SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended October 31, 2019
| ☐ | 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 |
Trading Symbol(s) |
Name of each exchange on which registered |
| -- | -- | -- |
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 ☒
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 ☒
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 every Interactive Data File required to be submitted 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 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 an 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 ☐ Accelerated Filer ☒ Non-Accelerated Filer ☐ Smaller Reporting Company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ☒
The aggregate market value of the registrant’s shares of beneficial interest held by non-affiliates was approximately $95 million. Computation is based on the closing sales price of such shares as quoted on the over-the-counter-market on April 30, 2019, the last business day of the registrant’s most recently completed second quarter.
As of January 21, 2020, the number of shares of beneficial interest outstanding was 6,787,540.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement for the Registrant’s 2020 Annual Meeting of Shareholders to be held on April 2, 2020 are incorporated by reference in Part III of this Annual Report.
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
| ITEM 1 | BUSINESS |
| (a) | General Business |
First Real Estate Investment Trust of New Jersey (“FREIT”) is an equity real estate investment trust (“REIT”) organized in New Jersey in 1961. FREIT acquires, develops, 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.
On January 14, 2020, FREIT reached a definitive agreement to sell 100% of seven apartment properties (“the Apartment Portfolio”) for an aggregate purchase price of $266.5 million to an affiliate of Kushner Companies (the “Purchaser”), subject to certain adjustments, including reductions for the amount of certain mortgage loans assumed by the Purchaser. The Board of Trustees concurrently approved a plan of voluntary liquidation, pursuant to which the Trust is authorized, upon the effectiveness of the plan of voluntary liquidation, to sell, or otherwise dispose of, all of the Trust’s remaining assets for cash, notes or such other assets, upon such terms as the Board may deem advisable. The sale of the Apartment Portfolio and the plan of voluntary liquidation are subject to the approval of the Trust’s shareholders. (See Note 15 to FREIT’s consolidated financial statements for further details.)
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 2019 Developments
| (i) | FINANCING |
| (a) | On August 26, 2019, Berdan Court, LLC (“Berdan Court”), (owned 100% by FREIT), refinanced its $17 million loan (which matured on September 1, 2019) with the lender in the amount of $28,815,000. This loan, secured by an apartment building located in Wayne, New Jersey, has a term of ten years and bears a fixed interest rate equal to 3.54%. 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 6.09% to a fixed rate of 3.54% and (ii) net refinancing proceeds of approximately $11.6 million which can be used for capital expenditures and general corporate purposes. |
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| (b) | On April 3, 2019, WestFREIT, Corp. (owned 100% by FREIT) exercised its option to extend its loan held by M&T Bank, with an outstanding balance of approximately $22.5 million, for twelve months. Effective beginning on June 1, 2019, the extension of this loan secured by the Westridge Square Shopping Center, requires monthly principal payments of $47,250 plus interest based on a floating interest rate equal to 240 basis points over the one-month LIBOR and has a maturity date of May 1, 2020. |
| (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, at the time that the property was acquired, a building with approximately 137,000 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 75,000 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 86.5% leased and 84.1% occupied as of October 31, 2019. FREIT expects Rotunda’s retail operations to stabilize in 2020.
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 8 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, 2019, approximately $118.5 million of this loan facility was drawn down and the interest rate was approximately 4.84%. (See Note 5 to FREIT’s consolidated financial statements for further details.)
| (iii) | DISPOSITIONS & ACQUISITIONS |
| On February 8, 2019, FREIT sold a commercial building, formerly occupied as a Pathmark supermarket in Patchogue, New York for a sales price of $7.5 million. The sale of this property, which had a carrying value of approximately $6.2 million, resulted in a gain of approximately $0.8 million net of sales fees and commissions. Net cash proceeds of approximately $2 million were realized after paying off the related mortgage on this property in the amount of approximately $5.2 million. FREIT distributed and paid approximately $676,000 of this gain by way of a one-time special dividend in connection with and in anticipation of the closing of the sale of the Patchogue property of $0.10 per share. The sale of this property eliminates an operating loss of approximately $0.8 million ($0.12 per share) incurred, annually, since Pathmark vacated the building in December 2015. (See Note 2 to FREIT’s consolidated financial statements for further details.) |
| (iv) | SPECIAL COMMITTEE FORMATION |
| On March 28, 2019, FREIT announced that its Board of Trustees (the “Board”) established a Special Committee of the Board (the “Special Committee”) to explore strategic alternatives focusing on maximizing shareholder value. The Special Committee is comprised solely of independent Trustees and is charged with exploring potential strategic transactions involving FREIT, including, without limitation, a potential sale of FREIT, a business combination involving FREIT or other alternatives for maximizing shareholder value, and determining whether a potential strategic transaction is in the best interests of FREIT and its shareholders. The members of the Special Committee are Ronald J. Artinian, Richard J. Aslanian, David F. McBride and Justin F. Meng. The Special Committee has engaged HFF Securities L.P. as the Special Committee’s financial advisor, and the law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP as legal counsel to the Special Committee. There can be no assurance that the Special Committee’s exploration of potential strategic transactions will result in any transaction being consummated. FREIT does not intend to discuss or disclose any developments with respect to the Special Committee’s functions or activity, unless and until otherwise determined that further disclosure is appropriate or required by regulation or law. There is no formal timetable for the Special Committee’s completion of its exploration of potential strategic transactions. |
| (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, 2019 is included in Note 13 “Segment Information” to FREIT’s consolidated financial statements.
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| (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, 2019, FREIT’s real estate holdings included (i) eight (8) apartment buildings or complexes containing a total of 1,437 apartment units, (ii) eight (8) commercial properties (retail and office) containing a total of approximately 1,280,000 square feet of leasable space, including 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 295,000 square foot mixed use property (office and retail) and a 379-unit residential apartment complex in Baltimore, Maryland that 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.
Berdan Court, LLC: FREIT owns a 100% membership interest in Berdan Court, LLC, which owns a 176-unit residential apartment complex located in Wayne, New Jersey.
Employees
On October 31, 2019, FREIT and its subsidiaries had thirty-two (32) full-time employees and eleven (11) part-time employees who work solely at the properties owned by FREIT or its subsidiaries. The number of part-time employees varies seasonally.
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Robert S. Hekemian, the Chairman of the Board and Chief Executive Officer of Hekemian, was 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. On February 7, 2019, Donald W. Barney retired and resigned as President, Chief Financial Officer, Treasurer and a Trustee of FREIT. The Board of Trustees appointed Allan Tubin, the Chief Financial Officer of Hekemian, as the Chief Financial Officer and Treasurer of the Trust and Robert S. Hekemian, Jr. as President of the Trust. As a result, Robert S. Hekemian, Jr. holds the offices of both Chief Executive Officer and President of FREIT.
Pursuant to the terms of a Consulting Agreement between Robert S. Hekemian and the Trust, Mr. Hekemian served the Trust in a consulting capacity effective April 5, 2018 through December 2019. The Consulting Agreement obliged 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 paid Mr. Hekemian a consulting fee of $5,000 per month during the term of the Consulting Agreement, which was payable in the form of Shares on a quarterly basis (i.e. in quarterly installments of $15,000). In addition, in connection with the termination of Mr. Hekemian’s service to the Trust under the Consulting Agreement in December 2019, Mr. Hekemian’s accrued plan benefits under the Trust’s Deferred Fee Plan became payable to him. See Note 11 for a more complete description of the Deferred Fee Plan.
Robert S. Hekemian, Jr., Chief Executive Officer and President, Ronald J. Artinian, Chairman of the Board, Allan Tubin, 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, 2019 for a two-year term, which will expire on October 31, 2021. 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. 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 Allan Tubin, FREIT’s Chief Financial Officer, and certain members of the immediate family of Robert S. Hekemian, FREIT’s former Chairman, Chief Executive Officer and consultant of FREIT, Robert S. Hekemian, Jr., Chief Executive Officer, President and a Trustee of FREIT, and David
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Hekemian, a Trustee of FREIT. The members of the Hekemian family have majority management control of this entity (Rotunda 100, LLC). (See Note 8 to FREIT’s consolidated financial statements.)
Robert S. Hekemian, a former consultant of FREIT, was the Chairman of the Board and Chief Executive Officer of Hekemian. Mr. Hekemian owned 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, 2019, FREIT’s aggregate outstanding mortgage debt was $352.8 million, which bears a weighted average interest rate of 4.51% and an average life of 4.4 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, 2019 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.
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| (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, 2019, the following table lists the ten (10) largest commercial tenants, which account for approximately 51.1% of FREIT’s leased commercial rental space and 38.4% of fixed commercial rents.
| Tenant | Center | Sq. Ft. | % of Revenue | |||
| Burlington Stores, Inc. | Westridge Square | 85,992 | 3.5% | |||
| Kmart Corporation | Westwood Plaza | 84,254 | 1.7% | |||
| Stop & Shop Supermarket Co. | Preakness | 61,020 | 3.3% | |||
| Safeway Stores, Inc. | Damascus Center | 58,358 | 5.1% | |||
| H-Mart Frederick, LLC | Westridge Square | 55,300 | 3.3% | |||
| The Association of Universities for Reseach in Astronomy | Rotunda | 51,520 | 7.8% | |||
| Stop & Shop Supermarket Co. | Franklin Crossing | 48,673 | 4.6% | |||
| Cobb Theaters IV LLC | Rotunda | 35,000 | 4.3% | |||
| TJ MAXX | Westwood Plaza | 28,480 | 3.1% | |||
| T-Bowl, Inc. | Preakness | 27,195 | 1.7% | |||
| (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.
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 provided for a $250,000 reduction in annual rent over the renewed term. (See Note 14 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.
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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 14 to FREIT’s consolidated financial statements.)
There were no other material lease expirations during Fiscal 2019 and Fiscal 2018. There are no additional material lease expirations expected during Fiscal 2020.
| (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. FREIT acquired the Westwood Plaza property in 1988, and the property has not experienced any flooding that gave rise to any claims under FREIT’s flood insurance in this time period.
| (ii) | Other |
a) The State of New Jersey has adopted an underground fuel storage tank law and various regulations with respect to underground storage tanks.
FREIT no longer has underground storage tanks on any of its properties.
Within the last twelve months, FREIT has conducted environmental audits for all of its properties. The environmental reports secured by FREIT have not revealed any environmental conditions on its properties which require any further remediation pursuant to any applicable federal or state law or regulation.
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b) FREIT has determined that several of its properties contain lead based paint (“LBP”). FREIT has obtained lead-free interior certifications with respect to all properties that were found to contain LBP, certifying that such properties contain no LBP on the interior surfaces. 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) - (ii) 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 or an affiliate of FREIT, is subject to some form of rent control ordinance which limits the amount by which FREIT or an affiliate of FREIT, can increase the rent for renewed leases, and in some cases, limits the amount of rent which FREIT or an affiliate of 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.
| (C) | Zoning Ordinances |
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.
| ITEM 1A | RISK FACTORS |
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 turnover rates; |
| · | rental rates; |
| · | operating expenses; |
| · | 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 continued 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; (vi) rising healthcare costs; and (vii) impact of trade policies.
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.
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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.
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, 2019, FREIT had approximately $212.1 million of non-recourse mortgage debt subject to fixed interest rates, and approximately $140.7 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, 2019), 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.
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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 apartment complexes; the proximity of commercial shopping centers; 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. Within the last twelve months, FREIT has conducted environmental audits for all of its properties. The environmental reports secured by FREIT have not revealed any environmental conditions on its properties which require any further 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.
