First Real Estate Investment Trust Of New Jersey, Inc 10-Q for FY2021 Q2
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 June 14, 2021, covering the quarter ended April 30, 2021 (FY2021 Q2).
Headline figures
Quarter ended April 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $12.8M
- down 6.5% from $13.69M a year earlier
- Net income
- $9000
- down 100.0% from net income of $27.22M a year earlier
- Diluted EPS
- $0.00
- compared with $3.88 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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OTC Pink Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large Accelerated Filer ☐ |
Accelerated Filer ☐ |
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Smaller Reporting Company | |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of June 14, 2021, the number of shares of beneficial interest outstanding was
Page 2
FIRST REAL ESTATE
INVESTMENT TRUST OF NEW JERSEY
INDEX
Page 3
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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April 30, 2021 |
October 31, 2020 | |||||||
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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, including deferred interest of $ |
$ |
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$ |
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Less unamortized debt issuance costs |
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Mortgages payable, net |
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Due to affiliate |
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Deferred 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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$ |
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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 without par value: | ||||||||
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and October 31, 2020, respectively |
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Treasury stock, at cost: |
( |
) |
( |
) | ||||
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Undistributed earnings |
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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 4
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
SIX AND THREE MONTHS ENDED APRIL 30, 2021 AND 2020
(Unaudited)
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Six Months Ended April 30, |
Three Months Ended April 30, | |||||||||||||||
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2021 |
2020 |
2021 |
2020 | |||||||||||||
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(In Thousands Except Per Share Amounts) |
(In Thousands Except Per Share Amounts) | |||||||||||||||
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Revenue: | ||||||||||||||||
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Rental income |
$ |
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$ |
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$ |
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$ |
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Reimbursements |
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Sundry income |
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Total revenue |
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Expenses: | ||||||||||||||||
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Operating expenses |
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Third party transaction costs (See Note 6) |
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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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Gain on deconsolidation of subsidiary |
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Loss on investment in tenancy-in-common |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
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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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Net income attributable to common equity |
$ |
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$ |
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$ |
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$ |
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Earnings per share: | ||||||||||||||||
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Basic |
$ |
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$ |
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$ |
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$ |
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Diluted |
$ |
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$ |
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$ |
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$ |
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Weighted average shares outstanding: | ||||||||||||||||
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Basic |
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Diluted |
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See Notes to Condensed Consolidated Financial Statements.
Page 5
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SIX AND THREE MONTHS ENDED APRIL 30, 2021 AND 2020
(Unaudited)
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Six Months Ended April 30, |
Three Months Ended April 30, | |||||||||||||||
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2021 |
2020 |
2021 |
2020 | |||||||||||||
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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: | ||||||||||||||||
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Unrealized gain (loss) on interest rate cap and swap contracts before reclassifications |
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( |
) |
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( |
) | ||||||||||
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Amount reclassified from accumulated other comprehensive loss to interest expense |
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Net unrealized gain (loss) on interest rate cap and swap contracts |
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( |
) |
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( |
) | ||||||||||
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Comprehensive income |
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Net (income) loss attributable to noncontrolling interests in subsidiaries |
( |
) |
( |
) |
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Other comprehensive (income) loss: | ||||||||||||||||
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Unrealized (gain) loss on interest rate cap and swap contracts attributable to noncontrolling interests in subsidiaries |
( |
) |
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( |
) |
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Comprehensive (income) loss attributable to noncontrolling interests in subsidiaries |
( |
) |
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( |
) |
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Comprehensive income attributable to common equity |
$ |
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$ |
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$ |
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$ |
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See Notes to Condensed Consolidated Financial Statements.
Page 6
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
SIX AND THREE MONTHS ENDED APRIL 30, 2021
(Unaudited)
|
Common Equity | ||||||||||||||||||||||||||||
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Shares of Beneficial Interest |
Treasury Shares at Cost |
Undistributed Earnings |
Accumulated Other Comprehensive 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, 2020 |
$ |
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$ |
( |
) |
$ |
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$ |
( |
) |
$ |
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$ |
( |
) |
$ |
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Stock based compensation expense |
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Vested share units granted to Trustees |
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Net income |
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Dividends declared, including $ |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||
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Net unrealized gain on interest rate cap and swap contracts |
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Balance at January 31, 2021 |
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( |
) |
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( |
) |
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( |
) |
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Stock based compensation expense |
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Vested share units granted to Trustees |
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Vested share units issued to retired Trustee* |
( |
) |
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Distributions to noncontrolling interests |
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( |
) |
( |
) | |||||||||||||||||||||||
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| ||||||||||||||||||||||||||||
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Net income (loss) |
|
|
( |
) |
( |
) | ||||||||||||||||||||||
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| ||||||||||||||||||||||||||||
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Dividends declared, including $ |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||||
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| ||||||||||||||||||||||||||||
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Net unrealized gain on interest rate cap and swap contracts |
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|
|
| ||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||
|
Balance at April 30, 2021 |
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
$ |
| |||||||||||
|
| ||||||||||||||||||||||||||||
* Represents the issuance of treasury shares to retired Trustee for share units earned.
See Notes to Condensed Consolidated Financial Statements.
Page 7
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
SIX AND THREE MONTHS ENDED APRIL 30, 2020
(Unaudited)
|
Common Equity | ||||||||||||||||||||||||||||
|
Shares of Beneficial Interest |
Treasury Shares at Cost |
Undistributed Earnings (Dividends in Excess of Net Income) |
Accumulated Other Comprehensive 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, 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 Trustee* |
( |
) |
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Distributions to noncontrolling interests |
- |
( |
) |
( |
) | |||||||||||||||||||||||
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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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| ||||||||||||||||||||||||||||
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Stock based compensation expense |
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Vested share units granted to Trustees |
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Vested share units issued to retired Trustee* |
( |
) |
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Deconsolidation of subsidiary |
- |
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Net income (loss) |
|
|
( |
) |
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| ||||||||||||||||||||||||||||
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Net unrealized loss on interest rate swaps |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||||||||||
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| ||||||||||||||||||||||||||||
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Balance at April 30, 2020 |
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
$ |
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$ |
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$ |
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*
See Notes to Condensed Consolidated Financial Statements.
Page 8
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 2021 AND 2020
(Unaudited)
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Six Months Ended | ||||||
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April 30, | ||||||
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2021 |
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2020 | ||||
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(In Thousands of Dollars) | ||||||
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Operating activities: |
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|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
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|
|
|
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|
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Depreciation |
|
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Amortization |
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Stock based compensation expense |
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Trustee fees, consultant fee and related interest paid in stock units |
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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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Deferred rents - straight line rent |
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( |
) | ||
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Bad debt expense |
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Changes in operating assets and liabilities: |
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Tenants' security accounts |
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( |
) |
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|
( |
) |
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Accounts receivable, prepaid expenses and other assets |
|
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Accounts payable, accrued expenses and deferred trustee compensation payable |
|
|
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|
( |
) | |
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Deferred revenue |
|
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( |
) |
|
|
( |
) |
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Due to affiliate - accrued interest |
|
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|
|
|
|
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Deferred interest on mortgages |
|
|
( |
) |
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|
Net cash provided by operating activities |
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Investing activities: |
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|
|
Capital improvements - existing properties |
|
|
( |
) |
|
|
( |
) |
|
Deferred leasing costs |
|
|
( |
) |
|
|
( |
) |
|
Distribution from investment in tenancy-in-common |
|
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|
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Deconsolidation of subsidiary cash and cash equivalents |
|
|
|
|
|
( |
) | |
|
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
|
Financing activities: |
|
|
|
|
|
|
|
|
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Repayment of mortgages |
|
|
( |
) |
|
|
( |
) |
|
Deferred financing costs |
|
|
( |
) |
|
|
|
|
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Due to affiliate - loan repayment |
|
|
( |
) |
|
|
|
|
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Dividends paid |
|
|
( |
) |
|
|
( |
) |
|
Distributions to noncontrolling interests in subsidiaries |
|
|
( |
) |
|
|
( |
) |
|
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
|
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
|
|
|
|
( |
) | |
|
Cash, cash equivalents and restricted cash, beginning of period |
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash, end of period |
|
$ |
|
|
|
$ |
|
|
|
|
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|
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|
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Supplemental disclosure of cash flow data: |
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|
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|
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Interest paid |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
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Supplemental schedule of non cash activities: |
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|
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Operating activities: |
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|
|
|
|
|
|
|
|
Commercial tenant security deposits applied to accounts receivable |
|
$ |
|
|
|
$ |
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
Accrued capital expenditures, construction costs and pre-development costs |
|
$ |
|
|
|
$ |
|
|
|
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 condensed consolidated balance sheets: |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
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 9
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 six and three-month periods ended April 30, 2021 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, 2020 of First Real Estate Investment Trust of New Jersey (“FREIT”, “Trust”, “us”, “we”, “our” or the “Company”).
Reclassification:
Certain prior year cash flow line items have been reclassified to conform to the current year presentation.
Note 2 – Recently issued accounting standards:
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“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.
Note 3 – Dividends and earnings per share:
The Board of Trustees (“Board”) declared a second quarter dividend of $
Basic earnings per share is calculated by dividing net income attributable to common equity (numerator) by the weighted average number of shares and vested share units (See Note 14 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 increasing the number of shares to be added in computing diluted earnings per share. For the six months ended April 30, 2021, the outstanding stock options were anti-dilutive with no impact on earnings per share. For the three months ended April 30, 2021, the outstanding stock options increased the average dilutive shares outstanding by approximately
Note 4 – Interest rate cap and swap contracts:
In accordance with “Accounting Standards Codification Topic 815, Derivatives and Hedging ("ASC 815")”, FREIT is accounting for the Damascus Centre, LLC (“Damascus Centre”), FREIT Regency, LLC (“Regency”), Wayne PSC, LLC (“Wayne PSC”) and Station Place on Monmouth (“Station Place”) interest rate swaps and the Grande Rotunda, LLC (“Grande Rotunda”) interest rate cap as cash flow hedges marking these contracts to market, taking into account present interest rates compared to the contracted
Page 10
fixed rate over the life of the contract and recording the unrealized gain or loss on the swaps and cap in comprehensive income. For the six and three months ended April 30, 2021, FREIT recorded an unrealized gain of approximately $
The fair values are based on observable inputs (level 2 in the fair value hierarchy as provided by authoritative guidance).
