10-Q 1 form10q-freit.htm FORM 10Q FQE 7/31/07 form10q-freit.htm

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q

 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
For the Quarterly Period Ended July 31, 2007
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
 
For the transition period from __________________ to ____________________
  
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 incorporation or organization)
 
(I.R.S. Employer 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)

(Former name, former address and former fiscal year, if changed since last report)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer o 
Accelerated Filer x 
Non-Accelerated Filer  o
     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o   No x 
 
As of September 10, 2007, the number of shares of beneficial interest outstanding was 6,760,652.



FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY
 

INDEX


 
 
Page
   
 
   
3
   
4
   
5
   
6
   
 
 
9
 
 
19
 
 
19
   
   
 
   
19
   
20
   
   


Page 2

Part I:  Financial Information

Item 1:  Unaudited Condensed Consolidated Financial Statements

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES    
CONSOLIDATED BALANCE SHEETS      
(Unaudited)       
               
               
     
July 31,
    
October 31,
  
     
2007
    
2006
  
     
(In Thousands of Dollars)
  
ASSETS 
            
Real estate, at cost, net of accumulated depreciation
   $
203,228
     $
204,313
  
Construction in progress
    
3,719
      
2,995
  
Cash and cash equivalents
    
13,697
      
9,616
  
Tenants' security accounts
    
2,311
      
2,161
  
Sundry receivables 
    
3,718
      
3,320
  
Secured loans receivable
    
3,325
      
3,109
  
Deposits, prepaid expenses and other assets
    
6,966
      
4,201
  
Acquired over market leases and in-place lease costs
    
1,176
      
1,395
  
Deferred charges, net
    
3,542
      
3,589
  
Interest rate swap contract
    
39
      
87
  
 
Totals
   $
241,721
     $
234,786
  
                   
                   
LIABILITIES AND SHAREHOLDERS' EQUITY
                
Liabilities: 
                
 
Mortgages payable
   $
189,957
     $
180,679
  
 
Accounts payable and accrued expenses
    
4,477
      
6,097
  
 
Dividends payable
    
2,027
      
3,375
  
 
Tenants' security deposits
    
3,052
      
2,823
  
 
Acquired below market value leases and deferred revenue
    
3,216
      
3,945
  
 
Total liabilities
    
202,729
      
196,919
  
                   
Minority interest 
    
12,890
      
12,895
  
                   
Commitments and contingencies
                
                   
Shareholders' equity:
                
 
Shares of beneficial interest without par value:
                
 
8,000,000 shares authorized;
                
 
     6,755,652 and 6,750,652 shares issued and outstanding
    
23,187
      
23,150
  
 
Undistributed earnings
    
2,876
      
1,735
  
 
Accumulated other comprehensive income
    
39
      
87
  
 
Total shareholders' equity       
   
26,102
      
24,972
  
 
Totals
   $
241,721
     $
234,786
  
                   
 
See Notes to Condensed Consolidated Financial Statements. 
                
 
 

Page 3
 
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES       
CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME       
AND UNDISTRIBUTED EARNINGS            
NINE AND THREE MONTHS ENDED JULY 31, 2007 AND 2006          
(Unaudited)            
                         
                         
                         
   
Nine Months Ended   
    
Three Months Ended   
  
   
July 31,   
    
July 31,   
  
   
2007
    
2006
    
2007
    
2006
  
   
(In Thousands of Dollars, Except Per Share Amounts)   
  
Revenue:
        
Restated
          
Restated
  
Rental income
   $
26,480
     $
24,194
     $
8,980
     $
8,155
  
Reimbursements
    
3,601
      
3,767
      
1,227
      
1,345
  
Sundry income
    
415
      
178
      
234
      
76
  
Totals
    
30,496
      
28,139
      
10,441
      
9,576
  
                                 
Expenses:
                                
Operating expenses
    
8,224
      
6,944
      
2,713
      
2,058
  
Management fees
    
1,321
      
1,258
      
451
      
440
  
Real estate taxes
    
4,277
      
4,053
      
1,424
      
1,351
  
Depreciation
    
3,972
      
3,456
      
1,323
      
1,195
  
Totals
    
17,794
      
15,711
      
5,911
      
5,044
  
                                 
Operating income
    
12,702
      
12,428
      
4,530
      
4,532
  
                                 
Investment income
    
382
      
150
      
157
      
37
  
Interest expense including amortization
                                
  of deferred financing costs
     (9,099 )     (8,291 )     (3,010 )     (2,784 )
Minority interest
     (386 )     (366 )     (129 )     (209 )
Distribution to certain minority interests
     (150 )     (90 )    
-
      
-
  
Income from continuing operations
    
3,449
      
3,831
      
1,548
      
1,576
  
Discontinued operations:
                                
Earnings from discontinued operations
    
91
      
121
      
15
      
53
  
    Gain on sale
    
3,680
      
-
      
3,680
      
-
  
Income from discontinued operations
    
3,771
      
121
      
3,695
      
53
  
Net income
   $
7,220
     $
3,952
     $
5,243
     $
1,629
  
                                 
Basic earnings per share:
                                
Continuing operations
   $
0.51
     $
0.59
     $
0.23
     $
0.24
  
Discontinued operations
   $
0.56
     $
0.02
     $
0.55
     $
0.01
  
Net income
   $
1.07
     $
0.61
     $
0.78
     $
0.25
  
Diluted earnings per share:
                                
Continuing operations
   $
0.50
     $
0.56
     $
0.22
     $
0.23
  
Discontinued operations
   $
0.54
     $
0.02
     $
0.54
     $
0.01
  
Net income
   $
1.04
     $
0.58
     $
0.76
     $
0.24
  
                                 
Weighted average shares outstanding:
                                
Basic
    
6,752
      
6,530
      
6,756
      
6,548
  
Diluted
    
6,919
      
6,787
      
6,925
      
6,888
  
                                 
COMPREHENSIVE INCOME
                                
Net income
   $
7,220
     $
3,952
     $
5,243
     $
1,629
  
Other comprehensive income (loss):
                                
Unrealized gain (loss) on interest
                                
   rate swap contract
     (48 )    
26
       (19 )     (2 )
Comprehensive income
   $
7,172
     $
3,978
     $
5,224
     $
1,627
  
                                 
UNDISTRIBUTED EARNINGS
                                
Balance, beginning of period
   $
1,735
     $
4,890
     $ (340 )   $
3,914
  
Net income
    
7,220
      
3,952
      
5,243
      
1,629
  
Less dividends declared
     (6,079 )     (4,938 )     (2,027 )     (1,639 )
Balance, end of period
   $
2,876
     $
3,904
     $
2,876
     $
3,904
  
Dividends declared per share
   $
0.90
     $
0.75
     $
0.30
     $
0.25
  
                                 
                                 
See Notes to Condensed Consolidated Financial Statements.
                          
