UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly
Period Ended
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________________ to ____________________
Commission File No.
| (Exact name of registrant as specified in its charter) |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| (1) | Registered pursuant to Section 12 (b) of the Act pursuant to a form 8-A filed by the registrant on August 3, 2023. Until the Distribution Date (as defined in the registrant’s Stockholder Rights Agreement dated July 31, 2023) the Preferred Stock Purchase Rights will be transferred with and only with the shares of the registrant’s Common Stock to which the Preferred Stock Purchase Rights are attached. |
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).
Page 2
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large Accelerated Filer ☐ | Accelerated Filer ☐ | Smaller Reporting Company | |
| Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of September 14, 2023, the number of shares
of common stock outstanding was
Page 3
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC.
INDEX
Page 4
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, | October 31, | |||||||
| 2023 | 2022 | |||||||
| (In Thousands, Except Share and Per Share Amounts) | ||||||||
| ASSETS | ||||||||
| Real estate, at cost, net of accumulated depreciation | $ | $ | ||||||
| Construction in progress | ||||||||
| Cash and cash equivalents | ||||||||
| Investment in tenancy-in-common | ||||||||
| Tenants' security accounts | ||||||||
| Receivables arising from straight-lining of rents | ||||||||
| Accounts receivable, net of allowance for doubtful accounts of $ | ||||||||
| Funds held in post-closing escrow | ||||||||
| Prepaid expenses and other assets | ||||||||
| Deferred charges, net | ||||||||
| Interest rate swap contracts | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Liabilities: | ||||||||
| Mortgages payable, including deferred interest of $ | $ | $ | ||||||
| Less unamortized debt issuance costs | ||||||||
| Mortgages payable, net | ||||||||
| Deferred director compensation payable | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Dividends payable | ||||||||
| Tenants' security deposits | ||||||||
| Deferred revenue | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Common Equity: | ||||||||
| Preferred stock with par value of $ | ||||||||
| Common stock with par value of $ | ||||||||
| Additional paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Total Common Equity | ||||||||
| Noncontrolling interests in subsidiaries | ( | ) | ( | ) | ||||
| Total Equity | ||||||||
| Total Liabilities and Equity | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements.
Page 5
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED JULY 31, 2023 AND 2022
(Unaudited)
| Nine Months Ended July 31, | Three Months Ended July 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (In Thousands Except Per Share Amounts) | (In Thousands Except Per Share Amounts) | |||||||||||||||
| Revenue: | ||||||||||||||||
| Rental income | $ | $ | $ | $ | ||||||||||||
| Reimbursements | ||||||||||||||||
| Sundry income | ||||||||||||||||
| Total revenue | ||||||||||||||||
| Expenses: | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Management fees | ||||||||||||||||
| Real estate taxes | ||||||||||||||||
| Depreciation | ||||||||||||||||
| Total expenses | ||||||||||||||||
| Investment income | ||||||||||||||||
| Net (loss) gain on sale of Maryland properties | ( | ) | ( | ) | - | |||||||||||
| Net realized gain on Wayne PSC interest rate swap termination | - | - | ||||||||||||||
| (Loss) gain on investment in tenancy-in-common | ( | ) | ( | ) | ( | ) | ||||||||||
| Interest expense including amortization of deferred financing costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net (loss) income | ( | ) | ( | ) | ||||||||||||
| Net loss (income) attributable to noncontrolling interests in subsidiaries | ( | ) | ( | ) | ||||||||||||
| Net income (loss) attributable to common equity | $ | $ | $ | ( | ) | $ | ||||||||||
| Earnings (loss) per share: | ||||||||||||||||
| Basic | $ | $ | $ | ( | ) | $ | ||||||||||
| Diluted | $ | $ | $ | ( | ) | $ | ||||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
Page 6
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
NINE AND THREE MONTHS ENDED JULY 31, 2023 AND 2022
(Unaudited)
| Nine Months Ended July 31, | Three Months Ended July 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (In Thousands of Dollars) | (In Thousands of Dollars) | |||||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Other comprehensive (loss) income: | ||||||||||||||||
| Unrealized gain (loss) on interest rate swap contracts before reclassifications | ( | ) | ||||||||||||||
| Amount reclassified from accumulated other comprehensive income to realized gain on termination of interest rate swap contract | ( | ) | ( | ) | ||||||||||||
| Amount reclassified from accumulated other comprehensive income to interest expense | ( | ) | ( | ) | ||||||||||||
| Net unrealized (loss) gain on interest rate swap contracts | ( | ) | ( | ) | ||||||||||||
| Comprehensive (loss) income | ( | ) | ( | ) | ||||||||||||
| Net loss (income) attributable to noncontrolling interests in subsidiaries | ( | ) | ( | ) | ||||||||||||
| Other comprehensive loss (income): | ||||||||||||||||
| Unrealized (gain) loss on interest rate swap contracts attributable to noncontrolling interests in subsidiaries | ( | ) | ||||||||||||||
| Comprehensive loss (income) attributable to noncontrolling interests in subsidiaries | ( | ) | ||||||||||||||
| Comprehensive (loss) income attributable to common equity | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
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, 2023
(Unaudited)
| Common Equity | ||||||||||||||||||||||||||||||||
| Common Stock | Accumulated | |||||||||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In- Capital | Accumulated Deficit | Other Comprehensive Income | Total Common Equity | Noncontrolling Interests in Subsidiaries | Total Equity | |||||||||||||||||||||||||
| (In Thousands of Dollars) | ||||||||||||||||||||||||||||||||
| Balance at October 31, 2022 | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||||||||||||||
| Vested share units granted to Directors | ||||||||||||||||||||||||||||||||
| Stock options exercised | ||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests in subsidiaries | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net income (loss) | ( | ) | ||||||||||||||||||||||||||||||
| Dividends declared | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net unrealized loss on interest rate swap contracts | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at January 31, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||||||||||||||
| Stock awards granted to Directors | ||||||||||||||||||||||||||||||||
| Stock options exercised | ||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests in subsidiaries | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Dividends declared | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net unrealized loss on interest rate swap contracts | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at April 30, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||||||||||||||
| Stock options exercised | ||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests in subsidiaries | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Dividends declared | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net unrealized gain on interest rate swap contracts | ||||||||||||||||||||||||||||||||
| Balance at July 31, 2023 | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
Page 8
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 | ||||||||||||||||||||||||||||||||
| Common Stock | Accumulated | |||||||||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In- Capital | Accumulated Deficit | Other Comprehensive Income | Total Common Equity | Noncontrolling Interests in Subsidiaries | Total Equity | |||||||||||||||||||||||||
| (In Thousands of Dollars) | ||||||||||||||||||||||||||||||||
| Balance at October 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||||||||||||||
| Vested share units granted to Directors, including $ | ||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests in subsidiaries | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Dividends declared, including $ | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net unrealized gain on interest rate swap contracts | ||||||||||||||||||||||||||||||||
| Balance at January 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||||||||||||||
| Vested share units granted to Directors, including $ | ||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests in subsidiaries | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Dividends declared, including $ | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net unrealized gain on interest rate swap contracts | ||||||||||||||||||||||||||||||||
| Balance at April 30, 2022 | ( | ) | ||||||||||||||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||||||||||||||
| Vested share units granted to Directors | ||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests in subsidiaries | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Net unrealized loss on interest rate swap contracts | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance at July 31, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
Page 9
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2023 AND 2022
(Unaudited)
| Nine Months Ended | ||||||||
| July 31, | ||||||||
| 2023 | 2022 | |||||||
| (In Thousands of Dollars) | ||||||||
| Operating activities: | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
| Net loss (gain) on sale of Maryland properties | ( | ) | ||||||
| Depreciation | ||||||||
| Amortization | ||||||||
| Stock based compensation expense | ||||||||
| Director fees and related interest paid in stock units | ||||||||
| Stock award granted to Directors | ||||||||
| 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: | ||||||||
| (Cash outlays) 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 (used in) provided by investing activities | ( | ) | ||||||
| Financing activities: | ||||||||
| Repayment of mortgages | ( | ) | ( | ) | ||||
| Proceeds from mortgage loan refinancing | ||||||||
| Proceeds from exercise of stock options | ||||||||
| 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 (decrease) increase 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: | ||||||||
| Investing activities: | ||||||||
| Accrued transactional costs for sale of Maryland properties | $ | $ | ||||||
| Accrued capital expenditures, construction costs and pre-development costs | $ | $ | ||||||
| Financing activities: | ||||||||
| Dividends declared but not paid | $ | $ | ||||||
| Dividends paid in share units | $ | $ | ||||||
| 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 10
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 has ceased and FREIT has 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 have received one newly issued share of common stock of FREIT for each share of First Real Estate Investment Trust of New Jersey that they own, 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, 2023 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, 2022.
