollars) Income statement data: Rental revenue $3,263 $3,169 $3,035 Rental expenses 2,797 2,497 2,559 ----- ----- ----- Net income $ 466 $ 672 $ 476 ====== ====== ====== F-13 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2 - Investment in affiliates (concluded): WPSCLLC: During 2002, FREIT invested $3,600,000 for a 40% membership interest in WPSCLLC which was formed to acquire a shopping center in Wayne, New Jersey. Prior to November 1, 2002, WPSCLLC had no significant operations. On November 1, 2002, WPSCLLC acquired a 323,000 square foot shopping center in Wayne, New Jersey. The total acquisition cost of $35,500,000 was financed, in part, by a $26,500,000 ten-year first mortgage loan and by $9,000,000 of equity contributions provided by the members in accordance with their equity ownership percentages. WPSCLLC is a limited liability company that is managed by Hekemian. Certain other members of WPSCLLC are either trustees of FREIT or their families or officers of Hekemian. Summarized financial information of WPSCLLC as of and for the year ended October 31, 2003 is as follows (in thousands of dollars): Balance sheet data: Assets: Real estate and equipment, net $32,896 Other 2,548 ------- Total assets $35,444 ======= Liabilities and members' equity: Liabilities: Mortgage payable $32,000 Other 306 ------- Total liabilities 32,306 ------- Members' equity: FREIT 1,255 Others 1,883 ------- Total members' equity 3,138 ------- Total liabilities and members' equity $35,444 ======= Income statement data: Rental revenue $ 4,875 Rental expenses 4,717 ------- Net income $ 158 ======= F-14 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 - Acquisition: On July 31, 2003, Damascus, a newly-formed limited liability company which is wholly-owned by FREIT, acquired a 139,000 square foot shopping center in Damascus, Maryland. The total acquisition cost of approximately $9,933,000 was financed in part by the assumption of a $2,610,000 first mortgage. The accompanying consolidated financial statements include the operations of Damascus since the date of acquisition. The following unaudited proforma information show the results of operations for the years ended October 31, 2003, 2002 and 2001 as though the acquisition of Damascus was consummated at the beginning of fiscal 2001:
2003 2002 2001 ---- ---- ---- (In Thousands of Dollars, Except Per Share Amounts) Revenue $ 21,063 $ 20,309 $ 20,099 Expenses 15,325 14,795 15,158 -------- -------- -------- Income from continuing operations 5,738 5,514 4,941 Income (loss) from discontinued operations 398 (10) -------- -------- -------- Net income $ 5,738 $ 5,912 $ 4,931 ======== ======== ======== Basic earnings per share: Continuing operations $ 1.83 $ 1.77 $ 1.58 Discontinued operations .13 -------- -------- -------- Totals $ 1.83 $ 1.90 $ 1.58 ======== ======== ======== Basic weighted average shares outstanding 3,134 3,120 3,120 ======== ======== ========
The unaudited proforma results include adjustments for depreciation based on the purchase price, increased interest expense and reduced net investment income related to assets utilized to make the acquisition, and obligations incurred to complete the transaction. The unaudited proforma results of operations set forth above are not necessarily indicative of the results that would have occurred had the acquisition been made at the beginning of fiscal 2001 or of future results of operations of FREIT's combined properties. F-15 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Real estate and equipment: Real estate and equipment consists of the following: Range of Estimated Useful Lives 2003 2002 ------------ ---- ---- (In Thousands of Dollars) Land $ 26,663 $ 23,713 Unimproved land 3,098 2,809 Apartment buildings 7-40 years 10,843 10,415 Commercial buildings/shopping centers 15-50 years 65,754 57,563 Equipment 3-15 years 707 651 --------- --------- 107,065 95,151 Less accumulated depreciation 22,651 20,464 --------- --------- Totals $ 84,414 $ 74,687 ========= ========= Note 5 - Mortgages payable: Mortgages payable consist of the following: 2003 2002 ---- ---- (In Thousands of Dollars) Northern Life Insurance Cos. - Frederick, MD (A) $17,289 $ 17,661 National Realty Funding L.C. - Westwood, NJ (B) 9,910 10,052 Larson Financial Resources, Inc. - Spring Lake, NJ (C) 3,476 3,528 Fleet Bank - Patchogue, NY (D) 6,744 6,914 Larson Financial Resources, Inc. - Wayne, NJ (E): First mortgage 10,353 10,505 Second mortgage 3,588 Larson Financial Resources, Inc. - River Edge, NJ (F): First mortgage 5,052 5,127 Second mortgage 1,994 Larson Financial Resources, Inc. - Maywood, NJ (G): First mortgage 3,666 3,720 Second mortgage 1,414 Fleet Bank - Olney, MD (H) 10,872 10,886 Keybank Real Estate Capital - Damascus, MD (I) 2,532 --------- --------- Totals $ 76,890 $ 68,393 ========= =========
F-16 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5 - Mortgages payable (continued): (A) Payable in monthly installments of $152,153 including interest at 8.31% through June 2007 at which time the outstanding balance is due. The mortgage is secured by a retail building in Frederick, Maryland having a net book value of approximately $21,476,000. (B) Payable in monthly installments of $73,248 including interest at 7.38% through February 2013 at which time the outstanding balance is due. The mortgage is secured by a retail building in Westwood, New Jersey having a net book value of approximately $11,538,000. (C) Payable in monthly installments of $23,875 including interest at 6.70% through December 2013 at which time the outstanding balance is due. The mortgage is secured by an apartment building in Spring Lake, New Jersey having a net book value of approximately $505,000. (D) Payable in monthly installments of $17,500 plus interest at the thirty day LIBOR rate plus 200 basis points through January 2008 at which time the outstanding balance is due. The mortgage is secured by a retail building in Patchogue, New York having a net book value of approximately $9,613,000. (E) The first mortgage is payable in monthly installments of $76,023 including interest at 7.29% through July 2010 at which time the outstanding balance is due. The second mortgage is payable in monthly installments of $20,878 including interest at 4.92% through July 2010 at which time the outstanding balance is due. The mortgages are secured by an apartment building in Wayne, New Jersey having a net book value of approximately $1,602,000. (F) The first mortgage is payable in monthly installments of $34,862 including interest at 6.75% through