Page 4

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES    
CONSOLIDATED STATEMENTS OF CASH FLOWS      
NINE MONTHS ENDED JULY 31, 2007 AND 2006      
(Unaudited)      
             
   
Nine Months Ended   
  
   
July 31,   
  
   
2007
    
2006
  
   
(In Thousands of Dollars)
  
         
Restated
  
Operating activities:
            
Net income
   $
7,220
     $
3,952
  
Adjustments to reconcile net income to net cash provided by
                
operating activities (including discontinued operations):
                
  Depreciation
    
3,980
      
3,466
  
  Amortization
    
570
      
359
  
  Net amortization of acquired leases
     (226 )     (271 )
  Deferred revenue
     (389 )     (629 )
  Minority interest
    
536
      
456
  
Gain on sale of discontinued operations
     (3,680 )    
-
  
 Changes in operating assets and liabilities:
                
   Tenants' security accounts
     (150 )     (136 )
   Sundry receivables, prepaid expenses and other assets
     (57 )     (352 )
   Accounts payable, accrued expenses and other liabilities
    
567
       (690 )
   Tenants' security deposits
    
229
      
234
  
Net cash provided by operating activities
    
8,600
      
6,389
  
Investing activities:
                
Capital improvements - existing properties
     (1,752 )     (1,301 )
Proceeds from sale of discontinued operations
    
3,796
      
-
  
Net sale proceeds held in escrow
     (3,796 )    
-
  
Construction and pre development costs
     (4,114 )     (11,751 )
                 
Net cash used in investing activities
     (5,866 )     (13,052 )
Financing activities:
                
Repayment of mortgages
     (19,053 )     (1,414 )
Proceeds from mortgages
    
28,331
      
14,592
  
Proceeds from exercise of stock options
    
37
      
532
  
Dividends paid
     (7,427 )     (6,216 )
Distribution to minority interest
     (541 )     (420 )
Net cash provided by financing activities
    
1,347
      
7,074
  
Net increase in cash and cash equivalents
    
4,081
      
411
  
Cash and cash equivalents, beginning of period
    
9,616
      
5,672
  
Cash and cash equivalents, end of period
   $
13,697
     $
6,083
  
                 
Supplemental disclosure of cash flow data:
                
Interest paid, including capitalized construction period interest
                
     of $402 in fiscal 2006.
   $
8,900
     $
8,501
  
Income taxes paid
   $
18
     $
18
  
Supplemental schedule of non cash financing activities:
                
Accrued capital expenditures, construction costs and pre-development costs
   $
235
     $
-
  
Dividends declared but not paid
   $
2,027
     $
1,638
  
                 
See Notes to Condensed Consolidated Financial Statements.
                

Page 5

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

Note 1 - Basis of presentation:
 
The accompanying condensed consolidated financial statements have been prepared without audit, in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and pursuant to the rules of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnotes required by GAAP for complete financial statements have been omitted. It is the opinion of management that all adjustments considered necessary for a fair presentation have been included, and that all such adjustments are of a normal recurring nature.
 
The consolidated results of operations for the nine and three months ended July 31, 2007 are not necessarily indicative of the results to be expected for the full year. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report on Form 10-K for the year ended October 31, 2006 of First Real Estate Investment Trust of New Jersey (“FREIT”).
 
Reclassification:
 
Certain amounts in the 2006 financial statements have been reclassified to conform to the current presentation.
 
Restatement:
 
FREIT has restated its prior year’s financial statements in order to properly reflect the Westwood Hills minority members’ share of the Westwood Hills capital deficit. This deficit resulted from distributions to the minority members, including proceeds received on refinancing the mortgage on the residential building owned by Westwood Hills. Although there is no economic effect or cost to FREIT, under GAAP FREIT cannot record a negative minority interest in consolidated financial statements if the minority members have no obligation to restore their negative capital accounts. Accordingly, FREIT’s 2006 quarterly financial statements, as reported herein, have been restated by reducing undistributed earnings and increasing minority interest as of October 31, 2005 by $2,458,000. In addition, net income for the prior year’s periods ended July 31, 2006 has been restated to reflect a decrease of $24,000 for the nine month period and an increase of $16,000 for the three month period, from amounts previously reported. (See Note 2 in FREIT’s Annual Report on Form 10-K for the year ended October 31, 2006 for additional information.)
 
Effective June 1, 2007, the Operating Agreement of Westwood Hills, LLC was amended by a majority of the Members of Westwood Hills, LLC to require the Members to restore their negative capital accounts at Westwood Hills caused by any future losses, distributions from operations or net refinancing proceeds from the effective date of this amendment forward. As a result of this amendment, future minority interest distributions by Westwood Hills, LLC will be recorded to minority interest and will no longer impact FREIT’s income statement.


Note 2 - Earnings per share:
 
FREIT has presented "basic" and "diluted" earnings per share in the accompanying condensed consolidated statements of income in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share” ("SFAS 128"). Basic earnings per share is calculated by dividing net income by the weighted average number of shares outstanding during each period. The calculation of diluted earnings per share is similar to that of basic earnings per share, except that the denominator is increased to include the number of additional shares that would have been outstanding if all potentially dilutive shares, such as those issuable upon the exercise of stock options and warrants, were issued during the period.

Page 6

In computing diluted earnings per share for each of the nine and three month periods ended July 31, 2007 and 2006, 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.
 
 
   
Nine Months Ended
    
Three Months Ended
  
   
July 31,   
    
July 31,   
  
   
2007
    
2006
    
2007
    
2006
  
Basic weighted average shares outstanding
    
6,752,484
      
6,529,527
      
6,755,652
      
6,547,902
  
                                 
Shares arising from assumed exercise of stock options
    
166,675
      
257,145
      
169,513
      
340,734
  
Dilutive weighted average shares outstanding
    
6,919,159
      
6,786,672
      
6,925,165
      
6,888,636
  
                                 
 
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 for the nine and three month periods ended July 31, 2007, and ordinary income for the prior year’s comparable periods.
 
Note 3 - 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 920,000 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.
 
Upon ratification of the Plan on April 7, 1999, FREIT issued 754,000 stock options (adjusted for stock splits), which it had previously granted to key personnel on September 10, 1998. The fair value of the options on the date of grant was $7.50 per share. As of July 31, 2007, options for 237,500 shares were outstanding. The total intrinsic value of the options outstanding at July 31, 2007 was approximately $4.4 million. On August 24, 2007, a FREIT shareholder exercised 5,000 options to purchase 5,000 FREIT shares at $7.50 per share. As a result, options for 232,500 shares remain outstanding and are exercisable through September 2008.
 