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| ITEM 2 | PROPERTIES |
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, 2019: | |||||||
| Property & Location | Year Acquired |
No. of Units |
Average Annual Occupancy Rate for the Year Ended 10/31/19 |
Average Monthly Rent per Unit @ 10/31/19 |
Average Monthly Rent per Unit @ 10/31/18 |
Mortgage Balance ($000) |
Depreciated Cost of Land, Buildings & Equipment ($000) |
| Berdan Court (1) | 1965 | 176 | 95.6% | $1,844 | $1,869 | $28,815 (7) | $1,622 |
| Wayne, NJ | |||||||
| Regency Club | 2014 | 132 | 97.7% | $1,702 | $1,672 | $15,588 | $18,735 |
| Middletown, NY | |||||||
| Steuben Arms | 1975 | 100 | 97.4% | $1,611 | $1,563 | $10,021 | $755 |
| River Edge, NJ | |||||||
| Westwood Hills (2) | 1994 | 210 | 95.6% | $1,936 | $1,872 | $19,617 | $8,934 |
| Westwood Hills, NJ | |||||||
| Pierre Towers (3) | 2004 | 266 | 93.6% | $2,448 | $2,444 | $48,000 (8) | $36,661 |
| Hackensack, NJ | |||||||
| Boulders (4) | 2006 | 129 | 94.6% | $2,130 | $2,110 | $15,615 | $15,276 |
| Rockaway, NJ | |||||||
| Icon (5) | 2016 | 379 | 95.1% | $2,132 | $2,070 | $65,186 (9) | $86,462 |
| Baltimore, Maryland | |||||||
| Station Place (6) | 2017 | 45 | 92.8% | $2,975 | $2,985 | $12,350 (10) | $19,035 |
| Red Bank, NJ | |||||||
| (1) Berdan Court is 100% owned by Berdan Court, LLC, which is 100% owned by FREIT. | |||||||
| (2) FREIT owns a 40% equity interest in Westwood Hills. | |||||||
| (3) Pierre Towers is 100% owned by S And A Commercial Associates LP, which is 65% owned by FREIT. | |||||||
| (4) Construction completed in August 2006 on land acquired in 1963 / 1964. | |||||||
| (5) 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. | |||||||
| (6) Station Place is 100% owned by Station Place on Monmouth, LLC, which is 100% owned by FREIT. | |||||||
| (7) On August 26, 2019, Berdan Court, LLC (“Berdan Court”), refinanced its $17 million loan (which matured on September 1, 2019) with the lender in the amount of $28,815,000. This loan has a term of ten years and bears a fixed interest rate equal to 3.54%. 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 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.) | |||||||
| (9) 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, 2019, 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.) | |||||||
| (10) 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.) | |||||||
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| Commercial Properties as of October 31, 2019: | |||||||
| Property & Location | Year Acquired |
Leasable Space- Approximate Sq.Ft. |
Average Annual Occupancy Rate for the Year Ended 10/31/19 |
Average Annualized Rent per Sq. Ft. @ 10/31/19* |
Average Annualized Rent per Sq. Ft. @ 10/31/18 * |
Mortgage Balance ($000) |
Depreciated Cost of Land, Buildings & Equipment ($000) |
| Glen Rock, NJ | 1962 | 4,672 | 100.0% | $24.30 | $24.85 | None (1) | $85 |
| Franklin Crossing | 1966 (2) | 87,661 | 91.6% | $21.87 | $22.15 | None (1) | $6,714 |
| Franklin Lakes, NJ | |||||||
| Westwood Plaza | 1988 | 174,275 | 92.7% | $13.28 | $13.15 | $18,973 | $7,121 |
| Westwood, NJ | |||||||
| Westridge Square (3) | 1992 | 252,733 | 92.0% | $13.01 | $13.43 | $22,200 (7) | $13,398 |
| Frederick, MD | |||||||
| Preakness Center (4) | 2002 | 322,142 | 60.9% | $18.51 | $17.97 | $23,737 | $24,787 |
| Wayne, NJ | |||||||
| Damascus Center (5) | 2003 | 143,815 | 85.6% | $22.57 | $21.45 | $19,354 | $26,136 |
| Damascus, MD | |||||||
| The Rotunda (6) | 2005 | 294,500 | 83.3% | $28.41 | $28.24 | $53,334 (8) | $64,668 |
| 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. The average rent per square foot at October 31, 2018 has been adjusted for comparability purposes to conform to the presentation at October 31, 2019. | |||||||
| (1) Security for draws against FREIT's Credit Line. As of October 31, 2019, 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) FREIT owns a 40% equity interest in Wayne PSC, LLC, that owns the center. | |||||||
| (5) 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. | |||||||
| (6) 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 137,000 sq. ft. of office space and approximately 83,000 sq. ft. of retail space on the lower level of the building and an additional 75,000 square feet of new retail space. | |||||||
| (7) On April 3, 2019, WestFREIT, Corp. (owned 100% by FREIT) exercised its option to extend its loan held by M&T Bank, with an outstanding balance of approximately $22.5 million, for twelve months. The extension of this loan requires monthly principal payments of $47,250 plus interest based on a floating interest rate equal to 240 basis points over the one-month LIBOR and has a maturity date of May 1, 2020. (See Note 5 to FREIT’s consolidated financial statements.) | |||||||
| (8) 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, 2019, 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.) | |||||||
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Supplemental Segment Information:
| Commercial lease expirations at October 31, 2019 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 | 13 | 13,243 | 1.3% | $ 323,686 | $ 24.44 |
| 2020 | 13 | 37,738 | 3.6% | $ 952,337 | $ 25.24 |
| 2021 | 31 | 120,021 | 11.5% | $ 3,010,707 | $ 25.08 |
| 2022 | 27 | 252,567 | 24.1% | $ 2,735,047 | $ 10.83 |
| 2023 | 24 | 67,828 | 6.5% | $ 1,943,880 | $ 28.66 |
| 2024 | 20 | 89,865 | 8.6% | $ 1,955,738 | $ 21.76 |
| 2025 | 10 | 37,928 | 3.6% | $ 928,136 | $ 24.47 |
| 2026 | 10 | 81,729 | 7.8% | $ 1,354,132 | $ 16.57 |
| 2027 | 9 | 67,432 | 6.4% | $ 1,532,473 | $ 22.73 |
| 2028 | 15 | 47,476 | 4.5% | $ 1,278,950 | $ 26.94 |
| 2029 | 11 | 95,101 | 9.1% | $ 1,689,925 | $ 17.77 |
| 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 | 3.3% | $ 875,000 | $ 25.00 |
Land Under Development and Vacant Land as of October 31, 2019:
| 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 2019, 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 29.3% for Fiscal 2019, 26.8% for Fiscal 2018 and 19.1% for Fiscal 2017 of 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. See “Business - Special Committee Formation” under Item 1(a)(iv) above and “Special Committee Formation” under Item 7 for additional information.
Except for the TD Bank branch located in Rockaway, New Jersey, all of FREIT’s and its subsidiaries’ commercial properties have multiple tenants.
15
FREIT and its subsidiaries’ commercial properties have sixteen (16) anchor/major tenants, which account for approximately 58.6% of the space leased. The balance of the space is leased to one hundred sixty-seven (167) 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. | 19 |
| Frederick, MD | H-Mart | |||
| Gold's Gym | ||||
| Franklin Crossing | (SC) | 87,661 | Stop & Shop | 18 |
| Franklin, Lakes, NJ | ||||
| Westwood Plaza | (SC) | 174,275 | Kmart Corp | 13 |
| Westwood, NJ | TJMaxx | |||
| Preakness Center (1) | (SC) | 322,142 | Stop & Shop | 28 |
| Wayne, NJ | CVS | |||
| Annie Sez | ||||
| Wayne Movietown | ||||
| Damascus Center (2) | (SC) | 143,815 | Safeway Stores | 26 |
| Damascus, MD | ||||
| The Rotunda (3) | (O) | 137,307 | iHeartMedia+Entertainment, Inc. (f/k/a Clear Channel Broadcasting Inc.) | 40 |
| Baltimore, MD | The Association of Universities For Research in Astronomy, Inc. | |||
| (SC) | 157,193 | Walgreen Corporation | 21 | |
| Mom's Organic Market | ||||
| Cobb Theatres | ||||
| Glen Rock, NJ | (SC) | 4,672 | — | 2 |
| (1) FREIT has a 40% interest in this property. | ||||
| (2) FREIT has a 70% interest in this property. | ||||
| (3) FREIT has a 60% interest in this property. | ||||
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 80.5%, 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 91.1% 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.
| ITEM 3 | LEGAL PROCEEDINGS |
There are no material pending legal proceedings to which FREIT is a party, or of which any of its properties is the subject. There is, however, ordinary and routine litigation involving FREIT's business including various tenancy and related matters. 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.
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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 21, 2020, 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, 2019 | |||||||
| First Quarter | $ | 15.80 | $ | 16.50 | |||
| Second Quarter | $ | 16.75 | $ | 17.50 | |||
| Third Quarter | $ | 17.25 | $ | 18.40 | |||
| Fourth Quarter | $ | 17.25 | $ | 18.20 | |||
| 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 | |||
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. For Fiscal 2019, FREIT paid/declared an annual dividend of $0.60 per share. In Fiscal 2018 and Fiscal 2017, FREIT paid/declared an annual dividend of $0.15 per share for each fiscal year. For Fiscal 2016 and Fiscal 2015, FREIT paid/declared an annual dividend of $1.20 per share for each fiscal year.
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.”
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| 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, 2019 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, | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| (In Thousands) | ||||||||||||||||||||
| Total assets | $ | 390,618 | $ | 392,073 | $ | 372,957 | $ | 367,971 | $ | 352,115 | ||||||||||
| Mortgage loans | $ | 352,790 | $ | 350,504 | $ | 323,435 | $ | 329,719 | $ | 307,899 | ||||||||||
| Common equity | $ | 15,715 | $ | 21,488 | $ | 17,838 | $ | 2,834 | $ | 7,544 | ||||||||||
| Weighted average shares outstanding: | ||||||||||||||||||||
| Basic | 6,940 | 6,883 | 6,833 | 6,783 | 6,778 | |||||||||||||||
| Diluted | 6,940 | 6,883 | 6,833 | 6,784 | 6,778 | |||||||||||||||
| INCOME STATEMENT DATA: | ||||||||||||||||||||
| Years Ended October 31, | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| (In Thousands of Dollars, Except Per Share Amounts) | ||||||||||||||||||||
| Revenue from real estate operations | $ | 60,277 | $ | 57,997 | $ | 51,634 | $ | 46,254 | $ | 44,783 | ||||||||||
| Expenses: | ||||||||||||||||||||
| Real estate operations | 26,062 | 24,883 | 26,233 | 21,797 | 21,062 | |||||||||||||||
| Lease termination fee | — | — | 620 | — | — | |||||||||||||||
| Straight line rent adjustment - bankrupt tenant | — | — | — | — | 1,046 | |||||||||||||||
| General and administrative expenses | 4,049 | 2,305 | 2,129 | 2,034 | 2,029 | |||||||||||||||
| Depreciation | 11,339 | 11,515 | 10,669 | 7,852 | 6,883 | |||||||||||||||
| Total expenses | 41,450 | 38,703 | 39,651 | 31,683 | 31,020 | |||||||||||||||
| Operating income | 18,827 | 19,294 | 11,983 | 14,571 | 13,763 | |||||||||||||||
| Investment income | 360 | 267 | 206 | 150 | 150 | |||||||||||||||
| Unrealized (loss) gain on interest rate cap contract | (160 | ) | 72 | — | — | — | ||||||||||||||
| Gain on sale of property | 836 | — | 15,395 | 314 | — | |||||||||||||||
| Loan prepayment costs relating to property sale | — | — | (1,139 | ) | — | — | ||||||||||||||
| Interest expense including amortization | ||||||||||||||||||||
| of deferred financing costs | (18,070 | ) | (18,667 | ) | (15,762 | ) | (11,936 | ) | (11,001 | ) | ||||||||||
| Net income | 1,793 | 966 | 10,683 | 3,099 | 2,912 | |||||||||||||||
| Net (income) loss attributable to noncontrolling interests in subsidiaries | (6 | ) | 517 | 2,433 | (94 | ) | (281 | ) | ||||||||||||
| Net income attributable to common equity | $ | 1,787 | $ | 1,483 | $ | 13,116 | $ | 3,005 | $ | 2,631 | ||||||||||
| Earnings per share - basic and diluted | $ | 0.26 | $ | 0.21 | $ | 1.92 | $ | 0.44 | $ | 0.39 | ||||||||||
| Cash dividends declared per common share | $ | 0.60 | $ | 0.15 | $ | 0.15 | $ | 1.20 | $ | 1.20 | ||||||||||
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| 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 an average annualized rate of 2.1% in the third quarter of 2019. Employment remains healthy with an unemployment rate at 3.6% in October 2019 and real income continues to grow at a solid pace. If the U.S. economy improves, the Federal Reserve may continue to increase lending rates which may affect the 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 resulting in FREIT’s rental rates continuing to show year-over-year increases at most of its properties. 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.
Special Committee Formation: On March 28, 2019, FREIT announced that its Board established a Special Committee to explore strategic alternatives focusing on maximizing shareholder value. The Special Committee is comprised solely of independent Trustees and is charged with exploring potential strategic transactions involving FREIT, including, without limitation, a potential sale of FREIT, a business combination involving FREIT or other alternatives for maximizing shareholder value, and determining whether a potential strategic transaction is in the best interests of FREIT and its shareholders. The members of the Special Committee are Ronald J. Artinian, Richard J. Aslanian, David F. McBride and Justin F. Meng. The Special Committee has engaged HFF Securities L.P. as the Special Committee’s financial advisor, and the law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP as legal counsel to the Special Committee. There can be no assurance that the Special Committee’s exploration of potential strategic transactions will result in any transaction being consummated. FREIT does not intend to discuss or disclose any developments with respect to the Special Committee’s functions or activity, unless and until otherwise determined that further disclosure is appropriate or required by regulation or law. There is no formal timetable for the Special Committee’s completion of its exploration of potential strategic transactions.
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
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space continues to lease-up and is approximately 86.5% leased and 84.1% occupied as of October 31, 2019. FREIT expects Rotunda’s retail operations to stabilize in 2020.
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 8 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, 2019, approximately $118.5 million of this loan facility was drawn down and the interest rate was approximately 4.84%.
On August 26, 2019, Berdan Court, LLC (“Berdan Court”), (owned 100% by FREIT), refinanced its $17 million loan (which matured on September 1, 2019) with the lender in the amount of $28,815,000. This loan, secured by an apartment building located in Wayne, New Jersey, has a term of ten years and bears a fixed interest rate equal to 3.54%. 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 6.09% to a fixed rate of 3.54% and (ii) net refinancing proceeds of approximately $11.6 million which can be used for capital expenditures and general corporate purposes.
On April 3, 2019, WestFREIT, Corp. (owned 100% by FREIT) exercised its option to extend its loan held by M&T Bank, with an outstanding balance of approximately $22.5 million, for twelve months. Effective beginning on June 1, 2019, the extension of this loan secured by the Westridge Square Shopping Center, requires monthly principal payments of $47,250 plus interest based on a floating interest rate equal to 240 basis points over the one-month LIBOR and has a maturity date of May 1, 2020.
On January 8, 2018, Pierre Towers, LLC (“Pierre”), owned by S And A Commercial Associates Limited Partnership (“S&A”), which is a consolidated subsidiary, 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 paid New York Life Insurance a good faith deposit in the amount of $960,000, which was reimbursed by New York Life when the loan 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.
On January 21, 2019, Station Place on Monmouth, LLC entered into a modification agreement with Provident Bank. The material terms of the modification were: (i) FREIT guarantees $2,350,000 of the outstanding principal balance of the loan; and (ii) the loan’s Debt Service Coverage Ratio (“DSCR”) covenants are reduced to a single test that will be tested semi-annually (commencing with the six-month period ending April 30, 2019) and require a DSCR of 1.2 / 1.0 based on actual debt service. Prior to this modification, the loan’s DSCR covenants were calculated using the greater of the actual debt service or other hypothetical debt service measures, as provided in the loan agreement, that were to be tested quarterly. As previously disclosed in FREIT’s current report on Form 8-K filed with the SEC on January 24, 2019, Station Place had not been in compliance with the loan covenants as of October 31, 2018, and the modification waives all previous non-compliance. If the DSCR should fall below 1.2 / 1.0, Provident Bank, at its discretion, may require a current appraisal of the Station Place property. If the loan balance exceeds 85% loan-to-value (“L-T-V”) based on the appraised value, Station Place may be required to resize the loan to bring the L-T-V into compliance by paying down the outstanding principal balance of the loan, posting a letter of credit, or providing additional collateral to Provident Bank. As of October 31, 2019, Station Place was in compliance with this covenant.
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
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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%. As of October 31, 2019, there was no amount outstanding and $13 million was available under the line of credit.
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, 2019 and October 31, 2018, and for the years ended October 31, 2019, 2018 and 2017. We believe that the following accounting policies or estimates require the application of management's most difficult, subjective, or complex judgments:
Revenue Recognition: Base rents, additional rents based on tenants' sales volume and reimbursement of the tenants' share of certain operating expenses are generally recognized when due from tenants. The straight-line basis is used to recognize base rents under leases if they provide for varying rents over the lease terms. Straight-line rents represent unbilled rents receivable to the extent straight-line rents exceed current rents billed in accordance with lease agreements. Before FREIT can recognize revenue, it is required to assess, among other things, its 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 may 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 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.