December 2013 at which time the outstanding balance is due. The second mortgage is payable in monthly installments of $12,318 including interest at 5.53% through December 2013 at which time the outstanding balance is due. The mortgages are secured by an apartment building in River Edge, New Jersey having a net book value of approximately $1,248,000. (G) The first mortgage is payable in monthly installments of $25,295 including interest at 6.75% through December 2013 at which time the outstanding balance is due. The second mortgage is payable in monthly installments of $8,739 including interest at 5.53% through December 2013 at which time the outstanding balance is due. The mortgages are secured by an apartment building in Maywood, New Jersey having a net book value of approximately $823,000. F-17 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5 - Mortgages payable (concluded): (H) Payable in monthly installments of $15,000 plus interest at FREIT's option of either (i) the thirty day LIBOR rate plus 200 basis points or (ii) the prime rate plus 50 basis points through January 1, 2008, at which time the unpaid balance is due. The mortgage is secured by a retail building in Olney, Maryland having a net book value of $14,427,000. (I) Payable in monthly installments of $39,719 including interest at 9.25% through March 2011 at which time the outstanding balance is due. The mortgage is secured by a retail building in Damascus, Maryland having a net book value of approximately $9,893,000. Principal amounts (in thousands of dollars) due under the above obligations in each of the five years subsequent to October 31, 2003 are as follows: Year Ending October 31, Amount ----------- -------- 2004 $ 1,689 2005 1,793 2006 1,905 2007 17,520 2008 17,303 The fair value of FREIT's long-term debt, which approximates $80,770,000 and $73,500,000 at October 31, 2003 and 2002, respectively, is estimated based on the current rates offered to FREIT for debt of the similar remaining maturities. Note 6 - Line of credit: On June 20, 2002, FREIT obtained a two-year $14,000,000 revolving line of credit from The Provident Bank. Draws against the line of credit can be used for general corporate purposes, or for property acquisitions, construction activities, letters-of-credit and other related business purposes. Draws are secured by mortgages on FREIT's Franklin Crossing Shopping Center, Franklin Lakes, NJ, single-tenanted retail space in Glen Rock, NJ, Lakewood Apartments, Lakewood, NJ and Grandview Apartments, Hasbrouck Heights, NJ. Interest rates on draws will be set at the time of each draw, based on FREIT's choice of the prime rate or at 175 basis points over the 30, 60 or 90 day LIBOR rates. There were no draws under the line of credit during the years ended October 31, 2003 and 2002. Note 7 - Interest rate swap contract: During November 2002, FREIT entered into an interest rate swap contract to reduce the impact of interest rate fluctuations on its variable rate mortgage secured by its Patchogue, NY property. At October 31, 2003, the derivative financial instrument has a notional amount of approximately $6,769,000 and a current maturity date of January 1, 2008. The contract effectively converted the variable rate to a fixed rate of 5.95%. In accordance with SFAS 133, FREIT recorded a liability for the net present value of the increase in interest cost over the remaining term of the debt of $201,000 at October 31, 2003. Such amount is included in comprehensive income. F-18 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8 - Commitments and contingencies: Leases: Retail tenants: FREIT leases retail space having a net book value of approximately $76,674,000 at October 31, 2003 to tenants for periods of up to twenty-five years. Most of the leases contain clauses for reimbursement of real estate taxes, maintenance, insurance and certain other operating expenses of the properties. Minimum rental income (in thousands of dollars) to be received from noncancelable operating leases in years subsequent to October 31, 2003 are as follows: Year Ending October 31, Amount ----------- ------ 2004 $ 9,085 2005 8,466 2006 7,752 2007 6,592 2008 5,829 Thereafter 36,216 -------- Total $ 73,940 ======== The above amounts assume that all leases which expire are not renewed and, accordingly, neither minimal rentals nor rentals from replacement tenants are included. Minimum future rentals do not include contingent rentals which may be received under certain leases on the basis of percentage of reported tenants' sales volume or increases in Consumer Price Indices. Rental income that is contingent on future events is not included in income until the contingency is resolved. Contingent rentals included in income for each of the three years in the period ended October 31, 2003 were not material. Residential tenants: Lease terms for residential tenants are usually one year or less. Ground lease: FREIT's shopping center in Olney, Maryland contains approximately 98,800 square feet of gross leaseable area situated on approximately 13 acres of land. Approximately 11 acres of the land are subject to a ground lease expiring in 2078, and approximately 2 acres are owned in Fee simple. The lease requires the payment of a minimum annual rental plus real estate taxes, assessments and other operating expenses. Rent expense charged to operations totaled approximately $121,000, $121,000 and $118,000 in 2003, 2002 and 2001, respectively. Future minimum annual lease payments (in thousands of dollars) in each of the five years subsequent to October 31, 2003 and thereafter are as follows: F-19 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8 - Commitments and contingencies (concluded): Ground lease (concluded): Year Ending October 31, Amount ----------- ------ 2004 $ 76 2005 76 2006 76 2007 76 2008 76 Thereafter 5,330 ------- Total $ 5,710 ======= Minimum future rentals do not include contingent rentals which may be due under the lease on the basis of percentage of S and A's adjusted gross income, as defined. Contingent rentals included in rent expense for each of the three years in the period ended October 31, 2003 were not material. Environmental concerns: In accordance with applicable regulations, FREIT reported to the New Jersey Department of Environmental Protection ("NJDEP") that a historical discharge of hazardous material was discovered in 1997 at the renovated Franklin Lakes shopping center (the "Center"). In November 1999, FREIT received a no further action letter from the NJDEP concerning the historical discharge at