On April 4, 2007, FREIT shareholders approved amendments to FREIT’s Equity Incentive Plan as follows: (a) reserving an additional 300,000 shares for issuance under the Plan; and (b) extending the term of the Plan until September 10, 2018.


Note 4 – Discontinued operations:
 
On June 26, 2007, FREIT closed on its contract for the sale of the Lakewood Apartments in Lakewood, New Jersey. The sales price for the property was $4 million. The property was acquired in 1962 for approximately $407,000. For financial reporting purposes, FREIT recognized a gain of approximately $3.7 million from the sale. In compliance with current accounting guidance (SFAS No. 144 – “Accounting for the Impairment or Disposal of Long-Lived Assets”), the gain on the sale, as well as the current and prior year’s earnings of the Lakewood operation are classified as “Income from discontinued operations”, which is included within “Net Income” after “Income from continuing operations”. Revenue attributable to discontinued operations was $267,875 and $60,752 for the Current Nine Months and Current Quarter, compared to $308,156 and $101,773 for the Prior Nine Minths and Prior Quarter.


Note 5 - 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: commercial properties and residential properties. These reportable segments offer different types of space, have different types of tenants, and are managed separately because each requires different operating strategies and management expertise. The commercial segment contains nine (9) separate properties and the residential segment contains nine (9) properties. The accounting policies of the segments are the same as those described in Note 1 in FREIT’s Annual Report on Form 10-K for the year ended October 31, 2006.

Page 7

The chief operating and decision-making group of FREIT's commercial segment, residential segment and corporate/other is comprised of FREIT’s Board of Trustees.
 
FREIT assesses and measures segment operating results based on net operating income ("NOI"). NOI, a standard used by real estate professionals, is based on operating revenue and expenses directly associated with the operations of the real estate properties, but excludes deferred rents (straight lining), lease amortization, depreciation, and financing costs. NOI is not a measure of operating results or cash flows from operating activities as measured by accounting principles generally accepted in the United States of America, and is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity.
 
Real estate rental revenue, operating expenses, NOI and recurring capital improvements for the reportable segments are summarized below and reconciled to consolidated net income for the nine and three month periods ended July 31, 2007 and 2006. Asset information is not reported since FREIT does not use this measure to assess performance.

   
Nine Months Ended
    
Three Months Ended
  
   
July 31,   
    
July 31,   
  
   
2007
    
 2006*
    
2007
      
2006*
  
   
(In Thousands of Dollars)       
  
Real estate rental revenue:
                            
Commercial
   $
16,198
     $
15,941
     $
5,464
     $
5,440
  
Residential
    
13,886
      
11,677
      
4,831
      
3,988
  
Totals
    
30,084
      
27,618
      
10,295
      
9,428
  
Real estate operating expenses:
                                
Commercial
    
6,425
      
6,116
      
2,123
      
2,020
  
Residential
    
6,120
      
5,360
      
1,992
      
1,576
  
Totals
    
12,545
      
11,476
      
4,115
      
3,596
  
Net operating income:
                                
Commercial
    
9,773
      
9,825
      
3,341
      
3,420
  
Residential
    
7,766
      
6,317
      
2,839
      
2,412
  
Totals
   $
17,539
     $
16,142
     $
6,180
     $
5,832
  
Recurring capital improvements-residential
   $
314
     $
234
     $
77
     $
90
  
                                 
Reconciliation to consolidated net income:
                                
Segment NOI
   $
17,539
     $
16,142
     $
6,180
     $
5,832
  
Deferred rents - straight lining
    
186
      
250
      
72
      
79
  
Amortization of acquired leases
    
226
      
271
      
75
      
69
  
Net investment income
    
382
      
150
      
157
      
37
  
Minority interest in earnings of subsidiaries
     (386 )     (366 )     (129 )     (209 )
Distribution to certain minority interests
     (150 )     (90 )    
-
      
-
  
General and administrative expenses
     (1,277 )     (779 )     (474 )     (253 )
Depreciation
     (3,972 )     (3,456 )     (1,323 )     (1,195 )
Financing costs
     (9,099 )     (8,291 )     (3,010 )     (2,784 )
Income from continuing operations
    
3,449
      
3,831
      
1,548
      
1,576
  
Income from discontinued operations
    
3,771
      
121
      
3,695
      
53
  
Net income
   $
7,220
     $
3,952
     $
5,243
     $
1,629
  
                                 
* Restated (See Notes 1 & 4 for more details.)
                                


 

Page 8

Item 2: 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 unaudited condensed consolidated financial statements of FREIT (including related notes thereto) appearing elsewhere in this Form 10-Q, and the consolidated financial statements included in FREIT’s most recently filed Form 10-K. Certain statements in this discussion may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect FREIT’s current expectations regarding future results of operations, economic performance, financial condition and achievements of FREIT, and do not relate strictly to historical or current facts. FREIT has tried, wherever possible, to identify these forward-looking statements by using words such as “believe,”  “expect,” “anticipate,” “intend,” “plan,” “estimate,” or words of similar meaning.
Although FREIT believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties, which may cause the actual results to differ materially from those projected.  Such factors include, but are not limited to the following: general economic and business conditions, which will, among other things, affect demand for rental space, the availability of prospective tenants, lease rents and the availability of financing; adverse changes in FREIT’s real estate markets, including, among other things, competition with other real estate owners, risks of real estate development and acquisitions; governmental actions and initiatives; and environmental/safety requirements.


OVERVIEW
 
FREIT is an equity real estate investment trust ("REIT") that owns a portfolio of residential apartment and commercial properties. Our revenues consist primarily of fixed rental income from our residential and commercial properties and additional rent in the form of expense reimbursements derived from our income producing commercial properties.  Our properties are primarily located in northern New Jersey and Maryland. We acquire existing properties for investment. We also acquire properties, which we feel have redevelopment potential, and make changes and capital improvements to these properties. We develop and construct properties on our vacant land. Our policy is to acquire and develop real property for long-term investment.

Almost all of FREIT’s income and cash flow is derived from the net rental income (revenues after expenses) from our properties. FREIT’s business and financial results are affected by the following fundamental factors:

 
·
the national and regional economic climate;
 
·
occupancy rates at the properties;
 
·
tenant turn-over rates;
 
·
rental rates;
 
·
operating expenses;
 
·
tenant improvement and leasing costs;
 
·
cost of and availability of capital;
 
·
new acquisitions and development projects; and
 
·
governmental regulations.