Note 5 – Investment in tenancy-in-common:
On February 28, 2020, FREIT reorganized its subsidiary S and A Commercial Associates Limited Partnership (“S&A”) from a partnership into a tenancy-in-common form of ownership (“TIC”). Prior to this reorganization, FREIT owned a
Pursuant to the TIC agreement, FREIT ultimately acquired a
FREIT’s investment in the TIC was approximately $19.5 million and $20.1 million at April 30, 2021 and October 31, 2020, respectively. For the six and three months ended April 30, 2021, FREIT recognized a loss on investment in TIC of approximately $145,000 and $118,000, respectively, in the accompanying condensed consolidated statements of income. For the six and three months ended April 30, 2020, FREIT recognized a loss on investment in TIC of approximately $18,000 and $18,000, respectively, in the accompanying condensed consolidated statements of income.
Hekemian & Co., Inc. (“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, 2022, 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
Page 11
The following table summarizes the balance sheets of the Pierre Towers property as of April 30, 2021 and October 31, 2020, accounted for by the equity method:
|
April 30, |
October 31, | |||||
|
2021 |
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 six and three months ended April 30, 2021 and for the period from February 28, 2020 through April 30, 2020, accounted for by the equity method:
|
For the period from | |||||||||
|
Six Months Ended |
Three Months Ended |
February 28, 2020 | |||||||
|
April 30, 2021 |
April 30, 2021 |
through April 30, 2020 | |||||||
|
(In Thousands of Dollars) | |||||||||
|
| |||||||||
|
Revenue |
$ |
|
$ |
|
$ |
| |||
|
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) |
$ |
( |
$ |
( |
$ |
( | |||
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)
Page 12
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. Pending the resolution of this litigation, 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. On April 28, 2021, the Sellers amended the Answer to include (1) counterclaims against the Purchaser for breach of contract due to the Purchaser’s breach of confidentiality and non-disclosure obligations contained in the Purchase and Sale Agreement, and (2) third-party claims against Purchaser’s affiliate Kushner Realty Acquisition LLC for breach of its confidentiality and non-disclosure obligations contained in the non-disclosure agreement entered into by the parties in connection with the negotiation of the transactions contemplated by the Purchase and Sale Agreement, based on the conduct of the Purchaser and its affiliates after the Sellers terminated the Purchase and Sale Agreement.
In connection with these counterclaims and third-party claims, 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; (f) an order enjoining the Purchaser and its affiliates from engaging in further breaches of the Purchase and Sale Agreement and non-disclosure agreement, and compelling the Purchaser and its affiliates to return the Sellers’ confidential information and materials and to use best efforts to ensure the return of the Sellers’ confidential information and materials from third parties to whom the Purchaser and/or its affiliates provided such materials; and (g) such other relief as the Court deems just and equitable.
In the Answer filed by the Purchaser on September 15, 2020 and the Answer and Affirmative Defenses filed by the Purchaser and Kushner Realty Acquisition LLC on June 7, 2021, the Purchaser and Kushner Realty Acquisition LLC have generally denied the claims, counterclaims and allegations contained in the Sellers’ original and amended Answer, and asserted affirmative defenses to the Sellers’ claims and counterclaims.
The Sellers believe that the allegations set forth in the Complaint and Answer filed by the Purchaser and in the Answer and Affirmative Defenses filed by the Purchaser and Kushner Realty Acquisition LLC 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 April 30, 2021, the $
For the six and three months ended April 30, 2020, the Special Committee of the Board (“Special Committee”) incurred on behalf of the Company third party transaction costs for advisory, legal and other expenses primarily related to the Purchase and Sale Agreement and the Plan of Liquidation discussed in Note 7 in the amount of 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, the Plan of Liquidation did not become effective as the Sellers terminated the Purchase and Sale Agreement by written notice delivered to the Purchaser on April 30, 2020, and the transactions
Page 13
contemplated thereby were not consummated. Accordingly, the Trust did 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 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”) has been renewed and will expire on October 31, 2023. The Management Agreement is automatically renewed for successive periods of two years unless either party gives not less than six (6) months prior notice of non-renewal.
The Management Agreement requires the payment of management fees equal to
From time to time, FREIT engages Hekemian, or certain affiliates of Hekemian, to provide additional services, such as consulting services related to development, property sales and financing activities of FREIT. Separate fee arrangements are negotiated between Hekemian and FREIT with respect to such additional services. Such fees incurred for the six and three months ended April 30, 2021 were approximately $
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 and/or executive compensation (including interest and dividends) incurred by FREIT for the six months ended April 30, 2021 and 2020 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 (“Rotunda 100”), which owns a 40% minority equity interest in Grande Rotunda, 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. 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. On December 7, 2017, the Board approved a further extension of the
Page 14
previously amended maturity dates of these loans to the date or dates upon which distributions of cash are made by Grande Rotunda to its members as a result of a refinancing or sale of Grande Rotunda or the Rotunda property.
The aggregate outstanding principal balance of the Rotunda 100 notes was $
In Fiscal 2017, Grande Rotunda incurred substantial expenditures at the Rotunda property related to retail tenant improvements, leasing costs and operating expenditures which, in the aggregate, exceeded revenues as the property was still in the rent up phase and the construction loan held with Wells Fargo at that time was at its maximum level, with no additional funding available to draw. Accordingly, during Fiscal 2017 the equity owners in Grande Rotunda (FREIT with a
Note 9 – Mortgage financings and line of credit:
On September 30, 2020, Westwood Hills, LLC (“Westwood Hills”), a consolidated subsidiary, refinanced its $
On April 3, 2019, WestFREIT Corp. (owned 100% by FREIT) exercised its option to extend its loan secured by the Westridge Square shopping center in Frederick, Maryland, held by M&T Bank, with a then outstanding balance of approximately $
On February 7, 2018, Grande Rotunda refinanced its construction loan with a new loan held by Aareal Capital Corporation in the amount of approximately $
Page 15
FREIT’s revolving line of credit provided by the Provident Bank was renewed for a three-year term ending on October 31, 2023. Draws against the credit line can be used for working capital needs and standby letters of credit. Draws against the credit line are secured by mortgages on FREIT’s Franklin Crossing Shopping Center in Franklin Lakes, New Jersey and retail space in Glen Rock, New Jersey. The total line of credit is $
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. (See Note 6 to FREIT’s condensed consolidated financial statements for additional details.)
As a result of the negative impact of the COVID-19 pandemic at our commercial properties, in Fiscal 2020 we were granted debt payment relief from certain of our lenders on such properties in the form of deferral of principal and/or interest payments for a three-month period, 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 April 30, 2021 and October 31, 2020:
|
($ in Millions) |
April 30, 2021 |
October 31, 2020 | ||
|
| ||||
|
Fair Value |
$ |
$ | ||
|
| ||||
|
Carrying Value, Net |
$302.4 |
$305.4 |
Fair values are estimated based on market interest rates at April 30, 2021 and October 31, 2020 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
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, 2020. 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.
Page 16
Real estate rental revenue, operating expenses, NOI and recurring capital improvements for the reportable segments are summarized below and reconciled to condensed consolidated net income attributable to common equity for the six and three month periods ended April 30, 2021 and 2020. Asset information is not reported since FREIT does not use this measure to assess performance.
|
Six Months Ended |
Three Months Ended | |||||||||||||||
|
April 30, |
April 30, | |||||||||||||||
|
2021 |
2020 |
2021 |
2020 | |||||||||||||
|
(In Thousands of Dollars) |
(In Thousands of Dollars) | |||||||||||||||
|
Real estate rental revenue: | ||||||||||||||||
|
Commercial |
$ |
|
$ |
|
$ |
|
$ |
| ||||||||
|
Residential |
|
|
|
| ||||||||||||
|
Total real estate rental revenue |
|
|
|
| ||||||||||||
|
| ||||||||||||||||
|
Real estate operating expenses: | ||||||||||||||||
|
Commercial |
|
|
|
| ||||||||||||
|
Residential |
|
|
|
| ||||||||||||
|
Total real estate operating expenses |
|
|
|
| ||||||||||||
|
| ||||||||||||||||
|
Net operating income: | ||||||||||||||||
|
Commercial |
|
|
|
| ||||||||||||
|
Residential |
|
|
|
| ||||||||||||
|
Total net operating income |
$ |
|
$ |
|
$ |
|
$ |
| ||||||||
|
| ||||||||||||||||
|
| ||||||||||||||||
|
Recurring capital improvements - residential |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) | |
|
|
|
| ||||||||||||||||
|
Reconciliation to condensed consolidated net income attributable to common equity: | ||||||||||||||||
|
Segment NOI |
$ |
|
$ |
|
$ |
|
$ |
| ||||||||
|
Deferred rents - straight lining |
( |
) |
|
( |
) |
| ||||||||||
|
Investment income |
|
|
|
| ||||||||||||
|
General and administrative expenses |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
|
Third party transaction costs |
- |
(4,519 |
) |
- |
(1,137 |
) | ||||||||||
|
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 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
There was no ordinary taxable income for the fiscal year ending October 31, 2020 and no dividends were made/declared for Fiscal 2020. Accordingly, no provision for federal or state income taxes related to such ordinary taxable income was recorded in FREIT’s condensed consolidated financial statements.
As of April 30, 2021, FREIT had no material uncertain income tax positions. The tax years subsequent to and including the fiscal year ended October 31, 2017 remain open to examination by the major taxing jurisdictions.
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
Page 17
share, will vest in equal annual installments over a
On March 4, 2019, the Board approved the grant of an aggregate of
As of April 30, 2021,
The following table summarizes stock option activity for the six month periods ended April 30, 2021 and 2020:
|
Six Months Ended April 30, 2021 |
Six Months Ended April 30, 2020 | |||||||||||||
|
No. of Options |
Exercise |
No. of Options |
Exercise | |||||||||||
|
Outstanding |
Price |
Outstanding |
Price | |||||||||||
|
Options outstanding at beginning of period |
|
$ |
|
|
$ |
| ||||||||
|
Options granted during period |
|
|
|
| ||||||||||
|
Options forfeited/cancelled during period |
|
|
|
| ||||||||||
|
Options outstanding at end of period |
|
$ |
|
|
$ |
| ||||||||
|
Options vested and expected to vest |
|
| ||||||||||||
|
Options exercisable at end of period |
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For the six month periods ended April 30, 2021 and 2020, compensation expense related to stock options vested amounted to approximately $
The aggregate intrinsic value of options vested and expected to vest and options exercisable at April 30, 2021 was approximately $
Note 14 – Deferred fee plan:
On September 4, 2014, the Board approved amendments, effective November 1, 2014, to the FREIT Deferred Fee Plan for its Executive Officers and 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 six and three-month periods ended April 30, 2021 and 2020 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 six-month periods ended April 30, 2021 and 2020, the aggregate amounts of deferred Trustee fees together with related interest and dividends were approximately $
For the six-month periods ended April 30, 2021 and 2020, 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. As of April 30, 2021 and October 31, 2020, approximately $
Note 15 – Rental Income:
Commercial tenants:
Fixed lease income under our commercial operating leases generally includes fixed minimum lease consideration which is accrued on a straight-line basis over the terms of the leases. Variable lease income includes consideration based on sales, as well as reimbursements for real estate taxes, maintenance, insurance and certain other operating expenses of the properties.