the Center. However, FREIT is required to continue monitoring such discharge, the cost of which will not be material. Note 9 - Management agreement and related party transactions: The properties owned by FREIT are currently managed by Hekemian. The management agreement, effective November 1, 2001, requires fees equal to a percentage of rents collected. Such fees were approximately $825,000, $817,000 and $771,000 in 2003, 2002 and 2001, respectively, inclusive of $27,000 and $26,000 in 2002 and 2001, respectively, included in discontinued operations in the accompanying consolidated statements of income. The agreement expires on October 31, 2005. In addition, Hekemian charged FREIT fees and commissions in connection with the acquisition of Damascus in 2003 and various mortgage refinancing and lease acquisition fees. Such fees and commissions amounted to approximately $793,000, $280,000 and $472,000 in 2003, 2002 and 2001, respectively. FREIT earned approximately $48,000 in 2001 on the advance it made in 2000 on behalf of the minority interest in Olney which was repaid in 2001. F-20 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10- Dividends and earnings per share: FREIT declared dividends (in thousands of dollars) of $5,667, $5,366 and $4,305 to shareholders of record during 2003, 2002 and 2001, respectively. FREIT has determined the shareholders' treatment for Federal income tax purposes to be as follows: 2003 2002 2001 ---- ---- ---- Ordinary income $5,667 $4,891 $4,305 Capital income 475 ------ ------ ------ Totals $5,667 $5,366 $4,305 ====== ====== ====== Basic and diluted earnings per share, based on the weighted average number of shares outstanding during each period, are comprised of ordinary and capital gain income. FREIT has adopted the provisions of SFAS 128, which require the presentation of "basic" earnings per share and, if appropriate, "diluted" earnings per share. 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 years in the period ended October 31, 2003, the assumed exercise of all of FREIT'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:
2003 2002 2001 Basic weighted average shares outstanding 3,133,976 3,119,576 3,119,576 Shares arising from assumed exercise of stock options 127,401 113,201 13,759 --------- --------- --------- Dilutive weighted average shares outstanding 3,261,377 3,232,777 3,133,335 ========= ========= =========
F-21 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11- Equity incentive plan: On September 10, 1998, the Board of Trustees approved FREIT's Equity Incentive Plan (the "Plan") which was ratified by FREIT's shareholders on April 7, 1999, whereby up to 460,000 of FREIT'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. In connection therewith, the Board of Trustees approved an increase of 460,000 shares in FREIT's number of authorized shares of beneficial interest. Key personnel eligible for these awards include trustees, executive officers and other persons or entities including, without limitation, employees, consultants and employees of consultants, who are in a position to make significant contributions to the success of FREIT. Under the Plan, the exercise price of all options will be the fair market value of the shares on the date of grant. The consideration to be paid for restricted share and other share-based awards shall be determined by the Board of Trustees, with the amount not to exceed the fair market value of the shares on the date of grant. The maximum term of any award granted may not exceed ten years. The actual terms of each award will be determined by the Board of Trustees. Upon ratification of the Plan on April 7, 1999, FREIT 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. On May 23, 2003, 36,000 options were exercised for proceeds totaling $540,000. The balance of the options 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 or SFAS 148 using the Black-Scholes option pricing model and assuming a risk-free interest rate of 4.27%, expected option lives of ten years, expected volatility of 1.65% and expected dividends of 8.59%, FREIT's proforma net income and proforma basic net income per share arising from such computation would not have differed materially from the corresponding historical amounts. The impact on FREIT's consolidated shareholders' equity for the 36,000 options that were exercised on May 23, 2003 for $540,000 was to increase the number of shares and values of beneficial interest outstanding to 3,155,576 and $19,854,000 at October 31, 2003, respectively, from 3,119,576 and $19,314,000 at October 31, 2002, respectively. Note 12- 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. F-22 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 13- Deferred fee plan: During fiscal 2001, the Board of Trustees adopted a deferred fee plan (the "Plan") for its officers and trustees. Pursuant to the Plan, any officer or trustee may elect to defer receipt of any fees that would be due them. FREIT has agreed to pay any participant (the "Participant") in the Plan interest on any deferred fee at 9% per annum, compounded quarterly. Any such deferred fee is to be paid to the Participants at the later of: (i) the retirement age specified in the deferral election; (ii) actual retirement; or (iii) upon cessation of a Participant's duties as an officer or trustee. The Plan provides that any such deferral fee will be paid in a lump sum or in annual installments over a period not to exceed 10 years, at the election of the Participant. As of October 31, 2003 and 2002, approximately $476,000 and $210,000, respectively, of fees have been deferred together with accrued interest of approximately $32,000 and $18,000, respectively. Note 14- 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. FREIT 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 seven separate properties and the continuing residential segment contains seven properties (see Note 16). The accounting policies of the segments are the same as those described in Note 1. The chief operating decision-making group of FREIT's retail segment, residential segment and corporate/other is comprised of FREIT's Executive Committee of the Board of Trustees. FREIT 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. F-23 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 14- Segment information (concluded): Continuing 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 each of the three years in the period ended October 31, 2003. Asset information is not reported since FREIT does not use this measure to assess performance.