A negative quality change in the above factors could potentially cause a detrimental effect in FREIT’s revenue, earnings and cash flow.

Page 9

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 included in our Annual Report on Form 10-K for the year ended October 31, 2006, have been applied consistently as at July 31, 2007 and October 31, 2006, and for the nine and three month periods ended July 31, 2007 and 2006. 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 flow 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.



All references to per share amounts are on a diluted basis unless otherwise indicated.







Page 10

Results of Operations:

Real Estate revenue for the nine months ended July 31, 2007 (“Current Nine Months”) increased 8.4% to $30,496,000 compared to $28,139,000 for the nine months ended July 31, 2006 (“Prior Nine Months”).  Real Estate revenue for the three months ended July 31, 2007 (“Current Quarter”) increased 9.0% to $10,441,000 compared to $9,576,000 for the three months ended July 31, 2006 (“Prior Year’s Quarter”).  The increase in real estate revenues was principally attributable to FREIT’s residential operations, primarily at The Boulders in Rockaway Township, NJ (“The Boulders”), which accounted for 5.9% and 6.1% of the increase for the nine and three month periods, respectively. (See discussion below.)
 
During the Current Quarter, FREIT sold its Lakewood Apartments in Lakewood, New Jersey. In compliance with current accounting guidance, the gain on the sale, as well as the current and prior year’s earnings of the Lakewood operation are classified as “Income from discontinued operations”, which is included within “Net Income” after “Income from continuing operations”. (See Note 4 for a further discussion of the sale.) Net income for the Current Nine Months was $7,220,000 ($1.04 diluted) compared to $3,952,000 ($0.58 diluted) for the Prior Nine Months. Net income for the Current Quarter was $5,243,000 ($0.76 diluted) compared to $1,629,000 ($0.24 diluted) for the Prior Year’s Quarter. Income from continuing operations for the Current Nine Months was $3,449,000 ($0.50 diluted) compared to $3,831,000 ($0.56 diluted) for the Prior Nine Months. Income from continuing operations for the Current Quarter was $1,548,000 ($0.22 diluted) compared to $1,576,000 ($0.23 diluted) for the Prior Year’s Quarter. The schedule below provides a detailed analysis of the major changes that impacted revenue and net income for the nine and three months ended July 31, 2007 and 2006:
 
                                     
NET INCOME COMPONENTS
                                    
                                     
                                     
   
Nine Months Ended   
    
Three Months Ended   
  
   
July 31,      
   
July 31,      
  
   
2007
      
2006*
    
Change
   
2007
    
 2006*
    
Change
  
   
(thousands of dollars)             
  
Commercial Properties
                                        
Same Properties (1)
   $
9,896
     $
9,791
     $
105
     $
3,392
     $
3,393
     $ (1 )
Damascus Center - undergoing renovation
    
289
      
555
       (266 )   
96
      
175
       (79 )
Total Commercial Properties
    
10,185
      
10,346
       (161 )   
3,488
      
3,568
       (80 )
                                                 
Residential Properties
                                                
Same Properties (1)
    
6,796
      
6,301
      
495
      
2,469
      
2,389
      
80
  
Boulders at Rockaway
    
970
      
16
      
954
     
370
      
23
      
347
  
Total Residential Properties
    
7,766
      
6,317
      
1,449
     
2,839
      
2,412
      
427
  
                                                 
Total income from real estate operations
    
17,951
      
16,663
      
1,288
      
6,327
      
5,980
      
347
  
                                                 
Financing costs:
                                                
Fixed rate mortgages
                                                
Same Properties (1)
     (6,812 )     (7,023 )    
211
       (2,276 )     (2,333 )    
57
  
Boulders at Rockaway
     (824 )     (7 )     (817 )     (284 )     (1 )     (283 )
Floating Rate - Rotunda
     (1,228 )     (1,098 )     (130 )     (411 )     (397 )     (14 )
Corporate interest - Line / Floating
     (235 )     (163 )     (72 )    (39 )     (53 )    
14
  
Total financing costs
     (9,099 )     (8,291 )     (808 )    (3,010 )     (2,784 )     (226 )
                                                 
Investment income
    
382
      
150
      
232
      
157
      
37
      
120
  
                                                 
Corporate expenses
     (678 )     (578 )     (100 )     (216 )     (174 )     (42 )
Accounting
     (599 )     (201 )     (398 )     (258 )     (79 )     (179 )
Minority interest in earnings of subsidiaries
     (386 )     (366 )     (20 )     (129 )     (209 )    
80
  
Distribution to Westwood Hills minority interests
     (150 )     (90 )     (60 )    
-
      
-
      
-
  
                                                 
Depreciation:
                                                
Same Properties (1)
     (3,576 )     (3,436 )     (140 )     (1,196 )     (1,175 )     (21 )
Boulders at Rockaway
     (396 )     (20 )     (376 )    (127 )     (20 )     (107 )
Total depreciation
     (3,972 )     (3,456 )     (516 )    (1,323 )     (1,195 )     (128 )
                                               
Income from continuing operations
      3,449        3,831        (382 )     1,548        1,576        (28 ) 
                                                 
Income from discontinued operations
    
3,771
      
121
      
3,650
      
3,695
      
53
      
3,642
  
                                                
Net Income
   $
7,220
     $
3,952
     $
3,268
    $
5,243
     $
1,629
     $
3,614
  
                                                 
 (1) Properties operated since the beginning of fiscal 2006.     
                                      
   * Restated (See Notes 1 & 4 for more details.)      
                                    

The consolidated results of operations for the Current Nine Months and Current Quarter are not necessarily indicative of the results to be expected for the full year.