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Minimum fixed lease consideration (in thousands of dollars) under non-cancelable tenant operating leases for each of the next five years and thereafter, excluding variable lease consideration and rents from tenants for which collectability is deemed to be constrained, for the years ending October 31, as of April 30, 2021, is as follows:
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Year Ending October 31, |
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2021* |
$ |
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2022 |
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2023 |
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2024 |
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2025 |
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Thereafter |
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$ |
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* | ||||
The above amounts assume that all leases which expire are not renewed and, accordingly, neither month-to-month nor rentals from replacement tenants are included.
Minimum future rentals do not include contingent rentals, which may be received under certain leases on the basis of percentage of reported tenants' sales volume. Rental income that is contingent on future events is not included in income until the contingency is resolved. Contingent rentals included in income for the six and three-month periods ended April 30, 2021 and 2020 were not material.
Residential tenants:
Lease terms for residential tenants are usually to
Note 16 – 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. Beginning in March 2020, 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. These orders have continued to evolve resulting in a full or partial lifting of these restrictions at various points over the past year. Vaccinations for the COVID-19 virus have begun to be widely distributed among the general U.S. population which has resulted in loosened restrictions previously mandated on our tenants identified as nonessential. However, the potential emergence of vaccine-resistant variants of COVID-19 could trigger restrictions to be put back in place. Such restrictions may include mandatory business shut-downs, reduced business operations and social distancing requirements.
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 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. 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 continued imposed restrictions as many of these tenants have not been able to open or resume operations at full capacity. While the overall average cash realization of monthly billings as compared to monthly cash collections for the commercial properties for the six months ended April 30, 2021 has resumed to pre-pandemic levels, the average annual occupancy rate has declined from approximately
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commercial tenants to outstanding receivables due. For the six and three months ended April 30, 2021, on a case by case basis, FREIT has offered some commercial tenants rent abatements over a specified time period totaling approximately $
As a result of the negative impact of the COVID-19 pandemic at our commercial properties, in Fiscal 2020 we were granted debt payment relief from certain of our lenders on such properties in the form of deferral of principal and/or interest payments for a three-month period, resulting in total deferred payments of approximately $
For the six months ended April 30, 2021, we have experienced a positive cash flow from operations with cash provided by operations of approximately $8.7 million. This could change based on the duration of the pandemic, which is uncertain. We believe that our cash balance as of April 30, 2021 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.
Note 17 – Reincorporation:
FREIT’s Board of Trustees has unanimously approved a proposal to change FREIT’s form of organization from a New Jersey real estate investment trust to a Maryland corporation (the “Reincorporation”). The effect of the Reincorporation will be to change the law applicable to our affairs from New Jersey law to Maryland law. The Reincorporation was approved by shareholders at the Annual Meeting of Shareholders on May 6, 2021 and FREIT is in the final stages of completing all items to finalize the reincorporation which will be accomplished by the merger of FREIT with and into its newly formed, wholly owned subsidiary, First Real Estate Investment Trust of New Jersey, Inc. (“FREIT Maryland”). On the effective date of the Reincorporation, the separate existence of FREIT will cease and FREIT Maryland, will succeed to all the business, properties, assets and liabilities of FREIT. Holders of shares of beneficial interest in FREIT will receive one newly issued share of common stock of FREIT Maryland for each share of FREIT that they own, without any action of shareholders required. We believe that after the Reincorporation, we will continue to be organized and will continue to operate in such a manner as to qualify for taxation as a REIT under the Internal Revenue Code of 1986, as amended.
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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
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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. | ||
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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. | ||
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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, 2020, 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. 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. | ||
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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. Beginning in March 2020, 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. These orders have continued to evolve resulting in a full or partial lifting of these restrictions at various points over the past year. Vaccinations for the COVID-19 virus have begun to be widely distributed among the general U.S. population which has resulted in loosened restrictions previously mandated on our tenants identified as nonessential. However, the potential emergence of vaccine-resistant variants of COVID-19 could trigger restrictions to be put back in place. Such restrictions may include mandatory business shut-downs, reduced business operations and social distancing requirements.
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 was the highest recorded rate since the Great Depression. Since April 2020, the U.S unemployment rate has declined to 6.1% as of April 2021, as many businesses continue to reopen and rehire employees following many of the COVID-19 mandated shutdown orders. However, the jobless rate remains well above the pre-pandemic levels of about 3.5%. 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
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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. The average annual occupancy rate for the residential properties (including the Pierre TIC) has increased from approximately 93.6% and 93.6%, respectively, for the six and three months ended April 30, 2020 to approximately 95.8% and 95.8%, respectively, for the six and three months ended April 30, 2021. The tenants at these properties, for the most part, continue to pay their rent.
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 continued imposed restrictions as many of these tenants have not been able to open or resume operations at full capacity. While the overall average cash realization of monthly billings as compared to monthly cash collections for the commercial properties for the six months ended April 30, 2021 has resumed to pre-pandemic levels, the average annual occupancy rate has declined from approximately 81.0% for the six months ended April 30, 2020 to approximately 76.6% for the six months ended April 30, 2021. During the first quarter of Fiscal 2021, Pet Valu, Inc., a pet store tenant, vacated several stores located in shopping centers owned by FREIT affiliates (Wayne PSC, Damascus Centre and Grande Rotunda) and terminated the related leases early paying an aggregate lease termination fee in the amount of approximately $260,000 (with a consolidated impact to FREIT of approximately $140,000). Until the space is re-leased at each of these properties, FREIT’s operating results will be adversely impacted from the loss of base rent and additional rent of approximately $0.4 million (with a consolidated impact to FREIT of approximately $0.2 million) on an annualized basis. The Company is closely monitoring changes in the collectability assessment of its tenant receivables as a result of certain tenants suffering adverse financial consequences related to the COVID-19 pandemic. For the six and three months ended April 30, 2021, rental revenue deemed uncollectible of approximately $0.9 million and $0.3 million (with a consolidated impact to FREIT of approximately $0.6 million and $0.2 million), respectively, was classified as a reduction in rental revenue based on our assessment of the probability of collecting substantially all of the remaining rents for certain tenants. As of April 30, 2021, FREIT has applied, net of amounts subsequently paid back by tenants, an aggregate of approximately $402,000 of security deposits from its commercial tenants to outstanding receivables due. For the six and three months ended April 30, 2021, on a case by case basis, FREIT has offered some commercial tenants rent abatements over a specified time period totaling approximately $101,000 and $51,000 (with a consolidated impact to FREIT of approximately $71,000 and $40,000), respectively. FREIT has not offered any significant new deferrals of rent over a specified time period during the six and three months ended April 30, 2021. FREIT currently remains in active discussions and negotiations with these impacted retail tenants.
As a result of the negative impact of the COVID-19 pandemic at our commercial properties, in Fiscal 2020 we were granted debt payment relief from certain of our lenders on such properties in the form of deferral of principal and/or interest payments for a three-month period, resulting in total deferred payments of approximately $1,013,000, which will become due at the maturity of the loans. As of April 30, 2021 and October 31, 2020, approximately $162,000 of this amount has been repaid, there will be no further deferrals of principal and/or interest payments on these loans and the balance due has been included in mortgages payable on the condensed consolidated balance sheets as of April 30, 2021 and October 31, 2020. (See Note 9 to FREIT’s condensed consolidated financial statements for additional details).
For the six months ended April 30, 2021, we have experienced a positive cash flow from operations with cash provided by operations of approximately $8.7 million. This could change based on the duration of the pandemic, which is uncertain. We believe that our cash balance as of April 30, 2021 of approximately $38.6 million coupled with a $13 million available line of credit (available through October 31, 2023, see Note 9) will provide us with sufficient liquidity for at least the next twelve months from the filing of this Form 10-Q.
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. However, we believe the actions we have taken and continue to take 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. (See Note 16 to FREIT’s condensed consolidated financial statements for further details.)
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.
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 evolve, 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, the magnitude and duration of the
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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 and the rollout of the vaccinations to the population.
Burlington Coat Factory (“Burlington”), which does business as a retail tenant at the Westridge Square Shopping Center located in Frederick, Maryland, did not exercise its option to renew its lease which is set to expire on November 30, 2021. On May 4, 2021, Burlington amended its lease extending the term of the lease for a period of one (1) year and ninety (90) days commencing on December 1, 2021 and expiring on February 28, 2023 (“Fourth Extension Period”). The fixed rent during this Fourth Extension Period shall be reduced from $59,120 per month to $35,830 per month. Additionally, Burlington has the right to terminate the lease at any time prior to the last day of the Fourth Extension Period by providing at least twelve (12) months prior written notice of such termination (the “Termination Notice”). In the event that Burlington delivers the Termination Notice, the term of the lease shall automatically end on the last day of the twelfth (12th) full calendar month immediately following receipt of the Termination Notice.
Reincorporation: FREIT’s Board of Trustees has unanimously approved a proposal to change FREIT’s form of organization from a New Jersey real estate investment trust to a Maryland corporation (the “Reincorporation”). The effect of the Reincorporation will be to change the law applicable to our affairs from New Jersey law to Maryland law. The Reincorporation was approved by shareholders at the Annual Meeting of Shareholders on May 6, 2021 and FREIT is in the final stages of completing all items to finalize the reincorporation which will be accomplished by the merger of FREIT with and into its newly formed, wholly owned subsidiary, First Real Estate Investment Trust of New Jersey, Inc. (“FREIT Maryland”). On the effective date of the Reincorporation, the separate existence of FREIT will cease and FREIT Maryland, will succeed to all the business, properties, assets and liabilities of FREIT. Holders of shares of beneficial interest in FREIT will receive one newly issued share of common stock of FREIT Maryland for each share of FREIT that they own, without any action of shareholders required. We believe that after the Reincorporation, we will continue to be organized and will continue to operate in such a manner as to qualify for taxation as a REIT under the Internal Revenue Code of 1986, as amended. (See Note 17 to FREIT’s condensed consolidated financial statements for further details.)