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 the recently deferred date of December 31, 2024. 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, 2024.
Note 3 – Dividends and earnings (loss) per share:
The FREIT Board of Directors (“Board”)
declared a total dividend of approximately $
Basic earnings (loss) 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, 2023, the outstanding stock options increased the average dilutive shares outstanding by approximately
Page 11
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 (loss). On December
30, 2021, the property owned by Grande Rotunda was sold, a portion of the proceeds from the sale was used to pay off the $
For the nine and three months ended July 31,
2023, FREIT recorded an unrealized loss 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 pursuant to a management agreement between the owners of the TIC and Hekemian & Co. dated as of February 28, 2020, which was for an initial term of one (1) year and which renews for successive one (1) year terms unless either party gives written notice of termination to the other party at least sixty (60) days prior to the end of the then-current term. The management agreement renewed for a successive one (1) year term on February 28, 2023 and will expire on February 28, 2024.
The management agreement requires the payment
of management fees equal to
Page 12
| July 31, | October 31, | |||||||
| 2023 | 2022 | |||||||
| (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) | $ | $ | ||||||
| Nine Months Ended July 31, | Three Months Ended July 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (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) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
Note 6 – Termination of Purchase and Sale Agreement:
On July 19, 2023, First Real Estate Investment
Trust of New Jersey, Inc. and certain of its affiliates (collectively, “FREIT”) filed a complaint (the “Complaint”)
in the Superior Court of New Jersey, Monmouth County, Chancery Division (the “Court”), against Kushner Companies LLC (“Kushner”)
seeking to collect on a $
The Complaint alleges that Kushner used Sinatra as a shell to evade its debts and obligations, and asks the Court to pierce the corporate veil and hold Kushner liable for Sinatra’s debts and obligations under the Purchase Agreement, including the attorneys’ fees awarded to FREIT, all costs incurred by FREIT to enforce the Judgment and any additional fees awarded to FREIT in connection with the pending appeal.
Page 13
As previously disclosed, FREIT has incurred
substantial costs in legal fees and related costs through July 31, 2023 in connection with the Sinatra litigation. FREIT expects to continue
to incur additional costs until such time as (i) the appeal is resolved with respect to the Court’s decision to deny FREIT’s
liquidated damages claim, and (ii) FREIT also resolves the additional claims to collect on its $
Through the quarter ended July 31, 2023, the
$
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 sale of the Maryland Properties having a
total net book value of $
On August 4, 2022, FREIT’s Board declared
a special, extraordinary, non-recurring cash distribution of approximately $
On July 12, 2023, FREIT’s Board declared
an ordinary dividend 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 of 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”) has been renewed and will expire on October 31, 2025. The Management Agreement is automatically renewed for successive periods of two years unless either party gives not less than six (6) months prior notice of non-renewal.
Page 14
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, 2023 were approximately $
The Management Agreement provides for a termination fee (“Termination Fee”) in the event of a termination by FREIT without cause and a termination fee of 1.25 times the Termination Fee if the Management Agreement terminates following a merger or acquisition of FREIT (the “M&A Termination Fee”). On March 9, 2023, the Board approved an amendment to the Management Agreement (the “Second Amendment”) which provides, among other things, that the M&A Termination Fee shall be increased from 1.25 times the Termination Fee to 2.5 times the Termination Fee.
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, dividends and stock awards) incurred by FREIT for the nine months ended July 31, 2023 and 2022 was approximately
$
Note 9 – Mortgage financings and line of credit:
On August 19, 2022, Westwood Hills, LLC (“Westwood
Hills”) exercised its right, pursuant to the loan agreement, to extend the term of its $
Page 15
Effective February 1, 2023, FREIT entered into
a loan extension and modification agreement with Valley National Bank on its loan secured by the Westwood Plaza shopping center in Westwood,
New Jersey with a then outstanding balance of approximately $
On July 22, 2022,
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 October 31, 2023. FREIT is currently working with the bank to complete
its due diligence around the renewal/extension of the credit line. Draws against the credit line can be used for working capital needs
and standby letters of credit. Draws against the credit line are secured by mortgages on FREIT’s Franklin Crossing Shopping Center
in Franklin Lakes, New Jersey and retail space in Glen Rock, New Jersey. The total line of credit is $
While FREIT intends to renew or refinance its debt obligations as they become due, there can be no assurance that it will be successful or, if successful, that the new terms will be similar to the terms of its existing debt obligations or as favorable.
Note 10 – Fair value of long-term debt:
| ($ in Millions) | July 31, 2023 | October 31, 2022 | ||
| Fair Value | $ |
$ | ||
| Carrying Value, Net | $ |
$ | ||
Fair values are estimated based on market interest rates at July 31, 2023 and October 31, 2022 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:
ASC 280-10, "Disclosures about Segments of an Enterprise and Related Information", establishes standards for reporting financial information about operating segments in interim and annual financial reports and provides for a "management approach" in identifying the reportable segments. FREIT has determined that it has two reportable segments: commercial properties and residential properties. These reportable segments offer different types of space, have different types of tenants, and are managed separately because each requires different operating strategies and management expertise. The commercial segment 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 as part of the Maryland Properties on December 30, 2021. (See Note 7 for further details.)
Page 16
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, 2022. 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.
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 (loss) attributable to common equity for the nine and three months ended July 31, 2023 and 2022. 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, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (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 (loss) 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 (loss) gain on sale of Maryland properties | ( | ) | ( | ) | ||||||||||||
| Net realized gain on Wayne PSC interest rate swap contract termination | ||||||||||||||||
| Financing costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net (loss) income | ( | ) | ( | ) | ||||||||||||
| Net loss (income) attributable to noncontrolling interests in subsidiaries | ( | ) | ( | ) | ||||||||||||
| Net income (loss) 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, 2023, FREIT had no material uncertain income tax positions. The tax years subsequent to and including the fiscal year ended October 31, 2020 remain open to examination by the major taxing jurisdictions.
