UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Quarterly Period Ended | |
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or | |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from __________________ to ____________________ | |
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Commission File No. | |
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(Exact name of registrant as specified in its charter) | |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
(Zip Code) |
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(Registrant’s telephone number, including area code) | |
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(Former name, former address and former fiscal year, if changed since last report) | |
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
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OTC Pink Market |
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.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large Accelerated Filer ☐ |
Accelerated Filer ☐ |
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Smaller Reporting Company | |
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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 ☐ No
As of September 14, 2022, the number of shares of common stock outstanding was
Page 2
FIRST REAL ESTATE
INVESTMENT TRUST OF NEW JERSEY, INC.
INDEX
| Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 |
| Item 3: Quantitative and Qualitative Disclosures About Market Risk | 33 |
| Item 4: Controls and Procedures | 33 |
| Part II: Other Information | |
| Item 1: Legal Proceedings | 34 |
| Item 1A: Risk Factors | 35 |
| Item 6: Exhibits | 35 |
| Signatures | 35 |
Page 3
Part I: Financial Information
Item 1: Unaudited Condensed Consolidated Financial Statements
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
July 31, 2022 |
October 31, 2021 | |||||||
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(In Thousands, Except Share and Per Share Amounts) | ||||||||
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ASSETS | ||||||||
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Real estate, at cost, net of accumulated depreciation |
$ |
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$ |
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Construction in progress |
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Cash and cash equivalents |
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Investment in tenancy-in-common |
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Tenants' security accounts |
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Receivables arising from straight-lining of rents |
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Accounts receivable, net of allowance for doubtful accounts of $ |
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Secured loans receivable (related party) |
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Funds held in post-closing escrow |
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Prepaid expenses and other assets |
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Deferred charges, net |
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Interest rate swap contract |
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Total Assets |
$ |
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$ |
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LIABILITIES AND EQUITY | ||||||||
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Liabilities: | ||||||||
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Mortgages payable, including deferred interest of $ |
$ |
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$ |
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Less unamortized debt issuance costs |
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Mortgages payable, net |
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Due to affiliate |
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Deferred director compensation payable |
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Accounts payable and accrued expenses |
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Dividends payable |
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Tenants' security deposits |
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Deferred revenue |
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Interest rate cap and swap contracts |
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Total Liabilities |
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Commitments and contingencies | ||||||||
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Common Equity: | ||||||||
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Preferred stock with par value of $ | ||||||||
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Common stock with par value of $ | ||||||||
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Additional paid-in-capital |
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Retained earnings |
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Accumulated other comprehensive income (loss) |
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( |
) | |||||
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Total Common Equity |
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Noncontrolling interests in subsidiaries |
( |
) |
( |
) | ||||
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Total Equity |
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Total Liabilities and Equity |
$ |
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$ |
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See Notes to Condensed Consolidated Financial Statements.
Page 4
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NINE AND THREE MONTHS ENDED JULY 31, 2022 AND 2021
(Unaudited)
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Nine Months Ended July 31, |
Three Months Ended July 31, | |||||||||||||||
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2022 |
2021 |
2022 |
2021 | |||||||||||||
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(In Thousands Except Per Share Amounts) |
(In Thousands Except Per Share Amounts) | |||||||||||||||
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Revenue: | ||||||||||||||||
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Rental income |
$ |
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$ |
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$ |
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$ |
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Reimbursements |
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Sundry income |
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Total revenue |
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Expenses: | ||||||||||||||||
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Operating expenses |
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Management fees |
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Real estate taxes |
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Depreciation |
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Total expenses |
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Operating income |
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Investment income |
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(Loss) Gain on investment in tenancy-in-common |
( |
) |
( |
) |
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( |
) | |||||||||
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Net gain on sale of Maryland properties |
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Net realized gain on Wayne PSC interest rate swap termination |
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Interest expense including amortization of deferred financing costs |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
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Net income |
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Net income attributable to noncontrolling interests in subsidiaries |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
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Net income attributable to common equity |
$ |
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$ |
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$ |
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$ |
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Earnings per share: | ||||||||||||||||
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Basic |
$ |
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$ |
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$ |
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$ |
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Diluted |
$ |
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$ |
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$ |
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$ |
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Weighted average shares outstanding: | ||||||||||||||||
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Basic |
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Diluted |
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See Notes to Condensed Consolidated Financial Statements.
Page 5
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
NINE AND THREE MONTHS ENDED JULY 31, 2022 AND 2021
(Unaudited)
|
Nine Months Ended July 31, |
Three Months Ended July 31, | |||||||||||||||
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2022 |
2021 |
2022 |
2021 | |||||||||||||
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(In Thousands of Dollars) |
(In Thousands of Dollars) | |||||||||||||||
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Net income |
$ |
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$ |
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$ |
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$ |
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Other comprehensive income: | ||||||||||||||||
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Unrealized gain (loss) on interest rate cap and swap contracts before reclassifications |
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( |
) |
( |
) | ||||||||||
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Amount reclassified from accumulated other comprehensive income to realized gain on termination of interest rate swap |
( |
) |
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( |
) |
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Amount reclassified from accumulated other comprehensive income to interest expense |
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Net unrealized gain (loss) on interest rate cap and swap contracts |
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( |
) |
( |
) | ||||||||||
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Comprehensive income |
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Net income attributable to noncontrolling interests in subsidiaries |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
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Other comprehensive (income) loss: | ||||||||||||||||
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Unrealized (gain) loss on interest rate cap and swap contracts attributable to noncontrolling interests in subsidiaries |
( |
) |
( |
) |
|
| ||||||||||
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Comprehensive (income) loss attributable to noncontrolling interests in subsidiaries |
( |
) |
( |
) |
|
( |
) | |||||||||
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Comprehensive income attributable to common equity |
$ |
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$ |
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$ |
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$ |
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| ||||||
See Notes to Condensed Consolidated Financial Statements.
Page 6
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
NINE AND THREE MONTHS ENDED JULY 31, 2022
(Unaudited)
|
Common Equity | ||||||||||||||||||||||||||||||||
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Common Stock |
Accumulated | |||||||||||||||||||||||||||||||
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Additional |
Other |
Total |
Noncontrolling | |||||||||||||||||||||||||||||
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Paid-In- |
Retained |
Comprehensive |
Common |
Interests in | ||||||||||||||||||||||||||||
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Shares |
Amount |
Captital |
Earnings |
(Loss) Income |
Equity |
Subsidiaries |
Total Equity | |||||||||||||||||||||||||
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(In Thousands of Dollars, Except Per Share Amounts) | ||||||||||||||||||||||||||||||||
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Balance at October 31, 2021 |
|
$ |
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$ |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
$ |
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Stock based compensation expense |
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Vested share units granted to Directors, including $17 in dividends declared payable in share units ($0.10 per share) |
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Distributions to noncontrolling interests in subsidiaries |
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( |
) |
( |
) | |||||||||||||||||||||||||||
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Net income |
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Dividends declared, including $17 payable in share units ($0.10 per share) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||
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Net unrealized gain on interest rate swap contracts |
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Balance at January 31, 2022 |
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( |
) |
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( |
) |
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| ||||||||||||||||||||||||||||||||
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Stock based compensation expense |
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Vested share units granted to Directors, including $18 in dividends declared payable in share units ($0.10 per share) |
|
|
|
| ||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||
|
Distributions to noncontrolling interests in subsidiaries |
|
( |
) |
( |
) | |||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||
|
Net loss |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||
|
Dividends declared, including $18 payable in share units ($0.10 per share) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||||
|
Net unrealized gain on interest rate swap contracts |
|
|
|
| ||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||
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Balance at April 30, 2022 |
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|
|
|
|
|
( |
) |
| |||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||
|
Stock based compensation expense |
|
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| |||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||
|
Vested share units granted to Directors |
|
|
|
| ||||||||||||||||||||||||||||
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Distributions to noncontrolling interests in subsidiaries |
|
( |
) |
( |
) | |||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||
|
Net income |
|
|
|
| ||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||
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Net unrealized loss on interest rate swap contracts |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||
|
Balance at July 31, 2022 |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
| ||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
Page 7
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
NINE AND THREE MONTHS ENDED JULY 31, 2021
(Unaudited)
|
Common Equity | |||||||||||||||||||||||||||||||||||||
|
Beneficial Interest |
Treasury Shares at Cost |
Common Stock |
Additional Paid-In- |
Retained |
Accumulated Other Comprehensive |
Total Common |
Noncontrolling Interests |
Total | |||||||||||||||||||||||||||||
|
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Capital |
Earnings |
Loss |
Equity |
Subsidiaries |
Equity | ||||||||||||||||||||||||||
|
(In Thousands, Except Per Share Amounts) | |||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||
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Balance at October 31, 2020 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
$ |
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| |||||||||||||||||||||||||||||||||||||
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Stock based compensation expense |
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Vested share units granted to Directors, including $ |
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Net income |
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Dividends declared, including $ |
( |
) |
( |
) |
( |
) | |||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||
|
Net unrealized gain on interest rate cap and swap contracts |
|
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| |||||||||||||||||||||||||||||||||||||
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Balance at January 31, 2021 |
|
|
|
( |
) |
|
|
|
|
( |
) |
|
( |
) |
| ||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||
|
Stock based compensation expense |
|
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| ||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||
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Vested share units granted to Directors, including $ |
|
|
|
| |||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||
|
Vested share units issued to retired Director* |
( |
) |
( |
) |
( |
) |
|
|
| ||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||
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Distributions to noncontrolling interests |
|
( |
) |
( |
) | ||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||
|
Net income (loss) |
|
|
( |
) |
( |
) | |||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||
|
Dividends declared, including $ |
( |
) |
( |
) |
( |
) | |||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||
|
Net unrealized gain on interest rate cap and swap contracts |
|
|
|
| |||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||
|
Balance at April 30, 2021 |
|
|
|
( |
) |
|
|
|
|
( |
) |
|
( |
) |
| ||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||
|
Stock based compensation expense |
|
|
|
| |||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||
|
Vested share units granted to Directors, including $ |
|
|
|
|
| ||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||
|
Distributions to noncontrolling interests |
|
( |
) |
( |
) | ||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||
|
Net income |
|
|
|
| |||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||
|
Dividends declared, including $ |
( |
) |
( |
) |
( |
) | |||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||
|
Reincorporation of First Real Estate Investment Trust of New Jersey with and into FREIT (See Note 1) |
( |
) |
( |
) |
( |
) |
|
|
|
|
|
| |||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||
|
Net unrealized loss on interest rate cap and swap contracts |
( |
) |
( |
) |
( |
) |
( |
) | |||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||
|
Balance at July 31, 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
$ |
| ||||||||||||||
*
See Notes to Condensed Consolidated Financial Statements.
