First Real Estate Investment Trust Of New Jersey, Inc 10-Q for FY2020 Q3
First Real Estate Investment Trust Of New Jersey, Inc. (FREVS)
About this 10-Q
First Real Estate Investment Trust Of New Jersey, Inc filed this 10-Q on September 9, 2020, covering the quarter ended July 31, 2020 (FY2020 Q3).
Headline figures
Quarter ended July 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $12.15M
- down 20.4% from $15.26M a year earlier
- Net loss
- $181K
- compared with net income of $199K a year earlier
- Diluted EPS
- -$0.02
- compared with $0.03 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Quarterly Period Ended | |
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or | |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from __________________ to ____________________ | |
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Commission File No. | |
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(Exact name of registrant as specified in its charter) | |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
(Zip Code) |
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(Registrant's telephone number, including area code) | |
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(Former name, former address and former fiscal year, if changed since last report) | |
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large Accelerated Filer ☐ |
Accelerated Filer ☐ |
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Smaller Reporting Company | |
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Emerging growth company |
Page 2
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
As of September 9, 2020, the number of shares of beneficial interest outstanding was
Page 3
FIRST REAL ESTATE
INVESTMENT TRUST OF NEW JERSEY
INDEX
Page 4
Part I: Financial Information
Item 1: Unaudited Condensed Consolidated Financial Statements
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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July 31, 2020 |
October 31, 2019 | |||||||
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(In Thousands of Dollars) | ||||||||
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ASSETS | ||||||||
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Real estate, at cost, net of accumulated depreciation |
$ |
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$ |
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Construction in progress |
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Cash and cash equivalents |
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Investment in tenancy-in-common |
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Tenants' security accounts |
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Receivables arising from straight-lining of rents |
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Accounts receivable, net of allowance for doubtful accounts of $ |
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Secured loans receivable |
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Prepaid expenses and other assets |
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Deferred charges, net |
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Total Assets |
$ |
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$ |
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LIABILITIES AND EQUITY | ||||||||
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Liabilities: | ||||||||
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Mortgages payable |
$ |
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$ |
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Less unamortized debt issuance costs |
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Mortgages payable, net |
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Due to affiliate |
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Deferred trustee compensation payable |
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Accounts payable and accrued expenses |
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Dividends payable |
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Tenants' security deposits |
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Deferred revenue |
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Interest rate cap and swap contracts |
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Total Liabilities |
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Commitments and contingencies | ||||||||
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Equity: | ||||||||
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Common equity: | ||||||||
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Shares of beneficial interest |
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Treasury stock, at cost: |
( |
) |
( |
) | ||||
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Undistributed earnings (dividends in excess of net income) |
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( |
) | |||||
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Accumulated other comprehensive loss |
( |
) |
( |
) | ||||
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Total Common Equity |
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Noncontrolling interests in subsidiaries |
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Total Equity |
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Total Liabilities and Equity |
$ |
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$ |
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See Notes to Condensed Consolidated Financial Statements.
Page 5
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED JULY 31, 2020 AND 2019
(Unaudited)
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Nine Months Ended July 31, |
Three Months Ended July 31, | |||||||||||||||
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2020 |
2019 |
2020 |
2019 | |||||||||||||
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(In Thousands of Dollars, Except Per Share Amounts) |
(In Thousands of Dollars, Except Per Share Amounts) | |||||||||||||||
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Revenue: | ||||||||||||||||
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Rental income |
$ |
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$ |
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$ |
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$ |
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Reimbursements |
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Sundry income |
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Total revenue |
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Expenses: | ||||||||||||||||
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Property operating expenses |
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Special committee advisory, legal and other expenses |
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Management fees |
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Real estate taxes |
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Depreciation |
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Total expenses |
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Operating income |
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Investment income |
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Unrealized loss on interest rate cap contract |
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( |
) |
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( |
) | ||||||||||
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Gain on sale of property |
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Gain on deconsolidation of subsidiary |
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Loss on investment in tenancy-in-common |
( |
) |
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( |
) |
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Interest expense including amortization of deferred financing costs |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
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Net income (loss) |
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( |
) |
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Net (income) loss attributable to noncontrolling interests in subsidiaries |
( |
) |
( |
) |
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( |
) | |||||||||
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Net income (loss) attributable to common equity |
$ |
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$ |
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$ |
( |
) |
$ |
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Earnings (Loss) per share: | ||||||||||||||||
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Basic |
$ |
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$ |
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$ |
( |
) |
$ |
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Diluted |
$ |
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$ |
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$ |
( |
) |
$ |
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Weighted average shares outstanding: | ||||||||||||||||
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Basic |
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Diluted |
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See Notes to Condensed Consolidated Financial Statements.
Page 6
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
NINE AND THREE MONTHS ENDED JULY 31, 2020 AND 2019
(Unaudited)
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Nine Months Ended July 31, |
Three Months Ended July 31, | |||||||||||||||
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2020 |
2019 |
2020 |
2019 | |||||||||||||
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(In Thousands of Dollars) |
(In Thousands of Dollars) | |||||||||||||||
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Net income (loss) |
$ |
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$ |
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$ |
( |
) |
$ |
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Other comprehensive income (loss): | ||||||||||||||||
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Unrealized loss on interest rate swap contracts before reclassifications |
( |
) |
( |
) |
( |
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( |
) | ||||||||
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Amount reclassified from accumulated other comprehensive loss to interest expense |
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( |
) |
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( |
) | ||||||||||
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Net unrealized loss on interest rate swap contracts |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
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Comprehensive income (loss) |
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( |
) |
( |
) |
( |
) | |||||||||
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Net (income) loss attributable to noncontrolling interests |
( |
) |
( |
) |
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( |
) | |||||||||
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Other comprehensive loss: | ||||||||||||||||
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Unrealized loss on interest rate swap contracts attributable to noncontrolling interests |
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Comprehensive loss attributable to noncontrolling interests |
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Comprehensive income (loss) attributable to common equity |
$ |
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$ |
( |
) |
$ |
( |
) |
$ |
( |
) | |||||
See Notes to Condensed Consolidated Financial Statements.
Page 7
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
NINE AND THREE MONTHS ENDED JULY 31, 2020
(Unaudited)
|
Common Equity | ||||||||||||||||||||||||||||
|
Shares of Beneficial Interest |
Treasury Shares at Cost |
Undistributed Earnings (Dividends in Excess of Net Income) |
Accumulated Other Comprehensive Income (Loss) |
Total Common Equity |
Noncontrolling Interests |
Total Equity | ||||||||||||||||||||||
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(In Thousands of Dollars, Except Share and Per Share Amounts) | ||||||||||||||||||||||||||||
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Balance at October 31, 2019 |
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
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$ |
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$ |
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Stock based compensation expense |
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Vested share units granted to Trustees and consultant |
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Vested share units issued to consultant and retired Trustee* |
( |
) |
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Distributions to noncontrolling interests |
- |
( |
) |
( |
) | |||||||||||||||||||||||
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| ||||||||||||||||||||||||||||
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Net (loss) income |
( |
) |
( |
) |
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( |
) | |||||||||||||||||||||
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| ||||||||||||||||||||||||||||
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Net unrealized loss on interest rate swaps |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||
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Balance at January 31, 2020 |
|
( |
) |
( |
) |
( |
) |
|
( |
) |
| |||||||||||||||||
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| ||||||||||||||||||||||||||||
|
Stock based compensation expense |
|
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| |||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||
|
Vested share units granted to Trustees |
|
|
| |||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Vested share units issued to retired Trustee |
( |
) |
|
|
| |||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Deconsolidation of subsidiary |
- |
|
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| ||||||||||||||||||||||||||||
|
Net income (loss) |
|
|
( |
) |
| |||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Net unrealized loss on interest rate swaps |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Balance at April 30, 2020 |
|
( |
) |
|
( |
) |
|
|
| |||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Stock based compensation expense |
|
|
| |||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||
|
Vested share units granted to Trustees |
|
|
| |||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||
|
Net loss |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Net unrealized loss on interest rate swaps |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Balance at July 31, 2020 |
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
$ |
|
$ |
|
$ |
| ||||||||||||
*
See Notes to Condensed Consolidated Financial Statements.
Page 8
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
NINE AND THREE MONTHS ENDED JULY 31, 2019
(Unaudited)
|
Common Equity | ||||||||||||||||||||||||||||
|
Shares of Beneficial Interest |
Treasury Shares at Cost |
Undistributed Earnings (Dividends in Excess of Net Income) |
Accumulated Other Comprehensive Income (Loss) |
Total Common Equity |
Noncontrolling Interests |
Total Equity | ||||||||||||||||||||||
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(In Thousands of Dollars, Except Share and Per Share Amounts) | ||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||
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Balance at October 31, 2018 |
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
$ |
|
$ |
|
$ |
| ||||||||||||
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| ||||||||||||||||||||||||||||
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Stock based compensation expense |
|
|
| |||||||||||||||||||||||||
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Vested share units granted to Trustees and consultant |
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Vested share units issued to consultant* |
( |
) |
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|
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Distributions to noncontrolling interests |
- |
( |
) |
( |
) | |||||||||||||||||||||||
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| ||||||||||||||||||||||||||||
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Net income (loss) |
|
|
( |
) |
| |||||||||||||||||||||||
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Dividends declared, including $ |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||
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| ||||||||||||||||||||||||||||
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Net unrealized loss on interest rate swaps |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
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Balance at January 31, 2019 |
|
( |
) |
( |
) |
|
|
|
| |||||||||||||||||||
|
| ||||||||||||||||||||||||||||
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Stock based compensation expense |
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Vested share units granted to Trustees and consultant |
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Vested share units issued to consultant and retired Trustees* |
( |
) |
|
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| |||||||||||||||||||||||
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| ||||||||||||||||||||||||||||
|
Distributions to noncontrolling interests |
- |
( |
) |
( |
) | |||||||||||||||||||||||
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| ||||||||||||||||||||||||||||
|
Net income |
|
|
|
| ||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||
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Dividends declared, including $ |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Net unrealized loss on interest rate swaps |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Balance at April 30, 2019 |
|
( |
) |
( |
) |
|
|
|
| |||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Stock based compensation expense |
|
|
| |||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||
|
Vested share units granted to Trustees and consultant |
|
|
| |||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Vested share units issued to consultant* |
( |
) |
|
|
| |||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Net income |
|
|
|
| ||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Dividends declared, including $ |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Net unrealized loss on interest rate swaps |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Balance at July 31, 2019 |
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
|
$ |
|
$ |
| |||||||||||
*
See Notes to Condensed Consolidated Financial Statements.
Page 9
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2020 AND 2019
(Unaudited)
|
|
|
Nine Months Ended | ||||||
|
|
|
July 31, | ||||||
|
|
|
2020 |
|
2019 | ||||
|
|
|
(In Thousands of Dollars) | ||||||
|
Operating activities: |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
|
|
Unrealized loss on interest rate cap contract |
|
|
|
|
|
|
|
|
|
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
Trustee fees, consultant fee and related interest paid in stock units |
|
|
|
|
|
|
|
|
|
Gain on sale of property |
|
|
|
|
|
|
( |
) |
|
Gain on deconsolidation of subsidiary |
|
|
( |
) |
|
|
|
|
|
Loss on investment in tenancy-in-common |
|
|
|
|
|
|
|
|
|
Deferred rents - straight line rent |
|
|
|
|
|
|
( |
) |
|
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 trustee compensation payable |
|
|
( |
) |
|
|
|
|
|
Deferred revenue |
|
|
( |
) |
|
|
( |
) |
|
Due to affiliate - accrued interest |
|
|
|
|
|
|
|
|
|
Deferred interest on mortgages |
|
|
|
|
|
|
- |
|
|
Net cash (used in) provided by operating activities |
|
|
( |
) |
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
Capital improvements - existing properties |
|
|
( |
) |
|
|
( |
) |
|
Deconsolidation of subsidiary cash and cash equivalents |
|
|
( |
) |
|
|
— |
|
|
Proceeds from sale of commercial property |
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
( |
) |
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
Repayment of mortgages |
|
|
( |
) |
|
|
( |
) |
|
Deferred financing costs |
|
|
|
|
|
|
( |
) |
|
Dividends paid |
|
|
( |
) |
|
|
( |
) |
|
Distributions to noncontrolling interests |
|
|
( |
) |
|
|
( |
) |
|
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, net of amounts capitalized |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non cash activities: |
|
|
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
Commercial tenant security deposits applied to accounts receivable |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
Accrued capital expenditures, construction costs, pre-development costs and interest |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
Dividends declared but not paid |
|
$ |
|
|
|
$ |
|
|
|
Dividends paid in share units |
|
$ |
|
|
|
$ |
|
|
|
Vested share units issued to consultant and retired trustee |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deconsolidation of subsidiary: |
|
|
|
|
|
|
|
|
|
Real estate, at cost, net of accumulated depreciation |
|
$ |
( |
) |
|
$ |
|
|
|
Accounts receivable, net of allowance for doubtful accounts |
|
|
( |
) |
|
|
|
|
|
Prepaid expenses and other assets |
|
|
( |
) |
|
|
|
|
|
Mortgage payable |
|
|
|
|
|
|
|
|
|
Unamortized debt issuance costs |
|
|
( |
) |
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
|
|
|
|
|
|
|
Tenants' security deposits |
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
|
|
|
|
|
|
|
|
Deconsolidation of subsidiary cash and cash equivalents |
|
|
( |
) |
|
|
|
|
|
Net carrying value of assets and liabilities deconsolidated |
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of retained investment in tenancy-in-common at fair value |
|
$ |
|
|
|
$ |
|
|
|
Derecognition of noncontrolling interest in subsidiary |
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the balance sheet: |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
Tenants' security accounts |
|
|
|
|
|
|
|
|
|
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 AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Basis of presentation:
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, 2020 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 the Annual Report on Form 10-K for the year ended October 31, 2019 of First Real Estate Investment Trust of New Jersey (“FREIT”, “us”, “we”, “our” or the “Company”).
Certain prior period statement of operations and cash flow line items have been reclassified to conform to the current year presentation.
Note 2 – Recently issued accounting standards:
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-02, “Leases (Topic 842)”, which supersedes the existing guidance for lease accounting, “Leases (Topic 840)”. ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged; however, certain refinements were made to conform the standard with the recently issued revenue recognition guidance in ASU 2014-09, “Revenue From Contracts With Customers”, specifically related to the allocation and recognition of contract consideration earned from lease and non-lease revenue components. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Leasing Standard was amended by ASU 2018-11, “Targeted Improvements” (the “Practical Expedient Amendment”) in July of 2018, also codified as ASC 842, which created a practical expedient that provides lessors an option not to separate lease and non-lease components when certain criteria are met and instead account for those components as a single lease component. The Company determined that its lease arrangements meet the criteria under the practical expedient to account for lease and non-lease components as a single lease component, which alleviates the requirement upon adoption of ASC 842 that we reallocate or separately present consideration from lease and non-lease components. As such, the Company elected the practical expedient as allowed by the Practical Expedient Amendment and adopted ASU 2016-02 in the first quarter of Fiscal 2020.