Note 13 – Equity Incentive Plan:
On March 9, 2023, in accordance with FREIT’s
Equity Incentive Plan (the “Plan”), the Compensation Committee of the FREIT Board of Directors (the “Board”) recommended
to the Board and the Board approved that for services rendered and to be rendered in Fiscal 2023, in lieu of cash compensation in the
amount of $
Page 17
As of July 31, 2023,
| Nine Months Ended July 31, | Three Months Ended July 31, | |||||||||||||||
| 2023 | 2023 | |||||||||||||||
| 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 exercised during period | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Options outstanding at end of period | $ | $ | ||||||||||||||
| Options vested and expected to vest | ||||||||||||||||
| Options exercisable at end of period | ||||||||||||||||
| Nine and Three Months Ended July 31, 2022 | ||||||||||||||||
| No. of Options | Weighted Average | |||||||||||||||
| Outstanding | Price | |||||||||||||||
| Options outstanding at beginning of period | $ | |||||||||||||||
| Options granted during period | ||||||||||||||||
| Options forfeited/cancelled during period | ||||||||||||||||
| Options exercised during period | ||||||||||||||||
| Options outstanding at end of period | $ | |||||||||||||||
| Options vested and expected to vest | ||||||||||||||||
| Options exercisable at end of period | ||||||||||||||||
For the nine and three months ended July 31,
2023, 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
For the nine month periods ended July 31, 2023
and 2022, the aggregate amounts of deferred director fees together with related interest and dividends were approximately $
Page 18
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) (collectively “the Deferred Fee Plan Termination Payment”) 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. On November 3, 2022, the Board determined that the Deferred Fee Plan Termination Payment would be made to the participants in the Deferred Fee Plan on January 20, 2023.
As of October 31, 2022, the total payment related
to each participant’s cash account was 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.
| Year Ending October 31, | Amount | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
The above amounts assume that all leases that 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 months ended July 31, 2023 and 2022 were not material.
Residential tenants:
Lease terms for residential tenants are usually
Note 16 – Stockholder Rights Plan:
On July 28, 2023, FREIT’s Board adopted
a stockholder rights plan, as set forth in the Stockholder Rights Agreement, dated July 31, 2023, between the Company and Computershare
Trust Company, N.A., as Rights Agent (the “Rights Agreement”). Pursuant to the terms of the Rights Agreement, the Board declared
a dividend distribution of one Preferred Stock Purchase Right (a “Right”) for each outstanding share of common stock, par
value $
Initially, the Rights are not exercisable
and are attached to and trade with all shares of Common Stock outstanding as of, and issued subsequent to, the Record Date. The Rights
will separate from the Common Stock and will become exercisable upon the earlier of (i) the close of business on the tenth calendar day
following the first public announcement that a person or group of affiliated or associated persons (an “Acquiring Person”)
has acquired beneficial ownership of
Page 19
Note 17 – Kmart Lease:
On June 24, 2023, the owner/operator of
the
Note 18 – Subsequent Event:
On August 3, 2023, Westwood Hills refinanced
its $
Page 20
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, 2022, 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; interest rate risk; 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 public health crises, epidemics and pandemics. 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.
The economic and financial environment: As of July 2023, the annual inflation rate was 3.2% and the U.S. unemployment rate was 3.5%. Though the inflation rate has declined significantly from a 40-year high in June 2022 of 9.1%, this month halted the twelve consecutive months of declines as the rate increased slightly from the rate of 3% in June 2023. In an effort to lower inflation, the Federal Reserve has continued to raise interest rates. In July 2023, the Federal Reserve raised the interest rate to 5.50%, its highest rate level since 2001. The pace at which it continues to raise the interest rates is uncertain, especially if inflation begins to rebound, leading 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) has continued to increase across the portfolio. Additionally, the rate of increase on renewals for existing tenants has continued to be robust, but could begin to soften in the current year. These increases should meaningfully contribute to FREIT’s income over time but 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 from 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.
Page 21
Kmart lease: On June 24, 2023, the owner/operator of the 84,254 square foot Kmart store located at our Westwood Plaza shopping center in Westwood, New Jersey informed FREIT of its intent to sublet their space to three unidentified retail tenants. The current term of the lease for Kmart expires on October 31, 2027 with two 5-year renewal options remaining. The lease agreement provides that base rent payments are fixed at $4.00 per square foot ($336,720 annually) and additional rent for common area maintenance and insurance costs are based on an amount less than Kmart’s pro rata share of the shopping center. Management’s review of the Kmart space has determined that this space has a current rental market value of between $15 and $24 per square foot. While significant tenant and/or capital improvements will be necessary to fit-up this space for a new tenant or tenants, the higher rent potentially realizable equates to annual revenues in excess of approximately $930,000 to $1,685,000. FREIT believes these increased rent amounts, if achieved, will more than offset lost rent from Kmart and other tenants with co-tenancy clauses and will only increase the overall value of the shopping center. Accordingly, on July 24, 2023, FREIT denied Kmart’s request and elected pursuant to the lease to terminate the Kmart lease effective October 23, 2023. Thus, FREIT will now have full control of this space instead of waiting another 14 years to renegotiate or re-lease this space at a higher market rent. While management is unable to predict the length of time it may take to re-lease this space, the Westwood Plaza shopping center will incur losses of annual base rent revenues of approximately $726,000 to $962,000 until such time as this space is re-leased. (See Note 17 to FREIT’s condensed consolidated financial statements for further details.)
Debt Financing Availability: Financing has been available to FREIT and its affiliates. Certain recent refinancings and loan modifications/extensions have been at higher interest rates and for shorter terms.
On August 19, 2022, Westwood Hills, LLC (“Westwood Hills”) 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, for an additional six (6) months from an initial maturity date of October 1, 2022 to a new maturity date of April 1, 2023. On March 1, 2023, Westwood Hills exercised its right, pursuant to the loan agreement, to extend the term of its loan, for an additional six (6) months to a new maturity date of October 1, 2023 on the same terms and conditions as stated in the loan agreement. As of July 31, 2023, $25,000,000 of this loan was drawn and outstanding and the interest rate was 9.21%. On August 3, 2023, Westwood Hills refinanced its $25,000,000 loan (which would have matured on October 1, 2023) with a new loan held by Minnesota Life Insurance Company in the amount of $25,500,000. This loan is based on a fixed interest rate of 6.05%, provides for monthly payments of $153,706 and has a term of three years with a maturity date of September 1, 2026. This refinancing resulted in a decrease in the interest rate from a variable interest rate of approximately 9.21% (as of July 31, 2023) to a fixed interest rate of 6.05% and annual debt service savings of approximately $535,000. (See Notes 9 and 18 to FREIT’s condensed consolidated financial statements for further details.)
Effective February 1, 2023, FREIT entered into a loan extension and modification agreement with Valley National Bank on its loan secured by the Westwood Plaza shopping center in Westwood, New Jersey with a then outstanding balance of approximately $16,864,361. Under the terms and conditions of this loan extension and modification, the maturity date of the loan was extended for a term of one (1) year from February 1, 2023 to February 1, 2024 with the option of FREIT to extend for one additional year from the extended maturity date, subject to certain provisions of the loan agreement. The loan is payable based on monthly installments of approximately $157,347 based on a fixed rate of interest of 7.5%. Additionally, FREIT funded an interest reserve escrow account (“Escrow”) at closing representing the annualized principal and interest payments for one (1) year, amounting to approximately $1,888,166. This Escrow is held at Valley National Bank and in the event of a default on this loan, the bank shall be permitted to use the proceeds from the escrow account to make monthly debt service payments on the loan.