Page 8
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2022 AND 2021
(Unaudited)
|
|
Nine Months Ended | |||||||
|
|
July 31, | |||||||
|
|
2022 |
2021 | ||||||
|
|
(In Thousands of Dollars) | |||||||
|
Operating activities: |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
| ||
|
Net gain on sale of Maryland properties |
( |
) |
| |||||
|
Depreciation |
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
|
|
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
Director fees and related interest paid in stock units |
|
|
|
|
|
|
|
|
|
Loss on investment in tenancy-in-common |
|
|
|
|
|
|
|
|
|
Deferred rents - straight line rent |
|
|
|
|
|
|
|
|
|
Deferred real estate tax appeal fees |
|
| ||||||
|
Bad debt expense |
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Tenants' security accounts |
|
|
( |
) |
|
|
( |
) |
|
Accounts receivable, prepaid expenses and other assets |
|
|
|
|
|
( |
) | |
|
Accounts payable, accrued expenses and deferred director compensation payable |
|
|
( |
) |
|
|
| |
|
Deferred revenue |
|
|
( |
) |
|
|
( |
) |
|
Due to affiliate - accrued interest |
|
|
( |
) |
|
|
|
|
|
Deferred interest on mortgages |
|
|
( |
) |
|
|
( |
) |
|
Net cash provided by operating activities |
|
|
|
|
|
| ||
|
Investing activities: |
|
|
|
|
|
|
|
|
|
Proceeds from sale of Maryland properties, net |
|
|
|
|
|
| ||
|
Proceeds from payment of secured loans receivable inclusive of accrued interest |
|
|
|
|
|
| ||
|
Capital improvements - existing properties |
( |
) |
( |
) | ||||
|
Deferred leasing costs |
|
|
( |
) |
|
|
( |
) |
|
Distribution from investment in tenancy-in-common |
|
|
|
|
|
| ||
|
Net cash provided by (used in) investing activities |
|
( |
) | |||||
|
Financing activities: |
|
|
|
|
|
|
|
|
|
Repayment of mortgages |
|
|
( |
) |
|
|
( |
) |
|
Proceeds from mortgage loan refinancing |
|
| ||||||
|
Deferred financing costs |
|
|
( |
) |
|
|
( |
) |
|
Due to affiliate - loan proceeds |
|
| ||||||
|
Due to affiliate - loan repayment |
( |
) |
( |
) | ||||
|
Dividends paid |
|
|
( |
) |
|
|
( |
) |
|
Distributions to noncontrolling interests in subsidiaries |
|
|
( |
) |
|
|
( |
) |
|
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
|
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
|
|
|
|
( |
) | |
|
Cash, cash equivalents and restricted cash, beginning of period |
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash, end of period |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow data: |
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non cash activities: |
|
|
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
Commercial tenant security deposits applied to accounts receivable |
|
$ |
|
|
|
$ |
|
|
|
Investing activities: | ||||||||
|
Accrued capital expenditures, construction costs and pre-development costs |
|
$ |
|
|
|
$ |
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
Retirement of treasury stock |
$ |
|
$ |
| ||||
|
Dividends declared but not paid |
|
$ |
|
|
|
$ |
|
|
|
Dividends paid in share units |
|
$ |
|
|
|
$ |
|
|
|
Vested share units issued to consultant and retired director |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets: |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
Tenants' security accounts |
|
|
|
|
|
|
|
|
|
Funds held in post-closing escrow |
|
| ||||||
|
Mortgage escrows (included in prepaid expenses and other assets) |
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and restricted cash |
|
$ |
|
|
|
$ |
|
|
See Notes to Condensed Consolidated Financial Statements.
Page 9
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of presentation:
First Real Estate Investment Trust of New Jersey was organized on November 1, 1961 as a New Jersey Business Trust. On July 1, 2021, First Real Estate Investment Trust of New Jersey completed the change of its form of organization from a New Jersey real estate investment trust to a Maryland corporation (the “Reincorporation”) which was approved by its stockholders at the annual meeting of stockholders held on May 6, 2021. The Reincorporation changed the law applicable to First Real Estate Investment Trust of New Jersey’s affairs from New Jersey law to Maryland law and was accomplished by the merger of First Real Estate Investment Trust of New Jersey with and into its wholly owned subsidiary, First Real Estate Investment Trust of New Jersey, Inc. (“FREIT”, “Trust”, “us”, “we”, “our” or the “Company”), a Maryland corporation. As a result of the Reincorporation, the separate existence of First Real Estate Investment Trust of New Jersey ceased and FREIT succeeded to all the business, properties, assets and liabilities of First Real Estate Investment Trust of New Jersey. Holders of shares of beneficial interest in First Real Estate Investment Trust of New Jersey received one newly issued share of common stock of FREIT for each share of First Real Estate Investment Trust of New Jersey owned by them, without any action of stockholders required and all treasury stock held by First Real Estate Investment Trust of New Jersey was retired.
FREIT is organized and will continue to operate in such a manner as to qualify for taxation as a REIT under the Internal Revenue Code of 1986, as amended, and its stock is traded on the over-the-counter market under the trading symbol FREVS.
The accompanying interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and pursuant to the rules of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnotes required by GAAP for complete financial statements have been omitted. It is the opinion of management that all adjustments considered necessary for a fair presentation have been included, and that all such adjustments are of a normal recurring nature.
The consolidated results of operations for the nine and three-month periods ended July 31, 2022 are not necessarily indicative of the results to be expected for the full year or any other period. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in FREIT’s Annual Report on Form 10-K for the year ended October 31, 2021.
Reclassification:
Certain prior year cash flow line items have been reclassified to conform to the current year presentation.
Note 2 - Recently issued accounting standard:
In March 2020 and January 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2020-04 “Reference Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, and ASU 2021-01 “Reference Rate Reform (ASC 848): Scope” which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform in contracts and other transactions that reference the London Interbank Offered Rate or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. ASU 2020-04 and ASU 2021-01 are effective for all entities as of March 12, 2020 through December 31, 2022. We currently do not anticipate the need to modify our existing debt agreements as a result of reference rate reform in the current year, however if any modification is executed as a result of reference rate reform, the Company will elect the optional expedient available under ASU 2020-04 and ASU 2021-01, which allows entities to account for the modification as if the modification was not substantial. We will disclose the nature of and reason for electing the optional expedient in each interim and annual financial statement period if and when applicable through December 31, 2022.
Page 10
Note 3 – Dividends and earnings per share:
The FREIT Board of Directors (“Board”) did not declare a dividend in the third quarter of Fiscal 2022. 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 14) 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 increasing the number of shares to be added in computing diluted earnings per share. For the nine and three months ended July 31, 2022, the outstanding stock options increased the average dilutive shares outstanding by approximately
Note 4 - Interest rate cap and swap contracts:
In accordance with “Accounting Standards Codification Topic 815, Derivatives and Hedging ("ASC 815")”, FREIT has been accounting for the Damascus Centre, LLC (“Damascus Centre”), FREIT Regency, LLC (“Regency”), Wayne PSC, LLC (“Wayne PSC”) and Station Place on Monmouth (“Station Place”) interest rate swaps and the Grande Rotunda, LLC (“Grande Rotunda”) interest rate cap as 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 and cap in comprehensive income. On December 30, 2021, the Rotunda property owned by Grande Rotunda was sold, a portion of the proceeds from the sale was used to pay off the $
Page 11
For the nine and three months ended July 31, 2022, FREIT recorded an unrealized gain of approximately $
The fair values are based on observable inputs (level 2 in the fair value hierarchy as provided by authoritative guidance).
Note 5 – Investment in tenancy-in-common:
On February 28, 2020, FREIT reorganized its subsidiary S and A Commercial Associates Limited Partnership (“S&A”) from a partnership into a tenancy-in-common form of ownership (“TIC”). Prior to this reorganization, FREIT owned a
FREIT’s investment in the TIC was approximately $
Hekemian & Co., Inc. (“Hekemian & Co.”) manages the Pierre Towers property based on a management agreement between the owners of the TIC and Hekemian & Co. dated as of February 28, 2020 and will expire on February 28, 2023. The management agreement is for a term of one year and will renew for successive one (1) year terms upon the unanimous approval of the TIC owners prior to the expiration of the then-current term unless Hekemian & Co. delivers written notice of termination of this management agreement, which notice must be delivered at least sixty (60) days prior to the end of the then-current term.
The management agreement requires the payment of management fees equal to
Page 12
The following table summarizes the balance sheets of the Pierre Towers property as of July 31, 2022 and October 31, 2021, accounted for by the equity method:
|
July 31, |
October 31, | |||||
|
2022 |
2021 | |||||
|
(In Thousands of Dollars) | ||||||
|
| ||||||
|
Real estate, net |
$ |
|
$ |
| ||
|
Cash and cash equivalents |
|
| ||||
|
Tenants' security accounts |
|
| ||||
|
Receivables and other assets |
|
| ||||
|
Total assets |
$ |
|
$ |
| ||
|
| ||||||
|
Mortgages payable, net of unamortized debt issuance costs |
$ |
|
$ |
| ||
|
Accounts payable and accrued expenses |
|
| ||||
|
Tenants' security deposits |
|
| ||||
|
Deferred revenue |
|
| ||||
|
Equity |
|
| ||||
|
Total liabilities & equity |
$ |
|
$ |
| ||
|
| ||||||
|
FREIT's investment in TIC (65% interest) |
$ |
|
$ |
| ||
The following table summarizes the statements of operations of the Pierre Towers property for the nine and three months ended July 31, 2022 and 2021, accounted for by the equity method:
|
Nine Months Ended July 31, |
Three Months Ended July 31, | ||||||||||||
|
2022 |
2021 |
2022 |
2021 | ||||||||||
|
(In Thousands of Dollars) |
(In Thousands of Dollars) | ||||||||||||
|
| |||||||||||||
|
Revenue |
$ |
|
$ |
|
$ |
|
$ |
| |||||
|
Operating expenses |
|
|
|
| |||||||||
|
Depreciation |
|
|
|
| |||||||||
|
Operating income |
|
|
|
| |||||||||
|
| |||||||||||||
|
Interest expense including amortization of deferred financing costs |
|
|
|
| |||||||||
|
| |||||||||||||
|
Net (loss) income |
$ |
( |
$ |
( |
$ |
|
$ |
( | |||||
|
| |||||||||||||
|
FREIT's (loss) income on investment in TIC (65% interest) |
$ |
( |
$ |
( |
$ |
|
$ |
( | |||||
Page 13
Note 6 – Termination of Purchase and Sale Agreement:
On February 4, 2022, the Superior Court of New Jersey, Monmouth County (“Court”) entered an Order with respect to summary judgment motions filed by the parties in connection with litigation between certain affiliates of FREIT (the “Sellers” or “Defendant”) and Sinatra Properties, LLC (“Sinatra” or “Plaintiff”). The litigation relates to a Purchase and Sale Agreement entered into on January 14, 2020 (“PSA”) between the Sellers and Sinatra involving the sale by the Sellers of
The February 4, 2022 Order provided as follows:
(1)
The Court finds that the Plaintiff’s have breached the subject contract and the Court dismisses all claims for relief filed by the Plaintiff in this suit. The Court dismissed the Complaint and dismisses the Lis Pendens.
(2)
The Court finds that the liquidated damage provision of the contract is not enforceable and the Court Orders that the $
(3)
The Court dismisses the Counterclaims and Third Party Complaint. All pleadings are dismissed.