Debt Financing Availability: Financing has been available to FREIT and its affiliates. 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 (“Grande Rotunda”), a consolidated subsidiary, refinanced its construction loan with a new loan held by Aareal Capital Corporation in the amount of approximately $118.5 million with additional funding which was available through February 6, 2021 for retail tenant improvements and leasing costs in the amount of $3,380,000. This loan bears a floating interest rate at 285 basis points over the one-month LIBOR rate and had a maturity date of February 6, 2021 with two one-year options of Grande Rotunda to extend the maturity of this loan, subject to certain requirements as provided for in the loan agreement. Grande Rotunda had purchased an interest rate cap on LIBOR for the full amount that could have been drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan which matured on March 5, 2020. On February 28, 2020, Grande Rotunda had purchased an interest rate cap on LIBOR, with an effective date of March 5, 2020, for the full amount that could have been drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for one year, which matured on March 5, 2021. Effective February 6, 2021, Grande Rotunda exercised the first extension option on this loan with a balance in the amount of approximately $118.5 million, extending the loan one year with a new maturity date of February 6, 2022, which may be extended further for an additional one-year term at Grande Rotunda’s option. Principal payments in the amount of $500,000 were required upon exercise of the first loan extension option and per calendar quarter thereafter. If the second loan extension option is exercised, principal payments in the amount of $750,000 will be required upon exercise of the second loan extension option and per calendar quarter thereafter. Additionally, Grande Rotunda purchased an interest rate cap on LIBOR, with an effective date of March 5, 2021, for the loan amount of approximately $118.5 million, capping the one-month LIBOR rate at 3% for one year expiring on February 6, 2022. At April 30, 2021, the total amount outstanding on this loan was approximately $117.5 million and the interest rate was approximately 2.96%.
On September 30, 2020, Westwood Hills, LLC (“Westwood Hills”), a consolidated subsidiary, refinanced its $19.2 million loan (which would have matured on November 1, 2020) with a new loan held by ConnectOne Bank in the amount of $25,000,000, with additional funding available in the amount of $250,000 for legal fees potentially incurred by the lender related to the lis pendens on this property. (See Note 6 to FREIT’s condensed consolidated financial statements for additional details in regards to the lis pendens.) This loan, secured by an apartment building in Westwood, New Jersey, is interest-only based on a floating rate at 400 basis points over the one-month LIBOR rate with a floor of 4.15% and has a maturity date of October 1, 2022 with the option of Westwood Hills to extend for two (2) additional six (6)-month periods from the maturity date, subject to certain provisions of the loan agreement. This refinancing resulted in: (i) a change in the annual interest rate from a fixed rate of 4.62% to a variable rate with a floor of 4.15% and (ii) net refinancing proceeds of approximately $5.6 million that were distributed to the partners in Westwood Hills with FREIT receiving approximately $2.2 million based on its 40% membership interest in Westwood Hills. As of April 30, 2021, $25,000,000 of this loan was drawn and outstanding and the interest rate was based on the floor of 4.15%.
On April 3, 2019, WestFREIT Corp. (owned 100% by FREIT) exercised its option to extend its loan secured by the Westridge Square shopping center in Frederick, Maryland, 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 required monthly principal payments of
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$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 to November 1, 2020 and further extended to January 31, 2021 under the same terms and conditions of the existing agreement. WestFREIT Corp. entered into a loan extension and modification agreement with M&T Bank, effective beginning on February 1, 2021, which requires monthly principal payments of $49,250 plus interest based on a floating interest rate equal to 255 basis points over the one-month LIBOR and has a maturity date of January 31, 2022, with the option of WestFREIT Corp. to extend for an additional one-year period through January 31, 2023, subject to certain requirements as provided for in the loan agreement including the lease-up of certain space. As of April 30, 2021, approximately $21.5 million of this loan was outstanding and the interest rate was approximately 2.68%.
FREIT’s revolving line of credit provided by the Provident Bank was renewed for a three-year term ending on October 31, 2023. Draws against the credit line can be used for working capital needs and standby letters of credit. Draws against the credit line are secured by mortgages on FREIT’s Franklin Crossing Shopping Center in Franklin Lakes, New Jersey and retail space in Glen Rock, New Jersey. The total line of credit is $13 million and the interest rate on the amount outstanding is based on a floating interest rate of prime minus 25 basis points with a floor of 3.75%. As of April 30, 2021 and October 31, 2020, 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, which are expected to be refinanced and/or extended), real estate taxes, recurring capital improvements at its properties and other needs to maintain its status as a REIT for at least a period of one year from the date of filing of this quarterly report on Form 10-Q.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Pursuant to the SEC disclosure guidance for "Critical Accounting Policies," the SEC defines Critical Accounting Policies as those that require the application of management's most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, the preparation of which takes into account estimates based on judgments and assumptions that affect certain amounts and disclosures. Accordingly, actual results could differ from these estimates. The accounting policies and estimates used, which are outlined in Note 1 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020, have been applied consistently as of April 30, 2021, and for the six and three months ended April 30, 2021 and 2020. 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.
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RESULTS OF OPERATIONS
Real estate revenue for the six months ended April 30, 2021 (“Current Six Months”) decreased 12.7% to $25,558,000, compared to $29,281,000 for the six months ended April 30, 2020 (“Prior Year’s Six Months”). For the three months ended April 30, 2021 (“Current Quarter”) real estate revenue decreased 6.5% to $12,804,000, compared to $13,688,000 for the three months ended April 30, 2020 (“Prior Year’s Quarter”). The decline in revenue for the Current Six Months was primarily attributable to the following: (a) a decline in revenue of approximately $2.7 million resulting from the 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; (b) a reduction in revenue in the amount of approximately $0.9 million as compared to the Prior Year’s Six Months due to rental revenue being deemed uncollectible and classified as a reduction in rental revenue attributed to commercial tenants suffering adverse financial consequences as a result of the COVID-19 pandemic; (c) a decline in revenue from the commercial segment of approximately $0.5 million, (net of lease termination payments received from PetValu in the amount of approximately $0.3 million and a settlement payment in the amount of approximately $0.2 million received from Cobb Theatres), primarily driven by a decline in the average occupancy rate to 76.6% from 81.0% in the Prior Year’s Six Months; offset by (d) an increase in revenue from the residential segment of approximately $0.4 million primarily driven by an increase in the average occupancy rate to 96.2% from 94.0% in the Prior Year’s Six Months and an increase in base rents across most properties. The decline in revenue for the Current Quarter was primarily attributable to the following: (a) a decline in revenue of approximately $0.6 million resulting from the 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; (b) a reduction in revenue in the amount of approximately $0.3 million as compared to the Prior Year’s Quarter due to rental revenue being deemed uncollectible and classified as a reduction in rental revenue attributed to commercial tenants suffering adverse financial consequences as a result of the COVID-19 pandemic; (c) a decline in revenue from the commercial segment of approximately $0.2 million primarily driven by a decline in the average occupancy rate to 76.1% from 80.5% in the Prior Year’s Quarter; offset by (d) an increase in revenue from the residential segment of approximately $0.3 million primarily driven by an increase in the average occupancy rate to 96.5% from 93.9% in the Prior Year’s Quarter and an increase in base rents across most properties.
Net income attributable to common equity (“net income-common equity”) for the Current Six Months and Current Quarter was $567,000 ($0.08 per share basic and diluted) and $9,000 ($0.00 per share basic and diluted), compared to $24,958,000 ($3.57 per share basic and $3.56 per share diluted) and $27,220,000 ($3.89 per share basic and $3.88 per share diluted), for the Prior Year’s comparable periods, respectively.