Stockholder Rights Plan: On July 28, 2023, FREIT’s Board adopted a stockholder rights plan, as set forth in the Stockholder Rights Agreement, dated July 31, 2023, between the Company and Computershare Trust Company, N.A., as Rights Agent (the “Rights Agreement”). Pursuant to the terms of the Rights Agreement, the Board declared a dividend distribution of one Preferred Stock Purchase Right (a “Right”) for each outstanding share of common stock, par value $0.01 per share, of the Company (the “Common Stock”) to stockholders of record as of the close of business on August 11, 2023 (the “Record Date”). In addition, one Right will automatically attach to each share of Common Stock issued between the Record Date and the Distribution Date (as hereinafter defined). Each Right entitles the registered holder thereof to purchase from the Company a unit consisting of one ten-thousandth of a share (a “Unit”) of Series A Junior Participating Cumulative Preferred Stock, par value $0.01 per share, of the Company (the “Preferred Stock”) at a cash exercise price of $95.00 per Unit (the “Exercise Price”), subject to adjustment, under certain conditions specified in the Rights Agreement. The Rights are not exercisable until the Distribution Date and will expire at the close of business on July 31, 2026, unless previously redeemed or exchanged by the Company. (See Note 16 to FREIT’s condensed consolidated financial statements for further details.)
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.
Page 22
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, 2022, have been applied consistently as of July 31, 2023, and for the nine and three months ended July 31, 2023 and 2022. 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.
Page 23
RESULTS OF OPERATIONS
Real estate revenue for the nine months ended July 31, 2023 (“Current Nine Months”) decreased 12.5% to $21,191,000 compared to $24,223,000 for the nine months ended July 31, 2022 (“Prior Year’s Nine Months”). Real estate revenue for the three months ended July 31, 2023 (“Current Quarter”) increased 4.8% to $7,296,000 compared to $6,959,000 for the three months ended July 31, 2022 (“Prior Year’s Quarter”).
The decrease in revenue for the Current Nine Months was primarily attributable to the following: (a) a decrease of approximately $3.6 million attributed to the Maryland Properties sold in the Prior Year’s Nine Months; offset by (b) an increase from the residential segment of approximately $0.5 million primarily driven by an increase in base rents across all properties; and (c) an increase from the commercial segment of approximately $0.1 million primarily attributed to a reduction in rental revenue in the Prior Year’s Nine Months from a tenant being deemed collectability constrained.
The increase in revenue for the Current Quarter was primarily attributable to the following: (a) an increase from the residential segment of approximately $0.3 million primarily driven by an increase in base rents across all properties; and (b) a distribution from the bankruptcy court in the amount of approximately $81,000 related to unpaid claims filed for a former tenant at the Rotunda retail property.
Net income (loss) attributable to common equity (“net income (loss)-common equity”) for the Current Nine Months and Current Quarter was net income of $104,000 ($0.01 per share basic and diluted) and net loss of $412,000 (($0.06) per share basic and diluted), compared to 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), for the Prior Year’s comparable periods, respectively.
The schedule below provides a detailed analysis of the major changes that impacted net income (loss)-common equity for the nine and three months ended July 31, 2023 and 2022:
| NON-GAAP NET INCOME (LOSS) COMPONENTS | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
| July 31, | July 31, | |||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||
| (In Thousands of Dollars) | (In Thousands of Dollars) | |||||||||||||||||||||||
| Income from real estate operations: | ||||||||||||||||||||||||
| Commercial properties | $ | 2,740 | $ | 3,274 | $ | (534 | ) | $ | 966 | $ | 988 | $ | (22 | ) | ||||||||||
| Residential properties | 8,143 | 9,015 | (872 | ) | 2,847 | 2,643 | 204 | |||||||||||||||||
| Total income from real estate operations | 10,883 | 12,289 | (1,406 | ) | 3,813 | 3,631 | 182 | |||||||||||||||||
| Financing costs: | ||||||||||||||||||||||||
| Fixed rate mortgages | (3,822 | ) | (3,545 | ) | (277 | ) | (1,323 | ) | (1,114 | ) | (209 | ) | ||||||||||||
| Floating rate mortgages | (1,640 | ) | (1,550 | ) | (90 | ) | (584 | ) | (333 | ) | (251 | ) | ||||||||||||
| Interest rate swap contracts breakage fee | - | (213 | ) | 213 | - | - | - | |||||||||||||||||
| Other - corporate interest | (26 | ) | (108 | ) | 82 | - | (28 | ) | 28 | |||||||||||||||
| Mortgage cost amortization | (370 | ) | (813 | ) | 443 | (124 | ) | (299 | ) | 175 | ||||||||||||||
| Total financing costs | (5,858 | ) | (6,229 | ) | 371 | (2,031 | ) | (1,774 | ) | (257 | ) | |||||||||||||
| Investment income | 682 | 183 | 499 | 275 | 119 | 156 | ||||||||||||||||||
| General & administrative expenses: | ||||||||||||||||||||||||
| Accounting fees | (390 | ) | (367 | ) | (23 | ) | (121 | ) | (116 | ) | (5 | ) | ||||||||||||
| Legal and professional fees | (934 | ) | (1,322 | ) | 388 | (458 | ) | (312 | ) | (146 | ) | |||||||||||||
| Directors fees | (981 | ) | (792 | ) | (189 | ) | (297 | ) | (259 | ) | (38 | ) | ||||||||||||
| Stock compensation expense | (10 | ) | (15 | ) | 5 | - | (5 | ) | 5 | |||||||||||||||
| Corporate expenses | (1,046 | ) | (611 | ) | (435 | ) | (683 | ) | (219 | ) | (464 | ) | ||||||||||||
| Total general & administrative expenses | (3,361 | ) | (3,107 | ) | (254 | ) | (1,559 | ) | (911 | ) | (648 | ) | ||||||||||||
| Depreciation | (2,198 | ) | (3,257 | ) | 1,059 | (744 | ) | (723 | ) | (21 | ) | |||||||||||||
| (Loss) Gain on investment in tenancy-in-common | (231 | ) | (99 | ) | (132 | ) | (43 | ) | 57 | (100 | ) | |||||||||||||
| Adjusted net (loss) income | (83 | ) | (220 | ) | 137 | (289 | ) | 399 | (688 | ) | ||||||||||||||
| Net realized gain on Wayne PSC interest rate swap termination | - | 1,415 | (1,415 | ) | - | 1,415 | (1,415 | ) | ||||||||||||||||
| Net (loss) gain on sale of Maryland properties | (1,003 | ) | 68,771 | (69,774 | ) | (557 | ) | - | (557 | ) | ||||||||||||||
| Net (loss) income | (1,086 | ) | 69,966 | (71,052 | ) | (846 | ) | 1,814 | (2,660 | ) | ||||||||||||||
| Net loss (income) attributable to noncontrolling interests in subsidiaries | 1,190 | (23,420 | ) | 24,610 | 434 | (693 | ) | 1,127 | ||||||||||||||||
| Net income (loss) attributable to common equity | $ | 104 | $ | 46,546 | $ | (46,442 | ) | $ | (412 | ) | $ | 1,121 | $ | (1,533 | ) | |||||||||
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 $83,000 (($0.01) per share basic and diluted) and net loss of $289,000 (($0.04) per share basic and diluted), compared to a 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), 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 (loss) gain on sale of Maryland Properties; a realized gain on the Wayne PSC interest rate swap contract termination in Fiscal 2022.
