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,
2018
| o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 000-25043
| 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)
Securities registered pursuant to Section
12(b) of the Act:
|
Title of each Class |
|
Name of each exchange 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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o
No x
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes x
No o
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 Part III of this Form 10-K or
any amendment to this Form 10-K x
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company.
See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”,
and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
Accelerated Filer o Accelerated
Filer x Non-Accelerated
Filer o Smaller
Reporting Company o Emerging growth company 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
The aggregate market value of the registrant’s
shares of beneficial interest held by non-affiliates was approximately $79 million. Computation is based on the closing sales price
of such shares as quoted on the over-the-counter-market on April 30, 2018, the last business day of the registrant’s most
recently completed second quarter.
As of January 11, 2019, the number of
shares of beneficial interest outstanding was 6,758,554.
DOCUMENTS INCORPORATED BY REFERENCE: Portions
of the Proxy Statement for the Registrant’s 2019 Annual Meeting of Shareholders to be held on April 4, 2019 are incorporated
by reference in Part III of this Annual Report.
TABLE OF CONTENTS
FORM 10-K
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 borrow and service its debt; the economic and 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 of 1986, as amended (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
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, constructs and holds real estate properties for long-term investment and not for resale.
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 its 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 diversification of risk, ownership on a joint venture basis with other parties, including employees and affiliates of Hekemian
& Co., Inc., FREIT’s managing agent (“Hekemian”) (See “Management Agreement”), provided FREIT
is able to maintain management control over the property. While our general investment policy is to hold and maintain properties
for the long-term, we may, from time-to-time, sell or trade certain properties in order to (i) obtain capital 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 we have determined or determine are no longer compatible with our growth strategies
and investment objectives for our real estate portfolio.
FREIT Website: All of FREIT’s Securities
and Exchange Commission filings for the past three years are available free of charge on FREIT’s website, which can be accessed
at http://www.FREITNJ.com.
Fiscal Year 2018 Developments
| (a) | On February 7, 2018, Grande Rotunda, LLC refinanced its $115.3 million construction loan held by
Wells Fargo with a new loan held by Aareal Capital Corporation in the amount of approximately $118.5 million with additional funding
available for retail tenant improvements and leasing costs in the amount of $3,380,000. This refinancing paid off the loan previously
held by Wells Fargo, funded loan closing costs and paid the amount due to Hekemian Development Resources for a development fee
of $900,000 plus accrued interest of approximately $45,000 (See Note 9 to FREIT’s consolidated financial statements for further
details on this fee). This loan is secured by the Rotunda property, bears a floating interest rate at 285 basis points over the
one-month LIBOR rate and has a maturity date of February 6, 2021 with two one-year renewal options. As part of this transaction,
Grande Rotunda, LLC purchased an interest rate cap on LIBOR for the full amount that can be drawn on this loan of $121.9 million,
capping the one-month LIBOR rate at 3% for the first two years of this loan. As of October 31, 2018, approximately $118.5 million
of this loan facility was drawn down and the interest rate was approximately 5.13%. (See Note 5 to FREIT’s consolidated financial
statements.) |
| (b) | FREIT has a $13 million revolving line of credit provided by the Provident Bank. The line of credit
is for a three-year term ending on October 27, 2020 at which point no further advances shall be permitted and provided the line
of credit is not renewed by the lender, the outstanding principal balance of the line of credit shall convert to a |
|
| | | commercial term
loan maturing on October 31, 2022. Draws against the credit line can be used for working capital needs and standby letters of credit.
Draws against the credit line are secured by mortgages on FREIT’s Franklin Crossing Shopping Center in Franklin Lakes, New
Jersey and retail space in Glen Rock, New Jersey. The interest rate on the amount outstanding will be at a floating rate of 275
basis points over the 30-day LIBOR with a floor of 3.75%. During Fiscal 2017, FREIT utilized $3 million of its credit line to fund
tenant improvements for new retail tenants at the Rotunda property. As of October 31, 2017, approximately $3.1 million was outstanding
(including closing costs of approximately $0.1 million related to the renewal of the line). In February 2018, FREIT repaid the
line of credit in the amount of $3.1 million. As of October 31, 2018, there was no amount outstanding and $13 million was available
under the line of credit. (See Note 5 to FREIT’s consolidated financial statements.) |
| (c) | On January 8, 2018, Pierre Towers, LLC (“Pierre Towers”), (which is owned by S And
A Commercial Associates Limited Partnership (“S&A”), a consolidated subsidiary of FREIT), refinanced its $29.1
million loan held by State Farm with a new mortgage loan from New York Life Insurance in the amount of $48 million. Pierre Towers
paid New York Life Insurance a good faith deposit in the amount of $960,000 (which was included in prepaid expenses and other assets
on the accompanying consolidated balance sheet as of October 31, 2017) and was reimbursed by New York Life when the loan was closed
in January 2018. The new loan has a term of ten years and bears a fixed interest rate equal to 3.88%. Interest-only payments are
required each month for the first five years of the term and thereafter, principal payments plus accrued interest will be required
each month through maturity. This refinancing resulted in: (i) a reduction in the annual interest rate from a fixed rate of 5.38%
to a fixed rate of 3.88%; and (ii) net refinancing proceeds of approximately $17.2 million (after giving effect to a $1.2 million
loan prepayment cost to pay-off the loan held by State Farm) that were distributed to the partners in S&A with FREIT receiving
approximately $11.2 million, based on its 65% membership interest in S&A, which can be used for capital expenditures and general
corporate purposes. (See Note 5 to FREIT’s consolidated financial statements.) |
| (d) | On December 7, 2017, Station Place on Monmouth, LLC (owned 100% by FREIT) closed on a mortgage
loan in the amount of $12,350,000 held by Provident Bank to purchase the Station Place property in Red Bank, New Jersey. Interest-only
payments are required each month for the first two years of the term and thereafter, principal payments plus accrued interest will
be required each month through maturity. The loan bears a floating interest rate equal to 180 basis points over the one-month BBA
LIBOR with a maturity date of December 15, 2027. In order to minimize interest rate volatility during the term of the loan, Station
Place on Monmouth, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a
fixed interest rate of 4.35% over the term of the loan. (See Note 5 to FREIT’s consolidated financial statements.) |
| (e) | The loan on the Patchogue, New York property in the amount of approximately $5.2 million became
due on March 1, 2018. FREIT is currently operating under the same terms and conditions of the existing agreement while working
with the lender, Oritani Bank, to extend the maturity date of the loan and to provide for monthly payments of principal and interest.
Until such time as a definitive agreement providing for an extension of the loan is entered into, there can be no assurance the
loan will be extended. (See Note 5 to FREIT’s consolidated financial statements.) |
| (ii) |
ROTUNDA
The Rotunda property in Baltimore, Maryland
(owned by FREIT’s 60% owned consolidated affiliate Grande Rotunda, LLC) is an 11.5 acre site containing a building with approximately
136,000 sq. ft. of office space and approximately 83,000 sq. ft. of retail space on the lower level of the building. In September
2013, FREIT began construction to redevelop and expand this property and, with the exception of retail tenant improvements, the
redevelopment was substantially completed in the third quarter of Fiscal 2016. The redevelopment and expansion plans included a
modernization of the office building and smaller adjacent buildings, construction of 379 residential apartment rental units, an
additional 73,000 square feet of new retail space, and 864 above level parking spaces. The residential section reached a stabilized
level of occupancy of approximately 94% by the end of the third quarter of Fiscal 2018. The retail space continues to lease-up
and is approximately 84.1% leased and 78.2% occupied as of October 31, 2018. FREIT expects Rotunda’s operations to stabilize
in 2019. See “Item 1a-(i) (a)” under the caption Fiscal Year 2018 Developments for details on the financing
of this project. |
| (iii) |
DISPOSITIONS & ACQUISITIONS |
| |
On December 7, 2017, FREIT completed
the acquisition of Station Place, a residential apartment complex consisting of one building with 45 units, located in Red Bank,
New Jersey through Station Place on Monmouth, LLC (FREIT’s 100% owned consolidated subsidiary). FREIT identified Station
Place as the replacement property for the Hammel Gardens property located in Maywood, New Jersey that FREIT sold on June 12, 2017,
which completed the like-kind exchange pursuant to Section 1031 of the Internal Revenue Code. Station Place is part of FREIT’s
residential segment. The acquisition cost was $19,550,000 (inclusive of approximately $550,000 of transaction costs capitalized
as part of the asset acquisition), which was funded in part with $7 million in net proceeds from the sale of the Hammel Gardens
property, and the remaining balance of $12,350,000 (inclusive of the transaction costs) was funded by Station Place on Monmouth,
LLC through long-term financing for this property from Provident Bank. (See Notes 3 and 5 to FREIT’s consolidated financial
statements for further details.) |
| (b) |
Financial Information about Segments |
FREIT has two reportable segments: Commercial
Properties and Residential Properties. These reportable segments have different types of tenants and are managed separately because
each requires different operating strategies and management expertise. Segment information for the three years ended October 31,
2018 is included in Note 14 “Segment Information” to FREIT’s 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 commercial properties that consist of multi and single tenanted properties.
Our properties are located in New Jersey, Maryland and New York. We also currently own approximately 7.37 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, registered trademarks, or licenses.
Portfolio of Real Estate Investments
At October 31, 2018, FREIT’s real
estate holdings included (i) eight (8) apartment buildings or complexes containing a total of 1,437 rentable units which is inclusive
of the Station Place property in Red Bank, New Jersey which was acquired in December 2017 (See Item 1- a(iii) – “Dispositions
and Acquisitions”), (ii) nine (9) commercial properties (retail and office) containing a total of approximately 1,341,000
square feet of leasable space, including one (1) single tenant store (a building located in Patchogue, New York formerly occupied
as a supermarket), one (1) one-acre parcel subject to a ground lease, and (iii) three (3) parcels of undeveloped land consisting
of approximately 7.37 acres in total. FREIT and its subsidiaries 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.
Investment in Subsidiaries
The consolidated financial statements
(See Note 1 to the Consolidated Financial Statements included in this Form 10-K) include the accounts of the following subsidiaries
of FREIT:
Westwood Hills, LLC (“Westwood
Hills”): FREIT owns a 40% membership interest in Westwood Hills, which owns and operates a 210-unit residential apartment
complex in Westwood, New Jersey.
Wayne PSC, LLC (“Wayne PSC”):
FREIT owns a 40% membership interest in Wayne PSC, which owns a 322,000 square foot community shopping center in Wayne, New Jersey.
S And A Commercial Associates Limited
Partnership (“S And A”): S And A owns a 100% interest in Pierre Towers, LLC, which owns a 266-unit residential apartment
complex in Hackensack, New Jersey. FREIT owns a 65% partnership interest in S And A.
Grande Rotunda, LLC: FREIT owns a 60%
membership interest in Grande Rotunda, LLC, which owns a 292,000 square foot mixed use property (office and retail) and a 379-unit
residential apartment complex in Baltimore, Maryland that has substantially completed a major redevelopment and expansion project
at the property in the third quarter of Fiscal 2016.
Damascus Centre, LLC: FREIT owns a 70%
membership interest in Damascus Centre, LLC which owns a 144,000 square foot shopping center in Damascus, Maryland.
WestFREIT, Corp: FREIT owns a 100% membership
interest in WestFREIT, Corp., which owns Westridge Square, a 253,000 square foot shopping center in Frederick, Maryland.
FREIT Regency, LLC: FREIT owns a 100%
membership interest in FREIT Regency, LLC, which owns a 132-unit residential apartment complex located in Middletown, New York.
Station Place on Monmouth, LLC: FREIT
owns a 100% membership interest in Station Place on Monmouth, LLC, which owns a 45-unit residential apartment complex located in
Red Bank, New Jersey.
Employees
On October 31, 2018, FREIT and its subsidiaries
had twenty-eight (28) full-time employees and thirteen (13) part-time employees who work solely at the properties owned by FREIT
or its subsidiaries. The number of part-time employees varies seasonally.
Robert S. Hekemian, the Chairman of the
Board and Chief Executive Officer of Hekemian, is the former Chairman and Chief Executive Officer of FREIT. Mr. Hekemian retired
as Chairman and Chief Executive Officer of FREIT effective upon the conclusion of FREIT’s 2018 Annual Meeting of Shareholders
held on April 5, 2018 (the “2018 Annual Meeting”). Robert S. Hekemian, Jr., the President of Hekemian, is a Trustee
of FREIT, and succeeded Robert S. Hekemian as Chief Executive Officer of FREIT effective upon the conclusion of the 2018 Annual
Meeting. Ronald J. Artinian, a Trustee of FREIT and the Chairman of the Audit Committee of the Board, succeeded Robert S. Hekemian
as Chairman of the Board effective upon the conclusion of the 2018 Annual Meeting.
Pursuant to the terms of a Consulting
Agreement between Robert S. Hekemian and the Trust, Mr. Hekemian will continue to serve the Trust in a consulting capacity effective
upon conclusion of FREIT’s 2018 Annual Meeting. The Consulting Agreement has a term of four years and obliges Mr. Hekemian
to provide advice and consultation with respect to matters pertaining to FREIT and its subsidiaries, affiliates, assets and business
for no fewer than 30 hours per month during the term of the agreement. FREIT will pay Mr. Hekemian a consulting fee of $5,000 per
month during the term of the Consulting Agreement, which shall be payable in the form of Shares on a quarterly basis (i.e. in quarterly
installments of $15,000).
Robert S. Hekemian, Jr.,
Chief Executive Officer, Ronald J. Artinian, Chairman of the Board, Donald W. Barney, President, Treasurer and Chief
Financial Officer, and John A. Aiello, Esq., Secretary and Executive Secretary, are the executive officers of FREIT. FREIT
does not retain the services of its executive officers on an exclusive basis, and accordingly FREIT’s executive
officers are permitted to engage in other business activities as all of their business activities are not devoted to FREIT.
Please see “Item 10 – Directors, Executive Officers and Corporate Governance,” for additional
information about FREIT’s executive officers. Hekemian & Co., Inc. 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” below.
Management Agreement
On April 10, 2002, FREIT and Hekemian
executed a Management Agreement whereby Hekemian would continue as Managing Agent for FREIT. The term of the Management Agreement
was renewed on November 1, 2017 for a two-year term, which will expire on October 31, 2019. The Management Agreement automatically
renews for successive periods of two years unless either party gives not less than six (6) months prior notice to the other of
non-renewal. Hekemian currently manages all the properties owned by FREIT and its affiliates, except for the office building at
the Rotunda located in Baltimore, Maryland, which is managed by an independent third party management company. However, FREIT may
retain other managing agents to manage properties acquired after April 10, 2002 and to perform various other duties such as sales,
acquisitions, and development with respect to any or all properties. Hekemian does not serve as the exclusive property acquisition
advisor to FREIT and is not required to offer potential acquisition properties exclusively to FREIT before acquiring those properties
for its own account. The Management Agreement includes a detailed schedule of fees for those services, which Hekemian may be called
upon to perform. The 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 Management
Agreement, FREIT pays Hekemian fees and commissions as compensation for its services. From time to time, FREIT engages Hekemian
to provide additional services, such as consulting services related to development, property sales and financing activities of
FREIT. Separate fee arrangements are negotiated between Hekemian and FREIT with respect to such additional services. In Fiscal
2007, FREIT’s Board of Trustees approved and FREIT executed a development fee agreement for the Rotunda redevelopment project
for the development services to be provided by Hekemian Development Resources, LLC (“Resources”), a wholly-owned subsidiary
of Hekemian. The development fee agreement, as amended, for the Rotunda provided for Resources to receive a fee equal to 6.375%
of the development costs as defined in the development agreement, less the amount of $3 million previously paid to Hekemian for
the Rotunda project. In addition, the Board approved the payment of a fee to Resources in the amount of $1.4 million in connection
with the revision to the scope of the Rotunda redevelopment project. Grande Rotunda, LLC paid $500,000 of this fee to Resources
in Fiscal 2013 and the balance of $900,000 became due upon the issuance of a certificate of occupancy for the multi-family portion
of this project. A final certificate of occupancy was issued in Fiscal 2016; however Resources agreed to defer the payment of the
$900,000 balance of this fee (the $900,000 was included in accounts payable on FREIT’s consolidated balance sheet at October
31, 2017). Grande Rotunda, LLC paid the $900,000 portion of this fee to Resources in February 2018 in connection with the refinancing
of the Wells Fargo construction loan for the Rotunda property with a new loan from Aareal Capital Corporation. Additionally, Grande
Rotunda, LLC paid Resources the amount of approximately $45,000 representing a
mutually agreed upon amount of interest on the $900,000
portion of the fee for the period during which Hekemian Resources had agreed to defer payment thereof. The minority ownership interest
of Grande Rotunda, LLC is owned by Rotunda 100, LLC, which is principally owned by employees of Hekemian, including certain members
of the immediate family of Robert S. Hekemian, FREIT’s former Chairman and Chief Executive Officer and currently a consultant
of FREIT, Robert S. Hekemian, Jr., Chief Executive Officer and a Trustee of FREIT, and David Hekemian, a Trustee of FREIT. The
members of the Hekemian family have majority management control of this entity. (See Note 9 to FREIT’s consolidated financial
statements.)
Robert S. Hekemian, a consultant of FREIT,
is the Chairman of the Board and Chief Executive Officer of Hekemian. Mr. Hekemian owns approximately 0.2% of all of the issued
and outstanding shares of Hekemian. Robert S. Hekemian, Jr., the Chief Executive Officer and a Trustee of FREIT, is the President
of Hekemian, and owns approximately 33.3% of all of the issued and outstanding shares of Hekemian. David Hekemian, a Trustee of
FREIT, is a Principal of Hekemian, and owns approximately 33.3% 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, 2018, FREIT’s aggregate outstanding mortgage debt was $350.5 million, which bears a weighted average
interest rate of 4.02% and an average life of 4.3 years. 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, 2018 with respect to each of these properties.
FREIT is highly leveraged and will continue
to be for the foreseeable future. This level of indebtedness results in increased debt service requirements that could adversely
affect the financial condition and results of operations of FREIT. A number of FREIT’s mortgage loans are amortized over
a period that is longer 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” under 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 FREIT’s Amended and Restated
Declaration of Trust, as amended, nor any policy statement formally adopted by the Board 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 additional secured or unsecured indebtedness in the future 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 REITs, 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 commercial
properties face increasing competition from internet based marketing and shopping, discount shopping centers, outlet malls, sales
through catalogue offerings, discount shopping clubs and telemarketing. In many markets, the trade areas of FREIT's commercial
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 commercial 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 commercial real estate competition developed in the future could potentially have an adverse effect
on the revenues of and earnings from FREIT's commercial properties.
| |
(A) |
General Factors Affecting Investment in Commercial and Apartment Properties; Effect of Economic and Real Estate Conditions |
The revenues and value of FREIT’s commercial
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 commercial 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) |
Commercial 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 would not be operative
in this economic environment. 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 FREIT may not be able to recapture.
As of October 31, 2018, the following
table lists the ten (10) largest commercial tenants, which account for approximately 51.3% of FREIT’s leased commercial
rental space and 38.8% of fixed commercial rents.
| |
|
|
|
|
| Tenant |
Center |
Sq. Ft. |
|
% of Revenue |
| Burlington Stores, Inc. |
Westridge Square |
85,992 |
|
3.6% |
| Kmart Corporation |
Westwood Plaza |
84,254 |
|
1.7% |
| Stop & Shop Supermarket Co. |
Preakness |
61,020 |
|
3.4% |
| Safeway Stores, Inc. |
Damascus Center |
58,358 |
|
5.1% |
| H-Mart Frederick, LLC |
Westridge Square |
55,300 |
|
3.4% |
| The Association of Universities for Reseach in Astronomy |
Rotunda |
49,300 |
|
7.6% |
| Stop & Shop Supermarket Co. |
Franklin Crossing |
48,673 |
|
4.8% |
| Cobb Theaters IV LLC |
Rotunda |
35,000 |
|
4.5% |
| TJ MAXX |
Westwood Plaza |
28,480 |
|
2.9% |
| T-Bowl, Inc. |
Preakness |
27,195 |
|
1.8% |
| |
(C) |
Renewal of Leases and Reletting of Space |
There is no assurance that we will be
able to retain tenants at our commercial properties upon expiration of their leases. Upon expiration or termination of leases for
space located in FREIT's commercial 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 distributions
to its shareholders, could be adversely affected.
In October 2018, Sears Holdings Corporation
(“Sears”) and certain of its subsidiaries, including Kmart Corporation, filed for protection under Chapter 11 of the
bankruptcy code as disclosed in the bankruptcy filings. While Sears has elected to close numerous stores, as of the date of this
report, Sears continues to pay rent and the Kmart store at the Westwood Plaza Shopping Center in Westwood, New Jersey remains open.
In March 2018, iHeartMedia Inc. along
with its affiliates, including iHeartMedia+Entertainment (formerly known as Clear Channel Broadcasting Inc.), filed jointly for
protection under Chapter 11 of the bankruptcy code as disclosed in the
bankruptcy filings. As of the date of this report, the lease
for iHeartMedia+Entertainment at the Rotunda property in Baltimore, Maryland was assumed, continues to pay rent and remains open.
FREIT owns and operates an 87,661 square
foot shopping center located in Franklin Lakes, New Jersey, the anchor tenant of which is The Stop & Shop Supermarket Company,
LLC (“Stop & Shop”). On July 26, 2017, Stop & Shop entered into a lease modification with FREIT whereby the
tenant exercised its option to renew the lease for a ten-year period with a right of the tenant to terminate the lease at any time
during the fifth year if the store does not meet certain sales volume levels set forth in the modification. This lease modification,
which provided for a $250,000 reduction in annual rent, has adversely affected and will adversely affect FREIT’s future operating
results. (See Note 15 to FREIT’s consolidated financial statements.)
On January 4, 2017, Macy’s, Inc.
announced its intention to close several of its department stores across the United States, including the approximately 81,160
square foot Macy’s anchor store located at the Preakness Shopping Center in Wayne, New Jersey. Wayne PSC, a 40% owned consolidated
affiliate of FREIT, owns and operates this shopping center in which Macy’s operated its store under a long-term lease and
was paying annual rent of approximately $234,000 ($2.88 per square foot) with no future rent escalations for the remaining term
and option periods of the lease. On April 25, 2017, Wayne PSC announced it had agreed to a termination of Macy’s lease effective
as of April 15, 2017. To terminate the lease and take possession of the space, Wayne PSC paid Macy’s a termination fee of
$620,000, which was fully expensed in the second quarter of Fiscal 2017. Wayne PSC expects to re-position this space and re-lease
it to a new tenant (or multiple tenants) at market rents, which are currently higher than the rent provided for under the terminated
Macy’s lease. FREIT will lose total consolidated annual rental income, including reimbursements, of approximately $0.2 million
until such time as the space is fully re-leased. FREIT anticipates increased revenue from the space when it is re-leased.
(See Note 15 to FREIT’s consolidated financial statements.)
The Great Atlantic and Pacific Tea
Company and its affiliates, including Pathmark Stores, Inc. (“A&P”), filed for protection under Chapter 11 of
the bankruptcy code as disclosed in the bankruptcy filings, and Pathmark’s lease at FREIT’s Patchogue, New York
property was rejected as of December 31, 2015. As a result of the lease having been rejected, FREIT is losing annual rents of
approximately $1.4 million (related to the prior A&P lease) until the store is re-leased. FREIT continues to explore
various options for this property.
There were no other material lease expirations
during Fiscal 2018 and Fiscal 2017. There are no additional material lease expirations expected during Fiscal 2019.
| |
(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 interests in its partially owned subsidiaries are subject to transfer constraints imposed by the
operating agreements which govern FREIT’s investment in these partially owned subsidiaries. Even without such restrictions
on the transfer of its interests, FREIT believes that there would be a limited market for its interests in these partially owned
subsidiaries.
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 were 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 would therefore
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 injury or property damages and the
property owner's liability for same 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) |
Westwood Plaza Shopping Center, Westwood, NJ |
This property is in a Flood Hazard Zone. FREIT
maintains flood insurance in the amount of $500,000 for the subject property, which is the maximum available under the 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.
| |
(ii) |
Franklin Crossing, Franklin Lakes, NJ |
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.
| |
(iii) |
Preakness Shopping Center, Wayne, NJ |
Prior to its purchase in November 2002 by Wayne
PSC, a Phase I and Phase II Environmental Assessment of the Preakness shopping center revealed soil and ground water contamination
with Percloroethylene (Dry Cleaning Fluid) caused by the mishandling of this chemical by a former dry cleaner tenant. The seller
of the center to Wayne PSC has paid for and completed all required remediation work in accordance with the NJDEP standards, and
this matter is now closed.
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.
In prior years, FREIT conducted environmental
audits for all of its properties except for its undeveloped land and retail properties in Franklin Lakes (Franklin Crossing) and
Glen Rock, New Jersey. Except for the environmental matters related to the Preakness Shopping Center and Franklin Crossing described
in subsection A(ii) and A(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 believes that it complies 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 material 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, except for The Regency,
Westwood Hills, The Boulders at Rockaway, Station Place and Icon which are not subject to any rent control law or regulation.
Local zoning ordinances may prevent FREIT from
renovating, expanding or converting its existing properties for their highest and best use as determined by the Board.
| |
(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.
Almost all of FREIT’s income and
cash flow are 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 improvement and leasing costs; |
| · | cost of and availability of capital; |
| · | failure of banking institutions; |
| · | failure of insurance carriers; |
| · | new acquisitions and development projects;
and |
| · | changes in governmental regulations, real
estate tax rates and similar matters. |
A negative or adverse quality change
in the above factors could potentially cause a detrimental effect on FREIT’s revenue, earnings and cash flow. If rental revenues
decline, we would expect to have less cash available to pay our indebtedness and distribute to our shareholders.
Adverse Changes in General Economic
Climate: FREIT derives the majority of its revenues from renting apartments to individuals or families, and from retailers
renting space at its shopping centers. The U.S. economy has begun to show signs of growth and improvement over the past year. The
following U.S. developments and factors are positive: (a) the improvement in the housing market is expected to continue and drag
along ancillary services; (b) falling energy prices helping keep inflation low; (c) increasing consumer confidence should continue
to push spending modestly higher; (d) private sector employment is expected to continue to grow steadily; and (e) credit availability
has improved. These factors should aid economic growth in the United States. However, there are factors that can be a drag on long-term
economic growth, including, without limitation: (i) continued political gridlock in the federal government; (ii) regulatory uncertainties;
(iii) continued infrastructure deterioration; (iv) a dramatic international crisis; (v) increasing concerns regarding terrorism;
and (vi) rising healthcare costs.
FREIT receives a substantial portion
of its operating income as rent under long-term leases with commercial tenants. At any time, any of our commercial tenants could
experience a downturn in its business that might weaken its financial condition. These tenants might defer or fail to make rental
payments when due, delay lease commencement, voluntarily vacate the premises or declare bankruptcy, which could result in the termination
of the tenant’s lease, and could result in material losses to us and harm to our results of operations. Also, it might take
time to terminate leases of underperforming or nonperforming tenants and FREIT might incur costs to remove such tenants. Also,
if tenants are unable to comply with the terms of their leases, FREIT might modify lease terms in ways that are less favorable
to FREIT.
Tenants unable to pay rent:
Financially distressed tenants may be unable to pay rents and expense recovery charges, where applicable, and may default on their
leases. Enforcing FREIT’s rights as landlord could result in substantial costs and may not result in a full recovery of unpaid
rent. If a tenant files for bankruptcy, the tenant’s lease may be terminated. In each such instance FREIT’s income
and cash flow would be negatively impacted.
Costs of re-renting space:
If tenants fail to renew leases, fail to exercise renewal options, or terminate their leases early, the lost rents due to vacancy
and the costs of re-renting the space could prove costly to FREIT. In addition to cleaning and renovating the vacated space, we
may be required to grant concessions to a new tenant, and may incur leasing brokerage commissions. The lease terms to a new tenant
may be less favorable than the prior tenant’s lease terms, and will negatively impact FREIT’s income and cash flow
and adversely affect FREIT’s ability to pay mortgage debt and interest or make distributions to its shareholders.
In October 2018, Sears Holdings Corporation
(“Sears”) and certain of its subsidiaries, including Kmart Corporation, filed for protection under Chapter 11 of the
bankruptcy code as disclosed in the bankruptcy filings. While Sears has elected to close numerous stores, as of the date of this
report, Sears continues to pay rent and the Kmart store at the Westwood Plaza Shopping Center in Westwood, New Jersey remains open.
FREIT continues to explore various options for this property. See “Renewal of Leases and Reletting of Space”
under Item 1 and “Results of Operations – Segment Information – Commercial Segment” under Item 7
for further information.
In March 2018, iHeartMedia Inc. along
with its affiliates, including iHeartMedia+Entertainment (formerly known as Clear Channel Broadcasting Inc.), filed jointly for
protection under Chapter 11 of the bankruptcy code as disclosed in the bankruptcy filings. As of the date of this report, the lease
for iHeartMedia+Entertainment at the Rotunda property in Baltimore, Maryland was assumed, continues to pay rent and remains open.
See “Renewal of Leases and Reletting of Space” and “Results of Operations – Segment Information –
Commercial Segment” under Item 7 for further information.
A&P filed for protection under Chapter
11 of the bankruptcy code as disclosed in the bankruptcy filings and Pathmark’s lease at FREIT’s Patchogue, New York
property was rejected as of December 31, 2015. As a result of the lease having been
rejected, FREIT is losing annual
rents of approximately $1.4 million (related to the prior A&P lease) until the store is re-leased. FREIT continues to
explore various options for this property. See “Renewal of Leases and Reletting of Space” under Item 1 and
“Results of Operations – Segment Information – Commercial Segment” under Item 7 for further
information.
On April 25, 2017, Wayne PSC announced
it had agreed to a termination of Macy’s lease effective as of April 15, 2017. To terminate the lease and take possession
of the space, Wayne PSC paid Macy’s a termination fee of $620,000, which was fully expensed in the second quarter of Fiscal
2017. Wayne PSC expects to re-position this space and re-lease it to a new tenant (or multiple tenants) at market rents, which
are currently higher than the rent provided for under the terminated Macy’s lease. FREIT will lose total consolidated annual
rental income, including reimbursements, of approximately $0.2 million until such time as the space is fully re-leased. FREIT anticipates
increased revenue from the space when it is re-leased. See “Renewal of Leases and Reletting of Space”
under Item 1 and “Results of Operations – Segment Information – Commercial Segment” under Item 7
for further information.
Inflation may adversely affect
our financial condition and results of operations: Increased inflation could have a pronounced negative impact on FREIT’s
operating and administrative expenses, as these costs may increase at a higher rate than FREIT’s rents. While increases in
most operating expenses at FREIT’s commercial properties can be passed on to retail tenants, increases in expenses at its
residential properties cannot be passed on to residential tenants. Unreimbursed increased operating expenses may reduce cash flow
available for payment of mortgage debt and interest and for distributions to shareholders.
Development and construction risks:
As part of its investment strategy, FREIT seeks to acquire property for development and construction, as well as to develop
and build on land already in its portfolio. Development and construction activities are challenged with the following risks, which
may adversely affect FREIT’s cash flow:
| · | financing may not be available in the
amounts FREIT seeks, or may not be on favorable terms; |
| · | long-term financing may not be available
upon completion of the construction; |
| · | failure to complete construction on schedule
or within budget may increase debt service costs and construction costs; and |
| · | abandoned project costs could result in
an impairment loss. |
Debt financing could adversely
affect income and cash flow: FREIT relies on debt financing to fund its growth through acquisitions and development activities.
To the extent third party debt financing is not available or not available on acceptable terms, acquisitions and development activities
will be curtailed.
As of October 31, 2018, FREIT had approximately
$209.3 million of non-recourse mortgage debt subject to fixed interest rates, and approximately $141.2 million of variable interest
rate debt of which $118.5 million related to the outstanding loan balance on the Grande Rotunda, LLC loan with Aareal Capital.
These mortgages are being repaid over periods (amortization schedules) that are longer than the terms of the mortgages. Accordingly,
when the mortgages become due (at various times), significant balloon payments (the unpaid principal amounts) will be required.
FREIT expects to refinance the individual mortgages with new mortgages when their terms expire. To this extent, FREIT has exposure
to capital availability and interest rate risk. 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 the mortgage debt being retired. To the extent, FREIT is unable to refinance its indebtedness on acceptable terms, FREIT might
need to dispose of one or more of its properties upon disadvantageous terms.
FREIT’s revolving $13 million credit
line (of which $13 million was available as of October 31, 2018), and several of its loan agreements are required to meet or maintain
certain financial covenants that could restrict FREIT’s acquisition activities and result in a default on these loans if
FREIT fails to satisfy these covenants. (See Note 5 to FREIT’s consolidated financial statements.)