Substantially all of FREIT’s revenues are within the scope of ASC 842. FREIT will continue to account for its leases as operating leases. Leases for FREIT’s apartment buildings and complexes are generally short-term in nature (one to two-years in duration), based on fixed payments and contain separate lease components within the contract for each revenue stream (i.e. base rent, garage rent, etc.). Given the nature of these leases, the adoption of ASU No. 2016-02 had no impact on the accounting for the Company’s leases within the residential segment.
With respect to most of FREIT’s commercial properties, lease terms range from five years to twenty-five years with options, which if exercised would extend the terms of such leases. These lease agreements generally provide for reimbursement of real estate taxes, maintenance, insurance and certain other operating expenses of the properties (known as common area maintenance costs (“CAM”)). Some of FREIT’s leases in its commercial segment may contain lease and nonlease components. Generally, the primary lease component in most of FREIT’s commercial leases is base rent charged for the rental of space in an office complex/shopping center. Depending on the lease, the following nonlease components could be present: 1) fixed (or in substance fixed) payments related to real estate taxes and insurance; 2) variable payments that depend on an index or rate initially measured using the index or rate at the commencement date; and 3) fixed CAM reimbursements or CAM expense reimbursements based on the tenant’s proportionate share of the allocable operating expenses and CAM capital expenditures for the property.
FREIT accrues fixed lease income on a straight-line basis over the terms of the leases. FREIT accrues reimbursements from tenants for recoverable portions of real estate taxes, insurance, and CAM as variable lease consideration in the period the applicable expenditures are incurred recognizing differences between estimated recoveries and the final billed amounts in the subsequent year. Some of FREIT’s retail tenants are also required to pay overage rents based on sales over a stated base amount during the lease year. FREIT recognizes this variable lease consideration only when each tenant’s sales exceed the applicable sales threshold. Given that this standard has minimal impact on real estate operating lessors, the adoption of this new accounting guidance did not have a significant impact on FREIT’s consolidated financial statements and footnote disclosures. As a result, there was no cumulative effect adjustment to opening equity. Additionally, based on this new accounting guidance, the Company will no longer be able to capitalize certain leasing costs, such as legal expenses, as it relates to activities before a lease is entered into. (See Note 15 to FREIT’s condensed consolidated financial statements for further details).
In June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments – Credit Losses (Topic 326)", which amends the current approach to estimate credit losses on certain financial assets, including trade and other receivables, available-for-sale securities, and other financial instruments. Generally, this amendment requires entities to establish a valuation allowance for the expected lifetime losses of these certain financial assets. Subsequent changes in the valuation allowance are recorded in current earnings and reversal of previous losses are permitted. Currently, U.S. GAAP requires entities to write down credit losses only when losses are probable and loss reversals are not permitted. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. In November 2018, the FASB issued ASU 2018-19 “Codification Improvements to Topic 326, Financial Instruments—Credit Losses”, which clarifies that operating lease receivables are outside the scope of the new standard. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, “Leases (Topic 842)”. FREIT does not expect the adoption of this new accounting guidance to have a significant impact on its consolidated financial statements and footnote disclosures.
Page 11
In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities to ASC Topic 815, Derivatives and Hedging ("ASC 815")” which amends the hedge accounting recognition and presentation requirements in ASC 815. The update is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting and increase transparency as to the scope and results of hedge programs. ASU 2017-12 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018. FREIT adopted ASU 2017-12 in the first quarter of Fiscal 2020. This guidance requires that for cash flow and net investment hedges, all changes in the fair value of the hedging instrument (i.e. both the effective and ineffective portions) will be deferred in other comprehensive income and recognized in earnings at the same time that the hedged item affects earnings. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this update. The amended presentation and disclosure guidance is required only prospectively.
The adoption of ASU 2017-12 had no impact on the accounting for FREIT’s interest rate swap contracts, which were previously deemed effective cash flow hedges, on the following entities: Damascus Centre, LLC (“Damascus Centre”), Wayne PSC, LLC (“Wayne PSC”), FREIT Regency, LLC (“Regency”) and Station Place on Monmouth, LLC (“Station Place”). Accordingly, these interest rate swap contracts will continue to be accounted for by marking these contracts to market, taking into account present interest rates compared to the contracted fixed rate over the life of the contract and recording the unrealized gain or loss on the swaps in comprehensive income. The adoption of this accounting guidance has an impact on the accounting for Grande Rotunda, LLC’s (“Grande Rotunda”) interest rate cap, which was previously deemed an ineffective cash flow hedge and for which previous to the adoption of this guidance, the change in the fair value was reported in the statements of operations. Based on this new guidance, FREIT will record the change in the fair value of Grande Rotunda’s interest rate cap in other comprehensive income on a prospective basis. FREIT did not record an adjustment in Fiscal 2020 to the opening balance of retained earnings as the value of Grande Rotunda’s interest rate cap was $
In October 2018, the FASB issued ASU 2018-16 “Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes to ASC Topic 815, Derivatives and Hedging”. ASU 2018-16 expands the list of U.S benchmark interest rates permitted in the application of hedge accounting by adding the OIS rate based on SOFR as an eligible benchmark interest rate. ASU 2018-16 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018. FREIT adopted this update in the first quarter of Fiscal 2020 which did not have an impact on the condensed consolidated financial statements or footnote disclosures.
In April 2020, the FASB staff issued a question and answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 global pandemic. Under existing GAAP, the Company would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated within the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification Q&A allows the Company, if certain criteria have been met, to bypass the lease by lease analysis, and instead elect to either apply the lease modification accounting framework or not, with such election applied consistently to leases with similar characteristics and similar circumstances. This election is only available when total cash flows resulting from the modified lease are substantially similar to or less than the cash flows in the original lease. FREIT has made this election and accounts for rent deferrals by increasing its rent receivables as receivables accrue and continuing to recognize income during the deferral period. Lease concessions or amendments other than rent deferrals are evaluated to determine if a substantive change to the consideration in the original lease contract has occurred and should be accounted for as a lease modification. The adoption of this guidance did not have a significant impact on the condensed consolidated financial statements or footnote disclosures.
Note 3 – Earnings (Loss) per share:
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 to FREIT’s condensed consolidated financial statements) outstanding during each period (denominator). The calculation of diluted earnings per share is similar to that of basic earnings per share, except that the denominator is increased to include the number of additional shares that would have been outstanding if all potentially dilutive shares, such as those issuable upon the exercise of stock options, were issued during the period using the Treasury Stock method. Under the Treasury Stock method, the assumption is that the proceeds received upon exercise of the options, including the unrecognized stock option compensation expense attributable to future services, are used to repurchase FREIT’s stock at the average market price during the period, thereby reducing the number of shares to be added in computing diluted earnings per share. For the nine months ended July 31, 2020, the outstanding stock options increased the average dilutive shares outstanding by
Page 12
Note 4 – Interest rate cap and swap contracts:
On February 7, 2018, Grande Rotunda, a consolidated subsidiary, refinanced its $
On December 7, 2017, Station Place (owned 100% by FREIT) closed on a $
On September 29, 2016, Wayne PSC, a consolidated subsidiary, refinanced its $
On December 26, 2012, Damascus Centre refinanced its construction loan with long-term financing provided by People’s United Bank and the first tranche of the new loan was taken down in the amount of $
On December 29, 2014, Regency closed on a $
In accordance with ASU 2017-12, which was adopted by FREIT in the first quarter of Fiscal 2020, FREIT is accounting for the Damascus Centre, Regency, Wayne PSC and Station Place interest rate swaps and the 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 in comprehensive income. For the nine and three months ended July 31, 2020, FREIT recorded an unrealized loss of approximately $3,644,000 and $272,000, respectively, in the condensed consolidated statements of comprehensive income (loss) representing the change in the fair value of these cash flow hedges during such period. As of July 31, 2020, there was a liability of approximately $
In Fiscal 2019, FREIT was accounting for its interest rate swaps and cap contract in accordance with ASC 815. For the nine and three months ended July 31, 2019, FREIT recorded an unrealized loss of approximately $5,210,000 and $2,025,000, respectively, in the condensed consolidated statements of comprehensive income (loss) representing the change in the fair value of these cash flow hedges during such period. For the nine and three months ended July 31, 2019, FREIT recorded an unrealized loss in the condensed consolidated statements of operations of approximately $
The fair values are based on observable inputs (level 2 in the fair value hierarchy as provided by authoritative guidance).
Page 13
Note 5 – Property disposition:
On February 8, 2019, FREIT sold a commercial building, formerly occupied as a Pathmark supermarket in Patchogue, New York for a sales price of $
As the disposal of this property did not represent a strategic shift that would have a major impact on FREIT’s operations or financial results, the property’s operations were not reflected as discontinued operations in the accompanying condensed consolidated financial statements.
Note 6 – Termination of Purchase and Sale Agreement:
On January 14, 2020, FREIT and certain of its affiliates (collectively, the “Sellers”), entered into a Purchase and Sale Agreement (as subsequently amended, the “Purchase and Sale Agreement”) with Sinatra Properties LLC (the “Purchaser”), which as subsequently amended, provided for the sale by the Sellers to the Purchaser of
Upon the execution of the Purchase and Sale Agreement, the Purchaser delivered into escrow a deposit in the amount of $
On May 6, 2020, the Purchaser filed a complaint (the “Complaint”) against the Sellers in the Superior Court of New Jersey, in which, among other things, the Purchaser alleges breach of contract and breach of the covenant of good faith and fair dealing against the Sellers in connection with the Sellers’ termination of the Purchase and Sale Agreement. The Purchaser seeks (a) a judgment of specific performance compelling the Sellers to convey the properties under the Purchase and Sale Agreement to the Purchaser; (b) declaratory judgment from the court that (i) the Purchase and Sale Agreement is not terminated, (ii) the Purchaser is not in default under the Purchase and Sale Agreement, and (iii) the Sellers are in default under the Purchase and Sale Agreement, subject to a right to cure; (c) an order for injunctive relief compelling the Sellers to perform the Purchase and Sale Agreement; (d) in the event that the court does not order specific performance, a judgment directing that the Purchaser’s $15 million deposit under the Purchase and Sale Agreement be returned to the Purchaser, and compensatory, consequential and incidental damages in an amount to be determined at trial; and (e) attorneys’ fees and costs.
The Purchaser has filed lis pendens with respect to each of the six properties that were subject to the Purchase and Sale Agreement. The lis pendens provides notice to the public of the Complaint. The filing of the lis pendens will adversely affect the future sale or financing of those properties.
Page 14
On June 17, 2020, the Sellers filed their answer, separate defenses, and counterclaims (the “Answer”) in response to the Complaint, in which, among other things, the Sellers (a) deny the Purchaser’s claim that the Sellers’ termination of the Purchase and Sale Agreement was wrongful, and assert that there was no contractual basis in the Purchase and Sale Agreement to relieve the Purchaser from its obligation to perform thereunder, or to defer or postpone the Purchaser’s obligation to perform, (b) assert certain defenses to the allegations set forth in the Complaint without admitting any liability, and (c) request relief from the Court in the form of (i) judgment in the Sellers’ favor dismissing all of the Purchaser’s claims against them with prejudice and denying all of the Purchaser’s requests for relief, (ii) reasonable attorneys’ fees and costs, and (iii) such other and further relief as the Court deems just.
In addition, the Answer asserts counterclaims by the Sellers against the Purchaser for breach of contract due to the Purchaser’s failure to close the Purchase and Sale Agreement in accordance with its terms, and the Sellers seek a declaratory judgment from the Court that the Sellers properly terminated the Purchase and Sale Agreement in accordance with its terms due to the Purchaser’s default and an order from the Court that the Purchaser authorize the escrow agent to release the $15 million deposit under the Purchase and Sale Agreement to the Sellers.
In connection with these counterclaims, the Answer seeks the following relief from the Court: (a) liquidated damages in the amount of $15 million, as provided in the Purchase and Sale Agreement; (b) in the alternative to the liquidated damages provided for in the Purchase and Sale Agreement, money damages in an amount to be determined at trial; (c) interest, attorneys’ fees and costs associated with the defense of the Purchaser’s claims and the prosecution of the Sellers’ counterclaims against the Purchaser, as provided for in the Purchase and Sale Agreement; (d) judgment declaring that the Sellers properly terminated the Purchase and Sale Agreement due to the Purchaser’s default thereunder; (e) judgment declaring that the Purchaser must authorize the escrow agent to release the $15 million deposit to the Sellers; and (f) such other relief as the Court deems just and equitable.
The Sellers believe that the allegations set forth in the Complaint are without merit and intend to vigorously defend the action and enforce the Sellers’ rights and remedies under the Purchase and Sale Agreement in connection with the “Purchaser Default” thereunder, including the Purchaser’s forfeiture of its $15 million deposit to the Sellers as liquidated damages as provided in the Purchase and Sale Agreement. As of the quarter ended July 31, 2020, the $
During the nine months ended July 31, 2020 and 2019, the Special Committee of the Board incurred on behalf of the Company approximately $
Note 7 – Termination of Plan of Liquidation:
On January 14, 2020, the Trust’s Board of Trustees adopted a Plan of Voluntary Liquidation with respect to the Trust (the “Plan of Liquidation”), which provided for the voluntary dissolution, termination and liquidation of the Trust by the sale, conveyance, transfer or delivery of all of the Trust’s remaining assets in accordance with the terms and conditions of the Plan of Liquidation and the Internal Revenue Code of 1986, as amended, and the Treasury regulations thereunder. The Plan of Liquidation provided that it would become effective upon (i) approval by a majority of the votes cast by Trust’s shareholders present in person or represented by proxy at a duly called meeting of the Trust’s shareholders at which a quorum is present and (ii) the consummation of the transactions contemplated by the Purchase and Sale Agreement.
While the Plan of Liquidation received shareholder approval, as the Sellers terminated the Purchase and Sale Agreement by written notice delivered to the Purchaser on April 30, 2020, and the transactions contemplated thereby will not be consummated, the Plan of Liquidation will not become effective, and the Trust will not proceed with the sale, conveyance, transfer or delivery of all of the Trust’s remaining assets as contemplated by the Plan of Liquidation that was adopted by the Board on January 14, 2020.
Note 8 – Management agreement, fees and transactions with related party:
Hekemian & Co., Inc. (“Hekemian”) currently manages all the properties owned by FREIT and its affiliates, except for the office building at The Rotunda located in Baltimore, Maryland, which is managed by an independent third party management company. The management agreement between FREIT and Hekemian dated as of November 1, 2001 (“Management Agreement”) expires on October 31, 2021, and is automatically renewed for successive periods of two years unless either party gives not less than six (6) months prior notice of non-renewal.
On January 14, 2020, in connection with entering into the Purchase and Sale Agreement, FREIT and Hekemian entered into a First Amendment to Management Agreement (the “First Amendment”), which amends the Management Agreement. The First Amendment would become effective if, and only if, the Plan of Liquidation became effective. Since the Plan of Liquidation will not become effective due to the termination of the Purchase and Sale Agreement, the First Amendment will not become effective. (See Notes 6 and 7 to FREIT’s condensed consolidated financial statements for further details)
Page 15
The Management Agreement requires the payment of management fees equal to
From time to time, FREIT engages Hekemian to provide additional services, such as consulting services related to development, property sales and financing activities of FREIT. Separate fee arrangements may be negotiated between Hekemian and FREIT with respect to such additional services. There were
Robert S. Hekemian, Jr., Chief Executive Officer, President and a Trustee of the Trust, is the President and Chief Operating Officer of Hekemian. David B. Hekemian, a Trustee of the Trust, is the Principal/Broker – Salesperson and Director of Commercial Brokerage of Hekemian. Robert S. Hekemian, the former Chairman and Chief Executive Officer of the Trust, served as a consultant to the Trust and Chairman of the Board and Chief Executive Officer of Hekemian prior to his death in December 2019. Allan Tubin, Chief Financial Officer and Treasurer of the Trust, is the Chief Financial Officer of Hekemian.