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The decrease in adjusted net loss for the Current Nine Months was primarily driven by the following: (a) an increase in adjusted net income of approximately $748,000 (with a consolidated impact to FREIT of approximately $496,000) attributed to losses incurred in the prior year’s comparable period at the Maryland Properties sold in the Prior Year’s Nine Months; (b) an increase in revenue, excluding the Maryland Properties sold, of approximately $586,000 (with a consolidated impact to FREIT of approximately $447,000); and (c) an increase in investment income of approximately $499,000 resulting from higher interest rates in the Current Nine Months; offset by (d) an increase in interest expense, excluding the Maryland Properties sold, of approximately $933,000 (with a consolidated impact to FREIT of approximately $416,000) primarily attributed to the increase in the variable interest rate on the loan for the Westwood Hills property in the Current Nine Months and an increase in the fixed interest rate on the loans for the Westwood Plaza and Wayne PSC properties due to the refinancing/modification of these loans; (e) an increase in total operating expenses at the residential properties, excluding the Icon property sold, of approximately $287,000 (with a consolidated impact to FREIT of approximately $154,000) resulting primarily from an increase in repairs and maintenance expense and management fee expense in the Current Year’s Nine Months; (f) an increase in General & Administrative expenses (“G&A”) of approximately $254,000 driven by an increase in corporate expenses of approximately $435,000 primarily attributed to costs incurred for the adoption of the Stockholder Rights Plan (See Note 16 to FREIT’s condensed consolidated financial statements for additional details) and an increase in FREIT’s director fees of approximately $189,000 attributed to the issuance of stock awards for services rendered and to be rendered in 2023 in lieu of cash compensation and an increase in executive compensation (See Note 13 to FREIT’s condensed consolidated financial statements for additional details) offset by a decline in legal costs of approximately $388,000 primarily attributed to the legal proceeding between FREIT and certain of its affiliates and Sinatra Properties, LLC; (g) an increase in the total operating expenses at the commercial properties, excluding the Maryland Properties sold, of approximately $132,000 (with a consolidated impact to FREIT of approximately $106,000) resulting primarily from an increase in repairs and maintenance expense and expense for uncollectible rents in the Current Year’s Nine Months; and (h) an increase in loss on investment in tenancy-in-common of approximately $132,000.
The increase in adjusted net loss for the Current Quarter was primarily driven by the following: (a) an increase in G&A of approximately $648,000 primarily driven by an increase in corporate expenses of approximately $464,000 primarily attributed to costs incurred for the adoption of the Stockholder Rights Plan and an increase in legal costs of approximately $146,000 primarily attributed to the legal proceeding between FREIT and certain of its affiliates and Sinatra Properties, LLC; (b) an increase in interest expense of approximately $257,000 (with a consolidated impact to FREIT of approximately $161,000) primarily attributed to the increase in the variable interest rate on the loan for the Westwood Hills property in the Current Quarter and an increase in the fixed interest rate on the loan for the Westwood Plaza property due to the modification of this loan; (c) an increase in repairs and maintenance expense of approximately $138,000 (with a consolidated impact to FREIT of approximately $110,000); and (d) an increase in loss on investment in tenancy-in-common of approximately $100,000; offset by (e) an increase in revenue of approximately $337,000 (with a consolidated impact to FREIT of approximately $255,000); and (f) an increase in investment income of approximately $156,000 resulting from higher interest rates in the Current Quarter.
(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 (loss)-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, | ||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | 2023 | 2022 | |||||||||||||||||||||||||||||||
| (In Thousands) | (In Thousands) | (In Thousands) | ||||||||||||||||||||||||||||||||||||||
| Rental income | $ | 4,756 | $ | 6,624 | $ | (1,868 | ) | -28.2% | $ | 14,413 | $ | 15,496 | $ | (1,083 | ) | -7.0% | $ | 19,169 | $ | 22,120 | ||||||||||||||||||||
| Reimbursements | 1,752 | 1,793 | (41 | ) | -2.3% | (3 | ) | 20 | (23 | ) | -115.0% | 1,749 | 1,813 | |||||||||||||||||||||||||||
| Other | 105 | 28 | 77 | 275.0% | 259 | 287 | (28 | ) | -9.8% | 364 | 315 | |||||||||||||||||||||||||||||
| Total revenue | 6,613 | 8,445 | (1,832 | ) | -21.7% | 14,669 | 15,803 | (1,134 | ) | -7.2% | 21,282 | 24,248 | ||||||||||||||||||||||||||||
| Operating expenses | 3,782 | 5,146 | (1,364 | ) | -26.5% | 6,526 | 6,788 | (262 | ) | -3.9% | 10,308 | 11,934 | ||||||||||||||||||||||||||||
| Net operating income | $ | 2,831 | $ | 3,299 | $ | (468 | ) | -14.2% | $ | 8,143 | $ | 9,015 | $ | (872 | ) | -9.7% | 10,974 | 12,314 | ||||||||||||||||||||||
| Average Occupancy % * | 65.4% | 67.1% | -1.7% | 97.1% | 98.4% | -1.3% | ||||||||||||||||||||||||||||||||||
| Reconciliation to condensed consolidated net income-common equity: | |||||||||
| Deferred rents - straight lining | (91 | ) | (25 | ) | |||||
| Investment income | 682 | 183 | |||||||
| Net (loss) gain on sale of Maryland properties | (1,003 | ) | 68,771 | ||||||
| Net realized gain on Wayne PSC interest rate swap contract termination | - | 1,415 | |||||||
| General and administrative expenses | (3,361 | ) | (3,107 | ) | |||||
| Loss on investment in tenancy-in-common | (231 | ) | (99 | ) | |||||
| Depreciation | (2,198 | ) | (3,257 | ) | |||||
| Financing costs | (5,858 | ) | (6,229 | ) | |||||
| Net (loss) income | (1,086 | ) | 69,966 | ||||||
| Net loss (income) attributable to noncontrolling interests in subsidiaries | 1,190 | (23,420 | ) | ||||||
| Net income attributable to common equity | $ | 104 | $ | 46,546 | |||||
| Commercial | Residential | Combined | ||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||||||
| July 31, | Increase (Decrease) | July 31, | Increase (Decrease) | July 31, | ||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | 2023 | 2022 | |||||||||||||||||||||||||||||||
| (In Thousands) | (In Thousands) | (In Thousands) | ||||||||||||||||||||||||||||||||||||||
| Rental income | $ | 1,584 | $ | 1,618 | $ | (34 | ) | -2.1% | $ | 4,942 | $ | 4,663 | $ | 279 | 6.0% | $ | 6,526 | $ | 6,281 | |||||||||||||||||||||
| Reimbursements | 610 | 561 | 49 | 8.7% | 2 | (3 | ) | 5 | 166.7% | 612 | 558 | |||||||||||||||||||||||||||||
| Other | 81 | - | 81 | 100.0% | 92 | 84 | 8 | 9.5% | 173 | 84 | ||||||||||||||||||||||||||||||
| Total revenue | 2,275 | 2,179 | 96 | 4.4% | 5,036 | 4,744 | 292 | 6.2% | 7,311 | 6,923 | ||||||||||||||||||||||||||||||
| Operating expenses | 1,294 | 1,227 | 67 | 5.5% | 2,189 | 2,101 | 88 | 4.2% | 3,483 | 3,328 | ||||||||||||||||||||||||||||||
| Net operating income | $ | 981 | $ | 952 | $ | 29 | 3.0% | $ | 2,847 | $ | 2,643 | $ | 204 | 7.7% | 3,828 | 3,595 | ||||||||||||||||||||||||
| Average Occupancy % * | 65.1% | 65.9% | -0.8% | 96.8% | 97.8% | -1.0% | ||||||||||||||||||||||||||||||||||
| Reconciliation to condensed consolidated net (loss) income-common equity: | |||||||||
| Deferred rents - straight lining | (15 | ) | 36 | ||||||
| Investment income | 275 | 119 | |||||||
| Net loss on sale of Maryland properties | (557 | ) | - | ||||||
| Net realized gain on Wayne PSC interest rate swap contract termination | - | 1,415 | |||||||
| General and administrative expenses | (1,559 | ) | (911 | ) | |||||
| (Loss) Gain on investment in tenancy-in-common | (43 | ) | 57 | ||||||
| Depreciation | (744 | ) | (723 | ) | |||||
| Financing costs | (2,031 | ) | (1,774 | ) | |||||
| Net (loss) gain | (846 | ) | 1,814 | ||||||
| Net loss (income) attributable to noncontrolling interests in subsidiaries | 434 | (693 | ) | ||||||
| Net (loss) income attributable to common equity | $ | (412 | ) | $ | 1,121 | ||||
* 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 nine months ended July 31, 2022. 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 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.