Failure of banking and financing
institutions: Banking and financing institutions such as insurance companies provide FREIT with credit lines and construction
financing. The credit lines available to FREIT may be used for a variety of business purposes, including general corporate purposes,
acquisitions, construction, and letters of credit. Construction financing enables FREIT to develop new properties, or renovate
or expand existing properties. A failure of the banking institution making credit lines available may render the line unavailable
and adversely affect FREIT’s liquidity, and negatively impact FREIT’s operations in a number of ways. A failure of
a financial institution unable to fund its construction financing obligations to FREIT may cause the construction to halt or be
delayed. Substitute financing may be significantly more expensive, and construction delays may subject FREIT to delivery penalties.
Failure of insurance carriers:
FREIT’s properties are insured against unforeseen liability claims, property damages, and other hazards. The insurance companies
FREIT uses have good ratings at the time the policies are put into effect. Substantially all of FREIT’s insurance coverage
is provided by one carrier. Financial failure of FREIT’s carriers may result in their inability to pay current and future
claims. This inability to pay claims may have an adverse impact on FREIT’s financial condition. In addition, a failure of
a FREIT insurance carrier may cause FREIT’s insurance renewal or replacement policy costs to increase.
Real estate is a competitive business:
FREIT is subject to normal competition with other investors to acquire real property and to profitably manage such property. Numerous
other REITs, 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 commercial 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 commercial
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 commercial 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 commercial real estate competition developed in the future could potentially have an adverse effect
on the revenues of and earnings from FREIT's commercial properties.
FREIT also faces competition with respect
to its residential properties based on a variety of factors, including 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. Certain of these factors, such as the availability of amenities in the area surrounding a
residential property, are not within FREIT’s control.
Illiquidity of real estate investment:
Real estate investments are relatively difficult to buy and sell quickly. Accordingly, the ability of FREIT to diversify its portfolio
in response to changing economic, market or other conditions is limited. Also, FREIT’s interests in its partially-owned subsidiaries
are subject to transfer constraints imposed under the operating agreements that govern FREIT’s investment in these partially
owned subsidiaries.
Environmental problems may be costly:
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 injury or property damages and the property owner's liability for same 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. In prior years, FREIT conducted environmental audits for all of its properties except for
its undeveloped land and retail properties in Franklin Lakes (Franklin Crossing) and Glen Rock, New Jersey. Except for the
environmental matters related to the Preakness Shopping Center and Franklin Crossing, 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 regulations.
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.
Qualification as a REIT:
Since its inception in 1961, FREIT has elected to qualify as a REIT for federal income tax purposes, and will continue to operate
so as to qualify as a REIT. In order to qualify as a REIT, we must satisfy a number of highly technical and complex provisions
of the Internal Revenue Code. Governmental legislation, new regulations, and administrative interpretations may significantly change
the tax laws with respect to the requirements for qualification as a REIT, or the federal income tax consequences of qualifying
as a REIT. Although FREIT intends to continue to operate in a manner to allow it to qualify as a REIT, future economic, market,
legal, tax or other considerations may cause it to revoke the REIT election or fail to qualify as a REIT. Such a revocation would
subject FREIT’s income to federal income tax at regular corporate rates, and failure to qualify as a REIT would also eliminate
the requirement that FREIT pay dividends to its shareholders.
Change of investment and operating
policies: FREIT’s investment and operating policies, including indebtedness and dividends, are exclusively determined
by the Board, and not subject to shareholder approval.
| ITEM 1B |
UNRESOLVED STAFF COMMENTS |
None.
Portfolio
of Investments: The following tables 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, 2018: |
|
|
|
| Property & Location |
Year
Acquired |
No.
of
Units |
Average Annual
Occupancy Rate for
the Year Ended
10/31/18 |
Average
Monthly Rent
per Unit @
10/31/18 |
Average
Monthly Rent
per Unit @
10/31/17 |
Mortgage
Balance ($000) |
Depreciated Cost of
Land, Buildings &
Equipment ($000) |
| |
|
|
|
|
|
|
|
| Berdan Court |
1965 |
176 |
94.6% |
$1,869 |
$1,783 |
$17,334 |
$1,663 |
| Wayne, NJ |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| Regency Club |
2014 |
132 |
96.7% |
$1,672 |
$1,608 |
$15,922 |
$19,231 |
| Middletown, NY |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| Steuben Arms |
1975 |
100 |
96.0% |
$1,563 |
$1,558 |
$10,243 |
$804 |
| River Edge, NJ |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| Westwood Hills (1) |
1994 |
210 |
95.7% |
$1,872 |
$1,804 |
$20,134 |
$9,231 |
| Westwood Hills, NJ |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| Pierre Towers (2) |
2004 |
266 |
95.0% |
$2,444 |
$2,445 |
$48,000 (7) |
$37,619 |
| Hackensack, NJ |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| Boulders (3) |
2006 |
129 |
94.7% |
$2,110 |
$2,019 |
$16,152 |
$15,590 |
| Rockaway, NJ |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| Icon (4) |
2016 |
379 |
91.9% |
$2,070 |
$2,032 |
$65,186 (6) |
$88,611 |
| Baltimore, Maryland |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| Station Place (5) |
2017 |
45 |
93.5% |
$2,985 |
N/A |
$12,350 (8) |
$19,303 |
| Red Bank, NJ |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
(1) FREIT owns a 40% equity interest in Westwood Hills.
(2) Pierre Towers is 100% owned by S And A Commercial Associates LP, which is 65% owned by FREIT.
(3) Construction completed in August 2006 on land acquired in 1963 / 1964.
(4) FREIT owns a 60% equity interest in Grande Rotunda, LLC. A major redevelopment and expansion project was substantially completed in the third quarter of Fiscal 2016, in which a 379-unit residential complex was constructed upon property acquired in 2005.
(5) Station Place is 100% owned by Station Place on Monmouth, LLC, which is 100% owned by FREIT.
(6) On February 7, 2018, Grande Rotunda, LLC, refinanced its $115.3 million construction loan held by Wells Fargo with a new loan held by Aareal Capital Corporation in the amount of approximately $118.5 million with additional funding available for retail tenant improvements and leasing costs in the amount of $3,380,000. This loan bears a floating interest rate at 285 basis points over the one-month LIBOR rate and has a maturity date of February 6, 2021. At October 31, 2018, the total amount outstanding on this loan was approximately $118.5 million. As part of this transaction, Grande Rotunda, LLC purchased an interest rate cap on LIBOR for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan. Approximately 55% of this outstanding loan balance was allocated to the residential segment based on the appraisal. (See Note 5 to FREIT’s consolidated financial statements.)
(7) On January 8, 2018, Pierre Towers, LLC (“Pierre”), refinanced its $29.1 million loan held by State Farm with a new mortgage loan from New York Life Insurance in the amount of $48 million. The new loan has a term of ten years and bears a fixed interest rate equal to 3.88%. Interest-only payments are required each month for the first five years of the term and thereafter, principal payments plus accrued interest will be required each month through maturity. (See Note 5 to FREIT’s consolidated financial statements.)
(8) On December 7, 2017, Station Place on Monmouth, LLC closed on a mortgage loan in the amount of $12,350,000 held by Provident Bank to purchase the Station Place property in Red Bank, New Jersey. Interest-only payments are required each month for the first two years of the term and thereafter, principal payments plus accrued interest will be required each month through maturity. The loan bears a floating interest rate equal to 180 basis points over the one-month BBA LIBOR with a maturity date of December 15, 2027. In order to minimize interest rate volatility during the term of the loan, Station Place on Monmouth, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 4.35% over the term of the loan. (See Note 5 to FREIT’s consolidated financial statements.)
| Commercial Properties as of October 31, 2018: |
|
|
|
|
| Property & Location |
Year
Acquired |
Leasable
Space-
Approximate
Sq.Ft. |
Average Annual
Occupancy Rate for
the Year Ended
10/31/18 |
Average
Annualized Rent
per Sq. Ft. @
10/31/18 * |
Average
Annualized Rent
per Sq. Ft. @
10/31/17 * |
Mortgage Balance
($000) |
Depreciated Cost
of Land, Buildings
& Equipment
($000) |
| |
|
|
|
|
|
|
|
| Glen Rock, NJ |
1962 |
4,672 |
90.3% |
$28.15 |
$16.51 |
None (1) |
$90 |
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| Franklin Crossing |
1966 (2) |
87,661 |
93.1% |
$22.32 |
$22.11 |
None (1) |
$6,890 |
| Franklin Lakes, NJ |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| Westwood Plaza |
1988 |
174,275 |
95.0% |
$13.07 |
$13.37 |
$19,611 |
$7,359 |
| Westwood, NJ |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| Westridge Square (3) |
1992 |
252,733 |
93.5% |
$13.08 |
$13.61 |
$22,710 (10) |
$14,195 |
| Frederick, MD |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| Single Tenant Store (4) |
1997 |
63,932 |
0.0% |
$0.00 |
$0.00 |
$5,231 (8) |
$6,268 |
| Patchogue, NY |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| Preakness Center (5) |
2002 |
322,064 |
62.1% |
$18.80 |
$14.15 |
$24,432 |
$25,034 |
| Wayne, NJ |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| Damascus Center (6) |
2003 |
143,815 |
82.5% |
$23.13 |
$17.78 |
$19,865 |
$26,774 |
| Damascus, MD |
|
|
|
|
|
|
|
| |
|
|
|
|
. |
|
|
| The Rotunda (7) |
2005 |
291,851 |
76.5% |
$32.56 |
$31.55 |
$53,334 (9) |
$65,915 |
| Baltimore, MD |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| Rockaway, NJ |
1964/1963 |
1 Acre |
100.0% |
N/A |
N/A |
None |
$114 |
| |
|
Land lease |
|
|
|
|
|
| |
|
|
|
|
|
|
|
* Average annualized rent per sq. ft. includes the impact of straight-line rent escalations and the amortization of rent concessions and abatements.
(1) Security for draws against FREIT's Credit Line. As of October 31 2018, there was no amount outstanding and $13 million was available under the line of credit.
(2) The original 33,000 sq. ft. shopping center was replaced with a new 87,661 sq. ft. center that opened in October 1997.
(3) FREIT owns a 100% interest in WestFREIT Corp, that owns the center.
(4) A&P filed for protection under Chapter 11 of the bankruptcy code as disclosed in the bankruptcy filings and Pathmark’s lease at FREIT’s Patchogue, New York property was rejected as of December 31, 2015. See “Renewal of Leases and Reletting of Space” and “Results of Operations – Segment Information – Commercial Segment” under Item 7 for further information.
(5) FREIT owns a 40% equity interest in Wayne PSC, LLC, that owns the center.
(6) FREIT owns a 70% equity interest in Damascus Centre, LLC, that owns the center. A major renovation and expansion project was completed in November 2011.
(7) FREIT owns a 60% equity interest in Grande Rotunda, LLC, that owns the center. A major redevelopment and expansion project was substantially completed in the third quarter of Fiscal 2016, which included modernization of the office building containing 135,000 sq. ft. of office space and approximately 82,000 sq. ft. of retail space on the lower level of the building and an additional 75,000 square feet of new retail space.
(8) The loan on the Patchogue, New York property in the amount of approximately $5.2 million became due on March 1, 2018. FREIT is currently operating under the same terms and conditions of the existing agreement while working with the lender, Oritani Bank, to extend the maturity date of the loan and to provide for monthly payments of principal and interest. Until such time as a definitive agreement providing for an extension of the loan is entered into, there can be no assurance the loan will be extended.
(9) On February 7, 2018, Grande Rotunda, LLC, a consolidated subsidiary, refinanced its $115.3 million construction loan held by Wells Fargo with a new loan held by Aareal Capital Corporation in the amount of approximately $118.5 million with additional funding available for retail tenant improvements and leasing costs in the amount of $3,380,000. This loan bears a floating interest rate at 285 basis points over the one-month LIBOR rate and has a maturity date of February 6, 2021. At October 31, 2018, the total amount outstanding on this loan was approximately $118.5 million. As part of this transaction, Grande Rotunda, LLC purchased an interest rate cap on LIBOR for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan. Approximately 45% of this outstanding loan balance was allocated to the commercial segment based on the appraisal. (See Note 5 to FREIT’s consolidated financial statements.)
(10) On April 28, 2017, WestFREIT Corp., a consolidated subsidiary, refinanced its $22 million mortgage loan held with Wells Fargo Bank, with a new mortgage loan from Manufacturer’s and Traders Trust Company in the amount of $23.5 million. The new loan, secured by a shopping center in Frederick, Maryland, bears a floating interest rate equal to 275 basis points over the one-month LIBOR and a maturity date of April 28, 2019 with the option to extend for 12 months. (See Note 5 to FREIT’s consolidated financial statements.)
Supplemental Segment
Information:
| |
|
|
|
|
|
| Commercial lease expirations at October 31, 2018 assuming none of the tenants exercise renewal options: |
| |
|
|
|
Annual Rent of Expiring Leases |
| Year Ending |
Number of |
Expiring Leases |
Percent of |
|
|
| October 31, |
Expiring Leases |
Sq. Ft. |
Commercial Sq. Ft. |
Total |
Per Sq. Ft. |
| |
|
|
|
|
|
| Month to month |
17 |
26,079 |
2.5% |
$ 537,297 |
$ 20.60 |
| 2019 |
15 |
46,341 |
4.5% |
$ 721,290 |
$ 15.56 |
| 2020 |
19 |
58,867 |
5.7% |
$ 1,579,033 |
$ 26.82 |
| 2021 |
31 |
117,189 |
11.3% |
$ 2,924,479 |
$ 24.96 |
| 2022 |
27 |
252,634 |
24.3% |
$ 2,693,557 |
$ 10.66 |
| 2023 |
23 |
52,328 |
5.0% |
$ 1,357,703 |
$ 25.95 |
| 2024 |
7 |
62,960 |
6.0% |
$ 1,338,899 |
$ 21.27 |
| 2025 |
6 |
26,717 |
2.6% |
$ 605,125 |
$ 22.65 |
| 2026 |
8 |
78,550 |
7.5% |
$ 1,256,464 |
$ 16.00 |
| 2027 |
10 |
75,230 |
7.2% |
$ 1,752,548 |
$ 23.30 |
| 2028 |
13 |
44,144 |
4.2% |
$ 1,163,378 |
$ 26.35 |
| 2029 |
3 |
62,884 |
6.0% |
$ 1,143,705 |
$ 18.19 |
| 2030 |
1 |
55,300 |
5.3% |
$ 663,600 |
$ 12.00 |
| 2031 |
1 |
17,550 |
1.7% |
$ 403,650 |
$ 23.00 |
| 2032 |
2 |
24,846 |
2.4% |
$ 459,876 |
$ 18.51 |
| 2033 |
1 |
4,365 |
0.4% |
$ 130,950 |
$ 30.00 |
| 2037 |
1 |
35,000 |
3.4% |
$ 875,000 |
$ 25.00 |
Land Under Development and Vacant Land as of October
31, 2018:
| Vacant Land |
|
|
Permitted Use Per |
Acreage Per |
| Location (1) |
Acquired |
Current Use |
Local Zoning Laws |
Parcel |
| Franklin Lakes, NJ |
1966 |
None |
Residential |
4.27 |
| Wayne, NJ |
2002 |
None |
Commercial |
2.1 |
| Rockaway, NJ |
1964 |
None |
Residential |
1.0 |
(1) All
of the above land is unencumbered, except as noted elsewhere.
FREIT believes that it has a diversified
portfolio of residential and commercial properties. FREIT does not derive 10% or greater of its revenue from any single lease
agreement.
In Fiscal 2018 and 2017, FREIT had one
(1) property that contributed over 15% of FREIT’s total consolidated revenue: within both the residential and commercial
segment, the Rotunda property in Baltimore, Maryland, accounted for 26.8% for Fiscal 2018 and 19.1% for Fiscal 2017 of total consolidated
revenue. In Fiscal 2016, none of FREIT’s properties accounted for over 15% of FREIT’s total consolidated revenue.
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. See “Business- Disposition” under
Item 1 above. 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 complement and increase the
overall value of FREIT’s existing investment portfolio.
Except for a building formerly occupied
as a supermarket located in Patchogue, New York and the TD Bank branch located in Rockaway, New Jersey, all of FREIT’s and
its subsidiaries’ commercial properties have multiple tenants.
FREIT and its subsidiaries’ commercial
properties have sixteen (16) anchor/major tenants, which account for approximately 58.8% of the space leased. The balance of the
space is leased to one hundred sixty-four (164) satellite and office tenants. The following table lists the anchor/major tenants
at each center and the number of satellite tenants:
| Commercial Property |
|
|
|
No. of |
| Shopping Center (SC) |
|
Net Leasable |
|
Additional/Satellite |
| Office Building (O) |
|
Space |
Anchor/Major Tenants |
Tenants |
| |
|
|
|
|
| Westridge Square |
(SC) |
252,733 |
Burlington Stores, Inc. |
20 |
| Frederick, MD |
|
|
H-Mart |
|
| |
|
|
Gold's Gym |
|
| Franklin Crossing |
(SC) |
87,661 |
Stop & Shop |
17 |
| Franklin, Lakes, NJ |
|
|
|
|
| Westwood Plaza |
(SC) |
174,275 |
Kmart Corp (6) |
16 |
| Westwood, NJ |
|
|
TJMaxx |
|
| Preakness Center (1) (2) |
(SC) |
322,064 |
Stop & Shop |
31 |
| Wayne, NJ |
|
|
CVS |
|
| |
|
|
Annie Sez |
|
| |
|
|
Clearview Theaters |
|
| Damascus Center (3) |
(SC) |
143,815 |
Safeway Stores |
23 |
| Damascus, MD |
|
|
|
|
| The Rotunda (4) |
(O) |
135,964 |
iHeartMedia+Entertainment, Inc. (f/k/a Clear Channel Broadcasting Inc.) (7) |
37 |
| Baltimore, MD |
|
|
The Association of Universities For Research in Astronomy, Inc. |
|
| |
|
|
|
|
| |
(SC) |
155,887 |
Walgreen Corporation |
18 |
| |
|
|
Mom's Organic Market |
|
| |
|
|
Cobb Theatres |
|
| |
|
|
|
|
| Patchogue, NY (5) |
(SC) |
63,932 |
- |
- |
| Glen Rock, NJ |
(SC) |
4,672 |
- |
2 |
(1) On April 25, 2017, Wayne PSC announced it had agreed to a termination of Macy’s lease for the 81,160 square foot Macy’s store at the Preakness Shopping Center, effective as of April 15, 2017. To terminate the lease and take possession of the space, Wayne PSC paid Macy’s a termination fee of $620,000. Wayne PSC expects to re-position this space and re-lease to a new tenant (or multiple tenants) at market rents, which are currently higher than the rent provided for under the terminated Macy’s lease. See “Renewal of Leases and Reletting of Space” and “Results of Operations – Segment Information – Commercial Segment” under Item 7 for further information. See also Note 15 to the consolidated financial statements.
(2) FREIT has a 40% interest in this property.
(3) FREIT has a 70% interest in this property.
(4) FREIT has a 60% interest in this property.
(5) A&P filed for protection under Chapter 11 of the bankruptcy code as disclosed in the bankruptcy filings, and Pathmark’s lease at FREIT’s Patchogue, New York property was rejected as of December 31, 2015. See “Renewal of Leases and Reletting of Space” and “Results of Operations – Segment Information – Commercial Segment” under Item 7 for further information.
(6) In October 2018, Sears Holdings Corporation ("Sears") and certain of its subsidiaries, including Kmart Corporation, filed for protection under Chapter 11 of the bankruptcy code as disclosed in the bankruptcy filings. While Sears has elected to close numerous stores, as of the date of this report, Sears continues to pay rent and the Kmart store at the Westwood Plaza Shopping Center in Westwood, New Jersey remains open. See “Renewal of Leases and Reletting of Space” and “Results of Operations – Segment Information – Commercial Segment” under Item 7 for further information.
(7) In March 2018, iHeartMedia Inc. along with its affiliates, including iHeartMedia+Entertainment (formerly known as Clear Channel Broadcasting Inc.), filed jointly for protection under Chapter 11 of the bankruptcy code as disclosed in the bankruptcy filings. As of the date of this report, the lease for iHeartMedia+Entertainment at the Rotunda property in Baltimore, Maryland was assumed, continues to pay rent and remains open. See “Renewal of Leases and Reletting of Space” and “Results of Operations – Segment Information – Commercial Segment” under Item 7 for further information.
With respect to most of FREIT’s
commercial 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 provide for reimbursement of real estate taxes, maintenance, insurance
and certain other operating expenses of the properties. During the last three (3) completed fiscal years, occupancy at FREIT’s
commercial properties averaged 75.8%, which represents the actual “physical” occupancy rate (based upon possession
and use of leased space). The lower average occupancy level is attributed to the continued lease-up of the additional approximately
75,000 square feet of leasable space at the Rotunda as a result of the major redevelopment and expansion project at the Rotunda
which was completed in the third quarter of Fiscal 2016 and the vacancy at Preakness Shopping Center located in Wayne, New Jersey
due to Macy’s vacating its space in April 2017.
Leases for FREIT’s apartment buildings
and complexes are usually one to two years 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, an 83.3% occupancy rate with respect to FREIT’s available
apartment units. The lower average occupancy level is attributed to the continued lease-up at the Icon over the past three years
as a result of the major redevelopment and expansion project at the Rotunda which was completed in the third quarter of Fiscal
2016. The Icon reached a stabilized level of occupancy of approximately 94% by the end of the third quarter of Fiscal 2018.
FREIT does not believe that any seasonal
factors materially affect FREIT’s business operations and the leasing of its commercial and apartment properties.
FREIT believes that its properties are
covered by adequate fire and property insurance provided by reputable companies and with commercially reasonable deductibles and
limits.
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. Except for the environmental conditions involving remediation
disclosed in “Item 1(c) Narrative 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 |
MINE SAFETY DISCLOSURES |
Not
applicable.
PART II
|
ITEM 5 |
MARKET FOR FREIT'S COMMON EQUITY, RELATED SECURITY HOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES |
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 11, 2019, 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 Service (the “OTC Bulletin Board”) provided by FINRA, 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, 2018 |
|
|
|
|
|
| First Quarter |
|
$ |
14.80 |
|
$ |
16.00 |
|
| Second Quarter |
|
$ |
15.30 |
|
$ |
16.00 |
|
| Third Quarter |
|
$ |
16.55 |
|
$ |
17.15 |
|
| Fourth Quarter |
|
$ |
15.62 |
|
$ |
16.00 |
|
| |
|
Bid |
|
Asked |
|
| Fiscal Year Ended October 31, 2017 |
|
|
|
|
|
| First Quarter |
|
$ |
21.00 |
|
$ |
21.60 |
|
| Second Quarter |
|
$ |
19.00 |
|
$ |
19.65 |
|
| Third Quarter |
|
$ |
17.50 |
|
$ |
17.65 |
|
| Fourth Quarter |
|
$ |
15.35 |
|
$ |
15.99 |
|
The bid quotations set forth above for
the Shares reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual
transactions. The source of the bid and asked quotations is Bloomberg.
Dividends
The holders of Shares are entitled to receive
distributions as may be declared by the Board. Dividends may be declared from time to time by the Board and may be paid in cash,
property, or Shares. The Board’s 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 2018 and Fiscal 2017, FREIT paid/declared annual dividends of $0.15 per share and $0.15
per share, respectively. For Fiscal 2016 and the prior two (2) years, FREIT paid/declared an annual dividend of at least $1.20
per share.
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 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, 2018 are derived from financial statements
herein or previously filed financial statements. 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, | |
2018 | | |
2017 | | |
2016 | | |
2015 | | |
2014 | |
| | |
(In Thousands) | |
| Total assets | |
$ | 392,073 | | |
$ | 372,957 | | |
$ | 367,971 | | |
$ | 352,115 | | |
$ | 301,555 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Mortgage loans | |
$ | 350,504 | | |
$ | 323,435 | | |
$ | 329,719 | | |
$ | 307,899 | | |
$ | 251,552 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Common equity | |
$ | 21,488 | | |
$ | 17,838 | | |
$ | 2,834 | | |
$ | 7,544 | | |
$ | 15,727 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Weighted average shares outstanding: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Basic | |
| 6,883 | | |
| 6,833 | | |
| 6,783 | | |
| 6,778 | | |
| 6,908 | |
| Diluted | |
| 6,883 | | |
| 6,833 | | |
| 6,784 | | |
| 6,778 | | |
| 6,908 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| INCOME STATEMENT DATA: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Years Ended October 31, | |
2018 | | |
2017 | | |
2016 | | |
2015 | | |
| 2014 | |
| | |
(In Thousands of Dollars, Except Per Share Amounts) | |
| Revenue from real estate operations | |
$ | 57,997 | | |
$ | 51,634 | | |
$ | 46,254 | | |
$ | 44,783 | | |
$ | 42,430 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Expenses: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Real estate operations | |
| 24,883 | | |
| 26,233 | | |
| 21,797 | | |
| 21,062 | | |
| 19,492 | |
| Lease termination fee | |
| — | | |
| 620 | | |
| — | | |
| — | | |
| — | |
| Straight line rent adjustment - bankrupt tenant | |
| — | | |
| — | | |
| — | | |
| 1,046 | | |
| — | |
| General and administrative expenses | |
| 2,305 | | |
| 2,129 | | |
| 2,034 | | |
| 2,029 | | |
| 1,396 | |
| Depreciation | |
| 11,515 | | |
| 10,669 | | |
| 7,852 | | |
| 6,883 | | |
| 6,346 | |
| Total expenses | |
| 38,703 | | |
| 39,651 | | |
| 31,683 | | |
| 31,020 | | |
| 27,234 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Operating income | |
| 19,294 | | |
| 11,983 | | |
| 14,571 | | |
| 13,763 | | |
| 15,196 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Investment income | |
| 267 | | |
| 206 | | |
| 150 | | |
| 150 | | |
| 184 | |
| Unrealized gain on interest rate cap contract | |
| 72 | | |
| — | | |
| — | | |
| — | | |
| — | |
| Gain on sale of property | |
| — | | |
| 15,395 | | |
| 314 | | |
| — | | |
| — | |
| Loan prepayment costs relating to property sale | |
| — | | |
| (1,139 | ) | |
| — | | |
| — | | |
| — | |
| Acquisition expenses-Regency | |
| — | | |
| — | | |
| — | | |
| — | | |
| (648 | ) |
| Interest expense including amortization | |
| | | |
| | | |
| | | |
| | | |
| | |
| of deferred financing costs | |
| (18,667 | ) | |
| (15,762 | ) | |
| (11,936 | ) | |
| (11,001 | ) | |
| (11,309 | ) |
| Income from continuing operations | |
| 966 | | |
| 10,683 | | |
| 3,099 | | |
| 2,912 | | |
| 3,423 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Discontinued operations: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Income from discontinued operations | |
| — | | |
| — | | |
| — | | |
| — | | |
| 7 | |
| Gain on sale of discontinued operations | |
| — | | |
| — | | |
| — | | |
| — | | |
| 8,734 | |
| Net income | |
| 966 | | |
| 10,683 | | |
| 3,099 | | |
| 2,912 | | |
| 12,164 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net (income) loss attributable to noncontrolling interests in subsidiaries | |
| 517 | | |
| 2,433 | | |
| (94 | ) | |
| (281 | ) | |
| (507 | ) |
| Net income attributable to common equity | |
$ | 1,483 | | |
$ | 13,116 | | |
$ | 3,005 | | |
$ | 2,631 | | |
$ | 11,657 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Basic and diluted earnings per share: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Continuing operations | |
$ | 0.21 | | |
$ | 1.92 | | |
$ | 0.44 | | |
$ | 0.39 | | |
$ | 0.42 | |
| Discontinued operations | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1.27 | |
| Net income | |
$ | 0.21 | | |
$ | 1.92 | | |
$ | 0.44 | | |
$ | 0.39 | | |
$ | 1.69 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Cash dividends declared per common share | |
$ | 0.15 | | |
$ | 0.15 | | |
$ | 1.20 | | |
$ | 1.20 | | |
$ | 1.20 | |
|
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, the financial condition of tenants and the default rate on leases, operating and administrative
expenses and the availability of financing; adverse changes in FREIT’s real estate markets, including, among other things,
competition with other real estate owners, competition confronted by tenants at FREIT’s commercial properties, governmental
actions and initiatives; environmental/safety requirements; and risks of real estate development and acquisitions. The risks with
respect to the development of real estate include: increased construction costs, inability to obtain construction financing, or
unfavorable terms of financing that may be available, unforeseen construction delays and the failure to complete construction within
budget. |
OVERVIEW
FREIT is an equity real estate investment
trust ("REIT") that is self-administered and externally managed. FREIT owns a portfolio of residential apartment and
commercial properties. FREIT’s revenues consist primarily of rental income and other related revenues from its residential
and commercial properties and additional rent in the form of expense reimbursements derived from operating commercial properties.
FREIT’s properties are primarily located in northern New Jersey, Maryland and New York. FREIT acquires existing properties
for investment and properties that FREIT believes have redevelopment potential through changes and capital improvements to these
properties. FREIT’s policy is to acquire and develop real property for long-term investment.
The economic and financial environment:
The U.S. economy grew throughout the year reaching an average annualized rate of 3.5% on quarter in the third quarter of 2018,
which is the strongest growth rate since the third quarter of 2014. Employment remains healthy with an unemployment rate at 3.7%
in October 2018, the lowest rate in 49 years, and real income continues to grow at a solid pace. If the U.S. economy continues
to improve, the Federal Reserve may continue to increase lending rates which may affect refinancing of mortgages coming due in
the short-term and borrowings for other purposes.
Residential Properties:
FREIT has aggressively increased rental rates on its stabilized properties. As a result, FREIT’s rental rates continue to
show year-over-year increases. FREIT expects increases in rental rates to taper; however, the increased rental rates that are in
place should positively impact future revenues.
Commercial Properties:
There continues to be uncertainty in the retail environment that could have an adverse impact on FREIT’s retail tenants,
which could have an adverse impact on FREIT.
Development Projects and Capital
Expenditures: FREIT continues to make only those capital expenditures that are absolutely necessary. The construction at
the Rotunda development project began in September 2013 and, with the exception of retail tenant improvements, the redevelopment
was substantially completed in the third quarter of Fiscal 2016. By the end of the third quarter of Fiscal 2018, the residential
section reached a stabilized level of occupancy of approximately 94%. The retail space continues to lease-up and is approximately
84.1% leased and 78.2% occupied as of October 31, 2018. FREIT expects Rotunda’s operations to stabilize in 2019.
Debt Financing Availability:
Financing has been available to FREIT and its affiliates. On February 7, 2018, Grande Rotunda, LLC refinanced its $115.3 million
construction loan held by Wells Fargo with a new loan held by Aareal Capital Corporation in the amount of approximately $118.5
million with additional funding available for retail tenant improvements and leasing costs in the amount of $3,380,000. This refinancing
paid off the loan previously held by Wells Fargo, funded loan closing costs and paid the amount due to Hekemian Development Resources
for a development fee of $900,000 plus accrued interest of approximately $45,000 (See Note 9 to FREIT’s consolidated financial
statements for further details on this fee). This loan is secured by the Rotunda property, bears a floating interest rate at 285
basis points over the one-month LIBOR rate and has a maturity date of February 6, 2021 with two one-year renewal options. As part
of this transaction, Grande Rotunda, LLC purchased an interest rate cap on LIBOR for the full amount that can be drawn on this
loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan. As of October 31, 2018, approximately
$118.5 million of this loan facility was drawn down and the interest rate was approximately 5.13%.
On January 8, 2018, Pierre Towers, (which
is owned by S&A, a consolidated subsidiary of FREIT), refinanced its $29.1 million loan held by State Farm with a new mortgage
loan from New York Life Insurance in the amount of $48 million. Pierre Towers paid New York Life Insurance a good faith deposit
in the amount of $960,000 (which was included in prepaid expenses and other assets on the accompanying consolidated balance sheet
as of October 31, 2017) and was reimbursed by New York Life when the loan was closed in January 2018. The new loan has a term of
ten years and bears a fixed interest rate equal to 3.88%. Interest-only payments are required each month for the first five years
of the term and thereafter, principal payments plus accrued interest will be required each month through maturity. This refinancing
resulted in: (i) a reduction in the annual interest rate from a fixed rate of 5.38% to a fixed rate of 3.88%; and (ii) net refinancing
proceeds of approximately $17.2 million (after giving effect to a $1.2 million loan prepayment cost to pay-off the loan held by
State Farm) that were distributed to the partners in S&A with FREIT receiving approximately $11.2 million, based on its 65%
membership interest in S&A, which can be used for capital expenditures and general corporate purposes.