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Results of Operations:
Fiscal Years Ended October 31, 2019 and 2018
Summary revenues and net income for the fiscal years ended October 31, 2019 (“Fiscal 2019”) and October 31, 2018 (“Fiscal 2018”) are as follows:
| Years Ended October 31, | ||||||||||||
| 2019 | 2018 | Change | ||||||||||
| (in thousands, except per share amounts) | ||||||||||||
| Real estate revenues: | ||||||||||||
| Commercial properties | $ | 27,122 | $ | 26,149 | $ | 973 | ||||||
| Residential properties | 33,155 | 31,848 | 1,307 | |||||||||
| Total real estate revenues | 60,277 | 57,997 | 2,280 | |||||||||
| Operating expenses: | ||||||||||||
| Real estate operations | 26,062 | 24,883 | 1,179 | |||||||||
| General and administrative | 4,049 | 2,305 | 1,744 | |||||||||
| Depreciation | 11,339 | 11,515 | (176 | ) | ||||||||
| Total operating expenses | 41,450 | 38,703 | 2,747 | |||||||||
| Operating income | 18,827 | 19,294 | (467 | ) | ||||||||
| Investment income | 360 | 267 | 93 | |||||||||
| Unrealized (loss) gain on interest rate cap contract | (160 | ) | 72 | (232 | ) | |||||||
| Gain on sale of property | 836 | — | 836 | |||||||||
| Financing costs | (18,070 | ) | (18,667 | ) | 597 | |||||||
| Net income | 1,793 | 966 | 827 | |||||||||
| Net (income) loss attributable to noncontrolling | ||||||||||||
| interests in subsidiaries | (6 | ) | 517 | (523 | ) | |||||||
| Net income attributable to common equity | $ | 1,787 | $ | 1,483 | $ | 304 | ||||||
| Earnings per share - basic and diluted: | $ | 0.26 | $ | 0.21 | $ | 0.05 | ||||||
| Weighted average shares outstanding: | ||||||||||||
| Basic and diluted | 6,940 | 6,883 | ||||||||||
Real estate revenue for Fiscal 2019 increased 3.9% to $60,277,000 compared to $57,997,000 for Fiscal 2018. 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 residential units and retail space at the property.
Net income attributable to common equity (“net income-common equity”) for Fiscal 2019 was $1,787,000 ($0.26 per share basic and diluted), compared to $1,483,000 ($0.21 per share basic and diluted) for Fiscal 2018.
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The schedule below provides a detailed analysis of the major changes that impacted revenue and net income-common equity for Fiscal 2019 and 2018:
| NET INCOME COMPONENTS | ||||||||||||
| Years Ended October 31, | ||||||||||||
| 2019 | 2018 | Change | ||||||||||
| (thousands of dollars) | ||||||||||||
| Income from real estate operations: | ||||||||||||
| Commercial properties | $ | 15,427 | $ | 14,288 | $ | 1,139 | ||||||
| Residential properties | 18,788 | 18,826 | (38 | ) | ||||||||
| Total income from real estate operations | 34,215 | 33,114 | 1,101 | |||||||||
| Financing costs: | ||||||||||||
| Fixed rate mortgages | (8,953 | ) | (10,248 | ) | 1,295 | |||||||
| Floating rate mortgages | (7,384 | ) | (5,368 | ) | (2,016 | ) | ||||||
| Floating rate - Rotunda construction loan | — | (1,321 | ) | 1,321 | ||||||||
| Credit line | — | (28 | ) | 28 | ||||||||
| Other - Corporate interest | (594 | ) | (652 | ) | 58 | |||||||
| Mortgage cost amortization | (1,139 | ) | (1,050 | ) | (89 | ) | ||||||
| Total financing costs | (18,070 | ) | (18,667 | ) | 597 | |||||||
| Investment income | 360 | 267 | 93 | |||||||||
| Unrealized (loss) gain on interest rate cap contract | (160 | ) | 72 | (232 | ) | |||||||
| General & administrative expenses: | ||||||||||||
| Accounting fees | (654 | ) | (544 | ) | (110 | ) | ||||||
| Legal & professional fees | (135 | ) | (121 | ) | (14 | ) | ||||||
| Trustees and consultant fees | (1,164 | ) | (989 | ) | (175 | ) | ||||||
| Stock option expense | (124 | ) | (130 | ) | 6 | |||||||
| Special committee expenses | (1,416 | ) | — | (1,416 | ) | |||||||
| Corporate expenses | (556 | ) | (521 | ) | (35 | ) | ||||||
| Total general & administrative expenses | (4,049 | ) | (2,305 | ) | (1,744 | ) | ||||||
| Depreciation | (11,339 | ) | (11,515 | ) | 176 | |||||||
| Adjusted net income | 957 | 966 | (9 | ) | ||||||||
| Gain on sale of property | 836 | — | 836 | |||||||||
| Net income | 1,793 | 966 | 827 | |||||||||
| Net (income) loss attributable to noncontrolling | ||||||||||||
| interests in subsidiaries | (6 | ) | 517 | (523 | ) | |||||||
| Net income attributable to common equity | $ | 1,787 | $ | 1,483 | $ | 304 | ||||||
Adjusted net income for Fiscal 2019 was $957,000 ($0.14 per share basic and diluted) compared to $966,000 ($0.14 per share basic and diluted) for Fiscal 2018. 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 related to the sale of the property in Patchogue, New York in Fiscal 2019. The slight decrease in adjusted net income for Fiscal 2019 was primarily driven by the following: real estate tax credits and refunds related to the Icon at the Rotunda property in the amount of approximately $1.1 million received in Fiscal 2018 related to Fiscal 2017 (with a consolidated impact to FREIT of approximately $0.7 million); general and administrative expense increase in the amount of approximately $1.7 million, primarily attributable to $1.4 million in Special Committee expenses related to advisory and legal fees incurred in Fiscal 2019; interest expense increase on the loan on the Rotunda property in the amount of approximately $0.6 million resulting primarily from an increase in interest rates as compared to the prior year; offset by an increase in revenue of approximately $2.3 million as explained above and Fiscal 2018 being burdened by a $1.2 million loan prepayment cost (with a consolidated impact to FREIT of $0.8 million) related to the Pierre Towers, LLC loan refinancing. Refer to the segment disclosure below for a more detailed discussion on the financial performance of FREIT’s commercial and residential segments.)
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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 2019, as compared to Fiscal 2018 (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, | ||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | $ | % | 2019 | 2018 | $ | % | 2019 | 2018 | |||||||||||||||||||||||||||||||
| (In Thousands) | (In Thousands) | (In Thousands) | ||||||||||||||||||||||||||||||||||||||
| Rental income | $ | 20,324 | $ | 19,379 | $ | 945 | 4.9 | % | $ | 32,592 | $ | 31,283 | $ | 1,309 | 4.2 | % | $ | 52,916 | $ | 50,662 | ||||||||||||||||||||
| Reimbursements | 6,295 | 5,989 | 306 | 5.1 | % | 134 | 104 | 30 | 28.8 | % | 6,429 | 6,093 | ||||||||||||||||||||||||||||
| Other | 73 | 96 | (23 | ) | -24.0 | % | 449 | 541 | (92 | ) | -17.0 | % | 522 | 637 | ||||||||||||||||||||||||||
| Total revenue | 26,692 | 25,464 | 1,228 | 4.8 | % | 33,175 | 31,928 | 1,247 | 3.9 | % | 59,867 | 57,392 | ||||||||||||||||||||||||||||
| Operating expenses | 11,694 | 11,861 | (167 | ) | -1.4 | % | 14,368 | 13,022 | 1,346 | 10.3 | % | 26,062 | 24,883 | |||||||||||||||||||||||||||
| Net operating income | $ | 14,998 | $ | 13,603 | $ | 1,395 | 10.3 | % | $ | 18,807 | $ | 18,906 | $ | (99 | ) | -0.5 | % | 33,805 | 32,509 | |||||||||||||||||||||
| Gain on sale of property | $ | 836 | $ | — | $ | 836 | 100.0 | % | $ | — | $ | — | $ | — | 0.0 | % | 836 | — | ||||||||||||||||||||||
| Average Occupancy % | 81.5 | %* | 80.6 | %* | 0.9 | % | 95.2 | % | 94.4 | % | 0.8 | % | ||||||||||||||||||||||||||||
| Reconciliation to consolidated net income-common equity: | |||||||||
| Deferred rents - straight lining | 410 | 605 | |||||||
| Investment income | 360 | 267 | |||||||
| Unrealized (loss) gain on interest rate cap contract | (160 | ) | 72 | ||||||
| General and administrative expenses | (4,049 | ) | (2,305 | ) | |||||
| Depreciation | (11,339 | ) | (11,515 | ) | |||||
| Financing costs | (18,070 | ) | (18,667 | ) | |||||
| Net income | 1,793 | 966 | |||||||
| Net (income) loss attributable to noncontrolling interests | (6 | ) | 517 | ||||||
| Net income attributable to common equity | $ | 1,787 | $ | 1,483 | |||||
*Average occupancy rate excludes the Patchogue, New York property from all periods presented as the property was sold in February 2019.
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 eight (8) separate properties. Seven of these properties are multi-tenanted retail or office centers, and one is single tenanted on 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 February 8, 2019, FREIT sold a commercial building, formerly occupied as a Pathmark supermarket in Patchogue, New York for a sales price of $7.5 million. The sale of this property, which had a carrying value of approximately $6.2 million, resulted in a gain of approximately $0.8 million net of sales fees and commissions. Net cash proceeds of approximately $2 million were realized after paying off the related mortgage on this property in the amount of approximately $5.2 million. The sale of this property eliminates an operating loss of approximately $0.8 million ($0.12 per share) incurred, annually, since Pathmark vacated the building in December 2015 (see Note 2 to FREIT’s consolidated financial statements for further details).
As indicated in the table above under the caption Segment Information, total revenue and NOI from FREIT’s commercial segment for Fiscal 2019 increased by 4.8% and 10.3%, respectively, as compared to Fiscal 2018. Average occupancy for all commercial properties increased by 0.9% as compared to Fiscal 2018. 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 from an average annual occupancy of 73.8% in Fiscal 2018 to 82.3% in Fiscal 2019.
Same Property Operating Results: FREIT’s commercial segment currently contains eight (8) same properties. (See definition of same property under Segment Information above.) The Patchogue property was excluded from same property results for Fiscal 2019 and 2018 because this property was sold in February 2019. Same property revenue and NOI for Fiscal 2019
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increased by 4.8% and 8.2%, respectively, as compared to Fiscal 2018. The changes resulted from the factors discussed in the immediately preceding paragraph.
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 2019.
| 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) | 23 | 83,812 | $ | 16.99 | $ | 16.26 | 4.5 | % | $ | 0.20 | $ | 0.50 | ||||||||||||||||
| Non-comparable leases | 8 | 10,708 | $ | 33.35 | N/A | N/A | $ | 2.32 | $ | 1.62 | ||||||||||||||||||
| Total leasing activity | 31 | 94,520 | ||||||||||||||||||||||||||
| 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) | 15 | 28,845 | $ | 31.68 | $ | 29.06 | 9.0 | % | $ | 0.40 | $ | 0.85 | ||||||||||||||||
| Non-comparable leases | 4 | 14,590 | $ | 25.76 | N/A | N/A | $ | 5.16 | $ | 1.77 | ||||||||||||||||||
| Total leasing activity | 19 | 43,435 | ||||||||||||||||||||||||||
(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.
RESIDENTIAL SEGMENT
FREIT currently operates eight (8) multi-family apartment buildings or complexes totaling 1,437 apartment units. 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 Notes 2 and 3 to FREIT’s consolidated financial statements for further details).
As indicated in the table above under the caption Segment Information, total revenue and NOI from FREIT’s residential segment for Fiscal 2019 increased by 3.9% and decreased by 0.5%, respectively, as compared to Fiscal 2018. Average occupancy for all residential properties increased by 0.8% as compared to Fiscal 2018. The increase in revenue for Fiscal 2019 was primarily attributable to: (a) an increase in the average occupancy at the Icon (the residential portion of the Rotunda property in Baltimore, Maryland) to 95.1% in Fiscal 2019 from 91.9% in Fiscal 2018; and (b) an increase in base rent across the residential properties. The slight decrease in NOI for Fiscal 2019 was primarily attributed to the real estate tax credits and refunds related to the Icon property at the Rotunda in the amount of $1.1 million received in Fiscal 2018 related to Fiscal 2017 (with a consolidated impact to FREIT of approximately $0.7 million) offset by a $1.2 million increase in revenue as explained above.
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 had been in operation for less than a year in Fiscal 2018. Same property revenue and NOI increased by 3.8% and decreased by 0.3%, respectively, from Fiscal 2018. Average occupancy for same properties increased by approximately 0.9% as compared to Fiscal 2018. 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 had been in operation for less than a year in Fiscal 2018), at the end of Fiscal 2019 and Fiscal 2018 were $1,949 and $1,902, respectively. For comparability purposes, the average residential rent for Fiscal 2018 has been restated to include the impact of the Icon. 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 $326,000 and $304,000, 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 funded a project to make certain upgrades at the Pierre property located in Hackensack, New Jersey, which included
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boiler replacement, replacement of interior and exterior lighting fixtures and minor lighting controls in apartment lighting. PSE&G funded 100% of this project at a total cost of approximately $926,000 and the project was completed in December 2018. Per the reimbursement agreement, Pierre Towers, LLC will reimburse PSE&G for approximately $314,000 of this cost on a monthly basis over a five-year term with no interest.
FINANCING COSTS
| Years Ended October 31, | ||||||||
| 2019 | 2018 | |||||||
| (In Thousands of Dollars) | ||||||||
| Fixed rate mortgages (a): | ||||||||
| 1st Mortgages | ||||||||
| Existing | $ | 8,763 | $ | 8,353 | ||||
| New | 190 | 1,895 | ||||||
| Variable rate mortgages: | ||||||||
| 1st Mortgages | ||||||||
| Existing | 7,384 | 1,071 | ||||||
| New | — | 4,297 | ||||||
| Construction loan-Rotunda | — | 1,321 | ||||||
| Credit line | — | 28 | ||||||
| Other | 594 | 652 | ||||||
| Total financing costs, gross | 16,931 | 17,617 | ||||||
| Amortization of mortgage costs | 1,139 | 1,050 | ||||||
| Total financing costs, net | $ | 18,070 | $ | 18,667 | ||||
(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 2019 decreased 3.2% as compared to Fiscal 2018 which was primarily driven by Fiscal 2018 being burdened by a $1.2 million loan prepayment cost (with a consolidated impact to FREIT of $0.8 million) related to the Pierre Towers, LLC loan refinancing offset by an increase in Fiscal 2019 of approximately $0.6 million in interest expense on the Grande Rotunda, LLC loan resulting from an increase in the one-month LIBOR interest rate. (See Note 5 to FREIT’s consolidated financial statements for more details.)