2003 2002 2001 ---- ---- ---- (In Thousands of Dollars) Real estate rental revenue: Retail $ 12,987 $ 11,961 $ 11,522 Residential 6,567 6,338 6,130 -------- -------- -------- Totals $ 19,554 $ 18,299 $ 17,652 ======== ======== ======== Real estate operating expenses: Retail $ 4,091 $ 3,610 $ 3,617 Residential 2,664 2,445 2,495 -------- -------- -------- Totals $ 6,755 $ 6,055 $ 6,112 ======== ======== ======== Net operating income: Retail $ 8,896 $ 8,351 $ 7,905 Residential 3,903 3,893 3,635 -------- -------- -------- Totals $ 12,799 $ 12,244 $ 11,540 ======== ======== ======== Recurring capital improvements - residential $ 484 $ 378 $ 429 ======== ======== ======== Reconciliation to consolidated net income: Segment NOI $ 12,799 $ 12,244 $ 11,540 Deferred rents - straight lining 199 326 415 Net investment income 187 250 683 Equity in income of affiliates 250 269 190 General and administrative expenses (593) (643) (539) Depreciation (2,229) (2,153) (2,138) Financing costs (4,802) (4,873) (5,356) Minority interest (246) (137) (85) Discontinued operations (Note 16) 398 (10) -------- -------- -------- Net income $ 5,565 $ 5,681 $ 4,700 ======== ======== ========
F-24 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 15- Quarterly data (unaudited): The following summary represents the results of operations for each quarter for the years ended October 31, 2003 and 2002 (in thousands, except per share data):
Quarter Ended ---------------------------------------------------- January 31, April 30, July 31, October 31, ----------- --------- -------- ----------- 2003: Revenue $ 4,832 $ 5,061 $ 4,940 $ 5,357 Expenses 3,562 3,665 3,566 3,832 ------- ------- ------- ------- Net income $ 1,270 $ 1,396 $ 1,374 $ 1,525 ======= ======= ======= ======= Earnings per share: Basic $ .41 $ .45 $ .44 $ .48 ======= ======= ======= ======= Diluted $ .39 $ .43 $ .43 $ .46 ======= ======= ======= ======= Dividends per share $ .35 $ .35 $ .35 $ .75 ======= ======= ======= ======= 2002: Revenue $ 4,789 $ 4,771 $ 4,830 $ 4,755 Expenses 3,409 3,454 3,516 3,483 ------- ------- ------- ------- Income from continuing operations 1,380 1,317 1,314 1,272 Income (loss) from dis- continued operations (42) 19 (10) 431 ------- ------- ------- ------- Net income $ 1,338 $ 1,336 $ 1,304 $ 1,703 ======= ======= ======= ======= Earnings per share: Basic $ .43 $ .43 $ .42 $ .54 ======= ======= ======= ======= Diluted $ .42 $ .42 $ .41 $ .50 ======= ======= ======= ======= Dividends per share $ .30 $ .30 $ .30 $ .82 ======= ======= ======= =======
Note 16- Discontinued operations: On August 9, 2002, FREIT sold the Sheridan Apartments in Camden, NJ for cash of $1,050,000 and recognized a gain of approximately $475,000. FREIT has owned and operated the property since 1964. The Board of Trustees declared a special capital gain dividend of $.15 per share, which was distributed on September 6, 2002 to shareholders of record on August 23, 2002. The remaining sales proceeds have been retained by FREIT to increase its liquidity. F-25 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 16- Discontinued operations (concluded): Summarized operating results included in discontinued operations in the accompanying consolidated statements of income for each of the years ended October 31, 2002 and 2001 are as follows: 2002 2001 ---- ---- Revenue $ 536 $ 596 Expenses 613 606 ----- ----- Net loss $ (77) $ (10) ===== ===== * * * F-26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Members Westwood Hills, LLC We have audited the accompanying balance sheets of WESTWOOD HILLS, LLC as of October 31, 2003 and 2002, and the related statements of income and members' deficiency and cash flows for each of the three years in the period ended October 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Westwood Hills, LLC as of October 31, 2003 and 2002, and its results of operations and cash flows for each of the three years in the period ended October 31, 2003 in conformity with accounting principles generally accepted in the United States of America. /s/ J.H. Cohn LLP ------------- Roseland, New Jersey November 18, 2003 WESTWOOD HILLS, LLC (A New Jersey Limited Liability Company) BALANCE SHEETS OCTOBER 31, 2003 AND 2002
ASSETS 2003 2002 ------ ---- ---- (In Thousands of Dollars) Real estate, at cost, net of accumulated depreciation of $3,028,000 and $2,683,000 $13,237 $13,519 Equipment, at cost, net of accumulated depreciation of $177,000 and $142,000 168 154 Cash 224 104 Tenants' security accounts 451 386 Prepaid expenses and other assets 144 59 Deferred charges, net 201 230 ------- ------- Totals $14,425 $14,452 ======= ======= LIABILITIES AND MEMBERS' DEFICIENCY ----------------------------------- Liabilities: Mortgages payable $17,881 $14,794 Accounts payable and accrued expenses 16 64 Tenants' security deposits 457 391 ------- ------- Total liabilities 18,354 15,249 Members' deficiency (3,929) (797) ------- ------- Totals $14,425 $14,452 ======= =======
See Notes to Financial Statements. F-28 WESTWOOD HILLS, LLC (A New Jersey Limited Liability Company) STATEMENTS OF INCOME AND MEMBERS' DEFICIENCY YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