On December 7, 2017, Station Place on
Monmouth, LLC (owned 100% by FREIT) closed on a mortgage loan in the amount of $12,350,000 held by Provident Bank to purchase the
Station Place property in Red Bank, New Jersey. Interest-only payments are required each month for the first two years of the term
and thereafter, principal payments plus accrued interest will be required each month through maturity. The loan bears a floating
interest rate equal to 180 basis points over the one-month BBA LIBOR with a maturity date of December 15, 2027. In order to minimize
interest rate volatility during the term of the loan, Station Place on Monmouth, LLC entered into an interest rate swap agreement
that, in effect, converted the floating interest rate to a fixed interest rate of 4.35% over the term of the loan. (See Note 5
to FREIT’s consolidated financial statements.)
On October 27, 2017, FREIT’s revolving
line of credit provided by the Provident Bank was renewed for a three-year term ending on October 27, 2020 at which point no further
advances shall be permitted and provided the line of credit is not renewed by the lender, the outstanding principal balance of
the line of credit shall convert to a commercial term loan maturing on October 31, 2022. Draws against the credit line can be used
for working capital needs and standby letters of credit. Draws against the credit line are secured by mortgages on FREIT’s
Franklin Crossing Shopping Center in Franklin Lakes, New Jersey and retail space in Glen Rock, New Jersey. The total line of credit
was increased from $12.8 million to $13 million and the interest rate on the amount outstanding will be at a floating rate of 275
basis points over the 30-day LIBOR with a floor of 3.75%. During Fiscal 2017, FREIT utilized $3 million of its credit line to fund
tenant improvements for new retail tenants at the Rotunda property. As of October 31, 2017, approximately $3.1 million was outstanding
(including closing costs of approximately $0.1 million related to the renewal of the line). In February 2018, FREIT repaid the
line of credit in the amount of $3.1 million. As of October 31, 2018, there was no amount outstanding and $13 million was available
under the line of credit.
On April 28, 2017, WestFREIT Corp., a
consolidated subsidiary, refinanced its $22 million mortgage loan held by Wells Fargo Bank, with a new mortgage loan from Manufacturer’s
and Traders Trust Company in the amount of $23.5 million. The new loan bears a floating interest rate equal to 275 basis points
over the one-month LIBOR and has a maturity date of April 28, 2019 with the option to extend for 12 months. This refinancing resulted
in: (i) a reduction in the annual interest rate from a fixed rate of 5.55% to a variable rate and (ii) net refinancing proceeds
of approximately $1.1 million which have been used for general corporate purposes.
The loan on the Patchogue, New York property
in the amount of approximately $5.2 million became due on March 1, 2018. FREIT is currently operating under the same terms and
conditions of the existing agreement while working with the lender, Oritani Bank, to extend the maturity date of the loan and to
provide for monthly payments of principal and interest. Until such time as a definitive agreement providing for an extension of
the loan is entered into, there can be no assurance the loan will be extended.
In accordance with the loan agreement
for each of the loans described above, FREIT may be required to meet or maintain certain financial covenants throughout the term
of the loan.
Operating Cash Flow: FREIT
expects that cash provided by net operating income will be adequate to cover mandatory debt service payments (excluding balloon
payments), necessary capital improvements at stabilized properties and other needs as may be required to maintain its status as
a REIT.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Pursuant to the 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 Form 10-K, have been applied consistently as of October 31, 2018 and October 31, 2017, and
for the years ended October 31, 2018, 2017 and 2016. 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, reimbursement
of the tenants' share of certain operating expenses and additional rents based on tenants' sales volume 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
collectability.
Valuation of Long-Lived Assets: We assess
the carrying value of long-lived assets periodically, or whenever events or changes in circumstances indicate that the carrying
amounts of certain assets 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 could significantly
affect the measurement of impairment.
Real Estate Development Costs: It is
FREIT’s policy to capitalize pre-development costs, which generally include legal and professional fees and other directly
related third-party costs. Real estate taxes and interest costs incurred during the development and construction phases are also
capitalized. FREIT ceases capitalization of these costs when the project or portion thereof becomes operational, or when construction
has been postponed. In the event of a postponement, capitalization of these costs will recommence once construction on the project
resumes.
See Note 1 to FREIT’s consolidated
financial statements for recently issued accounting standards.
Results of Operations:
Fiscal Years Ended October 31, 2018 and 2017
Summary revenues and net income for the
fiscal years ended October 31, 2018 (“Fiscal 2018”) and October 31, 2017 (“Fiscal 2017”) are as follows:
| | |
Years Ended October 31, | |
| | |
2018 | | |
2017 | | |
Change | |
| | |
(in thousands, except per share amounts) | |
| Real estate revenues: | |
| | | |
| | | |
| | |
| Commercial properties | |
$ | 26,149 | | |
$ | 24,748 | | |
$ | 1,401 | |
| Residential properties | |
| 31,848 | | |
| 26,886 | | |
| 4,962 | |
| Total real estate revenues | |
| 57,997 | | |
| 51,634 | | |
| 6,363 | |
| | |
| | | |
| | | |
| | |
| Operating expenses: | |
| | | |
| | | |
| | |
| Real estate operations | |
| 24,883 | | |
| 26,233 | | |
| (1,350 | ) |
| Lease termination fee | |
| — | | |
| 620 | | |
| (620 | ) |
| General and administrative | |
| 2,305 | | |
| 2,129 | | |
| 176 | |
| Depreciation | |
| 11,515 | | |
| 10,669 | | |
| 846 | |
| Total operating expenses | |
| 38,703 | | |
| 39,651 | | |
| (948 | ) |
| | |
| | | |
| | | |
| | |
| Operating income | |
| 19,294 | | |
| 11,983 | | |
| 7,311 | |
| | |
| | | |
| | | |
| | |
| Investment income | |
| 267 | | |
| 206 | | |
| 61 | |
| Unrealized gain on interest rate cap contract | |
| 72 | | |
| — | | |
| 72 | |
| Gain on sale of property | |
| — | | |
| 15,395 | | |
| (15,395 | ) |
| Loan prepayment costs relating to property sale | |
| — | | |
| (1,139 | ) | |
| 1,139 | |
| Financing costs | |
| (18,667 | ) | |
| (15,762 | ) | |
| (2,905 | ) |
| Net income | |
| 966 | | |
| 10,683 | | |
| (9,717 | ) |
| | |
| | | |
| | | |
| | |
| Net loss attributable to noncontrolling | |
| | | |
| | | |
| | |
| interests in subsidiaries | |
| 517 | | |
| 2,433 | | |
| (1,916 | ) |
| Net income attributable to common equity | |
$ | 1,483 | | |
$ | 13,116 | | |
$ | (11,633 | ) |
| | |
| | | |
| | | |
| | |
| Earnings per share - basic and diluted: | |
$ | 0.21 | | |
$ | 1.92 | | |
$ | (1.71 | ) |
| | |
| | | |
| | | |
| | |
| Weighted average shares outstanding: | |
| | | |
| | | |
| | |
| Basic | |
| 6,883 | | |
| 6,833 | | |
| | |
| Diluted | |
| 6,883 | | |
| 6,833 | | |
| | |
Real estate revenue for Fiscal 2018 increased
12.3% to $57,997,000 compared to $51,634,000 for Fiscal 2017. The increase in revenue was primarily attributable to an increase
in the average occupancy rate at the Rotunda property resulting from the lease-up of the new residential units and retail space
at the property offset partially by the loss of revenue from Macy’s vacating the Preakness Shopping Center in Wayne, New
Jersey in April 2017.
Net income attributable to common equity
(“net income-common equity”) for Fiscal 2018 was $1,483,000 ($0.21 per share basic and diluted), compared to $13,116,000
($1.92 per share basic and diluted) for Fiscal 2017. Excluding the $14.3 million net impact of the sale of the Hammel Gardens property,
net income for Fiscal 2017 was a net loss of $1.1 million or ($0.17) per share.
Included in net income for Fiscal 2018
was the following: a consolidated net loss of $1.8 million at the Rotunda property as the property continues to lease-up the new
retail space and residential units (inclusive of $2.2 million of real estate tax refunds and credits attributed to the residential
development at the Rotunda Icon property with a consolidated impact to FREIT of approximately $1.3 million based on FREIT’s
60% ownership); a loan prepayment cost of $1.2 million related to the Pierre Towers, LLC loan refinancing (which is included in
interest expense on the accompanying consolidated statement of income for the year ended October 31, 2018) with a consolidated
impact to FREIT of approximately $0.8 million based on FREIT’s 65% ownership. Included in net income for Fiscal 2017 was
the following: a consolidated net loss of $4.6 million at the Rotunda property driven by higher operational costs as the property
was leasing up the new retail space and residential units and increased real estate taxes related to the reassessment resulting
from completion of the project; and a $620,000 lease termination fee payment made by Wayne PSC, LLC, owner of the Preakness Shopping
Center in Wayne, New Jersey, with a consolidated impact to FREIT of approximately ($250,000) based on FREIT’s 40% ownership.
(Refer to the segment disclosure below for a more detailed discussion on the financial performance of FREIT’s commercial
and residential segments.)
The schedule below provides a detailed analysis of the major changes
that impacted revenue and net income-common equity for Fiscal 2018 and 2017:
| NET INCOME COMPONENTS | |
| | |
| | |
| |
| | |
Years Ended October 31, | |
| | |
2018 | | |
2017 | | |
Change | |
| | |
(thousands of dollars) | |
| Income from real estate operations: | |
| | | |
| | | |
| | |
| Commercial properties | |
$ | 14,288 | | |
$ | 12,957 | | |
$ | 1,331 | |
| Residential properties | |
| 18,826 | | |
| 12,444 | | |
| 6,382 | |
| Total income from real estate operations | |
| 33,114 | | |
| 25,401 | | |
| 7,713 | |
| | |
| | | |
| | | |
| | |
| Financing costs: | |
| | | |
| | | |
| | |
| Fixed rate mortgages | |
| (10,248 | ) | |
| (9,462 | ) | |
| (786 | ) |
| Floating rate mortgages | |
| (5,368 | ) | |
| (476 | ) | |
| (4,892 | ) |
| Floating rate - Rotunda construction loan | |
| (1,321 | ) | |
| (4,014 | ) | |
| 2,693 | |
| Credit line | |
| (28 | ) | |
| (69 | ) | |
| 41 | |
| Other - Corporate interest | |
| (652 | ) | |
| (443 | ) | |
| (209 | ) |
| Mortgage cost amortization | |
| (1,050 | ) | |
| (1,298 | ) | |
| 248 | |
| Total financing costs | |
| (18,667 | ) | |
| (15,762 | ) | |
| (2,905 | ) |
| | |
| | | |
| | | |
| | |
| Investment income | |
| 267 | | |
| 206 | | |
| 61 | |
| Unrealized gain on interest rate cap contract | |
| 72 | | |
| — | | |
| 72 | |
| | |
| | | |
| | | |
| | |
| General & administrative expenses: | |
| | | |
| | | |
| | |
| Accounting fees | |
| (544 | ) | |
| (521 | ) | |
| (23 | ) |
| Legal & professional fees | |
| (121 | ) | |
| (74 | ) | |
| (47 | ) |
| Trustees and consultant fees | |
| (989 | ) | |
| (947 | ) | |
| (42 | ) |
| Stock option expense | |
| (130 | ) | |
| (122 | ) | |
| (8 | ) |
| Corporate expenses | |
| (521 | ) | |
| (465 | ) | |
| (56 | ) |
| Total general & administrative expenses | |
| (2,305 | ) | |
| (2,129 | ) | |
| (176 | ) |
| | |
| | | |
| | | |
| | |
| Depreciation | |
| (11,515 | ) | |
| (10,669 | ) | |
| (846 | ) |
| Adjusted net income (loss) | |
| 966 | | |
| (2,953 | ) | |
| 3,919 | |
| | |
| | | |
| | | |
| | |
| Gain on sale of property | |
| — | | |
| 15,395 | | |
| (15,395 | ) |
| Loan prepayment costs relating to property sale | |
| — | | |
| (1,139 | ) | |
| 1,139 | |
| Lease termination fee | |
| — | | |
| (620 | ) | |
| 620 | |
| Net income | |
| 966 | | |
| 10,683 | | |
| (9,717 | ) |
| | |
| | | |
| | | |
| | |
| Net loss attributable to noncontrolling interests | |
| | | |
| | | |
| | |
| in subsidiaries | |
| 517 | | |
| 2,433 | | |
| (1,916 | ) |
| Net income attributable to common equity | |
$ | 1,483 | | |
$ | 13,116 | | |
$ | (11,633 | ) |
Adjusted net income for Fiscal 2018 was
$966,000 ($0.14 per share basic and diluted), compared to a loss of $2,953,000 or ($0.43) per share basic and diluted) for Fiscal
2017. Adjusted income is a non-GAAP measure, which management believes is a useful and meaningful gauge to investors of our operating
performance, since it excludes the impact of unusual and infrequent items, specifically: a gain and loan prepayment costs related
to the sale of Hammel Gardens in Maywood, New Jersey in Fiscal 2017; and a lease termination fee paid in Fiscal 2017.
SEGMENT INFORMATION
The following table sets forth comparative
net operating income ("NOI") data for FREIT’s real estate segments and reconciles the NOI to consolidated net
income-common equity for Fiscal 2018, as compared to Fiscal 2017 (See below for definition of NOI):
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
Commercial | | |
Residential | | |
Combined | |
| | |
Years Ended | | |
| | |
| | |
Years Ended | | |
| | |
| | |
Years Ended | |
| | |
October 31, | | |
Increase (Decrease) | | |
October 31, | | |
Increase (Decrease) | | |
October 31, | |
| | |
2018 | | |
2017 | | |
$ | | |
% | | |
2018 | | |
2017 | | |
$ | | |
% | | |
2018 | | |
2017 | |
| | |
(In Thousands) | | |
| | |
(In Thousands) | | |
| | |
(In Thousands) | |
| Rental income | |
$ | 19,379 | | |
$ | 18,247 | | |
$ | 1,132 | | |
| 6.2% | | |
$ | 31,283 | | |
$ | 26,476 | | |
$ | 4,807 | | |
| 18.2% | | |
$ | 50,662 | | |
$ | 44,723 | |
| Reimbursements | |
| 5,989 | | |
| 5,550 | | |
| 439 | | |
| 7.9% | | |
| 104 | | |
| 47 | | |
| 57 | | |
| 121.3% | | |
| 6,093 | | |
| 5,597 | |
| Other | |
| 96 | | |
| 317 | | |
| (221 | ) | |
| -69.7% | | |
| 541 | | |
| 363 | | |
| 178 | | |
| 49.0% | | |
| 637 | | |
| 680 | |
| Total revenue | |
| 25,464 | | |
| 24,114 | | |
| 1,350 | | |
| 5.6% | | |
| 31,928 | | |
| 26,886 | | |
| 5,042 | | |
| 18.8% | | |
| 57,392 | | |
| 51,000 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Operating expenses | |
| 11,861 | | |
| 11,791 | | |
| 70 | | |
| 0.6% | | |
| 13,022 | | |
| 14,442 | | |
| (1,420 | ) | |
| -9.8% | | |
| 24,883 | | |
| 26,233 | |
| Net operating income | |
$ | 13,603 | | |
$ | 12,323 | | |
$ | 1,280 | | |
| 10.4% | | |
$ | 18,906 | | |
$ | 12,444 | | |
$ | 6,462 | | |
| 51.9% | | |
| 32,509 | | |
| 24,767 | |
| Gain on sale of property | |
$ | — | | |
$ | — | | |
$ | — | | |
| 0.0% | | |
$ | — | | |
$ | 15,395 | | |
$ | (15,395 | ) | |
| -100.0% | | |
| — | | |
| 15,395 | |
| Loan prepayment costs relating to property sale | |
$ | — | | |
$ | — | | |
$ | — | | |
| 0.0% | | |
$ | — | | |
$ | (1,139 | ) | |
$ | 1,139 | | |
| 100.0% | | |
| — | | |
| (1,139 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Average Occupancy % | |
| 76.8% | | |
| 75.7% | | |
| | | |
| 1.1% | | |
| 94.4% | | |
| 83.8% | * | |
| | | |
| 10.6% | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Reconciliation to consolidated net income-common equity: | |
| | |
| |
| |
Deferred rents - straight lining | |
| 605 | | |
| 634 | |
| |
Lease termination fee | |
| — | | |
| (620 | ) |
| |
Investment income | |
| 267 | | |
| 206 | |
| |
Unrealized gain on interest rate cap contract | |
| 72 | | |
| — | |
| |
General and administrative expenses | |
| (2,305 | ) | |
| (2,129 | ) |
| |
Depreciation | |
| (11,515 | ) | |
| (10,669 | ) |
| |
Financing costs | |
| (18,667 | ) | |
| (15,762 | ) |
| |
Net income | |
| 966 | | |
| 10,683 | |
| |
Net loss attributable to noncontrolling interests | |
| 517 | | |
| 2,433 | |
| |
Net income attributable to common equity | |
$ | 1,483 | | |
$ | 13,116 | |
*
Average occupancy rate excludes the Maywood, New Jersey ("Hammel Gardens") as the property was sold in June 2017.
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, financing costs and other items. FREIT assesses and measures segment operating results based on NOI.
Same Property NOI: FREIT considers same
property net operating income (“Same Property NOI”) to be a useful supplemental non-GAAP measure of its operating performance.
FREIT defines same property within both the commercial and residential segments to be those properties that FREIT has owned and
operated for both the current and prior periods presented, excluding those properties that FREIT acquired or redeveloped during
those periods. Any newly acquired property that has been in operation for less than a year, any property that is undergoing a major
redevelopment but may still be in operation at less than full capacity, and/or any property that has been sold is not considered
same property.
NOI and Same Property NOI are non-GAAP
financial measures and are not measures of operating results or cash flow as measured by GAAP, and are 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.
COMMERCIAL SEGMENT
The commercial segment contains nine
(9) separate properties. Seven are multi-tenanted retail or office centers, and two are single tenanted – a building formerly
occupied as a supermarket and land located in Rockaway, New Jersey owned by FREIT from which it receives monthly rental income
from a tenant who has built and operates a bank branch on the land.
As indicated in the table above under
the caption Segment Information, total revenue and NOI from FREIT’s commercial segment for Fiscal 2018 increased by 5.6%
and 10.4%, respectively, as compared to Fiscal 2017. The increase in revenue and NOI was primarily attributable to an increase
in occupancy at the Rotunda property resulting from the lease-up of the new retail space offset partially by the loss of revenue
from Macy’s vacating the Preakness Shopping Center in Wayne, New Jersey in April 2017.
Same Property Operating Results: FREIT’s
commercial segment currently contains nine (9) same properties. (See definition of same property under Segment Information above.)
Since all of FREIT’s commercial properties are considered same properties in the current fiscal year, refer to the preceding
paragraph for discussion of changes in same property results.
Leasing: The following tables reflect
leasing activity at FREIT’s commercial properties for comparable leases (leases executed for spaces in which there was a
tenant at some point during the previous twelve-month period) and non-comparable leases for Fiscal 2018.
| RETAIL: | |
Number of
Leases | | |
Lease Area
(Sq. Ft.) | | |
Weighted
Average
Lease Rate
(per Sq. Ft.) | | |
Weighted
Average Prior
Lease Rate
(per Sq. Ft.) | | |
% Increase
(Decrease) | | |
Tenant
Improvement
Allowance
(per Sq. Ft.) (a) | | |
Lease
Commissions
(per Sq. Ft.)
(a) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Comparable leases (b) | |
| 19 | | |
| 75,158 | | |
$ | 23.74 | | |
$ | 23.82 | | |
| -0.3% | | |
$ | 0.20 | | |
$ | 0.46 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Non-comparable leases | |
| 7 | | |
| 12,400 | | |
$ | 40.64 | | |
| N/A | | |
| N/A | | |
$ | 4.32 | | |
$ | 1.99 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total leasing activity | |
| 26 | | |
| 87,558 | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| OFFICE: | |
Number of
Leases | | |
Lease Area
(Sq. Ft.) | | |
Weighted
Average
Lease Rate
(per Sq. Ft.) | | |
Weighted
Average Prior
Lease Rate
(per Sq. Ft.) | | |
% Increase
(Decrease) | | |
Tenant
Improvement
Allowance
(per Sq. Ft.)
(a) | | |
Lease
Commissions
(per Sq. Ft.)
(a) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Comparable leases (b) | |
| 5 | | |
| 7,870 | | |
$ | 26.24 | | |
$ | 23.78 | | |
| 10.3% | | |
$ | 0.27 | | |
$ | 0.15 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Non-comparable leases | |
| — | | |
| — | | |
$ | — | | |
| N/A | | |
| N/A | | |
$ | — | | |
$ | — | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total leasing activity | |
| 5 | | |
| 7,870 | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
(a) These leasing costs are presented as annualized costs per square foot and are allocated uniformly over the initial lease term.
(b) This includes new tenant leases and/or modifications/extensions of existing tenant leases.
The US economic recovery continued to
show signs of improvement while there continues to be some uncertainty in the retail environment. Average occupancy rates for Fiscal
2018, increased 1.1% from last year’s comparable period which was primarily attributed to an increase in occupancy at the
Rotunda property due to continued lease up at the property offset by the decline in occupancy at Wayne PSC due to Macy’s
vacating its space at the Preakness Shopping Center in April 2017.
In October 2018, Sears and certain of
its subsidiaries, including Kmart Corporation, filed for protection under Chapter 11 of the bankruptcy code as disclosed in the
bankruptcy filings. While Sears has elected to close numerous stores, as of the date of this report, Sears continues to pay rent
and the Kmart store at the Westwood Plaza Shopping Center in Westwood, New Jersey remains open.
In March 2018, iHeartMedia Inc. along
with its affiliates, including iHeartMedia+Entertainment (formerly known as Clear Channel Broadcasting Inc.), filed jointly for
protection under Chapter 11 of the bankruptcy code as disclosed in the bankruptcy filings. As of the date of this report, the lease
for iHeartMedia+Entertainment at the Rotunda property in Baltimore, Maryland was assumed, continues to pay rent and remains open.
ROTUNDA
The Rotunda property in Baltimore, Maryland
(owned by FREIT’s 60% owned consolidated affiliate Grande Rotunda, LLC) is an 11.5 acre site containing a building with approximately
136,000 sq. ft. of office space and approximately 83,000 sq. ft. of retail space on the lower level of the building. In September
2013, FREIT began construction to redevelop and expand this property and, with the exception of retail tenant improvements, the
redevelopment was substantially completed in the third quarter of Fiscal 2016. The redevelopment and expansion plans included a
modernization of the office building and smaller adjacent buildings, construction of 379 residential apartment rental units, an
additional 73,000 square feet of new retail space, and 864 above level parking spaces. By the end of the third quarter of Fiscal
2018, the residential section reached a stabilized level of occupancy of approximately 94%. The retail space continues to lease-up
and is approximately 84.1% leased and 78.2% occupied as of October 31, 2018. FREIT expects Rotunda’s operations to stabilize
in 2019.
On February 7, 2018, Grande Rotunda,
LLC refinanced its $115.3 million construction loan held by Wells Fargo with a new loan held by Aareal Capital Corporation in the
amount of approximately $118.5 million with additional funding available for retail tenant improvements and leasing costs in the
amount of $3,380,000. This refinancing paid off the loan previously held by Wells Fargo, funded loan closing costs and paid the
amount due to Hekemian Development Resources for a development fee of $900,000 plus accrued interest of approximately $45,000 (See
Note 9 to FREIT’s consolidated financial statements for further details on this fee). This loan is secured by the Rotunda
property, bears a floating interest rate at 285 basis points over the one-month LIBOR rate and has a maturity date of February
6, 2021 with two one-year renewal options. As part of this transaction, Grande Rotunda, LLC purchased an interest rate cap on LIBOR
for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two
years of this loan. As of October 31, 2018, approximately $118.5 million of this loan facility was drawn down and the interest
rate was approximately 5.13%.
Through October 31, 2018, funding for
the construction at the Rotunda was provided by: (a) the Grande Rotunda, LLC members, who are FREIT and Rotunda 100, LLC, and who
contributed approximately $14.5 million in accordance with the loan agreement with Wells Fargo Bank; and (b) a new loan held by
Aareal Capital Corporation in the amount of approximately $118.5 million.
In Fiscal 2017, Grande Rotunda, LLC incurred
substantial expenditures at the Rotunda property related to retail tenant improvements, leasing costs and operating expenditures
which, in the aggregate, exceeded revenues as the property was still in the rent up phase and the construction loan held with Wells
Fargo at that time was at its maximum level, with no additional funding available to draw. Accordingly, the equity owners in Grande
Rotunda, LLC (FREIT with a 60% ownership and Rotunda 100 with a 40% ownership) contributed their respective pro-rata share of any
cash needs through loans to Grande Rotunda, LLC. As of October 31, 2018 and 2017, Rotunda 100 has funded Grande Rotunda, LLC with
approximately $5.4 million and $5.2 million (including interest), respectively, which is included in “Due to affiliate”
on the accompanying consolidated balance sheets.
RESIDENTIAL SEGMENT
FREIT currently operates eight (8) multi-family
apartment buildings or complexes totaling 1,437 apartment units, which is inclusive of the Station Place property in Red Bank New
Jersey, which was acquired in December 2017. On June 12, 2017, FREIT sold its Hammel Gardens property, a residential property located
in Maywood, New Jersey, for a sales price of $17 million. The sale of this property, which had a carrying value of approximately
$0.7 million, resulted in a capital gain of approximately $15.4 million net of sales fees and commissions. As a result of this
sale, FREIT incurred a loan prepayment cost of approximately $1.1 million and paid off the related mortgage on the Hammel Gardens
property in the amount of approximately $8 million from the proceeds of the sale. FREIT structured this sale in a manner that qualified
it as a like-kind exchange of real estate pursuant to Section 1031 of the Internal Revenue Code. The 1031 exchange transaction
resulted in a deferral for income tax purposes of the $15.4 million capital gain. The net proceeds from this sale, which were approximately
$7 million, were held in escrow until a replacement property was purchased. A replacement property related to this like-kind exchange
(Station Place) was acquired on December 7, 2017, and the sale proceeds held in escrow were applied to the purchase price of such
property. (See Note 2 and 3 to FREIT’s consolidated financial statements.)
As indicated in the table above under
the caption Segment Information, total revenue and NOI from FREIT’s residential segment for Fiscal 2018 increased by 18.8%
and 51.9%, respectively, as compared to Fiscal 2017. The increase in revenue and NOI for Fiscal 2018 was primarily attributable
to: (a) an increase in the average annual occupancy at the Icon (the residential portion of the Rotunda property in Baltimore,
Maryland) to 91.9% in Fiscal 2018 from 51.3% in Fiscal 2017; (b) an increase in base rent; (c) $2.2 million in real estate tax
refunds and credits attributed to the residential development at the Rotunda Icon property (with a consolidated impact to FREIT
of approximately $1.3 million based on FREIT’s 60% ownership).
Same Property Operating Results: FREIT’s
residential segment currently contains seven (7) same properties. (See definition of same property under Segment Information above.)
The Station Place property is not included as same property, since it is a newly acquired property that has been in operation for
less than a year. The Hammel Gardens property was excluded from same property results for all periods presented because this property
was sold in the prior fiscal year. Same property revenue and NOI increased by 17.6% and 50%, respectively, from Fiscal 2017. The
changes resulted from the factors discussed in the immediately preceding paragraph.
FREIT’s 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, (excluding from both periods presented for comparability purposes, the Station Place property
which was a newly acquired property that has been in operation for less than a year and the Icon which reached a stabilized occupancy
rate in the third quarter of Fiscal 2018), at the end of Fiscal 2018 and Fiscal 2017 were $1,902 and $1,863, 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 $231,000 and $220,000, respectively.
Capital expenditures: Since all of FREIT’s
apartment communities, with the exception of the Boulders, Regency, Icon and Station Place properties, were constructed more than
25 years ago, FREIT tends to spend more in any given year on maintenance and capital improvements than may be spent on newer properties.
Funds for these capital projects will be available from cash flow from the property's operations and cash reserves. In April 2018,
Pierre Towers, LLC (“Pierre”), a consolidated subsidiary, entered into an agreement with Public Service Electric &
Gas Company (“PSE&G”), whereby PSE&G would fund a project to make certain upgrades at the Pierre property located
in Hackensack, New Jersey which include boiler replacement, lighting replacement of interior and exterior fixtures and minor lighting
controls in apartment lighting. PSE&G will initially fund 100% of this project at an estimated cost of $924,000. As of October
31, 2018, PSE&G has funded Pierre with approximately $601,000 of the total project cost. Upon completion of the project, which
is targeted for the end of first quarter Fiscal 2019, Pierre Towers, LLC will be required to reimburse PSE&G for approximately
$391,000 of this cost, to be paid monthly over a five-year term with no interest.
FINANCING COSTS
| | |
Years Ended October 31, | |
| | |
2018 | | |
2017 | |
| | |
(In Thousands of Dollars) | |
| Fixed rate mortgages (a): | |
| | | |
| | |
| 1st Mortgages | |
| | | |
| | |
| Existing | |
$ | 8,353 | | |
$ | 9,462 | |
| New | |
| 1,895 | | |
| — | |
| Variable rate mortgages: | |
| | | |
| | |
| 1st Mortgages | |
| | | |
| | |
| Existing | |
| 1,071 | | |
| — | |
| New | |
| 4,297 | | |
| 476 | |
| Construction loan-Rotunda | |
| 1,321 | | |
| 4,014 | |
| Credit line | |
| 28 | | |
| 69 | |
| Other | |
| 652 | | |
| 443 | |
| Total financing costs, gross | |
| 17,617 | | |
| 14,464 | |
| Amortization of mortgage costs | |
| 1,050 | | |
| 1,298 | |
| Total financing costs, net | |
$ | 18,667 | | |
$ | 15,762 | |
| | |
| | | |
| | |
| (a) Includes the effect of interest rate swap contracts which effectively convert the floating interest rate to a fixed interest rate over the term of the loan. |
Total net financing costs for Fiscal 2018 increased
18.4% as compared to Fiscal 2017 which was primarily attributable to a $1.2 million loan prepayment cost related to the Pierre
Towers, LLC loan refinancing with a consolidated impact to FREIT of approximately $0.8 million and an increase in interest associated
with the refinancing of Grande Rotunda LLC’s loan on the Rotunda property. (See Note 5 to FREIT’s consolidated financial
statements for more details.)
INVESTMENT INCOME
Investment income for Fiscal 2018 was $267,000
as compared to $206,000 for the prior year’s period. 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’s former Chairman and Chief Executive Officer
and currently a consultant of FREIT, Robert S. Hekemian, Jr., the Chief Executive Officer and a Trustee of FREIT, and David Hekemian,
a Trustee of FREIT, for their equity investments (through Rotunda 100, LLC) in Grande Rotunda, LLC, a limited liability company
in which FREIT owns a 60% equity interest, and for their equity investments (through Damascus 100, LLC) in Damascus Centre, LLC,
a limited liability company in which FREIT owns a 70% equity interest). The secured loan receivable (including accrued interest)
from Damascus 100 was repaid in the fourth quarter of Fiscal 2018.
GENERAL AND ADMINISTRATIVE EXPENSES (“G
& A”)
During Fiscal 2018, G & A was $2,305,000
as compared to $2,129,000 for the prior year’s period. The primary components of G&A are accounting/auditing fees, legal
and professional fees, Trustees’ and consulting fees.
DEPRECIATION
Depreciation expense from operations for Fiscal
2018 was $11,515,000 as compared to $10,669,000 for the prior year’s period. The increase in depreciation was primarily attributable
to additional retail tenant improvements at the Rotunda property being placed into service as the property continues to lease-up
and the acquisition of Station Place in December 2017.