Adjusted net income (loss) for the Current Six Months and Current Quarter was net income of $716,000 ($0.10 per share basic and diluted) and net loss of $63,000 (($0.01)) per share basic and diluted), compared to net loss of $2,565,000 (($0.37) per share basic and diluted) and $544,000 (($0.08) per share basic and diluted), for the Prior Year’s comparable periods, respectively. Adjusted net income (loss) 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. The increase in adjusted net income for the Current Six Months was primarily driven by the following: (a) a decrease in third party transaction costs incurred in the Prior Year’s Six Months of approximately $4.5 million; (b) a decrease in net financing costs of approximately $1.1 million (with a consolidated impact to FREIT of approximately $0.8 million), (excluding the impact of the deconsolidation of the operating results of the Pierre Towers from FREIT’s operating results of approximately $0.6 million in interest expense), primarily driven by a decline in interest rates on variable mortgage loans; (c) a decline in expense for the reserve of uncollectible rents for commercial tenants of approximately $0.5 million (with a consolidated impact to FREIT of approximately $0.3 million) primarily resulting from the reclassification of rental revenue being deemed uncollectible from expense to a reduction in rental revenue; offset by (d) a reduction in revenue, excluding the impact of the conversion of the Pierre Towers property to a TIC, in the amount of approximately $1.1 million (with a consolidated impact to FREIT of approximately $0.5 million) as explained above; (e) an increase in general & administrative (“G&A”) expenses of approximately $0.9 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; (f) an increase in snow removal costs due to a harsher winter in Fiscal 2021 of approximately $0.5 million (with a consolidated impact to FREIT of approximately $0.4 million); and (g) a decrease in adjusted net income with an impact of approximately $0.3 million attributed to the Pierre Towers deconsolidation from FREIT’s operating results in the Prior Year’s Six Months (with a consolidated impact to FREIT of approximately $0.3 million). The decrease in adjusted net loss for the Current Quarter was primarily driven by the following: (a) a decrease in third party transaction costs incurred in the Prior Year’s Quarter of approximately $1.1 million; (b) a decrease in net financing costs of approximately $0.5 million (with a consolidated impact to FREIT of approximately $0.3 million), (excluding the impact of the deconsolidation of the operating results of the Pierre Towers from FREIT’s operating results of approximately $0.2 million in interest expense), driven by a decline in interest rates on variable mortgage loans; (c) a decline in expense for the reserve of uncollectible rents of approximately $0.4 million (with a consolidated impact to FREIT of approximately $0.3 million) primarily resulting from the reclassification of rental revenue being deemed uncollectible from expense to a reduction in rental revenue; offset by (d) an increase in snow removal costs due to a harsher winter in Fiscal 2021 of approximately $0.5 million (with a consolidated impact to FREIT of approximately $0.4 million); (e) a reduction in revenue, excluding the impact of the conversion of the Pierre Towers property to a TIC, in the amount of approximately $0.3 million (with a consolidated impact to FREIT of approximately $0.1 million) as explained above; and (f) an increase in G&A expenses of approximately $0.4 million primarily
Page 25
driven by an increase in legal costs attributed to the legal proceedings between FREIT and certain of its affiliates and Sinatra Properties, LLC. (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-common equity for the six and three months ended April 30, 2021 and 2020:
|
NET INCOME COMPONENTS |
Six Months Ended |
Three Months Ended | ||||||||||||||||||||||
|
April 30, |
April 30, | |||||||||||||||||||||||
|
2021 |
2020 |
Change |
2021 |
2020 |
Change | |||||||||||||||||||
|
(In Thousands of Dollars) |
(In Thousands of Dollars) | |||||||||||||||||||||||
|
Income from real estate operations: |
| |||||||||||||||||||||||
|
Commercial properties |
$ |
6,390 |
$ |
7,773 |
$ |
(1,383 |
) |
$ |
2,872 |
$ |
3,420 |
$ |
(548 |
) | ||||||||||
|
Residential properties |
7,967 |
9,264 |
(1,297 |
) |
4,022 |
4,389 |
(367 |
) | ||||||||||||||||
|
Total income from real estate operations |
14,357 |
17,037 |
(2,680 |
) |
6,894 |
7,809 |
(915 |
) | ||||||||||||||||
|
|
| |||||||||||||||||||||||
|
Financing costs: |
| |||||||||||||||||||||||
|
Fixed rate mortgages |
(2,903 |
) |
(4,055 |
) |
1,152 |
(1,442 |
) |
(1,844 |
) |
402 |
| |||||||||||||
|
Floating rate mortgages |
(2,581 |
) |
(3,098 |
) |
517 |
(1,265 |
) |
(1,466 |
) |
201 |
| |||||||||||||
|
Other - Corporate interest |
(140 |
) |
(210 |
) |
70 |
(79 |
) |
(97 |
) |
18 |
| |||||||||||||
|
Mortgage cost amortization |
(568 |
) |
(548 |
) |
(20 |
) |
(274 |
) |
(269 |
) |
(5 |
) | ||||||||||||
|
Total financing costs |
(6,192 |
) |
(7,911 |
) |
1,719 |
(3,060 |
) |
(3,676 |
) |
616 |
| |||||||||||||
|
|
| |||||||||||||||||||||||
|
Investment income |
59 |
136 |
(77 |
) |
29 |
64 |
(35 |
) | ||||||||||||||||
|
|
| |||||||||||||||||||||||
|
General & administrative expenses: |
| |||||||||||||||||||||||
|
Accounting fees |
(264 |
) |
(326 |
) |
62 |
(110 |
) |
(161 |
) |
51 | ||||||||||||||
|
Legal and professional fees |
(1,177 |
) |
(35 |
) |
(1,142 |
) |
(645 |
) |
(17 |
) |
(628 |
) | ||||||||||||
|
Trustees and consultant fees |
(465 |
) |
(714 |
) |
249 |
(228 |
) |
(295 |
) |
67 |
| |||||||||||||
|
Stock option expense |
(24 |
) |
(24 |
) |
- |
(12 |
) |
(12 |
) |
- |
| |||||||||||||
|
Corporate expenses |
(800 |
) |
(729 |
) |
(71 |
) |
(475 |
) |
(571 |
) |
96 | |||||||||||||
|
Total general & administrative expenses |
(2,730 |
) |
(1,828 |
) |
(902 |
) |
(1,470 |
) |
(1,056 |
) |
(414 |
) | ||||||||||||
|
|
| |||||||||||||||||||||||
|
Third party transaction costs |
- |
(4,519 |
) |
4,519 |
- |
(1,137 |
) |
1,137 | ||||||||||||||||
|
Depreciation |
(4,633 |
) |
(5,462 |
) |
829 |
(2,338 |
) |
(2,530 |
) |
192 |
| |||||||||||||
|
Loss on investment in tenancy-in-common |
(145 |
) |
(18 |
) |
(127 |
) |
(118 |
) |
(18 |
) |
(100 |
) | ||||||||||||
|
Adjusted net income (loss) |
716 |
(2,565 |
) |
3,281 |
(63 |
) |
(544 |
) |
481 | |||||||||||||||
|
|
| |||||||||||||||||||||||
|
Gain on deconsolidation of subsidiary |
- |
27,680 |
(27,680 |
) |
- |
27,680 |
(27,680 |
) | ||||||||||||||||
|
Net income (loss) |
716 |
25,115 |
(24,399 |
) |
(63 |
) |
27,136 |
(27,199 |
) | |||||||||||||||
|
|
| |||||||||||||||||||||||
|
Net (income) loss attributable to noncontrolling interests in subsidiaries |
(149 |
) |
(157 |
) |
8 |
72 |
84 |
(12 |
) | |||||||||||||||
|
|
| |||||||||||||||||||||||
|
Net income attributable to common equity |
$ |
567 |
$ |
24,958 |
$ |
(24,391 |
) |
$ |
9 |
$ |
27,220 |
$ |
(27,211 |
) | ||||||||||
The condensed consolidated results of operations for the Current Six 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 26
SEGMENT INFORMATION
The following tables set forth comparative net operating income ("NOI") data for FREIT’s real estate segments and reconciles the NOI to condensed consolidated net income-common equity for the Current Six Months and Current Quarter as compared to the Prior Year’s comparable periods (see below for definition of NOI):
|
Commercial |
Residential |
Combined | ||||||||||||||||||||||||||||||||||||||
|
Six Months Ended April 30, |
Increase (Decrease) |
Six Months Ended April 30, |
Increase (Decrease) |
Six Months Ended April 30, | ||||||||||||||||||||||||||||||||||||
|
2021 |
2020 |
$ |
% |
2021 |
2020 |
$ |
% |
2021 |
2020 | |||||||||||||||||||||||||||||||
|
(In Thousands) |
(In Thousands) |
(In Thousands) | ||||||||||||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||||||||||
|
Rental income |
$ |
8,987 |
$ |
10,187 |
$ |
(1,200 |
) |
-11.8 |
% |
$ |
13,141 |
$ |
15,149 |
$ |
(2,008 |
) |
-13.3 |
% |
$ |
22,128 |
$ |
25,336 | ||||||||||||||||||
|
Reimbursements |
3,119 |
3,346 |
(227 |
) |
-6.8 |
% |
78 |
76 |
2 |
2.6 |
% |
3,197 |
3,422 | |||||||||||||||||||||||||||
|
Other |
308 |
15 |
293 |
1953.3 |
% |
138 |
387 |
(249 |
) |
-64.3 |
% |
446 |
402 | |||||||||||||||||||||||||||
|
Total revenue |
12,414 |
13,548 |
(1,134 |
) |
-8.4 |
% |
13,357 |
15,612 |
(2,255 |
) |
-14.4 |
% |
25,771 |
29,160 | ||||||||||||||||||||||||||
|
Operating expenses |
5,811 |
5,896 |
(85 |
) |
-1.4 |
% |
5,390 |
6,348 |
(958 |
) |
-15.1 |
% |
11,201 |
12,244 | ||||||||||||||||||||||||||
|
Net operating income |
$ |
6,603 |
$ |
7,652 |
$ |
(1,049 |
) |
-13.7 |
% |
$ |
7,967 |
$ |
9,264 |
$ |
(1,297 |
) |
-14.0 |
% |
14,570 |
16,916 | ||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||||||||||
|
Average Occupancy % |
76.6% |
81.0% |
-4.4 |
% |
96.2%* |
94.0%* |
2.2 |
% | ||||||||||||||||||||||||||||||||
|
Reconciliation to condensed consolidated net income-common equity: | |||||||||
|
Deferred rents - straight lining |
(213 |
) |
121 | ||||||
|
Investment income |
59 |
136 | |||||||
|
General and administrative expenses |
(2,730 |
) |
(1,828 |
) | |||||
|
Third party transaction costs |
- |
(4,519 |
) | ||||||
|
Gain on deconsolidation of subsdiary |
- |
27,680 | |||||||
|
Loss on investment in tenancy-in-common |
(145 |
) |
(18 |
) | |||||
|
Depreciation |
(4,633 |
) |
(5,462 |
) | |||||
|
Financing costs |
(6,192 |
) |
(7,911 |
) | |||||
|
Net income |
716 |
25,115 | |||||||
|
Net income attributable to noncontrolling interests in subsidiaries |
(149 |
) |
(157 |
) | |||||
|
Net income attributable to common equity |
$ |
567 |
$ |
24,958 | |||||
|
Commercial |
Residential |
Combined | ||||||||||||||||||||||||||||||||||||||
|
Three Months Ended April 30, |
Increase (Decrease) |
Three Months Ended April 30, |
Increase (Decrease) |
Three Months Ended April 30, | ||||||||||||||||||||||||||||||||||||
|
2021 |
2020 |
$ |
% |
2021 |
2020 |
$ |
% |
2021 |
2020 | |||||||||||||||||||||||||||||||
|
(In Thousands) |
(In Thousands) |
(In Thousands) | ||||||||||||||||||||||||||||||||||||||
|
Rental income |
$ |
4,436 |
$ |
5,063 |
$ |
(627 |
) |
-12.4 |
% |
$ |
6,636 |
$ |
6,973 |
$ |
(337 |
) |
-4.8 |
% |
$ |
11,072 |
$ |
12,036 | ||||||||||||||||||
|
Reimbursements |
1,615 |
1,469 |
146 |
9.9 |
% |
38 |
37 |
1 |
2.7 |
% |
1,653 |
1,506 | ||||||||||||||||||||||||||||
|
Other |
12 |
2 |
10 |
500.0 |
% |
74 |
86 |
(12 |
) |
-14.0 |
% |
86 |
88 | |||||||||||||||||||||||||||
|
Total revenue |
6,063 |
6,534 |
(471 |
) |
-7.2 |
% |
6,748 |
7,096 |
(348 |
) |
-4.9 |
% |
12,811 |
13,630 | ||||||||||||||||||||||||||
|
Operating expenses |
3,184 |
3,172 |
12 |
0.4 |
% |
2,726 |
2,707 |
19 |
0.7 |
% |
5,910 |
5,879 | ||||||||||||||||||||||||||||
|
Net operating income |
$ |
2,879 |
$ |
3,362 |
$ |
(483 |
) |
-14.4 |
% |
$ |
4,022 |
$ |
4,389 |
$ |
(367 |
) |
-8.4 |
% |
6,901 |
7,751 | ||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||||||||||
|
Average Occupancy % |
76.1% |
80.5% |
-4.4 |
% |
96.5%* |
93.9%* |
2.6 |
% | ||||||||||||||||||||||||||||||||
|
Reconciliation to condensed consolidated net income-common equity: | |||||||||
|
Deferred rents - straight lining |
(7 |
) |
58 | ||||||
|
Investment income |
29 |
64 | |||||||
|
General and administrative expenses |
(1,470 |
) |
(1,056 |
) | |||||
|
Third party transaction costs |
- |
(1,137 |
) | ||||||
|
Gain on deconsolidation of subsidiary |
- |
27,680 | |||||||
|
Loss on investment in tenancy-in-common |
(118 |
) |
(18 |
) | |||||
|
Depreciation |
(2,338 |
) |
(2,530 |
) | |||||
|
Financing costs |
(3,060 |
) |
(3,676 |
) | |||||
|
Net (loss) income |
(63 |
) |
27,136 | ||||||
|
Net loss attributable to noncontrolling interests in subsidiaries |
72 |
84 | |||||||
|
Net income attributable to common equity |
$ |
9 |
$ |
27,220 | |||||
|
* |
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 27
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.