On May 31, 2022, Sinatra filed a Motion for Reconsideration with the Court, requesting that the Court reconsider its February 4, 2022 Order and, among other things, (a) grant Sinatra’s motion for summary judgment, and (b) reverse the Court’s findings that (1) Sinatra breached the PSA, (2) the Sellers did not breach the PSA and (3) the Court’s dismissal of the Complaint and Lis Pendens.
On July 8, 2022, the Court denied Sinatra’s Motion for Reconsideration.
Through the quarter ended July 31, 2022, the $
The Sellers have been evaluating the February 4, 2022 Order and their rights and remedies with respect thereto. The Sellers continue to believe that the allegations set forth in the Complaint filed by Sinatra and in the Answer to Counterclaims and Third-Party Complaint and Affirmative Defenses filed by Sinatra and Kushner Realty Acquisition LLC, are without merit.
Page 14
Note 7 – Maryland property dispositions:
On November 22, 2021, certain affiliates (the “Maryland Sellers”) of FREIT entered into a Purchase and Sale Agreement (the “Maryland Purchase and Sale Agreement”) with MCB Acquisition Company, LLC (the “Maryland Purchaser”), a third party, pursuant to which the Maryland Sellers agreed to sell three properties to the Maryland Purchaser. The properties consisted of retail and office space and a residential apartment community owned by Grande Rotunda, LLC (the “Rotunda Property”), a shopping center owned by Damascus Centre, LLC (the “Damascus Property”), and a shopping center owned by WestFREIT Corp. (the “Westridge Square Property”). FREIT owns
The original purchase price for the Rotunda Property, the Damascus Property and the Westridge Square Property (collectively the “Maryland Properties”) under the Maryland Purchase and Sale Agreement was reduced by $
On December 30, 2021, the sale of the Rotunda Property, which had a net book value of approximately $
On January 7, 2022, the sale of the Westridge Square Property, which had a net book value of approximately $
On January 10, 2022, the sale of the Damascus Property, which had a net book value of approximately $
Page 15
In summary, the sale of the Maryland Properties having a total net book value of $
As the disposal of the Maryland 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 condensed consolidated financial statements.
Note 8 - Management agreement, fees and transactions with related party:
Hekemian & Co. currently manages all the properties owned by FREIT and its affiliates, except for the office building at the Rotunda Property, which was sold on December 30, 2021 and was formerly managed by an independent third party management company. The management agreement between FREIT and Hekemian & Co. dated as of November 1, 2001 (“Management Agreement”) expires on October 31, 2023 and is automatically renewed for successive periods of two years unless either party gives not less than six (6) months prior notice of non-renewal.
The Management Agreement requires the payment of management fees equal to
From time to time, FREIT engages Hekemian & Co., or certain affiliates of Hekemian & Co., 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 & Co. and FREIT with respect to such additional services. Such fees incurred for the nine and three months ended July 31, 2022 were approximately $
Robert S. Hekemian, Jr., Chief Executive Officer, President and a Director of FREIT, is the Chief Executive Officer of Hekemian & Co. David B. Hekemian, a Director of FREIT, is the President of Hekemian & Co. Allan Tubin, Chief Financial Officer and Treasurer of FREIT, is the Chief Financial Officer of Hekemian & Co.
Director fee expense and/or executive compensation (including interest and dividends) incurred by FREIT for the nine months ended July 31, 2022 and 2021 was approximately $
The equity owners of Rotunda 100, which owns a
Page 16
December 30, 2021, the Rotunda Property was sold and the net sales proceeds were distributed to the partners in Grande Rotunda. (See Note 7 for further details.) As of July 31, 2022, approximately $
In Fiscal 2017, Grande Rotunda incurred substantial expenditures at the Rotunda Property related to retail tenant improvements, leasing costs and operating expenditures which, in the aggregate, exceeded revenues as the property was still in the rent up phase and the construction loan held with Wells Fargo at that time was at its maximum level, with no additional funding available to draw. Accordingly, during Fiscal 2017 the equity owners in Grande Rotunda contributed their respective pro-rata share of any cash needs through loans to Grande Rotunda. In Fiscal 2021, Grande Rotunda repaid $
FREIT owns a
Note 9 – Mortgage financings and line of credit:
On August 19, 2022, Westwood Hills, LLC, exercised its right, pursuant to the loan agreement, to extend the term of its $
On July 22, 2022, Wayne PSC refinanced its $22.1 million loan (inclusive of deferred interest of approximately $
On December 30, 2021, FREIT refinanced its $
FREIT’s revolving line of credit provided by the Provident Bank was renewed for a three-year term ending on
Page 17
Note 10 – Fair value of long-term debt:
The following table shows the estimated fair value and net carrying value of FREIT’s long-term debt at July 31, 2022 and October 31, 2021:
|
($ in Millions) |
July 31, 2022 |
October 31, 2021 | ||
|
| ||||
|
Fair Value |
$ |
$ | ||
|
| ||||
|
Carrying Value, Net |
$ |
$ |
Fair values are estimated based on market interest rates at July 31, 2022 and October 31, 2021 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).
Note 11 – Segment information:
FREIT has determined that it has two reportable segments: commercial properties and residential properties. These reportable segments offer different types of space, have different types of tenants, and are managed separately because each requires different operating strategies and management expertise. The commercial segment is comprised of five (5) properties, excluding the Rotunda Property, the Westridge Square Property and the Damascus Property, which were sold on December 30, 2021, January 7, 2022 and January 10, 2022, respectively. The residential segment is comprised of six (6) properties, excluding the Icon at the Rotunda Property, which was sold on December 30, 2021. (See Note 7 for further details.)
The accounting policies of the segments are the same as those described in Note 1 in FREIT’s Annual Report on Form 10-K for the fiscal year ended October 31, 2021. The chief operating and decision-making group responsible for oversight and strategic decisions of FREIT's commercial segment, residential segment and corporate/other is comprised of FREIT’s Board.
FREIT, through its chief operating and decision making group, 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 GAAP, and is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity.
Page 18
Real estate rental revenue, operating expenses, NOI and recurring capital improvements for the reportable segments are summarized below and reconciled to condensed consolidated net income attributable to common equity for the nine and three-month periods ended July 31, 2022 and 2021. Asset information is not reported since FREIT does not use this measure to assess performance.
|
Nine Months Ended |
Three Months Ended | |||||||||||||||
|
July 31, |
July 31, | |||||||||||||||
|
2022 |
2021 |
2022 |
2021 | |||||||||||||
|
(In Thousands of Dollars) |
(In Thousands of Dollars) | |||||||||||||||
|
Real estate rental revenue: | ||||||||||||||||
|
Commercial |
$ |
|
$ |
|
$ |
|
$ |
| ||||||||
|
Residential |
|
|
|
| ||||||||||||
|
Total real estate rental revenue |
|
|
|
| ||||||||||||
|
| ||||||||||||||||
|
Real estate operating expenses: | ||||||||||||||||
|
Commercial |
|
|
|
| ||||||||||||
|
Residential |
|
|
|
| ||||||||||||
|
Total real estate operating expenses |
|
|
|
| ||||||||||||
|
| ||||||||||||||||
|
Net operating income: | ||||||||||||||||
|
Commercial |
|
|
|
| ||||||||||||
|
Residential |
|
|
|
| ||||||||||||
|
Total net operating income |
$ |
|
$ |
|
$ |
|
$ |
| ||||||||
|
| ||||||||||||||||
|
| ||||||||||||||||
|
Recurring capital improvements - residential |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) | |
|
|
|
| ||||||||||||||||
|
Reconciliation to condensed consolidated net income attributable to common equity: | ||||||||||||||||
|
Segment NOI |
$ |
|
$ |
|
$ |
|
$ |
| ||||||||
|
Deferred rents - straight lining |
( |
) |
( |
) |
|
( |
) | |||||||||
|
Investment income |
|
|
|
| ||||||||||||
|
General and administrative expenses |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
|
(Loss) Gain on investment in tenancy-in-common |
( |
) |
( |
) |
|
( |
) | |||||||||
|
Depreciation |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
|
Net gain on sale of Maryland properties |
|
|
|
| ||||||||||||
|
Net realized gain on Wayne PSC interest rate swap termination |
|
|
|
| ||||||||||||
|
Financing costs |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
|
Net income |
|
|
|
| ||||||||||||
|
Net income attributable to noncontrolling interests in subsidiaries |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
|
Net income attributable to common equity |
$ |
|
$ |
|
$ |
|
$ |
|
Note 12 – Income taxes:
FREIT has elected to be treated as a REIT for federal income tax purposes and as such intends to distribute at least
As of July 31, 2022, FREIT had no material uncertain income tax positions. The tax years subsequent to and including the fiscal year ended October 31, 2019 remain open to examination by the major taxing jurisdictions.
Note 13 – Equity Incentive Plan:
As of July 31, 2022,
The following table summarizes stock option activity for the nine and three-month periods ended July 31, 2022 and 2021:
|
Nine and Three Months Ended July 31, 2022 |
Nine and Three Months Ended July 31, 2021 | |||||||||||||
|
No. of Options |
Weighted Average |
No. of Options |
Weighted Average | |||||||||||
|
Outstanding |
Price |
Outstanding |
Price | |||||||||||
|
Options outstanding at beginning of period |
|
$ |
|
|
$ |
| ||||||||
|
Options granted during period |
|
|
|
| ||||||||||
|
Options forfeited/cancelled during period |
|
|
|
| ||||||||||
|
Options outstanding at end of period |
|
$ |
|
|
$ |
| ||||||||
|
Options vested and expected to vest |
|
| ||||||||||||
|
Options exercisable at end of period |
|
| ||||||||||||
Page 19
For the nine and three month periods ended July 31, 2022, compensation expense related to stock options vested amounted to approximately $
Note 14 – Deferred fee plan:
On September 4, 2014, the Board approved amendments, effective November 1, 2014, to the FREIT Deferred Fee Plan for its executive officers and directors, one of which provides for the issuance of share units payable in FREIT shares in respect of (i) deferred amounts of all director fees on a prospective basis; (ii) interest on director fees deferred prior to November 1, 2014 (payable at a floating rate, adjusted quarterly, based on the average
On November 4, 2021 (the “Adoption Date”), the Board approved the termination of the Deferred Fee Plan resulting in the termination of the deferral of fees on December 31, 2021 with any subsequent fees earned by a participant being paid in cash. Consistent with the termination of the Deferred Fee Plan, payment related to each participant’s cash account (in the form of a cash lump sum payment) and share unit account (in the form of the issuance of common stock) must be made to each participant no earlier than twelve (12) months and one day after, and no later than twenty-four (24) months, after the Adoption Date. Any interest earned on the participant’s cash account along with dividends (if any) earned on share units, will continue to accrue in share units on each participant’s account until final payment is made.
