FREVS 10-Q
First Real Estate Investment Trust Of New Jersey, Inc. (FREVS)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly
Period Ended
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from __________________ to ____________________ | |
Commission File No.
| (Exact name of registrant as specified in its charter) |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| (1) | Registered pursuant to Section 12 (b) of the Act pursuant to a form 8-A filed by the registrant on August 3, 2023. Until the Distribution Date (as defined in the registrant’s Stockholder Rights Agreement dated July 31, 2023) the Preferred Stock Purchase Rights will be transferred with and only with the shares of the registrant’s Common Stock to which the Preferred Stock Purchase Rights are attached. |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large Accelerated Filer ☐ | Accelerated Filer ☐ | Smaller Reporting Company | |
| Emerging growth company | |||
Page 2
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of June 14,
2024, the number of shares of common stock outstanding was
Page 3
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC.
INDEX
Page 4
Part I: Financial Information
Item 1: Unaudited Condensed Consolidated Financial Statements
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| April 30, | October 31, | |||||||
| 2024 | 2023 | |||||||
| (In Thousands, Except Share and Per Share Amounts) | ||||||||
| ASSETS | ||||||||
| Real estate, at cost, net of accumulated depreciation | $ | $ | ||||||
| Construction in progress | ||||||||
| Cash and cash equivalents | ||||||||
| Investment in U.S. Treasury securities available-for-sale | ||||||||
| Investment in tenancy-in-common | ||||||||
| Tenants' security accounts | ||||||||
| Receivables arising from straight-lining of rents | ||||||||
| Accounts receivable, net of allowance for doubtful accounts of $ | ||||||||
| Funds held in post-closing escrow | ||||||||
| Prepaid expenses and other assets | ||||||||
| Deferred charges, net | ||||||||
| Interest rate swap contracts | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Liabilities: | ||||||||
| Mortgages payable, including deferred interest of $ | $ | $ | ||||||
| Less unamortized debt issuance costs | ||||||||
| Mortgages payable, net | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Dividends payable | ||||||||
| Tenants' security deposits | ||||||||
| Deferred revenue | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Common Equity: | ||||||||
| Preferred stock with par value of $ | ||||||||
| Common stock with par value of $ | ||||||||
| Additional paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Total Common Equity | ||||||||
| Noncontrolling interests in subsidiaries | ( | ) | ( | ) | ||||
| Total Equity | ||||||||
| Total Liabilities and Equity | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements.
Page 5
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
SIX AND THREE MONTHS ENDED APRIL 30, 2024 AND 2023
(Unaudited)
| Six Months Ended April 30, | Three Months Ended April 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (In Thousands Except Per Share Amounts) | (In Thousands Except Per Share Amounts) | |||||||||||||||
| Revenue: | ||||||||||||||||
| Rental income | $ | $ | $ | $ | ||||||||||||
| Reimbursements | ||||||||||||||||
| Sundry income | ||||||||||||||||
| Total revenue | ||||||||||||||||
| Expenses: | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Management fees | ||||||||||||||||
| Real estate taxes | ||||||||||||||||
| Depreciation | ||||||||||||||||
| Total expenses | ||||||||||||||||
| Investment income | ||||||||||||||||
| Net loss on sale of Maryland properties | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| (Loss) gain on investment in tenancy-in-common | ( | ) | ( | ) | ( | ) | ||||||||||
| Interest expense including amortization of deferred financing costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net (loss) income | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss attributable to noncontrolling interests in subsidiaries | ||||||||||||||||
| Net income attributable to common equity | $ | $ | $ | $ | ||||||||||||
| Earnings per share: | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
SIX AND THREE MONTHS ENDED APRIL 30, 2024 AND 2023
(Unaudited)
| Six Months Ended April 30, | Three Months Ended April 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (In Thousands of Dollars) | (In Thousands of Dollars) | |||||||||||||||
| Net (loss) income | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Other comprehensive (loss) income: | ||||||||||||||||
| Unrealized gain (loss) on interest rate swap contracts before reclassifications | ( | ) | ||||||||||||||
| Amount reclassified from accumulated other comprehensive income to interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net unrealized (loss) gain on interest rate swap contracts | ( | ) | ( | ) | ( | ) | ||||||||||
| Unrealized loss on U.S. Treasury securities available-for-sale before reclassifications | ( | ) | ( | ) | ||||||||||||
| Amount reclassified from accumulated other comprehensive income to investment income | ( | ) | ||||||||||||||
| Net unrealized loss on U.S. Treasury securities available-for-sale | ( | ) | ( | ) | ||||||||||||
| Comprehensive (loss) income | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive loss attributable to noncontrolling interests in subsidiaries | ||||||||||||||||
| Comprehensive (loss) income attributable to common equity | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
See Notes to Condensed Consolidated Financial Statements.
Page 7
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
SIX AND THREE MONTHS ENDED APRIL 30, 2024
(Unaudited)
| Common Equity | ||||||||||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In- Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Common Equity | Noncontrolling Interests in Subsidiaries | Total Equity | |||||||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||||||||
| Balance at October 31, 2023 | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests in subsidiaries | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Dividends declared | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net unrealized loss on interest rate swap contracts | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net unrealized loss on investment in U.S. Treasury securities available-for-sale | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at January 31, 2024 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock awards granted to directors | ||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests in subsidiaries | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net income (loss) | ( | ) | ||||||||||||||||||||||||||||||
| Dividends declared | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net unrealized gain on interest rate swap contracts | ||||||||||||||||||||||||||||||||
| Net unrealized loss on investment in U.S. Treasury securities available-for-sale | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at April 30, 2024 | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
Page 8
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
SIX AND THREE MONTHS ENDED APRIL 30, 2023
(Unaudited)
| Common Equity | ||||||||||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In- Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Common Equity | Noncontrolling Interests in Subsidiaries | Total Equity | |||||||||||||||||||||||||
| Balance at October 31, 2022 | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||||||||||||||
| Vested share units granted to Directors | ||||||||||||||||||||||||||||||||
| Stock options exercised | ||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests in subsidiaries | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net income (loss) | ( | ) | ||||||||||||||||||||||||||||||
| Dividends declared | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net unrealized loss on interest rate swap contracts | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at January 31, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||||||||||||||
| Stock awards granted to directors | ||||||||||||||||||||||||||||||||
| Stock options exercised | ||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests in subsidiaries | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Dividends declared | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net unrealized loss on interest rate swap contracts | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at April 30, 2023 | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
Page 9
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 2024 AND 2023
(Unaudited)
| Six Months Ended | ||||||||
| April 30, | ||||||||
| 2024 | 2023 | |||||||
| (In Thousands of Dollars) | ||||||||
| Operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Net loss on sale of Maryland properties | ||||||||
| Depreciation | ||||||||
| Amortization | ||||||||
| Stock based compensation expense | ||||||||
| Director fees and related interest paid in stock units | ||||||||
| Stock award granted to directors | ||||||||
| Loss on investment in tenancy-in-common | ||||||||
| Deferred rents - straight line rent | ||||||||
| Bad debt expense (recovery) | ( | ) | ||||||
| Accreted interest on investment in U.S. Treasury securities | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Tenants' security accounts | ( | ) | ||||||
| Accounts receivable, prepaid expenses and other assets | ( | ) | ||||||
| Accounts payable, accrued expenses and deferred director compensation payable | ( | ) | ( | ) | ||||
| Deferred revenue | ||||||||
| Net cash provided by operating activities | ||||||||
| Investing activities: | ||||||||
| Cash outlays from sale of Maryland properties, net | ( | ) | ( | ) | ||||
| Purchase of U.S. Treasury securities | ( | ) | ( | ) | ||||
| Proceeds from maturities of U.S. Treasury securities | ||||||||
| Capital improvements - existing properties | ( | ) | ( | ) | ||||
| Deferred leasing costs | ( | ) | ( | ) | ||||
| Distribution from investment in tenancy-in-common | ||||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Financing activities: | ||||||||
| Repayment of mortgages | ( | ) | ( | ) | ||||
| Proceeds from exercise of stock options | ||||||||
| Deferred financing costs | ( | ) | ( | ) | ||||
| Dividends paid | ( | ) | ( | ) | ||||
| Distributions to noncontrolling interests in subsidiaries | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ) | ( | ) | ||||
| Cash, cash equivalents and restricted cash, beginning of period | ||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow data: | ||||||||
| Interest paid | $ | $ | ||||||
| Supplemental schedule of non cash activities: | ||||||||
| Investing activities: | ||||||||
| Accrued capital expenditures, construction costs and pre-development costs | $ | $ | ||||||
| Financing activities: | ||||||||
| Dividends declared but not paid | $ | $ | ||||||
| The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Tenants' security accounts | ||||||||
| Funds held in post-closing escrow | ||||||||
| Mortgage escrows (included in prepaid expenses and other assets) | ||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements.
Page 10
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of presentation:
First Real Estate Investment Trust of New Jersey was organized on November 1, 1961 as a New Jersey Business Trust. On July 1, 2021, First Real Estate Investment Trust of New Jersey completed the change of its form of organization from a New Jersey real estate investment trust to a Maryland corporation (the “Reincorporation”) which was approved by its stockholders at the annual meeting of stockholders held on May 6, 2021. The Reincorporation changed the law applicable to First Real Estate Investment Trust of New Jersey’s affairs from New Jersey law to Maryland law and was accomplished by the merger of First Real Estate Investment Trust of New Jersey with and into its wholly owned subsidiary, First Real Estate Investment Trust of New Jersey, Inc. (“FREIT”, “Trust”, “us”, “we”, “our” or the “Company”), a Maryland corporation. As a result of the Reincorporation, the separate existence of First Real Estate Investment Trust of New Jersey has ceased and FREIT has succeeded to all the business, properties, assets and liabilities of First Real Estate Investment Trust of New Jersey. Holders of shares of beneficial interest in First Real Estate Investment Trust of New Jersey have received one newly issued share of common stock of FREIT for each share of First Real Estate Investment Trust of New Jersey that they own, without any action of stockholders required and all treasury stock held by First Real Estate Investment Trust of New Jersey was retired.
FREIT is organized and will continue to operate in such a manner as to qualify for taxation as a REIT under the Internal Revenue Code of 1986, as amended, and its stock is traded on the over-the-counter market under the trading symbol FREVS.
The accompanying interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and pursuant to the rules of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnotes required by GAAP for complete financial statements have been omitted. It is the opinion of management that all adjustments considered necessary for a fair presentation have been included, and that all such adjustments are of a normal recurring nature.
The consolidated results of operations for the six and three-month periods ended April 30, 2024 are not necessarily indicative of the results to be expected for the full year or any other period. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in FREIT’s Annual Report on Form 10-K for the year ended October 31, 2023.
Note 2 – Recently issued accounting standards:
In March 2020 and January 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2020-04 “Reference Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, and ASU 2021-01 “Reference Rate Reform (ASC 848): Scope” which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform in contracts and other transactions that reference the London Interbank Offered Rate or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. ASU 2020-04 and ASU 2021-01 are effective for all entities as of March 12, 2020 through the recently deferred date of December 31, 2024. We currently do not anticipate the need to modify our existing debt agreements as a result of reference rate reform in the current year, however if any modification is executed as a result of reference rate reform, the Company will elect the optional expedient available under ASU 2020-04 and ASU 2021-01, which allows entities to account for the modification as if the modification was not substantial. We will disclose the nature of and reason for electing the optional expedient in each interim and annual financial statement period if and when applicable through December 31, 2024.
In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”) to improve reportable segment disclosure requirements, primarily through enhanced disclosure about significant segment expenses. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact that the updated standard will have on its financial statement disclosure.
Note 3 – Dividends and earnings per share:
The FREIT Board of Directors (“Board”)
declared a dividend of approximately $
Basic earnings per share is calculated by dividing net income attributable to common equity (numerator) by the weighted average number of shares 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
Page 11
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 both the six and three months ended April 30, 2024, the outstanding
stock options increased the average dilutive shares outstanding by approximately
Note 4 – Fair Value Measurements:
Financial assets that are measured at fair value on our condensed consolidated balance sheets consist of (i) investments in U.S. Treasury securities (classified as available for sale) and (ii) interest rate swap contracts.
In accordance with ASC Topic 320, “Investments
– Debt Securities”, FREIT is accounting for the investments in U.S. Treasury securities classified as available for sale
in the amount of approximately $
In accordance with “Accounting Standards
Codification Topic 815, Derivatives and Hedging ("ASC 815")”, FREIT has been accounting for the FREIT Regency, LLC
(“Regency”) and Station Place on Monmouth (“Station Place”) interest rate swap contracts as cash flow hedges marking
these contracts to market, taking into account present interest rates compared to the contracted fixed rate over the life of the contract
and recording the unrealized gain or loss on the swaps in comprehensive income (loss). For the six and three months ended April 30, 2024,
FREIT recorded an unrealized loss of approximately $
Note 5 – Investment in tenancy-in-common:
On February 28, 2020, FREIT reorganized its subsidiary
S and A Commercial Associates Limited Partnership (“S&A”) from a partnership into a tenancy-in-common form of ownership
(“TIC”). Prior to this reorganization, FREIT owned a
FREIT’s investment in the TIC was approximately
$
Hekemian & Co., Inc. (“Hekemian & Co.”) manages the Pierre Towers property pursuant to a management agreement between the owners of the TIC and Hekemian & Co. dated as of February 28, 2020, which was for an initial term of one (1) year and which renews for successive one (1) year terms unless either party gives written notice of termination to the other party at least sixty (60) days prior to the end of the then-current term. The management agreement was renewed for a successive one (1) year term expiring on February 28, 2025.