INVESTMENT INCOME
Investment income for Fiscal 2019 was $360,000 as compared to $267,000 for Fiscal 2018. 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, Chief Executive Officer and consultant of FREIT, Robert S. Hekemian, Jr., the Chief Executive Officer, President 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 2019, G&A was $4,049,000 as compared to $2,305,000 for Fiscal 2018. The primary components of G&A are accounting/auditing fees, legal and professional fees, Trustees’ and consultant fees, and Special Committee fees. The increase in G&A expense in Fiscal 2019 was primarily attributed to expenses incurred by the Special Committee related to advisory and legal fees incurred.
DEPRECIATION
Depreciation expense from operations for Fiscal 2019 was $11,339,000 as compared to $11,515,000 for Fiscal 2018. The slight decrease in depreciation in Fiscal 2019 was primarily attributable to lower depreciation expense resulting from the sale of the Patchogue property in February 2019. (See Note 2 to FREIT’s consolidated financial statements for further details.)
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Fiscal Years Ended October 31, 2018 and 2017
Summary revenues and net income for the fiscal years ended October 31, 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 and 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.)
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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.
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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:
| 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.
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.
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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.
RESIDENTIAL SEGMENT
FREIT 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.
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
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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, Chief Executive Officer and 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $13.8 million for Fiscal 2019 compared to $12.9 million for Fiscal 2018. 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, 2019, FREIT had cash, cash equivalents and restricted cash totaling $42.5 million compared to $26.4 million at October 31, 2018. The increase in cash for Fiscal 2019 is primarily attributable to $13.8 million in net cash provided by operating activities and $4 million in net cash provided by investing activities after capital expenditures, offset by $1.7 million used in financing activities.
On February 8, 2019, FREIT sold a commercial building, formerly occupied as a Pathmark supermarket in Patchogue, New York for a sales price of $7.5 million. The sale of this property, which had a carrying value of approximately $6.2 million, resulted in a gain of approximately $0.8 million net of sales fees and commissions. Net cash proceeds of approximately $2 million were realized after paying off the related mortgage on this property in the amount of approximately $5.2 million. In connection with and in anticipation of the closing of the sale of the Patchogue property, FREIT declared a one-time special dividend of $0.10 per share in the first quarter of Fiscal 2019. The sale of this property eliminates an operating loss of approximately $0.8 million ($0.12 per share) incurred, annually, since Pathmark vacated the building in December 2015. (See Note 2 to FREIT’s consolidated financial statements.)
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.)
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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 14 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 provided for a $250,000 reduction in annual rent over the renewed term. (See Note 14 to FREIT’s consolidated financial statements.)
The Rotunda property in Baltimore, Maryland (owned by FREIT’s 60% owned consolidated affiliate Grande Rotunda, LLC) is an 11.5 acre site containing, at the time that the property was acquired, a building with approximately 137,000 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 75,000 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 86.5% leased and 84.1% occupied as of October 31, 2019. FREIT expects Rotunda’s retail operations to stabilize in 2020.
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 Allan Tubin, FREIT’s Chief Financial Officer, and certain members of the immediate family of Robert S. Hekemian, FREIT’s former Chairman, Chief Executive Officer and consultant of FREIT, Robert S. Hekemian, Jr., Chief Executive Officer, President and a Trustee of FREIT, and David Hekemian, a Trustee of FREIT. As of October 31, 2019, FREIT and Rotunda 100 have made their required capital 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 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 previously held with Wells Fargo was at its maximum level resulting in no additional funding available to draw. Accordingly, during Fiscal 2017 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, 2019 and 2018, Rotunda 100, LLC has funded Grande Rotunda, LLC with approximately $5.7 million and $5.4 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 8 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, 2019,
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approximately $118.5 million of this loan facility was drawn down and the interest rate was approximately 4.84%. (See Notes 5 and 6 to FREIT’s consolidated financial statements for further details).
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. 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.
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. In February 2018, FREIT repaid the line of credit in the amount of $3.1 million. As of October 31, 2019 and 2018, there was no amount outstanding and $13 million was available under the line of credit.
Dividend: After careful consideration of FREIT’s Fiscal 2019 financial results, cash flow and projected cash needs, the Board of Trustees declared a fourth quarter dividend of $0.20 per share, which was paid on December 13, 2019 to shareholders of record on December 1, 2019. Specifically, over the course of the Trust’s history, the fourth quarter dividend takes into consideration the full fiscal year results, and as such, may not be indicative of future quarterly dividends. The Board will continue to evaluate the dividend on a quarterly basis.
As at October 31, 2019, FREIT’s aggregate outstanding mortgage debt was $352.8 million, which bears a weighted average interest rate of 4.51% and an average life of approximately 4.4 years. FREIT’s fixed rate mortgages are subject to amortization schedules that are longer than the terms of the mortgages. As such, balloon payments (unpaid principal amounts at mortgage due date) for all mortgage debt will be required as follows:
| Fiscal Year | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2028 | 2029 |
| ($ in millions) | |||||||||
| Mortgage "Balloon" Payments | $21.9 | $137.6 (A) | $14.4 | $34.4 | $9.0 | $13.9 | $18.2 | $53.9 | $25.9 |
| (A) Includes loan on the Rotunda property located in Baltimore, Maryland in the amount of approximately $118.5 million refinanced with Aareal Capital Corporation on February 7, 2018. | |||||||||
The following table shows the estimated fair value and carrying value of FREIT’s long-term debt, net at October 31, 2019 and 2018:
| ($ in Millions) | October 31, 2019 | October 31, 2018 | ||
| Fair Value | $352.9 | $338.3 | ||
| Carrying Value, Net | $349.9 | $347.0 | ||
Fair values are estimated based on market interest rates at the end of each fiscal year and on a 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, 2019, a 1% interest rate increase would reduce the fair value of FREIT’s debt by $10 million, and a 1% decrease would increase the fair value by $10.7 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 for its real estate portfolio that will increase income and cash flow to shareholders.
On August 26, 2019, Berdan Court, LLC (“Berdan Court”), (owned 100% by FREIT), refinanced its $17 million loan (which matured on September 1, 2019) with the lender in the amount of $28,815,000. This loan, secured by an apartment building located in Wayne, New Jersey, has a term of ten years and bears a fixed interest rate equal to 3.54%. 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 6.09% to a fixed rate of 3.54% and (ii) net refinancing proceeds of approximately $11.6 million which can be used for capital expenditures and general corporate purposes.
On April 3, 2019, WestFREIT, Corp. (owned 100% by FREIT) exercised its option to extend its loan held by M&T Bank, with an outstanding balance of approximately $22.5 million, for twelve months. Effective beginning on June 1, 2019, the
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extension of this loan secured by the Westridge Square Shopping Center, requires monthly principal payments of $47,250 plus interest based on a floating interest rate equal to 240 basis points over the one-month LIBOR and has a maturity date of May 1, 2020.
On January 8, 2018, Pierre Towers, LLC (“Pierre”), owned by S And A Commercial Associates Limited Partnership (“S&A”), which is a consolidated subsidiary, 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 paid New York Life Insurance a good faith deposit in the amount of $960,000, which was reimbursed by New York Life when the loan 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. On January 21, 2019, Station Place on Monmouth, LLC entered into a modification agreement with Provident Bank to modify the loan’s DSCR covenants. (See Note 5 to the consolidated financial statements.)
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 Centre, 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 ($19,396,000 at October 31, 2019) for the Damascus Centre swaps, a notional amount of approximately $16,200,000 ($15,588,000 at October 31, 2019) for the Regency swap, a notional amount of approximately $25,800,000 ($23,794,000 at October 31, 2019) for the Preakness Shopping Center swap and a notional amount of approximately $12,350,000 ($12,350,000 at October 31, 2019) 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, 2019) 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
34
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, 2019, the interest rate cap contract for the Rotunda property, the swap contracts for the Damascus Centre, Regency, Station Place and Preakness Shopping Center properties were in the counterparties’ favor. If FREIT had terminated these contracts at that date, it would have realized losses of approximately $0 for the Rotunda cap, $179,000 for the Damascus Centre swaps, $860,000 for the Regency swap, $1,034,000 for the Station Place swap and $53,000 for the Preakness Shopping Center swap, all of which have been included as a liability in FREIT’s consolidated balance sheet as at October 31, 2019. 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, 2019, FREIT recorded an unrealized loss of $6,400,000 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, 2019, FREIT recorded an unrealized loss of approximately $160,000. For the year ended October 31, 2018, FREIT recorded an unrealized gain of $3,113,000 in comprehensive income representing the change in fair value of the swaps during such period with a corresponding asset of approximately $2,452,000 for the Preakness Shopping Center swap, $955,000 for the Damascus Center swaps, $408,000 for the Regency swap and $460,000 for the Station Place swap as of October 31, 2018. For the year ended October 31, 2018, FREIT recorded an unrealized gain of $72,000 in the consolidated statement of income representing the change in the fair value of the Rotunda interest rate cap contract during such period with a corresponding asset of approximately $160,000 as of October 31, 2018.
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, 2019 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 | $ | 23,522 | $ | 3,722 | $ | 6,412 | $ | 4,843 | $ | 8,545 | ||||||||||
| Balloon Payments | 329,268 | 21,916 | 151,993 | 43,413 | 111,946 | |||||||||||||||
| Total Long-Term Debt | $ | 352,790 | $ | 25,638 | $ | 158,405 | $ | 48,256 | $ | 120,491 | ||||||||||
FREIT’s annual estimated cash requirements related to interest on its line of credit and mortgage loans in place as of October 31, 2019 are as follows:
| INTEREST OBLIGATIONS | ||||||||||||||||||||
| (in thousands of dollars) | ||||||||||||||||||||
| Within | 2 - 3 | 4 - 5 | After 5 | |||||||||||||||||
| Total | One Year | Years | Years | Years | ||||||||||||||||
| Interest on Fixed Rate Debt | $ | 46,265 | $ | 7,969 | $ | 14,710 | $ | 10,285 | $ | 13,301 | ||||||||||
| Interest on Variable Rate Debt (a) | 7,778 | 6,238 | 1,540 | — | — | |||||||||||||||
| Total Interest Obligations | $ | 54,043 | $ | 14,207 | $ | 16,250 | $ | 10,285 | $ | 13,301 | ||||||||||
(a) Includes estimated interest on the Rotunda loan held with Aareal Capital through maturity.
35
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 sources or 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, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (In Thousands, Except Per Share) | ||||||||||||
| Funds From Operations ("FFO") (a) | ||||||||||||
| Net income | $ | 1,793 | $ | 966 | $ | 10,683 | ||||||
| Depreciation of consolidated properties | 11,339 | 11,515 | 10,669 | |||||||||
| Amortization of deferred leasing costs | 611 | 739 | 634 | |||||||||
| Distributions to minority interests | (686 | ) | (626 | )(b) | (420 | ) | ||||||
| Gain on sale of property | (836 | ) | — | (15,395 | ) | |||||||
| Loan prepayment costs relating to property sale | — | — | 1,139 | |||||||||
| FFO | $ | 12,221 | $ | 12,594 | $ | 7,310 | ||||||
| Per Share - Basic and Diluted | $ | 1.76 | $ | 1.83 | $ | 1.07 | ||||||
(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.
| Adjusted Funds From Operations ("AFFO") | ||||||||||||
| FFO | $ | 12,221 | $ | 12,594 | $ | 7,310 | ||||||
| Deferred rents (Straight lining) | (410 | ) | (605 | ) | (634 | ) | ||||||
| Capital Improvements - Apartments | (685 | ) | (738 | ) | (798 | ) | ||||||
| Lease termination fee | — | — | 620 | |||||||||
| AFFO | $ | 11,126 | $ | 11,251 | $ | 6,498 | ||||||
| Per Share - Basic and Diluted | $ | 1.60 | $ | 1.63 | $ | 0.95 | ||||||
| Weighted Average Shares Outstanding: | ||||||||||||
| Basic and Diluted | 6,940 | 6,883 | 6,833 | |||||||||
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, 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 amendments to FREIT’s Equity Incentive Plan (the “Plan”) to (a) increase the number of shares reserved for issuance thereunder by an additional 300,000 shares and (b) further extend the term of the Plan from September 10, 2018 to September 10, 2028. As of October 31, 2019, 442,060 shares are available for issuance under the Plan.
On May 3, 2018, the Board approved the grant of an aggregate of 38,000 non-qualified share options under the 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 10 to FREIT’s consolidated financial statements for further details.)
On March 4, 2019, the Board approved the grant of an aggregate of 5,000 non-qualified share options under the Plan to the Chairman of the Board. The options have an exercise price of $15.00 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 March 3, 2029. (See Note 10 to FREIT’s consolidated financial statements for further details.)
36
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. After careful consideration of FREIT’s Fiscal 2019 financial results, cash flow and projected cash needs, the Board of Trustees declared a fourth quarter dividend of $0.20 per share, which was paid on December 13, 2019 to shareholders of record on December 1, 2019. Specifically, over the course of the Trust’s history, the fourth quarter dividend takes into consideration the full fiscal year results, and as such, may not be indicative of future quarterly dividends. The Board will continue to evaluate the dividend on a quarterly basis.
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, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| First Quarter | $ | 0.150 | $ | — | $ | 0.15 | ||||||
| Second Quarter | $ | 0.125 | $ | 0.05 | $ | — | ||||||
| Third Quarter | $ | 0.125 | $ | 0.05 | $ | — | ||||||
| Fourth Quarter | $ | 0.200 | $ | 0.05 | $ | — | ||||||
| Total For Year | $ | 0.600 | $ | 0.15 | $ | 0.15 | ||||||
| (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 | ||||||||||||||||||||
| 2019 | $ | 0.60 | $ | 4,173 | $ | 3,150 | * | $ | 910 | $ | 2,700 | * | 154.6 | % | ||||||||||||
| 2018 | $ | 0.15 | $ | 1,035 | $ | 1,035 | $ | — | $ | 630 | 164.3 | % | ||||||||||||||
| 2017 | $ | 0.15 | $ | 1,024 | $ | — | $ | — | $ | — | 0.0 | % | ||||||||||||||
| *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 41 of this Form 10-K.
| ITEM 9 | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
37
| 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, 2019. The Company implemented a new accounting and reporting system and updated the relevant controls in the third quarter of Fiscal 2019. The change in FREIT’s internal control over financial reporting during the period covered by this report has neither materially affected, nor is reasonably likely to materially affect, FREIT’s internal control over financial reporting.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in FREIT’s reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in FREIT’s reports filed under the Exchange Act is accumulated and communicated to management, including FREIT’s Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.