For the nine-month periods ended July 31, 2022 and 2021, the aggregate amounts of deferred director fees together with related interest and dividends were approximately $
For the nine-month periods ended July 31, 2022 and 2021, FREIT has charged as expense approximately $
The Deferred Fee Plan, as amended, provides that cumulative fees together with accrued interest deferred as of November 1, 2014 would 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 July 31, 2022 and October 31, 2021, approximately $
Note 15 – Rental Income:
Commercial tenants:
Fixed lease income under our commercial operating leases generally includes fixed minimum lease consideration, which is accrued on a straight-line basis over the terms of the leases. Variable lease income includes consideration based on sales, as well as reimbursements for real estate taxes, maintenance, insurance and certain other operating expenses of the properties.
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Minimum fixed lease consideration (in thousands of dollars) under non-cancelable tenant operating leases for each of the next five years and thereafter, excluding variable lease consideration and rents from tenants for which collectability is deemed to be constrained, for the years ending October 31, as of July 31, 2022, is as follows:
|
Year Ending October 31, |
Amount | |||
|
2022* |
$ |
| ||
|
2023 |
| |||
|
2024 |
| |||
|
2025 |
| |||
|
2026 |
| |||
|
Thereafter |
| |||
|
Total |
$ |
| ||
|
| ||||
|
* |
|
The above amounts assume that all leases which expire are not renewed and, accordingly, neither month-to-month 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 the nine and three-month periods ended July 31, 2022 and 2021 were not material.
Residential tenants:
Lease terms for residential tenants are usually to years.
Note 16 – COVID-19 Pandemic:
The Company continues to monitor changes in the collectability assessment of its tenant receivables resulting from the lingering effects that the COVID-19 pandemic and preventive measures taken to mitigate the spread had on some of its commercial tenants. For the nine and three months ended July 31, 2022, rental revenue deemed uncollectible of approximately $
Note 17 – Subsequent Event:
On August 4, 2022, FREIT’s Board declared a special, extraordinary, non-recurring cash distribution of approximately $
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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Identifying Important Factors That Could Cause First Real Estate Investment Trust of New Jersey, Inc.’s (“FREIT”) Actual Results to Differ From Those Projected in Forward Looking Statements.
Readers of this discussion are advised that the discussion should be read in conjunction with the unaudited condensed consolidated financial statements of FREIT (including related notes thereto) appearing elsewhere in this Form 10-Q, and the consolidated financial statements included in FREIT’s most recently filed Form 10-K. Certain statements in this discussion may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect FREIT’s current expectations and are based on estimates, projections, beliefs, data, methods and assumptions of management of FREIT at the time of such statements regarding future results of operations, economic performance, financial condition and achievements of FREIT, and do not relate strictly to historical or current facts. These forward-looking statements are identified through the use of words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” or words of similar meaning. Forward-looking statements involve risks and uncertainties in predicting future results and conditions.
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. These and certain other uncertainties, factors and risks, including those risk factors set forth and further described in Part I, Item 1A entitled “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended October 31, 2021, and other risks described in our subsequent filings with the SEC, may cause our actual results to differ materially from those projected. Such factors include, but are not limited to, the following: general economic and business conditions, including the purchase of retail products over the Internet, 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; risks of real estate development and acquisitions; and on-going negative effects of the COVID-19 pandemic on our properties and tenants, and generally on our real estate assets and the real estate markets in which we operate, and the global, U.S. and local economies. 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 rents derived from operating commercial properties. FREIT’s properties are primarily located in northern New Jersey and New York.
Maryland Property Dispositions:
On November 22, 2021, certain affiliates (the “Maryland Sellers”) of FREIT entered into a Purchase and Sale Agreement (the “Maryland Purchase and Sale Agreement”) with MCB Acquisition Company, LLC (the “Maryland Purchaser”), a third party, pursuant to which the Maryland Sellers agreed to sell three properties to the Maryland Purchaser. The properties consisted of retail and office space and a residential apartment community owned by Grande Rotunda, LLC (the “Rotunda Property”), a shopping center owned by Damascus Centre, LLC (the “Damascus Property”), and a shopping center owned by WestFREIT Corp. (the “Westridge Square Property”). FREIT owns 100% of its subsidiary, WestFREIT Corp. (“WestFREIT”), a 60% interest in Grande Rotunda, LLC (“Grande Rotunda”), the joint venture that owned the Rotunda Property, and a 70% interest in Damascus Centre, LLC (“Damascus Centre”), the joint venture that owned the Damascus Property.
The original purchase price for the Rotunda Property, the Damascus Property and the Westridge Square Property (collectively the “Maryland Properties”) under the Maryland Purchase and Sale Agreement was reduced by $2,723,000 from $267,000,000 to $248,750,269, after giving effect to the $15,526,731 escrow deposit described below. This reduction in the sales price of $2,723,000 was to account for improvements and repairs to the Maryland Properties and miscellaneous items identified by the Maryland Purchaser in the course of its due diligence inspection. Additionally, the Maryland Purchaser was obligated under the Maryland Purchase and Sale Agreement to deposit a total of $15,526,731 in escrow with respect to certain leases at the Maryland Properties, which have not been executed or where the rent commencement date has not occurred or economic obligations of the Maryland Sellers under certain leases remain unpaid. Although there can be no assurance, a portion of the $15,526,731 escrow deposit (the “Maryland Purchaser Escrow Payment”) may be paid to the Maryland Sellers depending upon the outcome of construction and leasing activities at the Maryland Properties. The Maryland Purchaser Escrow Payment Agreement provides for among other things, monthly disbursements from escrow to the Maryland Purchaser related to the aforementioned tenant lease agreements until the earlier of (i) the rent commencement date of the respective tenant lease agreements or (ii) 5-years from the date of the agreement. Release
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and amounts of escrowed funds to FREIT, generally, is contingent on the success and timing of future leasing activities at the Maryland Properties.
The sale of the Maryland Properties having a total net book value of $172.2 million, was consummated by the Maryland Sellers and the Maryland Purchaser for a purchase price of $248,750,269, after giving effect to the $15,526,731 Maryland Purchaser Escrow Payment. This sale resulted in net proceeds of approximately $53.9 million (inclusive of approximately $1.9 million in funds released from the Maryland Purchaser Escrow Payment during the second quarter of Fiscal 2022), after payment of related mortgage debt in the amount of $155.8 million and the corresponding swap breakage fees of approximately $213,000 related to the early termination of the interest rate swap contracts on the Damascus Property loan, payment of loans (including interest) to each of the partners in Grande Rotunda in the amount of approximately $31 million and certain transactional expenses and transfer taxes including brokerage fees due to Hekemian & Co. of approximately $6.2 million. As of July 31, 2022, approximately $1,946,000 of the Maryland Purchaser Escrow Payment has been released from escrow to the Maryland Sellers. The escrow and related gain on sale were reduced by approximately $1.2 million due to a change in estimate in the second quarter of Fiscal 2022 related to a change in the timing of anticipated rent commencement dates for certain tenants, which will reduce the escrowed funds available to be released to Grande Rotunda. Approximately $6.3 million of remaining funds are held in a post-closing escrow for rents anticipated to be fully released in Fiscal 2023 and are included in “Funds held in post-closing escrow” on the accompanying condensed consolidated balance sheet as of July 31, 2022. The sale of the Maryland Properties resulted in a net gain of approximately $68.8 million (as adjusted) (with a consolidated impact to FREIT of approximately $45.6 million) which includes approximately $8.2 million of proceeds released and anticipated to be released from funds held in escrow, a write-off of the straight-line rent receivable of approximately $2.9 million and a write-off of unamortized lease commissions of approximately $1.7 million.
On August 4, 2022, FREIT’s Board of Directors (“Board”) declared a special, extraordinary, non-recurring cash distribution of approximately $51.5 million, or $7.50 per share, which was paid on August 30, 2022, to stockholders of record on August 16, 2022 (with an ex-dividend date of August 31, 2022). This distribution represents most of the after-tax proceeds of FREIT’s extraordinary sale of its portfolio of Maryland properties.
See Note 7 to FREIT’s condensed consolidated financial statements for additional details on the sale of the Maryland properties.
The economic and financial environment: The U.S. unemployment rate is 3.5% as of July 2022, which is the lowest since the onset of the COVID-19 pandemic in February 2020. The annual inflation rate in the U.S. still remains high at 8.5% in July 2022, which is the highest since the 1980’s, which is primarily driven by soaring food prices and energy costs, labor shortages and supply disruptions. The Federal Reserve continues to raise interest rates, which has led to uncertainties in the financing market and a volatile economy.
Residential Properties: Our residential properties continue to generate positive cash flow while average rents on turned units (apartments which were vacated and then re-leased to new tenants) from 2021 to 2022 continues to increase across the portfolio. Additionally, the rate of increase on renewals for existing tenants has also been robust. Should this trend continue, we believe the increase will contribute meaningfully to FREIT’s income over time. However, it is uncertain what impact the significant rise in inflation and rising interest rates may have on these properties over the next year.
Commercial Properties: While our retail properties have stabilized form the impact of the COVID-19 pandemic, certain of our properties still have not attained pre pandemic operating levels despite some recovery in brick and mortar retail. Additionally, the significant rise in inflation and rising interest rates could have an impact on the operating and financial performance of our commercial properties.
Debt Financing Availability: Financing has been available to FREIT and its affiliates. (See Note 6 to FREIT’s condensed consolidated financial statements.)
On August 19, 2022, Westwood Hills, LLC, exercised its right, pursuant to the loan agreement, to extend the term of its $25 million loan on its property located in Westwood, New Jersey, maturing on October 1, 2022, for two (2) additional six (6) month periods on the same terms and conditions as stated in the loan agreement.
On July 22, 2022, Wayne PSC, LLC refinanced its $22.1 million loan (inclusive of deferred interest of approximately $136,000), which would have matured on October 1, 2026, on its Preakness Shopping center located in Wayne, New Jersey with a new loan held by ConnectOne Bank in the amount of $25,000,000. This loan is interest-only based on a fixed interest rate of 5% and has a term of three years with a maturity date of August 1, 2025. Additionally, an interest reserve escrow was established at closing representing twelve months of interest of $1,250,000, which can be used to pay monthly interest on this loan with a requirement to replenish the escrow account back to $1,250,000 when the balance in the escrow account is reduced to three months of interest. This refinancing resulted in (i) annual debt service savings of approximately $340,000 due to interest-only payments; (ii) an increase in the interest rate from a fixed interest rate of 3.625% to a fixed interest rate of 5%; and (iii) net refinancing proceeds of approximately $1.1 million which can be used for capital expenditures and general corporate purposes. As part of the refinancing, Wayne PSC terminated the interest rate swap contract on the underlying loan resulting in a realized gain on the swap breakage of approximately $1.4 million, which has been recorded as a realized gain on the accompanying condensed consolidated statements of income for the nine and three months ended July 31, 2022. (See Note 4 to FREIT’s condensed consolidated financial statements for additional details.)
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On December 30, 2021, FREIT refinanced its $14.4 million loan (which would have matured on February 1, 2022) on its Boulders property located in Rockaway, New Jersey with a new loan held by ConnectOne Bank in the amount of $7,500,000, with additional funding available to be drawn upon in the amount of $7,500,000 for corporate needs. This loan is interest-only and has a maturity date of January 1, 2024 with the option of FREIT to extend for one year from the maturity date, subject to certain provisions of the loan agreement. This refinancing will provide annual debt service savings of approximately $1,173,000 as a result of the reduction in the principal amount, a reduction in the annual interest rate from a fixed rate of 5.37% to a fixed rate of 2.85% and interest-only payments being required under this new loan.