The management agreement requires the payment
of management fees equal to
Page 12
paid a commission for these services. There were no such commissions, charged to operations, for the six and three months ended April 30, 2024 and 2023.
| April 30, | October 31, | |||||||
| 2024 | 2023 | |||||||
| (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 ( | $ | $ | ||||||
| Six Months Ended April 30, | Three Months Ended April 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (In Thousands of Dollars) | (In Thousands of Dollars) | |||||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Operating expenses | ||||||||||||||||
| Depreciation | ||||||||||||||||
| Operating income | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense including amortization of deferred financing costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net (loss) income | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| FREIT's (loss) gain on investment in TIC (65% interest) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
Note 6 – Termination of Purchase and Sale Agreement:
FREIT previously reported in connection with litigation
between FREIT and certain of its affiliates and Sinatra Properties, LLC (“Sinatra”) that on December 8, 2022 it had filed
a Notice of Appeal with the Appellate Division of the New Jersey Superior Court (the “Appellate Division”) appealing that
portion of the trial court’s February 4, 2022 ruling which declined to enforce the liquidated damages provision in the Purchase
and Sale Agreement between FREIT and certain of its affiliates and Sinatra (the “Purchase Agreement”). On December 22, 2022,
Sinatra filed a Notice of Cross Appeal appealing from all determinations by the trial court adverse to Sinatra, including (i) that portion
of the trial court’s order holding that Sinatra breached the Purchase Agreement; (ii) the denial of Sinatra’s motion for reconsideration
of the trial court’s order; and (iii) the trial court’s order awarding FREIT and certain of its affiliates $
On May 1, 2024, the Appellate Division issued
its opinion affirming the trial court’s order that (1) held that Sinatra breached the Purchase Agreement; and (2) dismissed all
of Sinatra’s other claims and lis pendens on the properties, and reversed that portion of the trial court’s ruling that held
the liquidated damages provision of the Purchase Agreement unenforceable. The case was remanded by the Appellate Division to the trial
court with direction that the trial court enter an order enforcing the liquidated damages provision and directing Sinatra or the escrow
agent to pay to FREIT and certain of its affiliates $
Page 13
the Appellate Division affirmed the trial court’s order denying Sinatra’s motion for reconsideration and the order of the trial court granting the motion made by FREIT and certain of its affiliates for attorney’s fees and costs.
FREIT and its affiliates that are parties to this
litigation intend to take the necessary actions to collect the $
As previously disclosed, FREIT and certain of its affiliates filed a complaint against Kushner Companies LLC (“Kushner”) asserting that Kushner used Sinatra as a shell to evade its debts and obligations and asking the Court to pierce the corporate veil and hold Kushner liable for Sinatra’s debts and obligations under the Purchase Agreement. Kushner filed a motion with the Court seeking to dismiss the complaint with prejudice. By Order of the Court dated February 2, 2024 (the “Order”), Kushner’s motion to dismiss the complaint was granted without prejudice for failure to join an indispensable party, Sinatra; the Court rejected all of Kushner’s other arguments seeking dismissal of the complaint with prejudice, and expressly granted FREIT the right to file an amended complaint adding Sinatra as a defendant. On February 8, 2024, FREIT filed the amended complaint naming Sinatra as an additional defendant and asserting the same claims as against Kushner. On March 11, 2024, Kushner and Sinatra filed a motion to dismiss FREIT’s amended complaint and seeking reconsideration of the Court’s order dismissing the initial complaint without prejudice. The Court denied the motion made by Kushner and Sinatra to dismiss and for reconsideration. On May 23, 2024, Kushner and Sinatra answered the veil piercing complaint, asserted several affirmative defenses to the claims made in the veil piercing complaint and filed a counterclaim against FREIT and its affiliates. In their counterclaim, Kushner and Sinatra contend that to the extent that they prevail in the veil piercing litigation, they are entitled to a monetary judgment in the amount of their reasonable attorney’s fees and costs incurred in connection with the defense of that action. FREIT will vigorously oppose the affirmative defenses and counterclaim asserted by Kushner and Sinatra.
Also, as previously disclosed, FREIT has incurred
substantial costs in legal fees and related costs through April 30, 2024 in connection with the Sinatra litigation. FREIT expects to continue
to incur additional costs until such time as (i) the appeal is resolved with respect to the Court’s decision to deny FREIT’s
liquidated damages claim, and (ii) FREIT also resolves the additional claims to collect on its $
As of April 30, 2024, the $
Note 7 – Maryland property dispositions:
On November 22, 2021, certain affiliates (the
“Maryland Sellers”) of FREIT entered into a Purchase and Sale Agreement (the “Maryland Purchase and Sale Agreement”)
with MCB Acquisition Company, LLC (the “Maryland Purchaser”), a third party, pursuant to which the Maryland Sellers agreed
to sell three properties to the Maryland Purchaser. The properties consisted of retail and office space and a residential apartment community
owned by Grande Rotunda, LLC (the “Rotunda Property”), a shopping center owned by Damascus Centre, LLC (the “Damascus
Property”), and a shopping center owned by WestFREIT Corp. (the “Westridge Square Property”). FREIT owns
The sale of the Maryland Properties having a total
net book value of $
Page 14
respectively. These funds held in
post-closing escrow are anticipated to be released by the end of Fiscal 2026. The sale of the Maryland Properties resulted in a net gain
of approximately $
On August 4, 2022, FREIT’s Board declared
a special, extraordinary, non-recurring cash distribution of approximately $
On July 12, 2023, FREIT’s Board declared
an ordinary dividend of $
As the disposal of the Maryland Properties did not represent a strategic shift that would have a major impact on FREIT’s operations or financial results, the properties’ operations were not reflected as discontinued operations in the accompanying consolidated financial statements.
Note 8 - Management agreement, fees and transactions with related party:
Hekemian & Co. currently manages all of the properties owned by FREIT and its affiliates. The management agreement between FREIT and Hekemian & Co. dated as of November 1, 2001 (“Management Agreement”) will expire on October 31, 2025 and is automatically renewed for successive periods of two years unless either party gives not less than six (6) months prior notice of non-renewal.