Results of Operations:
Fiscal Years Ended October 31, 2017 and 2016
Summary revenues and net income for
Fiscal 2017 and October 31, 2016 (“Fiscal 2016”) are as follows:
| | |
Years Ended October 31, | |
| | |
2017 | | |
2016 | | |
Change | |
| | |
(in thousands, except per share amounts) | |
| Real estate revenues: | |
| | | |
| | | |
| | |
| Commercial properties | |
$ | 24,748 | | |
$ | 23,202 | | |
$ | 1,546 | |
| Residential properties | |
| 26,886 | | |
| 23,052 | | |
| 3,834 | |
| Total real estate revenues | |
| 51,634 | | |
| 46,254 | | |
| 5,380 | |
| | |
| | | |
| | | |
| | |
| Operating expenses: | |
| | | |
| | | |
| | |
| Real estate operations | |
| 26,233 | | |
| 21,797 | | |
| 4,436 | |
| Lease termination fee | |
| 620 | | |
| — | | |
| 620 | |
| General and administrative | |
| 2,129 | | |
| 2,034 | | |
| 95 | |
| Depreciation | |
| 10,669 | | |
| 7,852 | | |
| 2,817 | |
| Total operating expenses | |
| 39,651 | | |
| 31,683 | | |
| 7,968 | |
| | |
| | | |
| | | |
| | |
| Operating income | |
| 11,983 | | |
| 14,571 | | |
| (2,588 | ) |
| | |
| | | |
| | | |
| | |
| Investment income | |
| 206 | | |
| 150 | | |
| 56 | |
| Gain on sale of property | |
| 15,395 | | |
| 314 | | |
| 15,081 | |
| Loan prepayment costs relating to property sale | |
| (1,139 | ) | |
| — | | |
| (1,139 | ) |
| Financing costs | |
| (15,762 | ) | |
| (11,936 | ) | |
| (3,826 | ) |
| Net income | |
| 10,683 | | |
| 3,099 | | |
| 7,584 | |
| | |
| | | |
| | | |
| | |
| Net (income) loss attributable to noncontrolling | |
| | | |
| | | |
| | |
| interests in subsidiaries | |
| 2,433 | | |
| (94 | ) | |
| 2,527 | |
| Net income attributable to common equity | |
$ | 13,116 | | |
$ | 3,005 | | |
$ | 10,111 | |
| | |
| | | |
| | | |
| | |
| Earnings per share - basic and diluted: | |
$ | 1.92 | | |
$ | 0.44 | | |
$ | 1.48 | |
| | |
| | | |
| | | |
| | |
| Weighted average shares outstanding: | |
| | | |
| | | |
| | |
| Basic | |
| 6,833 | | |
| 6,783 | | |
| | |
| Diluted | |
| 6,833 | | |
| 6,784 | | |
| | |
Real estate revenue for Fiscal 2017 increased
11.6% to $51,634,000 compared to $46,254,000 for Fiscal 2016. The increase in revenue was primarily attributable to an increase
in the average occupancy rates at the Rotunda property resulting from the lease-up of the new residential units and retail space
at the property. This increase was partially offset by the loss of revenue from (1) the rejection of the lease for the Pathmark
store at FREIT’s Patchogue, New York property as a result of A&P’s bankruptcy filing, (2) the loss of revenue from
the Rochelle Park property following the sale of that property in June 2016, (2) the loss of revenue from the Hammel Gardens property
following the sale of that property in June 2017, and (4) the termination of the lease for the Macy’s store at the Preakness
Shopping Center in Wayne, New Jersey as a result of Macy’s vacating that space in April 2017.
Net income attributable to common equity (“net
income-common equity”) for Fiscal 2017 was $13,116,000 ($1.92 per share basic and diluted), compared to $3,005,000 ($0.44
per share basic and diluted) for Fiscal 2016. Excluding the impact of the sale of the Hammel Gardens property, net income common-equity
was a loss of $1,140,000 or ($0.17) per share. Fiscal 2017 net income common-equity includes the following: a $15.4 million gain
from the sale of FREIT’s Hammel Gardens property on June 12, 2017 offset by a $1.1 million loan prepayment cost related to
this sale; a loss of $4.6 million at the Rotunda property driven by the substantial completion of the major redevelopment and expansion
project at the property in the third quarter of Fiscal 2016, resulting in the cessation of capitalization of certain costs in the
current year; and a $620,000 termination fee payment made by Wayne PSC to terminate the lease and take possession of the Macy’s
space at the Preakness Shopping Center in Wayne, New Jersey, which impacted net income-common equity by approximately ($250,000)
based on FREIT’s 40% ownership in Wayne PSC. Fiscal 2016 net income common-equity includes the following: a loss of $1.4
million at the Rotunda property driven by the substantial completion of the major redevelopment and expansion project at the property
in the third quarter of Fiscal 2016, resulting in the cessation of capitalization of certain costs in fourth quarter of Fiscal
2016; and a $314,000 gain relating to the sale of FREIT’s Rochelle Park, New Jersey property on June 17, 2016.
The schedule below provides a detailed analysis of the major changes
that impacted revenue and net income-common equity for Fiscal 2017 and Fiscal 2016:
| NET INCOME COMPONENTS | |
| | |
| | |
| |
| | |
Years Ended October 31, | |
| | |
2017 | | |
2016 | | |
Change | |
| | |
(thousands of dollars) | |
| Income from real estate operations: | |
| | | |
| | | |
| | |
| Commercial properties | |
$ | 12,957 | | |
$ | 12,541 | | |
$ | 416 | |
| Residential properties | |
| 12,444 | | |
| 11,916 | | |
| 528 | |
| Total income from real estate operations | |
| 25,401 | | |
| 24,457 | | |
| 944 | |
| | |
| | | |
| | | |
| | |
| Financing costs: | |
| | | |
| | | |
| | |
| Fixed rate mortgages | |
| (9,462 | ) | |
| (10,871 | ) | |
| 1,409 | |
| Floating rate mortgages | |
| (476 | ) | |
| — | | |
| (476 | ) |
| Floating rate - Rotunda loan | |
| (4,014 | ) | |
| (2,840 | ) | |
| (1,174 | ) |
| Credit line | |
| (69 | ) | |
| — | | |
| (69 | ) |
| Other - Corporate interest | |
| (443 | ) | |
| (293 | ) | |
| (150 | ) |
| Mortgage cost amortization | |
| (1,298 | ) | |
| (543 | ) | |
| (755 | ) |
| Less amounts capitalized | |
| — | | |
| 2,611 | | |
| (2,611 | ) |
| Total financing costs | |
| (15,762 | ) | |
| (11,936 | ) | |
| (3,826 | ) |
| | |
| | | |
| | | |
| | |
| Investment income | |
| 206 | | |
| 150 | | |
| 56 | |
| | |
| | | |
| | | |
| | |
| General & administrative expenses: | |
| | | |
| | | |
| | |
| Accounting fees | |
| (521 | ) | |
| (535 | ) | |
| 14 | |
| Legal & professional fees | |
| (74 | ) | |
| (76 | ) | |
| 2 | |
| Trustee fees | |
| (947 | ) | |
| (898 | ) | |
| (49 | ) |
| Stock option expense | |
| (122 | ) | |
| (94 | ) | |
| (28 | ) |
| Corporate expenses | |
| (465 | ) | |
| (431 | ) | |
| (34 | ) |
| Total general & administrative expenses | |
| (2,129 | ) | |
| (2,034 | ) | |
| (95 | ) |
| | |
| | | |
| | | |
| | |
| Depreciation | |
| (10,669 | ) | |
| (7,852 | ) | |
| (2,817 | ) |
| Adjusted net income (loss) | |
| (2,953 | ) | |
| 2,785 | | |
| (5,738 | ) |
| | |
| | | |
| | | |
| | |
| Gain on sale of property | |
| 15,395 | | |
| 314 | | |
| 15,081 | |
| Loan prepayment costs relating to property sale | |
| (1,139 | ) | |
| — | | |
| (1,139 | ) |
| Lease termination fee | |
| (620 | ) | |
| — | | |
| (620 | ) |
| Net income | |
| 10,683 | | |
| 3,099 | | |
| 7,584 | |
| | |
| | | |
| | | |
| | |
| Net (income) loss attributable to noncontrolling interests | |
| | | |
| | | |
| | |
| in subsidiaries | |
| 2,433 | | |
| (94 | ) | |
| 2,527 | |
| Net income attributable to common equity | |
$ | 13,116 | | |
$ | 3,005 | | |
$ | 10,111 | |
Adjusted net income/(loss) for
Fiscal 2017 was a loss of $2,953,000 or ($0.43) per share basic and diluted, compared to income of $2,785,000 or $0.41 per
share basic and diluted for Fiscal 2016. Adjusted income is a non-GAAP measure, which management believes is a useful and
meaningful gauge to investors of our operating performance, since it excludes the impact of unusual and infrequent items
specifically, a gain and loan prepayment costs related to the sale of Hammel Gardens in Maywood, New Jersey in Fiscal 2017; a
lease termination fee paid in Fiscal 2017; and a gain related to the sale of Rochelle Park, New Jersey in Fiscal 2016. (Refer
to the segment disclosure below for a more detailed discussion on the financial performance of FREIT’s commercial and
residential segments.)
SEGMENT INFORMATION
The following table sets forth comparative
net operating income ("NOI") data for FREIT’s real estate segments and reconciles the NOI to consolidated net
income-common equity for Fiscal 2017, as compared to Fiscal 2016:
| | |
Commercial | | |
Residential | | |
Combined | |
| | |
Years Ended | | |
| | |
| | |
Years Ended | | |
| | |
| | |
Years Ended | |
| | |
October 31, | | |
Increase (Decrease) | | |
October 31, | | |
Increase (Decrease) | | |
October 31, | |
| | |
2017 | | |
2016 | | |
$ | | |
% | | |
2017 | | |
2016 | | |
$ | | |
% | | |
2017 | | |
2016 | |
| | |
(In Thousands) | | |
| | |
(In Thousands) | | |
| | |
(In Thousands) | |
| Rental income | |
$ | 18,247 | | |
$ | 17,499 | | |
$ | 748 | | |
| 4.3% | | |
$ | 26,476 | | |
$ | 22,673 | | |
$ | 3,803 | | |
| 16.8% | | |
$ | 44,723 | | |
$ | 40,172 | |
| Reimbursements | |
| 5,550 | | |
| 5,148 | | |
| 402 | | |
| 7.8% | | |
| 47 | | |
| 10 | | |
| 37 | | |
| 370.0% | | |
| 5,597 | | |
| 5,158 | |
| Other | |
| 317 | | |
| 47 | | |
| 270 | | |
| 574.5% | | |
| 363 | | |
| 269 | | |
| 94 | | |
| 34.9% | | |
| 680 | | |
| 316 | |
| Total revenue | |
| 24,114 | | |
| 22,694 | | |
| 1,420 | | |
| 6.3% | | |
| 26,886 | | |
| 22,952 | | |
| 3,934 | | |
| 17.1% | | |
| 51,000 | | |
| 45,646 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Operating expenses | |
| 11,791 | | |
| 10,661 | | |
| 1,130 | | |
| 10.6% | | |
| 14,442 | | |
| 11,136 | | |
| 3,306 | | |
| 29.7% | | |
| 26,233 | | |
| 21,797 | |
| Net operating income | |
$ | 12,323 | | |
$ | 12,033 | | |
$ | 290 | | |
| 2.4% | | |
$ | 12,444 | | |
$ | 11,816 | | |
$ | 628 | | |
| 5.3% | | |
| 24,767 | | |
| 23,849 | |
| Gain on sale of property | |
$ | — | | |
$ | 314 | | |
$ | (314 | ) | |
| -100.0% | | |
$ | 15,395 | | |
$ | — | | |
$ | 15,395 | | |
| 100.0% | | |
| 15,395 | | |
| 314 | |
| Loan prepayment costs relating to property sale | |
$ | — | | |
$ | — | | |
$ | — | | |
| 0.0% | | |
$ | (1,139 | ) | |
$ | — | | |
$ | (1,139 | ) | |
| -100.0% | | |
| (1,139 | ) | |
| — | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Average Occupancy % | |
| 75.7% | | |
| 75.0% | | |
| | | |
| 0.7% | | |
| 83.8% | * | |
| 71.6% | * | |
| | | |
| 12.2% | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Reconciliation to consolidated net income-common equity: | |
| | |
| |
| |
Deferred rents - straight lining | |
| 634 | | |
| 608 | |
| |
Lease termination fee | |
| (620 | ) | |
| — | |
| |
Investment income | |
| 206 | | |
| 150 | |
| |
General and administrative expenses | |
| (2,129 | ) | |
| (2,034 | ) |
| |
Depreciation | |
| (10,669 | ) | |
| (7,852 | ) |
| |
Financing costs | |
| (15,762 | ) | |
| (11,936 | ) |
| |
Net income | |
| 10,683 | | |
| 3,099 | |
| |
Net (income) loss attributable to noncontrolling interests | |
| 2,433 | | |
| (94 | ) |
| |
Net income attributable to common equity | |
$ | 13,116 | | |
$ | 3,005 | |
*
Average occupancy rate excludes the Maywood, New Jersey ("Hammel Gardens") property from all periods presented as the property
was sold in June 2017.
COMMERCIAL SEGMENT
The commercial segment contains nine
(9) separate properties. Seven are multi-tenanted retail or office centers, and two are single tenanted – a building formerly
occupied as a supermarket and land located in Rockaway, New Jersey owned by FREIT from which it receives monthly rental income
from a tenant who has built and operates a bank branch on the land. On June 17, 2016, FREIT sold its property at Rochelle Park,
New Jersey, which had a carrying value of approximately $2.7 million (including a straight line rent receivable of approximately
$0.5 million) to Lakeland Bank (as successor by merger to Pascack Community Bank) for a purchase price of $3.1 million resulting
in a gain of approximately $0.3 million net of sales fees. This sale resulted in FREIT’s loss of future annual rents of approximately
$241,000, which would have increased periodically through September 2023.
As indicated in the table above under
the caption Segment Information, total revenue and NOI from FREIT’s commercial segment for Fiscal 2017 increased by 6.3%
and 2.4%, respectively, as compared to Fiscal 2016. The increase in revenue and NOI was primarily attributable to an increase in
occupancy at the Rotunda property resulting from the lease-up of the office and new retail space partially offset by the loss of
revenue from a lease with Pathmark (a subsidiary of A&P) at the Patchogue, New York property, which was rejected as of December
31, 2015 as a result of A&P’s bankruptcy filing, the loss of revenue from the Rochelle Park property following the sale
of that property in June 2016 and the loss of revenue from the termination of the lease for the Macy’s store at the Preakness
Shopping Center in Wayne, New Jersey as a result of Macy’s vacating that space in April 2017.
Same Property Operating Results: FREIT’s
commercial segment contains eight (8) same properties. Since the Rotunda property was part of a major redevelopment and expansion
project that was substantially completed in the third quarter of Fiscal 2016 and was in operation for less than a full year in
the prior year and the Rochelle Park property was sold in the prior year, both have been excluded from same property results for
all periods presented. For Fiscal 2017, same property revenue and NOI for FREIT’s commercial segment decreased by 2.1% and
6%, respectively, as compared to Fiscal 2016 primarily driven by the rejection of the Pathmark lease at the Patchogue, New York
property and the termination of the Macy’s lease at the Preakness Shopping Center.
Leasing: The following tables reflect
leasing activity at FREIT’s commercial properties for comparable leases (leases executed for spaces in which there was a
tenant at some point during the previous twelve-month period) and non-comparable leases for Fiscal 2017. The 8.5% decline in the
retail weighted average lease rate is primarily attributable to the Stop & Shop lease modification whereby annual rent was
reduced by approximately $250,000 (see Note 15 to FREIT’s consolidated financial statements for further details).
| RETAIL: | |
Number of
Leases | | |
Lease Area
(Sq. Ft.) | | |
Weighted
Average
Lease Rate
(per Sq. Ft.) | | |
Weighted
Average Prior
Lease Rate
(per Sq. Ft.) | | |
% Increase
(Decrease) | | |
Tenant
Improvement
Allowance
(per Sq. Ft.)
(a) | | |
Lease
Commissions
(per Sq. Ft.)
(a) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Comparable leases (b) | |
| 25 | | |
| 225,744 | | |
$ | 13.80 | | |
$ | 15.08 | | |
| -8.5% | | |
$ | — | | |
$ | 0.24 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Non-comparable leases | |
| 11 | | |
| 28,095 | | |
$ | 42.83 | | |
| N/A | | |
| N/A | | |
$ | 2.47 | | |
$ | 1.73 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total leasing activity | |
| 36 | | |
| 253,839 | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| OFFICE: | |
Number of
Leases | | |
Lease Area
(Sq. Ft.) | | |
Weighted
Average
Lease Rate
(per Sq. Ft.) | | |
Weighted
Average Prior
Lease Rate
(per Sq. Ft.) | | |
% Increase
(Decrease) | | |
Tenant
Improvement
Allowance
(per Sq. Ft.)
(a) | | |
Lease
Commissions
(per Sq. Ft.)
(a) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Comparable leases (b) | |
| 5 | | |
| 5,954 | | |
$ | 25.37 | | |
$ | 23.14 | | |
| 9.6% | | |
$ | 1.48 | | |
$ | 0.83 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Non-comparable leases | |
| 4 | | |
| 17,066 | | |
$ | 28.14 | | |
| N/A | | |
| N/A | | |
$ | 6.13 | | |
$ | 1.11 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total leasing activity | |
| 9 | | |
| 23,020 | | |
| | | |
| | | |
| | | |
| | | |
| | |
(a) These leasing costs are presented as annualized costs per square foot and are allocated uniformly over the initial lease term.
(b) This includes
new tenant leases and/or modifications/extensions of existing tenant leases.
The US economic recovery continued to show
signs of improvement while there continues to be some uncertainty in the retail environment. Average occupancy rates for Fiscal
2017, increased 0.7% from last year’s comparable period which was primarily attributed to an increase in occupancy at the
Rotunda property due to continued lease up at the property offset by the decline in occupancy at the Preakness Shopping Center
due to Macy’s vacating its space there in April 2017 and the decline in occupancy at the Patchogue property due to the rejection
of the Pathmark lease in December 2015. Excluding the impact of the Rotunda property, average occupancy for Fiscal 2017 decreased
5% from the prior year’s comparable period which was primarily driven by the rejection of the Pathmark lease at the Patchogue,
New York property and the termination of the Macy’s lease at the Preakness Shopping Center.
As of October 31, 2017, approximately 75.9%
of the retail space at the Rotunda property is leased and 63.5% is occupied.
RESIDENTIAL SEGMENT
FREIT operates seven (7) multi-family
apartment buildings or complexes totaling 1,392 apartment units, excluding the Hammel Gardens property, which was sold in June
2017. (See Note 2 to FREIT’s consolidated financial statements.) As indicated in the table above under the caption Segment
Information, total revenue and NOI from FREIT’s residential segment for Fiscal 2017 increased by 17.1% and 5.3%, respectively,
as compared to Fiscal 2016. The increase in revenue and NOI for Fiscal 2017 was primarily attributable to: (a) the addition of
the operating results of the Icon, which is the residential property located at the Rotunda in Baltimore, Maryland (See discussion
below), (b) an increase in base rent, (c) an increase in the average occupancy level of 12.2% as compared to the prior year partially
offset by (d) loss of income resulting from the sale of the Hammel Gardens property in June 2017.
Same Property Operating Results: FREIT’s
residential segment currently contains six (6) same properties. The Icon was excluded from same property results for all periods
presented because this property was part of a major redevelopment and expansion project that was substantially completed in the
third quarter of Fiscal 2016 and was in operation for less than a full year in the prior year. The Hammel Gardens property was
excluded from same property results for all periods presented because this property was sold in June 2017. Same property revenue
and NOI increased by 4% and 2.1%, respectively, from Fiscal 2016. The changes resulted from the factors discussed in the immediately
preceding paragraph. Exclusive of the Icon property, average occupancy for Fiscal 2017 increased 0.8% over the prior year’s
comparable period.
FREIT’s 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, excluding for both fiscal years presented the Hammel Gardens property which was sold in June
2017 and the Rotunda Icon property which is still in lease-up and not operating at full capacity, at the end of Fiscal 2017 and
Fiscal 2016 were $1,863 and $1,810, 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 $226,000 and $219,000, respectively.
FINANCING COSTS
| | |
Years Ended October 31, | |
| | |
2017 | | |
2016 | |
| | |
(In Thousands of Dollars) | |
| Fixed rate mortgages (a): | |
| | | |
| | |
| 1st Mortgages | |
| | | |
| | |
| Existing | |
$ | 9,462 | | |
$ | 10,742 | |
| New | |
| — | | |
| 129 | |
| Variable rate mortgages: | |
| | | |
| | |
| 1st Mortgages | |
| | | |
| | |
| New | |
| 476 | | |
| — | |
| Construction loan-Rotunda | |
| 4,014 | | |
| 2,840 | |
| Credit line | |
| 69 | | |
| — | |
| Other | |
| 443 | | |
| 293 | |
| Total financing costs, gross | |
| 14,464 | | |
| 14,004 | |
| Amortization of mortgage costs | |
| 1,298 | | |
| 543 | |
| Total financing costs, net | |
| 15,762 | | |
| 14,547 | |
| Less amounts capitalized | |
| — | | |
| (2,611 | ) |
| Total financing costs expensed | |
$ | 15,762 | | |
$ | 11,936 | |
(a) Includes the
effect of interest rate swap contracts which effectively convert the floating interest rate to a fixed interest rate over the
term of the loan.
Total net financing costs for Fiscal 2017 increased
8.4% as compared to Fiscal 2016 which was primarily attributable to the Rotunda construction loan of approximately $115.3 million.
Interest costs with respect to the Rotunda project can no longer be capitalized because the Rotunda project was substantially completed
in the third quarter of Fiscal 2016. (See Note 5 to FREIT’s consolidated financial statements for more details.)
INVESTMENT INCOME
Investment income for Fiscal 2017 was $206,000
as compared to $150,000 for the prior year’s period. 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’s former Chairman and Chief Executive Officer
and currently a consultant of FREIT, Robert S. Hekemian, Jr., the Chief Executive Officer and a Trustee of FREIT, and David Hekemian,
a Trustee of FREIT, for their equity investments (through Rotunda 100, LLC) in Grande Rotunda, LLC, a limited liability company
in which FREIT owns a 60% equity interest, and for their equity investments (through Damascus 100, LLC) in Damascus Centre, LLC,
a limited liability company in which FREIT owns a 70% equity interest).
GENERAL AND ADMINISTRATIVE EXPENSES (“G
& A”)
During Fiscal 2017, G & A was $2,129,000
as compared to $2,034,000 for the prior year’s period. The primary components of G&A are accounting/auditing fees, legal
and professional fees and Trustees’ fees.
DEPRECIATION
Depreciation expense from operations for Fiscal
2017 was $10,669,000 as compared to $7,852,000 for the prior year’s period. The increase in depreciation was primarily attributable
to the depreciation related to assets at the Rotunda property becoming operational as the major redevelopment and expansion project
at this property was substantially completed in the third quarter of Fiscal 2016.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities
was $10.8 million for Fiscal 2018 compared to $4.7 million for Fiscal 2017. FREIT expects that cash provided by operating activities
and cash reserves will be adequate to cover mandatory debt service payments (including payments of interest, but excluding balloon
payments), real estate taxes, recurring capital improvements at properties and other needs to maintain its status as a REIT for
at least a period of one year from the date of filing of this Form 10-K.
As at October 31, 2018, FREIT had cash
and cash equivalents totaling $21.7 million compared to $7.9 million at October 31, 2017. The increase in cash for Fiscal 2018
is primarily attributable to $19.1 million in net cash provided by financing activities and $10.8 million in net cash provided
by operating activities, offset by $16.1 million used in investing activities including capital expenditures.
On June 12, 2017, FREIT sold its Hammel
Gardens property, a residential property located in Maywood, New Jersey, for a sales price of $17 million. The sale of this property,
which had a carrying value of approximately $0.7 million, resulted in a capital gain of approximately $15.4 million net of sales
fees and commissions. As a result of this sale, FREIT incurred a loan
prepayment cost of approximately $1.1 million and paid off
the related mortgage on the Hammel Gardens property in the amount of approximately $8 million from the proceeds of the sale. FREIT
structured this sale in a manner that qualified it as a like-kind exchange of real estate pursuant to Section 1031 of the Internal
Revenue Code. The 1031 exchange transaction resulted in a deferral for income tax purposes of the $15.4 million capital gain. The
net proceeds from this sale, which were approximately $7 million, were held in escrow until a replacement property was purchased.
(See Note 2 to FREIT’s consolidated financial statements.)
On December 7, 2017, FREIT completed
the acquisition of Station Place, a residential apartment complex consisting of one building with 45 units, located in Red Bank,
New Jersey through Station Place on Monmouth, LLC (FREIT’s 100% owned consolidated subsidiary). FREIT identified Station
Place as a replacement property for the Hammel Gardens property that FREIT sold on June 12, 2017 to complete the like-kind exchange
transaction under Section 1031 of the Internal Revenue Code. Station Place is part of FREIT’s residential segment. The acquisition
cost was $19,550,000 (inclusive of approximately $550,000 of transaction costs capitalized as part of the asset acquisition), which
was funded in part with $7 million in net proceeds from the sale of the Hammel Gardens property, and the remaining balance of $12,350,000
(inclusive of the transaction costs) was funded by Station Place on Monmouth, LLC through long-term financing for this property
from Provident Bank. (See Note 3 to FREIT’s consolidated financial statements.)
On June 17, 2016, FREIT sold its property
in Rochelle Park, New Jersey to Lakeland Bank (as successor by merger to Pascack Community Bank) for a purchase price of $3.1 million
resulting in a gain of approximately $0.3 million net of sales fees. This sale resulted in FREIT’s loss of future annual
rents from the property of approximately $241,000, which would have increased periodically through September 2023.
On April 25, 2017, Wayne PSC announced
it had agreed to a termination of Macy’s lease for the 81,160 square foot Macy’s store at the Preakness Shopping Center,
effective as of April 15, 2017. To terminate the lease and take possession of the space, Wayne PSC paid Macy’s a termination
fee of $620,000. Wayne PSC expects to re-position this space and re-lease to a new tenant (or multiple tenants) at market rents,
which are currently higher than the rent provided for under the terminated Macy’s lease. FREIT will lose total consolidated
annual rental income, including reimbursements, of approximately $0.2 million until such time as the space is fully re-leased.
FREIT anticipates increased revenue from the space when it is re-leased. (See Note 15 to FREIT’s consolidated financial
statements.)
FREIT owns and operates an 87,661 square
foot shopping center located in Franklin Lakes, New Jersey, the anchor tenant of which is Stop & Shop. On July 26, 2017, Stop
& Shop entered into a lease modification with FREIT whereby the tenant exercised its option to renew the lease for a ten-year
period with a right of the tenant to terminate the lease at any time during the fifth year if the store does not meet certain sales
volume levels set forth in the modification. This lease modification, which provided for a $250,000 reduction in annual rent, has
adversely affected and will adversely affect FREIT’s future operating results.
After careful consideration of FREIT’s
projected operating results and cash needs, the Board of Trustees declared a fourth quarter dividend of $0.05 per share which will
be paid on December 14, 2018 to shareholders of record on December 1, 2018. The Board will continue to evaluate the dividend on
a quarterly basis.
Credit Line: On October 27, 2017, FREIT’s
revolving line of credit provided by the Provident Bank was renewed for a three-year term ending on October 27, 2020 at which point
no further advances shall be permitted and provided the line of credit is not renewed by the lender, the outstanding principal
balance of the line of credit shall convert to a commercial term loan maturing on October 31, 2022. Draws against the credit line
can be used for working capital needs and standby letters of credit. Draws against the credit line are secured by mortgages on
FREIT’s Franklin Crossing Shopping Center in Franklin Lakes, New Jersey and retail space in Glen Rock, New Jersey. The total
line of credit was increased from $12.8 million to $13 million and the interest rate on the amount outstanding will be at a floating
rate of 275 basis points over the 30-day LIBOR with a floor of 3.75%. During Fiscal 2017, FREIT utilized $3 million of its credit
line to fund tenant improvements for new retail tenants at the Rotunda property. As of October 31, 2017, approximately $3.1 million
was outstanding (including closing costs of approximately $0.1 million related to the renewal of the line). In February 2018, FREIT
repaid the line of credit in the amount of $3.1 million. As of October 31, 2018, there was no amount outstanding and $13 million
was available under the line of credit.
The Rotunda property in Baltimore, Maryland
(owned by FREIT’s 60% owned consolidated affiliate Grande Rotunda, LLC) is an 11.5 acre site containing a building with approximately
136,000 sq. ft. of office space and approximately 83,000 sq. ft. of retail space on the lower level of the building. In September
2013, FREIT began construction to redevelop and expand this property and, with the exception of retail tenant improvements, the
redevelopment was substantially completed in the third quarter of Fiscal 2016. The redevelopment and expansion plans included a
modernization of the office building and smaller adjacent buildings, construction of 379 residential apartment rental units, an
additional 73,000 square feet of new retail space, and 864 above level parking spaces. By the end of the third quarter of Fiscal
2018, the residential section reached a stabilized level of occupancy of approximately 94%. The retail space continues to lease-up
and is approximately 84.1% leased as of October 31, 2018. FREIT expects Rotunda’s operations to stabilize in 2019.
With regard to the funding of the Rotunda
redevelopment project, Wells Fargo Bank, a previous lender, required that Grande Rotunda, LLC contribute not less than $14,460,000
toward the construction before any construction loan proceeds could be disbursed. To secure these funds Grande Rotunda, LLC made
a capital call on its members, which are FREIT and Rotunda
100, LLC (“Rotunda 100”). FREIT’s share (60%) amounted
to approximately $8.7 million, and the Rotunda 100 members’ share (40%) amounted to approximately $5.8 million. FREIT, pursuant
to previous agreements, made secured loans to the Rotunda 100 members of approximately $2.1 million towards their share of the
$5.8 million capital call. The balance of Rotunda 100’s capital call of approximately $3.7 million was initially made by
FREIT until it was repaid by Rotunda 100 in August 2014. These loans bear an interest rate of 225 basis points over the 90 day
LIBOR, and had a maturity date of June 19, 2015. On June 4, 2015, FREIT’s Board of Trustees approved an extension of the
maturity date to occur the earlier of (a) June 19, 2018 or (b) five days after the closing of a permanent mortgage loan secured
by the Rotunda property. On December 7, 2017, the Board approved a further extension of the maturity dates of these loans to the
date or dates upon which distributions of cash are made by Grande Rotunda, LLC to its members as a result of the refinancing or
sale of Grande Rotunda, LLC or the Rotunda property. Rotunda 100 is principally owned by employees of Hekemian & Co., including
certain members of the immediate family of Robert S. Hekemian, FREIT’s former Chairman and Chief Executive Officer and currently
a consultant of FREIT, Robert S. Hekemian, Jr., Chief Executive Officer and a Trustee of FREIT, and David Hekemian, a Trustee of
FREIT. As of October 31, 2018, FREIT and Rotunda 100 have made their required capital call contributions of $8.7 million and $5.8
million, respectively, towards the Rotunda construction financing. Both FREIT and the Rotunda 100 members are treating their required
capital call contributions as additional investments in Grande Rotunda, LLC.
In Fiscal 2017, Grande Rotunda, LLC incurred
substantial expenditures at the Rotunda property related to retail tenant improvements, leasing costs and operating expenditures
which, in the aggregate, exceeded revenues as the property was still in the rent up phase and the construction loan held with Wells
Fargo at that time was at its maximum level, with no additional funding available to draw. Accordingly, the equity owners in Grande
Rotunda, LLC (FREIT with a 60% ownership and Rotunda 100 with a 40% ownership) contributed their respective pro-rata share of any
cash needs through loans to Grande Rotunda, LLC. As of October 31, 2018 and 2017, Rotunda 100 has funded Grande Rotunda, LLC with
approximately $5.4 million and $5.2 million (including interest), respectively, which is included in “Due to affiliate”
on the accompanying consolidated balance sheets.
On February 7, 2018, Grande Rotunda,
LLC refinanced its $115.3 million construction loan held by Wells Fargo with a new loan held by Aareal Capital Corporation in the
amount of approximately $118.5 million with additional funding available for retail tenant improvements and leasing costs in the
amount of $3,380,000. This refinancing paid off the loan previously held by Wells Fargo, funded loan closing costs and paid the
amount due to Hekemian Development Resources for a development fee of $900,000 plus accrued interest of approximately $45,000 (See
Note 9 to FREIT’s consolidated financial statements for further details on this fee). This loan is secured by the Rotunda
property, bears a floating interest rate at 285 basis points over the one-month LIBOR rate and has a maturity date of February
6, 2021 with two one-year renewal options. As part of this transaction, Grande Rotunda, LLC purchased an interest rate cap on LIBOR
for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two
years of this loan. As of October 31, 2018, approximately $118.5 million of this loan facility was drawn down and the interest
rate was approximately 5.13%. (See Notes 5 and 6 to FREIT’s consolidated financial statements for further details).