Operating Cash Flow: 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 which are expected to be refinanced and/or extended), real estate taxes, recurring capital improvements at its 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 quarterly report on Form 10-Q.
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 included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021, have been applied consistently as of July 31, 2022, and for the nine and three months ended July 31, 2022 and 2021. 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 receivable 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: FREIT assesses 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 FREIT believes 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 2 to FREIT’s condensed consolidated financial statements for recently issued accounting standards.
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RESULTS OF OPERATIONS
Real estate revenue for the nine months ended July 31, 2022 (“Current Nine Months”) decreased 36.4% to $24,223,000, compared to $38,100,000 for the nine months ended July 31, 2021 (“Prior Year’s Nine Months”). For the three months ended July 31, 2022 (“Current Quarter”) real estate revenue decreased 44.5% to $6,959,000, compared to $12,542,000 for the three months ended July 31, 2021 (“Prior Year’s Quarter”).
The decrease in revenue for the Current Nine Months was primarily attributable to the following: (a) a decrease of approximately $14.5 million attributed to the Maryland Properties sold; (b) a decrease from the commercial segment of approximately $0.3 million, excluding the Maryland Properties sold, primarily attributed to approximately $0.2 million in rental revenue being deemed uncollectible and classified as a reduction in rental revenue in the Current Nine Months and a $0.1 million decrease resulting from a decline in the average occupancy rate to 67.1% from 69.1% in the Prior Year’s Nine Months; offset by (c) an increase from the residential segment of approximately $0.9 million, excluding the Icon at the Rotunda Property sold, driven by an increase in base rents across all properties and an increase in the average occupancy rate to 98.4% from 97.2% in the Prior Year’s Nine Months.
The decrease in revenue for the Current Quarter was primarily attributable to the following: (a) a decrease of approximately $6 million attributed to the Maryland Properties sold; offset by (b) an increase from the residential segment of approximately $0.3 million, excluding the Icon at the Rotunda Property sold, primarily driven by an increase in base rents across all properties and an increase in the average occupancy rate to 97.8% from 97.3% in the Prior Year’s Quarter; and (c) an increase from the commercial segment of approximately $0.1 million, excluding the Maryland Properties sold, primarily attributed to the recognition of revenue due to collections from a constrained tenant.
Net income attributable to common equity (“net income-common equity”) for the Current Nine Months and Current Quarter was net income of $46,546,000 ($6.61 per share basic and $6.56 per share diluted) and $1,121,000 ($0.16 per share basic and diluted), compared to net income of $776,000 ($0.11 per share basic and diluted) and $209,000 ($0.03 per share basic and diluted), for the Prior Year’s comparable periods, respectively.
The schedule below provides a detailed analysis of the major changes that impacted net income-common equity for the nine and three months ended July 31, 2022 and 2021:
| NON-GAAP NET INCOME COMPONENTS | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
| July 31, | July 31, | |||||||||||||||||||||||
| 2022 | 2021 | Change | 2022 | 2021 | Change | |||||||||||||||||||
| (In Thousands of Dollars) | (In Thousands of Dollars) | |||||||||||||||||||||||
| Income from real estate operations: | ||||||||||||||||||||||||
| Commercial properties | $ | 3,274 | $ | 9,728 | $ | (6,454 | ) | $ | 988 | $ | 3,338 | $ | (2,350 | ) | ||||||||||
| Residential properties | 9,015 | 11,794 | (2,779 | ) | 2,643 | 3,827 | (1,184 | ) | ||||||||||||||||
| Total income from real estate operations | 12,289 | 21,522 | (9,233 | ) | 3,631 | 7,165 | (3,534 | ) | ||||||||||||||||
| Financing costs: | ||||||||||||||||||||||||
| Fixed rate mortgages | (3,545 | ) | (4,348 | ) | 803 | (1,114 | ) | (1,445 | ) | 331 | ||||||||||||||
| Floating rate mortgages | (1,550 | ) | (3,873 | ) | 2,323 | (333 | ) | (1,292 | ) | 959 | ||||||||||||||
| Interest rate swap contracts breakage fee | (213 | ) | — | (213 | ) | — | — | — | ||||||||||||||||
| Other - Corporate interest | (108 | ) | (183 | ) | 75 | (28 | ) | (43 | ) | 15 | ||||||||||||||
| Mortgage cost amortization | (813 | ) | (838 | ) | 25 | (299 | ) | (270 | ) | (29 | ) | |||||||||||||
| Total financing costs | (6,229 | ) | (9,242 | ) | 3,013 | (1,774 | ) | (3,050 | ) | 1,276 | ||||||||||||||
| Investment income | 183 | 88 | 95 | 119 | 29 | 90 | ||||||||||||||||||
| General & administrative expenses: | ||||||||||||||||||||||||
| Accounting fees | (367 | ) | (374 | ) | 7 | (116 | ) | (110 | ) | (6 | ) | |||||||||||||
| Legal and professional fees | (1,322 | ) | (1,929 | ) | 607 | (312 | ) | (752 | ) | 440 | ||||||||||||||
| Directors fees | (792 | ) | (710 | ) | (82 | ) | (259 | ) | (245 | ) | (14 | ) | ||||||||||||
| Stock option expense | (15 | ) | (35 | ) | 20 | (5 | ) | (11 | ) | 6 | ||||||||||||||
| Corporate expenses | (611 | ) | (1,095 | ) | 484 | (219 | ) | (295 | ) | 76 | ||||||||||||||
| Total general & administrative expenses | (3,107 | ) | (4,143 | ) | 1,036 | (911 | ) | (1,413 | ) | 502 | ||||||||||||||
| Depreciation | (3,257 | ) | (6,948 | ) | 3,691 | (723 | ) | (2,315 | ) | 1,592 | ||||||||||||||
| (Loss) Gain on investment in tenancy-in-common | (99 | ) | (245 | ) | 146 | 57 | (100 | ) | 157 | |||||||||||||||
| Adjusted net (loss) income | (220 | ) | 1,032 | (1,252 | ) | 399 | 316 | 83 | ||||||||||||||||
| Net gain on sale of Maryland properties | 68,771 | — | 68,771 | — | — | — | ||||||||||||||||||
| Net realized gain on Wayne PSC interest rate swap termination | 1,415 | — | 1,415 | 1,415 | — | 1,415 | ||||||||||||||||||
| Net income | 69,966 | 1,032 | 68,934 | 1,814 | 316 | 1,498 | ||||||||||||||||||
| Net income attributable to noncontrolling interests in subsidiaries | (23,420 | ) | (256 | ) | (23,164 | ) | (693 | ) | (107 | ) | (586 | ) | ||||||||||||
| Net income attributable to common equity | $ | 46,546 | $ | 776 | $ | 45,770 | $ | 1,121 | $ | 209 | $ | 912 | ||||||||||||
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The condensed consolidated results of operations for the Current Nine Months and Current Quarter are not necessarily indicative of the results to be expected for the full year or any other period. The table above includes income from real estate operations, which is a non-GAAP financial measure and is not a measure of operating results or cash flow as measured by GAAP, and is not necessarily indicative of cash available to fund cash needs.
Adjusted net (loss) income for the Current Nine Months and Current Quarter was net loss of $220,000 (($0.03) per share basic and diluted) and net income of $399,000 ($0.06 per share basic and diluted), compared to net income of $1,032,000 ($0.15 per share basic and diluted) and $316,000 ($0.05 per share basic and diluted), for the Prior Year’s comparable periods. Adjusted net (loss) 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 on sale of Maryland properties in Fiscal 2022; a realized gain on the Wayne PSC interest rate swap contract termination in Fiscal 2022.
The decrease in adjusted net income for the Current Nine Months was primarily driven by the following: (a) a decrease of approximately $3.5 million (with a consolidated impact to FREIT of approximately $2.5 million) attributed to the Maryland Properties sold; offset by (b) a decrease in general and administrative expenses (“G&A”) of approximately $1 million primarily driven by reincorporation expenses of approximately $0.5 million incurred in the Prior Year’s Nine Months and a decline in legal costs of approximately $0.6 million primarily attributed to the legal proceeding between FREIT and certain of its affiliates and Sinatra Properties, LLC; (c) an increase in revenue of approximately $0.6 million (with a consolidated impact to FREIT of approximately $0.7 million), excluding the Maryland Properties sold; (d) a decrease in interest expense of approximately $0.3 million attributed to the refinancing of the loan on the Boulders property in the Current Nine Months resulting in a reduction in the interest rate and principal balance of the loan; (e) a decrease in the reserve for uncollectible rents of approximately $0.3 million (with a consolidated impact to FREIT of approximately $0.2 million), excluding the Maryland Properties sold, primarily due to rental revenue being deemed uncollectible and classified as a reduction in rental revenue in the Current Nine Months; and (f) a decrease in loss on investment in tenancy-in-common of approximately $0.2 million.
The increase in adjusted net income for the Current Quarter was primarily driven by the following: (a) a decrease in G&A of approximately $0.5 million primarily driven by a decline in legal costs attributed to the legal proceeding between FREIT and certain of its affiliates and Sinatra Properties, LLC; (b) a decrease in loss on investment in tenancy-in-common of approximately $0.2 million; (c) a decrease in repairs and maintenance of approximately $0.1 million (with a consolidated impact to FREIT of approximately $0.1 million); (d) a decrease in interest expense of approximately $0.1 million attributed to the refinancing of the loan on the Boulders property resulting in a reduction in the interest rate and principal balance of the loan; and (e) an increase in investment income of approximately $0.1 million resulting from a higher interest rate and cash balance in Fiscal 2022 due to the sale of the Maryland Properties; offset by (f) a decrease of approximately $1 million (with a consolidated impact to FREIT of approximately $0.8 million) attributed to the Maryland Properties sold. (Refer to the segment disclosure below for a more detailed discussion of the financial performance of FREIT’s commercial and residential segments.)