Trustee fee expense (including interest) incurred by FREIT for the nine months ended July 31, 2020 and 2019 was approximately $
Effective upon the late Robert S. Hekemian’s retirement as Chairman, Chief Executive Officer and as a Trustee on April 5, 2018, FREIT entered into a Consulting Agreement with Mr. Hekemian, pursuant to which Mr. Hekemian provided consulting services to the Trust through December 2019. The Consulting Agreement obliged Mr. Hekemian to provide advice and consultation with respect to matters pertaining to the Trust and its subsidiaries, affiliates, assets and business, for no fewer than 30 hours per month during the term of the agreement. FREIT paid Mr. Hekemian a consulting fee of $
The equity owners of Rotunda 100, LLC, which owns a 40% minority equity interest in Grande Rotunda, LLC, are principally employees of Hekemian. To incentivize the employees of Hekemian, FREIT advanced, only to employees of Hekemian, up to 50% of the amount of the equity contributions that the Hekemian employees were required to invest in Rotunda 100, LLC. These advances were in the form of secured loans that bear interest at rates that float at 225 basis points over the ninety (90) day LIBOR, as adjusted each November 1, February 1, May 1 and August 1. These loans are secured by the Hekemian employees’ interests in Rotunda 100 and are full recourse loans. The notes originally had maturity dates at the earlier of (a) ten (10) years after issue (Grande Rotunda, LLC – 6/19/2015), or, (b) at the election of FREIT, ninety (90) days after the borrower terminates employment with Hekemian, at which time all outstanding unpaid principal and interest is due. On June 4, 2015, the Board approved an extension of the maturity date of the secured loans to occur the earlier of (a) June 19, 2018 or (b) five days after the closing of a permanent mortgage loan secured by the Rotunda property. On December 7, 2017, the Board approved a further extension of the maturity dates of these loans to the date or dates upon which distributions of cash are made by Grande Rotunda, LLC to its members as a result of a refinancing or sale of Grande Rotunda, LLC or the Rotunda property.
The aggregate outstanding principal balance of the Rotunda 100 notes was $
In Fiscal 2017, Grande Rotunda, LLC incurred substantial expenditures at the Rotunda property related to retail tenant improvements, leasing costs and operating expenditures which, in the aggregate, exceeded revenues as the property was still in the rent up phase and the construction loan held with Wells Fargo at that time was at its maximum level, with no additional funding available to draw. Accordingly, during Fiscal 2017 the equity owners in Grande Rotunda, LLC (FREIT with a
Note 9 – Mortgage financings and line of credit:
The loan on the Westwood Hills property located in Westwood, New Jersey in the amount of approximately $
On August 26, 2019, Berdan Court, LLC (“Berdan Court”), (owned
Page 16
On April 3, 2019, WestFREIT, Corp. (owned
On February 7, 2018, Grande Rotunda, LLC refinanced its $
On October 27, 2017, FREIT’s revolving line of credit provided by the Provident Bank was renewed for a term ending on October 27, 2020 at which point no further advances shall be permitted and provided the line of credit is not renewed by the lender, the outstanding principal balance of the line of credit shall convert to a commercial term loan maturing on
The lis pendens filed in connection with the legal proceeding between FREIT and certain of its affiliates and Sinatra Properties, LLC may adversely affect FREIT’s ability to refinance certain of its residential properties.
As a result of the negative impact of the COVID-19 pandemic at our commercial properties, we were granted debt payment relief from certain of our lenders on the retail properties in the form of deferral of principal and/or interest payments for a three-month period which ended June 30, 2020, resulting in total deferred payments of approximately $
Note 10 – Fair value of long-term debt:
The following table shows the estimated fair value and net carrying value of FREIT’s long-term debt at July 31, 2020 and October 31, 2019:
|
($ in Millions) |
July 31, 2020 |
October 31, 2019 | ||
|
| ||||
|
Fair Value |
$ |
$ | ||
|
| ||||
|
Carrying Value, Net |
$300.7 |
$349.9 |
Fair values are estimated based on market interest rates at July 31, 2020 and October 31, 2019 and on a discounted cash flow analysis. Changes in assumptions or estimation methods may significantly affect these fair value estimates. The fair value is based on observable inputs (level 2 in the fair value hierarchy as provided by authoritative guidance).
Note 11 – Segment information:
FREIT has determined that it has
Page 17
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, 2019. The chief operating and decision-making group of FREIT's commercial segment, residential segment and corporate/other is comprised of FREIT’s Board of Trustees.
FREIT assesses and measures segment operating results based on net operating income ("NOI"). NOI, a standard used by real estate professionals, is based on operating revenue and expenses directly associated with the operations of the real estate properties, but excludes: deferred rents (straight lining), depreciation, financing costs and other items. NOI is not a measure of operating results or cash flows from operating activities as measured by 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 month periods ended July 31, 2020 and 2019. 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, | |||||||||||||||
|
2020 |
2019 |
2020 |
2019 | |||||||||||||
|
(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 |
|
|
|
| ||||||||||||
|
Unrealized loss on interest rate cap contract |
|
( |
) |
|
( |
) | ||||||||||
|
General and administrative expenses |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
|
Special committee advisory, legal and other expenses |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
|
Gain on sale of property |
|
|
|
| ||||||||||||
|
Gain on deconsolidation of subsidiary |
|
|
|
| ||||||||||||
|
Loss on investment in tenancy-in-common |
( |
) |
|
( |
) |
| ||||||||||
|
Depreciation |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
|
Financing costs |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
|
Net income (loss) |
|
|
( |
) |
| |||||||||||
|
Net (income) loss 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
FREIT distributed 100% of its ordinary taxable income and
As of July 31, 2020, FREIT had no material uncertain income tax positions. The tax years subsequent to and including the fiscal year ended October 31, 2018 remain open to examination by the major taxing jurisdictions.
Page 18
Note 13 – Equity incentive plan:
On September 4, 2014, the Board approved the grant of an aggregate of
On November 10, 2016, the Board approved the grant of an aggregate of
On May 3, 2018, the Board approved the grant of an aggregate of
On March 4, 2019, the Board approved the grant of an aggregate of
As of July 31, 2020,
The following table summarizes stock option activity for the nine-month period ended July 31, 2020:
|
|
|
No. of Options |
|
Weighted Average |
| |||
|
|
|
Outstanding |
|
Exercise Price |
| |||
|
Options outstanding beginning of period |
|
|
|
|
|
$ |
|
|
|
Options granted during period |
|
|
|
|
|
|
|
|
|
Options forfeited/cancelled during period |
|
|
|
|
|
|
|
|
|
Options outstanding end of period |
|
|
|
|
|
$ |
|
|
|
Options vested and expected to vest |
|
|
|
|
|
|
|
|
|
Options exercisable at end of period |
|
|
|
|
|
|
|
|
For the nine-month periods ended July 31, 2020 and 2019, compensation expense related to stock options granted amounted to approximately $
There was no aggregate intrinsic value of options vested and expected to vest and options exercisable at July 31, 2020 as the exercise price of the options was greater than the market price.
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 Trustees, one of which provides for the issuance of share units payable in FREIT shares in respect of (i) deferred amounts of all Trustee fees on a prospective basis; (ii) interest on Trustee fees deferred prior to November 1, 2014 (payable at a floating rate, adjusted quarterly, based on the average
All fees payable to Trustees for the nine and three-month periods ended July 31, 2020 and 2019 were deferred under the Deferred Fee Plan except for fees payable to one Trustee, who elected to receive such fees in cash. As a result of the amendment to the Deferred Fee Plan described above, for the nine-month periods ended July 31, 2020 and 2019, the aggregate amounts of deferred Trustee fees together with related interest and dividends were approximately $
Page 19
For the nine-month periods ended July 31, 2020 and 2019, FREIT has charged as expense approximately $
The Deferred Fee Plan, as amended, provides that cumulative fees together with accrued interest deferred as of November 1, 2014 will be paid in a lump sum or in annual installments over a period not to exceed 10 years, at the election of the Participant. In connection with the termination of Robert S. Hekemian’s service to the Trust under the Consulting Agreement between Mr. Hekemian and the Trust in December 2019, Mr. Hekemian’s accrued plan benefits under the Deferred Fee Plan became payable to him and were paid in a single lump sum in the amount of approximately $
Note 15 – Rental Income:
Commercial tenants:
As discussed in Note 2, fixed lease income under our operating leases generally includes fixed minimum lease consideration and fixed CAM reimbursements which are 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.
Minimum fixed lease consideration (in thousands of dollars) under non-cancelable tenant operating leases for each of the next five years and thereafter, excluding variable lease consideration, for the years ending October 31, as of July 31, 2020, is as follows:
|
Year Ending October 31, |
Amount | |||
|
2020* |
$ |
| ||
|
2021 |
| |||
|
2022 |
| |||
|
2023 |
| |||
|
2024 |
| |||
|
Thereafter |
| |||
|
Total |
$ |
| ||
|
* | ||||
The above amounts assume that all leases which expire are not renewed and, accordingly, neither minimal rentals nor rentals from replacement tenants are included.
Minimum future rentals do not include contingent rentals, which may be received under certain leases on the basis of percentage of reported tenants' sales volume. Rental income that is contingent on future events is not included in income until the contingency is resolved. Contingent rentals included in income for the nine and three-month periods ended July 31, 2020 and 2019 were not material.
Residential tenants:
Lease terms for residential tenants are usually to years.
Page 20
Note 16 – 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
Pursuant to the TIC agreement, FREIT ultimately acquired a
As of July 31, 2020, FREIT’s investment in TIC was approximately $20.7 million with a loss on investment of approximately $96,000 and $78,000, respectively, recognized in the accompanying condensed consolidated statements of operations for the nine and three months ended July 31, 2020.
Hekemian currently manages the Pierre Towers property based on a management agreement between the owners of the TIC and Hekemian dated as of February 28, 2020, which expires on February 28, 2021, and is automatically renewed for successive periods of one year unless either party gives not less than sixty (60) days prior notice of non-renewal. The management agreement requires the payment of management fees equal to
The following table summarizes the balance sheet of the Pierre Towers property as of July 31, 2020 accounted for by the equity method:
|
July 31, | ||||
|
2020 | ||||
|
(In Thousands of Dollars) | ||||
|
| ||||
|
Real estate, net |
$ |
| ||
|
Cash and cash equivalents |
| |||
|
Tenants' security accounts |
| |||
|
Receivables and other assets |
| |||
|
Total assets |
$ |
| ||
|
| ||||
|
Mortgages payable, net of unamortized debt issuance costs |
$ |
| ||
|
Accounts payable and accrued expenses |
| |||
|
Tenants' security deposits |
| |||
|
Deferred revenue |
| |||
|
Equity |
| |||
|
Total liabilities & equity |
$ |
| ||
|
| ||||
|
FREIT's investment in TIC (65% interest) |
$ |
|
The following table summarizes the statements of operations of the Pierre Towers property for the period from February 28, 2020 through July 31, 2020 and for the three months ended July 31, 2020, accounted for by the equity method:
|
For the period from | ||||||||
|
February 28, 2020 |
Three months ended | |||||||
|
through July 31, 2020 |
July 31, 2020 | |||||||
|
(In Thousands of Dollars) |
(In Thousands of Dollars) | |||||||
|
| ||||||||
|
Revenues |
$ |
|
$ |
| ||||
|
Operating expenses |
|
| ||||||
|
Net operating income |
|
| ||||||
|
| ||||||||
|
Depreciation |
|
| ||||||
|
Interest expense including amortization of deferred financing costs |
|
| ||||||
|
Net loss |
$ |
( |
) |
$ |
( |
) | ||
|
| ||||||||
|
FREIT's loss on investment in TIC (65% interest) |
$ |
( |
) |
$ |
( |
) | ||
Page 21
Note 17 – COVID-19 Pandemic:
The international spread of COVID-19 was declared a global pandemic by the World Health Organization on March 11, 2020. The extent to which this pandemic could continue to affect our financial condition, liquidity, and results of operations is difficult to predict and depends on evolving factors, including: duration, scope, government actions, and other social responses. Many states in the U.S., including New Jersey, New York and Maryland, where our properties are located, implemented stay-at-home orders for all "non-essential" business and activity in an aggressive effort to mitigate the spread of COVID-19. While some of these orders have been fully or partially lifted, many of our commercial tenants have not been able to open or resume operations at full capacity due to continued restrictions imposed upon them. As the impact of the pandemic has been evolving, it continues to cause uncertainty and volatility in the financial markets. The COVID-19 pandemic and the actions taken by individuals, businesses and government authorities to reduce its spread have caused substantial lost business revenue, changes in consumer behavior and large reductions in liquidity and fair value of many assets. These and other adverse conditions that may unfold in the future are expected to continue until such time as shutdown orders are fully lifted, and all business operations and commercial activity can fully resume. The lifting of shutdown orders cannot be predicted with any certainty. Further, even after such orders are fully lifted, the resumption of business operations and commercial activity will depend on several factors, including prevailing sentiments among workers and consumers regarding the safety of resuming public activity, and cannot be predicted with any certainty.
Despite the COVID-19 pandemic and preventive measures taken to mitigate the spread, our residential properties continue to generate cash flow. At our commercial properties, with the exception of grocery stores and other "essential" businesses, many of our retail tenants have been and continue to be adversely affected by the mandated shutdowns or imposed restrictions. The overall average cash realization for the commercial properties, based on monthly billings as compared to monthly cash collections from April through July 2020, was approximately
As a result of the negative impact of the COVID-19 pandemic at our commercial properties, we were granted debt payment relief from certain of our lenders on the retail properties in the form of deferral of principal and/or interest payments for a three-month period which ended June 30, 2020, resulting in total deferred payments of approximately $
Through the end of the fiscal quarter ended July 31, 2020, we have experienced a positive cash flow from operations, excluding corporate expenses such as Special Committee advisory, legal and other expenses paid of approximately $
The extent of the effects of COVID-19 on our business, results of operations, cash flows, value of our real estate assets and growth prospects is highly uncertain and will ultimately depend on future developments, none of which can be predicted with any certainty.