As indicated in the tables above under the caption Segment Information, total revenue from FREIT’s commercial segment for the Current Six Months and Current Quarter decreased by 8.4% and 7.2%, respectively, and NOI decreased by 13.7% and 14.4%, respectively, as compared to the Prior Year’s comparable periods. Average occupancy for all commercial properties for the Current Six Months and Current Quarter decreased by 4.4% and 4.4%, respectively, as compared to the Prior Year’s comparable periods. The decline in revenue for the Current Six Months was primarily attributable to the following: (a) a reduction in revenue in the amount of approximately $0.7 million (excluding the straight-line rent receivable write-off of approximately $0.2 million) due to rental revenue being deemed uncollectible and classified as a reduction in rental revenue attributed to commercial tenants suffering adverse financial consequences as a result of the COVID-19 pandemic; (b) a decline in revenue of approximately $0.3 million, (net of lease termination payments received from PetValu in the amount of approximately $0.3 million and a settlement payment in the amount of approximately $0.2 million received from Cobb Theatres), primarily driven by a decline in the average occupancy rate; and (c) a decrease in revenue of approximately $0.1 million attributed to commercial rent abatements resulting from the COVID-19 pandemic. The decline in NOI for the Current Six Months was primarily attributable to the following: (a) a decline in revenue of approximately $1.1 million as described above; (b) an increase in snow removal costs due to a harsher winter in Fiscal 2021 of approximately $0.4 million; offset by (c) a decline in expense for the reserve of uncollectible rents of approximately $0.5 million primarily resulting from the reclassification of rental revenue being deemed uncollectible from expense to a reduction in rental revenue. The decline in revenue for the Current Quarter was primarily attributable to the following: (a) a reduction in revenue in the amount of approximately $0.3 million due to rental revenue being deemed uncollectible and classified as a reduction in rental revenue attributed to commercial tenants suffering adverse financial consequences as a result of the COVID-19 pandemic; and (b) a decline in revenue of approximately $0.2 million primarily driven by a decline in the average occupancy rate. The decline in NOI for the Current Quarter was primarily attributable to the following: (a) a decline in revenue of approximately $0.5 million as described above; (b) an increase in snow removal costs due to a harsher winter in Fiscal 2021 of approximately $0.4 million; offset by (c) a decline in expense for the reserve of uncollectible rents of approximately $0.4 million primarily resulting from the reclassification of rental revenue being deemed uncollectible from expense to a reduction in rental revenue.
Same Property Operating Results: FREIT’s commercial segment currently contains eight (8) same properties. (See definition of same property under Segment Information above.) Since all of FREIT’s commercial properties are considered same properties in the Current Six Months and Current Quarter, refer to the preceding paragraph for discussion of changes in same property results.
Leasing: The following tables reflect leasing activity at FREIT’s commercial properties for comparable leases (leases executed for spaces in which there was a tenant at some point during the previous twelve-month period) and non-comparable leases for the Current Six Months:
|
RETAIL: |
Number of Leases |
Lease Area (Sq. Ft.) |
Weighted Average Lease Rate (per Sq. Ft.) |
Weighted Average Prior Lease Rate (per Sq. Ft.) |
% Increase (Decrease) |
Tenant Improvement Allowance (per Sq. Ft.) (a) |
Lease Commissions (per Sq. Ft.) (a) | |||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Comparable leases (b) |
7 |
14,737 |
$ |
24.82 |
$ |
25.96 |
-4.4 |
% |
$ |
- |
$ |
0.40 |
| |||||||||||||||
|
|
| |||||||||||||||||||||||||||
|
Non-comparable leases |
3 |
5,356 |
$ |
41.45 |
N/A |
N/A |
$ |
2.97 |
$ |
2.07 |
| |||||||||||||||||
|
|
| |||||||||||||||||||||||||||
|
Total leasing activity |
10 |
20,093 |
| |||||||||||||||||||||||||
|
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) |
7 |
15,037 |
$ |
32.20 |
$ |
30.54 |
5.4 |
% |
$ |
- |
$ |
0.43 |
| |||||||||||||||
|
|
| |||||||||||||||||||||||||||
|
Non-comparable leases |
1 |
3,182 |
$ |
23.27 |
N/A |
N/A |
$ |
- |
$ |
1.39 |
| |||||||||||||||||
|
|
| |||||||||||||||||||||||||||
|
Total leasing activity |
8 |
18,219 |
| |||||||||||||||||||||||||
|
(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. |
During the first quarter of Fiscal 2021, Pet Valu, Inc., a pet store tenant, vacated several stores located in shopping centers owned by FREIT affiliates (Wayne PSC, Damascus Centre and Grande Rotunda) and terminated the related leases early paying an aggregate lease termination fee in the amount of approximately $260,000 (with a consolidated impact to FREIT of approximately $140,000). Until the space is re-leased at each of these properties, FREIT’s operating results will be adversely impacted from the loss of base rent and additional rent of approximately $0.4 million (with a consolidated impact to FREIT of approximately $0.2 million) on an annualized basis.
Page 28
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. Until this space is re-leased, FREIT’s operating results will be adversely impacted from loss of base rent and additional rent of approximately $1.1 million (with a consolidated impact to FREIT of approximately $0.7 million) on an annualized basis. During the first quarter ended January 31, 2021, FREIT received a settlement payment from Cobb Theatre in the amount of approximately $0.2 million (with a consolidated impact to FREIT of approximately $0.1 million). The Company is currently exploring all possible options for the re-leasing of this space.
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 Accounting Standards Codification 810, “Consolidation”, FREIT’s investment in the TIC is 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. (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 residential segment for the Current Six Months and Current Quarter decreased by 14.4% and 4.9%, respectively, and NOI decreased by 14.0% and 8.4%, respectively, as compared to the Prior Year’s comparable periods. The decline in revenue for the Current Six 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 TIC as of February 28, 2020 resulting in a decline in revenue of approximately $2.7 million; offset by (b) an increase in revenue of approximately $0.4 million driven by an increase in the average occupancy rate by approximately 2.2% over the Prior Year’s Six Months and an increase in base rent across most properties. The decline in NOI for the Current Six 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 TIC as of February 28, 2020 resulting in a decline in NOI of approximately $1.3 million; (b) an increase in operating expenses of approximately $0.2 million partially driven by an increase in snow removal costs due to a harsher winter in Fiscal 2021; (c) an increase in repairs and maintenance of approximately $0.1 million; offset by (d) an increase in revenue of approximately $0.4 million as explained above. 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 $0.6 million; offset by (b) an increase in revenue of approximately $0.3 million, primarily driven by an increase in the average occupancy rate by approximately 2.6% over the Prior Year’s Quarter and an increase in base rents across most properties. The decline in NOI 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 NOI of approximately $0.3 million; (b) an increase in operating expenses of approximately $0.2 million partially driven by an increase in snow removal costs due to a harsher winter in Fiscal 2021; offset by (c) an increase in revenue of approximately $0.3 million as explained above.
Same Property Operating Results: FREIT’s residential segment currently contains seven (7) same properties. (See definition of same property under Segment Information above.) The 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 Six Months and Current Quarter increased by 3.1% and 4.3%, respectively, and same property NOI increased by 0.2% and decreased by 1.9%, 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 $1,952 and $1,932, respectively. A 1% decline in annual average occupancy, or a 1% decline in average rents from current levels, results in an annual revenue decline of approximately $274,000 and $264,000, 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.
Page 29
FINANCING COSTS
|
Six Months Ended April 30, |
Three Months Ended April 30, | |||||||||||||||
|
2021 |
2020 |
2021 |
2020 | |||||||||||||
|
(In Thousands of Dollars) |
(In Thousands of Dollars) | |||||||||||||||
|
Fixed rate mortgages (a): | ||||||||||||||||
|
1st Mortgages | ||||||||||||||||
|
Existing |
$ |
2,903 |
$ |
4,055 |
$ |
1,442 |
$ |
1,844 | ||||||||
|
New |
- |
- |
- |
- | ||||||||||||
|
Variable rate mortgages: | ||||||||||||||||
|
1st Mortgages | ||||||||||||||||
|
Existing |
2,581 |
3,098 |
1,265 |
1,466 | ||||||||||||
|
New |
- |
- |
- |
- | ||||||||||||
|
Other |
140 |
210 |
79 |
97 | ||||||||||||
|
Total financing costs, gross |
5,624 |
7,363 |
2,786 |
3,407 | ||||||||||||
|
Amortization of mortgage costs |
568 |
548 |
274 |
269 | ||||||||||||
|
Total financing costs, net |
$ |
6,192 |
$ |
7,911 |
$ |
3,060 |
$ |
3,676 | ||||||||
|
(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 Six Months decreased by approximately $1,719,000 or 21.7%, compared to the Prior Year’s Six Months which is primarily attributable to the following: (a) a decline in interest on the variable mortgage loans for the Rotunda and WestFREIT properties of approximately $1,039,000 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 as of February 28, 2020 resulting in a decrease in net financing costs of approximately $645,000. Total financing costs for the Current Quarter decreased by approximately $616,000 or 16.8%, compared to the Prior Year’s Quarter which is primarily attributable to the following: (a) a decline in interest on the variable mortgage loans for the Rotunda and WestFREIT properties of approximately $447,000 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 as of February 28, 2020 resulting in a decrease in net financing costs of approximately $161,000. (See Note 5 to FREIT’s condensed consolidated financial statements for further details on the deconsolidation of the Pierre Towers property.)