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SEGMENT INFORMATION
The following tables set forth comparative net operating income ("NOI") data for FREIT’s real estate segments and reconciles the NOI to condensed consolidated net income-common equity for the Current Nine Months and Current Quarter as compared to the Prior Year’s comparable periods (see below for definition of NOI):
| Commercial | Residential | Combined | ||||||||||||||||||||||||||||||||||||||
| Nine Months Ended | Nine Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||
| July 31, | Increase (Decrease) | July 31, | Increase (Decrease) | July 31, | ||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | 2022 | 2021 | |||||||||||||||||||||||||||||||
| (In Thousands) | (In Thousands) | (In Thousands) | ||||||||||||||||||||||||||||||||||||||
| Rental income | $ | 6,624 | $ | 13,410 | $ | (6,786 | ) | -50.6% | $ | 15,496 | $ | 19,686 | $ | (4,190 | ) | -21.3% | $ | 22,120 | $ | 33,096 | ||||||||||||||||||||
| Reimbursements | 1,793 | 4,544 | (2,751 | ) | -60.5% | 20 | 123 | (103 | ) | -83.7% | 1,813 | 4,667 | ||||||||||||||||||||||||||||
| Other | 28 | 345 | (317 | ) | -91.9% | 287 | 217 | 70 | 32.3% | 315 | 562 | |||||||||||||||||||||||||||||
| Total revenue | 8,445 | 18,299 | (9,854 | ) | -53.8% | 15,803 | 20,026 | (4,223 | ) | -21.1% | 24,248 | 38,325 | ||||||||||||||||||||||||||||
| Operating expenses | 5,146 | 8,346 | (3,200 | ) | -38.3% | 6,788 | 8,232 | (1,444 | ) | -17.5% | 11,934 | 16,578 | ||||||||||||||||||||||||||||
| Net operating income | $ | 3,299 | $ | 9,953 | $ | (6,654 | ) | -66.9% | $ | 9,015 | $ | 11,794 | $ | (2,779 | ) | -23.6% | 12,314 | 21,747 | ||||||||||||||||||||||
| Average Occupancy % * | 67.1% | 69.1% | -2.0% | 98.4% | 97.2% | 1.2% | ||||||||||||||||||||||||||||||||||
| Reconciliation to condensed consolidated net income-common equity: | |||||||||
| Deferred rents - straight lining | (25 | ) | (225 | ) | |||||
| Investment income | 183 | 88 | |||||||
| General and administrative expenses | (3,107 | ) | (4,143 | ) | |||||
| Loss on investment in tenancy-in-common | (99 | ) | (245 | ) | |||||
| Depreciation | (3,257 | ) | (6,948 | ) | |||||
| Net gain on sale of Maryland properties | 68,771 | — | |||||||
| Net realized gain on Wayne PSC interest rate swap termination | 1,415 | — | |||||||
| Financing costs | (6,229 | ) | (9,242 | ) | |||||
| Net income | 69,966 | 1,032 | |||||||
| Net income attributable to noncontrolling interests in subsidiaries | (23,420 | ) | (256 | ) | |||||
| Net income attributable to common equity | $ | 46,546 | $ | 776 | |||||
| Commercial | Residential | Combined | ||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||||||
| July 31, | Increase (Decrease) | July 31, | Increase (Decrease) | July 31, | ||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | 2022 | 2021 | |||||||||||||||||||||||||||||||
| (In Thousands) | (In Thousands) | (In Thousands) | ||||||||||||||||||||||||||||||||||||||
| Rental income | $ | 1,618 | $ | 4,423 | $ | (2,805 | ) | -63.4% | $ | 4,663 | $ | 6,545 | $ | (1,882 | ) | -28.8% | $ | 6,281 | $ | 10,968 | ||||||||||||||||||||
| Reimbursements | 561 | 1,425 | (864 | ) | -60.6% | (3 | ) | 45 | (48 | ) | -106.7% | 558 | 1,470 | |||||||||||||||||||||||||||
| Other | — | 37 | (37 | ) | -100.0% | 84 | 79 | 5 | 6.3% | 84 | 116 | |||||||||||||||||||||||||||||
| Total revenue | 2,179 | 5,885 | (3,706 | ) | -63.0% | 4,744 | 6,669 | (1,925 | ) | -28.9% | 6,923 | 12,554 | ||||||||||||||||||||||||||||
| Operating expenses | 1,227 | 2,535 | (1,308 | ) | -51.6% | 2,101 | 2,842 | (741 | ) | -26.1% | 3,328 | 5,377 | ||||||||||||||||||||||||||||
| Net operating income | $ | 952 | $ | 3,350 | $ | (2,398 | ) | -71.6% | $ | 2,643 | $ | 3,827 | $ | (1,184 | ) | -30.9% | 3,595 | 7,177 | ||||||||||||||||||||||
| Average Occupancy % * | 65.9% | 68.3% | -2.4% | 97.8% | 97.3% | 0.5% | ||||||||||||||||||||||||||||||||||
| Reconciliation to condensed consolidated net income-common equity: | |||||||||
| Deferred rents - straight lining | 36 | (12 | ) | ||||||
| Investment income | 119 | 29 | |||||||
| General and administrative expenses | (911 | ) | (1,413 | ) | |||||
| Gain (Loss) on investment in tenancy-in-common | 57 | (100 | ) | ||||||
| Depreciation | (723 | ) | (2,315 | ) | |||||
| Net realized gain on Wayne PSC interest rate swap termination | 1,415 | — | |||||||
| Financing costs | (1,774 | ) | (3,050 | ) | |||||
| Net income | 1,814 | 316 | |||||||
| Net income attributable to noncontrolling interests in subsidiaries | (693 | ) | (107 | ) | |||||
| Net income attributable to common equity | $ | 1,121 | $ | 209 | |||||
| * | Average occupancy rate excludes the Rotunda Property, the Damascus Property and the Westridge Square Property from all periods presented as the properties were sold in the Current Six Months. See Note 7 to FREIT’s condensed consolidated financial statements for further details. |
NOI is based on operating revenue and expenses directly associated with the operations of the real estate properties, but excludes deferred rents (straight lining), 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, sold or redeveloped during those periods. Any newly acquired property that has been in operation for less than
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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 five (5) separate properties, excluding the Rotunda Property, the Westridge Square Property and the Damascus Property, which were sold on December 30, 2021, January 7, 2022 and January 10, 2022, respectively. Three of these properties are multi-tenanted retail centers, one is a single tenanted retail center located in Glen Rock, New Jersey 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. (See Note 7 to FREIT’s condensed consolidated financial statements for additional details on the sale of the Maryland properties.)
As indicated in the tables above under the caption Segment Information, total revenue from FREIT’s commercial segment for the Current Nine Months and Current Quarter decreased by 53.8% and 63%, respectively, and NOI decreased by 66.9% and 71.6%, respectively, as compared to the Prior Year’s comparable periods. Average occupancy for all commercial properties, excluding the Maryland properties sold, for the Current Nine Months and Current Quarter decreased by 2% and 2.4%, respectively, as compared to the Prior Year’s comparable periods.
The decline in revenue for the Current Nine Months was primarily attributable to the following: (a) a decrease of approximately $9.5 million (excluding an increase in the straight-line rent receivable of approximately $0.1 million) attributed to the Maryland Properties sold; and (b) a decrease of approximately $0.4 million, excluding the Maryland Properties sold, primarily attributed to rental revenue being deemed uncollectible and classified as a reduction in rental revenue in the Current Nine Months and a decline in the average occupancy rate to 67.1% from 69.1% in the Prior Year’s Nine Months. The decrease in NOI for the Current Nine Months was primarily attributable to the following: (a) a decrease of approximately $6.6 million attributed to the Maryland Properties sold; (b) a decline in revenue of approximately $0.4 million, excluding the Maryland Properties sold; offset by (c) a decline in snow removal costs of approximately $0.1 million, excluding the Maryland Properties sold; and (d) a decrease in the reserve for uncollectible rents of approximately $0.1 million, excluding the Maryland Properties sold, primarily due to rental revenue being deemed uncollectible and classified as a reduction in rental revenue in the Current Nine Months.
The decline in revenue for the Current Quarter was primarily attributable to the Maryland Properties sold. The decrease in NOI for the Current Quarter was primarily attributable to the following: (a) a decrease of approximately $2.5 million attributed to the Maryland Properties sold; (b) an increase in the reserve for uncollectible rents of approximately $0.1 million, excluding the Maryland Properties sold; offset by (c) a decline in repairs and maintenance costs of approximately $0.1 million, excluding the Maryland Properties sold.
Same Property Operating Results: FREIT’s commercial segment currently contains five (5) same properties. (See definition of same property under Segment Information above.) The Rotunda property, the Westridge Square Property and the Damascus Property were excluded from same property results for all periods presented because these properties were sold in the Current Nine Months. Same property revenue for the Current Nine Months and Current Quarter decreased by 5.4% and increased by 2.4%, respectively, and same property NOI decreased by 2.2% and increased by 6.6%, respectively, as compared to the Prior Year’s comparable periods. The changes resulted from the factors discussed in the immediately preceding paragraph.
Leasing: The following table reflects 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 the Current Nine Months (excluding any leases executed for the Rotunda Property, the Westridge Square Property and the Damascus Property, which were sold in the Current Nine Months):
| 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) | 7 | 95,154 | $ | 6.65 | $ | 7.67 | -13.3% | $ | — | $ | 0.03 | |||||||||||||||||
| Non-comparable leases | 5 | 11,875 | $ | 26.37 | N/A | N/A | $ | 1.07 | $ | 1.32 | ||||||||||||||||||
| Total leasing activity | 12 | 107,029 | ||||||||||||||||||||||||||
(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/renewals of existing tenant leases.
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RESIDENTIAL SEGMENT
FREIT currently operates six (6) multi-family apartment buildings or complexes totaling 792 apartment units, excluding the Icon at the Rotunda Property, which was sold on December 30, 2021 (see Note 7 to FREIT’s condensed consolidated financial statements) and the Pierre Towers property, which was converted to a TIC (see Note 5 to FREIT’s condensed consolidated financial statements).
As indicated in the tables above under the caption Segment Information, total revenue from FREIT’s residential segment for the Current Nine Months and Current Quarter decreased by 21.1% and 28.9%, respectively, and NOI decreased by 23.6% and 30.9%, respectively, as compared to the Prior Year’s comparable periods. Average occupancy for all residential properties, except the Icon property sold, for the Current Nine Months and Current Quarter increased by 1.2% and 0.5%, respectively, as compared to the Prior Year’s comparable periods.
The decrease in revenue for the Current Nine Months was primarily attributable to the following: (a) a decrease of approximately $5.1 million attributed to the Icon at the Rotunda Property sold; offset by (b) an increase of approximately $0.9 million, excluding the Icon at the Rotunda Property sold, primarily driven by an increase in base rents across all properties and an increase in the average occupancy rate to 98.4% from 97.2% in the Prior Year’s Nine Months. The decrease in NOI for the Current Nine Months was primarily attributable to the following: (a) a decrease of approximately $3.6 million attributed to the Icon at the Rotunda Property sold; offset by (b) an increase in revenue of approximately $0.9 million, excluding the Icon at the Rotunda Property; and (c) a decrease in the reserve for uncollectible rents of approximately $0.2 million, excluding the Maryland Properties sold.
The decrease in revenue for the Current Quarter was primarily attributable to the following: (a) a decrease of approximately $2.2 million attributed to the Icon at the Rotunda Property sold; offset by (b) an increase of approximately $0.3 million, excluding the Icon at the Rotunda Property sold, primarily driven by an increase in base rents across all properties and an increase in the average occupancy rate to 97.8% from 97.3% in the Prior Year’s Quarter. The decrease in NOI for the Current Quarter was primarily attributable to the following: (a) a decrease of approximately $1.5 million attributed to the Icon at the Rotunda Property sold; (b) an increase in the reserve for uncollectible rents of approximately $0.1 million, excluding the Maryland Properties sold; offset by (c) an increase of approximately $0.3 million in revenue, excluding the Icon at the Rotunda Property sold.