Page 22
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’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, 2019, and other risks described in our subsequent filings with the SEC, may cause our actual results to differ materially from those projected. Such factors include, but are not limited to, the following: general economic and business conditions, including the purchase of retail products over the Internet, which will, among other things, affect demand for rental space, the availability of prospective tenants, lease rents, the financial condition of tenants and the default rate on leases, operating and administrative expenses and the availability of financing; adverse changes in FREIT’s real estate markets, including, among other things, competition with other real estate owners, competition confronted by tenants at FREIT’s commercial properties; governmental actions and initiatives; environmental/safety requirements; risks of real estate development and acquisitions; and on-going negative effects of the COVID-19 pandemic on our properties and tenants, and generally on real estate assets and the real estate markets in which we operate, and the global, U.S. and local economies (see Special Note below). 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. |
|
|
|
Special Note Regarding the COVID-19 Pandemic: |
|
|
|
On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus, known as COVID-19 (“COVID-19”), a pandemic. The full extent of the effects of the COVID-19 pandemic, including the full extent of its effects on the global, U.S., and local economies, and on FREIT and our business, operating results, financial condition, properties, and tenants, cannot yet be known. Any future developments in this regard will be highly uncertain and cannot be predicted with any certainty, including the scope and duration of the pandemic, actions taken by governmental authorities and other third parties in response to the pandemic and the effects thereof, and the other factors discussed above and throughout this report. The uncertain future development of the COVID-19 pandemic could materially and adversely affect FREIT and our business, operating results, financial condition, liquidity, and our properties and tenants. |
|
|
OVERVIEW
FREIT is an equity real estate investment trust (“REIT”) that is self-administered and externally managed. FREIT owns a portfolio of residential apartment and commercial properties. FREIT’s revenues consist primarily of rental income and other related revenues from its residential and commercial properties and additional rent in the form of expense reimbursements derived from operating commercial properties. FREIT’s properties are primarily located in northern New Jersey, Maryland and New York.
COVID-19 Pandemic: The international spread of COVID-19 was declared a global pandemic by the World Health Organization on March 11, 2020. The extent to which this pandemic could continue to affect our financial condition, liquidity, and results of operations is difficult to predict and depends on evolving factors, including: duration, scope, government actions, and other social responses. Many states in the U.S., including New Jersey, New York and Maryland, where our properties are located, implemented stay-at-home and shutdown orders for all "non-essential" business and activity in an aggressive effort to mitigate the spread of COVID-19. While some of these orders have been fully or partially lifted, many of our commercial tenants have not been able to open or resume operations at full capacity due to continued restrictions imposed upon them. As the impact of the pandemic has been evolving, it continues to cause uncertainty and volatility in the financial markets. Many U.S. industries and businesses have been negatively affected and millions of people have filed for unemployment resulting in the U.S. unemployment rate rising to 14.7% in April 2020, which is the highest recorded rate since the Great Depression. Since April 2020, the U.S unemployment rate
Page 23
has declined to 10.2% as of July 2020, as many businesses continue to reopen and rehire employees following many of the COVID-19 mandated shutdown orders. However, the jobless rate is still more than double the rate in February 2020 of 3.5%, which was prior to the spread of the pandemic to the U.S. The COVID-19 pandemic and the actions taken by individuals, businesses and government authorities to reduce its spread have caused substantial lost business revenue, changes in consumer behavior and large reductions in liquidity and fair value of many assets. These and other adverse conditions that may unfold in the future are expected to continue until such time as government shutdown orders are fully lifted, and business operations and commercial activity can fully resume. The lifting of all government shutdown orders cannot be predicted with any certainty. Further, even after such orders are fully lifted, the resumption of business operations and commercial activity will depend on several factors, including prevailing sentiments among workers and consumers regarding the safety of resuming public activity, and cannot be predicted with any certainty.
Despite the COVID-19 pandemic and preventive measures taken to mitigate the spread, our residential properties continue to generate cash flow. With the exception of the Icon at the Rotunda property, the annual average occupancy rates were approximately 93% or higher for both the nine and three months ended July 31, 2020. The tenants at these properties, for the most part, continue to pay their rent. The occupancy rate at the Icon has declined to an average occupancy rate of 92.1% and 88.9%, respectively, for the nine and three months ended July 31, 2020 as compared to 94.8% and 94.5%, respectively, for the prior year’s comparable periods. This decline in occupancy rate is primarily attributed to tenants attending the Johns Hopkins University, which is in close proximity to the Icon and represents approximately 30% of our tenants at this property. In response to the COVID-19 pandemic, Johns Hopkins University will only be offering online classes for the fall semester which has resulted and may continue to result in a loss of these tenants at our property.
At our commercial properties, with the exception of grocery stores and other "essential" businesses, many of our retail tenants have been and continue to be adversely affected by the mandated shutdowns or imposed restrictions. The overall average cash realization for the commercial properties, based on monthly billings as compared to monthly cash collections from April through July 2020, was approximately 68%. As such, FREIT incurred an increase in expense for the reserve of uncollectible rents of approximately $0.6 million (with a consolidated impact of approximately $0.4 million) and approximately $0.1 million (with a consolidated impact of approximately $0.1 million), respectively, for the nine and three months ended July 31, 2020. Additionally, as of July 31, 2020, FREIT has applied approximately $462,000 of security deposits from its commercial tenants to outstanding receivables due. FREIT has offered some commercial tenants deferrals of rent over a specified time period as well as rent abatements for a certain period of time, both of which were immaterial to FREIT for the nine and three months ended July 31, 2020. FREIT does not expect these deferrals or rent abatements to have a material impact on future operating results. FREIT currently remains in active discussions and negotiations with these impacted retail tenants. Additionally, Cobb Theatre, an anchor tenant movie theatre at the Rotunda retail property, filed for bankruptcy and rejected its lease at the Rotunda property as of June 30, 2020. As a result of the rejection of this lease, uncollected rents in the amount of approximately $0.3 million and a straight-line rent receivable of approximately $0.4 million were reversed against revenue, and unamortized leasing commissions in the amount of approximately $0.2 million were written off and fully expensed in the third quarter of Fiscal 2020 resulting in a net impact of approximately $0.9 million (with a consolidated impact of approximately $0.5 million) to net income (loss) for the nine and three months ended July 31, 2020. The Company is currently exploring all possible options for the re-leasing of this space, which includes renting to another movie theatre.
As a result of the negative impact of the COVID-19 pandemic at our commercial properties, we were granted debt payment relief from certain of our lenders on the retail properties in the form of deferral of principal and/or interest payments for a three-month period which ended June 30, 2020, resulting in total deferred payments of approximately $722,000 being due at maturity of the loans.
Through the end of the fiscal quarter ended July 31, 2020, we have experienced a positive cash flow from operations, after excluding certain corporate expenses such as Special Committee advisory, legal and other expenses paid of approximately $5.1 million and deferred compensation in the amount of $5 million paid to two retired trustees. However, this could change based on the duration of the pandemic, which is uncertain. We believe that our cash balance as of July 31, 2020 of approximately $31 million coupled with a $13 million available line of credit (available through October 27, 2020, see Note 9) will provide us with sufficient liquidity for at least the next twelve months from the filing of this Form 10-Q. Additionally, in an effort to further preserve cash flow, effective May 1, 2020, our Board of Trustees reduced all fees, salaries and retainers payable to our executive officers and members of the Board of Trustees by up to 30% through the end of Fiscal 2020.
The extent of the effects of COVID-19 on our business, results of operations, cash flows, value of our real estate assets and growth prospects is highly uncertain and will ultimately depend on future developments, none of which can be predicted with any certainty. See “Item 1A. Risk Factors”. However, we believe the actions we are taking will help minimize interruptions to our operations and will put us in the best position to participate in the economic recovery as the recovery occurs. FREIT will continue to actively monitor the effects of the pandemic, including governmental directives in the jurisdictions in which we operate and the recommendations of public health authorities, and will, as needed, take further measures to adapt our business in the best interests of our shareholders and personnel.
Residential Properties: While our residential properties continue to generate positive cash flow, the impact COVID-19 may have on these properties over the next year is uncertain and will depend on the duration of the pandemic and the reopening of the economy.
Page 24
Commercial Properties: There continues to be uncertainty in the retail environment that could have an adverse impact on FREIT’s retail tenants, which could have an adverse impact on FREIT. As restrictions continue to be fully or partially lifted, the impact COVID-19 may have on the operating and financial performance of our commercial properties over the next year is currently uncertain and will depend on certain developments, including, among others, the impact of COVID-19 on our tenants and the magnitude and duration of the pandemic, including its impact on store closing and social distancing rules which may impact a tenant’s ability to generate sales at sufficient levels to cover operating costs, including rent.
Special Committee Formation: On March 28, 2019, FREIT announced that its Board had established a Special Committee to explore strategic alternatives focusing on maximizing shareholder value. The Special Committee was comprised solely of independent Trustees and was charged with exploring potential strategic transactions involving FREIT, including, without limitation, a potential sale of FREIT, a business combination involving FREIT or other alternatives for maximizing shareholder value, and determining whether a potential strategic transaction is in the best interests of FREIT and its shareholders. The members of the Special Committee were Ronald J. Artinian, Richard J. Aslanian, David F. McBride and Justin F. Meng, who served as the Chairman of the Special Committee. The Special Committee engaged HFF Securities L.P. as the Special Committee’s financial advisor, and the law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP as legal counsel to the Special Committee. On May 7, 2020, the Board approved the elimination of the Special Committee as a committee of the Board.
Termination of Purchase and Sale Agreement: On January 14, 2020, FREIT and certain of its affiliates (collectively, the “Sellers”), entered into a Purchase and Sale Agreement (as subsequently amended, the “Purchase and Sale Agreement”) with Sinatra Properties LLC (the “Purchaser”), which as subsequently amended, provided for the sale by the Sellers to the Purchaser of 100% of the Sellers’ ownership interests in six real properties held by the Sellers in exchange for the purchase price described therein, subject to the terms and conditions of the Purchase and Sale Agreement. On April 30, 2020, the Sellers delivered written notice to the Purchaser of the Sellers’ termination of the Purchase and Sale Agreement in accordance with its terms due to the occurrence of a “Purchaser Default” thereunder, based on the Purchaser’s failure to perform its obligations under the Purchase and Sale Agreement and close the transactions contemplated therein.
Upon the execution of the Purchase and Sale Agreement, the Purchaser delivered into escrow a deposit in the amount of $15 million (the “Deposit”), in the form of an unconditional, irrevocable letter of credit in such amount (the “Letter of Credit”). The Purchase and Sale Agreement provides that the Sellers’ exclusive remedy, in the event of a “Purchaser Default” and the termination of the Purchase and Sale Agreement, is the forfeiture of the Deposit to the Sellers as liquidated damages. Accordingly, contemporaneously with the Sellers’ delivery of the termination notice to the Purchaser, the Sellers delivered written notice to the escrow agent requesting that the escrow agent release the Letter of Credit from escrow and deliver same to the Sellers.
On May 6, 2020, the Purchaser filed a complaint (the “Complaint”) against the Sellers in the Superior Court of New Jersey, in which, among other things, the Purchaser alleges breach of contract and breach of the covenant of good faith and fair dealing against the Sellers in connection with the Sellers’ termination of the Purchase and Sale Agreement. The Purchaser seeks (a) a judgment of specific performance compelling the Sellers to convey the properties under the Purchase and Sale Agreement to the Purchaser; (b) declaratory judgment from the court that (i) the Purchase and Sale Agreement is not terminated, (ii) the Purchaser is not in default under the Purchase and Sale Agreement, and (iii) the Sellers are in default under the Purchase and Sale Agreement, subject to a right to cure; (c) an order for injunctive relief compelling the Sellers to perform the Purchase and Sale Agreement; (d) in the event that the court does not order specific performance, a judgment directing that the Purchaser’s $15 million deposit under the Purchase and Sale Agreement be returned to the Purchaser, and compensatory, consequential and incidental damages in an amount to be determined at trial; and (e) attorneys’ fees and costs.
On June 17, 2020, the Sellers filed their answer, separate defenses, and counterclaims (the “Answer”) in response to the Complaint, in which, among other things, the Sellers (a) deny the Purchaser’s claim that the Sellers’ termination of the Purchase and Sale Agreement was wrongful, and assert that there was no contractual basis in the Purchase and Sale Agreement to relieve the Purchaser from its obligation to perform thereunder, or to defer or postpone the Purchaser’s obligation to perform, (b) assert certain defenses to the allegations set forth in the Complaint without admitting any liability, and (c) request relief from the Court in the form of (i) judgment in the Sellers’ favor dismissing all of the Purchaser’s claims against them with prejudice and denying all of the Purchaser’s requests for relief, (ii) reasonable attorneys’ fees and costs, and (iii) such other and further relief as the Court deems just.
In addition, the Answer asserts counterclaims by the Sellers against the Purchaser for breach of contract due to the Purchaser’s failure to close the Purchase and Sale Agreement in accordance with its terms, and the Sellers seek a declaratory judgment from the Court that the Sellers properly terminated the Purchase and Sale Agreement in accordance with its terms due to the Purchaser’s default and an order from the Court that the Purchaser authorize the escrow agent to release the $15 million deposit under the Purchase and Sale Agreement to the Sellers.
In connection with these counterclaims, the Answer seeks the following relief from the Court: (a) liquidated damages in the amount of $15 million, as provided in the Purchase and Sale Agreement; (b) in the alternative to the liquidated damages provided for in the Purchase and Sale Agreement, money damages in an amount to be determined at trial; (c) interest, attorneys’ fees and costs associated with the defense of the Purchaser’s claims and the prosecution of the Sellers’ counterclaims against the Purchaser, as provided for in the Purchase and Sale Agreement; (d) judgment declaring that the Sellers properly terminated the Purchase and
Page 25
Sale Agreement due to the Purchaser’s default thereunder; (e) judgment declaring that the Purchaser must authorize the escrow agent to release the $15 million deposit to the Sellers; and (f) such other relief as the Court deems just and equitable.
As of the quarter ended July 31, 2020, the $15 million deposit has not been included in income in the accompanying condensed consolidated statement of operations. (See Note 6 to FREIT’s condensed consolidated financial statements for further details.)
Termination of Plan of Liquidation:
On January 14, 2020, the Trust’s Board of Trustees adopted a Plan of Voluntary Liquidation with respect to the Trust (the “Plan of Liquidation”), which provided for the voluntary dissolution, termination and liquidation of the Trust by the sale, conveyance, transfer or delivery of all of the Trust’s remaining assets in accordance with the terms and conditions of the Plan of Liquidation and the Internal Revenue Code of 1986, as amended, and the Treasury regulations thereunder. The Plan of Liquidation provided that it would become effective upon (i) approval by a majority of the votes cast by Trust’s shareholders present in person or represented by proxy at a duly called meeting of the Trust’s shareholders at which a quorum is present and (ii) the consummation of the transactions contemplated by the Purchase and Sale Agreement.
While the Plan of Liquidation received shareholder approval, as the Trust terminated the Purchase and Sale Agreement by written notice delivered to the Purchaser on April 30, 2020, and the transactions contemplated thereby will not be consummated, the Plan of Liquidation will not become effective, and the Trust will not proceed with the sale, conveyance, transfer or delivery of all of the Trust’s remaining assets as contemplated by the Plan of Liquidation that was adopted by the Board on January 14, 2020. The Board will nonetheless continue to evaluate ways in which to maximize shareholder value, including through sales of Trust assets.
Amendment to Management Agreement:
On January 14, 2020, in connection with entering into the Purchase and Sale Agreement, FREIT and Hekemian entered into a First Amendment to Management Agreement (the “First Amendment”), which amends the Management Agreement dated as of November 1, 2001 between FREIT and Hekemian. The First Amendment would become effective if, and only if, the Plan of Liquidation became effective. Since the Plan of Liquidation will not become effective due to the termination of the Purchase and Sale Agreement, the First Amendment will not become effective. (See Note 8 to FREIT’s condensed consolidated financial statements for further details)
Debt Financing Availability: Financing has been available to FREIT and its affiliates. The lis pendens filed in connection with the legal proceeding between FREIT and certain of its affiliates and Sinatra Properties, LLC may adversely affect FREIT’s ability to refinance certain of its residential properties.