GENERAL AND ADMINISTRATIVE EXPENSES (“G&A”)
G&A expense for the Current Six Months and Current Quarter was approximately $2,730,000 and $1,470,000, respectively, compared to $1,828,000 and $1,056,000, 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 expenses. The increase in G&A costs for the Current Six Months was primarily driven by the following: (a) an increase in legal costs of approximately $1,108,000 resulting from the legal proceedings between FREIT and certain of its affiliates and Sinatra Properties, LLC; (b) an increase in corporate expenses of approximately $71,000 primarily attributed to reincorporation expenses incurred in the Current Six Months of approximately $396,000 to reincorporate FREIT in the state of Maryland offset by costs incurred in the Prior Year’s Six Months for the formation and transfer of the Pierre subsidiary to a TIC of approximately $293,000; offset by (c) a decline in Trustees’ and consultant fees of approximately $249,000. The increase in G&A costs for the Current Quarter was primarily driven by the following: (a) an increase in legal costs of approximately $628,000 resulting from the legal proceedings between FREIT and certain of its affiliates and Sinatra Properties, LLC; offset by (b) a decrease in corporate expenses of approximately $96,000 primarily attributed to reincorporation expenses incurred in the Current Quarter of approximately $257,000 to reincorporate FREIT in the state of Maryland offset by costs incurred in the Prior Year’s Quarter for the formation and transfer of the Pierre subsidiary to a TIC of approximately $293,000; and (c) a decline in Trustees’ and consultant fees of approximately $67,000.
THIRD PARTY TRANSACTION COSTS
The Special Committee of the Board (“Special Committee”) incurred on behalf of the Company third party transaction costs for advisory, legal and other expenses primarily related to the Purchase and Sale Agreement and the Plan of Liquidation (See Notes 6 and 7 for additional details) in the amount of approximately $0 and $0, respectively for the Current Six Months and Current Quarter, compared to approximately $4,519,000 and $1,137,000, respectively, for the Prior Year’s comparable periods. On April 30, 2020, the Sellers delivered written notice to the Purchaser of the Sellers' termination of the Purchase and Sale Agreement (See Note 6 for details) and on May 7, 2020, the Board approved the elimination of the Special Committee. No further transaction costs were incurred thereafter.
DEPRECIATION
Depreciation expense for the Current Six Months and Current Quarter was approximately $4,633,000 and $2,338,000, respectively, compared to $5,462,000 and $2,530,000, respectively, for the Prior Year’s comparable periods. The decline in depreciation expense for the Current Six Months was primarily attributable to the following: (a) a decline in the amount of approximately $460,000 resulting from the deconsolidation of the operating results of the Pierre Towers property from FREIT’s operating results as of February 28, 2020; and (b) the remainder of the decline is primarily related to tenant improvements written
Page 30
off in Fiscal 2020. The decline in depreciation expense for the Current Quarter was primarily attributable to the following: (a) a decline in the amount of approximately $115,000 resulting from the deconsolidation of the operating results of the Pierre Towers property from FREIT’s operating results as of February 28, 2020; and (b) the remainder of the decline is primarily related to tenant improvements written off in Fiscal 2020. (See Note 5 to FREIT’s condensed consolidated financial statements for further details on the deconsolidation of the Pierre Towers property.)
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $8.7 million for the Current Six Months compared to net cash provided by operating activities of $0.4 million for the Prior Year’s Six Months. FREIT expects that cash provided by operating activities and cash reserves will be adequate to cover mandatory debt service payments (including payments of interest, but excluding balloon payments, which are expected to be refinanced and/or extended), real estate taxes, recurring capital improvements at its properties and other needs to maintain its status as a REIT for at least a period of one year from the date of filing of this quarterly report on Form 10-Q.
As of April 30, 2021, FREIT had cash, cash equivalents and restricted cash totaling $42.7 million, compared to $39.5 million at October 31, 2020. The increase in cash in the Current Six Months is primarily attributable to approximately $8.7 million in net cash provided by operating activities offset by approximately $5.3 million in net cash used in financing activities and approximately $0.3 million in net cash used in investing activities including capital expenditures.
In Fiscal 2017, Grande Rotunda incurred substantial expenditures at the Rotunda property related to retail tenant improvements, leasing costs and operating expenditures which, in the aggregate, exceeded revenues as the property was still in the rent up phase and the construction loan held with Wells Fargo at that time was at its maximum level, with no additional funding available to draw. Accordingly, during Fiscal 2017 the equity owners in Grande Rotunda (FREIT with a 60% ownership and Rotunda 100 with a 40% ownership) contributed their respective pro-rata share of any cash needs through loans to Grande Rotunda, LLC. In the second quarter of Fiscal 2021, Grande Rotunda repaid $2 million to the equity owners in Grande Rotunda based on their respective pro-rata share resulting in a loan repayment to Rotunda 100 of approximately $0.8 million. As of April 30, 2021 and October 31, 2020, Rotunda 100 has funded Grande Rotunda with approximately $5.2 million and $5.9 million (including interest), respectively, which is included in “Due to affiliate” on the accompanying condensed consolidated balance sheets.
Credit Line: FREIT’s revolving line of credit provided by the Provident Bank was renewed for a three-year term ending on October 31, 2023. Draws against the credit line can be used for working capital needs and standby letters of credit. Draws against the credit line are secured by mortgages on FREIT’s Franklin Crossing Shopping Center in Franklin Lakes, New Jersey and retail space in Glen Rock, New Jersey. The total line of credit is $13 million and the interest rate on the amount outstanding is based on a floating interest rate of prime minus 25 basis points with a floor of 3.75%. As of April 30, 2021 and October 31, 2020, there was no amount outstanding and $13 million was available under the line of credit.
As at April 30, 2021, FREIT’s aggregate outstanding mortgage debt was $304.3 million, which bears a weighted average interest rate of 3.56% and an average life of approximately 2.95 years. FREIT’s fixed rate mortgages are subject to amortization schedules that are longer than the terms of the mortgages. As such, balloon payments (unpaid principal amounts at mortgage due date) for all mortgage debt will be required as follows:
|
Fiscal Year |
2021 |
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
2028 |
2029 |
|
($ in millions) | |||||||||
|
Mortgage "Balloon" Payments |
$0.0 |
$176.5(A) |
$34.8 |
$9.0 |
$13.9 |
$18.6 |
$0.0 |
$10.5 |
$26.0 |
|
(A) Includes the loan on the Rotunda property located in Baltimore, Maryland with a balloon payment in the amount of approximately $116 million due on February 6, 2022, which may be extended further for an additional one-year term at Grande Rotunda’s option. |
The following table shows the estimated fair value and net carrying value of FREIT’s long-term debt at April 30, 2021 and October 31, 2020:
|
($ in Millions) |
April 30, 2021 |
October 31, 2020 | ||
|
| ||||
|
Fair Value |
$303.8 |
$ | ||
|
| ||||
|
Carrying Value, Net |
$302.4 |
$305.4 |
Fair values are estimated based on market interest rates at April 30, 2021 and October 31, 2020 and on a discounted cash flow analysis. Changes in assumptions or estimation methods may significantly affect these fair value estimates. The fair value is based on observable inputs (level 2 in the fair value hierarchy as provided by authoritative guidance).
FREIT expects to refinance the individual mortgages with new mortgages or exercise extension options when their terms expire. To this extent FREIT has exposure to interest rate risk. If interest rates, at the time any individual mortgage note is due, are higher than the current fixed interest rate, higher debt service may be required, and/or refinancing proceeds may be less than the amount
Page 31
of mortgage debt being retired. For example, at April 30, 2021, a 1% interest rate increase would reduce the fair value of FREIT’s debt by $5 million, and a 1% decrease would increase the fair value by $5.2 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 February 7, 2018, Grande Rotunda refinanced its construction loan with a new loan held by Aareal Capital Corporation in the amount of approximately $118.5 million with additional funding which was available through February 6, 2021 for retail tenant improvements and leasing costs in the amount of $3,380,000. This loan bears a floating interest rate at 285 basis points over the one-month LIBOR rate and had a maturity date of February 6, 2021 with two one-year options of Grande Rotunda to extend the maturity of this loan, subject to certain requirements as provided for in the loan agreement. Grande Rotunda had purchased an interest rate cap on LIBOR for the full amount that could have been drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan which matured on March 5, 2020. On February 28, 2020, Grande Rotunda had purchased an interest rate cap on LIBOR, with an effective date of March 5, 2020, for the full amount that could have been drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for one year, maturing on March 5, 2021. Effective February 6, 2021, Grande Rotunda exercised the first extension option on this loan with a balance in the amount of approximately $118.5 million, extending the loan one year with a new maturity date of February 6, 2022, which may be extended further for an additional one-year term at Grande Rotunda’s option. Principal payments in the amount of $500,000 were required upon exercise of the first loan extension option and per calendar quarter thereafter. If the second loan extension option is exercised, principal payments in the amount of $750,000 will be required upon exercise of the second loan extension option and per calendar quarter thereafter. Additionally, Grande Rotunda purchased an interest rate cap on LIBOR, with an effective date of March 5, 2021, for the loan amount of approximately $118.5 million, capping the one-month LIBOR rate at 3% for one year expiring on February 6, 2022. At April 30, 2021, the total amount outstanding on this loan was approximately $117.5 million and the interest rate was approximately 2.96%.
On September 30, 2020, Westwood Hills refinanced its $19.2 million loan (which would have matured on November 1, 2020) with a new loan held by ConnectOne Bank in the amount of $25,000,000, with additional funding available in the amount of $250,000 for legal fees potentially incurred by the lender related to the lis pendens on this property. (See Note 6 to FREIT’s condensed consolidated financial statements for additional details in regards to the lis pendens.) This loan, secured by an apartment building in Westwood, New Jersey, is interest-only based on a floating rate at 400 basis points over the one-month LIBOR rate with a floor of 4.15% and has a maturity date of October 1, 2022 with the option of Westwood Hills to extend for two (2) additional six (6)-month periods from the maturity date, subject to certain provisions of the loan agreement. This refinancing resulted in: (i) a change in the annual interest rate from a fixed rate of 4.62% to a variable rate with a floor of 4.15% and (ii) net refinancing proceeds of approximately $5.6 million that were distributed to the partners in Westwood Hills with FREIT receiving approximately $2.2 million based on its 40% membership interest in Westwood Hills. As of April 30, 2021, $25,000,000 of this loan was drawn and outstanding and the interest rate was based on the floor of 4.15%.