The Management Agreement requires the payment
of management fees equal to
From time to time, FREIT engages Hekemian &
Co., or certain affiliates of Hekemian & Co., to provide additional services, such as consulting services related to development,
property sales and financing activities of FREIT. Separate fee arrangements are negotiated between Hekemian & Co. and FREIT with respect
to such additional services. Such fees incurred for the six and three months ended April 30, 2024 were approximately $
Robert S. Hekemian, Jr., Chief Executive Officer,
President and a Director of FREIT, is the Chief Executive Officer of Hekemian & Co. David B. Hekemian, a Director of FREIT, is the
President of Hekemian & Co. Allan Tubin, Chief Financial Officer and Treasurer of FREIT, is the Chief Financial Officer of Hekemian
& Co. Director fee expense and/or executive compensation (including interest, dividends and stock awards) incurred by FREIT for the
six months ended April 30, 2024 and 2023 was approximately $
Page 15
Note 9 – Mortgage financings and line of credit:
On December 1, 2023, the mortgage secured by an
apartment building located in River Edge, New Jersey in the amount of approximately $
Effective February 1, 2023, FREIT entered into
a loan extension and modification agreement with Valley National Bank on its loan secured by the Westwood Plaza shopping center located
in Westwood, New Jersey with a then outstanding balance of approximately $
On October 31, 2023, FREIT exercised its right,
pursuant to the loan agreement, to extend the term of its $
On August 3, 2023, Westwood Hills refinanced its
$
FREIT’s revolving line of credit provided
by Provident Bank was renewed for a three-year term ending on October 31, 2026. Draws against the credit line can be used for working
capital needs and standby letters of credit. Draws against the credit line are secured by mortgages on FREIT’s Franklin Crossing
Shopping Center in Franklin Lakes, New Jersey and retail space in Glen Rock, New Jersey. The total line of credit is $
While FREIT intends to renew or refinance its debt obligations as they become due, there can be no assurance that it will be successful or, if successful, that the new terms will be similar to the terms of its existing debt obligations or as favorable.
Note 10 – Fair value of long-term debt:
| ($ in Millions) | April 30, 2024 | October 31, 2023 | ||
| Fair Value | $ |
$ | ||
| Carrying Value, Net | $ |
$ | ||
Fair values are estimated based on market interest rates at April 30, 2024 and October 31, 2023 and on a discounted cash flow analysis. Changes in assumptions or estimation methods may significantly affect these fair value estimates. The fair value is based on observable inputs (level 2 in the fair value hierarchy as provided by authoritative guidance).
Note 11 - Segment information:
ASC 280-10, "Disclosures about Segments
of an Enterprise and Related Information", establishes standards for reporting financial information about operating segments
in interim and annual financial reports and provides for a "management approach" in identifying the reportable segments. FREIT
has determined that it has
Page 16
different operating strategies and management expertise. The commercial segment is comprised of five (5) properties and the residential segment is comprised of six (6) properties.
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, 2023. The chief operating and decision-making group responsible for oversight and strategic decisions of FREIT's commercial segment, residential segment and corporate/other is comprised of FREIT’s Board.
FREIT, through its chief operating and decision making group, assesses and measures segment operating results based on net operating income ("NOI"). NOI, a standard used by real estate professionals, is based on operating revenue and expenses directly associated with the operations of the real estate properties, but excludes: deferred rents (straight lining), depreciation, financing costs and other items. NOI is not a measure of operating results or cash flows from operating activities as measured by GAAP, and is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity.
Real estate rental revenue, operating expenses,
NOI and recurring capital improvements for the reportable segments are summarized below and reconciled to condensed consolidated net income
attributable to common equity for the six and three months ended April 30, 2024 and 2023.
| Six Months Ended | Three Months Ended | |||||||||||||||
| April 30, | April 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (In Thousands of Dollars) | (In Thousands of Dollars) | |||||||||||||||
| Real estate rental revenue: | ||||||||||||||||
| Commercial | $ | $ | $ | $ | ||||||||||||
| Residential | ||||||||||||||||
| Total real estate rental revenue | ||||||||||||||||
| Real estate operating expenses: | ||||||||||||||||
| Commercial | ||||||||||||||||
| Residential | ||||||||||||||||
| Total real estate operating expenses | ||||||||||||||||
| Net operating income: | ||||||||||||||||
| Commercial | ||||||||||||||||
| Residential | ||||||||||||||||
| Total net operating income | $ | $ | $ | $ | ||||||||||||
| Recurring capital improvements - residential | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Reconciliation to condensed consolidated net income attributable to common equity: | ||||||||||||||||
| Segment NOI | $ | $ | $ | $ | ||||||||||||
| Deferred rents - straight lining | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Investment income | ||||||||||||||||
| General and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| (Loss) gain on investment in tenancy-in-common | ( | ) | ( | ) | ( | ) | ||||||||||
| Depreciation | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss on sale of Maryland properties | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Financing costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net (loss) income | ( | ) | ( | ) | ( | ) | ||||||||||
| Net 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 at least
As of April 30, 2024, FREIT had no material uncertain income tax positions. The tax years subsequent to and including the fiscal year ended October 31, 2020 remain open to examination by the major taxing jurisdictions.
Note 13 – Equity Incentive Plan:
On March 22, 2024, in accordance with FREIT’s
Equity Incentive Plan (the “Plan”), the Compensation Committee of FREIT’s Board recommended to the Board and the Board
approved that for services rendered and to be rendered in Fiscal 2024, in lieu of cash compensation in the amount of $
Page 17
in FREIT. Based on the closing price of FREIT’s
Shares on March 22, 2024 of $
On March 9, 2023, in accordance with the Plan,
the Compensation Committee of FREIT’s Board recommended to the Board and the Board approved that for services rendered and to be
rendered in Fiscal 2023, in lieu of cash compensation in the amount of $
As of April 30, 2024,
| Six and Three Months Ended April 30, | |||||||||
| 2024 | |||||||||
| No. of Options | Weighted Average | ||||||||
| Outstanding | Price | ||||||||
| Options outstanding at beginning of period | $ | ||||||||
| Options granted during period | |||||||||
| Options forfeited/cancelled during period | |||||||||
| Options exercised during period | |||||||||
| Options outstanding at end of period | $ | ||||||||
| Options vested | |||||||||
| Options exercisable at end of period | |||||||||
| Six Months Ended April 30, | Three Months Ended April 30, | |||||||||||||||
| 2023 | 2023 | |||||||||||||||
| No. of Options | Weighted Average | No. of Options | Weighted Average | |||||||||||||
| Outstanding | Price | Outstanding | Price | |||||||||||||
| Options outstanding at beginning of period | $ | $ | ||||||||||||||
| Options granted during period | ||||||||||||||||
| Options forfeited/cancelled during period | ||||||||||||||||
| Options exercised during period | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Options outstanding at end of period | $ | $ | ||||||||||||||
| Options vested and expected to vest | ||||||||||||||||
| Options exercisable at end of period | ||||||||||||||||
For the six and three months ended April 30, 2024,
compensation expense related to stock options vested amounted to approximately $
Note 14 – Termination of Deferred Fee Plan:
On November 4, 2021 (the “Adoption Date”),
the Board approved the termination of the Deferred Fee Plan resulting in the termination of the deferral of fees on December 31, 2021
with any subsequent fees earned by a participant being paid in cash. Consistent with the termination of the Deferred Fee Plan, payment
related to each participant’s cash account (in the form of a cash lump sum payment) and share unit account (in the form of the issuance
of common stock) (collectively “the Deferred Fee Plan Termination Payment”) was made to each participant no earlier than twelve
(12) months and one day after, and no later than twenty-four (24) months, after the Adoption Date. Any interest earned on the participant’s
cash account along with dividends (if any) earned on share units, continued to accrue in share units on each participant’s account
until final payment was made. On January 20, 2023, in accordance with the Deferred Fee Plan Termination Payment, total payments related
to the cash accounts of all participants of approximately $
Page 18
Note 15 – Rental Income:
Commercial tenants:
Fixed lease income under our commercial operating leases generally includes fixed minimum lease consideration, which is accrued on a straight-line basis over the terms of the leases. Variable lease income includes consideration based on sales, as well as reimbursements for real estate taxes, maintenance, insurance and certain other operating expenses of the properties.