Same Property Operating Results: FREIT’s residential segment currently contains six (6) same properties. (See definition of same property under Segment Information above.) The Icon at the Rotunda property was excluded from same property results for all periods presented because this property was sold in the Current Nine Months. Same property revenue for the Current Nine Months and Current Quarter increased by 7.1% and 6.8%, respectively, and same property NOI increased by 11.2% and 12.7%, respectively, as compared to the Prior Year’s comparable periods. 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 Icon at the Rotunda property, which was sold in the Current Nine Months), at the end of the Current Quarter and the Prior Year’s Quarter were $2,006 and $1,913, respectively. A 1% decline in annual average occupancy, or a 1% decline in average rents from current levels, results in an annual revenue decline of approximately $191,000 and $184,000, respectively.
Capital expenditures: Since all of FREIT’s apartment communities, with the exception of the Boulders, Regency 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 are available from cash flow from the property's operations and cash reserves.
FINANCING COSTS
| Nine Months Ended July 31, | Three Months Ended July 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (In Thousands of Dollars) | (In Thousands of Dollars) | |||||||||||||||
| Fixed rate mortgages (a): | ||||||||||||||||
| 1st Mortgages | ||||||||||||||||
| Existing | $ | 3,383 | $ | 4,348 | $ | 1,024 | $ | 1,445 | ||||||||
| New | 162 | — | 90 | — | ||||||||||||
| Variable rate mortgages: | ||||||||||||||||
| 1st Mortgages | ||||||||||||||||
| Existing | 1,550 | 3,873 | 333 | 1,292 | ||||||||||||
| New | — | — | — | — | ||||||||||||
| Interest rate swap contracts breakage fee | 213 | — | — | |||||||||||||
| Other | 108 | 183 | 28 | 43 | ||||||||||||
| Total financing costs, gross | 5,416 | 8,404 | 1,475 | 2,780 | ||||||||||||
| Amortization of mortgage costs | 813 | 838 | 299 | 270 | ||||||||||||
| Total financing costs, net | $ | 6,229 | $ | 9,242 | $ | 1,774 | $ | 3,050 | ||||||||
(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.
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Total financing costs for the Current Nine Months decreased by approximately $3,013,000, or 32.6%, compared to the Prior Year’s Nine Months which was primarily attributable to the following: (a) a decline of approximately $3,137,000 attributed to the pay-down of the loans outstanding on the Maryland Properties sold in the Current Nine Months; (b) a decrease of approximately $278,000 attributed to the refinancing of the loan on the Boulders property in the Current Nine Months resulting in a reduction in the interest rate from 5.37% to 2.85% and in the principal balance from approximately $14.4 million to $7.5 million; offset by (c) an increase of approximately $213,000 attributed to a breakage fee on the early termination of the interest rate swap contracts relating to the underlying loan on the Damascus property, which was repaid from the net proceeds of the sale of the Damascus property in the Current Nine Months; and (d) an increase of approximately $148,000 related to the write-off of deferred mortgage costs on the Wayne PSC mortgage loan previously held with People’s United Bank which was refinanced with a new lender in July of 2022.
Total financing costs for the Current Quarter decreased by approximately $1,276,000, or 41.8%, compared to the Prior Year’s Quarter which was primarily attributable to the following: (a) a decline of approximately $1,377,000 attributed to the pay-down of the loans outstanding on the Maryland Properties sold; offset by (b) an increase of approximately $148,000 related to the write-off of deferred mortgage costs on the Wayne PSC mortgage loan previously held with People’s United Bank which was refinanced with a new lender in July of 2022.
(See Note 7 to FREIT’s condensed consolidated financial statements for additional details on the sale of the Maryland properties.)
GENERAL AND ADMINISTRATIVE EXPENSES
G&A for the Current Nine Months and Current Quarter was approximately $3,107,000 and $911,000, respectively, compared to $4,143,000 and $1,413,000, respectively, for the Prior Year’s comparable periods. The primary components of G&A are legal and professional fees, directors’ fees, corporate expenses and accounting/auditing fees. The decrease in G&A for the Current Nine Months was primarily driven by reincorporation expenses of approximately $0.5 million incurred in the Prior Year’s Nine Months and a decline in legal costs of approximately $0.6 million primarily attributed to the legal proceeding between FREIT and certain of its affiliates and Sinatra Properties, LLC. The decrease in G&A for the Current Quarter was primarily driven by a decline in legal costs attributed to the legal proceeding between FREIT and certain of its affiliates and Sinatra Properties, LLC.
DEPRECIATION
Depreciation expense for the Current Nine Months and Current Quarter was approximately $3,257,000 and $723,000, respectively, compared to $6,948,000 and $2,315,000, respectively, for the Prior Year’s comparable periods. The decline in depreciation expense for the Current Nine Months and Current Quarter was primarily attributable the sale of the Maryland Properties. (See Note 7 to FREIT’s condensed consolidated financial statements for additional details on the sale of the Maryland properties.)
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $5.8 million for the Current Nine Months compared to net cash provided by operating activities of approximately $10.2 million for the Prior Year’s Nine Months. 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 which are expected to be refinanced and/or extended), real estate taxes, dividends, recurring capital improvements at its 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 quarterly report on Form 10-Q.
As of July 31, 2022, FREIT had cash, cash equivalents and restricted cash totaling $107.6 million, compared to $39 million at October 31, 2021. The increase in cash in the Current Nine Months was primarily attributable to approximately $250.4 million in net cash provided by investing activities including capital expenditures and $5.8 million in net cash provided by operating activities offset by approximately $187.6 million in net cash used in financing activities. The increase in cash of approximately $68.6 million was primarily attributed to the following: (a) a distribution of net proceeds received from the sale of the Rotunda Property of approximately $54.4 million (inclusive of a loan repayment from Grande Rotunda of approximately $27.7 million and repayment of secured loans receivable including accrued interest by certain members in Rotunda 100 of approximately $5.3 million); (b) a distribution of net proceeds received from the sale of the Damascus Property of approximately $11.8 million; (c) net proceeds received from the sale of the Westridge Square Property of approximately $0.1 million; (d) anticipated funds to be released of approximately $6.3 million and funds released of approximately $1.9 million from the funds held in post-closing escrow for rents related to the sale of the Maryland Properties; (e) net proceeds received from the refinancing of the Wayne PSC loan of approximately $2.5 million; offset by (f) a loan pay-down including closing costs of approximately $7.6 million attributed to the refinancing of the loan on the Boulders property; and (g) dividends paid in the Current Nine Months the amount of approximately $2.1 million. (See Note 7 to FREIT’s condensed consolidated financial statements for additional details on the sale of the Maryland properties.)
Credit Line: FREIT’s revolving line of credit provided by Provident Bank was renewed for a three-year term ending on October 31, 2023. 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
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Rock, New Jersey. The total line of credit is $13 million and the interest rate on the amount outstanding is based on a floating interest rate of prime minus 25 basis points with a floor of 3.75%. As of July 31, 2022 and October 31, 2021, there was no amount outstanding and $13 million was available under the line of credit.
Dividend: The FREIT Board of Directors (“Board”) declared dividends of approximately $1,407,000 ($0.20 per share) to stockholders of record during Fiscal 2022. The Board did not declare a dividend in the third quarter of Fiscal 2022. On August 4, 2022, FREIT’s Board declared a special, extraordinary, non-recurring cash distribution of approximately $51.5 million, or $7.50 per share, which was paid on August 30, 2022, to stockholders of record on August 16, 2022 (with an ex-dividend date of August 31, 2022). (See Note 7 to FREIT’s condensed consolidated financial statements for additional details.) The Board will continue to evaluate the dividend on a quarterly basis.
As of July 31, 2022, FREIT’s aggregate outstanding mortgage debt was $139.6 million, which bears a weighted average interest rate of 4.28% and an average life of approximately 2.7 years. FREIT’s mortgages are subject to amortization schedules that are longer than the terms of the mortgages. As such, balloon payments (unpaid principal amounts at the mortgage due date) for all mortgage debt will be required as follows:
| Fiscal Year | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | |
| ($ in millions) | |||||||||
| Mortgage "Balloon" Payments | $0.0 (A) | $42.1 | $16.5 | $38.9 | $0.0 | $0.0 | $10.5 | $26.0 | |
| (A) | On August 19, 2022, Westwood Hills, LLC, exercised its right, pursuant to the loan agreement, to extend the term of its $25 million loan on its property located in Westwood, New Jersey, which matures on October 1, 2022, for two (2) additional six (6) month periods on the same terms and conditions as stated in the loan agreement. | ||||||||
The following table shows the estimated fair value and net carrying value of FREIT’s long-term debt at July 31, 2022 and October 31, 2021:
| ($ in Millions) | July 31, 2022 | October 31, 2021 | ||
| Fair Value | $136.8 | $301.6 | ||
| Carrying Value, Net | $138.3 | $299.9 | ||
Fair values are estimated based on market interest rates at July 31, 2022 and October 31, 2021 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 or exercise extension options 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 July 31, 2022, a 1% interest rate increase would reduce the fair value of FREIT’s debt by $3.4 million, and a 1% decrease would increase the fair value by $3.6 million.
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 stockholders.
On August 19, 2022, Westwood Hills, LLC, exercised its right, pursuant to the loan agreement, to extend the term of its $25 million loan on its property located in Westwood, New Jersey, maturing on October 1, 2022, for two (2) additional six (6) month periods on the same terms and conditions as stated in the loan agreement.
On July 22, 2022, Wayne PSC refinanced its $22.1 million loan (inclusive of deferred interest of approximately $136,000), which would have matured on October 1, 2026, on its Preakness Shopping center located in Wayne, New Jersey with a new loan held by ConnectOne Bank in the amount of $25,000,000. This loan is interest-only based on a fixed interest rate of 5% and has a term of three years with a maturity date of August 1, 2025. Additionally, an interest reserve escrow was established at closing representing twelve months of interest of $1,250,000, which can be used to pay monthly interest on this loan with a requirement to replenish the escrow account back to $1,250,000 when the balance in the escrow account is reduced to three months of interest. This refinancing resulted in (i) annual debt service savings of approximately $340,000 due to interest-only payments; (ii) an increase in the interest rate from a fixed interest rate of 3.625% to a fixed interest rate of 5%; and (iii) net refinancing proceeds of approximately $1.1 million which can be used for capital expenditures and general corporate purposes. As part of the refinancing, Wayne PSC terminated the interest rate swap contract on the underlying loan resulting in a realized gain on the swap breakage of approximately $1.4 million, which has been recorded as a realized gain on the accompanying condensed consolidated statements of income for the nine and three months ended July 31, 2022.
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On December 30, 2021, FREIT refinanced its $14.4 million loan (which would have matured on February 1, 2022) on its Boulders property located in Rockaway, New Jersey with a new loan held by ConnectOne Bank in the amount of $7,500,000, with additional funding available to be drawn upon in the amount of $7,500,000 for corporate needs. This loan is interest-only and has a maturity date of January 1, 2024 with the option of FREIT to extend for one year from the maturity date, subject to certain provisions of the loan agreement. This refinancing will provide annual debt service savings of approximately $1,173,000 as a result of the reduction in the principal amount, a reduction in the annual interest rate from a fixed rate of 5.37% to a fixed rate of 2.85% and interest-only payments being required under this new loan.