On April 3, 2019, WestFREIT Corp. exercised its option to extend its loan secured by the Westridge Square shopping center in Frederick, Maryland, 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 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 to November 1, 2020 and further extended to January 31, 2021 under the same terms and conditions of the existing agreement. WestFREIT Corp. entered into a loan extension and modification agreement with M&T Bank, effective beginning on February 1, 2021, which requires monthly principal payments of $49,250 plus interest based on a floating interest rate equal to 255 basis points over the one-month LIBOR and has a maturity date of January 31, 2022, with the option of WestFREIT Corp. to extend for an additional one-year period through January 31, 2023, subject to certain requirements as provided for in the loan agreement including the lease-up of certain space. As of April 30, 2021, approximately $21.5 million of this loan was outstanding and the interest rate was approximately 2.68%.
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 ($18,596,000 at April 30, 2021) for the Damascus Centre swaps, a notional amount of approximately $16,200,000 ($15,088,000 at April 30, 2021) for the Regency swap, a notional amount of approximately $25,800,000 ($22,708,000 at April 30, 2021) for the Wayne PSC swap and a notional amount of approximately $12,350,000 ($12,077,000 at April 30, 2021) for the Station Place swap.
Page 32
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’s construction loan with a new loan from Aareal Capital Corporation, Grande Rotunda had purchased an interest rate cap on LIBOR for the full amount that could have been drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan which matured on March 5, 2020. On February 28, 2020, Grande Rotunda had purchased an interest rate cap on LIBOR, with an effective date of March 5, 2020, for the full amount that could have been drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for one year, maturing on March 5, 2021. Effective February 6, 2021, Grande Rotunda exercised the first extension option on this loan with a balance in the amount of approximately $118.5 million, extending the loan one year with a new maturity date of February 6, 2022. Additionally, Grande Rotunda purchased an interest rate cap on LIBOR, with an effective date of March 5, 2021, for the loan amount of approximately $118.5 million, capping the one-month LIBOR rate at 3% for one year expiring on February 6, 2022. The cap contract was based on a notional amount of approximately $118,520,000 ($118,520,000 at April 30, 2021).
In accordance with ASU 2017-12, “Accounting Standards Codification Topic 815, Derivatives and Hedging ("ASC 815")”, FREIT marks-to-market its interest rate swap and cap contracts. As the floating interest rate varies from time-to-time over the term of the contract, the value of the contract will change upward or downward. If the floating rate is higher than the fixed rate, the value of the contract goes up and there is a gain and an asset. If the floating rate is less than the fixed rate, there is a loss and a liability. The interest rate swaps and cap are accounted for as cash flow hedges with the corresponding gains or losses on these contracts not affecting FREIT’s condensed consolidated statement of income; changes in the fair value of these cash flow hedges will be reported in other comprehensive income and appear in the equity section of the condensed consolidated balance sheet. This gain or loss represents the economic consequence of liquidating fixed rate swaps or the cap contract and replacing them with like-duration funding at current market rates, something we would likely never do. Periodic cash settlements of these contracts will be accounted for as an adjustment to interest expense.
FREIT has the following derivative-related risks with its 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 April 30, 2021, 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 Grande Rotunda cap, $459,000 for the Damascus Centre swaps, $1,068,000 for the Regency swap, $1,106,000 for the Station Place swap and $616,000 for the Wayne PSC swap, all of which have been included as a liability in FREIT’s condensed consolidated balance sheet as at April 30, 2021. The change in the fair value for the contract (gain or loss) during such period has been included in comprehensive income and for the six and three months ended April 30, 2021, FREIT recorded an unrealized gain of approximately $1,675,000 and $1,177,000, respectively, in the condensed consolidated statements of comprehensive income. For the six and three months ended April 30, 2020, FREIT recorded an unrealized loss of approximately $3,372,000 and $2,982,000, respectively, in the condensed consolidated statements of comprehensive income.
Counterparty Credit Risk: Each party to a contract bears the risk that its counterparty will default on its obligation to make a periodic payment. FREIT reduces this risk by entering into a contract only with major financial institutions that are experienced market makers in the derivatives market.
Dividend: After careful consideration of FREIT’s projected operating results and cash needs, the Board of Trustees (“Board”) declared a second quarter dividend of $0.05 per share which will be paid on June 15, 2021 to shareholders of record on June 1, 2021. The Board will continue to evaluate the dividend on a quarterly basis.
Page 33
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 Six Months Ended April 30, |
For the Three Months Ended April 30, | |||||||||||||||
|
2021 |
2020 |
2021 |
2020 | |||||||||||||
|
(In Thousands, Except Per Share) |
(In Thousands, Except Per Share) | |||||||||||||||
|
Funds From Operations ("FFO") (a) | ||||||||||||||||
|
Net income (loss) |
$ |
716 |
$ |
25,115 |
$ |
(63 |
) |
$ |
27,136 | |||||||
|
Depreciation of consolidated properties |
4,633 |
5,462 |
2,338 |
2,530 | ||||||||||||
|
Amortization of deferred leasing costs |
232 |
238 |
122 |
125 | ||||||||||||
|
Distributions to non-controlling interests |
(510 |
) |
(583 |
) |
(510 |
) |
- | |||||||||
|
Gain on deconsolidation of subsidiary |
- |
(27,680 |
) |
- |
(27,680 |
) | ||||||||||
|
Adjustment to loss in investment in tenancy-in-common for depreciation |
703 |
233 |
352 |
233 | ||||||||||||
|
FFO |
$ |
5,774 |
$ |
2,785 |
$ |
2,239 |
$ |
2,344 | ||||||||
|
| ||||||||||||||||
|
Per Share - Basic |
$ |
0.82 |
$ |
0.40 |
$ |
0.32 |
$ |
0.34 | ||||||||
|
Per Share - Diluted |
$ |
0.82 |
$ |
0.40 |
$ |
0.32 |
$ |
0.34 | ||||||||
|
(a) As prescribed by NAREIT. |
|
Adjusted Funds From Operations ("AFFO") | ||||||||||||||||
|
FFO |
$ |
5,774 |
$ |
2,785 |
$ |
2,239 |
$ |
2,344 | ||||||||
|
Deferred rents (Straight lining) |
213 |
(121 |
) |
7 |
(58 |
) | ||||||||||
|
Capital Improvements - Apartments |
(180 |
) |
(226 |
) |
(98 |
) |
(130 |
) | ||||||||
|
AFFO |
$ |
5,807 |
$ |
2,438 |
$ |
2,148 |
$ |
2,156 | ||||||||
|
| ||||||||||||||||
|
Per Share - Basic |
$ |
0.83 |
$ |
0.35 |
$ |
0.31 |
$ |
0.31 | ||||||||
|
Per Share - Diluted |
$ |
0.83 |
$ |
0.35 |
$ |
0.31 |
$ |
0.31 | ||||||||
|
| ||||||||||||||||
|
Weighted Average Shares Outstanding: | ||||||||||||||||
|
Basic |
7,012 |
6,984 |
7,016 |
6,989 | ||||||||||||
|
Diluted |
7,012 |
7,003 |
7,018 |
7,026 | ||||||||||||
FFO and AFFO do not represent cash generated from operating activities in accordance with GAAP, and therefore should not be considered a substitute for net income as a measure of results of operations or for cash flow from operations as a measure of liquidity. Additionally, the application and calculation of FFO and AFFO by certain other REITs may vary materially from that of FREIT, and therefore FREIT’s FFO and AFFO may not be directly comparable to those of other REITs.
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 34
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 April 30, 2021. 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.
Page 35
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. Pending the resolution of this litigation, 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. On April 28, 2021, the Sellers amended the Answer to include (1) counterclaims against the Purchaser for breach of contract due to the Purchaser’s breach of confidentiality and non-disclosure obligations contained in the Purchase and Sale Agreement, and (2) third-party claims against Purchaser’s affiliate Kushner Realty Acquisition LLC for breach of its confidentiality and non-disclosure obligations contained in the non-disclosure agreement entered into by the parties in connection with the negotiation of the transactions contemplated by the Purchase and Sale Agreement, based on the conduct of the Purchaser and its affiliates after the Sellers terminated the Purchase and Sale Agreement.
In connection with these counterclaims and third-party claims, 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; (f) an order enjoining the Purchaser and its affiliates from engaging in further breaches of the Purchase and Sale Agreement and non-disclosure agreement, and compelling the Purchaser and its affiliates to return the Sellers’ confidential information and materials and to use best efforts to ensure the return
Page 36
of the Sellers’ confidential information and materials from third parties to whom the Purchaser and/or its affiliates provided such materials; and (g) such other relief as the Court deems just and equitable.
In the Answer filed by the Purchaser on September 15, 2020 and the Answer and Affirmative Defenses filed by the Purchaser and Kushner Realty Acquisition LLC on June 7, 2021, the Purchaser and Kushner Realty Acquisition LLC have generally denied the claims, counterclaims and allegations contained in the Sellers’ original and amended Answer, and asserted affirmative defenses to the Sellers’ claims and counterclaims.
The Sellers believe that the allegations set forth in the Complaint and Answer filed by the Purchaser and in the Answer and Affirmative Defenses filed by the Purchaser and Kushner Realty Acquisition LLC 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. (See Note 6 to FREIT’s condensed consolidated financial statements for further details.)
Item 1A: Risk Factors
There were no material changes in any risk factors previously disclosed in FREIT’s Annual Report on Form 10-K for the year ended October 31, 2020, that was filed with the Securities and Exchange Commission on January 29, 2021.
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 April 30, 2021, are formatted in Inline Extensible Business Reporting Language (“iXBRL”): (i) condensed consolidated balance sheets; (ii) condensed consolidated statements of income; (iii) condensed consolidated statements of comprehensive income; (iv) condensed consolidated statements of equity; (v) condensed consolidated statements of cash flows; and (vi) notes to condensed consolidated financial statements. | ||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
FIRST REAL ESTATE INVESTMENT | |
|
TRUST OF NEW JERSEY | |
|
(Registrant) | |
|
| |
|
Date: June 14, 2021 | |
|
/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) |