On February 7, 2018, Grande Rotunda, LLC refinanced its $115.3 million construction loan held by Wells Fargo with a new loan held by Aareal Capital Corporation in the amount of approximately $118.5 million with additional funding available for retail tenant improvements and leasing costs in the amount of $3,380,000. This loan is secured by the Rotunda property, bears a floating interest rate at 285 basis points over the one-month LIBOR rate and has a maturity date of February 6, 2021 with two one-year options to extend the maturity of this loan. As part of this transaction, Grande Rotunda had purchased an interest rate cap on LIBOR for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan which matured on March 5, 2020. On February 28, 2020, Grande Rotunda purchased an interest rate cap on LIBOR, with an effective date of March 5, 2020, for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for one year. As of July 31, 2020, approximately $118.5 million of this loan facility was drawn down and the interest rate was approximately 3.01%.
On August 26, 2019, Berdan Court, LLC (“Berdan Court”), (owned 100% by FREIT), refinanced its $17 million loan (which matured on September 1, 2019) with the lender in the amount of $28,815,000. This loan, secured by an apartment building located in Wayne, New Jersey, has a term of ten years and bears a fixed interest rate equal to 3.54%. Interest-only payments are required each month for the first five years of the term and thereafter, principal payments plus accrued interest will be required each month through maturity. This refinancing resulted in: (i) a reduction in the annual interest rate from a fixed rate of 6.09% to a fixed rate of 3.54% and (ii) net refinancing proceeds of approximately $11.6 million which can be used for capital expenditures and general corporate purposes.
On April 3, 2019, WestFREIT, Corp. (owned 100% by FREIT) exercised its option to extend its loan held by M&T Bank, with a then outstanding balance of approximately $22.5 million, for twelve months. Effective beginning on June 1, 2019, the extension of this loan secured by the Westridge Square Shopping Center, required monthly principal payments of $47,250 plus interest based on a floating interest rate equal to 240 basis points over the one-month LIBOR and had a maturity date of May 1, 2020. This loan was extended for another six months with a new maturity date of November 1, 2020 under the same terms and conditions of the existing agreement while the lender is in discussions with the Company regarding a further modification and extension.
On October 27, 2017, FREIT’s revolving line of credit provided by the Provident Bank was renewed for a three-year term ending on October 27, 2020 at which point no further advances shall be permitted and provided the line of credit is not renewed by the lender, the outstanding principal balance of the line of credit shall convert to a commercial term loan maturing on October 31, 2022. Draws against the credit line can be used for working capital needs and standby letters of credit. Draws against the credit line are secured by mortgages on FREIT’s Franklin Crossing Shopping Center in Franklin Lakes, New Jersey and retail space in Glen Rock, New Jersey. The total line of credit is $13 million and the interest rate on the amount outstanding will be at a floating
Page 26
rate of 275 basis points over the 30-day LIBOR with a floor of 3.75%. As of July 31, 2020 and October 31, 2019, there was no amount outstanding and $13 million was available under the line of credit.
In accordance with the loan agreement for each of the loans described above, FREIT may be required to meet or maintain certain financial covenants throughout the term of the loan.
Operating Cash Flow: FREIT expects that cash provided by operating activities and cash reserves will be adequate to cover mandatory debt service payments (including payments of interest, but excluding balloon payments), real estate taxes, recurring capital improvements at properties and other needs to maintain its status as a REIT for at least a period of one year from the date of filing of this quarterly report on Form 10-Q.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Pursuant to the SEC disclosure guidance for "Critical Accounting Policies," the SEC defines Critical Accounting Policies as those that require the application of management's most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, the preparation of which takes into account estimates based on judgments and assumptions that affect certain amounts and disclosures. Accordingly, actual results could differ from these estimates. The accounting policies and estimates used, which are outlined in Note 1 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019, have been applied consistently as of July 31, 2020, and for the nine and three months ended July 31, 2020 and 2019. We believe that the following accounting policies or estimates require the application of management's most difficult, subjective, or complex judgments:
Revenue Recognition: Base rents, additional rents based on tenants' sales volume and reimbursement of the tenants' share of certain operating expenses are generally recognized when due from tenants. The straight-line basis is used to recognize base rents under leases if they provide for varying rents over the lease terms. Straight-line rents represent unbilled rents receivable to the extent straight-line rents exceed current rents billed in accordance with lease agreements. Before FREIT can recognize revenue, it is required to assess, among other things, its collectability.
Valuation of Long-Lived Assets: 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 the condensed consolidated financial statements for recently issued accounting standards.
RESULTS OF OPERATIONS
Real estate revenue for the nine months ended July 31, 2020 (“Current Nine Months”) decreased 7.9% to $41,430,000, compared to $44,969,000 for the nine months ended July 31, 2019 (“Prior Year’s Nine Months”). For the three months ended July 31, 2020 (“Current Quarter”) real estate revenue decreased 20.4% to $12,149,000, compared to $15,255,000 for the three months ended July 31, 2019 (“Prior Year’s Quarter”). The decline in revenue for the Current Nine Months was primarily attributable to the following: (a) a deconsolidation of the operating results of the Pierre Towers property from FREIT’s operating results due to the conversion to a tenancy-in-common form of ownership (“TIC”) as of February 28, 2020 resulting in a decline in revenue of approximately $3.1 million; (b) a reduction in total revenue in the amount of approximately $0.8 million as compared to the Prior Year’s Nine Months due to the rejection of the lease for Cobb Theatre at the Rotunda retail property as of June 30, 2020 resulting from the Cobb Theatre bankruptcy filing; offset by (c) an increase in revenue of approximately $0.3 million related to the office tenants at the Rotunda property driven by an increase in base rents and the average occupancy rate from 83.8% in the prior year to 85.4% in the current year; and (d) an insurance reimbursement received in Fiscal 2020 related to Fiscal 2019 of approximately $0.2 million. The decline in revenue for the Current Quarter was primarily attributable to the following: (a) a deconsolidation of the operating results of the Pierre Towers property from FREIT’s operating results due to the conversion to a TIC as of February 28, 2020 resulting in a decline in revenue of approximately $1.9 million; (b) a reduction in total revenue in the amount of approximately $0.8 million as compared to the Prior Year’s Quarter due to the rejection of the lease for Cobb Theatre at the Rotunda retail property as of June 30, 2020 resulting from the Cobb Theatre bankruptcy filing; and (c) a decline in the amount of approximately $0.4 million driven by the decline in the average occupancy rate for the commercial properties to 79.1% from 81.6% in the prior year’s comparable period.
Page 27
Net income (loss) attributable to common equity (“net income (loss)-common equity”) for the Current Nine Months and Current Quarter was net income of $24,777,000 ($3.55 per share basic and $3.54 per share diluted) and net loss of $181,000 (($0.02) per share basic and diluted), compared to net income of $1,444,000 ($0.21 per share basic and diluted) and $199,000 ($0.03 per share basic and diluted) for the Prior Year’s comparable periods, respectively.
Adjusted net (loss) income for the Current Nine Months and Current Quarter was a net loss of $2,885,000 (($0.41) per share basic and diluted) and $320,000 (($0.05) per share basic and diluted), compared to net income of $694,000 ($0.10 per share basic and diluted) and $265,000 ($0.04 per share basic and diluted) for the Prior Year’s comparable periods, respectively. Adjusted net (loss) income is a non-GAAP measure, which management believes is a useful and meaningful gauge to investors of our operating performance, since it excludes the impact of unusual and infrequent items specifically: a gain on deconsolidation of the Pierre Towers property in Fiscal 2020; a gain related to the sale of the property in Patchogue, New York in Fiscal 2019.
The increase in adjusted net loss for the Current Nine Months was primarily driven by the following: (a) an increase in Special Committee advisory, legal and other expenses incurred of approximately $3.6 million; (b) an increase in General & Administrative (“G&A”) expenses of approximately $1 million primarily driven by an $0.6 million increase in legal costs attributed to the legal proceedings between FREIT and certain of its affiliates and Sinatra Properties, LLC and an increase of approximately $0.3 million in lender and legal fees related to the conversion of the Pierre Towers partnership to a TIC in Fiscal 2020; (c) net impact of approximately $0.9 million (with a consolidated impact of approximately $0.5 million) due to a reduction in revenue and the write-off of unamortized leasing costs related to Cobb Theatre’s rejection of its lease as of June 30, 2020 due to the Cobb Theatre bankruptcy filing; (d) an increase in expense for the reserve of uncollectible rents of approximately $0.8 million (with a consolidated impact of approximately $0.5 million) primarily resulting from the COVID-19 pandemic impact on certain commercial non-essential tenants due to mandated shutdowns; offset by (e) a decrease in interest expense of approximately $2 million (with a consolidated impact of approximately $0.9 million), (excluding the impact of the deconsolidation of the operating results of the Pierre Towers from FREIT’s operating results of approximately $0.7 million in interest expense), attributed to the decline in interest rates on variable mortgage loans; (f) an increase in revenue of approximately $0.3 million related to the office tenants at the Rotunda property driven by an increase in base rents and the average occupancy rate from 83.8% in the prior year to 85.4% in the current year; (g) an insurance reimbursement received in Fiscal 2020 related to Fiscal 2019 of approximately $0.2 million; and (h) an unrealized loss on the interest rate cap contract incurred in the Prior Year’s Nine Months of approximately $0.2 million.
The increase in adjusted net loss for the Current Quarter was primarily driven by the following: (a) net impact of approximately $0.9 million (with a consolidated impact of approximately $0.5 million) due to a reduction in revenue and the write-off of unamortized leasing costs related to Cobb Theatre’s rejection of its lease as of June 30, 2020 due to the Cobb Theatre bankruptcy filing; (b) an increase in G&A expenses of approximately $0.5 million primarily driven by an increase in legal costs attributed to the legal proceedings between FREIT and certain of its affiliates and Sinatra Properties, LLC; (c) an increase in expense for the reserve of uncollectible rents of approximately $0.1 million (with a consolidated impact of approximately $0.1 million) primarily resulting from the COVID-19 pandemic impact on certain commercial non-essential tenants due to mandated shutdowns; offset by (d) a decrease in interest expense of approximately $1 million (with a consolidated impact of approximately $0.4 million), (excluding the impact of the deconsolidation of the operating results of the Pierre Towers from FREIT’s operating results of approximately $0.4 million in interest expense) attributed to the decline in interest rates on variable mortgage loans; and (e) a decrease in Special Committee advisory, legal and other expenses incurred of approximately $0.3 million. See Note 16 to FREIT’s condensed consolidated financial statements for further details on the deconsolidation of the Pierre Towers property to a TIC. (Refer to the segment disclosure below for a more detailed discussion of the financial performance of FREIT’s commercial and residential segments.)
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, 2020 and 2019:
|
Net Income (Loss) Components |
Nine Months Ended |
Three Months Ended | ||||||||||||||||||||||
|
July 31, |
July 31, | |||||||||||||||||||||||
|
2020 |
2019 |
Change |
2020 |
2019 |
Change | |||||||||||||||||||
|
(In Thousands of Dollars) |
(In Thousands of Dollars) | |||||||||||||||||||||||
|
Income from real estate operations: | ||||||||||||||||||||||||
|
Commercial properties |
$ |
10,615 |
$ |
11,529 |
$ |
(914 |
) |
$ |
2,842 |
$ |
3,904 |
$ |
(1,062 |
) | ||||||||||
|
Residential properties |
13,008 |
14,264 |
(1,256 |
) |
3,744 |
4,722 |
(978 |
) | ||||||||||||||||
|
Total income from real estate operations |
23,623 |
25,793 |
(2,170 |
) |
6,586 |
8,626 |
(2,040 |
) | ||||||||||||||||
|
| ||||||||||||||||||||||||
|
Financing costs: | ||||||||||||||||||||||||
|
Fixed rate mortgages |
(5,773 |
) |
(6,726 |
) |
953 |
(1,718 |
) |
(2,218 |
) |
500 | ||||||||||||||
|
Floating rate mortgages |
(4,190 |
) |
(5,625 |
) |
1,435 |
(1,092 |
) |
(1,860 |
) |
768 | ||||||||||||||
|
Other - Corporate interest |
(270 |
) |
(460 |
) |
190 |
(60 |
) |
(145 |
) |
85 | ||||||||||||||
|
Mortgage cost amortization |
(799 |
) |
(864 |
) |
65 |
(251 |
) |
(273 |
) |
22 | ||||||||||||||
|
Total financing costs |
(11,032 |
) |
(13,675 |
) |
2,643 |
(3,121 |
) |
(4,496 |
) |
1,375 | ||||||||||||||
|
| ||||||||||||||||||||||||
|
Investment income |
174 |
276 |
(102 |
) |
38 |
92 |
(54 |
) | ||||||||||||||||
|
Unrealized loss on interest rate cap contract |
- |
(160 |
) |
160 |
- |
(1 |
) |
1 | ||||||||||||||||
|
| ||||||||||||||||||||||||
|
General & administrative expenses: | ||||||||||||||||||||||||
|
Accounting fees |
(507 |
) |
(513 |
) |
6 |
(181 |
) |
(220 |
) |
39 | ||||||||||||||
|
Legal and professional fees |
(676 |
) |
(117 |
) |
(559 |
) |
(641 |
) |
(40 |
) |
(601 |
) | ||||||||||||
|
Trustees and consultant fees |
(1,032 |
) |
(889 |
) |
(143 |
) |
(318 |
) |
(270 |
) |
(48 |
) | ||||||||||||
|
Stock option expense |
(35 |
) |
(104 |
) |
69 |
(11 |
) |
(35 |
) |
24 | ||||||||||||||
|
Corporate expenses |
(811 |
) |
(486 |
) |
(325 |
) |
(82 |
) |
(153 |
) |
71 | |||||||||||||
|
Total general & administrative expenses |
(3,061 |
) |
(2,109 |
) |
(952 |
) |
(1,233 |
) |
(718 |
) |
(515 |
) | ||||||||||||
|
| ||||||||||||||||||||||||
|
Special committee advisory, legal and other expenses |
(4,606 |
) |
(1,018 |
) |
(3,588 |
) |
(87 |
) |
(432 |
) |
345 | |||||||||||||
|
Depreciation |
(7,887 |
) |
(8,413 |
) |
526 |
(2,425 |
) |
(2,806 |
) |
381 | ||||||||||||||
|
Loss on investments in tenancy-in-common |
(96 |
) |
- |
(96 |
) |
(78 |
) |
- |
(78 |
) | ||||||||||||||
|
Adjusted net (loss) income |
(2,885 |
) |
694 |
(3,579 |
) |
(320 |
) |
265 |
(585 |
) | ||||||||||||||
|
| ||||||||||||||||||||||||
|
Gain on sale of property |
- |
836 |
(836 |
) |
- |
- |
- | |||||||||||||||||
|
Gain on deconsolidation of subsidiary |
27,680 |
- |
27,680 |
- |
- |
- | ||||||||||||||||||
|
Net income (loss) |
24,795 |
1,530 |
23,265 |
(320 |
) |
265 |
(585 |
) | ||||||||||||||||
|
| ||||||||||||||||||||||||
|
Net (income) loss attributable to noncontrolling interests in subsidiaries |
(18 |
) |
(86 |
) |
68 |
139 |
(66 |
) |
205 | |||||||||||||||
|
| ||||||||||||||||||||||||
|
Net income (loss) attributable to common equity |
$ |
24,777 |
$ |
1,444 |
$ |
23,333 |
$ |
(181 |
) |
$ |
199 |
$ |
(380 |
) | ||||||||||
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.