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 generally 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 loans secured by its Damascus Centre, Regency, Wayne PSC 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 $16,200,000 ($14,671,000 at July 31, 2022) for the Regency swap and a notional amount of approximately $12,350,000 ($11,806,000 at July 31, 2022) for the Station Place swap. On January 10, 2022, the property owned by Damascus Centre was sold and a portion of the proceeds from the sale was used to pay off the $18.2 million then outstanding balance of the underlying loan and the corresponding swap breakage fees of approximately $213,000 related to the early termination of the interest rate swap contracts on this loan which was included as interest expense on the accompanying condensed consolidated statement of income for the nine months ended July 31, 2022. (See Note 7 to FREIT’s condensed consolidated financial statements for further details on the sale of this property.) On June 17, 2022, Wayne PSC terminated its interest rate swap contract on its underlying loan held with People’s United Bank, which had a maturity date of October 2026, for a settlement amount of approximately $1.4 million. People’s United Bank held the proceeds from this settlement in escrow until the underlying loan was paid off in July 2022 and has been included as a realized gain on interest rate swap termination on the accompanying condensed consolidated statements of income for the nine and three months ended July 31, 2022. (See Note 9 to FREIT’s condensed consolidated financial statements for further details.)
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 generally 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 had a variable interest rate loan secured by its Rotunda Property. As part of the refinancing of Grande Rotunda’s construction loan with a new loan from Aareal Capital Corporation, Grande Rotunda had purchased an interest rate cap contract on LIBOR for the full amount that could have been drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan which matured on March 5, 2020. On February 28, 2020, Grande Rotunda had purchased an interest rate cap on LIBOR, with an effective date of March 5, 2020, for the full amount that could have been drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for one year, maturing on March 5, 2021. Effective February 6, 2021, Grande Rotunda exercised the first extension option on this loan with a balance of approximately $118.5 million, extending the loan one year with a new maturity date of February 6, 2022. Additionally, Grande Rotunda purchased an interest rate cap contract on LIBOR, with an effective date of March 5, 2021, for the loan amount of approximately $118.5 million, capping the one-month LIBOR rate at 3% for one year expiring on February 6, 2022. On December 30, 2021, the Rotunda Property owned by Grande Rotunda was sold, a portion of the proceeds from the sale was used to pay off the $116.5 million then outstanding balance of the underlying loan and the corresponding interest rate cap on this loan matured with no settlement due at maturity. (See Note 7 to FREIT’s condensed consolidated financial statements for further details.)
In accordance with ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities to Accounting Standards Codification Topic 815, Derivatives and Hedging ("ASC 815")”, FREIT marks-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 and cap are accounted for as cash flow hedges with the corresponding gains or losses on these contracts not affecting FREIT’s condensed consolidated statement of operations; 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 condensed consolidated balance sheet. This gain or loss represents the economic consequence of liquidating fixed rate swaps or the cap contract and replacing them with like-duration funding at current market rates, something we would likely never do. Periodic cash settlements of these contracts will be accounted for as an adjustment to interest expense.
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FREIT has the following derivative-related risks with its interest rate 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 July 31, 2022, the contract for Regency was in FREIT’s favor and the contract for Station Place was in the counterparties’ favor. If FREIT had terminated these contracts at that date, it would have realized a gain of approximately $116,000 for the Regency swap and a loss of $16,000 for the Station Place swap all of which have been included in FREIT’s condensed consolidated balance sheet as at July 31, 2022. The change in the fair value for the contract (gain or loss) during such period has been included in comprehensive income (loss) and for the nine and three months ended July 31, 2022, FREIT recorded an unrealized gain of approximately $2,408,000 and unrealized loss of $1,393,000, respectively, in the condensed consolidated statements of comprehensive income. For the nine and three months ended July 31, 2021, FREIT recorded an unrealized gain of approximately $1,441,000 and unrealized loss of $234,000, respectively, in the condensed consolidated statements of comprehensive income.
Counterparty Credit Risk: Each party to a contract bears the risk that its counterparty will default on its obligation to make a periodic payment. FREIT reduces this risk by entering into a contract only with major financial institutions that are experienced market makers in the derivatives market.
ADJUSTED FUNDS FROM OPERATIONS
Funds From Operations (“FFO”) is a non-GAAP measure defined by the National Association of Real Estate Investment Trusts (“NAREIT”). FREIT does not include distributions from equity/debt/capital gain 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 and recurring capital improvements on FREIT’s residential apartments. 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:
| For the Nine Months Ended July 31, | For the Three Months Ended July 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (In Thousands, Except Per Share) | (In Thousands, Except Per Share) | |||||||||||||||
| Funds From Operations ("FFO") (a) | ||||||||||||||||
| Net income | $ | 69,966 | $ | 1,032 | $ | 1,814 | $ | 316 | ||||||||
| Depreciation of consolidated properties | 3,257 | 6,948 | 723 | 2,315 | ||||||||||||
| Amortization of deferred leasing costs | 107 | 363 | 19 | 131 | ||||||||||||
| Distributions to non-controlling interests | (735 | ) | (960 | ) | (210 | ) | (450 | ) | ||||||||
| Net gain on sale of Maryland properties | (68,771 | ) | — | — | — | |||||||||||
| Adjustment to loss on investment in tenancy-in-common for depreciation | 1,062 | 1,055 | 355 | 352 | ||||||||||||
| Net realized gain on Wayne PSC interest rate swap termination | (1,415 | ) | — | (1,415 | ) | — | ||||||||||
| FFO | $ | 3,471 | $ | 8,438 | $ | 1,286 | $ | 2,664 | ||||||||
| Per Share - Basic and Diluted | $ | 0.49 | $ | 1.20 | $ | 0.18 | $ | 0.38 | ||||||||
| (a) As prescribed by NAREIT. | ||||||||||||||||
| Adjusted Funds From Operations ("AFFO") | ||||||||||||||||
| FFO | $ | 3,471 | $ | 8,438 | $ | 1,286 | $ | 2,664 | ||||||||
| Deferred rents (Straight lining) | 25 | 225 | (36 | ) | 12 | |||||||||||
| Capital Improvements - Apartments | (401 | ) | (438 | ) | (195 | ) | (258 | ) | ||||||||
| AFFO | $ | 3,095 | $ | 8,225 | $ | 1,055 | $ | 2,418 | ||||||||
| Per Share - Basic and Diluted | $ | 0.44 | $ | 1.17 | $ | 0.15 | $ | 0.34 | ||||||||
| Weighted Average Shares Outstanding: | ||||||||||||||||
| Basic | 7,038 | 7,016 | 7,040 | 7,022 | ||||||||||||
| Diluted | 7,110 | 7,018 | 7,114 | 7,026 | ||||||||||||
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.
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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 3: Quantitative and Qualitative Disclosures About Market Risk
See “Commercial Segment”, “Residential Segment” and “Liquidity and Capital Resources” under Item 2 above for a detailed discussion of FREIT’s quantitative and qualitative market risk disclosures.
Item 4: Controls and Procedures
At the end of the period covered by this report, we carried out an evaluation of the effectiveness of the design and operation of FREIT’s disclosure controls and procedures. This evaluation was carried out under the supervision and with participation of FREIT’s management, including FREIT’s Chief Executive Officer and Chief Financial Officer, who concluded that FREIT’s disclosure controls and procedures are effective as of July 31, 2022. There has been no change in FREIT’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, FREIT’s internal control over financial reporting.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in FREIT’s reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in FREIT’s reports filed under the Exchange Act is accumulated and communicated to management, including FREIT’s Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.
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Part II: Other Information
Item 1: Legal Proceedings
On February 4, 2022, the Superior Court of New Jersey, Monmouth County (“Court”) entered an Order with respect to summary judgment motions filed by the parties in connection with litigation between certain affiliates of FREIT (the “Sellers” or “Defendant”) and Sinatra Properties, LLC (“Sinatra” or “Plaintiff”). The litigation relates to a Purchase and Sale Agreement entered into on January 14, 2020 (“PSA”) between the Sellers and Sinatra involving the sale by the Sellers of 100% of their ownership interests in six (6) real properties held by the Sellers.
The February 4, 2022 Order provided as follows:
(1) The Court finds that the Plaintiff’s have breached the subject contract and the Court dismisses all claims for relief filed by the Plaintiff in this suit. The Court dismissed the Complaint and dismisses the Lis Pendens.
(2) The Court finds that the liquidated damage provision of the contract is not enforceable and the Court Orders that the $15 million held in escrow be returned to the Plaintiff.
(3) The Court dismisses the Counterclaims and Third Party Complaint. All pleadings are dismissed.
On May 31, 2022, Sinatra filed a Motion for Reconsideration with the Court, requesting that the Court reconsider its February 4, 2022 Order and, among other things, (a) grant Sinatra’s motion for summary judgment, and (b) reverse the Court’s findings that (1) Sinatra breached the PSA, (2) the Sellers did not breach the PSA and (3) the Court’s dismissal of the Complaint and Lis Pendens.
On July 8, 2022, the Court denied Sinatra’s Motion for Reconsideration.
The Sellers have been evaluating the February 4, 2022 Order and their rights and remedies with respect thereto. The Sellers continue to believe that the allegations set forth in the Complaint filed by Sinatra and in the Answer to Counterclaims and Third-Party Complaint and Affirmative Defenses filed by Sinatra and Kushner Realty Acquisition LLC, are without merit.
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Item 1A: Risk Factors
There were no material changes in any risk factors previously disclosed in FREIT’s Annual Report on Form 10-K for the year ended October 31, 2021, that was filed with the Securities and Exchange Commission on January 28, 2022.
Item 6: Exhibits
Exhibit Index
Exhibit 31.1 - Section 302 Certification of Chief Executive Officer
Exhibit 31.2 - Section 302 Certification of Chief Financial Officer
Exhibit 32.1 - Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
Exhibit 32.2 - Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
Exhibit 101 - The following materials from FREIT’s quarterly report on Form 10-Q for the period ended July 31, 2022, are formatted in Inline Extensible Business Reporting Language (“iXBRL”): (i) condensed consolidated balance sheets; (ii) condensed consolidated statements of income; (iii) condensed consolidated statements of comprehensive income; (iv) condensed consolidated statements of equity; (v) condensed consolidated statements of cash flows; and (vi) notes to condensed consolidated financial statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FIRST REAL ESTATE INVESTMENT | |
| TRUST OF NEW JERSEY, INC. | |
| (Registrant) | |
| Date: September 14, 2022 | |
| /s/ Robert S. Hekemian, Jr. | |
| (Signature) | |
| Robert S. Hekemian, Jr. | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) | |
| /s/ Allan Tubin | |
| (Signature) | |
| Allan Tubin | |
| Chief Financial Officer and Treasurer | |
| (Principal Financial/Accounting Officer) |