INCOME 2003 2002 2001 ------ ---- ---- ---- (In Thousands of Dollars) Revenue: Rental income $ 3,238 $3,145 $3,014 Sundry income 25 24 21 ------- ------ ------ Totals 3,263 3,169 3,035 ------- ------ ------ Expenses: Operating expenses 694 586 676 Management fees 159 162 151 Real estate taxes 381 361 348 Interest 1,182 1,011 1,024 Depreciation 381 377 360 ------- ------ ------ Totals 2,797 2,497 2,559 ------- ------ ------ Net income 466 672 476 MEMBERS' DEFICIENCY ------------------- Balance, beginning of year (797) (969) (885) Less distributions (3,598) (500) (560) ------- ------ ------ Balance, end of year $(3,929) $ (797) $ (969) ======= ====== ======
See Notes to Financial Statements. F-29 WESTWOOD HILLS, LLC (A New Jersey Limited Liability Company) STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
2003 2002 2001 ---- ---- ---- (In Thousands of Dollars) Operating activities: Net income $ 466 $ 672 $ 476 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 381 377 360 Amortization 19 14 13 Changes in operating assets and liabilities: Tenants' security accounts (65) (19) (46) Prepaid expenses and other assets (85) 69 (9) Accounts payable and accrued expenses (38) (23) 20 Tenants' security deposits 66 23 37 ------- ------- ------- Net cash provided by operating activities 744 1,113 851 ------- ------- ------- Investing activities - capital expenditures (113) (244) (224) ------- ------- ------- Financing activities: Distributions paid (3,598) (500) (560) Repayment of mortgage (263) (202) (189) Proceeds from second mortgage 3,350 Good faith deposits (83) ------- ------- ------- Net cash used in financing activities (511) (785) (749) Net increase (decrease) in cash 120 84 (122) Cash, beginning of year 104 20 142 ------- ------- ------- Cash, end of year $ 224 $ 104 $ 20 ======= ======= ======= Supplemental disclosure of cash flow data: Interest paid $ 1,163 $ 997 $ 1,009 ======= ======= =======
See Notes to Financial Statements. F-30 WESTWOOD HILLS, LLC (A New Jersey Limited Liability Company) NOTES TO FINANCIAL STATEMENTS Note 1 - Organization and significant accounting policies: Organization: Westwood Hills, LLC (the "Company") was formed in May 1994 as a New Jersey limited liability company for the purpose of acquiring a residential apartment complex in Westwood, New Jersey. The Company is 40%-owned by First Real Estate Investment Trust of New Jersey (the "Trust") and managed by Hekemian & Co., Inc. ("Hekemian"), a company which manages all of the Trust's properties and in which one of the trustees of the Trust is the chairman of the board. Certain other members of the Company are either trustees of the Trust or their families or officers of Hekemian. The Company will be dissolved on the earlier of April 2024 or upon the sale of substantially all of it assets. Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Cash: The Company maintains its cash in bank deposit accounts which, at times, may exceed Federally insured limits. At October 31, 2003, such cash exceeded Federally insured limits by approximately $116,000. The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. At October 31, 2003 and 2002, the Company had no cash equivalents. Depreciation: Real estate and equipment are depreciated on the straight-line method by annual charges to operations calculated to absorb costs of assets over their estimated useful lives ranging from 7 to 40 years. Deferred charges: Deferred charges consist of mortgage costs which are amortized on the straight-line method by annual charges to operations over the term of the mortgage. Amortization of such costs is included in interest expense and approximated $19,000, $14,000 and $13,000 in 2003, 2002 and 2001, respectively. Advertising: The Company expenses the cost of advertising and promotions as incurred. Advertising costs charged to operations were not material. Income taxes: The Company, with the consent of its members, elected to be treated as a limited liability company under the applicable sections of the Internal Revenue Code. Under these sections, income or loss, in general, is allocated to the members for inclusion in their individual income tax returns. Accordingly, there is no provision for income taxes in the accompanying financial statements. F-31 WESTWOOD HILLS, LLC (A New Jersey Limited Liability Company) NOTES TO FINANCIAL STATEMENTS Note 2 - Real estate: Real estate consists of the following: 2003 2002 ---- ---- (In Thousands of Dollars) Land $ 3,849 $ 3,849 Apartment buildings 12,416 12,353 ------ ------ 16,265 16,202 ------ ------ Less accumulated depreciation 3,028 2,683 ------ ------ Totals $13,237 $13,519 ======= ======= Note 3 - Mortgages payable: Mortgages payable consist of a first and second mortgage on the real estate of the Company. The first mortgage is payable in monthly installments of $99,946 including interest at 6.693% through January 2014 at which time the outstanding balance is due. The second mortgage is payable in monthly installments of $21,954 including interest at 6.18% through January 2014 at which time the outstanding balance is due. The mortgages are secured by an apartment building located in Westwood, New Jersey having a net book value of approximately $13,237,000. Principal amounts (in thousands of dollars) due under the above obligations in each of the years subsequent to October 31, 2003 are as follows: Year Ending October 31, Amount ----------- ------ 2004 $231 2005 247 2006 264 2007 282 2008 301 Based on borrowing rates currently available to the Company, the fair value of the mortgages approximates $18,811,000 and $16,078,000 at October 31, 2003 and 2002, respectively. Note 