Page 28
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 July 31, |
Increase (Decrease) |
Nine Months Ended July 31, |
Increase (Decrease) |
Nine Months Ended July 31, | ||||||||||||||||||||||||||||||||||||
|
2020 |
2019 |
$ |
% |
2020 |
2019 |
$ |
% |
2020 |
2019 | |||||||||||||||||||||||||||||||
|
(In Thousands) |
(In Thousands) |
(In Thousands) | ||||||||||||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||||||||||
|
Rental income |
$ |
14,919 |
$ |
15,208 |
$ |
(289 |
) |
-1.9 |
% |
$ |
21,452 |
$ |
24,374 |
$ |
(2,922 |
) |
-12.0 |
% |
$ |
36,371 |
$ |
39,582 | ||||||||||||||||||
|
Reimbursements |
4,695 |
4,594 |
101 |
2.2 |
% |
109 |
102 |
7 |
6.9 |
% |
4,804 |
4,696 | ||||||||||||||||||||||||||||
|
Other |
24 |
63 |
(39 |
) |
-61.9 |
% |
444 |
315 |
129 |
41.0 |
% |
468 |
378 | |||||||||||||||||||||||||||
|
Total revenue |
19,638 |
19,865 |
(227 |
) |
-1.1 |
% |
22,005 |
24,791 |
(2,786 |
) |
-11.2 |
% |
41,643 |
44,656 | ||||||||||||||||||||||||||
|
Operating expenses |
8,810 |
8,664 |
146 |
1.7 |
% |
8,997 |
10,512 |
(1,515 |
) |
-14.4 |
% |
17,807 |
19,176 | |||||||||||||||||||||||||||
|
Net operating income |
$ |
10,828 |
$ |
11,201 |
$ |
(373 |
) |
-3.3 |
% |
$ |
13,008 |
$ |
14,279 |
$ |
(1,271 |
) |
-8.9 |
% |
23,836 |
25,480 | ||||||||||||||||||||
|
Gain on sale of property |
$ |
- |
$ |
836 |
$ |
(836 |
) |
-100.0 |
% |
$ |
- |
$ |
- |
$ |
- |
0.0 |
% |
- |
836 | |||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||||||||||
|
Average Occupancy % |
80.3% |
81.4%* |
-1.1 |
% |
93.8%** |
95.7%** |
-1.9 |
% | ||||||||||||||||||||||||||||||||
|
Reconciliation to condensed consolidated net income-common equity: | |||||||||
|
Deferred rents - straight lining |
(213 |
) |
313 | ||||||
|
Investment income |
174 |
276 | |||||||
|
Unrealized loss on interest rate cap contract |
- |
(160 |
) | ||||||
|
General and administrative expenses |
(3,061 |
) |
(2,109 |
) | |||||
|
Special committee advisory, legal and other expenses |
(4,606 |
) |
(1,018 |
) | |||||
|
Gain on deconsolidation of subsdiary |
27,680 |
- | |||||||
|
Loss on investment in tenancy-in-common |
(96 |
) |
- | ||||||
|
Depreciation |
(7,887 |
) |
(8,413 |
) | |||||
|
Financing costs |
(11,032 |
) |
(13,675 |
) | |||||
|
Net income |
24,795 |
1,530 | |||||||
|
Net income attributable to noncontrolling interests in subsidiaries |
(18 |
) |
(86 |
) | |||||
|
Net income attributable to common equity |
$ |
24,777 |
$ |
1,444 | |||||
|
Commercial |
Residential |
Combined | ||||||||||||||||||||||||||||||||||||||
|
Three Months Ended July 31, |
Increase (Decrease) |
Three Months Ended July 31, |
Increase (Decrease) |
Three Months Ended July 31, | ||||||||||||||||||||||||||||||||||||
|
2020 |
2019 |
$ |
% |
2020 |
2019 |
$ |
% |
2020 |
2019 | |||||||||||||||||||||||||||||||
|
(In Thousands) |
(In Thousands) |
(In Thousands) | ||||||||||||||||||||||||||||||||||||||
|
Rental income |
$ |
4,732 |
$ |
5,096 |
$ |
(364 |
) |
-7.1 |
% |
$ |
6,303 |
$ |
8,187 |
$ |
(1,884 |
) |
-23.0 |
% |
$ |
11,035 |
$ |
13,283 | ||||||||||||||||||
|
Reimbursements |
1,349 |
1,666 |
(317 |
) |
-19.0 |
% |
33 |
35 |
(2 |
) |
-5.7 |
% |
1,382 |
1,701 | ||||||||||||||||||||||||||
|
Other |
9 |
24 |
(15 |
) |
-62.5 |
% |
57 |
121 |
(64 |
) |
-52.9 |
% |
66 |
145 | ||||||||||||||||||||||||||
|
Total revenue |
6,090 |
6,786 |
(696 |
) |
-10.3 |
% |
6,393 |
8,343 |
(1,950 |
) |
-23.4 |
% |
12,483 |
15,129 | ||||||||||||||||||||||||||
|
Operating expenses |
2,914 |
3,013 |
(99 |
) |
-3.3 |
% |
2,649 |
3,616 |
(967 |
) |
-26.7 |
% |
5,563 |
6,629 | ||||||||||||||||||||||||||
|
Net operating income |
$ |
3,176 |
$ |
3,773 |
$ |
(597 |
) |
-15.8 |
% |
$ |
3,744 |
$ |
4,727 |
$ |
(983 |
) |
-20.8 |
% |
6,920 |
8,500 | ||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||||||||||
|
Average Occupancy % |
79.1% |
81.6%* |
-2.5 |
% |
93.5%** |
96.6%** |
-3.1 |
% | ||||||||||||||||||||||||||||||||
|
Reconciliation to condensed consolidated net income (loss)-common equity: | |||||||||
|
Deferred rents - straight lining |
(334 |
) |
126 | ||||||
|
Investment income |
38 |
92 | |||||||
|
Unrealized loss on interest rate cap contract |
- |
(1 |
) | ||||||
|
General and administrative expenses |
(1,233 |
) |
(718 |
) | |||||
|
Special committee advisory, legal and other expenses |
(87 |
) |
(432 |
) | |||||
|
Loss on investment in tenancy-in-common |
(78 |
) |
- | ||||||
|
Depreciation |
(2,425 |
) |
(2,806 |
) | |||||
|
Financing costs |
(3,121 |
) |
(4,496 |
) | |||||
|
Net (loss) income |
(320 |
) |
265 | ||||||
|
Net loss (income) attributable to noncontrolling interests in subsidiaries |
139 |
(66 |
) | ||||||
|
Net (loss) income attributable to common equity |
$ |
(181 |
) |
$ |
199 | ||||
|
* |
Average occupancy rate excludes the Patchogue, New York property from all periods presented as the property was sold in February 2019. | |
|
** |
Average occupancy rate excludes the Pierre Towers property from all periods presented as the property was deconsolidated and converted to a TIC effective February 28, 2020. |
NOI is based on operating revenue and expenses directly associated with the operations of the real estate properties, but excludes deferred rents (straight lining), depreciation, financing costs and other items. FREIT assesses and measures segment operating results based on NOI.
Same Property NOI: FREIT considers same property net operating income (“Same Property NOI”) to be a useful supplemental non-GAAP measure of its operating performance. FREIT defines same property within both the commercial and residential segments to be those properties that FREIT has owned and operated for both the current and prior periods presented, excluding those properties that FREIT acquired or redeveloped during those periods. Any newly acquired property that has been in operation for less than a year, any property that is undergoing a major redevelopment but may still be in operation at less than full capacity, and/or any property that has been sold is not considered same property.
NOI and Same Property NOI are non-GAAP financial measures and are not measures of operating results or cash flow as measured by GAAP, and are not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity.
Page 29
COMMERCIAL SEGMENT
The commercial segment contains eight (8) separate properties. Seven of these properties are multi-tenanted retail or office centers, and one is single tenanted on land located in Rockaway, New Jersey owned by FREIT from which it receives monthly rental income from a tenant who has built and operates a bank branch on the land. On February 8, 2019, FREIT sold a commercial building, formerly occupied as a Pathmark supermarket in Patchogue, New York for a sales price of $7.5 million. The sale of this property, which had a carrying value of approximately $6.2 million, resulted in a gain of approximately $0.8 million net of sales fees and commissions. Net cash proceeds of approximately $2 million were realized after paying off the related mortgage on this property in the amount of approximately $5.2 million. The sale of this property eliminates an operating loss of approximately $0.8 million ($0.12 per share) incurred, annually, since Pathmark vacated the building in December 2015 (see Note 5 to FREIT’s condensed consolidated financial statements for further details).
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 1.1% and 10.3%, respectively, and NOI decreased by 3.3% and 15.8%, respectively, as compared to the Prior Year’s comparable periods. Average occupancy for all commercial properties for the Current Nine Months and Current Quarter decreased by 1.1% and 2.5%, respectively, as compared to the Prior Year’s comparable periods. The decline in revenue for the Current Nine Months was primarily attributable to the reduction in revenue resulting from Cobb Theatre’s rejection of its lease due to the Cobb Theatre bankruptcy filing as of June 30, 2020 at the Rotunda retail property in the amount of approximately $0.4 million (excluding the straight-line rent adjustment of approximately $0.4 million) offset by an increase in revenue of approximately $0.2 million related to the office tenants at the Rotunda property driven by an increase in base rents and the average occupancy rate from 83.8% in the prior year to 85.4% in the current year. The decline in NOI for the Current Nine Months was primarily attributable to the following: (a) an increase in expense for the reserve of uncollectible rents of approximately $0.6 million primarily resulting from the COVID-19 pandemic impact; (b) a decrease in revenue of approximately $0.2 million; (c) a write-off of unamortized leasing costs related to Cobb Theatres’ rejection of its lease in the amount of approximately $0.2 million; offset by (d) a decline in other operating expenses of approximately $0.4 million primarily related to greater parking lot repairs and snow removal costs in the prior year. The decline in revenue for the Current Quarter was primarily attributable to the reduction in revenue resulting from Cobb Theatre’s rejection of its lease due to the Cobb Theatre bankruptcy filing as of June 30, 2020 at the Rotunda retail property in the amount of approximately $0.4 million (excluding the straight-line rent adjustment of approximately $0.4 million); and a decline in the amount of approximately $0.4 million driven by the 2.5% decline in the average occupancy rate for the commercial properties as compared to the prior year. The decline in NOI for the Current Quarter was primarily attributable to the following: (a) a decrease in revenue of approximately $0.7 million; (b) a write-off of unamortized leasing costs related to Cobb Theatres’ rejection of its lease in the amount of approximately $0.2 million; (c) an increase in expense for the reserve of uncollectible rents of approximately $0.1 million primarily resulting from the COVID-19 pandemic impact; offset by (d) a decline in other operating expenses of approximately $0.3 million primarily related to greater parking lot repairs in the prior year.
Same Property Operating Results: FREIT’s commercial segment currently contains eight (8) same properties. (See definition of same property under Segment Information above.) The Patchogue property was excluded from same property results for all periods presented because this property was sold in February 2019. Same property revenue for the Current Nine Months and Current Quarter decreased by 1.1% and 10.3%, respectively, and same property NOI decreased by 4.3% and 15.8%, 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 tables reflect leasing activity at FREIT’s commercial properties for comparable leases (leases executed for spaces in which there was a tenant at some point during the previous twelve-month period) and non-comparable leases for 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) |
9 |
17,411 |
$ |
26.37 |
$ |
31.45 |
-16.2 |
% |
$ |
- |
$ |
0.27 |
| |||||||||||||||
|
|
| |||||||||||||||||||||||||||
|
Non-comparable leases |
1 |
1,730 |
$ |
14.99 |
N/A |
N/A |
$ |
- |
$ |
0.75 |
| |||||||||||||||||
|
|
| |||||||||||||||||||||||||||
|
Total leasing activity |
10 |
19,141 |
| |||||||||||||||||||||||||
|
OFFICE: |
Number of Leases |
Lease Area (Sq. Ft.) |
Weighted Average Lease Rate (per Sq. Ft.) |
Weighted Average Prior Lease Rate (per Sq. Ft.) |
% Increase (Decrease) |
Tenant Improvement Allowance (per Sq. Ft.) (a) |
Lease Commissions (per Sq. Ft.) (a) | |||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Comparable leases (b) |
1 |
444 |
$ |
35.87 |
$ |
32.08 |
11.8 |
% |
$ |
- |
$ |
0.68 |
| |||||||||||||||
|
|
| |||||||||||||||||||||||||||
|
Non-comparable leases |
- |
- |
$ |
- |
N/A |
N/A |
$ |
- |
$ |
- |
| |||||||||||||||||
|
|
| |||||||||||||||||||||||||||
|
Total leasing activity |
1 |
444 |
| |||||||||||||||||||||||||
|
(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. |
The decline in the weighted average prior lease rate from $31.45 to $26.37 was primarily due to lease modifications at the Wayne Preakness shopping center and Westwood Plaza shopping center properties.
On April 26, 2020, CB Theatre Experience, LLC filed for protection under Chapter 11 of the bankruptcy code as disclosed in the bankruptcy filings. The CB Theatre Experience, LLC (known as “Cobb Theatre”) at the Rotunda retail property in Baltimore, Maryland has been closed since April 2020 due to the mandated shutdown related to the COVID-19 pandemic and on July 14, 2020 rejected its lease at this property as of June 30, 2020. Refer to Commercial Segment above for the details of the impact of the rejection of this lease on FREIT’s operating results for the nine and three months ended July 31, 2020. Until this space is re-leased, FREIT’s operating results will be adversely impacted from loss of rent and additional rent of approximately $1.1 million on an annualized basis. Additionally,
Page 30
there were unamortized tenant improvements related to the buildout of the movie theatre space in the amount of approximately $7.4 million. As the Company is currently exploring all possible options for the re-leasing of this space, including renting to another movie theatre, these costs are not deemed to be impaired as of July 31, 2020.
RESIDENTIAL SEGMENT
FREIT currently operates seven (7) multi-family apartment buildings or complexes totaling 1,171 apartment units. On February 28, 2020, FREIT reorganized its subsidiary S and A Commercial Associates Limited Partnership (“S&A”) from a partnership into a TIC. Prior to this reorganization, FREIT owned a 65% membership interest in S&A, which owned 100% of the Pierre Towers property located in Hackensack, NJ through its 100% interest in Pierre Towers, LLC. Accordingly, FREIT consolidated the financial statements of S&A and its subsidiary to include 100% of the subsidiary’s assets, liabilities, operations and cash flows with the interest not owned by FREIT reflected as “noncontrolling interests in subsidiary” and all significant intercompany accounts and transactions were eliminated in consolidation.