As at October 31, 2018, FREIT’s
aggregate outstanding mortgage debt was $350.5 million, which bears a weighted average interest rate of 4.02% and an average life
of approximately 4.3 years. FREIT’s fixed rate mortgages are subject to amortization schedules that are longer than the
terms of the mortgages. As such, balloon payments (unpaid principal amounts at mortgage due date) for all mortgage debt will be
required as follows:
| Fiscal Year |
2019 |
2021 |
2022 |
2023 |
2024 |
2025 |
2026 |
2028 |
| ($ in millions) |
|
|
|
|
|
|
|
|
| Mortgage "Balloon" Payments |
$44.6 (A) |
$137.6 (B) |
$14.4 |
$34.4 |
$9.0 |
$13.9 |
$18.2 |
$53.9
(C) |
| |
|
|
|
|
|
|
|
|
(A) Two loans aggregating approximately $39.5M are extendable for a period of one (1) year.
(B) Includes Rotunda loan in the amount of approximately $118.5 million refinanced with Aareal Capital Corporation on February 7, 2018.
(C) Assumes
modification of Station Place loan document. See Note 5 to consolidated financial statements for further details.
The following table shows the estimated
fair value and carrying value of FREIT’s long-term debt at October 31, 2018 and 2017:
| |
|
|
|
|
| ($ in Millions) |
|
October 31, 2018 |
|
October 31, 2017 |
| |
|
|
|
|
| Fair Value |
|
$338.3 |
|
$317.8 |
| |
|
|
|
|
| Carrying Value |
|
$347.0 |
|
$321.6 |
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. The fair value is based on observable inputs (level 2 in the fair value hierarchy
as provided by authoritative guidance).
FREIT expects to refinance the individual
mortgages with new mortgages when their terms expire. To this extent FREIT has exposure to interest rate risk. 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 October 31, 2018, a 1%
interest rate increase would reduce the fair value of FREIT’s debt by $8.6 million, and a 1% decrease would increase
the fair value by $9.2 million.
FREIT believes that the values of its
properties will be adequate to command refinancing proceeds equal to or higher than the mortgage debt to be refinanced. FREIT continually
reviews its debt levels to determine if additional debt can prudently be utilized for property acquisitions to our real estate
portfolio that will increase income and cash flow to shareholders.
The loan on the Patchogue, New York property
in the amount of approximately $5.2 million became due on March 1, 2018. FREIT is currently operating under the same terms and
conditions of the existing agreement while working with the lender, Oritani Bank, to extend the maturity date of the loan and to
provide for monthly payments of principal and interest. Until such time as a definitive agreement providing for an extension of
the loan is entered into, there can be no assurance the loan will be extended.
On January 8, 2018, Pierre Towers (which
is owned by S&A, a consolidated subsidiary of FREIT), refinanced its $29.1 million loan held by State Farm with a new mortgage
loan from New York Life Insurance in the amount of $48 million. Pierre Towers paid New York Life Insurance a good faith deposit
in the amount of $960,000 (which was included in prepaid expenses and other assets on the accompanying consolidated balance sheet
as of October 31, 2017) and was reimbursed by New York Life when the loan was closed in January 2018. The new loan has a term of
ten years and bears a fixed interest rate equal to 3.88%. Interest-only payments are required each month for the first five years
of the term and thereafter, principal payments plus accrued interest will be required each month through maturity. This refinancing
resulted in: (i) a reduction in the annual interest rate from a fixed rate of 5.38% to a fixed rate of 3.88%; and (ii) net refinancing
proceeds of approximately $17.2 million (after giving effect to a $1.2 million loan prepayment cost to pay-off the loan held by
State Farm) that were distributed to the partners in S&A with FREIT receiving approximately $11.2 million, based on its 65%
membership interest in S&A, which can be used for capital expenditures and general corporate purposes.
On December 7, 2017, Station Place on
Monmouth, LLC (owned 100% by FREIT) closed on a mortgage loan in the amount of $12,350,000 held by Provident Bank to purchase
the Station Place property in Red Bank, New Jersey. Interest-only payments are required each month for the first two years of
the term and thereafter, principal payments plus accrued interest will be required each month through maturity. The loan bears
a floating interest rate equal to 180 basis points over the one-month BBA LIBOR with a maturity date of December 15, 2027. In
order to minimize interest rate volatility during the term of the loan, Station Place on Monmouth, LLC entered into an interest
rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 4.35% over the term of the
loan. The interest rate swap is considered a derivative financial instrument that will be used only to reduce interest rate risk,
and not held or used for trading purposes. (See Note 6 to FREIT’s consolidated financial statements for additional information
relating to the interest rate swap contract.) As of October 31, 2018, Station Place on Monmouth, LLC was not, and is not currently,
in compliance with a loan covenant contained in the mortgage loan held by Provident Bank. The lender waived compliance with the
loan covenant through October 31, 2018. The lender has agreed in principle to modifications of the loan covenant that will allow
Station Place on Monmouth, LLC to comply with the covenant going forward, subject to execution of a definitive agreement providing
for the modifications. Until such time as a definitive agreement is entered into, there can be no assurance the loan covenant
will be modified.
On April 28, 2017, WestFREIT Corp., a
consolidated subsidiary, refinanced its $22 million mortgage loan held by Wells Fargo Bank, with a new mortgage loan from Manufacturer’s
and Traders Trust Company in the amount of $23.5 million. The new loan bears a floating interest rate equal to 275 basis points
over the one-month LIBOR and has a maturity date of April 28, 2019 with the option to extend for 12 months. This refinancing resulted
in: (i) a reduction in the annual interest rate from a fixed rate of 5.55% to a variable rate and (ii) net refinancing proceeds
of approximately $1.1 million which have been used for general corporate purposes.
On September 29, 2016, Wayne PSC refinanced
its $24,200,000 mortgage loan held by Metropolitan Life Insurance Company, with a new mortgage loan from People’s United
Bank in the amount of $25,800,000. The new loan bears a floating interest rate equal to 220 basis points over the one-month BBA
LIBOR with a maturity date of October 1, 2026. In order to minimize interest rate volatility during the term of the loan, Wayne
PSC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate
of 3.625% over the term of the loan. This refinancing resulted in: (i) a reduction in interest rate from 6.04% to 3.625% and (ii)
net refinancing proceeds of approximately $1 million that were distributed to the partners in Wayne PSC with FREIT receiving $0.4
million based on it 40% membership interest in Wayne PSC. (See Note 6 to FREIT’s consolidated financial statements for additional
information relating to the interest rate swap contract.)
On April 22, 2016, Damascus Centre, LLC
was able to take down a second tranche of its loan held with People’s United Bank in the amount of $2,320,000, of which approximately
$470,000 was readily available and the remaining $1,850,000 was held in escrow (included in prepaid expenses and other assets in
the consolidated balance sheet as of October 31, 2017) and would be available to Damascus Centre, LLC once certain tenants opened
and began paying rent. In July 2018, these funds totaling $1,850,000 were released from escrow by the bank and became readily available
to Damascus Centre, LLC. Damascus Centre, LLC distributed amounts due to FREIT and Damascus 100 and Damascus 100 in turn repaid
FREIT the secured loans receivable plus accrued interest in the amount of approximately $1.9 million.
Interest rate swap contracts: To reduce
interest rate volatility, FREIT uses a “pay fixed, receive floating” interest rate swap to convert floating interest
rates to fixed interest rates over the term of a certain loan. FREIT enters into these swap contracts with a counterparty that
is usually a high-quality commercial bank. In essence, FREIT agrees to pay its counterparties a fixed rate of interest on a dollar
amount of notional principal (which corresponds to FREIT’s mortgage debt) over a term equal to the term of the mortgage notes.
FREIT’s counterparties, in return, agree to pay FREIT a short-term rate of interest - generally LIBOR - on that same notional
amount over the same term as the mortgage notes.
FREIT has variable interest rate mortgages
securing its Damascus Center, Regency, Preakness Shopping Center and Station Place properties. To reduce interest rate fluctuations,
FREIT entered into interest rate swap contracts for each of these loans.
These interest rate swap contracts effectively converted
variable interest rate payments to fixed interest rate payments. The contracts were based on a notional amount of approximately
$22,320,000 ($19,906,000 at October 31, 2018) for the Damascus Center swaps, a notional amount of approximately $16,200,000 ($15,922,000
at October 31, 2018) for the Regency swap, a notional amount of approximately $25,800,000 ($24,487,000 at October 31, 2018) for
the Preakness Shopping Center swap and a notional amount of approximately $12,350,000 ($12,350,000 at October 31, 2018) for the
Station Place swap.
Interest rate cap contract: To limit
exposure on interest rate volatility, FREIT uses an interest rate cap contract to cap a floating interest rate at a set pre-determined
rate. FREIT enters into cap contracts with a counterparty that is usually a high-quality commercial bank. In essence, so long as
the floating interest rate is below the cap rate, FREIT agrees to pay its counterparties a variable rate of interest on a dollar
amount of notional principal (which corresponds to FREIT’s mortgage debt). Once the floating interest rate rises above the
cap rate, FREIT’s counterparties, in return, agree to pay FREIT a short-term rate of interest above the cap on that same
notional amount.
FREIT has a variable interest rate loan
securing its Rotunda property. As part of the refinancing of Grande Rotunda, LLC’s construction loan held by Wells Fargo
with a new loan from Aareal Capital Corporation, Grande Rotunda, LLC purchased an interest rate cap on LIBOR for the full amount
that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan.
The cap contract was based on a notional amount of approximately $121,900,000 ($121,900,000 at October 31, 2018) and a term of
two years with the loan being hedged against having a balance of approximately $118,520,000 and a term of three years.
Current GAAP requires FREIT to mark-to-market
its interest rate swap and cap contracts. 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.
The interest rate swaps are accounted for as effective cash flow hedges with the corresponding gains or losses on these contracts
not affecting FREIT’s income statement; changes in the fair value of these cash flow hedges will be reported in other comprehensive
income and appear in the equity section of the balance sheet. The interest rate cap is for accounting purposes deemed to be accounted
for as an ineffective cash flow hedge with a corresponding gain or loss being recorded in FREIT’s income statement. This
gain or loss represents the economic consequence of liquidating fixed rate swaps or the cap contract and replacing them with like-duration
funding at current market rates, something we would likely never do. Periodic cash settlements of these contracts will be accounted
for as an adjustment to interest expense.
FREIT has the following derivative-related
risks with its swap and cap contracts (“contract”): 1) early termination risk, and 2) counterparty credit risk.
Early Termination Risk: If FREIT
wants to terminate its contract before maturity, it would 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 contract’s parties. If current variable interest rates
are significantly 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 October
31, 2018, the interest rate cap contract for the Rotunda property and the swap contracts for the Damascus Center, Regency, Preakness
Shopping Center and Station Place properties were in FREIT’s favor. If FREIT had terminated these contracts at that date
it would have realized gains of approximately $2,452,000 for the Preakness Shopping Center swap, $955,000 for the Damascus Center
swaps, $408,000 for the Regency swap, $460,000 for the Station Place swap and $159,000 for the Rotunda cap, all of which have been
included as an asset in FREIT’s consolidated balance sheet as at October 31, 2018. The change in the fair value for the interest
rate swap contracts (gain or loss) during such period has been included in comprehensive income and for the year ended October
31, 2018, FREIT recorded an unrealized gain of $3,113,000 in comprehensive income. The change in the fair value of the Rotunda
interest rate cap contract (gain or loss) during such period has been included in the consolidated statement of income and for
the year ended October 31, 2018, FREIT recorded an unrealized gain of approximately $72,000. For the year ended October 31, 2017,
FREIT recorded an unrealized gain of $2,952,000 in comprehensive income representing the change in fair value of the swaps during
such period with a corresponding asset of approximately $1,325,000 for the Preakness Shopping Center swap and $275,000 for the
Damascus Center swaps and a corresponding liability of $439,000 for the Regency swap as at October 31, 2017.
Counterparty Credit Risk: Each
party to a cap or swap contract bears the risk that its counterparty will default on its obligation to make a periodic payment.
FREIT reduces this risk by entering into swap or cap contracts only with major financial institutions that are experienced market
makers in the derivatives market.
FREIT’s
total contractual obligations under its line of credit and mortgage loans in place as of October 31, 2018 are as follows:
| CONTRACTUAL OBLIGATIONS-PRINCIPAL |
| (in thousands of dollars) |
| | |
Within | |
2 - 3 | |
4 - 5 | |
After 5 |
| | |
Total | |
One Year | |
Years | |
Years | |
Years |
| Long-Term Debt | |
| | | |
| | | |
| | | |
| | | |
| | |
| Annual Amortization | |
$ | 24,454 | | |
$ | 3,824 | | |
$ | 7,102 | | |
$ | 5,526 | | |
$ | 8,002 | |
| Balloon Payments | |
| 326,050 | | |
| 44,616 | | |
| 137,643 | | |
| 48,740 | | |
| 95,051 | |
| Total Long-Term Debt | |
| 350,504 | | |
| 48,440 | | |
| 144,745 | | |
| 54,266 | | |
| 103,053 | |
| Line of Credit (a) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
| Total Contractual Obligations | |
$ | 350,504 | | |
$ | 48,440 | | |
$ | 144,745 | | |
$ | 54,266 | | |
$ | 103,053 | (b) |
(a) Represents draws on line of credit with Provident Bank.
(b) Assumes
modification of Station Place loan document. See Note 5 to consolidated financial statements for further details.
FREIT’s annual estimated cash requirements
related to interest on its line of credit and mortgage loans in place as of October 31, 2018 are as follows:
| INTEREST OBLIGATIONS | |
| |
| |
| |
|
| (in thousands of dollars) | |
| |
| |
| |
| |
|
| | |
Total | |
Within One
Year | |
2 - 3 Years | |
4 - 5
Years | |
After 5
Years |
| | |
| |
| |
| |
| |
|
| Interest on Fixed Rate Debt | |
$ | 45,306 | | |
$ | 8,173 | | |
$ | 14,380 | | |
$ | 10,531 | | |
$ | 12,222 | |
| Interest on Variable Rate Debt (a) | |
| 14,303 | | |
| 6,574 | | |
| 7,729 | | |
| — | | |
| — | |
| Total Interest Obligations | |
$ | 59,609 | | |
$ | 14,747 | | |
$ | 22,109 | | |
$ | 10,531 | | |
$ | 12,222 | (b) |
(a) Includes estimated interest on the Rotunda loan held with Aareal Capital through maturity.
(b) Assumes
modification of Station Place loan document. See Note 5 to consolidated financial statements for further details.
ADJUSTED FUNDS FROM OPERATIONS
Funds From Operations (“FFO”)
is a non-GAAP measure defined by the National Association of Real Estate Investment Trusts (“NAREIT”). FREIT does
not include distributions from equity/debt sources in its computation of FFO. Although many consider FFO as the standard measurement
of a REIT’s performance, FREIT modified the NAREIT computation of FFO to include other adjustments to GAAP net income that
are not considered by management to be the primary drivers of its decision making process. These adjustments to GAAP net income
are straight-line rents, recurring capital improvements on FREIT’s residential apartments and lease termination fees paid
to buyout a lease. The modified FFO computation is referred to as Adjusted Funds From Operations (“AFFO”). FREIT believes
that AFFO is a superior measure of its operating performance. FREIT computes FFO and AFFO as follows:
| | |
Years Ended October 31, | |
| | |
2018 | | |
2017 | | |
2016 | |
| | |
(In Thousands, Except Per Share) | |
| Funds From Operations ("FFO") (a) | |
| | | |
| | | |
| | |
| Net income | |
$ | 966 | | |
$ | 10,683 | | |
$ | 3,099 | |
| Depreciation of consolidated properties | |
| 11,515 | | |
| 10,669 | | |
| 7,852 | |
| Amortization of deferred leasing costs | |
| 739 | | |
| 634 | | |
| 410 | |
| Distributions to minority interests | |
| (626 | )(b) | |
| (420 | ) | |
| (495 | )(c) |
| Gain on sale of property | |
| — | | |
| (15,395 | ) | |
| (314 | ) |
| Loan prepayment costs relating to property sale | |
| — | | |
| 1,139 | | |
| — | |
| | |
| | | |
| | | |
| | |
| FFO | |
$ | 12,594 | | |
$ | 7,310 | | |
$ | 10,552 | |
| | |
| | | |
| | | |
| | |
| Per Share - Basic and Diluted | |
$ | 1.83 | | |
$ | 1.07 | | |
$ | 1.56 | |
| | |
| | | |
| | | |
| | |
(a) As prescribed by NAREIT.
(b) FFO excludes the distribution of proceeds to minority interest in the amount of approximately $6 million related to the refinancing of the loan for Pierre Towers, LLC, owned by S And A Commercial Associates Limited Partnership which is a consolidated subsidiary and the distribution of funds to minority interest in the amount of approximately $1.6 million received from Damascus Centre, LLC for funds which were previously held in escrow. See Note 5 to the consolidated financial statements for further details.
(c) Revised
AFFO for Fiscal 2016 to exclude the distribution of procceds in the amount of $0.6 million related to the refinancing of the loan
for the Wayne Preakness Shopping center.
| Adjusted Funds From Operations ("AFFO") | |
| | |
| | |
| |
| FFO | |
$ | 12,594 | | |
$ | 7,310 | | |
$ | 10,552 | |
| Deferred rents (Straight lining) | |
| (605 | ) | |
| (634 | ) | |
| (608 | ) |
| Capital Improvements - Apartments | |
| (738 | ) | |
| (798 | ) | |
| (898 | ) |
| Lease termination fee | |
| — | | |
| 620 | | |
| — | |
| AFFO | |
$ | 11,251 | | |
$ | 6,498 | | |
$ | 9,046 | |
| | |
| | | |
| | | |
| | |
| Per Share - Basic and Diluted | |
$ | 1.63 | | |
$ | 0.95 | | |
$ | 1.33 | |
| | |
| | | |
| | | |
| | |
| Weighted Average Shares Outstanding: | |
| | | |
| | | |
| | |
| Basic | |
| 6,883 | | |
| 6,833 | | |
| 6,783 | |
| Diluted | |
| 6,883 | | |
| 6,833 | | |
| 6,784 | |
FFO and AFFO do not represent cash generated
from operating activities in accordance with GAAP, 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 and AFFO by certain other REITs may vary materially from that of FREIT’s, and therefore FREIT’s FFO and AFFO
may not be directly comparable to those of other REITs.
STOCK OPTION PLAN
On
April 5, 2018, FREIT shareholders approved an amendment to FREIT’s Equity Incentive Plan reserving an additional 300,000
shares for issuance under the Plan. As of October 31, 2018, 447,020 shares are available for issuance under the Plan after giving
effect to the amendment.
On
November 10, 2016, the Board approved the grant of 38,000 non-qualified share options under the Plan to two members of the Board
who were appointed to the Board during Fiscal 2016. The options have an exercise price of $21.00 per share, will vest in equal
annual installments over a 5-year period, and will expire 10 years from the date of grant, which will be November 9, 2026. (See
Note 11 to FREIT’s consolidated financial statements for further details.)
On
May 3, 2018, the Board approved the grant of 38,000 non-qualified share options under the Equity Incentive Plan to two members
of the Board who were appointed to the Board during Fiscal 2018. The options have an exercise price of $15.50 per
share, will vest
in equal annual installments over a 5-year period, and will expire 10 years from the date of grant, which will be May 2, 2028.
(See Note 11 to FREIT’s consolidated financial statements
for further details.)
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, FREIT must satisfy a number of
highly technical and complex operational requirements, including a requirement that FREIT must distribute to its shareholders at
least 90% of its REIT taxable income. Although cash used to make distributions reduces amounts available for capital investment,
FREIT generally intends 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 other than capital gains dividends, which are subject
to capital gains rates. FREIT’s policy is to pass on at least 90% of its ordinary taxable income to shareholders. FREIT’s
taxable income is untaxed at the trust level to the extent distributed to shareholders. FREIT’s dividends of ordinary taxable
income will be taxed as ordinary income to its shareholders and FREIT’s capital gains dividends will be taxed as capital
gains to its shareholders. FREIT’s Board of Trustees evaluates the dividend to be paid (if any) on a quarterly basis. FREIT
paid/declared a dividend of $0.15 per share in Fiscal 2018.
The following tables list the quarterly
dividends declared for the three most recent fiscal years and the dividends as a percentage of taxable income for those periods.
| | |
Fiscal Years Ended October 31, | |
| | |
2018 | | |
2017 | | |
2016 | |
| First Quarter | |
$ | — | | |
$ | 0.15 | | |
$ | 0.30 | |
| Second Quarter | |
$ | 0.05 | | |
$ | — | | |
$ | 0.30 | |
| Third Quarter | |
$ | 0.05 | | |
$ | — | | |
$ | 0.30 | |
| Fourth Quarter | |
$ | 0.05 | | |
$ | — | | |
$ | 0.30 | |
| Total For Year | |
$ | 0.15 | | |
$ | 0.15 | | |
$ | 1.20 | |
| | |
| | |
(in thousands of dollars) | | |
Dividends |
| Fiscal | |
Per | | |
Total | | |
Ordinary | | |
Capital Gain | | |
Taxable | | |
as a % of |
| Year | |
Share | | |
Dividends | | |
Income-Tax Basis | | |
Income-Tax Basis | | |
Income | | |
Taxable Income |
| 2018 | |
$ | 0.15 | | |
$ | 1,035 | | |
$ | 762 | * | |
$ | — | | |
$ | 762 | * | |
135.8% |
| 2017 | |
$ | 0.15 | | |
$ | 1,024 | | |
$ | — | | |
$ | — | | |
$ | — | | |
0.0% |
| 2016 | |
$ | 1.20 | | |
$ | 8,152 | | |
$ | 2,466 | | |
$ | 2,569 | | |
$ | 5,035 | | |
161.9% |
| *Estimated | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
INFLATION
Inflation can impact the financial performance
of FREIT in various ways. FREIT’s 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 FREIT to seek increased rents as leases renew or when new tenants are obtained, subject to prevailing market
conditions.
|
ITEM 7A |
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK |
See
“Liquidity and Capital Resources” and “Segment Information” in Item 7 above.
|
ITEM 8 |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The consolidated financial statements
and supplementary data of FREIT are submitted as a separate section of this Form 10-K. See “Index to Consolidated Financial
Statements” on page 44 of this Form 10-K.
| ITEM 9 |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
|
ITEM 9A |
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 Chief Executive Officer and Chief Financial Officer, who concluded that FREIT’s disclosure controls and procedures
are effective as of October 31, 2018. 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.
Management’s Annual Report on
Internal Control Over Financial Reporting — FREIT’s
management, under the supervision of FREIT’s Chief Executive Officer and Chief Financial Officer, is responsible for establishing
and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange
Act). Management evaluated the effectiveness of FREIT’s internal control over financial reporting based on the framework
in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on that evaluation, management has concluded that FREIT’s internal control over financial reporting
was effective as of October 31, 2018. EisnerAmper LLP, FREIT’s independent registered public accounting firm for Fiscal 2018,
audited FREIT’s financial statements contained in this Form 10-K, and has issued the attestation report on FREIT’s
internal control over financial reporting provided on the following page.
Changes in Internal Control Over Financial
Reporting — FREIT’s management, with the participation
of FREIT’s Chief Executive Officer and Chief Financial Officer, has evaluated whether any change in FREIT’s internal
control over financial reporting occurred during the fourth quarter of Fiscal 2018. Based on that evaluation, management concluded
that there has been no change in FREIT’s internal control over financial reporting during the fourth quarter of Fiscal 2018
that has materially affected, or is reasonably likely to materially affect, FREIT’s internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Trustees and Shareholders
First Real Estate Investment Trust of New Jersey
Opinion on Internal Control over Financial
Reporting
We have audited First Real Estate Investment
Trust of New Jersey and Subsidiaries' (the "Company") internal control over financial reporting as of October 31, 2018,
based on criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of October 31, 2018, based on criteria established in the Internal Control
- Integrated Framework (2013) issued by COSO.
We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated balance sheets
of First Real Estate Investment Trust of New Jersey and Subsidiaries as of October 31, 2018 and 2017, and the related consolidated
statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended October
31, 2018, and the related notes and the financial statement schedule identified in Item 15 and our report dated January 11, 2019
expressed an unqualified opinion.
Basis for Opinion
The Company's management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are
a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal
Control over Financial Reporting
An entity's internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. An entity's internal
control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the entity are being made only in accordance with authorizations
of management and trustees of the entity; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the entity's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ EisnerAmper LLP
EISNERAMPER LLP
New York, New York
January 11, 2019
|
ITEM 9B |
OTHER INFORMATION |
None.
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, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this item
is incorporated herein by reference to the sections titled "Election of Trustees" and “Section 16(a) Beneficial
Ownership Reporting Compliance" in FREIT's Proxy Statement for its Annual Meeting to be held in April 2019.
| ITEM 11 |
EXECUTIVE COMPENSATION |
The information required by this item
is incorporated herein by reference to the section titled “Executive Compensation" in FREIT's Proxy Statement for its
Annual Meeting to be held in April 2019.
| ITEM 12 |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by 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 2019.
| ITEM 13 |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this item
is incorporated herein by reference to the section titled "Certain Relationships and Related Party Transactions; Director
Independence" in FREIT's Proxy Statement for its Annual Meeting to be held in April 2019.
| ITEM 14 |
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this item
is incorporated by reference to the sections titled “Audit Fees,” “Audit-Related Fees,” “Tax Fees”
and “All Other Fees” contained in FREIT’s Proxy Statement for its Annual Meeting to be held in April 2019.
PART IV
| ITEM 15: |
EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES |
| (a) Financial Statements: |
Page |
| |
|
| (i) Report of Independent Registered Public Accounting Firm |
46 |
| |
|
| (ii) Consolidated Balance Sheets as of October 31, 2018 and 2017 |
47 |
| |
|
| (iii) Consolidated Statements of Income for the years ended October 31, 2018, 2017 and 2016 |
48 |
| |
|
| (iv) Consolidated Statements of Comprehensive Income for the years ended October 31, 2018, 2017 and 2016 |
49 |
| |
|
|
(v) Consolidated Statements of Equity for the years ended
October 31, 2018, 2017 and 2016
|
50 |
| (vi) Consolidated Statements of Cash Flows for the years ended October 31, 2018, 2017 and 2016 |
51 |
| |
|
| (vii) Notes to Consolidated Financial Statements |
52 |
| |
|
| (b) Financial Statement Schedule: |
|
| |
|
| (i) III - Real Estate and Accumulated Depreciation |
67/68 |
| |
|
| (c) Exhibits: |
|
| |
|
| See Index to Exhibits. |
69 |
SIGNATURES
In accordance with 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 11, 2019 |
|
By: /s/ Robert S. Hekemian, Jr. |
|
| |
|
Robert S. Hekemian, Jr.
Chief Executive Officer
(Principal Executive Officer)
|
|
| |
|
By: /s/ Donald W. Barney |
|
| |
|
Donald W. Barney
President, Treasurer and Chief Financial Officer
(Principal Financial/Accounting Officer) |
|
KNOW ALL MEN BY THESE PRESENTS, that
each person whose signature appears below constitutes and appoints each of Robert S. Hekemian, Jr. and Donald W. Barney his true
and lawful attorney-in-fact and agent for him and in his name, place an stead, in any and all capacities, to sign any and all amendments
to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes
as they might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or
cause to be done by virtue hereof.
In accordance with Section 13 or
15(d) of the Exchange Act, the Registrant has caused this report to be signed by the following persons in the capacities and on
the dates stated.
Signatures |
Title |
Date |
|
/s/ Robert S. Hekemian,
Jr. |
Chief Executive Officer (Principal |
January 11, 2019 |
| Robert S. Hekemian, Jr. |
Executive Officer) and Trustee |
|
|
/s/ Donald W. Barney
|
President, Treasurer, Chief Financial |
January 11, 2019 |
| Donald W. Barney |
Officer (Principal Financial /
Accounting Officer) and Trustee |
|
|
/s/ Ronald J. Artinian |
|
|
| Ronald J. Artinian |
Chairman of the Board and Trustee |
January 11, 2019 |
|
/s/ Alan L. Aufzien |
Trustee |
January 11, 2019 |
| Alan L. Aufzien |
|
|
|
/s/ David F. McBride |
Trustee |
January 11, 2019 |
| David F. McBride |
|
|
|
/s/ John A. Aiello |
Trustee |
January 11, 2019 |
| John A. Aiello |
|
|
|
/s/ Justin F. Meng |
Trustee |
January 11, 2019 |
| Justin F. Meng |
|
|
|
/s/ David B. Hekemian |
Trustee |
January 11, 2019 |
| David Hekemian |
|
|
|
/s/ Richard J. Aslanian |
Trustee |
January 11, 2019 |
| Richard J. Aslanian |
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Trustees and Shareholders of
First Real Estate Investment Trust of New Jersey
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of First Real Estate Investment Trust of New Jersey and Subsidiaries (the "Company") as of October 31,
2018 and 2017, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the
years in the three-year period ended October 31, 2018, and the related notes and the financial statement schedule identified in
Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly,
in all material respects, the consolidated financial position of the Company as of October 31, 2018 and 2017, and the consolidated
results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2018, in conformity
with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control
over financial reporting as of October 31, 2018, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"), and our report
dated January 11, 2019 expressed an unqualified opinion.
Basis for Opinion
These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ EisnerAmper LLP
We have served as the Company's auditor since
2006.
EISNERAMPER LLP
New York, New York
January 11, 2019
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED BALANCE
SHEETS
| | |
October 31, | |
| | |
2018 | | |
2017 | |
| | |
(In Thousands of Dollars) | |
| ASSETS | |
| | | |
| | |
| | |
| | | |
| | |
| Real estate, at cost, net of accumulated depreciation | |
$ | 344,532 | | |
$ | 331,965 | |
| Construction in progress | |
| 159 | | |
| 129 | |
| Cash and cash equivalents | |
| 21,747 | | |
| 7,899 | |
| Tenants' security accounts | |
| 2,212 | | |
| 2,007 | |
| Receivables arising from straight-lining of rents | |
| 3,964 | | |
| 3,359 | |
| Accounts receivable, net of allowance for doubtful accounts of $276 and | |
| 2,298 | | |
| 1,767 | |
| $175 as of October 31, 2018 and 2017, respectively | |
| | | |
| | |
| Secured loans receivable | |
| 4,000 | | |
| 5,451 | |
| Prepaid expenses and other assets | |
| 6,034 | | |
| 9,135 | |
| Qualified intermediary deposit - 1031 exchange | |
| — | | |
| 6,965 | |
| Deferred charges, net | |
| 2,693 | | |
| 2,680 | |
| Interest rate cap and swap contracts | |
| 4,434 | | |
| 1,600 | |
| Total Assets | |
$ | 392,073 | | |
$ | 372,957 | |
| | |
| | | |
| | |
| | |
| | | |
| | |
| LIABILITIES AND EQUITY | |
| | | |
| | |
| | |
| | | |
| | |
| Liabilities: | |
| | | |
| | |
| Mortgages payable | |
$ | 350,504 | | |
$ | 323,435 | |
| Less unamortized debt issuance costs | |
| 3,498 | | |
| 1,863 | |
| Mortgages payable, net (Note 5) | |
| 347,006 | | |
| 321,572 | |
| | |
| | | |
| | |
| Due to affiliate | |
| 5,417 | | |
| 5,172 | |
| Deferred trustee compensation payable | |
| 8,457 | | |
| 9,078 | |
| Accounts payable and accrued expenses | |
| 1,910 | | |
| 3,870 | |
| Dividends payable | |
| 338 | | |
| — | |
| Tenants' security deposits | |
| 3,232 | | |
| 2,960 | |
| Deferred revenue | |
| 1,369 | | |
| 1,276 | |
| Interest rate swap contract | |
| — | | |
| 439 | |
| Total Liabilities | |
| 367,729 | | |
| 344,367 | |
| | |
| | | |
| | |
| Commitments and contingencies (Note 8) | |
| | | |
| | |
| | |
| | | |
| | |
| | |
| | | |
| | |
| Equity: | |
| | | |
| | |
| Common equity: | |
| | | |
| | |
| Shares of beneficial interest without par value: | |
| | | |
| | |
| 8,000,000 shares authorized; 6,993,152 shares issued plus 157,395 and | |
| 28,288 | | |
| 27,651 | |
| 122,092 vested share units granted to Trustees at October 31, 2018 | |
| | | |
| | |
| and 2017, respectively | |
| | | |
| | |
| Treasury stock, at cost: 235,536 and 253,083 shares at October 31, 2018 | |
| (4,941 | ) | |
| (5,273 | ) |
| and 2017, respectively | |
| | | |
| | |
| Dividends in excess of net income | |
| (4,376 | ) | |
| (4,824 | ) |
| Accumulated other comprehensive income | |
| 2,517 | | |
| 284 | |
| Total Common Equity | |
| 21,488 | | |
| 17,838 | |
| Noncontrolling interests in subsidiaries | |
| 2,856 | | |
| 10,752 | |
| Total Equity | |
| 24,344 | | |
| 28,590 | |
| Total Liabilities and Equity | |
$ | 392,073 | | |
$ | 372,957 | |
See Notes to Consolidated Financial Statements.