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, 2019. EisnerAmper LLP, FREIT’s independent registered public accounting firm for Fiscal 2019, 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 2019. 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 2019 that has materially affected, or is reasonably likely to materially affect, FREIT’s internal control over financial reporting.
38
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, 2019, 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, 2019, 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, 2019 and 2018, and the related consolidated statements of income, comprehensive (loss) income, equity, and cash flows for each of the years in the three-year period ended October 31, 2019, and the related notes and the financial statement schedule identified in Item 15 and our report dated January 21, 2020 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 21, 2020
39
| 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 2020.
| 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 2020.
| 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 2020.
| 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 2020.
| 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 2020.
40
PART IV
| ITEM 15: | EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES |
41
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 21, 2020 | By: /s/ Robert S. Hekemian, Jr. | ||
|
Robert S. Hekemian, Jr. President and Chief Executive Officer (Principal Executive Officer)
|
|||
| By: /s/ Allan Tubin | |||
|
Allan Tubin Chief Financial Officer and Treasurer (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 Allan Tubin 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. |
President, Chief Executive Officer | January 21, 2020 |
| Robert S. Hekemian, Jr. | (Principal Executive Officer) and Trustee |
|
|
/s/ Allan Tubin |
Chief Financial Officer and | January 21, 2020 |
| Allan Tubin | Treasurer (Principal Financial / Accounting Officer) |
|
|
/s/ Ronald J. Artinian |
Chairman of the Board and Trustee | January 21, 2020 |
| Ronald J. Artinian | ||
|
/s/ David F. McBride |
Trustee | January 21, 2020 |
| David F. McBride | ||
|
/s/ John A. Aiello |
Trustee | January 21, 2020 |
| John A. Aiello | ||
|
/s/ Justin F. Meng |
Trustee | January 21, 2020 |
| Justin F. Meng | ||
|
/s/ David B. Hekemian |
Trustee | January 21, 2020 |
| David Hekemian | ||
|
/s/ Richard J. Aslanian |
Trustee | January 21, 2020 |
| Richard J. Aslanian |
42
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, 2019 and 2018, and the related consolidated statements of income, comprehensive (loss) income, equity, and cash flows for each of the years in the three-year period ended October 31, 2019, 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, 2019 and 2018, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2019, 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, 2019, 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 21, 2020 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 21, 2020
43
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
| October 31, | ||||||||
| 2019 | 2018 | |||||||
| (In Thousands of Dollars) | ||||||||
| ASSETS | ||||||||
| Real estate, at cost, net of accumulated depreciation | $ | 330,108 | $ | 344,532 | ||||
| Construction in progress | 395 | 159 | ||||||
| Cash and cash equivalents | 38,075 | 21,747 | ||||||
| Tenants' security accounts | 2,278 | 2,212 | ||||||
| Receivables arising from straight-lining of rents | 4,374 | 3,964 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $379 and | ||||||||
| $276 as of October 31, 2019 and 2018, respectively | 1,741 | 1,436 | ||||||
| Secured loans receivable | 5,053 | 4,862 | ||||||
| Prepaid expenses and other assets | 5,951 | 6,034 | ||||||
| Deferred charges, net | 2,643 | 2,693 | ||||||
| Interest rate cap and swap contracts | — | 4,434 | ||||||
| Total Assets | $ | 390,618 | $ | 392,073 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Liabilities: | ||||||||
| Mortgages payable | $ | 352,790 | $ | 350,504 | ||||
| Less unamortized debt issuance costs | 2,886 | 3,498 | ||||||
| Mortgages payable, net (Note 5) | 349,904 | 347,006 | ||||||
| Due to affiliate | 5,705 | 5,417 | ||||||
| Deferred trustee compensation payable | 7,610 | 8,457 | ||||||
| Accounts payable and accrued expenses | 3,097 | 1,910 | ||||||
| Dividends payable | 1,357 | 338 | ||||||
| Tenants' security deposits | 3,381 | 3,232 | ||||||
| Deferred revenue | 1,390 | 1,369 | ||||||
| Interest rate swap contract | 2,126 | — | ||||||
| Total Liabilities | 374,570 | 367,729 | ||||||
| Commitments and contingencies (Note 7) | ||||||||
| Equity: | ||||||||
| Common equity: | ||||||||
| Shares of beneficial interest without par value: | ||||||||
| 8,000,000 shares authorized; 6,993,152 shares issued plus 192,122 and | 28,847 | 28,288 | ||||||
| 157,395 vested share units granted to Trustees at October 31, 2019 | ||||||||
| and 2018, respectively | ||||||||
| Treasury stock, at cost: 206,408 and 235,536 shares at October 31, 2019 | (4,330 | ) | (4,941 | ) | ||||
| and 2018, respectively | ||||||||
| Dividends in excess of net income | (6,762 | ) | (4,376 | ) | ||||
| Accumulated other comprehensive (loss) income | (2,040 | ) | 2,517 | |||||
| Total Common Equity | 15,715 | 21,488 | ||||||
| Noncontrolling interests in subsidiaries | 333 | 2,856 | ||||||
| Total Equity | 16,048 | 24,344 | ||||||
| Total Liabilities and Equity | $ | 390,618 | $ | 392,073 | ||||
See Notes to Consolidated Financial Statements.
44
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| Years Ended October 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (In Thousands of Dollars, Except Per Share Amounts) | ||||||||||||
| Revenue: | ||||||||||||
| Rental income | $ | 53,326 | $ | 51,267 | $ | 45,357 | ||||||
| Reimbursements | 6,429 | 6,093 | 5,597 | |||||||||
| Sundry income | 522 | 637 | 680 | |||||||||
| Total revenue | 60,277 | 57,997 | 51,634 | |||||||||
| Expenses: | ||||||||||||
| Operating expenses | 17,917 | 16,245 | 15,848 | |||||||||
| Lease termination fee | — | — | 620 | |||||||||
| Management fees | 2,603 | 2,547 | 2,375 | |||||||||
| Real estate taxes | 9,591 | 8,396 | 10,139 | |||||||||
| Depreciation | 11,339 | 11,515 | 10,669 | |||||||||
| Total expenses | 41,450 | 38,703 | 39,651 | |||||||||
| Operating income | 18,827 | 19,294 | 11,983 | |||||||||
| Investment income | 360 | 267 | 206 | |||||||||
| Unrealized (loss) gain on interest rate cap contract | (160 | ) | 72 | — | ||||||||
| Gain on sale of property | 836 | — | 15,395 | |||||||||
| Loan prepayment costs relating to property sale | — | — | (1,139 | ) | ||||||||
| Interest expense including amortization | ||||||||||||
| of deferred financing costs | (18,070 | ) | (18,667 | ) | (15,762 | ) | ||||||
| Net income | 1,793 | 966 | 10,683 | |||||||||
| Net (income) loss attributable to noncontrolling | ||||||||||||
| interests in subsidiaries | (6 | ) | 517 | 2,433 | ||||||||
| Net income attributable to common equity | $ | 1,787 | $ | 1,483 | $ | 13,116 | ||||||
| Earnings per share - basic and diluted: | $ | 0.26 | $ | 0.21 | $ | 1.92 | ||||||
| Weighted average shares outstanding: | ||||||||||||
| Basic and diluted | 6,940 | 6,883 | 6,833 | |||||||||
See Notes to Consolidated Financial Statements.
45
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
| Years Ended October 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (In Thousands of Dollars) | ||||||||||||
| Net income | $ | 1,793 | $ | 966 | $ | 10,683 | ||||||
| Other comprehensive (loss) income: | ||||||||||||
| Unrealized (loss) gain on interest rate swap contracts | ||||||||||||
| before reclassifications | (6,081 | ) | 3,043 | 2,424 | ||||||||
| Amount reclassified from accumulated other | ||||||||||||
| comprehensive income to interest expense | (319 | ) | 70 | 528 | ||||||||
| Net unrealized (loss) gain on interest rate swap contracts | (6,400 | ) | 3,113 | 2,952 | ||||||||
| Comprehensive (loss) income | (4,607 | ) | 4,079 | 13,635 | ||||||||
| Net (income) loss attributable to noncontrolling interests | (6 | ) | 517 | 2,433 | ||||||||
| Other comprehensive income (loss): | ||||||||||||
| Unrealized loss (gain) on interest rate swap contracts | ||||||||||||
| attributable to noncontrolling interests | 1,843 | (880 | ) | (978 | ) | |||||||
| Comprehensive income (loss) attributable to noncontrolling interests | 1,837 | (363 | ) | 1,455 | ||||||||
| Comprehensive (loss) income attributable to common equity | $ | (2,770 | ) | $ | 3,716 | $ | 15,090 | |||||
See Notes to Consolidated Financial Statements.
46
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, 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 | |||||||||||||||||||
| Stock based compensation expense | 124 | 124 | 124 | |||||||||||||||||||||||||
| Vested share units granted to Trustees and consultant | 1,046 | 1,046 | 1,046 | |||||||||||||||||||||||||
| Vested share units issued to consultant and retired Trustees * | (611 | ) | 611 | — | — | |||||||||||||||||||||||
| Distributions to noncontrolling interests | — | (686 | ) | (686 | ) | |||||||||||||||||||||||
| Net income | 1,787 | 1,787 | 6 | 1,793 | ||||||||||||||||||||||||
| Dividends declared, including $106 payable in share units ($0.60 per share) | (4,173 | ) | (4,173 | ) | (4,173 | ) | ||||||||||||||||||||||
| Net unrealized loss on interest rate swaps | (4,557 | ) | (4,557 | ) | (1,843 | ) | (6,400 | ) | ||||||||||||||||||||
| Balance at October 31, 2019 | $ | 28,847 | $ | (4,330 | ) | $ | (6,762 | ) | $ | (2,040 | ) | $ | 15,715 | $ | 333 | $ | 16,048 | |||||||||||
* Represents the issuance of treasury shares to consultant and retired Trustee(s) for share units earned.
See Notes to Consolidated Financial Statements.
47
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended October 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (In Thousands of Dollars) | ||||||||||||
| Operating activities: | ||||||||||||
| Net income | $ | 1,793 | $ | 966 | $ | 10,683 | ||||||
| Adjustments to reconcile net income to net cash provided by | ||||||||||||
| operating activities: | ||||||||||||
| Depreciation | 11,339 | 11,515 | 10,669 | |||||||||
| Amortization | 1,750 | 1,789 | 1,932 | |||||||||
| Unrealized loss (gain) on interest rate cap contract | 160 | (72 | ) | — | ||||||||
| Stock based compensation expense | 124 | 130 | 122 | |||||||||
| Trustee fees, consultant fee and related interest paid in stock units | 940 | 818 | 803 | |||||||||
| Gain on sale of property | (836 | ) | — | (15,395 | ) | |||||||
| Deferred rents - straight line rent | (410 | ) | (605 | ) | (634 | ) | ||||||
| Bad debt expense | 263 | 198 | 196 | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Tenants' security accounts | 149 | 272 | 142 | |||||||||
| Accounts receivable, prepaid expenses and other assets | (1,537 | ) | (371 | ) | (4,160 | ) | ||||||
| Accounts payable, accrued expenses and deferred | ||||||||||||
| trustee compensation | 64 | (1,808 | ) | (1,021 | ) | |||||||
| Deferred revenue | 21 | 93 | 142 | |||||||||
| Net cash provided by operating activities | 13,820 | 12,925 | 3,479 | |||||||||
| Investing activities: | ||||||||||||
| Proceeds from sale of property, net | 7,060 | — | 16,100 | |||||||||
| Capital improvements - existing properties | (3,087 | ) | (5,335 | ) | (10,058 | ) | ||||||
| Acquisition of Station Place | — | (19,550 | ) | — | ||||||||
| Proceeds from payment of secured loans receivable inclusive of accrued interest | — | 1,870 | — | |||||||||
| Net cash provided by (used in) investing activities | 3,973 | (23,015 | ) | 6,042 | ||||||||
| Financing activities: | ||||||||||||
| Repayment of mortgages and construction loan | (26,529 | ) | (148,680 | ) | (34,254 | ) | ||||||
| (Repayment of)/proceeds from credit line | — | (3,121 | ) | 3,121 | ||||||||
| Proceeds from mortgage loan refinancings | 28,815 | 166,520 | 23,500 | |||||||||
| Proceeds from acquisition mortgage loan | — | 12,350 | — | |||||||||
| Proceeds from construction loan | — | — | 1,349 | |||||||||
| Deferred financing costs | (539 | ) | (2,685 | ) | (640 | ) | ||||||
| Interest rate cap contract cost | — | (88 | ) | — | ||||||||
| Dividends paid | (3,048 | ) | (676 | ) | (3,033 | ) | ||||||
| Due to affiliate | 288 | 245 | 5,172 | |||||||||
| Distributions to noncontrolling interests | (686 | ) | (8,259 | ) | (420 | ) | ||||||
| Net cash (used in) provided by financing activities | (1,699 | ) | 15,606 | (5,205 | ) | |||||||
| Net increase in cash, cash equivalents and restricted cash | 16,094 | 5,516 | 4,316 | |||||||||
| Cash, cash equivalents and restricted cash, beginning of year | 26,394 | 20,878 | 16,562 | |||||||||
| Cash, cash equivalents and restricted cash, end of year | $ | 42,488 | $ | 26,394 | $ | 20,878 | ||||||
| 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 | $ | 16,337 | $ | 17,040 | $ | 15,160 | ||||||
| Supplemental schedule of non cash activities: | ||||||||||||
| Investing activities: | ||||||||||||
| Accrued capital expenditures, construction costs, pre-development costs and interest | $ | 157 | $ | 82 | $ | 413 | ||||||
| Financing activities: | ||||||||||||
| Dividends declared but not paid | $ | 1,357 | $ | 338 | $ | — | ||||||
| Dividends paid in share units | $ | 106 | $ | 21 | $ | 13 | ||||||
| The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the balance sheet: | ||||||||||||
| Cash and cash equivalents | $ | 38,075 | $ | 21,747 | $ | 7,899 | ||||||
| Tenants' security accounts | 2,278 | 2,212 | 2,007 | |||||||||
| Qualified intermediary deposit | — | — | 6,965 | |||||||||
| Mortgage escrows (included in prepaid expenses and other assets) | 2,135 | 2,435 | 4,007 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 42,488 | $ | 26,394 | $ | 20,878 | ||||||
See Notes to Consolidated Financial Statements.
48
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.