4 - Management agreement: The apartment complex is currently managed by Hekemian. The management agreement requires fees equal to a percentage of rents collected. Such fees were approximately $159,000, $162,000 and $151,000 in 2003, 2002 and 2001, respectively. * * * F-32 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Members Wayne PSC, LLC We have audited the accompanying balance sheet of WAYNE PSC, LLC as of October 31, 2003, and the related statements of income and members' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Wayne PSC, LLC as of October 31, 2003, and its results of operations and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ J.H. Cohn LLP ------------- Roseland, New Jersey November 18, 2003 F-33 WAYNE PSC, LLC (A New Jersey Limited Liability Company) BALANCE SHEET OCTOBER 31, 2003 (In Thousands of Dollars)
ASSETS ------ Real estate, at cost, net of accumulated depreciation of $599,000 $32,880 Equipment, at cost, net of accumulated depreciation of $6,000 16 Cash 1,342 Sundry receivables 466 Prepaid expenses and other assets 184 Deferred charges, net 556 ------- Total $35,444 ======= LIABILITIES AND MEMBERS' EQUITY ------------------------------- Liabilities: Mortgage payable $32,000 Accounts payable and accrued expenses 215 Tenants' security deposits 91 ------- Total liabilities 32,306 Members' equity 3,138 ------- Total $35,444 =======
See Notes to Financial Statements. F-34 WAYNE PSC, LLC (A New Jersey Limited Liability Company) STATEMENT OF INCOME AND MEMBERS' EQUITY YEAR ENDED OCTOBER 31, 2003 (In Thousands of Dollars) INCOME ------ Revenue: Rental income $4,848 Sundry income 27 ------ Total 4,875 ------ Expenses: Operating expenses 775 Management fees 186 Real estate taxes 990 Interest 2,161 Depreciation 605 ------ Total 4,717 ------ Net income 158 MEMBERS' EQUITY --------------- Capital contribution 9,000 Less distributions (6,020) ------ Balance, end of year $3,138 ====== See Notes to Financial Statements. F-35 WAYNE PSC, LLC (A New Jersey Limited Liability Company) STATEMENT OF CASH FLOWS YEAR ENDED OCTOBER 31, 2003 (In Thousands of Dollars) Operating activities: Net income $ 158 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 605 Amortization 74 Changes in operating assets and liabilities: Sundry receivables (466) Prepaid expenses and other assets (184) Deferred leasing and other charges (183) Accounts payable and accrued expenses 215 Tenants' security deposits 91 -------- Net cash provided by operating activities 310 -------- Investing activities - capital expenditures (33,501) -------- Financing activities: Distributions paid (6,020) Capital contribution 9,000 Proceeds from mortgage 32,000 Deferred mortgage costs (447) -------- Net cash provided by financing activities 34,533 -------- Net increase in cash and cash balance, end of year $ 1,342 ======== Supplemental disclosure of cash flow data: Interest paid $ 2,161 ======== See Notes to Financial Statements. F-36 WAYNE PSC, LLC (A New Jersey Limited Liability Company) NOTES TO FINANCIAL STATEMENTS Note 1 - Organization and significant accounting policies: Organization: Wayne PSC, LLC (the "Company") was formed in March 2002 as a New Jersey limited liability company for the purpose of acquiring a shopping center complex in Wayne, New Jersey. The Company is 40%-owned by First Real Estate Investment Trust of New Jersey (the "Trust") and managed by Hekemian & Co., Inc. ("Hekemian"), a company which manages all of the Trust's properties and in which one of the trustees of the Trust is the chairman of the board. Certain other members of the Company are either trustees of the Trust or their families or officers of Hekemian. The Company will be dissolved on the earlier of the sale of substantially all of its assets, agreement of all members, or bankruptcy of any member. Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Cash: The Company maintains its cash in bank deposit accounts which, at times, may exceed Federally insured limits. At October 31, 2003, such cash exceeded Federally insured limits by approximately $1,136,000. The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. At October 31, 2003, the Company had no cash equivalents. Depreciation: Real estate and equipment are depreciated on the straight-line method by annual charges to operations calculated to absorb costs of assets over their estimated useful lives ranging from 7 to 40 years. Deferred charges: Deferred charges consist of mortgage costs and leasing commissions. Deferred mortgage costs are amortized on the straight-line method by annual charges to operations over the term of the mortgage. Amortization of such costs is included in interest expense and approximated $38,000 in 2003. Deferred leasing commissions are amortized on the straight-line method over the terms of the applicable leases. Revenue recognition: Income from leases is recognized on a straight-line basis regardless of when payment is due. Lease agreements between the Company and commercial tenants generally provide for additional rentals based on such factors as percentage of tenants' sales in excess of specified volumes, increases in real estate taxes, Consumer Price Indices and common area maintenance charges. These additional rentals are generally included in income when reported to the Company, when billed to tenants or ratably over the appropriate period. F-37 WAYNE PSC, LLC (A New