Page 11

SEGMENT INFORMATION

The following tables set forth comparative NOI data for FREIT’s real estate segments and reconciles the NOI to consolidated net income for the Current Nine Months and Current Quarter, as compared to the Prior Nine Months and Prior Year’s Quarter:
 
Nine Months Ended July 31:
                                                            
   
Commercial    
  
Residential
  
Combined   
  
   
Nine Months Ended   
                
Nine Months Ended 
              
Nine Months Ended
  
   
July 31,      
    
Increase (Decrease) 
  
July 31,    
  
Increase (Decrease)
    
July 31,   
  
   
2007
    
 2006
      $      
%
  
2007
    
 2006*
     $      
%
  
2007
    
 2006*
  
   
(in thousands)        
          
(in thousands)        
          
(in thousands)    
  
Rental income
   $
12,454
     $
12,141
     $
313
       2.6 %   $
13,614
     $
11,532
     $
2,082
       18.1 %   $
26,068
     $
23,673
  
Reimbursements
    
3,601
      
3,767
       (166 )     -4.4 %                    
-
              
3,601
      
3,767
  
Other
    
143
      
33
      
110
       333.3 %    
272
      
145
      
127
       87.6 %    
415
      
178
  
Total Revenue
    
16,198
      
15,941
      
257
       1.6 %    
13,886
      
11,677
      
2,209
       18.9 %    
30,084
      
27,618
  
                                                                                 
Operating expenses
    
6,425
      
6,116
      
309
       5.1 %    
6,120
      
5,360
      
760
       14.2 %    
12,545
      
11,476
  
Net operating income
   $
9,773
     $
9,825
     $ (52 )     -0.5 %   $
7,766
     $
6,317
     $
1,449
       22.9 %    
17,539
      
16,142
  
Average
                                                                                
Occupancy %
     90.1 %     90.5 %             -0.4 %     94.8 %     95.4 %             -0.6 %                

                 
 
Reconciliation to consolidated net income:
            
 
Deferred rents - straight lining
    
186
      
250
  
 
Amortization of acquired leases
    
226
      
271
  
 
Net investment income
    
382
      
150
  
 
General and administrative expenses
     (1,277 )     (779 )
 
Depreciation 
     (3,972 )     (3,456 )
 
Financing costs
     (9,099 )     (8,291 )
 
Distributions to certain minority interests
     (150 )     (90 )
 
Minority interest
     (386 )     (366 )
 
      Income from continuing operations
    
3,449
      
3,831
  
 
Income from discontinued operations
    
3,771
      
121
  
   
 Net income
   $
7,220
     $
3,952
  

* Restated (See Notes 1 & 4 for more details.)
                                                        
                                                             
                                                             
Three Months Ended July 31:
                                                            
   
Commercial          
  
Residential          
  
Combined   
  
   
Three Months Ended
                
Three Months Ended
                
Three Months Ended
  
   
July 31,   
    
Increase (Decrease) 
  
July 31,   
    
Increase (Decrease) 
  
July 31,   
  
   
2007
    
 2006
     $       
%
  
2007
    
 2006*
     $      
%
  
2007
    
 2006*
  
   
(in thousands)       
            
(in thousands)       
            
(in thousands)
  
Rental income
   $
4,192
     $
4,084
     $
108
       2.6 %   $
4,642
     $
3,923
     $
719
       18.3 %   $
8,834
     $
8,007
  
Reimbursements
    
1,227
      
1,345
       (118 )     -8.8 %                    
-
              
1,227
      
1,345
  
Other
    
45
      
11
      
34
       309.1 %    
189
      
65
      
124
       190.8 %    
234
      
76
  
Total Revenue
    
5,464
      
5,440
      
24
       0.4 %    
4,831
      
3,988
      
843
       21.1 %    
10,295
      
9,428
  
                                                                                 
Operating expenses
    
2,123
      
2,020
      
103
       5.1 %    
1,992
      
1,576
      
416
       26.4 %    
4,115
      
3,596
  
Net operating income
   $
3,341
     $
3,420
     $ (79 )     -2.3 %   $
2,839
     $
2,412
     $
427
       17.7 %    
6,180
      
5,832
  
Average
                                                                                
Occupancy %
     91.0 %     90.2 %             0.8 %     95.9 %     96.4 %             -0.5 %                
                                                                                 

 
Reconciliation to consolidated net income:
            
 
Deferred rents - straight lining
    
72
      
79
  
 
Amortization of acquired leases
    
75
      
69
  
 
Net investment income
    
157
      
37
  
 
General and administrative expenses
     (474 )     (253 )
 
Depreciation 
     (1,323 )     (1,195 )
 
Financing costs
     (3,010 )     (2,784 )
 
Distributions to certain minority interests
    
-
      
-
  
 
Minority interest
     (129 )     (209 )
 
      Income from continuing operations
    
1,548
      
1,576
  
 
Income from discontinued operations
    
3,695
      
53
  
   
 Net income
   $
5,243
     $
1,629
  

    * Restated (See Notes 1 & 4 for more details.)
                    
                     
NOI is based on operating revenue and expenses directly associated with the operations of the real estate properties, but excludes deferred rents (straight lining), lease amortization, 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.

Page 12

COMMERCIAL SEGMENT

FREIT’s commercial properties consist of nine (9) properties totaling approximately 1,100,000 sq. ft. of retail space and 138,000 sq. ft. of office space.  Seven (7) are multi-tenanted retail or office centers, and one is a single tenanted store. In addition, FREIT has leased land and receives rental income from a tenant who has built and operates a bank branch on land FREIT owns in Rockaway, NJ.
 
As indicated in the above Segment Information table, revenue from FREIT’s commercial segment for the Current Nine Months and Current Quarter increased slightly by 1.6% and 0.4%, respectively, over the comparable prior year’s periods. However, NOI for the Current Nine Months and Current Quarter decreased by 0.5% and 2.3%, over the comparable prior year’s periods. The primary reason was the adverse effect of the anticipated planned renovation at our Damascus Shopping Center property located in Damascus, MD (the “Damascus Center”), which caused a temporary decline in occupancy levels. (See discussion below). Average occupancy rates for FREIT’s commercial segment for the Current Nine Months was at 94.3%, exclusive of the Damascus Center, compared to 92.9% for the prior year’s period. The impact of this renovation on the year-to-date results of the commercial segment is reflected in the following chart:
 
     
Nine Months Ended July 31, 
  
     
2007
    
2006
  
     
Commercial
          
Same
    
Commercial
          
Same
  
($000)
    
Properties
    
Damascus
    
Properties
    
Properties
    
Damascus
    
Properties
  
Revenues
     $
16,198
     $
610
     $
15,588
     $
15,941
     $
891
     $
15,050
  
                                                     
Expenses
      
6,425
      
316
      
6,109
      
6,116
      
331
      
5,785
  
                                                     
NOI
     $
9,773
     $
294
     $
9,479
     $
9,825
     $
560
     $
9,265
  
                                                     
 
Development Activities:
 
The Rotunda, Baltimore, MD: Acquired in July 2005, the property is on 11.5 acres of land and is currently configured into about 138,000 sq. ft. of office space and 78,000 sq. ft. of retail space on the lower level of the main building. We are planning a modernization and expansion of the retail space, as well as the development of residential apartment units as allowed by the current zoning. Final development plans, however, are subject to approval by local governmental authorities.
 