| Year Ending October 31, | Amount | ||
| 2024 | $ | ||
| 2025 | |||
| 2026 | |||
| 2027 | |||
| 2028 | |||
| Thereafter | |||
| Total | $ | ||
The above amounts assume that all leases that expire are not renewed and, accordingly, neither month-to-month nor rentals from replacement tenants are included.
Minimum future rentals do not include contingent rentals, which may be received under certain leases on the basis of percentage of reported tenants' sales volume. Rental income that is contingent on future events is not included in income until the contingency is resolved. Contingent rentals included in income for the six and three months ended April 30, 2024 and 2023 were not material.
Residential tenants:
Lease terms for residential tenants are usually
Note 16 – Stockholder Rights Plan:
On July 28, 2023, FREIT’s Board adopted
a stockholder rights plan, as set forth in the Stockholder Rights Agreement, dated July 31, 2023, between the Company and Computershare
Trust Company, N.A., as Rights Agent (the “Rights Agreement”). Pursuant to the terms of the Rights Agreement, the Board declared
a dividend distribution of one Preferred Stock Purchase Right (a “Right”) for each outstanding share of common stock, par
value $
Initially, the Rights are not exercisable and
are attached to and trade with all shares of Common Stock outstanding as of, and issued subsequent to, the Record Date. The Rights will
separate from the Common Stock and will become exercisable upon the earlier of (i) the close of business on the tenth calendar day following
the first public announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired
beneficial ownership of
Note 17 – Kmart Lease Termination:
On June 24, 2023, the owner/operator of the
Page 19
Note 18 – Subsequent Event:
On May 1, 2024, FREIT entered into a loan extension
and modification agreement with Provident Bank, effective June 1, 2024, on its loan secured by an apartment building located in River
Edge, New Jersey with a then outstanding loan balance of approximately $
Page 20
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Identifying Important Factors That Could Cause First Real Estate Investment Trust of New Jersey, Inc.’s (“FREIT”) Actual Results to Differ From Those Projected in Forward Looking Statements.
Readers of this discussion are advised that the discussion should be read in conjunction with the unaudited condensed consolidated financial statements of FREIT (including related notes thereto) appearing elsewhere in this Form 10-Q, and the consolidated financial statements included in FREIT’s most recently filed Form 10-K. Certain statements in this discussion may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect FREIT’s current expectations and are based on estimates, projections, beliefs, data, methods and assumptions of management of FREIT at the time of such statements regarding future results of operations, economic performance, financial condition and achievements of FREIT, and do not relate strictly to historical or current facts. These forward-looking statements are identified through the use of words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” or words of similar meaning. Forward-looking statements involve risks and uncertainties in predicting future results and conditions.
Although FREIT believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties. These and certain other uncertainties, factors and risks, including those risk factors set forth and further described in Part I, Item 1A entitled “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended October 31, 2023, and other risks described in our subsequent filings with the SEC, may cause our actual results to differ materially from those projected. Such factors include, but are not limited to, the following: general economic and business conditions, including the purchase of retail products over the Internet, which will, among other things, affect demand for rental space, the availability of prospective tenants, lease rents, the financial condition of tenants and the default rate on leases, operating and administrative expenses and the availability of financing; interest rate risk; adverse changes in FREIT’s real estate markets, including, among other things, competition with other real estate owners, competition confronted by tenants at FREIT’s commercial properties; governmental actions and initiatives; environmental/safety requirements; risks of real estate development and acquisitions; and public health crises, epidemics and pandemics. The risks with respect to the development of real estate include: increased construction costs, inability to obtain construction financing, or unfavorable terms of financing that may be available, unforeseen construction delays and the failure to complete construction within budget.
OVERVIEW
FREIT is an equity real estate investment trust (“REIT”) that is self-administered and externally managed. FREIT owns a portfolio of residential apartment and commercial properties. FREIT’s revenues consist primarily of rental income and other related revenues from its residential and commercial properties and additional rents derived from operating commercial properties. FREIT’s properties are primarily located in northern New Jersey and New York.
The economic and financial environment: In April 2024, the U.S. inflation rate was 3.4% and the U.S. unemployment rate was 3.9%. The Federal Reserve has held the interest rate at 5.5% since July 2023, which is the highest rate level since 2001. As a result, mortgage rates have been at the highest in more than a decade. Though the inflation rate has declined significantly from 6% in January 2023, it is still uncertain which direction the Federal Reserve is heading with the interest rates. If it decides to raise interest rates again, the pace at which it would continue to do so is uncertain, especially if inflation begins to rebound, leading to uncertainties in the financing market and a volatile economy.
Residential Properties: Our residential portfolio continues to generate positive cash flow while average rents on turned units (apartments which were vacated and then re-leased to new tenants) has continued to increase across most of the portfolio. Additionally, the rate of increase on renewals for existing tenants has been robust but is slightly softening. These increases should meaningfully contribute to FREIT’s income over time but it is uncertain what impact the significant rise in inflation and interest rates may have on these properties over the next year.
Commercial Properties: While the Franklin Crossing and Glen Rock shopping centers continue to attain higher occupancies and realize stronger net operating incomes, the vacancy rates at the Westwood Plaza and Preakness shopping centers remain elevated. We continue to work diligently to locate the right tenant(s) for the vacant anchor tenant spaces at each of these properties. Given the rebounding interest for “brick and mortar” sites, and the fact that these properties are located in desirable communities with high barriers to entry, management remains optimistic about the successful leasing at these two properties. Additionally, the higher inflation and interest rates could have a continued adverse impact on the operating and financial performance of our existing commercial tenants.
Debt Financing Availability: Financing has been available to FREIT and its affiliates. Certain recent refinancings and loan modifications/extensions have been at higher interest rates and for shorter terms.