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF INCOME
| | |
Years Ended October 31, | |
| | |
2018 | | |
2017 | | |
2016 | |
| | |
(In Thousands of Dollars, Except Per Share Amounts) | |
| Revenue: | |
| | | |
| | | |
| | |
| Rental income | |
$ | 51,267 | | |
$ | 45,357 | | |
$ | 40,780 | |
| Reimbursements | |
| 6,093 | | |
| 5,597 | | |
| 5,158 | |
| Sundry income | |
| 637 | | |
| 680 | | |
| 316 | |
| Total revenue | |
| 57,997 | | |
| 51,634 | | |
| 46,254 | |
| | |
| | | |
| | | |
| | |
| Expenses: | |
| | | |
| | | |
| | |
| Operating expenses | |
| 16,245 | | |
| 15,848 | | |
| 13,734 | |
| Lease termination fee | |
| — | | |
| 620 | | |
| — | |
| Management fees | |
| 2,547 | | |
| 2,375 | | |
| 2,046 | |
| Real estate taxes | |
| 8,396 | | |
| 10,139 | | |
| 8,051 | |
| Depreciation | |
| 11,515 | | |
| 10,669 | | |
| 7,852 | |
| Total expenses | |
| 38,703 | | |
| 39,651 | | |
| 31,683 | |
| | |
| | | |
| | | |
| | |
| Operating income | |
| 19,294 | | |
| 11,983 | | |
| 14,571 | |
| | |
| | | |
| | | |
| | |
| Investment income | |
| 267 | | |
| 206 | | |
| 150 | |
| Unrealized gain on interest rate cap contract | |
| 72 | | |
| — | | |
| — | |
| Gain on sale of property | |
| — | | |
| 15,395 | | |
| 314 | |
| Loan prepayment costs relating to property sale | |
| — | | |
| (1,139 | ) | |
| — | |
| Interest expense including amortization | |
| | | |
| | | |
| | |
| of deferred financing costs | |
| (18,667 | ) | |
| (15,762 | ) | |
| (11,936 | ) |
| Net income | |
| 966 | | |
| 10,683 | | |
| 3,099 | |
| | |
| | | |
| | | |
| | |
| Net (income) loss attributable to noncontrolling | |
| | | |
| | | |
| | |
| interests in subsidiaries | |
| 517 | | |
| 2,433 | | |
| (94 | ) |
| | |
| | | |
| | | |
| | |
| Net income attributable to common equity | |
$ | 1,483 | | |
$ | 13,116 | | |
$ | 3,005 | |
| | |
| | | |
| | | |
| | |
| Earnings per share - basic and diluted: | |
$ | 0.21 | | |
$ | 1.92 | | |
$ | 0.44 | |
| | |
| | | |
| | | |
| | |
| Weighted average shares outstanding: | |
| | | |
| | | |
| | |
| Basic | |
| 6,883 | | |
| 6,833 | | |
| 6,783 | |
| Diluted | |
| 6,883 | | |
| 6,833 | | |
| 6,784 | |
See Notes to Consolidated Financial Statements.
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
| | |
Years Ended October 31, | |
| | |
2018 | | |
2017 | | |
2016 | |
| | |
(In Thousands of Dollars) | |
| | |
| | |
| | |
| |
| Net income | |
$ | 966 | | |
$ | 10,683 | | |
$ | 3,099 | |
| | |
| | | |
| | | |
| | |
| Other comprehensive income (loss): | |
| | | |
| | | |
| | |
| Unrealized gain (loss) on interest rate swap contracts | |
| | | |
| | | |
| | |
| before reclassifications | |
| 3,043 | | |
| 2,424 | | |
| (1,346 | ) |
| Amount reclassified from accumulated other | |
| | | |
| | | |
| | |
| comprehensive income to interest expense | |
| 70 | | |
| 528 | | |
| 621 | |
| Net unrealized gain (loss) on interest rate swap contracts | |
| 3,113 | | |
| 2,952 | | |
| (725 | ) |
| Comprehensive income | |
| 4,079 | | |
| 13,635 | | |
| 2,374 | |
| Net (income) loss attributable to noncontrolling interests | |
| 517 | | |
| 2,433 | | |
| (94 | ) |
| Other comprehensive income (loss): | |
| | | |
| | | |
| | |
| Unrealized (gain) loss on interest rate swap contracts | |
| | | |
| | | |
| | |
| attributable to noncontrolling interests | |
| (880 | ) | |
| (978 | ) | |
| 65 | |
| Comprehensive income (loss) attributable to noncontrolling interests | |
| (363 | ) | |
| 1,455 | | |
| (29 | ) |
| Comprehensive income attributable to common equity | |
$ | 3,716 | | |
$ | 15,090 | | |
$ | 2,345 | |
See Notes to Consolidated Financial Statements.
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
| | |
Common Equity | | |
| | |
| |
| | |
Shares of
Beneficial
Interest | | |
Treasury
Stock at
Cost | | |
Dividends in
Excess of Net
Income | | |
Accumulated
Other
Comprehensive
Income (Loss) | | |
Total
Common
Equity | | |
Noncontrolling
Interests | | |
Total Equity | |
| | |
(In Thousands of Dollars, Except Share and Per Share Amounts) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Balance at October 31, 2015 | |
$ | 25,860 | | |
$ | (5,517 | ) | |
$ | (11,769 | ) | |
$ | (1,030 | ) | |
$ | 7,544 | | |
$ | 13,693 | | |
$ | 21,237 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Stock based compensation expense | |
| 94 | | |
| | | |
| | | |
| | | |
| 94 | | |
| | | |
| 94 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Vested share units granted to Trustees | |
| 759 | | |
| | | |
| | | |
| | | |
| 759 | | |
| | | |
| 759 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Stock options exercised | |
| | | |
| 244 | | |
| | | |
| | | |
| 244 | | |
| | | |
| 244 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Distributions to noncontrolling interests | |
| | | |
| | | |
| | | |
| | | |
| — | | |
| (1,095 | ) | |
| (1,095 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net income | |
| | | |
| | | |
| 3,005 | | |
| | | |
| 3,005 | | |
| 94 | | |
| 3,099 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Dividends declared, including $76 payable in share units ($1.20 per share) | |
| | | |
| | | |
| (8,152 | ) | |
| | | |
| (8,152 | ) | |
| | | |
| (8,152 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net unrealized loss on interest rate swaps | |
| | | |
| | | |
| | | |
| (660 | ) | |
| (660 | ) | |
| (65 | ) | |
| (725 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance at October 31, 2016 | |
| 26,713 | | |
| (5,273 | ) | |
| (16,916 | ) | |
| (1,690 | ) | |
| 2,834 | | |
| 12,627 | | |
| 15,461 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Stock based compensation expense | |
| 122 | | |
| | | |
| | | |
| | | |
| 122 | | |
| | | |
| 122 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Vested share units granted to Trustees | |
| 816 | | |
| | | |
| | | |
| | | |
| 816 | | |
| | | |
| 816 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Distributions to noncontrolling interests | |
| | | |
| | | |
| | | |
| | | |
| — | | |
| (420 | ) | |
| (420 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net income (loss) | |
| | | |
| | | |
| 13,116 | | |
| | | |
| 13,116 | | |
| (2,433 | ) | |
| 10,683 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Dividends declared, including $13 payable in share units ($0.15 per share) | |
| | | |
| | | |
| (1,024 | ) | |
| | | |
| (1,024 | ) | |
| | | |
| (1,024 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net unrealized gain on interest rate swaps | |
| | | |
| | | |
| | | |
| 1,974 | | |
| 1,974 | | |
| 978 | | |
| 2,952 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance at October 31, 2017 | |
| 27,651 | | |
| (5,273 | ) | |
| (4,824 | ) | |
| 284 | | |
| 17,838 | | |
| 10,752 | | |
| 28,590 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Stock based compensation expense | |
| 130 | | |
| | | |
| | | |
| | | |
| 130 | | |
| | | |
| 130 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Vested share units granted to Trustees and consultant | |
| 839 | | |
| | | |
| | | |
| | | |
| 839 | | |
| | | |
| 839 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Vested share units issued to consultant and retired Trustee * | |
| (332 | ) | |
| 332 | | |
| | | |
| | | |
| — | | |
| | | |
| — | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Distributions to noncontrolling interests | |
| | | |
| | | |
| | | |
| | | |
| — | | |
| (8,259 | ) | |
| (8,259 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net income (loss) | |
| | | |
| | | |
| 1,483 | | |
| | | |
| 1,483 | | |
| (517 | ) | |
| 966 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Dividends declared, including $21 payable in share units ($0.15 per share) | |
| | | |
| | | |
| (1,035 | ) | |
| | | |
| (1,035 | ) | |
| | | |
| (1,035 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net unrealized gain on interest rate swaps | |
| | | |
| | | |
| | | |
| 2,233 | | |
| 2,233 | | |
| 880 | | |
| 3,113 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance at October 31, 2018 | |
$ | 28,288 | | |
$ | (4,941 | ) | |
$ | (4,376 | ) | |
$ | 2,517 | | |
$ | 21,488 | | |
$ | 2,856 | | |
$ | 24,344 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
* Represents the issuance of treasury shares to consultant and retired Trustee for share units earned.
See Notes to Consolidated Financial Statements.
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF CASH FLOWS
| | |
Years Ended October 31, | |
| | |
2018 | | |
2017 | | |
2016 | |
| | |
(In Thousands of Dollars) | |
| Operating activities: | |
| | | |
| | | |
| | |
| Net income | |
$ | 966 | | |
$ | 10,683 | | |
$ | 3,099 | |
| Adjustments to reconcile net income to net cash provided by | |
| | | |
| | | |
| | |
| operating activities: | |
| | | |
| | | |
| | |
| Depreciation | |
| 11,515 | | |
| 10,669 | | |
| 7,852 | |
| Amortization | |
| 1,789 | | |
| 1,932 | | |
| 952 | |
| Unrealized gain on interest rate cap contract | |
| (72 | ) | |
| — | | |
| — | |
| Stock based compensation expense | |
| 130 | | |
| 122 | | |
| 94 | |
| Trustee fees, consultant fee and related interest paid in stock units | |
| 818 | | |
| 803 | | |
| 683 | |
| Gain on sale of property | |
| — | | |
| (15,395 | ) | |
| (314 | ) |
| Deferred rents - straight line rent | |
| (605 | ) | |
| (634 | ) | |
| (608 | ) |
| Bad debt expense | |
| 198 | | |
| 196 | | |
| 196 | |
| Net amortization of acquired leases | |
| — | | |
| — | | |
| — | |
| Changes in operating assets and liabilities: | |
| | | |
| | | |
| | |
| Tenants' security accounts | |
| 67 | | |
| 11 | | |
| 109 | |
| Accounts receivable, prepaid expenses and other assets | |
| (2,256 | ) | |
| (2,780 | ) | |
| (793 | ) |
| Accounts payable, accrued expenses and deferred | |
| | | |
| | | |
| | |
| trustee compensation | |
| (1,808 | ) | |
| (1,021 | ) | |
| (3,264 | ) |
| Deferred revenue | |
| 93 | | |
| 142 | | |
| 54 | |
| Net cash provided by operating activities | |
| 10,835 | | |
| 4,728 | | |
| 8,060 | |
| Investing activities: | |
| | | |
| | | |
| | |
| Proceeds from sale of property | |
| — | | |
| 9,135 | | |
| 3,059 | |
| Capital improvements - existing properties | |
| (5,335 | ) | |
| (10,058 | ) | |
| (9,927 | ) |
| Acquisition of Station Place, net of proceeds released from escrow related to 1031 exchange | |
| (12,585 | ) | |
| — | | |
| — | |
| Proceeds from payment of secured loans receivable inclusive of accrued interest | |
| 1,870 | | |
| — | | |
| — | |
| Construction and pre-development costs | |
| — | | |
| — | | |
| (13,535 | )(a) |
| Net cash used in investing activities | |
| (16,050 | ) | |
| (923 | ) | |
| (20,403 | ) |
| Financing activities: | |
| | | |
| | | |
| | |
| Repayment of mortgages and construction loan | |
| (148,680 | ) | |
| (34,254 | ) | |
| (28,314 | ) |
| Proceeds from/(repayment of) credit line | |
| (3,121 | ) | |
| 3,121 | | |
| — | |
| Proceeds from mortgage loan refinancings | |
| 166,520 | | |
| 23,500 | | |
| 25,800 | |
| Proceeds from acquisition mortgage loan | |
| 12,350 | | |
| — | | |
| — | |
| Proceeds from additional tranche of loan | |
| — | | |
| — | | |
| 2,320 | |
| Restricted loan proceeds held in/(released from) escrow | |
| 1,850 | | |
| — | | |
| (1,850 | ) |
| Refinancing good faith deposit | |
| 960 | | |
| (960 | ) | |
| — | |
| Proceeds from construction loan | |
| — | | |
| 1,349 | | |
| 21,093 | |
| Advanced funding for construction loan reserve | |
| 647 | | |
| (647 | ) | |
| — | |
| Proceeds from exercise of stock options | |
| — | | |
| — | | |
| 244 | |
| Deferred financing costs | |
| (2,685 | ) | |
| (640 | ) | |
| (377 | ) |
| Interest rate cap contract cost | |
| (88 | ) | |
| — | | |
| — | |
| Dividends paid | |
| (676 | ) | |
| (3,033 | ) | |
| (8,072 | ) |
| Due to affiliate | |
| 245 | | |
| 5,172 | | |
| — | |
| Distributions to noncontrolling interests | |
| (8,259 | ) | |
| (420 | ) | |
| (1,095 | ) |
| Net cash provided by (used in) financing activities | |
| 19,063 | | |
| (6,812 | ) | |
| 9,749 | |
| Net increase (decrease) in cash and cash equivalents | |
| 13,848 | | |
| (3,007 | ) | |
| (2,594 | ) |
| Cash and cash equivalents, beginning of year | |
| 7,899 | | |
| 10,906 | | |
| 13,500 | |
| Cash and cash equivalents, end of year | |
$ | 21,747 | | |
$ | 7,899 | | |
$ | 10,906 | |
| | |
| | | |
| | | |
| | |
| Supplemental disclosure of cash flow data: | |
| | | |
| | | |
| | |
| Interest paid, net of amounts capitalized including $1,139 in loan prepayment costs related to property sale in 2017 | |
$ | 17,040 | | |
$ | 15,160 | | |
$ | 11,100 | |
| Supplemental schedule of non cash activities: | |
| | | |
| | | |
| | |
| Investing activities: | |
| | | |
| | | |
| | |
| Transfer from construction in progress to real estate for completion of Rotunda | |
$ | — | | |
$ | — | | |
$ | 124,423 | |
| | |
| | | |
| | | |
| | |
| Proceeds from sale of property, held in escrow pending 1031 exchange | |
$ | — | | |
$ | 6,965 | | |
$ | — | |
| | |
| | | |
| | | |
| | |
| Accrued capital expenditures, construction costs, pre-development costs and interest | |
$ | 82 | | |
$ | 413 | | |
$ | 3,130 | |
| Financing activities: | |
| | | |
| | | |
| | |
| Dividends declared but not paid | |
$ | 338 | | |
$ | — | | |
$ | 2,022 | |
| Dividends paid in share units | |
$ | 21 | | |
$ | 13 | | |
$ | 76 | |
(a) Includes $4,213 that was incurred and accrued in fiscal 2015; paid in fiscal 2016.
See Notes to Consolidated Financial Statements.
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" or the “Company”) was organized on 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.
Recently issued accounting standards:
In May 2014, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from
Contracts with Customers”, which is codified as ASC 606 and effective for fiscal years, and interim periods within those
years, beginning on or after December 15, 2017. ASC 606 outlines a new, single comprehensive model for entities to use in accounting
for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry
specific guidance. Based on the nature of FREIT’s operations and sources of revenue, FREIT does not expect the adoption of
this new accounting guidance to have a significant impact on its consolidated financial statements and footnote disclosures.
In February 2016, the FASB issued
ASU 2016-02, “Leases (Topic 842)”, which supersedes the existing guidance for lease accounting, “Leases
(Topic 840)”. ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting
largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods
within those fiscal years with early adoption permitted. ASU 2016-02 requires a modified retrospective approach for all leases
existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief.
The Leasing Standard was amended by ASU 2018-11, “Targeted Improvements” (the “Practical Expedient
Amendment”) in July of 2018 by allowing lessors to elect to combine lease and associated nonlease components, by classes
of underlying asset, in contracts meeting certain criteria. The Company expects to qualify for the practical expedient as allowed
by the Practical Expedient Amendment. Given that this standard has minimal impact on real estate operating lessors, FREIT does
not expect the adoption of this new accounting guidance to have a significant impact on its consolidated financial statements and
footnote disclosures. Based on this new accounting guidance, the Company will no longer be able to capitalize certain leasing costs,
such as legal expenses, as it relates to activities before a lease is entered into.
In November 2016, the FASB issued
ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”, which requires companies to include
cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash
flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and interim periods within those years and early
adoption is permitted including adoption in an interim period. The standard should be applied using a retrospective transition
method to each period presented. FREIT does not expect the adoption of this new accounting guidance to have a significant impact
on its consolidated financial statements and footnote disclosures.
In January 2017, the FASB issued
ASU 2017-01, “Business Combinations: Clarifying the Definition of a Business”, which amends guidance that assists
preparers in evaluating whether a transaction will be accounted for as an acquisition of an asset or a business, likely resulting
in more acquisitions being accounted for as asset acquisitions. There are certain differences in accounting under these models,
including the capitalization of transaction expenses and application of a cost accumulation model in an asset acquisition. The
standard is effective for annual periods beginning after December 15, 2017, including interim periods within those periods with
early adoption permitted for certain transactions. Early application of this new accounting guidance is allowed for transactions
for which the acquisition date occurs before the effective date of the amendment, only when the transaction has not been previously
reported in financial statements. FREIT acquired a new property, Station Place, located in Red Bank, New Jersey on December 7,
2017. As such, FREIT early adopted this new accounting guidance in the first quarter of Fiscal 2018 and accounted for this transaction
as an acquisition of an asset capitalizing approximately $550,000 of transaction expenses.
In August 2017, the FASB issued
ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities to ASC Topic 815, Derivatives and Hedging ("ASC
815")” which amends the hedge accounting recognition and presentation requirements in ASC 815. The update is intended
to more closely align hedge accounting with
companies’ risk management strategies, simplify the application of hedge accounting
and increase transparency as to the scope and results of hedge programs. ASU 2017-12 requires subsequent changes in fair value
of a hedging instrument that has been designated and qualifies as a cash flow hedge to be recognized as a component of "other
comprehensive income (loss)." ASU 2017-12 is effective for interim and annual reporting periods in fiscal years beginning
after December 15, 2018, with early adoption permitted. FREIT does not expect the adoption of this new accounting guidance to have
a significant impact on its consolidated financial statements and footnote disclosures.
Principles of consolidation:
The consolidated financial statements
include the accounts of FREIT and the following subsidiaries in which FREIT has a controlling financial interest, including two
LLCs in which FREIT is the managing member with a 40% ownership interest:
| Subsidiary |
|
Owning
Entity |
|
%
Ownership |
|
Year
Acquired/Organized |
|
| |
|
|
|
|
|
|
|
|
|
|
| Westwood Hills, LLC |
|
|
FREIT |
|
|
40% |
|
|
1994 |
|
| S and A Commercial Associates Limited Partnership ("S and A") |
|
|
FREIT |
|
|
65% |
|
|
2000 |
|
| Wayne PSC, LLC |
|
|
FREIT |
|
|
40% |
|
|
2002 |
|
| Damascus Centre, LLC |
|
|
FREIT |
|
|
70% |
|
|
2003 |
|
| Pierre Towers, LLC |
|
|
S and A |
|
|
100% |
|
|
2004 |
|
| Grande Rotunda, LLC |
|
|
FREIT |
|
|
60% |
|
|
2005 |
|
| WestFREIT, Corp |
|
|
FREIT |
|
|
100% |
|
|
2007 |
|
| FREIT Regency, LLC |
|
|
FREIT |
|
|
100% |
|
|
2014 |
|
| Station Place on Monmouth, LLC |
|
|
FREIT |
|
|
100% |
|
|
2017 |
|
The consolidated financial statements
include 100% of each subsidiary’s assets, liabilities, operations and cash flows, with the interests not owned by FREIT reflected
as "noncontrolling interests in subsidiaries”. All significant inter-company 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 (“GAAP”) requires management
to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ
from those estimates.
Cash and cash equivalents:
Financial instruments that potentially
subject FREIT to concentrations of credit risk consist primarily of cash and cash equivalents. FREIT considers all highly liquid
investments purchased with an original 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 of $250,000.
Real estate development
costs:
It is FREIT’s policy to capitalize
pre-development costs, which generally include legal and other professional fees and other directly related third-party costs.
Real estate taxes and interest costs incurred during the development and construction phases are also capitalized. FREIT ceases
capitalization of these costs when the project or portion thereof becomes operational, or when construction has been postponed.
In the event of a postponement, capitalization of these costs will recommence once construction on the project resumes.
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:
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.
For the fiscal years ended October 31, 2018, 2017 and 2016, there were no impairments of long-lived assets.
Deferred charges:
Deferred charges consist of leasing
commissions which are amortized on the straight-line method over the terms of the applicable leases.
Debt issuance costs:
Debt issuance costs are amortized
on the straight-line method by annual charges to income over the terms of the mortgages. Amortization of such costs is included
in interest expense and approximated $1,050,000, $1,298,000 and $543,000 in 2018, 2017 and 2016, respectively. Unamortized debt
issuance costs are a direct deduction from mortgages payable on the consolidated balance sheets.
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 and reimbursements based on
such factors as increases in real estate taxes, Consumer Price Indices, common
area maintenance charges and percentage of tenants' sales in excess of specified volumes. These additional rentals are generally
included in income when reported to FREIT, when earned, or ratably over the appropriate period.
Interest rate cap and swap contracts:
FREIT utilizes derivative financial
instruments to reduce interest rate risk. FREIT does not hold or issue derivative financial instruments for trading purposes. FREIT
recognizes all derivatives as either assets or liabilities in the consolidated balance sheets and measures those instruments at
fair value. Changes in fair value of those instruments, which qualify as effective cash flow hedges, are reported in other comprehensive
income. Changes in fair value of those instruments, which qualify as ineffective cash flow hedges, are reported in the statement
of income (see Note 6 to FREIT’s consolidated financial statements).
Advertising:
FREIT expenses the cost of advertising
and promotions as incurred. Advertising costs charged to operations amounted to approximately $296,000, $386,000 and $257,000 in
2018, 2017 and 2016, respectively.
Stock-based compensation:
FREIT has a stock-based
compensation plan that was approved by FREIT’s Board of Trustees (the “Board”), and ratified by
FREIT’s shareholders. Stock based awards under the plan to employees are accounted for based on their grant-date fair
value (see Note 11 to FREIT’s consolidated financial statements). Stock-based awards to nonemployees are accounted for
based on the fair value of the equity instruments on the vesting date. The fair value is based on observable inputs (level 2
in the fair value hierarchy as provided by authoritative guidance).
Note 2 – Property sales:
On January 11, 2016, FREIT was
notified by Lakeland Bank (as successor by merger to Pascack Community Bank) of its election to exercise the option under its lease
to purchase the property leased by FREIT to Lakeland Bank located in Rochelle Park, New Jersey. Pursuant to the Lease Agreement,
Lakeland Bank had the right to exercise this option at a price equal to the greater of $3 million or the fair market value of the
property as determined by mutual agreement between tenant and landlord. FREIT and Lakeland Bank agreed to a purchase price of $3.1
million. On June 17, 2016, FREIT sold this property, having a carrying amount of approximately $2.7 million (including a straight-line
rent receivable in the amount of approximately $0.5 million), to Lakeland Bank for $3.1 million resulting in a gain of approximately
$0.3 million net of sales fees. This sale resulted in FREIT’s loss of future annual rents from the property of approximately
$241,000, which would have increased periodically through September 2023.
On June 12, 2017, FREIT sold its
Hammel Gardens property, a residential property located in Maywood, New Jersey, for a sale price of $17 million. The sale of this
property, which had a carrying value of approximately $0.7 million, resulted in a capital gain of approximately $15.4 million net
of sales fees and commissions. As a result of this sale, FREIT incurred a loan prepayment cost of approximately $1.1 million and
paid off the related mortgage on the Hammel Gardens property in the amount of approximately $8 million from the proceeds of the
sale. FREIT structured this sale in a manner that qualified it as a like-kind exchange of real estate pursuant to Section 1031
of the Internal Revenue Code. The 1031 exchange transaction resulted in a deferral for income tax purposes of the $15.4 million
capital gain. The net proceeds from this sale, which were approximately $7 million, were held in escrow until a replacement property
was purchased. A replacement property to complete this like-kind exchange was acquired on December 7, 2017, and the sale proceeds
held in escrow were applied to the purchase price of such property (See Note 3 to FREIT’s consolidated financials for further
details).
As the disposal of the Rochelle
Park and Hammel Gardens properties did not represent a strategic shift that would have a major impact on FREIT’s operations
or financial results, the properties’ operations were not reflected as discontinued operations in the accompanying consolidated
financial statements.
Note 3 – Property acquisition:
On December 7, 2017, FREIT completed
the acquisition of Station Place, a residential apartment complex consisting of one building with 45 units, located in Red Bank,
New Jersey through Station Place on Monmouth, LLC (FREIT’s 100% owned consolidated subsidiary). FREIT identified Station
Place as the replacement property for the Hammel Gardens property located in Maywood, New Jersey that FREIT sold on June 12, 2017,
which completed the like-kind exchange pursuant to Section 1031 of the Internal Revenue Code (See Note 2 to FREIT’s consolidated
financial statements). Station Place is part of FREIT’s residential segment. The acquisition cost was $19,550,000 (inclusive
of approximately $550,000 of transaction costs capitalized as part of the asset acquisition), which was funded in part with $7
million in net proceeds from the sale of the Hammel Gardens property, and the remaining balance of $12,350,000 (inclusive of the
transaction costs) was funded by Station Place on Monmouth, LLC through long-term financing for this property from Provident Bank.
The acquisition cost of $19.6 million
has been allocated as follows: $10.8 million to the building and $8.8 million to the land.
Note 4 - Real estate:
Real estate consists of the following:
| | |
Range of | |
| | |
| |
| | |
Estimated | |
October 31, | |
| | |
Useful Lives | |
2018 | | |
2017 | |
| | |
| |
(In Thousands of Dollars) | |
| Land | |
| |
$ | 86,225 | | |
$ | 77,432 | |
| Unimproved land | |
| |
| 405 | | |
| 405 | |
| Apartment buildings | |
7-40 years | |
| 201,793 | | |
| 190,554 | |
| Commercial buildings/shopping centers | |
5-40 years | |
| 165,986 | | |
| 162,837 | |
| Equipment/Furniture | |
5-15 years | |
| 2,090 | | |
| 1,931 | |
| Total real estate, gross | |
| |
| 456,499 | | |
| 433,159 | |
| Less: accumulated depreciation | |
| |
| 111,967 | | |
| 101,194 | |
| Total real estate, net | |
| |
$ | 344,532 | | |
$ | 331,965 | |
Note 5 – Mortgages payable and credit line:
| | |
October 31, 2018 | | |
October 31, 2017 | |
| | |
Principal | | |
Unamortized
Debt Issuance
Costs | | |
Principal | | |
Unamortized
Debt Issuance
Costs | |
| | |
(In Thousands of Dollars) | | |
(In Thousands of Dollars) | |
| Rockaway, NJ (A) | |
$ | 16,152 | | |
$ | 80 | | |
$ | 16,660 | | |
$ | 109 | |
| Westwood, NJ (B) | |
| 19,611 | | |
| 134 | | |
| 20,220 | | |
| 166 | |
| Patchogue, NY (C) | |
| 5,231 | | |
| 15 | | |
| 5,231 | | |
| 2 | |
| Wayne, NJ (D) | |
| 17,334 | | |
| 18 | | |
| 17,705 | | |
| 44 | |
| River Edge, NJ (E) | |
| 10,243 | | |
| 87 | | |
| 10,456 | | |
| 104 | |
| Red Bank, NJ (F) | |
| 12,350 | | |
| 138 | | |
| — | | |
| — | |
| Westwood, NJ (G) | |
| 20,134 | | |
| 67 | | |
| 20,628 | | |
| 101 | |
| Wayne, NJ (H) | |
| 24,432 | | |
| 274 | | |
| 25,102 | | |
| 308 | |
| Hackensack, NJ (I) | |
| 48,000 | | |
| 572 | | |
| 29,198 | | |
| 98 | |
| Damascus, MD (J) | |
| 19,865 | | |
| 296 | | |
| 20,357 | | |
| 362 | |
| Middletown, NY (K) | |
| 15,922 | | |
| 203 | | |
| 16,200 | | |
| 236 | |
| Total fixed rate | |
| 209,274 | | |
| 1,884 | | |
| 181,757 | | |
| 1,530 | |
| Frederick, MD (L) | |
| 22,710 | | |
| 70 | | |
| 23,241 | | |
| 209 | |
| Baltimore, MD (M) | |
| 118,520 | | |
| 1,439 | | |
| 115,316 | | |
| — | |
| Line of credit - Provident Bank (N) | |
| — | | |
| 105 | | |
| 3,121 | | |
| 124 | |
| Total variable rate | |
| 141,230 | | |
| 1,614 | | |
| 141,678 | | |
| 333 | |
| Total | |
$ | 350,504 | | |
$ | 3,498 | | |
$ | 323,435 | | |
$ | 1,863 | |
| |
(A) |
Payable in monthly installments of $115,850 including interest at 5.37% through February 2022 at which time the outstanding balance is due. The mortgage is secured by a residential building in Rockaway, New Jersey having a net book value of approximately $15,590,000 as of October 31, 2018. |
|
(B) |
On January 14, 2013, FREIT refinanced
its Westwood Plaza mortgage loan in the amount of $8.0 million, with a new mortgage loan in the amount of $22,750,000, which is
payable in monthly installments of $129,702 including interest at 4.75% through January 2023 at which time the outstanding balance
is due. The new mortgage is secured by a retail building in Westwood, New Jersey having a net book value of approximately $7,359,000
as of October 31, 2018. |
| |
(C) |
The loan, modified effective January 1, 2016, was reduced to interest only payments based on a rate of 4.5% resulting in monthly payments of approximately $19,600. This loan became due on March 1, 2018. FREIT is currently operating under the same terms and conditions of the existing agreement while working with the lender, Oritani Bank, to extend the maturity date of the loan and to provide for monthly payments of principal and interest. Until such time as a definitive agreement providing for an extension of the loan is entered into, there can be no assurance the loan will be extended. The mortgage is secured by a retail building in Patchogue, New York having a net book value of approximately $6,268,000 as of October 31, 2018. |
| |
(D) |
Payable in monthly installments of $121,100 including interest at 6.09% through September 1, 2019 at which time the outstanding balance is due with an automatic one-year extension of this loan. The mortgage is secured by an apartment building in Wayne, New Jersey having a net book value of approximately $1,663,000 as of October 31, 2018. |
|
|
(E) |
On November 19, 2013, FREIT refinanced mortgage loans scheduled to mature on December 1, 2013 with a new mortgage loan in the amount of $11,200,000 payable in monthly installments of $57,456 including interest at 4.54% through December 1, 2023 at which time the outstanding balance is due. The mortgage is secured by an apartment building in River Edge, New Jersey having a net book value of approximately $804,000 as of October 31, 2018. |
|
|
(F) |
On
December 7, 2017, Station Place on Monmouth, LLC (owned 100% by FREIT) closed on a mortgage loan in the amount of $12,350,000
held by Provident Bank to purchase the Station Place property in Red Bank, New Jersey (see Note 3 to FREIT’s consolidated
financial statements). Interest-only payments are required each month for the first two years of the term and thereafter, principal
payments plus accrued interest will be required each month through maturity. The loan bears a floating interest rate equal to
180 basis points over the one-month BBA LIBOR with a maturity date of December 15, 2027. In order to minimize interest
rate volatility during the term of the loan, Station Place on Monmouth, LLC entered into an interest rate swap agreement that,
in effect, converted the floating interest rate to a fixed interest rate of 4.35% over the term of the loan. (See Note 6 to FREIT’s
consolidated financial statements for additional information relating to the interest rate swap.) The mortgage is secured by an
apartment building in Red Bank, New Jersey having a net book value of approximately $19,303,000 as of October 31, 2018.