Damascus Center, Damascus, MD: FREIT has entered into construction agreements for the redevelopment of the Damascus Center. Building plans for Phase I have been completed and have been approved by governmental agencies. Phase I construction began on June 7, 2007. Because of this redevelopment, current leases for certain tenants are being allowed to expire and are not being renewed. This has caused occupancy to decline, on a temporary basis, during the construction phase.

RESIDENTIAL SEGMENT
 
On June 26, 2007, FREIT sold the Lakewood Apartments in Lakewood, New Jersey for $4 million. For financial reporting purposes, FREIT recognized a gain of approximately $3.7 million from the sale. In compliance with current accounting guidance, the gain on the sale and the earnings of the Lakewood operation are classified as discontinued operations. (See Note 4 for a further discussion of the sale.) With the completion of the 129-unit apartment community at The Boulders, FREIT now operates nine (9) multi-family apartment communities totaling 1,075 apartment units. As indicated in the table above, revenue from our residential segment for the Current Nine Months increased 18.9% to $13,886,000 and NOI for the same period is also up 22.9% to $7,766,000. For the Current Quarter, revenue increased 21.1% to $4,831,000 and NOI is also up 17.7% to $2,839,000. Fiscal 2007 will be the first full year of operation for The Boulders. (See discussion below.) The contribution made by The Boulders to the Current Nine Months and Current Quarter’s revenue and NOI, as compared to the Prior Year’s revenue and NOI is reflected in the following chart:
 
     
Nine Months Ended July 31,
  
     
2007
    
2006*
  
     
Residential
    
The
    
Same
    
Residential
    
The
    
Same
  
($000)
  
Properties
    
Boulders
    
Properties
    
Properties
    
Boulders
    
Properties
  
Revenues
     $
13,886
     $
1,703
     $
12,183
     $
11,677
     $
46
     $
11,631
  
                                                     
Expenses
      
6,120
      
733
      
5,387
      
5,360
      
30
      
5,330
  
                                                     
NOI
     $
7,766
     $
970
     $
6,796
     $
6,317
     $
16
     $
6,301
  

       
Three Months Ended July 31,
  
       
2007        
    
2006*
  
       
Residential
    
The
    
Same
    
Residential
    
The
    
Same
  
($000)
  
Properties
    
Boulders
    
Properties
    
Properties
    
Boulders
    
Properties
  
Revenues
     $
4,831
     $
635
     $
4,196
     $
3,988
     $
46
     $
3,942
  
                                                     
Expenses
      
1,992
      
265
      
1,727
      
1,576
      
23
      
1,553
  
                                                     
NOI
     $
2,839
     $
370
     $
2,469
     $
2,412
     $
23
     $
2,389
  
* Restated (See Note 4 for more details.)
                                  


Page 13

Revenues from FREIT’s residential properties continue to increase. Average occupancy rates for the Current Nine Months and Current Quarter, exclusive of The Boulders property, which was not completed until late fiscal 2006, was at 96.0% and 96.2%, respectively, compared to 95.4% and 96.4% for the prior year’s periods. The occupancy level at The Boulders was in excess of 96% at the end of July 2007, and averaged 86% during the Current Nine Month period.

Our residential revenue is principally composed of monthly apartment rental income. Total rental income is a factor of occupancy and monthly apartment rents. Monthly average residential rents at the end of the Current Nine Months and the Prior Nine Month period were $1,484 and $1,409, respectively. A 1% decline in annual average occupancy, or a 1% decline in average rents from current levels, results in an annual revenue decline of approximately $191,000 and $185,000, respectively.
 
Capital expenditures: Since all of our apartment communities, with the exception of The Boulders, 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. A major renovation program has been started at The Pierre Towers apartment complex (“The Pierre”). We intend to modernize, where required, all apartments and modernize some of the buildings’ mechanical services. This renovation is expected to cost approximately $2 - 4 million and take, at least, several years to complete. These costs will be financed from operating cash flow and cash reserves. Through July 31, 2007, we expended $2.6 million in capital improvements at The Pierre, including approximately $743,000 during the first nine months of the fiscal year.

The Boulders, Rockaway Township, NJ
 
Construction started on this 129-unit garden apartment community in July 2005 and was completed during August 2006. Development costs have been financed from construction financing and from funds available from our cash and cash equivalents. Certificates of Occupancy for all of the buildings have been received, and tenants started taking occupancy during June 2006. As of July 31, 2007 occupancy was in excess of 96%. The Boulders is expected to add to future earnings, cash flow and shareholder value.

FINANCING COSTS
 
 
   
Nine Months Ended
    
Three Months Ended
  
   
July 31,
    
July 31,
  
   
2007
    
2006
    
2007
    
2006
  
   
($ in thousands)
    
($ in thousands)
  
 Fixed rate mortgages
   $
7,338
     $
6,899
     $
2,515
     $
2,291
  
 Variable rate mortgages:
                                
      Construction Loan (1) - Boulders
    
161
      
402
      
-
      
247
  
      Acquisition loan - Rotunda
    
1,184
      
1,055
      
396
      
383
  
      Other
    
217
      
145
      
32
      
47
  
     
8,900
      
8,501
      
2,943
      
2,968
  
 Amortization of Mortgage Costs
    
199
      
192
      
67
      
63
  
 Total Financing Costs
    
9,099
      
8,693
      
3,010
      
3,031
  
      Less amount capitalized
    
-
       (402 )    
-
       (247 )
 Financing costs expensed
   $
9,099
     $
8,291
     $
3,010
     $
2,784
  
                                 
(1) Mortgages not in place at beginning of fiscal 2006.
                  

Financing costs before capitalized amounts for the Current Nine Months increased 4.7% compared to the Prior Nine Months, however for the Current Quarter, financing costs decreased 0.7% over the prior year’s comparable period.
 
Increased financing levels at The Boulders (construction and permanent loans) resulted in increased financing costs of $808,000 for the Current Nine Months. Our acquisition loan for The Rotunda property of $22.5 million bears a floating interest rate. Higher interest rates over the course of the last year raised the level of interest expense for the Rotunda by $129,000, to $1,184,000 for the Current Nine Month period.

CERTAIN MINORITY DISTRIBUTIONS
 
Westwood Hills, LLC (“WH”), our 40% owned subsidiary, has a capital deficit. This deficit resulted primarily from distributions to WH’s members, of proceeds from mortgage financings, which were in excess of the carrying basis of WH’s assets. The higher mortgage amounts provided by lenders reflected the increased value of WH’s property.