On November 1, 2018, FREIT adopted ASU No. 2014-09 using the modified retrospective approach. Since FREIT’s primary source of revenue is operating leases, which fall under the scope of “Leases, Topic 840” and will be under the scope of “Leases, Topic 842” once adopted in November 2019, the adoption of ASU No. 2014-09 did not have a significant impact on its consolidated financial statements and footnote disclosures. Additionally, the Company has elected to adopt the practical expedient under ASU 2018-11, to not separate nonlease components from the associated lease and, instead, to account for those non-lease components as a single lease component if the nonlease components otherwise would be accounted for under the new revenue guidance. The adoption of ASU No. 2014-09 did not have a significant impact on the consolidated financial statements and FREIT did not record any cumulative adjustment as of the adoption date of November 1, 2018 in connection with the implementation of ASU No. 2014-09.
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 June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments – Credit Losses (Topic 326)", which amends the current approach to estimate credit losses on certain financial assets, including trade and other receivables, available-for-sale securities, and other financial instruments. Generally, this amendment requires entities to establish a valuation allowance for the expected lifetime losses of these certain financial assets. Subsequent changes in the valuation allowance are recorded in current earnings and reversal of previous losses are permitted. Currently, U.S. GAAP requires entities to write down credit losses only when losses are probable and loss reversals are not permitted. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. 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 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
49
interim period. The standard should be applied using a retrospective transition method to each period presented. FREIT adopted this new accounting guidance in the first quarter of Fiscal 2019, which changed the presentation of cash and cash equivalents to include restricted cash on the consolidated statement of cash flows.
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.
The SEC's Disclosure Update and Simplification rule (Release 33-10532) amends the interim financial statement requirements to require a reconciliation of changes in stockholders' equity in the notes or as a separate statement. This analysis should reconcile the beginning balance to the ending balance of each caption in stockholders' equity for each period for which an income statement is required to be filed and comply with the remaining content requirements of Rule 3-04 of Regulation S-X. As a result, registrants will have to provide the reconciliation for both the year-to-date and quarterly periods and comparable periods in Form 10-Q but only for the year-to-date periods in registration statements. The rule does not prescribe the format of the presentation as long as the appropriate periods are provided. Per a Compliance and Disclosure Interpretation (Q 105.09, Exchange Act Forms, 10-Q), "The amendments are effective for all filings made on or after November 5, 2018. In light of the timing of effectiveness of the amendments and proximity of effectiveness to the filing date for most filers' quarterly reports, the staff would not object if the filer's first presentation of the changes in shareholders' equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments." This essentially made the requirements effective for the Company's first quarter 2019 filing. FREIT has adopted this guidance in the first quarter of Fiscal 2019 by presenting a reconciliation of changes in stockholders’ equity for the current and prior period as a separate statement.
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 | |||||||
| Berdan Court, LLC | FREIT | 100% | 2019 | |||||||
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.
Reclassification:
Certain prior year balance sheet accounts have been reclassified to conform to the current year presentation.
50
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.
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, 2019, 2018 and 2017, 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 $1,139,000, $1,050,000 and $1,298,000 in 2019, 2018 and 2017, 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 do not qualify as effective cash flow hedges for accounting purposes, 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 $281,000, $296,000 and $386,000 in 2019, 2018 and 2017, 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 10 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.
Note 2 – Property dispositions:
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
51
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).
On February 8, 2019, FREIT sold a commercial building, formerly occupied as a Pathmark supermarket in Patchogue, New York for a sales price of $7.5 million. The sale of this property, which had a carrying value of approximately $6.2 million, resulted in a gain of approximately $0.8 million net of sales fees and commissions. Net cash proceeds of approximately $2 million were realized after paying off the related mortgage on this property in the amount of approximately $5.2 million. FREIT distributed and paid approximately $676,000 of this gain by way of a one-time special dividend in connection with and in anticipation of the closing of the sale of the Patchogue property of $0.10 per share. The sale of this property eliminates an operating loss of approximately $0.8 million ($0.12 per share) incurred, annually, since Pathmark vacated the building in December 2015.
As the disposal of the Hammel Gardens and Patchogue 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 | 2019 | 2018 | ||||||||
| (In Thousands of Dollars) | ||||||||||
| Land | $ | 84,097 | $ | 86,225 | ||||||
| Unimproved land | 405 | 405 | ||||||||
| Apartment buildings | 7-40 years | 202,486 | 201,793 | |||||||
| Commercial buildings/shopping centers | 5-40 years | 159,186 | 165,986 | |||||||
| Equipment/Furniture | 5-15 years | 2,297 | 2,090 | |||||||
| Total real estate, gross | 448,471 | 456,499 | ||||||||
| Less: accumulated depreciation | 118,363 | 111,967 | ||||||||
| Total real estate, net | $ | 330,108 | $ | 344,532 | ||||||
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Note 5 – Mortgages payable and credit line:
| October 31, 2019 | October 31, 2018 | |||||||||||||||
| Principal | Unamortized Debt Issuance Costs | Principal | Unamortized Debt Issuance Costs | |||||||||||||
| (In Thousands of Dollars) | (In Thousands of Dollars) | |||||||||||||||
| Rockaway, NJ (A) | $ | 15,615 | $ | 51 | $ | 16,152 | $ | 80 | ||||||||
| Westwood, NJ (B) | 18,973 | 103 | 19,611 | 134 | ||||||||||||
| Patchogue, NY (C) | — | — | 5,231 | 15 | ||||||||||||
| Wayne, NJ (D) | 28,815 | 475 | 17,334 | 18 | ||||||||||||
| River Edge, NJ (E) | 10,021 | 70 | 10,243 | 87 | ||||||||||||
| Red Bank, NJ (F) | 12,350 | 123 | 12,350 | 138 | ||||||||||||
| Westwood, NJ (G) | 19,617 | 34 | 20,134 | 67 | ||||||||||||
| Wayne, NJ (H) | 23,737 | 240 | 24,432 | 274 | ||||||||||||
| Hackensack, NJ (I) | 48,000 | 509 | 48,000 | 572 | ||||||||||||
| Damascus, MD (J) | 19,354 | 231 | 19,865 | 296 | ||||||||||||
| Middletown, NY (K) | 15,588 | 170 | 15,922 | 203 | ||||||||||||
| Total fixed rate | 212,070 | 2,006 | 209,274 | 1,884 | ||||||||||||
| Frederick, MD (L) | 22,200 | 28 | 22,710 | 70 | ||||||||||||
| Baltimore, MD (M) | 118,520 | 800 | 118,520 | 1,439 | ||||||||||||
| Line of credit - Provident Bank (N) | — | 52 | — | 105 | ||||||||||||
| Total variable rate | 140,720 | 880 | 141,230 | 1,614 | ||||||||||||
| Total | $ | 352,790 | $ | 2,886 | $ | 350,504 | $ | 3,498 | ||||||||
| (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 $15,276,000 as of October 31, 2019. | |
| (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 $7,121,000 as of October 31, 2019. | |
| (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 and operated under the same terms and conditions of the then existing agreement until the property was sold on February 8, 2019. A portion of the proceeds from the sale were used to pay-off the $5.2 million then outstanding balance plus accrued interest and fees. | |
| (D) |
On August 26, 2019, Berdan Court, LLC (“Berdan Court”), (owned 100% by FREIT), refinanced its $17 million loan (which matured on September 1, 2019) with the lender in the amount of $28,815,000. This refinancing resulted in: (i) a reduction in the annual interest rate from a fixed rate of 6.09% to a fixed rate of 3.54% and (ii) net refinancing proceeds of approximately $11.6 million 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 approximately $85,004 each month through September 1, 2024. Thereafter, monthly installments of principal plus interest totaling approximately $130,036 will be required each month until September 1, 2029 at which time the unpaid balance is due. The mortgage is secured by an apartment building in Wayne, New Jersey having a net book value of approximately $1,622,000 as of October 31, 2019. | |
| (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 $755,000 as of October 31, 2019. | |
| (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 $19,035,000 as of October 31, 2019. On January 21, 2019, Station Place on Monmouth, LLC entered into a modification agreement with Provident Bank. The material terms of the modification were: (i) FREIT guarantees $2,350,000 of the outstanding principal balance of the loan; and (ii) the loan’s Debt Service Coverage Ratio (“DSCR”) covenants are reduced to a single test that will be tested semi-annually (commencing with the six-month period ending April 30, 2019) and require a DSCR of 1.2 / 1.0 based on actual |
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| debt service. Prior to this modification, the loan’s DSCR covenants were calculated using the greater of the actual debt service or other hypothetical debt service measures, as provided in the loan agreement, that were to be tested quarterly. As previously disclosed in FREIT’s current report on Form 8-K filed with the SEC on January 24, 2019, Station Place had not been in compliance with the loan covenants as of October 31, 2018, and the modification waives all previous non-compliance. If the DSCR should fall below 1.2 / 1.0, Provident Bank, at its discretion, may require a current appraisal of the Station Place property. If the loan balance exceeds 85% loan-to-value (“L-T-V”) based on the appraised value, Station Place may be required to resize the loan to bring the L-T-V into compliance by paying down the outstanding principal balance of the loan, posting a letter of credit, or providing additional collateral to Provident Bank. As of October 31, 2019, Station Place was in compliance with this covenant. | ||
| (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 $8,934,000 as of October 31, 2019. | |
| (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 $24,787,000 as of October 31, 2019 including approximately $0.4 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 reimbursed by New York Life when the loan 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 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 $36,661,000 as of October 31, 2019. | |
| (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. 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 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. (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 $26,136,000 as of October 31, 2019. | |
| (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 $18,735,000 as of October 31, 2019. | |
| (L) | On April 28, 2017, WestFREIT, Corp. (owned 100% by FREIT), 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 had a floating interest rate equal to 275 basis points over the one-month LIBOR and had 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 was 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 |
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| time the outstanding balance became due. On April 3, 2019, WestFREIT, Corp. exercised its option to extend its loan held by M&T Bank, with a then outstanding balance of approximately $22.5 million, for twelve months. Effective beginning on June 1, 2019, the extension of this loan requires monthly principal payments of $47,250 plus interest based on a floating interest rate equal to 240 basis points over the one-month LIBOR and has a maturity date of May 1, 2020. The mortgage is secured by a retail building in Frederick, Maryland having a net book value of approximately $13,398,000 as of October 31, 2019. | ||
| (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 8 to FREIT’s consolidated financial statements for further details on this fee). 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 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, 2019, approximately $118.5 million of this loan facility was drawn down and the interest rate was approximately 4.84%. The loan is secured by the Rotunda property, which has a net book value of approximately $151,130,000 as of October 31, 2019. | |
| (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. In February 2018, FREIT repaid the line of credit in the amount of $3.1 million. As of October 31, 2019 and 2018, there was no amount outstanding and $13 million was available under the line of credit. |
Certain of the Company’s mortgage loans and the Credit Line contain financial covenants. The Company was in compliance with all of its financial covenants as of October 31, 2019.
Fair value of long-term debt:
The following table shows the estimated fair value and carrying value of FREIT’s long-term debt, net at October 31, 2019 and 2018:
| October 31, | October 31, | |||
| ($ in Millions) | 2019 | 2018 | ||
| Fair Value | $352.9 | $338.3 | ||
| Carrying Value, Net | $349.9 | $347.0 | ||
Fair values are estimated based on market interest rates at the end of each fiscal year and on a 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).
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Principal amounts (in thousands of dollars) due under the above obligations in each of the five years subsequent to October 31, 2019 are as follows:
| Year Ending October 31, | Amount |
| ||
| 2020 | $ | 25,638 | ||
| 2021 | $ | 141,018 | (a) | |
| 2022 | $ | 17,388 | ||
| 2023 | $ | 36,878 | ||
| 2024 | $ | 11,378 | ||
| (a) | Includes Rotunda loan in the amount of approximately $118.5 million refinanced with Aareal Capital Corporation on February 7, 2018. (See Note 5(M)) |
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, 2019, 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, 2019, 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, 2019, 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, 2019, 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, 2019, the total amount outstanding on this loan was approximately $23.7 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, 2019, the derivative financial instrument has a notional amount of approximately $23.8 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, 2019 was approximately $19.4 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, 2019, the derivative financial instrument has a notional amount of approximately $19.4 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, 2019, the total amount outstanding on this loan was approximately $15.6 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, 2019, the derivative financial instrument has a notional amount of approximately $15.6 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, 2019, FREIT recorded an unrealized loss of
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approximately $6,400,000 in comprehensive income representing the change in the fair value of these cash flow hedges during such period with a corresponding liability of approximately $179,000 for the Damascus Centre swaps, $53,000 for the Wayne PSC swap, $860,000 for the Regency swap and $1,034,000 for the Station Place on Monmouth swap as of October 31, 2019. 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.
The Grande Rotunda, LLC interest rate cap is, for accounting purposes, an ineffective cash flow hedge with a corresponding gain or loss being recorded in FREIT’s income statement. For the year ended October 31, 2019, FREIT recorded an unrealized loss in the consolidated statement of income of approximately $160,000 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 $0 as of October 31, 2019. 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 $160,000 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 - Commitments and contingencies:
Leases:
Commercial tenants:
FREIT leases commercial space having a net book value of approximately $143 million at October 31, 2019 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, 2019 is as follows:
| Year Ending October 31, | Amount | |||
| 2020 | $ | 20,055 | ||
| 2021 | 18,911 | |||
| 2022 | 15,624 | |||
| 2023 | 12,993 | |||
| 2024 | 10,838 | |||
| Thereafter | 46,412 | |||
| Total | $ | 124,833 | ||
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. 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, 2019 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. FREIT acquired the Westwood Plaza property in 1988, and the property has not experienced any flooding that gave rise to any claims under FREIT’s flood insurance in this time period.
Within the last twelve months, FREIT has conducted environmental audits for all of its properties. The environmental reports secured by FREIT have not revealed any environmental conditions on its properties, which require any further remediation pursuant to any applicable federal or state law or regulation.
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FREIT has determined that several of its properties contain lead based paint (“LBP”). FREIT has obtained lead-free interior certifications with respect to all properties that were found to contain LBP, certifying that such properties contain no LBP on the interior surfaces. 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 8 - 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, 2019 for a two-year term which will expire on October 31, 2021. The Management Agreement automatically renews for successive periods of two years unless either party gives not less than six (6) months prior notice 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 $2,549,000, $2,438,000, and $2,216,000 in Fiscal 2019, 2018 and 2017, 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 $762,000, $742,000 and $1,191,000 in Fiscal 2019, 2018 and 2017, respectively. Total Hekemian management fees outstanding at October 31, 2019 and 2018 were approximately $219,000 and $212,000, 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 $196,000, $178,000 and $175,000 in Fiscal 2019, 2018 and 2017, respectively.