Page 21
On December 1, 2023, the mortgage secured by an apartment building located in River Edge, New Jersey came due. Provident Bank extended the initial maturity date of this loan for a 90-day period with a maturity date of March 1, 2024 and further extended this loan for another 60-day period with a new maturity date of June 1, 2024, based on the same terms and conditions of the existing loan agreement. On May 1, 2024, FREIT entered into a loan extension and modification agreement with Provident Bank, effective June 1, 2024, with a then outstanding loan balance of approximately $8.9 million. Under the terms and conditions of this loan extension and modification, the maturity date of this loan is extended for three years to May 31, 2027, will require monthly installments of principal and interest of approximately $58,016 and will be based on a fixed interest rate of 6.75%. (See Notes 9 and 18 to FREIT’s condensed consolidated financial statements for further details.)
On October 31, 2023, FREIT exercised its right, pursuant to the loan agreement, to extend the term of its loan secured by the Westwood Plaza shopping center located in Westwood, New Jersey for one additional year from an initial maturity date of February 1, 2024 to a new maturity date of February 1, 2025. This loan extension of its outstanding balance as of February 1, 2024 of approximately $16,458,000 is based on a fixed interest rate of 8.5% and is payable based on monthly installments of principal and interest of approximately $166,727. Additionally, FREIT funded an interest reserve escrow account (“Escrow”) with an additional $112,556 increasing the Escrow balance to $2,000,722, which represents the annualized principal and interest payments for one (1) year under this loan extension. This Escrow is held at Valley National Bank and in the event of a default on this loan, the bank shall be permitted to use the proceeds from the Escrow to make monthly debt service payments on the loan. (See Note 9 to FREIT’s condensed consolidated financial statements for further details.)
On October 31, 2023, FREIT exercised its right, pursuant to the loan agreement, to extend the term of its $7.5 million loan on its property located in Rockaway, New Jersey, for an additional one year from an initial maturity date of January 1, 2024 to a new maturity date of January 1, 2025. The loan extension would have been based on a fixed interest rate of approximately 7.44%. On January 11, 2024, FREIT used cash on hand to fully repay this loan with a balance of $7.5 million. This will result in annual debt service savings of approximately $558,000. (See Note 9 to FREIT’s condensed consolidated financial statements for further details.)
Operating Cash Flow: FREIT expects that cash provided by operating activities and cash reserves will be adequate to cover mandatory debt service payments (including payments of interest, but excluding balloon payments, which are expected to be refinanced and/or extended), real estate taxes, recurring capital improvements at its properties and other needs to maintain its status as a REIT for at least a period of one year from the date of filing of this quarterly report on Form 10-Q.
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, 2023, have been applied consistently as of April 30, 2024, and for the six and three months ended April 30, 2024 and 2023. We believe that the following accounting policies or estimates require the application of management's most difficult, subjective, or complex judgments.
Revenue Recognition: Base rents, additional rents based on tenants' sales volume and reimbursement of the tenants' share of certain operating expenses are generally recognized when due from tenants. The straight-line basis is used to recognize base rents under leases if they provide for varying rents over the lease terms. Straight-line rents receivable represent unbilled rents receivable to the extent straight-line rents exceed current rents billed in accordance with lease agreements. Before FREIT can recognize revenue, it is required to assess, among other things, its collectability.
Valuation of Long-Lived Assets: FREIT assesses the carrying value of long-lived assets periodically, or whenever events or changes in circumstances indicate that the carrying amounts of certain assets may not be recoverable. When FREIT determines that the carrying value of long-lived assets may be impaired, the measurement of any impairment is based on a projected discounted cash flow method determined by FREIT's management. While FREIT believes that our discounted cash flow methods are reasonable, different assumptions regarding such cash flows may significantly affect the measurement of impairment.
Real Estate Development Costs: It is FREIT’s policy to capitalize pre-development costs, which generally include legal and professional fees and other directly related third-party costs. Real estate taxes and interest costs incurred during the development and construction phases are also capitalized. FREIT ceases capitalization of these costs when the project or portion thereof becomes operational, or when construction has been postponed. In the event of postponement, capitalization of these costs will recommence once construction on the project resumes.
See Note 2 to FREIT’s condensed consolidated financial statements for recently issued accounting standards.
Page 22
RESULTS OF OPERATIONS
Real estate revenue for the six months ended April 30, 2024 (“Current Six Months”) increased 2.7% to $14,274,000 compared to $13,895,000 for the six months ended April 30, 2023 (“Prior Year’s Six Months”). Real estate revenue for the three months ended April 30, 2024 (“Current Quarter”) increased 5.2% to $7,275,000 compared to $6,916,000 for the three months ended April 30, 2023 (“Prior Year’s Quarter”).
The increase in revenue of approximately $379,000 for the Current Six Months was primarily attributable to the following: (a) an increase from the residential segment of approximately $635,000 driven by an increase in base rents across most properties while the average occupancy rate declined from 97.2% in the Prior Year’s Six Months to 95.9% in the Current Six Months; offset by (b) a decrease from the commercial segment of approximately $256,000 primarily driven by a decline in revenue of approximately $494,000 at the Westwood Plaza Shopping Center resulting from Kmart vacating its space in October 2023 offset by an increase in revenue of approximately $140,000 attributed to the increase in occupancy at the Franklin Crossing Shopping Center from 94.9% in the Prior Year’s Six Months to 97.2% in the Current Six Months.
The increase in revenue of approximately $359,000 for the Current Quarter was primarily attributable to an increase in base rents in the residential segment across most properties.
Net income attributable to common equity (“net income-common equity”) for the Current Six Months and Current Quarter was $21,000 ($0.00 per share basic and diluted) and $533,000 ($0.07 per share basic and diluted), compared to $516,000 ($0.07 per share basic and diluted) and $97,000 ($0.01 per share basic and diluted) for the Prior Year’s comparable periods, respectively.