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During the prior year’s nine month period, WH made a $150,000 distribution to its members. FREIT received $60,000 and the members owning 60% (“Minority”) received $90,000. Since WH has a capital deficit and its members are under no obligation to restore their negative capital accounts, under GAAP FREIT is required to charge its income statement for $90,000, the amount of the distribution received by the Minority. During the first quarter of fiscal 2007, WH made a $250,000 distribution to its members, of which the Minority received $150,000. FREIT reflected this distribution as a charge to its income statement for $150,000. These charges had no economic effect or cost to FREIT. No such distributions were made during the Current Quarter.
 
Effective June 1, 2007, the Operating Agreement of Westwood Hills, LLC was amended by a majority of the Members of Westwood Hills, LLC to require the Members to restore their negative capital accounts at Westwood Hills caused by any future losses, distributions from operations or net refinancing proceeds from the effective date of this amendment forward. As a result of this amendment, future minority interest distributions by Westwood Hills, LLC will be recorded to minority interest and will no longer impact FREIT’s income statement.

NET INVESTMENT INCOME
 
Net investment income for the Current Nine Months and Current Quarter was $382,000 and $157,000, respectively, a significant increase over the $150,000 and $37,000 reported for the Prior Nine Months and Prior Quarter, respectively. Net investment income is principally derived from interest earned from cash on deposit in institutional money market funds and interest earned from secured loans receivable (loans made to Hekemian employees, including certain members of the immediate family of Robert S. Hekemian, FREIT CEO and Chairman of the Board, for their equity investment in Grande Rotunda, LLC, a limited liability company, in which FREIT owns a 60% equity interest and Damascus Center, LLC, a limited liability company, in which FREIT owns a 70% equity interest). The increase in net investment income for the current year was primarily attributable to higher interest income for the Current Quarter due to higher interest rates on the Company’s investments, coupled with interest income relative to secured loans made in connection with the sale of an equity interest in the Damascus Center, effective October 31, 2006.

GENERAL AND ADMINISTRATIVE EXPENSES (“G & A”)
 
During the Current Nine Months and Current Quarter, G & A was $1,277,000 and $474,000, respectively, as compared to $779,000 and $253,000 for the prior year’s periods. The increases for the Current Nine Month and Current Quarter periods were primarily attributable to increases in accounting and auditing fees of $399,000 and $178,000, respectively.

DEPRECIATION
 
Depreciation expense from continuing operations for the Current Nine Months and Current Quarter was $3,972,000 and $1,323,000, respectively, an increase of $516,000 and $128,000 over the prior year’s comparable periods. The increase was primarily attributable to depreciation related to The Boulders property, completed in August 2006.

LIQUIDITY AND CAPITAL RESOURCES
 
Our financial condition remains strong. Net Cash Provided By Operating Activities was $8.6 million for the Current Nine Months compared to $6.4 million for the Prior Nine Months. 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).
 
Credit Line:
 
FREIT has an $18 million line of credit provided by the Provident Bank. The line of credit is for three years but can be cancelled by the bank, at its will, at each anniversary date. Draws against the credit line can be used for general corporate purposes, for property acquisitions, construction activities, and letters of credit. Draws against the credit line are secured by mortgages on FREIT’s Franklin Crossing Shopping Center, Franklin Lakes, NJ, retail space in Glen Rock, NJ, Palisades Manor Apartments, Palisades Park, NJ, and Grandview Apartments, Hasbrouck Heights, NJ. .Interest rates on draws will be 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.

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In connection with its construction activities in Rockaway, NJ, FREIT had drawn down $1.5 million and further utilized the credit line for the issuance of a $2 million Letter of Credit (“LoC”). The $1.5 million was repaid during our first quarter and the $2 million LoC was retired on May 16, 2007.
 
During the current year’s second quarter, FREIT utilized $15.8 million of its credit line to repay currently maturing mortgage debt secured by Westridge Square. The $15.8 million utilized under the credit line was subsequently repaid on April 25, 2007, using proceeds from the refinancing of the Westridge Square debt. (See discussion below under “Refinancing of debt obligation” for additional information.) $18 million is currently available under the line of credit.
 
As described in the segment analysis above, construction of The Boulders in Rockaway Township, NJ has been completed. Construction costs were funded from draws against a construction loan. Upon completion of construction, the construction loan of approximately $14 million was converted to a permanent loan with additional funding to bring the permanent loan balance up to $20.7 million. We also have entered into construction agreements for the redevelopment of the Damascus Center, in Damascus, MD, and are planning an expansion and redevelopment of The Rotunda in Baltimore, MD.  The total capital required for these projects is estimated at $19 million, and $145 million, respectively. We expect to finance these costs, in part, from construction and mortgage financing and, in part, from contributions from our partners and available cash.  We expect these redevelopment projects to add to revenues, income, cash flow, and shareholder value.
 
At July 31, 2007, FREIT’s aggregate outstanding mortgage debt was $190.0 million and bears a weighted average interest rate of 5.78%, and an average life of approximately 6.3 years. These fixed rate mortgages are subject to amortization schedules that are longer than the term of the mortgages. As such, balloon payments (unpaid principal amounts at mortgage due date) for all mortgage debt will be required as follows:
 
Fiscal Year
2008
2010
2013
2014
2016
2017
2019
2022
($ in millions)
                
Mortgage "Balloon" Payments
$28.4
$12.3
$8.0
$26.1
$24.7
$22.0
$28.3
$14.4

The following table shows the estimated fair value and carrying value of our long-term debt at July 31, 2007 and October 31, 2006:
 
   
July 31,
  
October 31,
($ in Millions)
  
2007
  
2006
Fair Value
  
$184.4
  
$184.4
         
Carrying Value
  
$190.0
  
$180.7
 
Fair values are estimated based on market interest rates at July 31, 2007 and October 31, 2006 and on discounted cash flow analysis. Changes in assumptions or estimation methods may significantly affect these fair value estimates.
 
FREIT expects to refinance 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 refinancing proceeds may be less than the amount of mortgage debt being retired. For example, at July 31, 2007 a 1% interest rate increase would reduce the fair value of our debt by $9.1 million, and a 1% decrease would increase the fair value by $9.9 million.
 
Refinancing of debt obligation: On April 2, 2007, FREIT repaid the outstanding principal balance with respect to its $19.2 million 8.31% mortgage note due on July 1, 2007, which was secured by its’ Westridge Square commercial property. The outstanding principal balance of $15.8 million was repaid using funds available on hand and borrowings from FREIT’s credit line. The decision to retire the debt early was made in order to take advantage of favorable interest rates relative to FREIT’s credit line. No prepayment penalty was incurred as a result of the early retirement of this debt.  On April 25, 2007, FREIT refinanced the above mentioned mortgage debt with the placement of a $22 million 5.55% mortgage note due in May 2017, also secured by FREIT’s Westridge Square commercial property. This new mortgage note will be “interest only” through the maturity date. It is FREIT’s intent to use the additional proceeds to fund existing capital projects.
 