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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. Four of these properties are multi-tenanted retail centers and one is single tenanted on land located in Rockaway, New Jersey owned by FREIT from which it receives monthly rental income from a tenant who has built and operates a bank branch on the land. (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 21.7% and increased by 4.4%, respectively, and NOI decreased by 14.2% and increased by 3.0%, 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 1.7% and 0.8%, respectively, as compared to the Prior Year’s comparable periods.
The decline in revenue for the Current Nine Months was primarily attributable to a decrease of approximately $2 million attributed to the Maryland Properties sold in the Prior Year’s Nine Months offset by an increase of approximately $0.1 million primarily attributed to a reduction in rental revenue in the Prior Year’s Nine Months from a tenant being deemed collectability constrained. The decrease in NOI for the Current Nine Months was primarily attributable to a decline of approximately $0.5 million attributed to net operating income recognized in the prior year’s comparable period attributed to the Maryland Properties sold in the Prior Year’s Nine Months and an increase of approximately $68,000 in repairs and maintenance expense in the Current Year’s Nine Months.
The increase in revenue and NOI for the Current Quarter was primarily attributable to a distribution from the bankruptcy court in the amount of approximately $81,000 related to claims filed for a former tenant at the Rotunda retail property.
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 Prior Year’s Nine Months. Same property revenue for the Current Nine Months and Current Quarter increased by 2.4% and 0.6%, respectively, and same property NOI increased by 0.8% and decreased by 4.4%, 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:
| 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) | 4 | 13,928 | $ | 26.88 | $ | 27.13 | -0.9% | $ | - | $ | 0.73 | |||||||||||||||||
| Non-comparable leases | 2 | 3,384 | $ | 30.08 | N/A | N/A | $ | - | $ | 1.39 | ||||||||||||||||||
| Total leasing activity | 6 | 17,312 | ||||||||||||||||||||||||||
(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.
On June 24, 2023, the owner/operator of the 84,254 square foot Kmart store located at our Westwood Plaza shopping center in Westwood, New Jersey informed FREIT of its intent to sublet their space to three unidentified retail tenants. The current term of the lease for Kmart expires on October 31, 2027 with two 5-year renewal options remaining. The lease agreement provides that base rent payments are fixed at $4.00 per square foot ($336,720 annually) and additional rent for common area maintenance and insurance costs are based on an amount less than Kmart’s pro rata share of the shopping center. Management’s review of the Kmart space has determined that this space has a current rental market value of between $15 and $24 per square foot. While significant tenant and/or capital improvements will be necessary to fit-up this space for a new tenant or tenants, the higher rent potentially realizable equates to annual revenues in excess of approximately $930,000 to $1,685,000. FREIT believes these increased rent amounts if achieved will more than offset lost rent from Kmart and other tenants with co-tenancy clauses and will only increase the overall value of the shopping center. Accordingly, on July 24, 2023, FREIT denied Kmart’s request and elected pursuant to the lease to terminate the Kmart lease effective October 23, 2023. Thus, FREIT will now have full control of this space instead of waiting another 14 years to renegotiate or re-lease this space at a higher market rent. While management is unable to predict the length of time it may take to re-lease this space, the Westwood Plaza shopping center will incur losses of annual base rent revenues of approximately $726,000 to $962,000 until such time as this space is re-leased.
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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 as part of the Maryland Properties 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 7.2% and increased by 6.2%, respectively, and NOI decreased by 9.7% and increased by 7.7%, respectively, as compared to the Prior Year’s comparable periods. Average occupancy for all residential properties, excluding the Icon at the Rotunda property sold, for the Current Nine Months and Current Quarter decreased by 1.3% and 1%, 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 $1.6 million attributed to the Icon at the Rotunda Property sold in the Prior Year’s Nine Months; offset by (b) an increase of approximately $0.5 million primarily driven by an increase in base rents across all properties, excluding the Icon. The decrease in NOI for the Current Nine Months was primarily attributable to the following: (a) a decrease of approximately $1.1 million attributed to the Icon at the Rotunda Property sold in the Prior Year’s Nine Months; (b) an increase in total operating expenses of approximately $0.3 million, excluding the Icon, resulting primarily from an increase in repairs and maintenance expense and an increase in management fee expense due to higher rents being collected in the Current Year’s Nine Months; offset by (c) an increase of approximately $0.5 million in revenue, excluding the Icon.
The increase in revenue for the Current Quarter was primarily attributable to an increase in base rents across all properties. The increase in NOI for the Current Quarter was primarily attributable to the increase in revenue of approximately $0.3 million offset by an increase in total operating expenses of approximately $0.1 million primarily driven by an increase in repairs and maintenance expense and an increase in management fee expense due to higher rents being collected in the Current Quarter.
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 Prior Year’s Nine Months. Same property revenue for the Current Nine Months and Current Quarter increased by 3.5% and 6.2%, respectively, and same property NOI increased by 2.7% and 7.6%, 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 at the end of the Current Quarter and the Prior Year’s Quarter were $2,154 and $2,006, 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 $205,000 and $196,000, respectively.
Capital expenditures: FREIT tends to spend more in any given year on maintenance and capital improvements at its residential properties which were constructed more than 25 years ago (Steuben Arms, Berdan Court, Westwood Hills and Pierre Towers properties) than on its newer properties (Boulders, Regency and Station Place 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, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (In Thousands of Dollars) | (In Thousands of Dollars) | |||||||||||||||
| Fixed rate mortgages (a): | ||||||||||||||||
| 1st Mortgages | ||||||||||||||||
| Existing | $ | 3,822 | $ | 3,383 | $ | 1,323 | $ | 1,024 | ||||||||
| New | - | 162 | - | 90 | ||||||||||||
| Variable rate mortgages: | ||||||||||||||||
| 1st Mortgages | ||||||||||||||||
| Existing | 1,640 | 1,550 | 584 | 333 | ||||||||||||
| New | - | - | - | - | ||||||||||||
| Interest rate swap contracts breakage fee | - | 213 | - | - | ||||||||||||
| Other | 26 | 108 | - | 28 | ||||||||||||
| Total financing costs, gross | 5,488 | 5,416 | 1,907 | 1,475 | ||||||||||||
| Amortization of mortgage costs | 370 | 813 | 124 | 299 | ||||||||||||
| Total financing costs, net | $ | 5,858 | $ | 6,229 | $ | 2,031 | $ | 1,774 | ||||||||
| (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 $371,000, or 6%, compared to the Prior Year’s Nine Months which was primarily attributable to the following: (a) a decline of approximately $1,304,000 attributed to the pay-down of the loans outstanding on the Maryland Properties sold in the Prior Year’s Nine Months; (b) a decline of approximately $82,000 in other interest expense attributed to the payment of the deferred fee compensation to FREIT’s directors in the Current Nine Months; (c) a decline of approximately $69,000 attributed to the decrease in the fixed interest rate from 5.37% to 2.85% on the Boulders loan refinanced in December 2022; offset by (d) an increase of approximately $596,000 primarily attributed to the increase in the variable interest rate on the loan for the Westwood Hills property as compared to the Prior Year’s Nine Months; (e) an increase of approximately $270,000 primarily attributed to the increase in the fixed interest rate from 3.625% to 5% on the Wayne PSC loan refinanced in July 2022; and (f) an increase of approximately $214,000 attributed to the increase in the fixed interest rate from 4.75% to 7.5% on the Westwood Plaza loan modified effective February 2023.