Jersey Limited Liability Company) NOTES TO FINANCIAL STATEMENTS Note 1 - Organization and significant accounting policies (concluded): Advertising: The Company expenses the cost of advertising and promotions as incurred. Advertising costs charged to operations were not material. Income taxes: The Company, with the consent of its members, elected to be treated as a limited liability company under the applicable sections of the Internal Revenue Code. Under these sections, income or loss, in general, is allocated to the members for inclusion in their individual income tax returns. Accordingly, there is no provision for income taxes in the accompanying financial statements. Note 2 - Real estate: Real estate consists of the following (in thousands of dollars): Land $ 9,567 Commercial building 23,912 -------- 33,479 Less accumulated depreciation 599 -------- Total $32,880 ======= Note 3 - Mortgage payable: The mortgage is payable in interest only installments of $161,067 through June 2006 and thereafter in monthly installments of $206,960 including interest at 6.04% through January 2016 at which time the outstanding balance is due. Principal amounts (in thousands of dollars) due under the above obligation in each of the five years subsequent to October 31, 2003 are as follows: Year Ending October 31, Amount ----------- ------ 2004 $ - 2005 - 2006 232 2007 581 2008 617 Based on borrowing rates currently available to the Company, the fair value of the mortgage approximates $32,105,000 at October 31, 2003. F-38 WAYNE PSC, LLC (A New Jersey Limited Liability Company) NOTES TO FINANCIAL STATEMENTS Note 4 - Management agreement: The shopping center is currently managed by Hekemian. The management agreement requires fees equal to a percentage of rents collected. Such fees were approximately $186,000 in 2003. In addition, Hekemian charged the Company $160,000 in connection with the mortgage financing. Note 5 - Leases: The Company leases retail space to tenants for periods of up to twenty-five years. Most of the leases contain clauses for reimbursement of real estate taxes, maintenance, insurance and certain other operating expenses of the properties. Minimum rental income (in thousands of dollars) to be received from noncancelable operating leases in years subsequent to October 31, 2003 are as follows: Year Ending October 31, Amount ----------- ------ 2004 $ 3,274 2005 3,076 2006 2,843 2007 2,611 2008 2,277 Thereafter 19,393 ------- Total $33,474 ======= The above amounts assume that all leases which expire are not renewed and, accordingly, neither minimal rentals nor rentals from replacement tenants are included. Minimum future rentals do not include contingent rentals which may be received under certain leases on the basis of percentage of reported tenants' sales volume or increases in Consumer Price Indices. Rental income that is contingent on future events is not included in income until the contingency is resolved. Contingent rentals included in income for the year ended October 31, 2003 were not material. * * * FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION (In Thousands of Dollars) Column A Column B -------- -------- Charged to Costs Item (A) and Expenses -------- ------------ 2003 2002 2001 ---- ---- ---- Maintenance and repairs $ 602 $ 692 $ 657 ====== ====== ====== Real estate taxes $2,532 $2,400 $2,293 ====== ====== ====== (A) Amounts for other items were less than 1% of revenue in all years. S-1 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION OCTOBER 31, 2003 (In Thousands of Dollars)
Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Costs Capitalized Initial Cost Subsequent Gross Amount at Which to Company to Acquisition Carried at Close of Period ---------------------------- -------------- -------------------------- Buildings Buildings Date Encum- and Improve- Carrying and Description brances Land Improvement Land ments Costs Land improvements Total(1) ----------- ------- ---- ----------- ---- ----- ------ ---- ------------ Garden apartments: Grandview Apts., Hasbrouck Heights, NJ $ 22 $ 180 $ 227 $ 22 $ 407 $ 429 Lakewood Apts., Lakewood, NJ 11 396 213 11 609 620 Hammel Gardens, Maywood, NJ $ 5,080 313 728 702 313 1,430 1,743 Palisades Manor, Palisades Park, NJ 12 81 78 12 159 171 Steuben Arms, River Edge, NJ 7,046 364 1,773 618 364 2,391 2,755 Heights Manor, Spring Lake Heights, NJ 3,476 109 974 425 109 1,399 1,508 Berdan Court, Wayne, NJ 13,941 250 2,206 2,238 250 4,444 4,694 Retail properties: Damascus Shopping Center, Damascus, MD 2,532 2,950 6,987 2,950 6,987 9,937 Franklin Lakes Shopping Center, Franklin Lakes, NJ 29 $3,382 7,421 3,411 7,421 10,832 Glen Rock, NJ 12 36 40 12 76 88 Olney Shopping Center, Olney, MD 10,872 1,058 14,590 123 1,058 14,713 15,771 Patchogue Shopping Center, Patchogue, NY 6,744 2,128 8,818 (21) 2,128 8,797 10,925 Westridge Shopping Center, Frederick, MD 17,289 9,135 19,159 394 9,135 19,553 28,688 Westwood Shopping Center, Westwood, NJ 9,910 6,889 6,416 1,794 6,889 8,210 15,099 Vacant land: Franklin Lakes, NJ 224 (156) 68 68 Rockaway, NJ 1,683 382 $633 2,698 2,698 South Brunswick, NJ 80 150 101 331 331 ------- -------- ------- ------ ------- ---- ------- ------- -------- Totals $76,890 $25,269 $62,344 $3,758 $14,252 $734 $29,761 $76,596 $106,357 ======= ======= ======= ====== ======= ==== ======= ======= ========
(1) Aggregate cost is the same for Federal income tax purposes.