The Management Agreement was amended on January 14, 2020. See Note 15 – Subsequent Events – Amendment to Management Agreement.
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 at rates that 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 originally 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 and interest 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
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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, 2019 and 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 was $4,000,000 at both October 31, 2019 and 2018. The accrued but unpaid interest related to these notes for Fiscal 2019 and Fiscal 2018 amounted to approximately $1,053,000 and $862,000, respectively, and is included in secured loans 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, 2019, FREIT and Rotunda 100 have made their required capital 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 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 previously held with Wells Fargo was at its maximum level resulting in no additional funding available to draw. Accordingly, during Fiscal 2017 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, 2019 and 2018, Rotunda 100, LLC has funded Grande Rotunda, LLC with approximately $5.7 million and $5.4 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 during Fiscal 2019, 2018 and 2017 were $275,000, $1,195,000 and $467,500, respectively. Fees incurred during Fiscal 2019 related to commissions to Hekemian for the following: $131,250 for the sale of the Patchogue property; $144,075 for the refinancing of the Berdan Court, LLC loan. 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.
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. 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
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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. On February 7, 2019, Donald W. Barney retired and resigned as President, Chief Financial Officer, Treasurer and a Trustee of FREIT. The Board of Trustees appointed Allan Tubin, the Chief Financial Officer of Hekemian, as the Chief Financial Officer and Treasurer of the Trust and Robert S. Hekemian, Jr. as President of the Trust. As a result, Robert S. Hekemian, Jr. holds the offices of both Chief Executive Officer and President of FREIT.
Trustee fee expense (including interest and dividends) incurred by FREIT for Fiscal 2019, 2018 and 2017 was approximately $214,000, $365,000 and $538,000, respectively, for Robert S. Hekemian, $381,000, $149,000 and $65,000, respectively, for Robert S. Hekemian, Jr., $22,000, $0 and $0, respectively, for Allan Tubin and $56,000, $26,000 and $0, respectively, for David Hekemian. (See Note 11 to FREIT’s consolidated financial statements).
Pursuant to the terms of a Consulting Agreement between Robert S. Hekemian and the Trust, Mr. Hekemian served the Trust in a consulting capacity effective April 5, 2018 through December 2019. The Consulting Agreement obliged 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 paid Mr. Hekemian a consulting fee of $5,000 per month during the term of the Consulting Agreement, which was 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 was 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 was payable. For Fiscal 2019 and 2018, consulting fee expense for Robert S. Hekemian was approximately $60,000 and $34,200, respectively.
Note 9 - Income taxes:
FREIT intends to distribute 100% of its ordinary taxable income to its shareholders as dividends for the fiscal year ended October 31, 2019. Accordingly, no provision for federal or state income taxes related to such ordinary taxable income was recorded in FREIT’s consolidated financial statements.
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 Hammel Gardens property in Maywood, New Jersey, 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.
As of October 31, 2019, FREIT had no material uncertain income tax positions. The tax years subsequent to and including the fiscal year ended October 31, 2016 remain open to examination by the major taxing jurisdictions to which FREIT is subject.
Note 10 - 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 amendments to the Plan to (a) increase the number of shares reserved for issuance thereunder by an additional 300,000 shares and (b) further extend the term of the Plan from September 10, 2018 to September 10, 2028. As of October 31, 2019, 442,060 shares are available for issuance under the Plan.
On September 4, 2014, the Board approved the grant of an aggregate 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.,
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Inc., FREIT’s managing agent. The options have an exercise price of $18.45 per share, fully vested on September 3, 2019 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 an aggregate 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 an aggregate of 38,000 non-qualified share options under the 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.
On March 4, 2019, the Board approved the grant of an aggregate of 5,000 non-qualified share options under the Plan to the Chairman of the Board. The options have an exercise price of $15.00 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 March 3, 2029.
The following table summarizes stock option activity for Fiscal 2019:
| Year Ended October 31, | ||||||||
| 2019 | ||||||||
| No. of Options | Exercise | |||||||
| Outstanding | Price | |||||||
| Options outstanding at beginning of year | 305,780 | $ | 18.40 | |||||
| Options granted during year | 5,000 | 15.00 | ||||||
| Options forfeited/cancelled during year | (40 | ) | 18.45 | |||||
| Options outstanding at end of year | 310,740 | $ | 18.35 | |||||
| Options vested and expected to vest | 308,310 | |||||||
| Options exercisable at end of year | 260,140 | |||||||
The estimated fair value of options granted during Fiscal 2019 was $2.43 per option. Such value was estimated on the grant date using a binomial lattice option pricing model using the following assumptions:
| · | Expected volatility – 27.69% |
| · | Risk-free interest rate – 2.72% |
| · | Imputed option life – 6.3 years |
| · | Expected dividend yield – 3.82% |
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 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 2019, 2018 and 2017, compensation expense related to stock options granted amounted to $124,000, $130,000 and $122,000, respectively. At October 31, 2019, there was approximately $117,000 of unrecognized compensation cost relating to outstanding non-vested stock options to be recognized over the remaining weighted average vesting period of approximately 3.1 years.
The aggregate intrinsic value of options vested and expected to vest and options exercisable at October 31, 2019 was approximately $77,100 and $13,600, respectively.
Note 11 - 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
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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, 2019 were deferred under the Deferred Fee Plan except for fees payable to one Trustee, who elected to receive such fees in cash. All fees payable to Trustees for the year ended October 31, 2018 were deferred under the Deferred Fee Plan except for the fees payable to three Trustees, 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, 2019 and 2018, the aggregate amounts of deferred Trustee fees together with related interest and dividends were approximately $986,000 and $805,800, respectively, which have been paid through the issuance of 60,148 and 51,109, 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, 2019 and 2018, FREIT has charged as expense approximately $879,800 and $784,000, respectively, representing deferred Trustee fees and interest, and the balance of approximately $106,200 and $21,800, 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, 2019 and 2018, approximately $4,422,000 and $4,881,000, respectively, of fees has been deferred together with accrued interest of approximately $3,188,000 and $3,576,000, respectively.
In connection with the termination of Robert S. Hekemian’s service to the Trust under the Consulting Agreement between Mr. Hekemian and the Trust in December 2019, Mr. Hekemian’s accrued plan benefits under the Deferred Fee Plan became payable to him in a single lump sum in the amount of approximately $4.8 million.
Note 12 - Dividends and earnings per share:
FREIT declared dividends of approximately $4,173,000 ($0.60 per share), $1,035,000 ($0.15 per share) and $1,024,000 ($0.15 per share) to shareholders of record during Fiscal 2019, 2018 and 2017, respectively.
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 11 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 attributable 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 2019, 2018 and 2017, the outstanding stock options were anti-dilutive with no impact on diluted earnings per share.
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Note 13 - 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 year ended October 31, 2019, the commercial segment is comprised of eight (8) properties, excluding the land and building formerly occupied as a Pathmark supermarket in Patchogue, New York, which was sold on February 8, 2019 (see Note 2 to FREIT’s consolidated financial statements). During the fiscal years ended October 31, 2018 and 2017, the commercial segment is comprised of nine (9) properties. The residential segment is comprised of eight (8) properties during the fiscal years ended October 31, 2019 and 2018. 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 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, 2019. Asset information is not reported since FREIT does not use this measure to assess performance.
| Years Ended October 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (In Thousands of Dollars) | ||||||||||||
| Real estate rental revenue: | ||||||||||||
| Commercial | $ | 26,692 | $ | 25,464 | $ | 24,114 | ||||||
| Residential | 33,175 | 31,928 | 26,886 | |||||||||
| Total real estate rental revenue | 59,867 | 57,392 | 51,000 | |||||||||
| Real estate operating expenses: | ||||||||||||
| Commercial | 11,694 | 11,861 | 11,791 | |||||||||
| Residential | 14,368 | 13,022 | 14,442 | |||||||||
| Total real estate operating expenses | 26,062 | 24,883 | 26,233 | |||||||||
| Net operating income: | ||||||||||||
| Commercial | 14,998 | 13,603 | 12,323 | |||||||||
| Residential | 18,807 | 18,906 | 12,444 | |||||||||
| Total net operating income | $ | 33,805 | $ | 32,509 | $ | 24,767 | ||||||
| Recurring capital improvements - residential | $ | (685 | ) | $ | (738 | ) | $ | (798 | ) | |||
| Reconciliation to consolidated net income attributable to common equity: | ||||||||||||
| Segment NOI | $ | 33,805 | $ | 32,509 | $ | 24,767 | ||||||
| Gain on sale of property | 836 | — | 15,395 | |||||||||
| Loan prepayment costs relating to property sale | — | — | (1,139 | ) | ||||||||
| Deferred rents - straight lining | 410 | 605 | 634 | |||||||||
| Lease termination fee | — | — | (620 | ) | ||||||||
| Investment income | 360 | 267 | 206 | |||||||||
| Unrealized (loss) gain on interest rate cap contract | (160 | ) | 72 | — | ||||||||
| General and administrative expenses | (4,049 | ) | (2,305 | ) | (2,129 | ) | ||||||
| Depreciation | (11,339 | ) | (11,515 | ) | (10,669 | ) | ||||||
| Financing costs | (18,070 | ) | (18,667 | ) | (15,762 | ) | ||||||
| Net income | 1,793 | 966 | 10,683 | |||||||||
| Net (income) loss attributable to noncontrolling interests | (6 | ) | 517 | 2,433 | ||||||||
| Net income attributable to common equity | $ | 1,787 | $ | 1,483 | $ | 13,116 | ||||||
Note 14- 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
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certain sales volume levels set forth in the modification. This lease modification provided for a $250,000 reduction in annual rent over the renewed term.
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 15- Subsequent events:
Purchase and Sale Agreement:
On January 14, 2020, FREIT and certain of its affiliates (collectively, the “Sellers”), entered into a Purchase and Sale Agreement (the “Purchase and Sale Agreement”) with an affiliate of the Kushner Companies (the “Purchaser”), pursuant to which the Sellers will sell to the Purchaser 100% of Sellers’ ownership interests in seven apartment properties held by the Sellers in exchange for the purchase price described therein, subject to the terms and conditions of the Purchase and Sale Agreement.
The Purchase and Sale Agreement provides for the sale of the following seven properties: Berdan Court, located in Wayne, New Jersey; The Boulders at Rockaway, located in Rockaway, New Jersey; Pierre Towers, located in Hackensack, New Jersey; The Regency Club, located in Middletown, New York; Station Place, located in Red Bank, New Jersey; Steuben Arms, located in River Edge, New Jersey; and Westwood Hills, located in Westwood, New Jersey. FREIT has a 100% ownership interest in each of these properties, except for (i) Pierre Towers, in which FREIT has a 65% ownership interest, and (ii) Westwood Hills, in which FREIT has a 40% ownership interest.
The aggregate purchase price for the 100% ownership interest in each of the properties is $266,500,000, subject to certain adjustments, including reductions for the amount of certain mortgage loans assumed by the Purchaser aggregating approximately $76,815,000. After taking into account FREIT’s 40% ownership interest in Westwood Hills and 65% ownership interest in Pierre Towers, the sale of all seven apartment properties, if consummated, would result in approximately $208,325,000 in total cash consideration paid to FREIT (subject to adjustments), and would be expected to result in a substantial gain to FREIT (as measured on a GAAP basis).
In connection with the entry into the Purchase and Sale Agreement, the Purchaser delivered in escrow a deposit in the form of an unconditional, irrevocable letter of credit in the amount of $15,000,000. Such deposit is non-refundable, except in connection with the termination of the Purchase and Sale Agreement in certain circumstances.
Pursuant to the Purchase and Sale Agreement, the Purchaser has agreed to assume, subject to lender approval, the outstanding mortgage loans on the Berdan Court and Pierre Towers properties. In the event one or both of such mortgage loans are not assumed, then the Purchase and Sale Agreement will be deemed to be terminated solely as to the property or properties associated with the mortgage loan or loans that are not assumed by the Purchaser, such property or properties will be excluded from the transaction, and the purchase price will be reduced by an amount equal to the amount(s) allocated to such property or properties in the Purchase and Sale Agreement. In addition, if the ownership structure of Pierre Towers is not converted into a tenancy-in-common on or prior to February 28, 2020, then the Purchase and Sale Agreement will be deemed to be terminated solely as to the Pierre Towers property, such property will be excluded from the transaction, and the purchase price will be reduced by an amount equal to the amount allocated to such property in the Purchase and Sale Agreement. Of the $266,500,000 aggregate purchase price, $42,000,000 has been allocated to Berdan Court, and $80,500,000 has been allocated to Pierre Towers.
The Purchase and Sale Agreement also provides that The Regency Club may be excluded from the transaction (and the purchase price will be reduced by an amount equal to the amount(s) allocated to such property in the Purchase and Sale Agreement) if certain title matters affecting such property are not adequately addressed. Of the $266,500,000 aggregate purchase price, $27,250,000 has been allocated to The Regency Club.
The Board, following the recommendation of the Special Committee of the Board, unanimously approved the Purchase and Sale Agreement and the transactions contemplated thereby. The closing of the transactions contemplated by the Purchase and Sale Agreement is expected to occur in the second calendar quarter of 2020.
The closing of the Purchase and Sale Agreement is subject to various conditions, including the approval of the Purchase and Sale Agreement and the transactions contemplated thereby by a majority of the votes cast by the holders of a majority of the outstanding shares of beneficial interest of the Trust (“Shares”) present in person or
64
represented by proxy at a meeting of the Trust’s shareholders. Concurrently with the execution of the Purchase and Sale Agreement, the Trustees of the Trust entered into voting agreements with the Purchaser pursuant to which, among other things, the Trustees agreed to vote an aggregate of 839,839 Shares held by them and over which they have voting control, which represent approximately 12.4% of the issued and outstanding Shares, in favor of the approval of the Purchase and Sale Agreement and the transactions contemplated thereby.
The parties’ respective obligations under the Purchase and Sale Agreement are subject to certain additional customary conditions. There is no due diligence or financing contingency.
The Purchase and Sale Agreement contains customary termination rights, including the right of either the Sellers or the Purchaser to terminate the agreement if the closing has not occurred on or before June 14, 2020. In the event that the Purchase and Sale Agreement is terminated in certain circumstances, the Trust will be required to pay the Purchaser a termination fee of $3.5 million and/or reimburse the Purchaser for certain out-of-pocket expenses (subject to a cap of $2 million).
The Purchase and Sale Agreement contains various representations, warranties and covenants of the parties customary for a transaction of this nature. Until the earlier of the termination of the Purchase and Sale Agreement and the closing of the Purchase and Sale Agreement, the Sellers will conduct their respective businesses with respect to the applicable properties in the ordinary course of business consistent with past practice.