The schedule below provides a detailed analysis of the major changes that impacted net income-common equity for the six and three months ended April 30, 2024 and 2023:
| NON-GAAP NET INCOME COMPONENTS | Six Months Ended | Three Months Ended | ||||||||||||||||||||||
| April 30, | April 30, | |||||||||||||||||||||||
| 2024 | 2023 | Change | 2024 | 2023 | Change | |||||||||||||||||||
| (In Thousands of Dollars) | (In Thousands of Dollars) | |||||||||||||||||||||||
| Income from real estate operations: | ||||||||||||||||||||||||
| Commercial properties | $ | 1,413 | $ | 1,774 | $ | (361 | ) | $ | 788 | $ | 795 | $ | (7 | ) | ||||||||||
| Residential properties | 5,813 | 5,296 | 517 | 2,948 | 2,683 | 265 | ||||||||||||||||||
| Total income from real estate operations | 7,226 | 7,070 | 156 | 3,736 | 3,478 | 258 | ||||||||||||||||||
| Financing costs: | ||||||||||||||||||||||||
| Fixed rate mortgages | (3,343 | ) | (2,499 | ) | (844 | ) | (1,656 | ) | (1,288 | ) | (368 | ) | ||||||||||||
| Floating rate mortgages | — | (1,056 | ) | 1,056 | — | (538 | ) | 538 | ||||||||||||||||
| Other - corporate interest | — | (26 | ) | 26 | — | — | — | |||||||||||||||||
| Mortgage cost amortization | (281 | ) | (246 | ) | (35 | ) | (126 | ) | (125 | ) | (1 | ) | ||||||||||||
| Total financing costs | (3,624 | ) | (3,827 | ) | 203 | (1,782 | ) | (1,951 | ) | 169 | ||||||||||||||
| Investment income | 686 | 407 | 279 | 279 | 218 | 61 | ||||||||||||||||||
| General & administrative expenses: | ||||||||||||||||||||||||
| Accounting fees | (238 | ) | (269 | ) | 31 | (103 | ) | (134 | ) | 31 | ||||||||||||||
| Legal and professional fees | (621 | ) | (476 | ) | (145 | ) | (246 | ) | (251 | ) | 5 | |||||||||||||
| Directors fees | (734 | ) | (684 | ) | (50 | ) | (437 | ) | (415 | ) | (22 | ) | ||||||||||||
| Stock compensation expense | (1 | ) | (10 | ) | 9 | — | (5 | ) | 5 | |||||||||||||||
| Corporate expenses | (1,229 | ) | (363 | ) | (866 | ) | (229 | ) | (170 | ) | (59 | ) | ||||||||||||
| Total general & administrative expenses | (2,823 | ) | (1,802 | ) | (1,021 | ) | (1,015 | ) | (975 | ) | (40 | ) | ||||||||||||
| Depreciation | (1,514 | ) | (1,454 | ) | (60 | ) | (789 | ) | (732 | ) | (57 | ) | ||||||||||||
| Loss (gain) on investment in tenancy-in-common | (47 | ) | (188 | ) | 141 | 62 | (121 | ) | 183 | |||||||||||||||
| Adjusted net (loss) income | (96 | ) | 206 | (302 | ) | 491 | (83 | ) | 574 | |||||||||||||||
| Net loss on sale of Maryland properties | (171 | ) | (446 | ) | 275 | (92 | ) | (203 | ) | 111 | ||||||||||||||
| Net (loss) income | (267 | ) | (240 | ) | (27 | ) | 399 | (286 | ) | 685 | ||||||||||||||
| Net loss attributable to noncontrolling interests in subsidiaries | 288 | 756 | (468 | ) | 134 | 383 | (249 | ) | ||||||||||||||||
| Net income attributable to common equity | $ | 21 | $ | 516 | $ | (495 | ) | $ | 533 | $ | 97 | $ | 436 | |||||||||||
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.
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Adjusted net (loss) income for the Current Six Months and Current Quarter was net loss of $96,000 (($0.01) per share basic and diluted) and net income of $491,000 ($0.07 per share basic and diluted) compared to net income of $206,000 ($0.03 per share basic and diluted) and net loss of $83,000 (($0.01) per share basic and diluted), for the Prior Year’s comparable periods. Adjusted net (loss) income is a non-GAAP measure, which management believes is a useful and meaningful gauge to investors of our operating performance, since it excludes the impact of unusual and infrequent items specifically: a net loss on sale of Maryland Properties.
The increase in adjusted net loss for the Current Six Months was primarily attributable to the following: (a) an increase in general and administrative expenses (“G&A”) of approximately $1,021,000 driven by an increase in corporate expenses of approximately $866,000 primarily related to work performed for the Company by a financial advisory firm in the Current Six Months and an increase in legal costs of approximately $145,000 primarily attributed to the legal proceeding between FREIT and certain of its affiliates and Sinatra Properties, LLC; (b) an increase in the general reserve for uncollectible rents related to the commercial segment of approximately $139,000 (with a consolidated impact to FREIT of approximately $111,000); (c) an increase in real estate tax expense related to the residential segment of approximately $94,000 (with a consolidated impact to FREIT of approximately $79,000); offset by (c) an increase in revenue of approximately $379,000 (with a consolidated impact to FREIT of approximately $234,000); (d) an increase in investment income of approximately $279,000 resulting from higher interest rates in the Current Six Months; (e) a decline in interest expense of approximately $203,000 (with a consolidated impact to FREIT of approximately $75,000) primarily attributed to the refinancing of the loan on the Westwood Hills property in the prior year’s period from a variable interest rate of approximately 8.4% to a fixed interest rate of 6.05%; and (f) an increase in income from investment in TIC of approximately $141,000.
The increase in adjusted net income for the Current Quarter was primarily attributable to the following: (a) an increase in revenue of approximately $359,000 (with a consolidated impact to FREIT of approximately $292,000); (b) an increase in income from investment in TIC of approximately $183,000; (c) a decline in interest expense of approximately $169,000 (with a consolidated impact to FREIT of approximately $99,000) primarily attributed to the refinancing of the loan on the Westwood Hills property in the prior year’s period from a variable interest rate of approximately 8.7% to a fixed interest rate of 6.05%; offset by (d) an increase in total operating expenses in the residential segment of approximately $76,000 (with a consolidated impact to FREIT of approximately $115,000).
(Refer to the segment disclosure below for a more detailed discussion of the financial performance of FREIT’s commercial and residential segments.)