Column F Column G Column H Column I -------- -------- -------- -------- Life on Which De- Accumulated Date of Date precaution Depreciation Construction Acquired is Computed ------------ ------------ -------- ----------- Garden apartments: Grandview Apts., Hasbrouck Heights, NJ $ 313 1925 1964 7-40 years Lakewood Apts., Lakewood, NJ 516 1960 1962 7-40 years Hammel Gardens, Maywood, NJ 920 1949 1972 7-40 years Palisades Manor, Palisades Park, NJ 128 1935/70 1962 7-40 years Steuben Arms, River Edge, NJ 1,507 1966 1975 7-40 years Heights Manor, Spring Lake Heights, NJ 1,003 1967 1971 7-40 years Berdan Court, Wayne, NJ 3,095 1964 1965 7-40 years Retail properties: Damascus Shopping Center, Damascus, MD 44 2003 15-39 years Franklin Lakes Shopping Center, Franklin Lakes, NJ 1,143 1963/75/97 1966 10-50 years Glen Rock, NJ 50 1940 1962 10-31.5 years Olney Shopping Center, Olney, MD 1,344 2000 15-39.5 years Patchogue Shopping Center, Patchogue, NY 1,312 1997 1997 39 years Westridge Shopping Center, Frederick, MD 7,212 1986 1992 15-31.5 years Westwood Shopping Center, Westwood, NJ 3,561 1981 1988 15-31.5 years Vacant land: Franklin Lakes, NJ 1966/93 Rockaway, NJ 1964/92/93 South Brunswick, NJ 1964 -------- Totals $22,148 =======
(1) Aggregate cost is the same for Federal income tax purposes. S-2 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION (In Thousands of Dollars) Reconciliation of real estate and accumulated depreciation:
2003 2002 2001 ---- ---- ---- Real estate: Balance, beginning of year $ 94,500 $ 95,637 $ 94,565 Additions: Building and improvements 11,857 365 1,036 Carrying costs 36 Deletions - building and improvements (1,502) --------- --------- --------- Balance, end of year $ 106,357 $ 94,500 $ 95,637 ========= ========= ========= Accumulated depreciation: Balance, beginning of year $ 20,026 $ 18,892 $ 16,726 Additions - charged to operating expenses 2,122 2,148 2,166 Deletions (1,014) --------- --------- --------- Balance, end of year $ 22,148 $ 20,026 $ 18,892 ========= ========= =========
S-3 FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY ("FREIT") EXHIBIT INDEX Exhibit No. 3 Amended and Restated Declaration of Trust of FREIT, dated November 7,1993, as amended on May 31, 1994 and on September 10, 1998. (a) 4 Form of Specimen Share Certificate, Beneficial Interest in FREIT. (b) 10.1 Management Agreement dated April 10, 2002, by and between FREIT and Hekemian & Co., Inc. (c) 10.2 Wayne PSC, L.L.C. Operating Agreement dated March 25, 2002 between FREIT and H-TPKE, LLC ( c) 10.3 Line of Credit Note in the principal amount of $14 million executed by FREIT as Borrower, and delivered to The Provident Bank, as Lender, in connection with the Credit Facility provided by The Provident Bank to FREIT. (d) 21 Subsidiaries of FREIT 23 Consent of J.H. Cohn LLP 24 Power of Attorney (filed with signature pages). 31.1 Rule 13a-14(a)-Certification of Chief Executive Officer. 31.2 Rule 13a-14(a)-Certification of Chief Financial Officer 99.1 Section 1350 Certification of Cheif Executive Officer. 99.2 Section 1350 Certification of Cheir Financial officer. The following filings with the Security and Exchange ------------------------------------------------------------ Commission are incorporated by reference: ----------------------------------------- Footnote (a) Exhibit No. 1 to FREIT's Registration Statement on Form 8-A filed on November 6, 1998. (b) FREIT's Annual Report on Form 10-K for the fiscal year ended October 31, 1998. (c) FREIT's Form 8-K filed on April 29, 2002. (d) Exhibit 10 to FREIT's Form 10-Q filed on September 13, 2002.