Total financing costs for the Current Quarter increased by approximately $257,000, or 14.5%, compared to the Prior Year’s Quarter which was primarily attributable to the following: (a) an increase of approximately $191,000 attributed to the increase in the variable interest rate on the loan for the Westwood Hills property as compared to the Prior Year’s Quarter; and (b) an increase of approximately $116,000 attributed to the increase in the fixed interest rate from 4.75% to 7.5% on the Westwood Plaza loan modified effective February 2023.
(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 $3,361,000 and $1,559,000, compared to $3,107,000 and $911,000, 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 increase in G&A for the Current Nine Months of approximately $254,000 was primarily driven by the following: (a) an increase in corporate expenses of approximately $435,000 primarily attributed to costs incurred for the adoption of the Stockholder Rights Plan (See Note 16 to FREIT’s condensed consolidated financial statements for additional details); and (b) an increase in director fees of approximately $189,000 attributed to the issuance of stock awards for services rendered and to be rendered in 2023 in lieu of cash compensation and an increase in executive compensation (See Note 13 to FREIT’s condensed consolidated financial statements for additional details); offset by (c) a decline in legal costs of approximately $388,000 primarily attributed to the legal proceeding between FREIT and certain of its affiliates and Sinatra Properties, LLC. The increase in G&A for the Current Quarter of approximately $648,000 was primarily driven by the following: (a) an increase in corporate expenses of approximately $464,000 primarily attributed to costs incurred for the adoption of the Stockholder Rights Plan and (b) an increase in legal costs of approximately $146,000 primarily 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 $2,198,000 and $744,000, compared to $3,257,000 and $723,000, respectively, for the Prior Year’s comparable periods. The decline in depreciation expense for the Current Nine Months was primarily attributable to the Maryland Properties sold in the Prior Year’s Nine Months. (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 $1.9 million for the Current Nine Months compared to approximately $5.8 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, 2023, FREIT had cash, cash equivalents and restricted cash totaling $43.4 million, compared to $58.5 million at October 31, 2022. The decrease in cash in the Current Nine Months was primarily attributable to $15.3 million in net cash used in financing activities, $1.7 million in net cash used in investing activities including capital expenditures offset by $1.9 million in net cash provided by operating activities. The decrease in cash, cash equivalents and restricted cash of approximately $15.1 million in the Current Nine Months was primarily attributed to the following: (a) dividends paid of approximately $11.5 million; (b) deferred compensation paid to certain members of the FREIT Board who participated in the Deferred Fee Plan of approximately $2.3 million; (c) a distribution of additional net proceeds received from the sale of the Damascus and Rotunda Property to the minority interest holders in those joint ventures of approximately $3.3 million; (d) expenditures related to capital improvements on existing properties of approximately $1.2 million; and (e) recurring repayment of mortgages of approximately $1.1 million; offset by (f) proceeds received from the exercise of stock options of approximately $1.3 million. (See Note 7 to FREIT’s condensed consolidated financial statements for additional details on the sale of the Maryland properties.)
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Credit Line: FREIT’s revolving line of credit provided by Provident Bank was renewed for a three-year term ending on October 31, 2023. FREIT is currently working with the bank to complete its due diligence around the renewal/extension of the credit line. Draws against the credit line can be used for working capital needs and standby letters of credit. Draws against the credit line are secured by mortgages on FREIT’s Franklin Crossing Shopping Center in Franklin Lakes, New Jersey and retail space in Glen Rock, New Jersey. The total line of credit 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, 2023 and October 31, 2022, there was no amount outstanding and $13 million was available under the line of credit.
Dividend: The Board declared a total dividend of approximately $2,235,000 ($0.30 per share) in the third quarter of Fiscal 2023, which was composed of an ordinary dividend of $0.05 per share and a special dividend of $0.25 per share to distribute funds released in Fiscal 2023 from a post-closing rent escrow established in connection with the sale of FREIT’s Maryland Properties. The total dividend of $0.30 per share will be paid on September 15, 2023 to holders of record of said shares at the close of business on September 1, 2023. The Board will continue to evaluate the dividend on a quarterly basis.
As of July 31, 2023, FREIT’s aggregate outstanding mortgage debt was $138.1 million, which bears a weighted average interest rate of 4.88% and an average life of approximately 2.3 years (including the effect of refinancing the loan on the Westwood Hills property). FREIT’s mortgages are subject to amortization schedules that are longer than the terms of the mortgages. As such, balloon payments (unpaid principal amounts at the mortgage due date) for all mortgage debt will be required as follows:
| Fiscal Year | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | |
| ($ in millions) | ||||||||
| Mortgage "Balloon" Payments | $25.0 (A) | $33.0 | $38.9 | $0.0 | $0.0 | $10.5 | $26.0 | |
| Includes the following: | ||||||||
| (A) | The loan on the Westwood Hills property, a residential property located in Westwood, New Jersey, in the amount of $25 million which had a maturity date of October 1, 2023. The loan was refinanced on August 3, 2023 and has a new maturity date of October 1, 2026. (See Note 17 to FREIT's condensed consolidated financial statements for additional details.) | |||||||
The following table shows the estimated fair value and net carrying value of FREIT’s long-term debt at July 31, 2023 and October 31, 2022:
| ($ in Millions) | July 31, 2023 | October 31, 2022 | ||
| Fair Value | $132.7 | $132.2 | ||
| Carrying Value, Net | $136.7 | $138.1 | ||
Fair values are estimated based on market interest rates at July 31, 2023 and October 31, 2022 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, 2023, a 1% interest rate increase would reduce the fair value of FREIT’s debt by $2.5 million, and a 1% decrease would increase the fair value by $2.6 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 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, for an additional six (6) months from an initial maturity date of October 1, 2022 to a new maturity date of April 1, 2023. On March 1, 2023, Westwood Hills exercised its right, pursuant to the loan agreement, to extend the term of its loan, for an additional six (6) months to a new maturity date of October 1, 2023 on the same terms and conditions as stated in the loan agreement. As of July 31, 2023, $25,000,000 of this loan was drawn and outstanding and the interest rate was 9.21%. On August 3, 2023, this loan was refinanced with a new loan in the amount of $25,500,000. (See Note 18 to FREIT’s condensed consolidated financial statements for additional details.)