As of October 31, 2018, Station Place on Monmouth, LLC was not,
and is not currently, in compliance with a loan covenant contained in the mortgage loan held by Provident Bank. The lender waived
compliance with the loan covenant through October 31, 2018. The lender has agreed in principle to modifications of the loan covenant
that will allow Station Place on Monmouth, LLC to comply with the covenant going forward, subject to execution of a definitive
agreement providing for the modifications. Until such time as a definitive agreement is entered into, there can be no assurance
the loan covenant will be modified. |
| |
(G) |
Payable in monthly
installments of $120,752 including interest of 4.62% through November 1, 2020
at which time the outstanding balance is due. The mortgage is secured by
an apartment building in Westwood, New Jersey having a net book value
of approximately $9,231,000 as of October 31, 2018. |
| |
(H) |
On September 29, 2016, Wayne PSC, LLC refinanced its $24,200,000 mortgage loan held by Metropolitan Life Insurance Company, with a new mortgage loan from People’s United Bank in the amount of $25,800,000. The new loan bears a floating interest rate equal to 220 basis points over the one-month BBA LIBOR with a maturity date of October 1, 2026. In order to minimize interest rate volatility during the term of the loan, Wayne PSC, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 3.625% over the term of the loan. This refinancing resulted in: (i) a reduction in interest rate from 6.04% to 3.625% and (ii) net refinancing proceeds of approximately $1 million that were distributed to the partners in Wayne PSC, LLC with FREIT receiving $0.4 million based on it 40% membership interest in Wayne PSC, LLC. (See Note 6 to FREIT’s consolidated financial statements for additional information relating to the interest rate swap.) The mortgage is secured by a shopping center in Wayne, New Jersey having a net book value of approximately $25,034,000 as of October 31, 2018 including approximately $0.2 million classified as construction in progress. |
| |
(I) |
On January 8, 2018, Pierre Towers, (which
is owned by S And A Commercial Associates Limited Partnership (“S&A”), a consolidated subsidiary of FREIT), refinanced
its $29.1 million loan held by State Farm with a new mortgage loan from New York Life Insurance in the amount of $48 million. Pierre
Towers paid New York Life Insurance a good faith deposit in the amount of $960,000 (which was included in prepaid expenses and
other assets on the accompanying consolidated balance sheet as of October 31, 2017) and was reimbursed by New York Life when the
loan was closed in January 2018. This refinancing resulted in: (i) a reduction in the annual interest rate from a fixed rate of
5.38% to a fixed rate of 3.88%; and (ii) net refinancing proceeds of approximately $17.2 million (after giving effect to a $1.2
million loan prepayment cost to pay-off the loan held by State Farm) that were distributed to the partners in S&A with FREIT
receiving approximately $11.2 million, based on its 65% membership interest in S&A, which can be used for capital expenditures
and general corporate purposes.
The loan is interest-only for the first
five years of the term with monthly installments of $155,200 each month through January 2023. Thereafter, monthly installments
of principal plus interest totaling $225,851.10 will be required each month until January 2028 at which time the unpaid balance
is due. The mortgage is secured by an apartment building in Hackensack, New Jersey having a net book value of approximately $37,619,000
as of October 31, 2018. |
| |
(J) |
On December 26, 2012, Damascus Centre,
LLC refinanced its construction loan with long-term financing provided by People’s United Bank and the first tranche of the
new loan was taken-down in the amount of $20 million. Based on leasing and net operating income at the shopping center, People’s
United Bank agreed to a take down of the second tranche of this loan on April 22, 2016 in the amount of $2,320,000, of which approximately
$470,000 was readily available and the remaining $1,850,000 was held in escrow (included in prepaid expenses and other assets in
the accompanying consolidated balance sheet as of October 31, 2017) and would be available to Damascus Centre, LLC once certain
tenants opened and began paying rent. In July 2018, these funds totaling $1,850,000 were released from escrow by the bank and became
readily available to Damascus Centre, LLC. Damascus Centre, LLC distributed amounts due to FREIT and certain members of Damascus
100.
The loan has a maturity date of January
3, 2023 and bears a floating interest rate equal to 210 points over the BBA LIBOR. In order to minimize interest rate volatility
during the term of this loan, Damascus Centre, LLC entered into an interest rate swap agreement that, in effect, converted the
floating interest rate to a fixed interest rate on each tranche of this loan, resulting in a fixed rate of 3.81% over the term
of the first tranche of this loan and a fixed rate of 3.53% over the term of the second tranche of this loan. (See Note 6 to FREIT’s
consolidated financial statements for additional information relating to the interest rate swaps.) The shopping center securing
the loan has a net book value of approximately $26,774,000 as of October 31, 2018. |
| |
(K) |
On December 29, 2014, FREIT
Regency, LLC closed on a $16.2 million mortgage loan with Provident Bank. The loan bears a floating interest rate equal to 125
basis points over the one-month BBA LIBOR and the loan will mature on December 15, 2024. Interest-only payments had been required
each month through December 15, 2017 and thereafter, principal payments of $27,807 (plus accrued interest) are required each month
through maturity. In order to minimize interest rate volatility during the term of the loan, FREIT Regency, LLC entered into an
interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 3.75% over the
term of the loan. (See Note 6 to FREIT’s consolidated financial statements for additional information relating to the interest
rate swap.) The mortgage is secured by an apartment complex in Middletown, New York having a net book value of $19,231,000 as
of October 31, 2018. |
| |
(L) |
On April 28, 2017, WestFREIT Corp., a consolidated subsidiary, refinanced its $22 million mortgage loan held by Wells Fargo Bank, with a new mortgage loan from Manufacturer’s and Traders Trust Company in the amount of $23.5 million. The new loan bears a floating interest rate equal to 275 basis points over the one-month LIBOR and has a maturity date of April 28, 2019 with the option to extend for 12 months. This refinancing resulted in: (i) a reduction in the annual interest rate from a fixed rate of 5.55% to a variable rate and (ii) net refinancing proceeds of approximately $1.1 million which have been used for general corporate purposes. The new loan is payable in monthly installments of interest (as defined above) plus principal of $43,250 through May 2018 and principal of $45,250 from June 2018 through May 2019 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 $14,195,000 as of October 31, 2018. |
| |
(M) |
The original Rotunda acquisition loan
for $22.5 million, which was subsequently reduced to $19.5 million on February 1, 2010, was acquired by FREIT on May 28, 2013.
FREIT subsequently sold this loan to Wells Fargo Bank. On December 9, 2013, Grande Rotunda, LLC, a consolidated subsidiary, closed
with Wells Fargo Bank on a construction loan of up to $120 million to be used to redevelop and expand the Rotunda property in Baltimore,
Maryland with a term of four (4) years, with one twelve-month extension, at a rate of 225 basis points over the monthly LIBOR.
On November 23, 2016, the following terms
and conditions of this loan were modified: (i) the total amount that could have been drawn on this loan was decreased from $120
million to $116.1 million, allowing for an additional draw of $2.1 million over the then existing balance of approximately $114
million to be used for retail tenant improvements and leasing commissions; (ii) leasing benchmarks were no longer required to be
met including the waiver of the leasing benchmarks FREIT was not in compliance with as of June 30, 2016; (iii) Grande Rotunda,
LLC provided an interest reserve to Wells Fargo Bank in the amount of $2 million for the purpose of funding interest payments,
and was obliged to replenish the account balance to $1 million if it should fall below $500,000; (iv) the maturity date of the
loan was changed from December 31, 2017 to October 31, 2017 with no option to extend; and (v) the interest rate on the amount outstanding
on the loan was increased by 25 basis points to 250 basis points over the monthly LIBOR. The following terms and conditions of
this loan were modified and effective as of October 31, 2017: (i) the maturity date of the loan was extended 120 days from October
31, 2017 to February 28, 2018; (ii) the interest rate on the amount outstanding on the loan was increased by 35 basis points to
285 basis points over the monthly LIBOR through December 31, 2017; and (iii) the interest rate on the amount outstanding on the
loan was increased by 65 basis points to 315 basis points over the monthly LIBOR from January 1, 2018 through February 28, 2018.
On February 7, 2018, Grande Rotunda,
LLC refinanced its $115.3 million construction loan held by Wells Fargo with a new loan held by Aareal Capital Corporation in the
amount of approximately $118.5 million with additional funding available for retail tenant improvements and leasing costs in the
amount of $3,380,000. This refinancing paid off the loan previously held by Wells Fargo, funded loan closing costs and paid the
amount due to Hekemian Development Resources for a development fee of $900,000 plus accrued interest of approximately $45,000 (See
Note 9 to FREIT’s consolidated financial statements for further details on this fee). This loan is secured by the Rotunda
property, bears a floating interest rate at 285 basis points over the one-month LIBOR rate and has a maturity date of February
6, 2021 with two one-year renewal options. As part of this transaction, Grande Rotunda, LLC purchased an interest rate cap on LIBOR
for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two
years of this loan. As of October 31, 2018, approximately $118.5 million of this loan facility was drawn down and the interest
rate was approximately 5.13%. The loan is secured by the Rotunda property, which has a net book value of approximately $154,526,000
as of October 31, 2018. |
| |
(N) |
Credit line: On October 27, 2017, FREIT’s revolving line of credit provided by the Provident Bank was renewed for a three-year term ending on October 27, 2020 at which point no further advances shall be permitted and provided the line of credit is not renewed by the lender, the outstanding principal balance of the line of credit shall convert to a commercial term loan maturing on October 31, 2022. Draws against the credit line can be used for working capital needs and standby letters of credit. Draws against the credit line are secured by mortgages on FREIT’s Franklin Crossing Shopping Center in Franklin Lakes, New Jersey and retail space in Glen Rock, New Jersey. The total line of credit was increased from $12.8 million to $13 million and the interest rate on the amount outstanding will be at a floating rate of 275 basis points over the 30-day LIBOR with a floor of 3.75%. During Fiscal 2017, FREIT utilized $3 million of its credit line to fund tenant improvements for new retail tenants at the Rotunda property. As of October 31, 2017, approximately $3.1 million was outstanding (including closing costs of approximately $0.1 million related to the renewal of the line). In February 2018, FREIT repaid the line of credit in the amount of $3.1 million. As of October 31, 2018, there was no amount outstanding and $13 million was available under the line of credit. |
Certain of the
Company’s mortgage loans and the Credit Line contain financial covenants. Except as noted in Note 5F above, the
Company was in compliance with all of its financial covenants as of October 31, 2018.
Fair value of long-term debt:
The following table shows the
estimated fair value and carrying value of FREIT’s long-term debt at October 31, 2018 and 2017:
| |
|
October 31, |
|
October 31, |
| ($ in Millions) |
|
2018 |
|
2017 |
| Fair Value |
|
$338.3 |
|
$317.8 |
| |
|
|
|
|
| Carrying Value |
|
$347.0 |
|
$321.6 |
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. The fair value is based on observable inputs (level 2 in the fair
value hierarchy as provided by authoritative guidance).
Principal amounts (in thousands
of dollars) due under the above obligations in each of the five years subsequent to October 31, 2018 are as follows:
Year Ending
October 31, |
|
Amount |
|
| 2019 |
|
$ |
48,440 |
(a)(c) |
| 2020 |
|
$ |
3,727 |
|
| 2021 |
|
$ |
141,018 |
(b) |
| 2022 |
|
$ |
17,388 |
|
| 2023 |
|
$ |
36,878 |
|
| |
|
|
|
|
| (a) | Two loans approximating $39.5 million are extendable for a period of one (1) year. |
| (b) | Includes Rotunda loan in the amount of approximately $118.5 million refinanced with Aareal Capital Corporation on February
7, 2018. (See Note 5(M) ) |
| (c) | Excludes $12.3 million attributable to Station Place assuming amendment of loan document. |
Note 6 - Interest
rate cap and swap contracts:
On February 7, 2018, Grande Rotunda,
LLC, a consolidated subsidiary, refinanced its $115.3 million construction loan held by Wells Fargo with a new loan held by Aareal
Capital Corporation in the amount of approximately $118.5 million with additional funding available for retail tenant improvements
and leasing costs in the amount of $3,380,000. This loan bears a floating interest rate at 285 basis points over the one-month
LIBOR rate and has a maturity date of February 6, 2021. At October 31, 2018, the total amount outstanding on this loan was approximately
$118.5 million. As part of this transaction, Grande Rotunda, LLC purchased an interest rate cap on LIBOR for the full amount that
can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan. At October
31, 2018, the derivative financial instrument has a notional amount of $121.9 million and a maturity date of March 5, 2020.
On December 7, 2017, Station Place
on Monmouth, LLC (owned 100% by FREIT) closed on a $12,350,000 mortgage loan with Provident Bank. The loan bears a floating interest
rate equal to 180 basis points over the one-month BBA LIBOR with a maturity date of December 15, 2027. At October 31, 2018, the
total amount outstanding on this loan was $12,350,000. In order to minimize interest rate volatility during the term of this loan,
Station Place on Monmouth, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate
to a fixed interest rate of 4.35% over the term of the loan. At October 31, 2018, the derivative financial instrument has a notional
amount of $12,350,000 and a maturity date of December 2027.
On September 29, 2016, Wayne PSC,
LLC, a consolidated subsidiary, refinanced its $24.2 million mortgage loan held by Metropolitan Life Insurance Company, with a
new mortgage loan from People’s United Bank in the amount of $25.8 million. The new loan bears a floating interest rate equal
to 220 basis points over the one-month BBA LIBOR with a maturity date of October 1, 2026. At October 31, 2018, the total amount
outstanding on this loan was approximately $24.4 million. In order to minimize interest rate volatility during the term of the
loan, Wayne PSC, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed
interest rate of 3.625% over the term of the loan. At October 31, 2018, the derivative financial instrument has a notional amount
of approximately $24.4 million and a maturity date of October 2026.
On December 26, 2012, Damascus
Centre, LLC refinanced its construction loan with long-term financing provided by People’s United Bank and the first tranche
of the new loan was taken down in the amount of $20 million. Based on leasing and net operating income at the shopping center,
People’s United Bank agreed to a take down of the second tranche of this loan on April 22, 2016 in the amount of $2,320,000.
The total amount outstanding for both tranches of this loan held with People’s United Bank as of October 31, 2018 was approximately
$19.9 million. The loan has a maturity date of January 3, 2023 and bears a floating interest rate equal to 210 basis points over
the one-month BBA LIBOR. In order to minimize interest rate volatility during the term of this loan, Damascus Centre, LLC entered
into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate on each tranche
of this loan, resulting in a fixed rate of 3.81% over the term of the first tranche of this loan and a
fixed rate of 3.53% over
the term of the second tranche of this loan. At October 31, 2018, the derivative financial instrument has a notional amount of
approximately $19.9 million and a maturity date of January 2023.
On December 29, 2014, FREIT Regency,
LLC closed on a $16.2 million mortgage loan with Provident Bank. The loan bears a floating interest rate equal to 125 basis points
over the one-month BBA LIBOR and the loan will mature on December 15, 2024. At October 31, 2018, the total amount outstanding on
this loan was approximately $15.9 million. In order to minimize interest rate volatility during the term of the loan, FREIT Regency,
LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate
of 3.75% over the term of the loan. At October 31, 2018, the derivative financial instrument has a notional amount of approximately
$15.9 million and a maturity date of December 2024.
In accordance with ASC 815, “Accounting
for Derivative Instruments and Hedging Activities”, FREIT is accounting for the Damascus Centre, LLC, FREIT Regency,
LLC, Wayne PSC, LLC and Station Place on Monmouth, LLC interest rate swaps as effective cash flow hedges marking these contracts
to market, taking into account present interest rates compared to the contracted fixed rate over the life of the contract and recording
the unrealized gain or loss on the swaps in comprehensive income. For the year ended October 31, 2018, FREIT recorded an unrealized
gain of approximately $3,113,000 in comprehensive income representing the change in the fair value of these cash flow hedges during
such period with a corresponding asset of approximately $955,000 for the Damascus Centre swaps, $2,452,000 for the Wayne PSC swap,
$408,000 for the Regency swap and $460,000 for the Station Place on Monmouth swap as of October 31, 2018. For the year ended October
31, 2017, FREIT recorded an unrealized gain of $2,952,000 in comprehensive income representing the change in the fair value of
these cash flow hedges during such period with a corresponding asset of approximately $275,000 for the Damascus Centre swaps, $1,325,000
for the Wayne PSC swap and a corresponding liability of approximately $439,000 for the Regency swap as of October 31, 2017. For
the year ended October 31, 2016, FREIT recorded an unrealized loss of $725,000 in comprehensive income representing the change
in the fair value of the swaps during such period with a corresponding liability of $521,000 for the Damascus Centre swaps and
$1,361,000 for the Regency swap and a corresponding asset of $91,000 for the Wayne PSC swap as of October 31, 2016.
The Grande Rotunda, LLC interest
rate cap is for accounting purposes deemed to be accounted for as an ineffective cash flow hedge with a corresponding gain or loss
being recorded in FREIT’s income statement. For the year ended October 31, 2018, FREIT recorded an unrealized gain in the
consolidated statement of income of approximately $72,000 for the Grande Rotunda, LLC interest rate cap representing the change
in the fair value of this ineffective cash flow hedge during such period with a corresponding asset of approximately $159,000 as
of October 31, 2018.
The fair values are based on observable
inputs (level 2 in the fair value hierarchy as provided by authoritative guidance).
Note 7 - Capitalized interest
Interest costs associated with
amounts expended for the Rotunda development were capitalized and included in the cost of the project. Capitalization of interest
ceased upon substantial completion of the project which occurred as of the end of the third quarter of Fiscal 2016. There was no
interest capitalized in Fiscal 2018 and Fiscal 2017. Interest capitalized during the year ended October 31, 2016 amounted to approximately
$2,611,000.
Note 8 - Commitments and contingencies:
Leases:
Commercial tenants:
FREIT leases commercial space having
a net book value of approximately $152.6 million at October 31, 2018 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 non-cancelable operating leases in years subsequent to October 31, 2018 is as follows:
| Year Ending October 31, |
|
Amount |
|
| 2019 |
|
$ |
19,511 |
|
| 2020 |
|
|
18,725 |
|
| 2021 |
|
|
16,825 |
|
| 2022 |
|
|
13,483 |
|
| 2023 |
|
|
10,924 |
|
| Thereafter |
|
|
52,561 |
|
| Total |
|
$ |
132,029 |
|
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 for the period ended October 31, 2018 were
not material.
Residential tenants:
Lease terms for residential tenants
are usually one to two years.
Environmental concerns:
The Westwood Plaza Shopping Center
property is in a Flood Hazard Zone. FREIT maintains flood insurance in the amount of $500,000 for the subject property, which is
the maximum available under the 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.
Prior to its purchase in November
2002 by Wayne PSC, LLC, a 40% owned consolidated affiliate of FREIT (“Wayne PSC”), a Phase I and Phase II Environmental
Assessment of the Preakness shopping center revealed soil and ground water contamination with Percloroethylene (Dry Cleaning Fluid)
caused by the mishandling of this chemical by a former dry cleaner tenant. The seller of the center to Wayne PSC has paid for and
completed all required remediation work in accordance with the NJDEP standards, and this matter is now closed. In prior years,
FREIT conducted environmental audits for all of its properties except for its undeveloped land and retail properties in Franklin
Lakes (Franklin Crossing) and Glen Rock, New Jersey. Except as noted 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.
FREIT has determined that several
of its properties contain lead based paint (“LBP”). FREIT believes that it complies with all federal, state and local
requirements as they pertain to LBP.
FREIT does not believe that the
environmental conditions described above will have a material adverse effect upon the capital expenditures, revenues, earnings,
financial condition or competitive position of FREIT.
Note 9 - Management agreement, fees and transactions with
related party:
On April 10, 2002, FREIT and Hekemian
& Co., Inc. (“Hekemian”) executed a Management Agreement whereby Hekemian would continue as Managing Agent for
FREIT. The term of the Management Agreement was renewed on November 1, 2017 for a two-year term which will expire on October 31,
2019. The Management Agreement automatically renews for successive periods of two years unless either party gives not less than
six (6) months prior notice to the other of non-renewal.
Hekemian currently manages all
the properties owned by FREIT and its affiliates, except for the office building at The Rotunda located in Baltimore, Maryland,
which is managed by an independent third party management company. However, FREIT may retain other managing agents to manage properties
acquired after April 10, 2002 and to perform various other duties such as sales, acquisitions, and development with respect to
any or all properties. Hekemian does not serve as the exclusive property acquisition advisor to FREIT and is not required to offer
potential acquisition properties exclusively to FREIT before acquiring those properties for its own account. The Management Agreement
includes a detailed schedule of fees for those services, which Hekemian may be called upon to perform. The Management Agreement
provides for a termination fee in the event of a termination or non-renewal of the Management Agreement under certain circumstances.
The Management Agreement with Hekemian,
effective November 1, 2001, requires the payment of management fees equal to 4% to 5% of rents collected. Such fees, charged to
operations, were approximately $2,438,000, $2,216,000, and $1,930,000 in Fiscal 2018, 2017 and 2016, respectively. In addition,
the Management Agreement provides for the payment to Hekemian of leasing commissions, as well as the reimbursement of operating
expenses incurred on behalf of FREIT. Such commissions and reimbursements amounted to approximately $742,000, $1,191,000 and $577,000
in Fiscal 2018, 2017 and 2016, respectively. Total Hekemian management fees outstanding at October 31, 2018 and 2017 were approximately
$212,000 and $200,000, respectively, and included in accounts payable on the accompanying consolidated balance sheets. FREIT also
uses the resources of the Hekemian insurance department to secure various insurance coverages for its properties and subsidiaries.
Hekemian is paid a commission for these services. Such commissions were charged to operations and amounted to approximately $178,000,
$175,000 and $164,000 in Fiscal 2018, 2017 and 2016, respectively.
Damascus Centre, LLC owns and operates
the Damascus Center. During Fiscal 2005, the Board authorized an investor group, Damascus 100, LLC (“Damascus 100”),
to acquire a 30% equity interest in Damascus Centre, LLC. The sale price, based on the fair market value of the
shopping center, reduced FREIT’s equity interest to 70%. The sale was completed on October 31, 2006, at a sales price of
$3,224,000, of which FREIT financed approximately $1,451,000. The sale price was equivalent to the book value of the interest sold.
Grande Rotunda, LLC owns and operates
the Rotunda property. FREIT owns a 60% equity interest in Grande Rotunda, LLC and Rotunda 100, LLC (“Rotunda 100”)
owns a 40% equity interest in Grande Rotunda, LLC.
The equity owners of Rotunda 100
and Damascus 100 are principally employees of Hekemian. To incentivize the employees of Hekemian, FREIT advanced, only to employees
of Hekemian, up to 50% of the amount of the equity contributions that the Hekemian employees were required to invest in Rotunda
100 and Damascus 100. These advances were in the form of secured loans that bear interest that will float at 225 basis points over
the ninety (90) day LIBOR, as adjusted each November 1, February 1, May 1 and August 1. These loans are secured by the Hekemian
employees’ interests in Rotunda 100 and Damascus 100, and are full recourse loans. Interest only payments are required to
be made when billed.
No principal payments are required
during the term of the notes, except that the borrowers are required to pay to FREIT all refinancing proceeds and other cash flow
they receive from their interests in Damascus Centre, LLC and Grande Rotunda, LLC. These payments shall be applied first to accrued
and unpaid interest and then any outstanding principal. The notes had maturity dates at the earlier of (a) ten (10) years after
issue (Grande Rotunda, LLC– 6/19/2015, Damascus Centre, LLC – 9/30/2016), or, (b) at the election of FREIT, ninety
(90) days after the borrower terminates employment with Hekemian, at which time all outstanding unpaid principal is due. On May
8, 2008, the Board approved amendments to the existing loan agreements with the Hekemian employees, relative to their interests
in Rotunda 100, to increase the aggregate amount that FREIT may advance to such employees from $2 million to $4 million. On June
4, 2015, the Board approved an extension of the maturity date of the secured loans to occur the earlier of (a) June 19, 2018 or
(b) five days after the closing of a permanent mortgage loan secured by the Rotunda property. On December 7, 2017, the Board approved
a further extension of the maturity dates of these loans to the date or dates upon which distributions of cash are made by Grande
Rotunda, LLC to its members as a result of a refinancing or sale of Grande Rotunda, LLC or the Rotunda property.
In the fourth quarter of Fiscal
2018, the Damascus 100 members repaid their secured notes outstanding in full for a total payment of $1,870,000 which was composed
of principal in the amount of $1,451,000 and accrued interest in the amount of approximately $419,000. As of October 31, 2018,
only the principal and accrued interest on the secured notes receivable with Rotunda 100 members was outstanding. As such, the
aggregate outstanding principal balance of the notes at October 31, 2018 and 2017 was $4,000,000 and $5,451,000, respectively.
The accrued but unpaid interest related to these notes for Fiscal 2018 and Fiscal 2017 amounted to approximately $862,000 and $1,068,000,
respectively, and is included in accounts receivable on the accompanying consolidated balance sheets.
With regard to the funding of the
Rotunda redevelopment project, Wells Fargo Bank, a previous lender, required that Grande Rotunda, LLC contribute not less than
$14,460,000 towards the construction before any construction loan proceeds could be disbursed. To secure these funds, Grande Rotunda,
LLC made a capital call on its members, which are FREIT and Rotunda 100. FREIT’s share (60%) amounted to approximately $8.7
million, and the Rotunda 100 members’ share (40%) amounted to approximately $5.8 million. FREIT, pursuant to previous agreements,
made secured loans to the Rotunda 100 members of approximately $2.1 million towards their share of the $5.8 million capital call,
which were in addition to the loans that FREIT made to the Rotunda 100 members in connection with their initial equity contribution
to Rotunda 100 (described above). The balance of Rotunda 100’s capital call of approximately $3.7 million was initially made
by FREIT until it was repaid by Rotunda 100 in August 2014. As of October 31, 2018, FREIT and Rotunda 100 have made their required
capital call contributions of $8.7 million and $5.8 million, respectively, towards the Rotunda construction financing. Both FREIT
and the Rotunda 100 members are treating their required capital call contributions as additional investments in Grande Rotunda,
LLC.
In Fiscal 2017, Grande Rotunda,
LLC incurred substantial expenditures at the Rotunda property related to retail tenant improvements, leasing costs and operating
expenditures which, in the aggregate, exceeded revenues as the property was still in the rent up phase and the construction loan
held with Wells Fargo at that time was at its maximum level, with no additional funding available to draw. Accordingly, the equity
owners in Grande Rotunda, LLC (FREIT with a 60% ownership and Rotunda 100 with a 40% ownership) contributed their respective pro-rata
share of any cash needs through loans to Grande Rotunda, LLC. As of October 31, 2018 and 2017, Rotunda 100 has funded Grande Rotunda,
LLC with approximately $5.4 million and $5.2 million (including interest), respectively, which is included in “Due to affiliate”
on the accompanying consolidated balance sheets.
From time to time, FREIT engages
Hekemian to provide additional services, such as consulting services related to development, property sales and financing activities
of FREIT. Separate fee arrangements are negotiated between Hekemian and FREIT with respect to such additional services. Such fees
incurred to Hekemian and Resources during Fiscal 2018, 2017 and 2016 were $1,195,000, $467,500 and $443,000, respectively. Fees
incurred during Fiscal 2018 related to commissions to Hekemian for the following: $522,500 for the purchase of the Station Place
property; $400,000 for the refinancing of the Grande Rotunda, LLC loan; $240,000 for the refinancing of the Pierre Towers, LLC
loan; $32,500 for the renewal of FREIT’s line of credit. Fees incurred in Fiscal 2017 related to commissions to Hekemian
relating to the sale of the Hammel Gardens property. Fees incurred in Fiscal 2016 related to the Rotunda development project and
were capitalized and included in the cost of the project.
In Fiscal 2007, FREIT’s Board
of Trustees approved and FREIT executed a development fee agreement for the Rotunda redevelopment project for the development services
to be provided by Hekemian Development Resources, LLC (“Resources”), a wholly-owned subsidiary of Hekemian. The development
fee agreement, as amended, for the Rotunda provided for Resources to receive a fee equal to 6.375% of the development costs as
defined in the
development agreement, less the amount of $3 million previously paid to Hekemian for the Rotunda project. As part
of this agreement, the Board approved the payment of a fee to Resources in the amount of $1.4 million in connection with the revision
to the scope of the Rotunda redevelopment project. Grande Rotunda, LLC paid $500,000 of this fee to Resources in Fiscal 2013 and
the balance of $900,000 became due upon the issuance of a certificate of occupancy for the multi-family portion of this project.
A final certificate of occupancy was issued in Fiscal 2016; however Resources agreed to defer the payment of the $900,000 balance
of this fee (the $900,000 was included in accounts payable on FREIT’s consolidated balance sheet at October 31, 2017). Grande
Rotunda, LLC paid the $900,000 portion of this fee to Resources in February 2018 in connection with the refinancing of the Wells
Fargo construction loan for the Rotunda property with a new loan from Aareal Capital Corporation. Additionally, Grande Rotunda,
LLC paid Resources the amount of approximately $45,000 representing a mutually agreed upon amount of interest on the $900,000 portion
of the fee for the period during which Hekemian Resources had agreed to defer payment thereof.
Robert S. Hekemian, the Chairman
of the Board and Chief Executive Officer of Hekemian, is the former Chairman and Chief Executive Officer of FREIT. Mr. Hekemian
retired as Chairman and Chief Executive Officer of FREIT effective upon the conclusion of FREIT’s 2018 Annual Meeting of
Shareholders held on April 5, 2018 (the “2018 Annual Meeting”). Robert S. Hekemian, Jr., the President of Hekemian,
is a Trustee of FREIT, and succeeded Robert S. Hekemian as Chief Executive Officer of FREIT effective upon the conclusion of the
2018 Annual Meeting. David Hekemian, a Principal of Hekemian, was elected as a Trustee of FREIT at the 2018 Annual Meeting.
Trustee fee expense (including
interest) incurred by FREIT for Fiscal 2018, 2017 and 2016 was approximately $365,000, $538,000 and $532,000, respectively, for
Robert S. Hekemian, $149,000, $65,000 and $65,000, respectively, for Robert S. Hekemian, Jr. and $26,000, $0 and $0, respectively,
for David Hekemian. (See Note 12 to FREIT’s consolidated financial statements).
Pursuant to the terms of a Consulting
Agreement between Robert S. Hekemian and the Trust, Mr. Hekemian will continue to serve the Trust in a consulting capacity effective
upon conclusion of FREIT’s 2018 Annual Meeting. The Consulting Agreement has a term of four years and obliges Mr. Hekemian
to provide advice and consultation with respect to matters pertaining to FREIT and its subsidiaries, affiliates, assets and business
for no fewer than 30 hours per month during the term of the agreement. FREIT will pay Mr. Hekemian a consulting fee of $5,000 per
month during the term of the Consulting Agreement, which shall be payable in the form of Shares on a quarterly basis (i.e. in quarterly
installments of $15,000). The number of Shares to be issued for each quarterly installment of the consulting fee will be determined
by dividing the dollar amount of the consulting fee by the closing price of one Share on the OTC Pink Open Market as of the close
of trading on the last trading day of the calendar quarter with respect to which such consulting fee is payable. For Fiscal 2018,
consulting fee expense for Robert S. Hekemian was approximately $34,200.
Note 10 - Income taxes:
There was no ordinary taxable income
for the fiscal years ended October 31, 2018 and 2017 for FREIT to distribute to its shareholders. As described in Notes 2 and 3
to FREIT’s consolidated financial statements, FREIT completed a like-kind exchange with respect to the sale of the Maywood,
New Jersey property, which was sold on June 12, 2017 resulting in a capital gain of approximately $15.4 million. The tax basis
of Station Place in Red Bank, New Jersey, which was the replacement property in the like-kind exchange, was approximately $18.9
million lower than the acquisition cost of approximately $19.6 million recorded for financial reporting purposes. Accordingly,
no provision for federal or state income taxes related to such gain was recorded in FREIT’s consolidated financial statements
for the fiscal years ended October 31, 2018 and 2017.
FREIT distributed 100% of its ordinary
taxable income for the fiscal year ended October 31, 2016 to its shareholders as dividends. FREIT also distributed 100% of the
capital gain in Fiscal 2016 from the sale of the property in Rochelle Park, New Jersey (See Note 2 to FREIT’s consolidated
financial statements) to its shareholders as dividends. Accordingly, no provision for federal or state income taxes related to
such ordinary taxable income or gain was recorded in FREIT’s consolidated financial statements for the fiscal year ended
October 31, 2016.