Pursuant to the TIC agreement, FREIT ultimately acquired a 65% undivided interest in the Pierre Towers property which was formerly owned by S&A. Based on the guidance of ASC 810, “Consolidation”, FREIT’s investment in the TIC was accounted for under the equity method of accounting. While FREIT’s effective ownership percentage interest in the Pierre Towers property remains unchanged after the reorganization to a TIC, FREIT no longer has a controlling interest as the TIC is now under joint control. Since FREIT retained a noncontrolling financial interest in the TIC and the deconsolidation of the subsidiary is not the result of a nonreciprocal transfer to owners, the subsidiary was deconsolidated from FREIT as of February 28, 2020. A gain in the amount of approximately $27.7 million was recognized in the accompanying condensed consolidated statements of operations for the nine months ended July 31, 2020. This gain was measured at the date of deconsolidation as the difference between the fair value of the investment in the TIC at the date the entity was deconsolidated and the carrying amount of the former subsidiary’s assets and liabilities. (See Note 16 to FREIT’s condensed consolidated financial statements for further details.)
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 11.2% and 23.4%, respectively, and total NOI decreased by 8.9% and 20.8%, respectively, as compared to the Prior Year’s comparable periods. The decline in revenue for the Current Nine Months was primarily attributable to a deconsolidation of the operating results of the Pierre Towers property from FREIT’s operating results due to the conversion to a tenancy-in-common form of ownership (“TIC”) as of February 28, 2020 resulting in a decline in revenue of approximately $3.1 million offset by an insurance reimbursement received in Fiscal 2020 related to Fiscal 2019 of approximately $0.2 million. The decline in revenue for the Current Quarter was primarily attributable to the deconsolidation of the operating results of the Pierre Towers property from FREIT’s operating results driving a decline in revenue of approximately $1.9
Page 31
million. The decline in NOI for the Current Nine Months and the Current Quarter is primarily attributed to the deconsolidation of the operating results of the Pierre Towers property from FREIT’s operating results resulting in a decrease of approximately $1.4 million and $0.8 million, respectively, in NOI as compared to the Prior Year’s comparable periods. Average occupancy for all residential properties for the Current Nine Months and Current Quarter decreased by approximately 1.9% and 3.1%, respectively, over the Prior Year’s comparable periods. The decline in the average occupancy rate is primarily driven by the decline in the average occupancy rate at the Icon to an average occupancy rate of 92.1% and 88.9%, respectively, for the Current Nine Months and Current Quarter as compared to 94.8% and 94.5%, respectively, for the Prior Year’s comparable periods. This decline in occupancy rate is primarily attributed to tenants attending the Johns Hopkins University, which is in close proximity to the Icon and represents approximately 30% of our tenants at this property. In response to the COVID-19 pandemic, Johns Hopkins University will only be offering online classes for the fall semester which has resulted and may continue to result in a loss of these tenants at our property.
Same Property Operating Results: FREIT’s residential segment currently contains seven (7) same properties. (See definition of same property under Segment Information above.) The Pierre Towers property was excluded from same property results for all periods presented because this property was deconsolidated and converted to a TIC as of February 28, 2020. Same property revenue for the Current Nine Months and Current Quarter increased by 0.7% and decreased by 2.0%, respectively, and same property NOI decreased by 0.6% and 4.1%, 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 $1,886 and $1,903, respectively. For comparability purposes, the average residential rent for the Prior Year’s Quarter has been restated to include the impact of Station Place and Icon and excludes the impact of the Pierre Towers due to the deconsolidation and conversion to a TIC in Fiscal 2020. 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 $265,000 and $248,000, respectively.
Capital expenditures: Since all of FREIT’s apartment communities, with the exception of the Boulders, Regency, Icon and Station Place properties, were constructed more than 25 years ago, FREIT tends to spend more in any given year on maintenance and capital improvements than may be spent on newer properties. As a result of the COVID-19 global pandemic, only capital improvements deemed essential are being made at this time. Funds for these capital projects will be available from cash flow from the property's operations and cash reserves.
FINANCING COSTS
|
Nine Months Ended July 31, |
Three Months Ended July 31, | |||||||||||||||
|
2020 |
2019 |
2020 |
2019 | |||||||||||||
|
(In Thousands of Dollars) |
(In Thousands of Dollars) | |||||||||||||||
|
Fixed rate mortgages (a): | ||||||||||||||||
|
1st Mortgages | ||||||||||||||||
|
Existing |
$ |
5,773 |
$ |
6,726 |
$ |
1,718 |
$ |
2,218 | ||||||||
|
New |
- |
- |
- |
- | ||||||||||||
|
Variable rate mortgages: | ||||||||||||||||
|
1st Mortgages | ||||||||||||||||
|
Existing |
4,190 |
5,625 |
1,092 |
1,860 | ||||||||||||
|
New |
- |
- |
- |
- | ||||||||||||
|
Other |
270 |
460 |
60 |
145 | ||||||||||||
|
Total financing costs, gross |
10,233 |
12,811 |
2,870 |
4,223 | ||||||||||||
|
Amortization of mortgage costs |
799 |
864 |
251 |
273 | ||||||||||||
|
Total financing costs, net |
$ |
11,032 |
$ |
13,675 |
$ |
3,121 |
$ |
4,496 | ||||||||
(a) Includes the effect of interest rate swap contracts which effectively convert the floating interest rate to a fixed interest rate over the term of the loan.
Total financing costs for the Current Nine Months decreased by approximately $2,643,000 or 19.3%, compared to the Prior Year’s Nine Months which is primarily driven by the following: (a) a decline in interest on variable mortgage loans of approximately $1,435,000 resulting from lower interest rates; (b) the deconsolidation of the Pierre Towers property from FREIT’s operating results due to the conversion to a TIC as of February 28, 2020 resulting in a decrease in interest expense of approximately $780,000; and (c) a decline in other interest expense of approximately $190,000 attributed to the decline in interest earned on deferred Trustee fees as a result of the $5.1 million paid out to two retired Trustees in Fiscal 2020. Total financing costs for the Current Quarter decreased by approximately $1,375,000 or 30.6%, compared to the Prior Year’s Quarter which is primarily driven by the following: (a) a decline in interest on variable mortgage loans of approximately $768,000 resulting from lower interest rates; and (b) the deconsolidation of the Pierre Towers property from FREIT’s operating results due to the conversion to a TIC resulting in a decrease in interest expense of approximately $468,000. (See Note 16 to FREIT’s condensed consolidated financial statements for further details on the deconsolidation of the Pierre Towers property.)
Page 32
GENERAL AND ADMINISTRATIVE EXPENSES (“G&A”)
G&A expense for the Current Nine Months and Current Quarter was $3,061,000 and $1,233,000, respectively, compared to $2,109,000 and $718,000, respectively, for the Prior Year’s comparable periods. The primary components of G&A are accounting/auditing fees, legal and professional fees, Trustees’ and consultant fees and corporate other expenses. The increase in G&A costs for the Current Nine Months was primarily driven by an increase in legal costs of approximately $601,000 attributed to the legal proceedings between FREIT and certain of its affiliates and Sinatra Properties, LLC and an increase of approximately $300,000 in lender and legal fees related to the conversion of the Pierre Towers partnership to a TIC in Fiscal 2020. The increase in G&A costs for the Current Quarter was primarily driven by an increase in legal costs of approximately $601,000 attributed to the legal proceedings between FREIT and certain of its affiliates and Sinatra Properties, LLC.
SPECIAL COMMITTEE ADVISORY, LEGAL AND OTHER EXPENSES
Special Committee advisory, legal and other expenses for the Current Nine Months and Current Quarter was $4,606,000 and $87,000, respectively, compared to $1,018,000 and $432,000, respectively, for the Prior Year’s comparable periods. These expenses are primarily composed of advisory and legal fees incurred. On May 7, 2020, the Board approved the elimination of the Special Committee as a committee of the Board.
DEPRECIATION
Depreciation expense from operations for the Current Nine Months and Current Quarter was $7,887,000 and $2,425,000, respectively, compared to $8,413,000 and $2,806,000, respectively, for the Prior Year’s comparable periods. The decline in depreciation expense for the Current Nine Months and Current Quarter was primarily attributable to the deconsolidation of the operating results of the Pierre Towers property from FREIT’s operating results as of February 28, 2020. (See Note 16 to FREIT’s condensed consolidated financial statements for further details.)
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $0.2 million for the Current Nine Months compared to net cash provided by operating activities of $11.2 million for the Prior Year’s Nine Months. FREIT expects that cash provided by operating activities and cash reserves will be adequate to cover mandatory debt service payments (including payments of interest, but excluding balloon payments), real estate taxes, recurring capital improvements at properties and other needs to maintain its status as a REIT for at least a period of one year from the date of filing of this quarterly report on Form 10-Q.
As of July 31, 2020, FREIT had cash, cash equivalents and restricted cash totaling $34.3 million, compared to $42.5 million at October 31, 2019. The decrease in cash in the Current Nine Months is primarily attributable to $4.9 million in net cash used in financing activities, $3.1 million in net cash used in investing activities including capital expenditures and $0.2 million in net cash used in operating activities. The decline in net cash for the Current Nine Months was primarily driven by Special Committee advisory, legal and other expenses paid in the amount of approximately $5.1 million, deferred compensation paid to two retired trustees in the amount of approximately $5 million and the deconsolidation of the operating results of the Pierre Towers property from FREIT’s operating results, reducing net cash by approximately $1.4 million.
In Fiscal 2017, Grande Rotunda, LLC incurred substantial expenditures at the Rotunda property related to retail tenant improvements, leasing costs and operating expenditures which, in the aggregate, exceeded revenues as the property was still in the rent up phase and the construction loan previously held with Wells Fargo was at its maximum level resulting in no additional funding available to draw. Accordingly, during Fiscal 2017 the equity owners in Grande Rotunda, LLC (FREIT with a 60% ownership and Rotunda 100, LLC with a 40% ownership) contributed their respective pro-rata share of any cash needs through loans to Grande Rotunda, LLC. As of July 31, 2020 and October 31, 2019, Rotunda 100, LLC has funded Grande Rotunda, LLC with approximately $5.9 million and $5.7 million (including interest), respectively, which is included in due to affiliate on the accompanying condensed consolidated balance sheets.
Credit Line: On October 27, 2017, FREIT’s revolving line of credit provided by the Provident Bank was renewed for a three-year term ending on October 27, 2020 at which point no further advances shall be permitted and provided the line of credit is not renewed by the lender, the outstanding principal balance of the line of credit shall convert to a commercial term loan maturing on October 31, 2022. Draws against the credit line can be used for working capital needs and standby letters of credit. Draws against the credit line are secured by mortgages on FREIT’s Franklin Crossing Shopping Center in Franklin Lakes, New Jersey and retail space in Glen Rock, New Jersey. The total line of credit is $13 million and the interest rate on the amount outstanding will be at a floating rate of 275 basis points over the 30-day LIBOR with a floor of 3.75%. As of July 31, 2020 and October 31, 2019, there was no amount outstanding and $13 million was available under the line of credit.
As at July 31, 2020, FREIT’s aggregate outstanding mortgage debt was $302.3 million, which bears a weighted average interest rate of 3.87% and an average life of approximately 3.3 years. FREIT’s fixed rate mortgages are subject to amortization schedules that are longer than the terms of the mortgages. As such, balloon payments (unpaid principal amounts at mortgage due date) for all mortgage debt will be required as follows:
|
Fiscal Year |
2021 |
2022 |
2023 |
2024 |
2025 |
2026 |
2028 |
2029 |
|
($ in millions) | ||||||||
|
Mortgage "Balloon" Payments |
$159.6 (A) |
$14.4 |
$34.8 |
$9.0 |
$13.9 |
$18.2 |
$10.5 |
$26.0 |
|
(A) Includes loan on the Rotunda property located in Baltimore, Maryland in the amount of approximately $118.5 million with two one-year renewal options. |
The following table shows the estimated fair value and net carrying value of FREIT’s long-term debt at July 31, 2020 and October 31, 2019:
|
($ in Millions) |
July 31, 2020 |
October 31, 2019 | ||
|
| ||||
|
Fair Value |
$309.2 |
$352.9 | ||
|
| ||||
|
Carrying Value, Net |
$300.7 |
$349.9 |
Page 33
Fair values are estimated based on market interest rates at July 31, 2020 and October 31, 2019 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 take 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, 2020, a 1% interest rate increase would reduce the fair value of FREIT’s debt by $6.3 million, and a 1% decrease would increase the fair value by $6.7 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 shareholders.
On August 26, 2019, Berdan Court, LLC (“Berdan Court”), (owned 100% by FREIT), refinanced its $17 million loan (which matured on September 1, 2019) with the lender in the amount of $28,815,000. This loan, secured by an apartment building located in Wayne, New Jersey, has a term of ten years and bears a fixed interest rate equal to 3.54%. Interest-only payments are required each month for the first five years of the term and thereafter, principal payments plus accrued interest will be required each month through maturity. This refinancing resulted in: (i) a reduction in the annual interest rate from a fixed rate of 6.09% to a fixed rate of 3.54% and (ii) net refinancing proceeds of approximately $11.6 million which can be used for capital expenditures and general corporate purposes.
Page 34
On April 3, 2019, WestFREIT, Corp. (owned 100% by FREIT) exercised its option to extend its loan held by M&T Bank, with a then outstanding balance of approximately $22.5 million, for twelve months. Effective beginning on June 1, 2019, the extension of this loan secured by the Westridge Square Shopping Center, required monthly principal payments of $47,250 plus interest based on a floating interest rate equal to 240 basis points over the one-month LIBOR and had a maturity date of May 1, 2020. This loan was extended for another six months with a new maturity date of November 1, 2020 under the same terms and conditions of the existing agreement while the lender is in discussions with the Company regarding a further modification and extension.
On February 7, 2018, Grande Rotunda, LLC refinanced its $115.3 million construction loan held by Wells Fargo with a new loan held by Aareal Capital Corporation in the amount of approximately $118.5 million with additional funding available for retail tenant improvements and leasing costs in the amount of $3,380,000. This loan is secured by the Rotunda property, bears a floating interest rate at 285 basis points over the one-month LIBOR rate and has a maturity date of February 6, 2021 with two one-year options to extend the maturity of this loan. As part of this transaction, Grande Rotunda had purchased an interest rate cap on LIBOR for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan which matured on March 5, 2020. On February 28, 2020, Grande Rotunda purchased an interest rate cap on LIBOR, with an effective date of March 5, 2020, for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for one year. As of July 31, 2020, approximately $118.5 million of this loan facility was drawn down and the interest rate was approximately 3.01%.
Interest rate swap contracts: To reduce interest rate volatility, FREIT uses a “pay fixed, receive floating” interest rate swap to convert floating interest rates to fixed interest rates over the term of a certain loan. FREIT enters into these swap contracts with a counterparty that is usually a high-quality commercial bank. In essence, FREIT agrees to pay its counterparties a fixed rate of interest on a dollar amount of notional principal (which corresponds to FREIT’s mortgage debt) over a term equal to the term of the mortgage notes. FREIT’s counterparties, in return, agree to pay FREIT a short-term rate of interest - generally LIBOR - on that same notional amount over the same term as the mortgage notes.