Effective February 1, 2023, FREIT entered into a loan extension and modification agreement with Valley National Bank on its loan secured by the Westwood Plaza shopping center in Westwood, New Jersey with a then outstanding balance of approximately $16,864,361. Under the terms and conditions of this loan extension and modification, the maturity date of the loan was extended for a term of one (1) year from February 1, 2023 to February 1, 2024 with the option of FREIT to extend for one additional year from the extended maturity date, subject to certain provisions of the loan agreement. The loan is payable based on monthly installments of approximately $157,347 based on a fixed rate of interest of 7.5%. Additionally, FREIT funded an Escrow at closing representing the annualized principal and interest payments for one (1) year, amounting to approximately $1,888,166. This Escrow is held at Valley National Bank and in the event of a default on this loan, the bank shall be permitted to use the proceeds from the escrow account to make monthly debt service payments on the loan.
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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 had variable interest rate loans secured by its Damascus Centre and Wayne PSC properties and currently has a variable interest rate loan secured by its Regency 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 ($14,337,000 at July 31, 2023) for the Regency swap and a notional amount of approximately $12,350,000 ($11,579,000 at July 31, 2023) 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 may use 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.
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 income; 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.
FREIT has the following derivative-related risks with its interest rate swap 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, 2023, the contracts for Regency and Station Place were in FREIT’s favor. If FREIT had terminated these contracts at that date, it would have realized a gain of approximately $526,000 for the Regency swap and $715,000 for the Station Place swap all of which have been included in FREIT’s condensed consolidated balance sheet as at July 31, 2023. The change in the fair value for the contract (gain or loss) during such period has been included in comprehensive (loss) income and for the nine and three months ended July 31, 2023, FREIT recorded an unrealized loss of approximately $168,000 and unrealized gain of approximately $389,000, respectively, in the condensed consolidated statements of comprehensive (loss) income. For the nine and three months ended July 31, 2022, FREIT recorded an unrealized gain of approximately $2,408,000 and an unrealized loss of approximately $1,393,000, respectively, in the condensed consolidated statements of comprehensive income (loss).
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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, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (In Thousands, Except Per Share) | (In Thousands, Except Per Share Amounts) | |||||||||||||||
| Funds From Operations ("FFO") (a) | ||||||||||||||||
| Net (loss) income | $ | (1,086 | ) | $ | 69,966 | $ | (846 | ) | $ | 1,814 | ||||||
| Depreciation of consolidated properties | 2,198 | 3,257 | 744 | 723 | ||||||||||||
| Amortization of deferred leasing costs | 67 | 107 | 27 | 19 | ||||||||||||
| Distributions to non-controlling interests | - | (b) | (735 | )(c) | - | (b) | (210 | ) | ||||||||
| Net loss (gain) on sale of Maryland properties | 1,003 | (68,771 | ) | 557 | - | |||||||||||
| Adjustment to loss on investment in tenancy-in-common for depreciation | 1,075 | 1,062 | 359 | 355 | ||||||||||||
| Net realized gain on Wayne PSC interest rate swap contract termination | - | (1,415 | ) | - | (1,415 | ) | ||||||||||
| FFO | $ | 3,257 | $ | 3,471 | $ | 841 | $ | 1,286 | ||||||||
| Per Share - Basic and Diluted | $ | 0.44 | $ | 0.49 | $ | 0.11 | $ | 0.18 | ||||||||
| (a) As prescribed by NAREIT. | ||||||||||||||||
| (b) FFO excludes the additional distribution of proceeds to non-controlling interests in the amount of approximately $3.3 million and $1.2 million for the nine and three months ended July 31, 2023, respectively, related to the sale of the Damascus and Rotunda properties. See Note 7 to FREIT's condensed consolidated financial statements for further details. | ||||||||||||||||
| (c) FFO excludes the distribution of proceeds to non-controlling interests in the amount of approximately $19.4 million for the nine months ended July 31, 2022 related to the sale of the Damascus and Rotunda properties. See Note 7 to FREIT's condensed consolidated financial statements for further details. | ||||||||||||||||
| Adjusted Funds From Operations ("AFFO") | ||||||||||||||||
| FFO | $ | 3,257 | $ | 3,471 | $ | 841 | $ | 1,286 | ||||||||
| Deferred rents (Straight lining) | 91 | 25 | 15 | (36 | ) | |||||||||||
| Capital Improvements - Apartments | (407 | ) | (401 | ) | (117 | ) | (195 | ) | ||||||||
| AFFO | $ | 2,941 | $ | 3,095 | $ | 739 | $ | 1,055 | ||||||||
| Per Share - Basic and Diluted | $ | 0.40 | $ | 0.44 | $ | 0.10 | $ | 0.15 | ||||||||
| Weighted Average Shares Outstanding: | ||||||||||||||||
| Basic | 7,438 | 7,038 | 7,449 | 7,040 | ||||||||||||
| Diluted | 7,444 | 7,110 | 7,449 | 7,114 | ||||||||||||
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.
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 one to two-years in term, which may allow FREIT to seek increased rents as leases renew or when new tenants are obtained, subject to prevailing market conditions.
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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, 2023. 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 July 19, 2023, First Real Estate Investment Trust of New Jersey, Inc. and certain of its affiliates (collectively, “FREIT”) filed a complaint (the “Complaint”) in the Superior Court of New Jersey, Monmouth County, Chancery Division (the “Court”), against Kushner Companies LLC (“Kushner”) seeking to collect on a $3.42 million judgment entered by the Court in favor of FREIT against Sinatra Properties, LLC (“Sinatra”), a wholly owned subsidiary of defendant, Kushner. Sinatra defaulted on an agreement with FREIT (the “Purchase Agreement”) by refusing to close the purchase of certain properties at the agreed upon time and then sued FREIT for specific performance to enforce the sale. The Court rejected Sinatra’s bid for specific performance, found that Sinatra breached the Purchase Agreement and entered a judgment in favor of FREIT for $3.42 million for the recovery of attorneys’ fees and expenses (the “Judgment”). As previously reported, the Court denied FREIT’s claim for liquidated damages resulting from Sinatra’s breach in the amount of $15,000,000. Both FREIT and Sinatra appealed the Court’s rulings adverse to it.
The Complaint alleges that Kushner used Sinatra as a shell to evade its debts and obligations, and asks the Court to pierce the corporate veil and hold Kushner liable for Sinatra’s debts and obligations under the Purchase Agreement, including the attorneys’ fees awarded to FREIT, all costs incurred by FREIT to enforce the Judgment and any additional fees awarded to FREIT in connection with the pending appeal.
As previously disclosed, FREIT has incurred substantial costs in legal fees and related costs through July 31, 2023 in connection with the Sinatra litigation. FREIT expects to continue to incur additional costs until such time as (i) the appeal is resolved with respect to the Court’s decision to deny FREIT’s liquidated damages claim, and (ii) FREIT also resolves the additional claims to collect on its $3.42 million Judgment and obtain reimbursement of its ongoing legal costs and expenses. Although it is not possible to forecast the final outcome of this litigation, to date FREIT has successfully avoided Sinatra’s claim for specific performance under the Purchase Agreement and won a favorable $3.42 million Judgement to be reimbursed for certain of its legal fees and expenses.
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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, 2022, that was filed with the Securities and Exchange Commission on January 27, 2023.
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, 2023, are formatted in Inline Extensible Business Reporting Language (“iXBRL”): (i) condensed consolidated balance sheets; (ii) condensed consolidated statements of operations; (iii) condensed consolidated statements of comprehensive (loss) 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, 2023 | |
| /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) |