As of October 31, 2018, FREIT had
no material uncertain income tax positions. The tax years subsequent to and including the fiscal year ended October 31, 2015 remain
open to examination by the major taxing jurisdictions to which FREIT is subject.
Note 11 - Equity
incentive plan:
On September 10, 1998, the Board
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 (adjusted for stock splits) 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 approved an increase
of 920,000 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, 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 Board will determine the actual terms
of each award.
On April 4, 2007, FREIT shareholders
approved amendments to the 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. On April 5, 2018, FREIT shareholders approved an amendment to FREIT’s Equity
Incentive Plan reserving an additional 300,000 shares for issuance under the Plan. As of October 31, 2018, 447,020 shares are available
for issuance under the Plan.
On September 4, 2014, the Board
approved the grant of 246,000 non-qualified share options under the Plan to certain FREIT executive officers, the members of the
Board and certain employees of Hekemian & Co., Inc., FREIT’s managing agent. The options have an exercise price of $18.45
per share, will vest in equal annual installments over a 5-year period and will expire 10 years from the date of grant, which will
be September 3, 2024.
On November 10, 2016, the Board
approved the grant of 38,000 non-qualified share options under the Plan to two members of the Board who were appointed to the Board
during Fiscal 2016. The options have an exercise price of $21.00 per share, will vest in equal annual installments over a 5-year
period and will expire 10 years from the date of grant, which will be November 9, 2026.
On May 3, 2018, the Board approved
the grant of 38,000 non-qualified share options under the Equity Incentive Plan to two members of the Board who were appointed
to the Board during Fiscal 2018. The options have an exercise price of $15.50 per share, will vest in equal annual installments
over a 5-year period and will expire 10 years from the date of grant, which will be May 2, 2028.
The following table summarizes
stock option activity for Fiscal 2018:
| | |
Year Ended October 31, | |
| | |
2018 | |
| | |
No. of Options | | |
Exercise | |
| | |
Outstanding | | |
Price | |
| Options outstanding at beginning of year | |
| 267,780 | | |
$ | 18.81 | |
| Options granted during year | |
| 38,000 | | |
$ | 15.50 | |
| Options forfeited/cancelled during year | |
| — | | |
$ | — | |
| Options outstanding at end of year | |
| 305,780 | | |
$ | 18.40 | |
| Options vested and expected to vest | |
| 299,140 | | |
| | |
| Options exercisable at end of year | |
| 200,260 | | |
| | |
The estimated fair value of options granted during Fiscal
2018 was $2.09 per option. Such value was estimated on the grant date using a binomial lattice option pricing model using the following
assumptions:
| · | Expected volatility – 27.6% |
| · | Risk-free interest rate – 2.94% |
| · | Imputed option life – 6.6 years |
| · | Expected dividend yield – 4.7% |
The estimated fair value of options
granted during Fiscal 2017 was $3.54 per option. Such value was estimated on the grant date using a binomial lattice option pricing
model using the following assumptions:
| · | Expected volatility – 30.30% |
| · | Risk-free interest rate – 2.23% |
| · | Imputed option life – 6.3 years |
| · | Expected dividend yield – 4.66% |
The expected volatility over the
options’ expected life was based on the historical volatility of the weekly closing price of the Company’s stock over
a five (5) year period. The risk-free interest rate was based on the annual yield on the grant date of a zero-coupon U.S. Treasury
Bond the maturity of which equals the option’s expected life. The imputed option life was based on the simplified expected
term calculation permitted by the SEC, which defines the expected life as the average of the contractual term of the options and
the weighted-average vesting period for all option tranches. The expected dividend yield was based on the Company’s historical
dividend yield, exclusive of capital gain dividends. The fair value is based on observable inputs (level 2 in the fair value hierarchy
as provided by authoritative guidance).
For Fiscal 2018, 2017 and 2016,
compensation expense related to stock options granted amounted to $130,000, $122,000 and $94,000, respectively. At October 31,
2018, there was approximately $229,000 of unrecognized
compensation cost relating to outstanding non-vested stock options to be
recognized over the remaining weighted average vesting period of approximately 2.6 years.
The aggregate intrinsic value of
options vested and expected to vest and options exercisable at October 31, 2018 was approximately $14,000 and $0, respectively.
Note 12 - Deferred
fee plan:
During Fiscal 2001, the Board adopted
a deferred fee plan for its officers and trustees, which was amended and restated in Fiscal 2009 to make the deferred fee plan
compliant with Section 409A of the Internal Revenue Code and the regulations promulgated thereunder (the "Deferred Fee Plan").
Pursuant to the Deferred Fee Plan, any officer or trustee may elect to defer receipt of any fees that would be due them. These
fees include annual retainer and meeting attendance fees as determined by the full Board of Trustees. Prior to the amendments to
the Deferred Fee Plan that went into effect November 1, 2014 (described in the following paragraph), amounts deferred under the
Deferred Fee Plan accrued interest at a rate of 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.
On September 4, 2014, the Board
approved amendments, effective November 1, 2014, to the FREIT Deferred Fee Plan for its Executive Officers and Trustees, one of
which provides for the issuance of share units payable in FREIT shares in respect of (i) deferred amounts of all Trustee fees on
a prospective basis; (ii) interest on Trustee fees deferred prior to November 1, 2014 (payable at a floating rate, adjusted quarterly,
based on the average 10-year Treasury Bond interest rate plus 150 basis points); and (iii) dividends payable in respect of share
units allocated to participants in the Deferred Fee Plan as a result of deferrals described above. The number of share units credited
to a participant’s account will be determined by the closing price of FREIT shares on the date as set forth in the Deferred
Fee Plan.
All fees payable to Trustees for
the year ended October 31, 2018 were deferred under the Deferred Fee Plan except for fees payable to three Trustees, who elected
to receive such fees in cash. All fees payable to Trustees for the year ended October 31, 2017 were deferred under the Deferred
Fee Plan except for the fees payable to one Trustee, who elected to receive such fees in cash. As a result of the amendment to
the Deferred Fee Plan described above, for the years ended October 31, 2018 and 2017, the aggregate amounts of deferred Trustee
fees together with related interest and dividends were approximately $805,800 and $815,800, respectively, which have been paid
through the issuance of 51,109 and 44,548, vested FREIT share units, respectively, based on the closing price of FREIT shares on
the dates as set forth in the Deferred Fee Plan.
For the years ended October 31,
2018 and 2017, FREIT has charged as expense approximately $784,000 and $802,800, respectively, representing deferred Trustee fees
and interest, and the balance of approximately $21,800 and $13,000, respectively, representing dividends payable in respect of
share units allocated to Plan participants, has been charged to equity.
The Deferred Fee Plan, as amended,
provides that cumulative fees together with accrued interest deferred as of November 1, 2014 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, 2018 and 2017, approximately
$4,881,000 and $5,224,000, respectively of fees has been deferred together with accrued interest of approximately $3,576,000 and
$3,854,000, respectively.
Note 13 - Dividends and earnings per share:
FREIT declared dividends of approximately
$1,035,000 ($0.15 per share), $1,024,000 ($0.15 per share) and $8,152,000 ($1.20 per share) to shareholders of record during Fiscal
2018, 2017 and 2016.
Basic earnings per share is calculated
by dividing net income attributable to common equity (numerator) by the weighted average number of shares and vested share units
(See Note 12 to FREIT’s consolidated financial statements) outstanding during each period (denominator). 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, were issued during the period using the Treasury Stock method. Under the Treasury Stock method,
the assumption is that the proceeds received upon exercise of the options, including the unrecognized stock option compensation
expense attributed to future services, are used to repurchase FREIT’s stock at the average market price during the period,
thereby reducing the number of shares to be added in computing diluted earnings per share.
For Fiscal 2018 and 2017, the outstanding
stock options were anti-dilutive with no impact on diluted earnings per share. For Fiscal 2016, the outstanding stock options increased
the average dilutive shares outstanding by approximately 1,627 shares with no impact on earnings per share.
Note 14
- Segment information:
ASC 280-10,
"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.
During the fiscal years ended
October 31, 2018, 2017 and 2016, the commercial segment is comprised of nine (9) properties after giving effect to the sale of
a property on June 17, 2016 (See Note 2 to FREIT’s consolidated financial statements). The residential segment is comprised
of eight (8) properties during the fiscal year ended October 31, 2018, which is inclusive of the property acquired in Fiscal 2018
(Station Place). The residential segment is comprised of seven (7) properties after giving effect to the sale of a property on
June 12, 2017 (See Note 2 to FREIT’s consolidated financial statements) during the fiscal year ended October 31, 2017. The
residential segment is comprised of eight (8) properties during the fiscal year ended October 31, 2016, which includes the 379-unit
apartment complex constructed as part of the redevelopment and expansion project at the Rotunda which was completed in the third
quarter of Fiscal 2016.
The accounting policies of the segments
are the same as those described in Note 1. 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), depreciation, financing costs and other items. 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 attributable to common equity for each of the years in the three-year period ended October 31, 2018. Asset information
is not reported since FREIT does not use this measure to assess performance.
| | |
Years Ended October 31, | |
| | |
2018 | | |
2017 | | |
2016 | |
| | |
(In Thousands of Dollars) | |
| Real estate rental revenue: | |
| | | |
| | | |
| | |
| Commercial | |
$ | 25,464 | | |
$ | 24,114 | | |
$ | 22,694 | |
| Residential | |
| 31,928 | | |
| 26,886 | | |
| 22,952 | |
| Total real estate rental revenue | |
| 57,392 | | |
| 51,000 | | |
| 45,646 | |
| | |
| | | |
| | | |
| | |
| Real estate operating expenses: | |
| | | |
| | | |
| | |
| Commercial | |
| 11,861 | | |
| 11,791 | | |
| 10,661 | |
| Residential | |
| 13,022 | | |
| 14,442 | | |
| 11,136 | |
| Total real estate operating expenses | |
| 24,883 | | |
| 26,233 | | |
| 21,797 | |
| | |
| | | |
| | | |
| | |
| Net operating income: | |
| | | |
| | | |
| | |
| Commercial | |
| 13,603 | | |
| 12,323 | | |
| 12,033 | |
| Residential | |
| 18,906 | | |
| 12,444 | | |
| 11,816 | |
| Total net operating income | |
$ | 32,509 | | |
$ | 24,767 | | |
$ | 23,849 | |
| | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | |
| Recurring capital improvements - residential | |
$ | (738 | ) | |
$ | (798 | ) | |
$ | (898 | ) |
| | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | |
| Reconciliation to consolidated net income attributable to common equity: | |
| | | |
| | | |
| | |
| Segment NOI | |
$ | 32,509 | | |
$ | 24,767 | | |
$ | 23,849 | |
| Gain on sale of property | |
| — | | |
| 15,395 | | |
| 314 | |
| Loan prepayment costs relating to property sale | |
| — | | |
| (1,139 | ) | |
| — | |
| Deferred rents - straight lining | |
| 605 | | |
| 634 | | |
| 608 | |
| Lease termination fee | |
| — | | |
| (620 | ) | |
| — | |
| Investment income | |
| 267 | | |
| 206 | | |
| 150 | |
| Unrealized gain on interest rate cap contract | |
| 72 | | |
| — | | |
| — | |
| General and administrative expenses | |
| (2,305 | ) | |
| (2,129 | ) | |
| (2,034 | ) |
| Depreciation | |
| (11,515 | ) | |
| (10,669 | ) | |
| (7,852 | ) |
| Financing costs | |
| (18,667 | ) | |
| (15,762 | ) | |
| (11,936 | ) |
| Net income | |
| 966 | | |
| 10,683 | | |
| 3,099 | |
| Net (income) loss attributable to noncontrolling interests | |
| 517 | | |
| 2,433 | | |
| (94 | ) |
| Net income attributable to common equity | |
$ | 1,483 | | |
$ | 13,116 | | |
$ | 3,005 | |
Note 15-
Anchor tenant termination and modification of lease:
FREIT owns and operates an 87,661
square foot shopping center located in Franklin Lakes, New Jersey, the anchor tenant of which is The Stop & Shop Supermarket
Company, LLC (“Stop & Shop”). On July 26, 2017, Stop & Shop entered into a lease modification with FREIT whereby
the tenant exercised its option to renew the lease for a ten-year period with a right of the tenant to terminate the lease at any
time during the fifth year if the store does not meet certain sales volume levels set forth in the modification. This lease modification,
which provided for a $250,000 reduction in annual rent, has adversely affected and will adversely affect FREIT’s future operating
results.
On January 4, 2017, Macy’s,
Inc. announced its intention to close several of its department stores across the United States, including the approximately 81,160
square foot Macy’s anchor store located at the Preakness Shopping Center in Wayne, New Jersey. Wayne PSC, LLC (“Wayne
PSC”), a 40% owned consolidated affiliate of FREIT, owns and operates this shopping center in which Macy’s operated
its store under a long-term lease and was paying annual rent of approximately $234,000 ($2.88 per square foot) with no future rent
escalations for the remaining term and option periods of the lease. On April 25, 2017, Wayne PSC announced it had agreed to a termination
of Macy’s lease effective as of April 15, 2017. To terminate the lease and take possession of the space, Wayne PSC paid Macy’s
a termination fee of $620,000, which was fully expensed in the second quarter of Fiscal 2017. Wayne PSC expects to re-position
this space and re-lease it to a new tenant (or multiple tenants) at market rents, which are currently higher than the rent provided
for under the terminated Macy’s lease. FREIT will lose total consolidated rental income, including reimbursements, of approximately
$0.2 million until such time as the space is re-leased. FREIT anticipates increased revenue from the space when it is fully
re-leased.
Note 16- Selected quarterly financial
data (unaudited):
The following summary represents
the results of operations for each quarter for the years ended October 31, 2018 and 2017 (in thousands, except per share amounts):
| | |
| | |
| | |
| | |
| | |
| |
| 2018: | |
Quarter Ended | | |
Year Ended | |
| | |
January 31, | | |
April 30, | | |
July 31, | | |
October 31, | | |
October 31, | |
| | |
| | |
| | |
| | |
| | |
| |
| Revenue | |
$ | 14,194 | | |
$ | 14,325 | | |
$ | 14,631 | | |
$ | 14,847 | | |
$ | 57,997 | |
| Expenses | |
| 15,114 | (a) | |
| 12,898 | (b) | |
| 14,520 | | |
| 14,499 | | |
| 57,031 | |
| Net income (loss) | |
| (920 | ) | |
| 1,427 | | |
| 111 | | |
| 348 | | |
| 966 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net (income) loss attributable to noncontrolling interests in subsidiaries | |
| 563 | | |
| (312 | ) | |
| 181 | | |
| 85 | | |
| 517 | |
| Net income (loss) attributable to common equity | |
$ | (357 | ) | |
$ | 1,115 | | |
$ | 292 | | |
$ | 433 | | |
$ | 1,483 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Earnings (loss) per share - basic and diluted | |
$ | (0.05 | )(a) | |
$ | 0.16 | (b) | |
$ | 0.04 | | |
$ | 0.06 | | |
$ | 0.21 | |
| Dividends declared per share | |
$ | — | | |
$ | 0.05 | | |
$ | 0.05 | | |
$ | 0.05 | | |
$ | 0.15 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| 2017: | |
Quarter Ended | | |
Year Ended | |
| | |
January 31, | | |
April 30, | | |
July 31, | | |
October 31, | | |
October 31, | |
| | |
| | |
| | |
| | |
| | |
| |
| Revenue | |
$ | 12,599 | | |
$ | 12,664 | | |
$ | 12,680 | | |
$ | 13,691 | | |
$ | 51,634 | |
| Expenses | |
| 12,943 | | |
| 14,365 | (c) | |
| (421 | )(d) | |
| 14,064 | | |
| 40,951 | |
| Net income (loss) | |
| (344 | ) | |
| (1,701 | ) | |
| 13,101 | | |
| (373 | ) | |
| 10,683 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net loss attributable to noncontrolling interests in subsidiaries | |
| 407 | | |
| 1,002 | | |
| 653 | | |
| 371 | | |
| 2,433 | |
| Net income (loss) attributable to common equity | |
$ | 63 | | |
$ | (699 | ) | |
$ | 13,754 | | |
$ | (2 | ) | |
$ | 13,116 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Earnings (loss) per share - basic and diluted | |
$ | 0.01 | | |
$ | (0.10 | )(c) | |
$ | 2.01 | (d) | |
$ | — | | |
$ | 1.92 | |
| Dividends declared per share | |
$ | 0.15 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 0.15 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| (a) Includes $1.2 million loan prepayment cost related to refinancing of the loan for Pierre Towers, LLC, owned by S And A Commercial Associates Limited Partnership, which is a consolidated subsidiary. ($0.11 per share) |
| (b) Includes $1.5 million in real estate tax refunds and credits related to tax years 2017 through second quarter of Fiscal 2018 at the Icon property, owned by Grande Rotunda, LLC, which is a consolidated subsidiary. ($0.13 per share) |
| (c) Includes expense for lease termination fee paid in the amount of $620,000 to Macy's to terminate the lease and take possession of the space at the Preakness Shopping center located in Wayne, NJ ($0.03 per share) |
| (d) Includes a $15.4 million gain from the sale of the Maywood, New Jersey property ("Hammel Gardens") on June 12, 2017 offset by a $1.1 million loan prepayment cost related to this sale ($2.08 per share) |
FIRST REAL ESTATE INVESTMENT TRUST OF NEW
JERSEY AND SUBSIDIARIES
SCHEDULE III – REAL ESTATE AND ACCUMULATED
DEPRECIATION
OCTOBER 31, 2018
(In Thousands of Dollars)
| Column A |
Column B | |
Column C | |
Column D | |
Column E | |
Column F | |
Column G |
Column H |
Column I |
| |
| |
Initial Cost | |
Costs Capitalized | |
Gross Amount at Which | |
| |
|
|
|
| |
| |
to Company | |
Subsequent
to Acquisition | |
Carried at
Close of Period | |
| |
|
|
|
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
|
Life on |
| |
| |
| |
Buildings | |
| |
| |
| |
| |
Buildings | |
| |
| |
|
|
Which |
| |
Encum- | |
| |
and | |
| |
Improve- | |
Carrying | |
| |
and | |
| |
Accumulated | |
Date of |
Date |
Depreciation |
| Description |
brances | |
Land | |
Improvements | |
Land | |
ments | |
Costs | |
Land | |
Improvements | |
Total (1) | |
Depreciation | |
Construction |
Acquired |
is Computed |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
|
|
| Residential Properties: |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
|
|
| Steuben Arms, River Edge, NJ |
$ | 10,243 | |
$ | 364 | |
$ | 1,773 | |
$ | — | |
$ | 1,490 | |
| | |
$ | 364 | |
$ | 3,263 | |
$ | 3,627 | |
$ | 2,823 | |
1966 |
1975 |
7-40 years |
| Berdan Court, Wayne, NJ |
| 17,334 | |
| 250 | |
| 2,206 | |
| — | |
| 4,626 | |
| | |
| 250 | |
| 6,832 | |
| 7,082 | |
| 5,419 | |
1964 |
1965 |
7-40 years |
| Westwood Hills, Westwood, NJ |
| 20,134 | |
| 3,849 | |
| 11,546 | |
| — | |
| 2,667 | |
| | |
| 3,849 | |
| 14,213 | |
| 18,062 | |
| 8,831 | |
1965-70 |
1994 |
7-39 years |
| Pierre Towers, Hackensack, NJ |
| 48,000 | |
| 8,390 | |
| 37,486 | |
| 19 | |
| 9,254 | |
| | |
| 8,409 | |
| 46,740 | |
| 55,149 | |
| 17,530 | |
1970 |
2004 |
7-40 years |
| Boulders - Rockaway, NJ |
| 16,152 | |
| 1,632 | |
| — | |
| 3,386 | |
| 15,835 | |
| | |
| 5,018 | |
| 15,835 | |
| 20,853 | |
| 5,314 | |
2005-2006 |
1963/1964 |
7-40 years |
| Regency Club - Middletown, NY |
| 15,922 | |
| 2,833 | |
| 17,792 | |
| — | |
| 713 | |
| | |
| 2,833 | |
| 18,505 | |
| 21,338 | |
| 2,107 | |
2003 |
2014 |
7-40 years |
| Icon - Baltimore, MD |
| 65,186 | |
| 5,871 | |
| — | |
| — | |
| 87,667 | |
| | |
| 5,871 | |
| 87,667 | |
| 93,538 | |
| 4,927 | |
2016 |
2005 |
7-40 years |
| Station Place - Red Bank, NJ |
| 12,350 | |
| 8,793 | |
| 10,757 | |
| — | |
| — | |
| | |
| 8,793 | |
| 10,757 | |
| 19,550 | |
| 247 | |
2015 |
2017 |
7-40 years |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
|
|
| Commercial Properties: |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
|
|
| Damascus Shopping Center, |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
|
|
| Damascus, MD |
| 19,865 | |
| 2,950 | |
| 6,987 | |
| 6,296 | |
| 17,454 | |
| | |
| 9,246 | |
| 24,441 | |
| 33,687 | |
| 6,913 | |
1960's |
2003 |
5-39.5 years |
| Franklin Crossing, Franklin Lakes, NJ |
| — | |
| 29 | |
| — | |
| 3,382 | |
| 7,407 | |
| | |
| 3,411 | |
| 7,407 | |
| 10,818 | |
| 3,996 | |
1963/75/97 |
1966 |
5-39.5 years |
| Glen Rock, NJ |
| — | |
| 12 | |
| 36 | |
| — | |
| 219 | |
| | |
| 12 | |
| 255 | |
| 267 | |
| 177 | |
1940 |
1962 |
5-25 years |
| Building formerly occupied by supermarket |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
|
|
| Patchogue, NY |
| 5,231 | |
| 2,128 | |
| 8,818 | |
| — | |
| (8 | ) |
| | |
| 2,128 | |
| 8,810 | |
| 10,938 | |
| 4,670 | |
1997 |
1997 |
15-39.5 years |
| Westridge Square S/C, Frederick, MD |
| 22,710 | |
| 9,135 | |
| 19,159 | |
| (1 | ) |
| 4,682 | |
| | |
| 9,134 | |
| 23,841 | |
| 32,975 | |
| 18,780 | |
1986 |
1992 |
5-31.5 years |
| Westwood Plaza, Westwood, NJ |
| 19,611 | |
| 6,889 | |
| 6,416 | |
| — | |
| 2,453 | |
| | |
| 6,889 | |
| 8,869 | |
| 15,758 | |
| 8,399 | |
1981 |
1988 |
5-31.5 years |
| Preakness S/C, Wayne, NJ |
| 24,432 | |
| 9,280 | |
| 24,217 | |
| — | |
| 2,374 | |
| | |
| 9,280 | |
| 26,591 | |
| 35,871 | |
| 11,123 | |
1955/89/00 |
2002 |
5-39.5 years |
| The Rotunda, Baltimore, MD |
| 53,334 | |
| 10,392 | |
| 14,634 | |
| 232 | |
| 51,368 | |
| | |
| 10,624 | |
| 66,002 | |
| 76,626 | |
| 10,711 | |
1920/2016 |
2005 |
5-40 years |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
|
|
| Land Leased: |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
|
|
| Rockaway, NJ |
| — | |
| 114 | |
| — | |
| — | |
| — | |
| | |
| 114 | |
| — | |
| 114 | |
| — | |
|
1963/1964 |
|
| Vacant Land: |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
|
|
| Franklin Lakes, NJ |
| — | |
| 224 | |
| — | |
| (156 | ) |
| — | |
| | |
| 68 | |
| — | |
| 68 | |
| — | |
|
1966/93 |
|
| Wayne, NJ |
| — | |
| 286 | |
| — | |
| — | |
| — | |
| | |
| 286 | |
| — | |
| 286 | |
| — | |
|
2002 |
|
| Rockaway, NJ |
| — | |
| 51 | |
| — | |
| — | |
| — | |
| | |
| 51 | |
| — | |
| 51 | |
| — | |
|
1963/1964 |
|
| |
$ | 350,504 | |
$ | 73,472 | |
$ | 161,827 | |
$ | 13,158 | |
$ | 208,201 | |
$ | — | |
$ | 86,630 | |
$ | 370,028 | |
$ | 456,658 | |
$ | 111,967 | |
|
|
|
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
|
|
| (1) |
Total cost for each property is the same for federal income tax purposes, with the exception of Pierre Towers, the Regency
Club, Station Place and the Rotunda properties (Icon and The Rotunda) whose cost for federal income tax purposes is approximately
$42.7 million, $13.3 million, $4.2 million and $168.7 million, respectively. |
FIRST REAL ESTATE INVESTMENT TRUST OF NEW
JERSEY AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION
(In Thousands of Dollars)
| Reconciliation of Real Estate and Accumulated Depreciation: |
| |
| |
| |
| |
| |
2018 | |
2017 | |
2016 | |
| |
| |
| |
| |
| Real estate: |
| | |
| | |
| | |
| Balance, Beginning of year |
$ | 433,288 | |
$ | 429,445 | |
$ | 409,297 | |
| |
| | |
| | |
| | |
| Additions - Buildings and improvements |
| 4,562 | |
| 6,602 | |
| 26,206 | |
| |
| | |
| | |
| | |
| Disposal - Buildings and improvements |
| (742 | ) |
| (443 | ) |
| (3,513 | ) |
| |
| | |
| | |
| | |
| Acquisition (Sale) of property |
| 19,550 | |
| (2,316 | ) |
| (2,545 | ) |
| |
| | |
| | |
| | |
| Balance, end of year |
$ | 456,658 | |
$ | 433,288 | |
$ | 429,445 | |
| |
| | |
| | |
| | |
| Accumulated depreciation: |
| | |
| | |
| | |
| Balance, beginning of year |
$ | 101,194 | |
$ | 92,547 | |
$ | 88,452 | |
| |
| | |
| | |
| | |
| Additions - Charged to operating expenses |
| 11,515 | |
| 10,667 | |
| 7,852 | |
| |
| | |
| | |
| | |
| Disposal - Buildings and improvements |
| (742 | ) |
| (409 | ) |
| (3,466 | ) |
| |
| | |
| | |
| | |
| Sale of property |
| — | |
| (1,611 | ) |
| (291 | ) |
| |
| | |
| | |
| | |
| Balance, end of year |
$ | 111,967 | |
$ | 101,194 | |
$ | 92,547 | |
FIRST REAL ESTATE INVESTMENT TRUST OF NEW
JERSEY (“FREIT”)
EXHIBIT INDEX
|
Exhibit
No. |
|
|
| 3.1 |
|
Amended and Restated Declaration of Trust of FREIT. (Incorporated by reference to Exhibit 3.1 to FREIT’s Form 8-K filed with the SEC on March 10, 2008) |
| 3.2 |
|
Amendment to Amended and Restated Declaration of Trust, dated May 31, 1994. (Incorporated by reference to Exhibit 3.2 to FREIT’s Form 10-K for the year ended October 31, 2013 and filed with the SEC on January 14, 2014.) |
| 3.3 |
|
Amendment to Amended and Restated Declaration of Trust, dated September 10, 1998. (Incorporated by reference to Exhibit 3.3 to FREIT’s Form 10-K for the year ended October 31, 2013 and filed with the SEC on January 14, 2014.) |
| 3.4 |
|
Amendment to Amended and Restated Declaration of Trust, dated January 21, 2004. (Incorporated by reference to Exhibit 3.4 to FREIT’s Form 10-K for the year ended October 31, 2013 and filed with the SEC on January 14, 2014.) |
| 3.5 |
|
Amendment to Amended and Restated Declaration of Trust, dated May 15, 2007. (Incorporated by reference to Exhibit 3.5 to FREIT’s Form 10-K for the year ended October 31, 2013 and filed with the SEC on January 14, 2014.) |
| 3.6 |
|
Amendment to Amended and Restated Declaration of Trust, dated March 4, 2008. (Incorporated by reference to Exhibit 3.6 to FREIT’s Form 10-K for the year ended October 31, 2013 and filed with the SEC on January 14, 2014.) |
| 3.7 |
|
Amendment to Amended and Restated Declaration of Trust, dated December 4, 2013. (Incorporated by reference to Exhibit 3.7 to FREIT’s Form 10-K for the year ended October 31, 2013 and filed with the SEC on January 14, 2014.) |
| 3.8 |
|
Amendment to Amended and Restated Declaration of Trust, dated December 7, 2017. (Incorporated by reference to Exhibit 3.1 to FREIT’s 8-K dated December 7, 2017 and filed with the SEC on December 11, 2017) |
| 4 |
|
Form of Specimen Share Certificate, Beneficial Interest in FREIT. |
| 10.1 |
|
Management Agreement dated April 10, 2002, by and between FREIT and Hekemian & Co., Inc. (Incorporated by reference to Exhibit 10.1 to FREIT’s Form 10-K for the fiscal year ended October 31, 2009 and filed with the SEC on January 14, 2010) |
| 10.2 |
|
Indemnification Agreements by Damascus 100, LLC and Rotunda 100, LLC to FREIT. (Incorporated by reference to Exhibits 10.1 and 10.2, respectively, to FREIT’s 10-Q for the quarter ended April 30, 2008 and filed with the SEC on June 9, 2008) |
| 10.3 |
|
Notes
to Hekemian employees relative to their investments in each of Grande Rotunda, LLC and Damascus Centre, LLC and the related
documents (pledge and security agreements and amendments). (Incorporated by reference to Exhibits 10.3.1, 10.3.2,
10.3.3, 10.3.4, 10.3.5, 10.3.6, 10.3.7, 10.3.8, 10.3.9, 10.3.10, 10.3.11, 10.3.12, 10.3.13, 10.3.14, 10.3.15, 10.4.1,
10.4.2, 10.4.3, 10.4.4, 10.4.5, 10.4.6, 10.4.7, 10.4.8, 10.4.9 and 10.4.10, respectively, to
FREIT’s 10-Q for the quarter ended April 30, 2008 and filed with the SEC on
June 9, 2008) |
| 10.4 |
|
Agency Agreement dated August 13, 2008 between Damascus Centre, LLC and Hekemian Development Resources, LLC. (Incorporated by reference to Exhibit 10.1 to FREIT’s 10-Q for the quarter ended July 31, 2008 and filed with the SEC on September 9, 2008) |
| 10.5 |
|
Agency Agreement dated November 10, 2009 between Grande Rotunda, LLC and Hekemian Development Resources, LLC. (Incorporated by reference to Exhibit 10.1 to FREIT’s Form 10-Q for the quarter ended April 30, 2010 and filed with the SEC on June 9, 2010) |
| 10.6 |
|
Amendment No. 1 to Agency Agreement dated as of July 24, 2012 between Grande Rotunda, LLC and Hekemian Resources Development, LLC. (Incorporated by reference to Exhibit 10.6 to FREIT’s Form 10-K for the year ended October 31, 2013 and filed with the SEC on January 14, 2014) |
| 10.7 |
|
Line of Credit Note in the principal amount of $18 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. (Incorporated by reference to Exhibit 10.6 to FREIT’s Form 10-K for the fiscal year ended October 31, 2009 and filed with the SEC on January 14, 2010.) |
| 10.8 |
|
Amended and Restated Deferred Fee Plan, adopted as of October 31, 2014. (Incorporated by reference to Exhibit 10.8 to FREIT’s Form 10-K for the year ended October 31, 2014 and filed with the SEC on January 14, 2015) |
| 10.9 |
|
Amendment No.2 to Amended and Restated Deferred Fee Plan, adopted May 7, 2015. (Incorporated by reference to Exhibit 10.1 to FREIT’s Form 10-Q for the quarter ended July 31, 2015 and filed with the SEC on September 9, 2015) |
| 21 |
|
Subsidiaries of FREIT |
| 22 |
|
Consent of EisnerAmper LLP |
| 31.1 |
|
Rule 13a-14(a) - Certification of Chief Executive Officer. |
| 31.2 |
|
Rule 13a-14(a) - Certification of Chief Financial Officer |
| 32.1 |
|
Section 1350 Certification of Chief Executive Officer |
| 32.2 |
|
Section 1350 Certification of Chief Financial Officer. |
| 101 |
|
The following materials from FREIT’s
annual report on Form 10-K for the fiscal year ended October 31, 2018, formatted in Extensible Business Reporting Language (“XBRL”):
(i) consolidated balance sheets; (ii) consolidated statements of income; (iii) consolidated statements of comprehensive income;
(iv) consolidated statements of equity; (v) consolidated statements of cash flows; and (vi) notes to consolidated financial statements.
|
* FREIT will furnish a copy of any exhibit not included herewith
upon request and upon payment of FREIT’s reasonable expenses in furnishing such exhibit.