The Purchase and Sale Agreement provides that the Trust will convene a meeting of its shareholders for the purpose of approving the Purchase and Sale Agreement and the transactions contemplated thereby.
The Purchase and Sale Agreement provides that following the closing of the Purchase and Sale Agreement, the Sellers, on the one hand, and the Purchaser, on the other hand, will indemnify one another for certain liabilities, subject to certain limitations.
Amendment to Management Agreement:
On January 14, 2020, in connection with entering into the Purchase and Sale Agreement, FREIT and Hekemian entered into a First Amendment to Management Agreement (the “First Amendment”), which amends the Management Agreement dated as of November 1, 2001 between FREIT and Hekemian. The First Amendment will become effective if, and only if, the Plan of Liquidation becomes effective (as described below). The First Amendment provides that upon the closing of any sale or other disposition of FREIT’s entire direct or indirect interest in each real property owned directly or indirectly, in whole or in part, by FREIT (each a “Trust Property”), whether pursuant to the Purchase and Sale Agreement or otherwise in furtherance of the Plan of Liquidation (as described below), (a) the Management Agreement will automatically terminate and be of no further force or effect with respect to such Trust Property and (b) FREIT will pay to Hekemian (i) any and all commissions and fees for management services and reimbursement required to be paid by FREIT pursuant to the Management Agreement in respect of the applicable Trust Property up to the termination date, calculated on a pro rata basis, plus (ii) a termination fee in respect to such Trust Property equal to the product of (x) the Trust’s direct or indirect percentage ownership interest in such Trust Property, multiplied by (y) 1.25, multiplied by (z) one (1) year’s Base Management Fee (as defined in the Management Agreement and First Amendment) in respect of such Trust Property.
In addition, the First Amendment amends the Management Agreement to provide that upon the closing of any sale or other disposition of FREIT’s entire direct or indirect interest in each Trust Property, whether pursuant to the Purchase and Sale Agreement or otherwise in furtherance of the Plan of Liquidation, FREIT will pay to Hekemian a sales fee equal to 1.65% of the sales price for such Trust Property (reduced from the existing range of 2.5% to 4.5% in the Management Agreement); provided, however, that in the event that a Trust Property is not wholly owned, directly or indirectly, by FREIT, the sales fee payable to Hekemian will only be payable in respect of FREIT’s percentage ownership share of the applicable Trust Property.
The First Amendment provides that the foregoing fees will be paid in lieu of, and will supersede in their entirety, any other payments which otherwise would be payable to Hekemian under the Management Agreement arising out of or attributable to the sale or other disposition of FREIT’s entire direct or indirect interest in each Trust Property or the termination of the Management Agreement in respect of such Trust Property (including, without limitation, any Termination Fee, M&A Termination Fee or Sale of Property Fee under the Management Agreement (each as defined in the Management Agreement)).
Adoption of Plan of Liquidation:
On January 14, 2020, the Board adopted a Plan of Voluntary Liquidation with respect to FREIT (the “Plan of Liquidation”), which provides for the voluntary dissolution, termination and liquidation of FREIT by the sale, conveyance, transfer or delivery of all of FREIT’s remaining assets in accordance with the terms and conditions of the Plan of Liquidation and the Internal Revenue Code of 1986, as amended, and the Treasury regulations thereunder. The Plan of Liquidation will become effective upon (i) approval by a majority of the votes cast by FREIT’s shareholders present in person or represented by proxy at a duly called meeting of FREIT’s shareholders at which a quorum is present and (ii) the consummation of the transactions contemplated by the Purchase and Sale Agreement.
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Upon the effectiveness of the Plan of Liquidation and pursuant thereto, FREIT is authorized to sell, or otherwise dispose of, all of FREIT’s remaining assets for cash, notes or such other assets, upon such terms as the Board may deem advisable, and without further approval of FREIT’s shareholders.
The Plan of Liquidation provides that the proceeds from sales and dispositions of FREIT’s assets may be utilized to pay or create a reserve fund for the payment of, or otherwise adequately provide for, all of the liabilities and obligations of FREIT, and will pay all expenses incidental to the Plan of Liquidation, including all counsel fees, accountants’ fees, advisory fees and such other fees and taxes as are necessary to effectuate the Plan of Liquidation. In addition, FREIT will distribute the remaining assets of FREIT, either in cash or in kind, to FREIT’s shareholders in cancellation or redemption of their Shares in one or more distributions.
The Plan of Liquidation further provides that upon a determination of the Board, FREIT may transfer any remaining assets, including any reserve fund or other cash on hand, and liabilities to a liquidating trust (or other liquidating entity) and simultaneously with such transfer and assignment, shares of beneficial interests in such liquidating trust (or other liquidating entity) will be deemed distributed to each of FREIT’s shareholders.
Upon the adoption of the Plan of Liquidation, FREIT will cease reporting on the going concern basis of accounting and reporting, and thereafter will report on the liquidation basis of accounting and reporting.
Note 16- Selected quarterly financial data (unaudited):
The following summary represents the results of operations for each quarter for the years ended October 31, 2019 and 2018 (in thousands, except per share amounts):
| 2019: | Quarter Ended | Year Ended | ||||||||||||||||||
| January 31, | April 30, | July 31, | October 31, | October 31, | ||||||||||||||||
| Revenue | $ | 14,928 | $ | 14,786 | $ | 15,255 | $ | 15,308 | $ | 60,277 | ||||||||||
| Expenses | 14,493 | 13,956 | (a) | 14,990 | 15,045 | 58,484 | ||||||||||||||
| Net income | 435 | 830 | 265 | 263 | 1,793 | |||||||||||||||
| Net (loss) income attributable to noncontrolling interests in subsidiaries | 24 | (44 | ) | (66 | ) | 80 | (6 | ) | ||||||||||||
| Net income attributable to common equity | $ | 459 | $ | 786 | $ | 199 | $ | 343 | $ | 1,787 | ||||||||||
| Earnings per share - basic and diluted | $ | 0.07 | $ | 0.11 | (a) | $ | 0.03 | $ | 0.05 | $ | 0.26 | |||||||||
| Dividends declared per share | $ | 0.15 | $ | 0.125 | $ | 0.125 | $ | 0.20 | $ | 0.60 | ||||||||||
| 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 | (b) | 12,898 | (c) | 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 | )(b) | $ | 0.16 | (c) | $ | 0.04 | $ | 0.06 | $ | 0.21 | ||||||||
| Dividends declared per share | $ | — | $ | 0.05 | $ | 0.05 | $ | 0.05 | $ | 0.15 | ||||||||||
(a) Includes $0.8 million gain on sale of the Patchogue, New York property sold on February 8, 2019. ($0.12 per share)
(b) 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)
(c) 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)
66
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION
OCTOBER 31, 2019
(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 | $ 10,021 | $ 364 | $ 1,773 | $ - | $ 1,501 | $ 364 | $ 3,274 | $ 3,638 | $ 2,883 | 1966 | 1975 | 7-40 years | |
| Berdan Court, Wayne, NJ | 28,815 | 250 | 2,206 | - | 4,779 | 250 | 6,985 | 7,235 | 5,613 | 1964 | 1965 | 7-40 years | |
| Westwood Hills, Westwood, NJ | 19,617 | 3,849 | 11,546 | - | 2,808 | 3,849 | 14,354 | 18,203 | 9,269 | 1965-70 | 1994 | 7-39 years | |
| Pierre Towers, Hackensack, NJ | 48,000 | 8,390 | 37,486 | 19 | 9,653 | 8,409 | 47,139 | 55,548 | 18,887 | 1970 | 2004 | 7-40 years | |
| Boulders - Rockaway, NJ | 15,615 | 1,632 | - | 3,386 | 15,951 | 5,018 | 15,951 | 20,969 | 5,744 | 2005-2006 | 1963/1964 | 7-40 years | |
| Regency Club - Middletown, NY | 15,588 | 2,833 | 17,792 | - | 730 | 2,833 | 18,522 | 21,355 | 2,620 | 2003 | 2014 | 7-40 years | |
| Icon - Baltimore, MD | 65,186 | 5,871 | - | - | 87,726 | 5,871 | 87,726 | 93,597 | 7,135 | 2016 | 2005 | 7-40 years | |
| Station Place - Red Bank, NJ | 12,350 | 8,793 | 10,757 | - | 1 | 8,793 | 10,758 | 19,551 | 516 | 2015 | 2017 | 7-40 years | |
| Commercial Properties: | |||||||||||||
| Damascus Shopping Center, | |||||||||||||
| Damascus, MD | 19,354 | 2,950 | 6,987 | 6,296 | 17,630 | 9,246 | 24,617 | 33,863 | 7,727 | 1960's | 2003 | 5-39.5 years | |
| Franklin Crossing, Franklin Lakes, NJ | - | 29 | - | 3,382 | 7,444 | 3,411 | 7,444 | 10,855 | 4,209 | 1963/75/97 | 1966 | 5-39.5 years | |
| Glen Rock, NJ | - | 12 | 36 | - | 235 | 12 | 271 | 283 | 198 | 1940 | 1962 | 5-25 years | |
| Westridge Square S/C, Frederick, MD | 22,200 | 9,135 | 19,159 | (1) | 4,788 | 9,134 | 23,947 | 33,081 | 19,683 | 1986 | 1992 | 5-31.5 years | |
| Westwood Plaza, Westwood, NJ | 18,973 | 6,889 | 6,416 | - | 2,374 | 6,889 | 8,790 | 15,679 | 8,558 | 1981 | 1988 | 5-31.5 years | |
| Preakness S/C, Wayne, NJ | 23,737 | 9,280 | 24,217 | - | 2,877 | 9,280 | 27,094 | 36,374 | 11,873 | 1955/89/00 | 2002 | 5-39.5 years | |
| The Rotunda, Baltimore, MD | 53,334 | 10,392 | 14,634 | 232 | 52,858 | 10,624 | 67,492 | 78,116 | 13,448 | 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 | |||
| $ 352,790 | $ 71,344 | $ 153,009 | $ 13,158 | $ 211,355 | $ - | $ 84,502 | $ 364,364 | $ 448,866 | $ 118,363 | ||||
(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 $43.1 million, $13.3 million, $4.2 million and $169.9 million, respectively.
67
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: | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Real estate: | ||||||||||||
| Balance, Beginning of year | $ | 456,658 | $ | 433,288 | $ | 429,445 | ||||||
| Additions - Buildings and improvements | 3,386 | 4,562 | 6,602 | |||||||||
| Disposal - Buildings and improvements | (240 | ) | (742 | ) | (443 | ) | ||||||
| Acquisition (Sale) of property | (10,938 | ) | 19,550 | (2,316 | ) | |||||||
| Balance, end of year | $ | 448,866 | $ | 456,658 | $ | 433,288 | ||||||
| Accumulated depreciation: | ||||||||||||
| Balance, beginning of year | $ | 111,967 | $ | 101,194 | $ | 92,547 | ||||||
| Additions - Charged to operating expenses | 11,339 | 11,515 | 10,667 | |||||||||
| Disposal - Buildings and improvements | (217 | ) | (742 | ) | (409 | ) | ||||||
| Sale of property | (4,726 | ) | — | (1,611 | ) | |||||||
| Balance, end of year | $ | 118,363 | $ | 111,967 | $ | 101,194 | ||||||
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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY (“FREIT”)
69
* 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.
70
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
| Name | State of Formation and Organization | Trade Name | ||
| S And A Commercial Associates Limited Partnership | Maryland | None | ||
| Pierre Towers, LLC * | New Jersey | Pierre Towers | ||
| Damascus Centre, LLC | New Jersey | Damascus Center | ||
| Westwood Hills, LLC | New Jersey | Westwood Hills | ||
| Wayne PSC, LLC | New Jersey | Preakness S/C | ||
| Grande Rotunda, LLC | Maryland | The Rotunda/Icon | ||
| WestFREIT Corp | Maryland | Westridge Square | ||
| FREIT Regency, LLC | New Jersey | Regency Club | ||
| Station Place on Monmouth, LLC | New Jersey | Station Place | ||
| Berdan Court, LLC | New Jersey | Berdan Court | ||
* Owned 100% by S And A Commercial Associates
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EXHIBIT 22
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements of First Real Estate Investment Trust of New Jersey and Subsidiaries on Form S-8 (No. 333-79555, No. 333-142675, No. 333-201922, and No. 333-224712) of our reports dated January 21, 2020, on our audits of the consolidated financial statements as of October 31, 2019 and 2018 and for each of the years in the three-year period ended October 31, 2019, the financial statement schedule listed in index Item 15, and the effectiveness of First Real Estate Investment Trust of New Jersey and Subsidiaries’ internal control over financial reporting as of October 31, 2019, which reports are included in this Annual Report on Form 10-K to be filed on or about January 21, 2020.
/s/ EisnerAmper LLP
EISNERAMPER LLP
New York, New York
January 21, 2020
72
EXHIBIT 31.1
CERTIFICATION
I, Robert S. Hekemian, Jr., certify that:
1. I have reviewed this report on Form 10-K of First Real Estate Investment Trust of New Jersey;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: January 21, 2020 | /s/ Robert S. Hekemian, Jr. | ||
| Robert S. Hekemian, Jr. | |||
| President and Chief Executive Officer |
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EXHIBIT 31.2
CERTIFICATION
I, Allan Tubin, certify that:
1. I have reviewed this report on Form 10-K of First Real Estate Investment Trust of New Jersey;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: January 21, 2020 | /s/ Allan Tubin | ||
| Allan Tubin | |||
| Chief Financial Officer and Treasurer |
74
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of First Real Estate Investment Trust of New Jersey (the “Company”) on Form 10-K for the year ended October 31, 2019 (the “Report”), I, Robert S. Hekemian, Jr., President and Chief Executive Officer of the Company, do hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
| (1) | the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, 15 U.S.C. § 78m(a) or 78o(d), and, |
| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: January 21, 2020 | /s/ Robert S. Hekemian, Jr. | ||
| Robert S. Hekemian, Jr. | |||
| President and Chief Executive Officer |
75
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of First Real Estate Investment Trust of New Jersey (the “Company”) on Form 10-K for the year ended October 31, 2019 (the “Report”), I, Allan Tubin, Chief Financial Officer and Treasurer of the Company, do hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
| (1) | the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, 15 U.S.C. § 78m(a) or 78o(d), and, |
| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: January 21, 2020 | /s/ Allan Tubin | ||
| Allan Tubin | |||
| Chief Financial Officer and Treasurer |
76
Real estate (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Oct. 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of real estate and equipment | Real estate consists of the following:
|
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