FREIT also has interest rate exposure on its floating rate loans. Currently, FREIT’s only floating rate loan outstanding is its $22.5 million acquisition loan for The Rotunda. A 1% rate fluctuation would impact earnings on an annual basis by $226,000.
 
We believe that the values of our properties will be adequate to command refinancing proceeds equal to or higher than the mortgage debt to be refinanced. We continually review our debt levels to determine if additional debt can prudently be utilized for property acquisition additions to our real estate portfolio that will increase income and cash flow to our shareholders.

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Interest rate swap contract: To reduce interest rate volatility, FREIT uses “pay fixed, receive floating” interest rate swaps to convert floating interest rates to fixed interest rates over the terms of certain loans. We enter into these swap contracts with a counterparty that is usually a high-quality commercial bank.
 
In essence, we agree to pay our counterparty a fixed rate of interest on a dollar amount of notional principal (which corresponds to our mortgage debt) over a term equal to the term of the mortgage note. Our counterparty, in return, agrees to pay us a short-term rate of interest, generally LIBOR, on that same notional amount over the same term as our mortgage note.
 
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” requires us to mark-to-market fixed pay interest rate swaps. As the floating interest rate varies from time-to-time over the term of the contract, the value of the contract will change upward or downward. If the floating rate is higher than the fixed rate, the value of the contract goes up and there is a gain and an asset. If the floating rate is less than the fixed rate, there is a loss and a liability. These gains or losses will not affect our income statement. Changes in the fair value of these swap contracts will be reported in other comprehensive income and appear in the equity section of our balance sheet. This gain or loss represents the economic consequence of liquidating our fixed rate swap contracts and replacing them with like-duration funding at current market rates, something we would likely never do.
 
FREIT had a variable interest rate mortgage securing its Patchogue, NY property. To reduce interest rate fluctuations, FREIT entered into an interest rate swap contract. This rate swap contract effectively converted variable interest rate payments to fixed interest rate payments. The contract was initially based on a notional amount of approximately $6,769,000 ($5,981,000 at July 31, 2007). FREIT has the following derivative-related risks with its swap contract: 1) early termination risk, and 2) counterparty credit risk.
 
Early Termination Risk: If FREIT wants to terminate its swap contract before maturity, it has to be bought out or terminated at market value; i.e., the difference in the present value of the anticipated net cash flows from each of the swap’s parties. If current variable interest rates are below FREIT’s fixed interest rate payments, this could be costly. Conversely, if interest rates rise above FREIT’s fixed interest payments and FREIT elected early termination, FREIT would realize a gain on termination. At July 31, 2007, FREIT’s swap contract was in the money. If FREIT had terminated its contract at that date it would have realized a gain of about $39,000. This amount has been included as an asset in FREIT’s balance sheet as at July 31, 2007, and the change (gain or loss) between reporting periods included in comprehensive income.
 
Counterparty Credit Risk: Each party to a swap contract bears the risk that its counterparty will default on its obligation to make a periodic payment. FREIT reduces this risk by entering swap contracts only with major financial institutions that are experienced market makers in the derivatives market.

FUNDS FROM OPERATIONS (“FFO”):
 
Many consider FFO as the standard measurement of a REIT’s performance. We compute FFO as follows:
                         
Funds From Operations ("FFO")
                        
     
Nine Months Ended   
    
Three Months Ended   
  
     
July 31,   
    
July 31,   
  
     
2007
    
 2006*
    
2007
    
 2006*
  
     
($ in thousands)           
  
                               
Net income
     $
7,220
     $
3,952
     $
5,243
     $
1,629
  
Depreciation
      
3,972
      
3,456
      
1,323
      
1,195
  
Amortization of deferred mortgage costs
    
199
      
192
      
67
      
63
  
Deferred rents (Straight lining)
     (186 )     (250 )     (72 )     (79 )
Amortization of acquired leases
     (226 )     (271 )     (75 )     (69 )
Capital Improvements - Apartments
     (314 )     (234 )     (77 )     (90 )
Discontinued operations
     (3,771 )     (121 )     (3,695 )     (53 )
Minority interests:
                                  
Equity in earnings of affiliates
    
536
      
456
      
129
      
209
  
Distributions to minority interests
     (541 )     (420 )     (155 )     (60 )
                                   
 
FFO
   $
6,889
     $
6,760
     $
2,688
     $
2,745
  
                                   
 
 Per Share - Basic
   $
1.02
     $
1.04
     $
0.40
     $
0.42
  
 
 Per Share - Diluted
   $
1.00
     $
1.00
     $
0.39
     $
0.40
  
                                   
 
Weighted Average Shares Outstanding:
          
 
 Basic
    
6,752
      
6,530
      
6,756
      
6,548
  
 
 Diluted
    
6,919
      
6,787
      
6,925
      
6,888
  
                                   
 *  Restated (See Notes 1 & 4 for more details.)
                                
 

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FFO does not represent cash generated from operating activities in accordance with accounting principles generally accepted in the United States of America, and therefore should not be considered a substitute for net income as a measure of results of operations or for cash flow from operations as a measure of liquidity. Additionally, the application and calculation of FFO by certain other REITs may vary materially from that of FREIT’s, and therefore FREIT’s FFO and the FFO of other REITs may not be directly comparable.

INFLATION
 
Inflation can impact the financial performance of FREIT in various ways. Our commercial 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.














Page 18




Item 3: Quantitative and Qualitative Disclosures About Market Risk

See “Liquidity and Capital Resources” above.


Item 4: Controls and Procedures

At the end of the period covered by 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 has been no change in FREIT’s internal control over financial reporting during the first nine months of fiscal 2007 that has materially affected, or is reasonably likely to materially affect, FREIT’s internal control over financial reporting.

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 II:  Other Information

Item 6: Exhibits

Reference is made to the Exhibit index below.

 



 


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



 
FIRST REAL ESTATE INVESTMENT
 
           TRUST OF NEW JERSEY
 
                       (Registrant)
   
Date: September 10, 2007
  
 
/s/ Robert S. Hekemian
 
          (Signature)
 
Robert S. Hekemian
 
Chairman of the Board and Chief Executive Officer
 
(Principal Executive Officer)
   
   
 
/s/ Donald W. Barney
 
          (Signature)
 
Donald W. Barney
 
President, Treasurer and Chief Financial Officer
 
(Principal Financial/Accounting Officer)


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