FREIT has variable interest rate loans secured by its Damascus Centre, Regency, Wayne PSC and Station Place properties. To reduce interest rate fluctuations, FREIT entered into interest rate swap contracts for each of these loans. These interest rate swap contracts effectively converted variable interest rate payments to fixed interest rate payments. The contracts were based on a notional amount of approximately $22,320,000 ($19,002,000 at July 31, 2020) for the Damascus Centre swaps, a notional amount of approximately $16,200,000 ($15,338,000 at July 31, 2020) for the Regency swap, a notional amount of approximately $25,800,000 ($23,258,000 at July 31, 2020) for the Wayne PSC swap and a notional amount of approximately $12,350,000 ($12,232,000 at July 31, 2020) for the Station Place swap.
Interest rate cap contract: To limit exposure on interest rate volatility, FREIT uses an interest rate cap contract to cap a floating interest rate at a set pre-determined rate. FREIT enters into cap contracts with a counterparty that is usually a high-quality commercial bank. In essence, so long as the floating interest rate is below the cap rate, FREIT agrees to pay its counterparties a variable rate of interest on a dollar amount of notional principal (which corresponds to FREIT’s mortgage debt). Once the floating interest rate rises above the cap rate, FREIT’s counterparties, in return, agree to pay FREIT a short-term rate of interest above the cap on that same notional amount.
FREIT has a variable interest rate loan secured by its Rotunda property. As part of the refinancing of Grande Rotunda, LLC’s construction loan held by Wells Fargo with a new loan from Aareal Capital Corporation, Grande Rotunda, LLC purchased an interest rate cap on LIBOR for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan which matured on March 5, 2020. On February 28, 2020, Grande Rotunda purchased an interest rate cap on LIBOR, with an effective date of March 5, 2020, for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for one year. The cap contract was based on a notional amount of approximately $121,900,000 ($121,900,000 at July 31, 2020) and a term of one year with the loan being hedged against having a balance of approximately $118,520,000 and a remaining term of one year.
Page 35
In accordance with ASU 2017-12, which was adopted by FREIT in the first quarter of Fiscal 2020, 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 statements of operations; changes in the fair value of these cash flow hedges will be reported in other comprehensive income and appear in the equity section of the 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. In Fiscal 2019, prior to the adoption of ASU 2017-12, the interest rate cap which matured on March 5, 2020 was, for accounting purposes, deemed to be an ineffective cash flow hedge with a corresponding gain or loss being recorded in FREIT’s statements of operations.
FREIT has the following derivative-related risks with its swap and cap contracts (“contract”): 1) early termination risk, and 2) counterparty credit risk.
Early Termination Risk: If FREIT wants to terminate its contract before maturity, it would be bought out or terminated at market value; i.e., the difference in the present value of the anticipated net cash flows from each of the contract’s parties. If current variable interest rates are significantly below FREIT’s fixed interest rate payments, this could be costly. Conversely, if interest rates rise above FREIT’s fixed interest payments and FREIT elected early termination, FREIT would realize a gain on termination. At July 31, 2020, the swap contracts for Damascus Centre, Regency, Station Place and Wayne PSC were in the counterparties’ favor. If FREIT had terminated these contracts at that date it would have realized losses of approximately $0 for the Rotunda cap, $709,000 for the Damascus Centre swaps, $1,552,000 for the Regency swap, $1,938,000 for the Station Place swap and $1,571,000 for the Wayne PSC swap, all of which have been included as a liability in FREIT’s condensed consolidated balance sheet as at July 31, 2020. The change in the fair value for the contract (gain or loss) during such period has been included in comprehensive loss and for the nine and three months ended July 31, 2020, FREIT recorded an unrealized loss of approximately $3,644,000 and $272,000, respectively, in the condensed consolidated statements of comprehensive income (loss).
In Fiscal 2019, FREIT was accounting for its interest rate swaps and cap contract in accordance with ASC 815, “Accounting for Derivative Instruments and Hedging Activities”. (See Notes 2 and 4 to FREIT’s condensed consolidated financial statements for additional details). For the nine and three months ended July 31 2019, FREIT recorded an unrealized loss of $5,210,000 and $2,025,000, respectively, in the condensed consolidated statements of comprehensive income (loss) representing the change in fair value of the swaps during such period. For the nine and three months ended July 31, 2019, FREIT recorded an unrealized loss in the condensed consolidated statements of operations of approximately $160,000 and $1,000, respectively, for Grande Rotunda’s interest rate cap (which matured on March 5, 2020) representing the change in the fair value of this ineffective cash flow hedge during such period. As of October 31, 2019, the fair value of the Grande Rotunda interest rate cap contract was $0.
Counterparty Credit Risk: Each party to a cap or swap contract bears the risk that its counterparty will default on its obligation to make a periodic payment. FREIT reduces this risk by entering into swap or cap contracts only with major financial institutions that are experienced market makers in the derivatives market.
Dividend: The Board of Trustees did not declare a dividend for the third quarter of Fiscal 2020. The Board will continue to evaluate the dividend on a quarterly basis.
STOCK OPTION PLAN
On March 4, 2019, the Board approved the grant of an aggregate of 5,000 non-qualified share options under the Plan to the Chairman of the Board. The options have an exercise price of $15.00 per share, will vest in equal annual installments over a 5-year period and will expire 10 years from the date of grant, which will be March 3, 2029. (See Note 13 to FREIT’s condensed consolidated financial statements for further details.)
Page 36
ADJUSTED FUNDS FROM OPERATIONS
Funds From Operations (“FFO”) is a non-GAAP measure defined by the National Association of Real Estate Investment Trusts (“NAREIT”). FREIT does not include sources or distributions from equity/debt sources in its computation of FFO. Although many consider FFO as the standard measurement of a REIT’s performance, FREIT modified the NAREIT computation of FFO to include other adjustments to GAAP net income that are not considered by management to be the primary drivers of its decision making process. These adjustments to GAAP net income are straight-line rents 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, | |||||||||||||||
|
2020 |
2019 |
2020 |
2019 | |||||||||||||
|
(In Thousands, Except Per Share) |
(In Thousands, Except Per Share) | |||||||||||||||
|
Funds From Operations ("FFO") (a) | ||||||||||||||||
|
Net income (loss) |
$ |
24,795 |
$ |
1,530 |
$ |
(320 |
) |
$ |
265 | |||||||
|
Depreciation of consolidated properties |
7,887 |
8,413 |
2,425 |
2,806 | ||||||||||||
|
Amortization of deferred leasing costs |
601 |
400 |
363 |
140 | ||||||||||||
|
Distributions to minority interests |
(583 |
) |
(686 |
) |
- |
- | ||||||||||
|
Adjustment to loss in investment in tenancy-in-common for depreciation |
582 |
- |
349 |
- | ||||||||||||
|
Gain on sale of property |
- |
(836 |
) |
- |
- | |||||||||||
|
Gain on deconsolidation of subsidiary |
(27,680 |
) |
- |
- |
- | |||||||||||
|
FFO |
$ |
5,602 |
$ |
8,821 |
$ |
2,817 |
$ |
3,211 | ||||||||
|
| ||||||||||||||||
|
Per Share - Basic and Diluted |
$ |
0.80 |
$ |
1.27 |
$ |
0.40 |
$ |
0.46 | ||||||||
|
(a) As prescribed by NAREIT. |
|
Adjusted Funds From Operations ("AFFO") | ||||||||||||||||
|
FFO |
$ |
5,602 |
$ |
8,821 |
$ |
2,817 |
$ |
3,211 | ||||||||
|
Deferred rents (Straight lining) |
213 |
(313 |
) |
334 |
(126 |
) | ||||||||||
|
Capital Improvements - Apartments |
(353 |
) |
(489 |
) |
(127 |
) |
(204 |
) | ||||||||
|
AFFO |
$ |
5,462 |
$ |
8,019 |
$ |
3,024 |
$ |
2,881 | ||||||||
|
| ||||||||||||||||
|
Per Share - Basic and Diluted |
$ |
0.78 |
$ |
1.16 |
$ |
0.43 |
$ |
0.41 | ||||||||
|
| ||||||||||||||||
|
Weighted Average Shares Outstanding: | ||||||||||||||||
|
Basic |
6,989 |
6,932 |
6,998 |
6,950 | ||||||||||||
|
Diluted |
6,992 |
6,932 |
6,998 |
6,951 | ||||||||||||
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 a one-year term, which may allow FREIT to seek increased rents as leases renew or when new tenants are obtained, subject to prevailing market conditions.
Page 37
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, 2020. 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.
Part II: Other Information
Item 1: Legal Proceedings
On January 14, 2020, FREIT and certain of its affiliates (collectively, the “Sellers”), entered into a Purchase and Sale Agreement (as subsequently amended, the “Purchase and Sale Agreement”) with Sinatra Properties LLC (the “Purchaser”), which as subsequently amended, provided for the sale by the Sellers to the Purchaser of 100% of the Sellers’ ownership interests in six real properties held by the Sellers in exchange for the purchase price described therein, subject to the terms and conditions of the Purchase and Sale Agreement. On April 30, 2020, the Sellers delivered written notice to the Purchaser of the Sellers’ termination of the Purchase and Sale Agreement in accordance with its terms due to the occurrence of a “Purchaser Default” thereunder, based on the Purchaser’s failure to perform its obligations under the Purchase and Sale Agreement and close the transactions contemplated therein.
Upon the execution of the Purchase and Sale Agreement, the Purchaser delivered into escrow a deposit in the amount of $15 million (the “Deposit”), in the form of an unconditional, irrevocable letter of credit in such amount (the “Letter of Credit”). The Purchase and Sale Agreement provides that the Sellers’ exclusive remedy, in the event of a “Purchaser Default” and the termination of the Purchase and Sale Agreement, is the forfeiture of the Deposit to the Sellers as liquidated damages. Accordingly, contemporaneously with the Sellers’ delivery of the termination notice to the Purchaser, the Sellers delivered written notice to the escrow agent requesting that the escrow agent release the Letter of Credit from escrow and deliver same to the Sellers.
On May 6, 2020, the Purchaser filed a complaint (the “Complaint”) against the Sellers in the Superior Court of New Jersey, in which, among other things, the Purchaser alleges breach of contract and breach of the covenant of good faith and fair dealing against the Sellers in connection with the Sellers’ termination of the Purchase and Sale Agreement. The Purchaser seeks (a) a judgment of specific performance compelling the Sellers to convey the properties under the Purchase and Sale Agreement to the Purchaser; (b) declaratory judgment from the court that (i) the Purchase and Sale Agreement is not terminated, (ii) the Purchaser is not in default under the Purchase and Sale Agreement, and (iii) the Sellers are in default under the Purchase and Sale Agreement, subject to a right to cure; (c) an order for injunctive relief compelling the Sellers to perform the Purchase and Sale Agreement; (d) in the event that the court does not order specific performance, a judgment directing that the Purchaser’s $15 million deposit under the Purchase and Sale Agreement be returned to the Purchaser, and compensatory, consequential and incidental damages in an amount to be determined at trial; and (e) attorneys’ fees and costs.
The Purchaser has filed lis pendens with respect to each of the six properties that were subject to the Purchase and Sale Agreement. The lis pendens provides notice to the public of the Complaint. The filing of the lis pendens will adversely affect the future sale or financing of those properties.
On June 17, 2020, the Sellers filed their answer, separate defenses, and counterclaims (the “Answer”) in response to the Complaint, in which, among other things, the Sellers (a) deny the Purchaser’s claim that the Sellers’ termination of the Purchase and Sale Agreement was wrongful, and assert that there was no contractual basis in the Purchase and Sale Agreement to relieve the Purchaser from its obligation to perform thereunder, or to defer or postpone the Purchaser’s obligation to perform, (b) assert certain defenses to the allegations set forth in the Complaint without admitting any liability, and (c) request relief from the Court in the form of (i) judgment in the Sellers’ favor dismissing all of the Purchaser’s claims against them with prejudice and denying all of the Purchaser’s requests for relief, (ii) reasonable attorneys’ fees and costs, and (iii) such other and further relief as the Court deems just.
In addition, the Answer asserts counterclaims by the Sellers against the Purchaser for breach of contract due to the Purchaser’s failure to close the Purchase and Sale Agreement in accordance with its terms, and the Sellers seek a declaratory judgment from the Court that the Sellers properly terminated the Purchase and Sale Agreement in accordance with its terms due to the Purchaser’s default and an order from the Court that the Purchaser authorize the escrow agent to release the $15 million deposit under the Purchase and Sale Agreement to the Sellers.
In connection with these counterclaims, the Answer seeks the following relief from the Court: (a) liquidated damages in the amount of $15 million, as provided in the Purchase and Sale Agreement; (b) in the alternative to the liquidated damages provided for in the Purchase and Sale Agreement, money damages in an amount to be determined at trial; (c) interest, attorneys’ fees and costs associated with the defense of the Purchaser’s claims and the prosecution of the Sellers’ counterclaims against the Purchaser, as provided for in the Purchase and Sale Agreement; (d) judgment declaring that the Sellers properly terminated the Purchase and Sale Agreement due to the Purchaser’s default thereunder; (e) judgment declaring that the Purchaser must authorize the escrow agent to release the $15 million deposit to the Sellers; and (f) such other relief as the Court deems just and equitable. (See Note 6 to FREIT’s condensed consolidated financial statements for further details.)
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Item 1A: Risk Factors
Except as set forth below, there were no material changes to the Risk Factors disclosed in FREIT’s Annual Report on Form 10-K for the year ended October 31, 2019, filed with the Securities and Exchange Commission on January 21, 2020. These risk factors may not identify or describe every risk currently applicable to us. Additional risks or uncertainties not currently known to us or that we currently deem immaterial may materially adversely affect our business, financial condition and results of operations.
The COVID-19 pandemic is adversely affecting us. Our business, financial condition, results of operations and cash flows have been and are expected to continue to be negatively impacted by the COVID-19 pandemic and the impact could be material to us.
Our business is subject to risks related to the effects of public health crises, epidemics and pandemics, including the COVID-19 pandemic. Such events could inhibit global, national and local economic activity; constrain our access to capital and other sources of funding, which could adversely affect the availability and terms of future borrowings or refinancings; adversely affect our residential tenants’ financial condition due to a sustained loss of income, which could affect their ability to pay rent; adversely affect our commercial tenants’ financial condition by limiting foot traffic and staffing at their businesses, which could affect their ability to pay rent and willingness to make new leasing commitments; reduce our cash flow, which could impact our ability to pay dividends or to service our debt; temporarily or permanently reduce the demand for retail or office space; reduce the value of our real estate assets, which may result in material non-cash impairment charges in future periods; and have other direct and indirect effects that are difficult to predict. Such risks depend upon the nature and severity of the public health concern, as well as the extent and duration of government-mandated orders and personal decisions to limit travel, economic activity and personal interaction, none of which can be predicted with confidence. In particular, we cannot predict the duration of stay-at-home and other government orders instituted in response to the COVID-19 pandemic, which vary by jurisdiction, or the short and long term economic effects caused by the pandemic, each of which could have a material adverse effect on our business.
Page 39
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, 2020, are formatted in Extensible Business Reporting Language (“XBRL”): (i) condensed consolidated balance sheets; (ii) condensed consolidated statements of operations; (iii) condensed consolidated statements of comprehensive income; (iv) condensed consolidated statements of equity; (v) condensed consolidated statements of cash flows; and (vi) notes to condensed consolidated financial statements. | ||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
FIRST REAL ESTATE INVESTMENT | |
|
TRUST OF NEW JERSEY | |
|
(Registrant) | |
|
| |
|
Date: September 9, 2020 | |
|
/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) |