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SEGMENT INFORMATION
The following tables set forth comparative net operating income ("NOI") data for FREIT’s real estate segments and reconciles the NOI to condensed consolidated net income-common equity for the Current 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 | Six Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||||
| April 30, | Increase (Decrease) | April 30, | Increase (Decrease) | April 30, | ||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | 2024 | 2023 | |||||||||||||||||||||||||||||||
| (In Thousands) | (In Thousands) | (In Thousands) | ||||||||||||||||||||||||||||||||||||||
| Rental income | $ | 2,991 | $ | 3,172 | $ | (181 | ) | -5.7% | $ | 10,107 | $ | 9,471 | $ | 636 | 6.7% | $ | 13,098 | $ | 12,643 | |||||||||||||||||||||
| Reimbursements | 1,045 | 1,142 | (97 | ) | -8.5% | (11 | ) | (5 | ) | (6 | ) | -120.0% | 1,034 | 1,137 | ||||||||||||||||||||||||||
| Other | 28 | 24 | 4 | 16.7% | 172 | 167 | 5 | 3.0% | 200 | 191 | ||||||||||||||||||||||||||||||
| Total revenue | 4,064 | 4,338 | (274 | ) | -6.3% | 10,268 | 9,633 | 635 | 6.6% | 14,332 | 13,971 | |||||||||||||||||||||||||||||
| Operating expenses | 2,593 | 2,488 | 105 | 4.2% | 4,455 | 4,337 | 118 | 2.7% | 7,048 | 6,825 | ||||||||||||||||||||||||||||||
| Net operating income | $ | 1,471 | $ | 1,850 | $ | (379 | ) | -20.5% | $ | 5,813 | $ | 5,296 | $ | 517 | 9.8% | 7,284 | 7,146 | |||||||||||||||||||||||
| Average Occupancy % | 50.4% | 65.6% | -15.2% | 95.9% | 97.2% | -1.3% | ||||||||||||||||||||||||||||||||||
| Reconciliation to condensed consolidated net income-common equity: | |||||||||
| Deferred rents - straight lining | (58 | ) | (76 | ) | |||||
| Investment income | 686 | 407 | |||||||
| Net loss on sale of Maryland properties | (171 | ) | (446 | ) | |||||
| General and administrative expenses | (2,823 | ) | (1,802 | ) | |||||
| Loss on investment in tenancy-in-common | (47 | ) | (188 | ) | |||||
| Depreciation | (1,514 | ) | (1,454 | ) | |||||
| Financing costs | (3,624 | ) | (3,827 | ) | |||||
| Net loss | (267 | ) | (240 | ) | |||||
| Net loss attributable to noncontrolling interests in subsidiaries | 288 | 756 | |||||||
| Net income attributable to common equity | $ | 21 | $ | 516 | |||||
| Commercial | Residential | Combined | ||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||||||
| April 30, | Increase (Decrease) | April 30, | Increase (Decrease) | April 30, | ||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | 2024 | 2023 | |||||||||||||||||||||||||||||||
| (In Thousands) | (In Thousands) | (In Thousands) | ||||||||||||||||||||||||||||||||||||||
| Rental income | $ | 1,484 | $ | 1,580 | $ | (96 | ) | -6.1% | $ | 5,131 | $ | 4,813 | $ | 318 | 6.6% | $ | 6,615 | $ | 6,393 | |||||||||||||||||||||
| Reimbursements | 572 | 505 | 67 | 13.3% | 4 | (14 | ) | 18 | 128.6% | 576 | 491 | |||||||||||||||||||||||||||||
| Other | 27 | (1 | ) | 28 | 2800.0% | 86 | 81 | 5 | 6.2% | 113 | 80 | |||||||||||||||||||||||||||||
| Total revenue | 2,083 | 2,084 | (1 | ) | 0.0% | 5,221 | 4,880 | 341 | 7.0% | 7,304 | 6,964 | |||||||||||||||||||||||||||||
| Operating expenses | 1,266 | 1,241 | 25 | 2.0% | 2,273 | 2,197 | 76 | 3.5% | 3,539 | 3,438 | ||||||||||||||||||||||||||||||
| Net operating income | $ | 817 | $ | 843 | $ | (26 | ) | -3.1% | $ | 2,948 | $ | 2,683 | $ | 265 | 9.9% | 3,765 | 3,526 | |||||||||||||||||||||||
| Average Occupancy % | 50.7% | 64.8% | -14.1% | 96.5% | 97.5% | -1.0% | ||||||||||||||||||||||||||||||||||
| Reconciliation to condensed consolidated net income-common equity: | |||||||||
| Deferred rents - straight lining | (29 | ) | (48 | ) | |||||
| Investment income | 279 | 218 | |||||||
| Net loss on sale of Maryland properties | (92 | ) | (203 | ) | |||||
| General and administrative expenses | (1,015 | ) | (975 | ) | |||||
| Gain (loss) on investment in tenancy-in-common | 62 | (121 | ) | ||||||
| Depreciation | (789 | ) | (732 | ) | |||||
| Financing costs | (1,782 | ) | (1,951 | ) | |||||
| Net income (loss) | 399 | (286 | ) | ||||||
| Net loss attributable to noncontrolling interests in subsidiaries | 134 | 383 | |||||||
| Net income attributable to common equity | $ | 533 | $ | 97 | |||||
NOI is based on operating revenue and expenses directly associated with the operations of the real estate properties, but excludes deferred rents (straight lining), depreciation, financing costs and other items. FREIT assesses and measures segment operating results based on NOI.
Same Property NOI: FREIT considers same property net operating income (“Same Property NOI”) to be a useful supplemental non-GAAP measure of its operating performance. FREIT defines same property within both the commercial and residential segments to be those properties that FREIT has owned and operated for both the current and prior periods presented, excluding those properties that FREIT acquired, sold or redeveloped during those periods. Any newly acquired property that has been in operation for less than a year, any property that is undergoing a major redevelopment but may still be in operation at less than full capacity, and/or any property that has been sold is not considered same property.
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NOI and Same Property NOI are non-GAAP financial measures and are not measures of operating results or cash flow as measured by GAAP, and are not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity.
COMMERCIAL SEGMENT
The commercial segment contains five (5) separate properties. Four of these properties are multi-tenanted retail centers and one is single tenanted on land located in Rockaway, New Jersey owned by FREIT from which it receives monthly rental income from a tenant who has built and operates a bank branch on the land.
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 6.3% and 0%, respectively, and NOI decreased by 20.5% and 3.1%, 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 15.2% and 14.1%, respectively, as compared to the Prior Year’s comparable periods.
The decrease in revenue for the Current Six Months was primarily driven by the decline in revenue of approximately $494,000 at the Westwood Plaza Shopping Center attributed to Kmart vacating its space in October 2023 offset by an increase in revenue of approximately $140,000 attributed to the increase in occupancy at the Franklin Crossing Shopping Center from 94.9% in the Prior Year’s Six Months to 97.2% in the Current Six Months. The decrease in NOI for the Current Six Months was primarily attributable to the decline in revenue of approximately $274,000 in conjunction with an increase in the general reserve for uncollectible rents of approximately $139,000 as compared to the Prior Year’s Six Months.
Revenue and NOI for the Current Quarter remained relatively flat which was primarily driven by the decline in revenue of approximately $178,000 at the Westwood Plaza shopping center as a result of Kmart vacating, offset by an increase in revenue of approximately $134,000 at the Franklin Crossing shopping center primarily driven by an increase in base rents and an increase in the average occupancy rate at this shopping center from 96.6% in the Prior Year’s Quarter to 97.2% in the Current Quarter.
Same Property Operating Results: FREIT’s commercial segment currently contains five (5) same properties. (See definition of same property under Segment Information above.) The Rotunda Property, the Westridge Square Property and the Damascus Property were excluded from same property results for all periods presented because these properties were sold in Fiscal 2022. Same property revenue for the Current Six Months and Current Quarter decreased by 6.9% and 1.2%, respectively, and same property NOI for the Current Six Months and Current Quarter decreased by 22.5% and 9.9%, respectively, as compared to the Prior Year’s comparable periods. The changes resulted from the factors discussed in the immediately preceding paragraph.
Leasing: The following table reflects leasing activity at FREIT’s commercial properties for comparable leases (leases executed for spaces in which there was a tenant at some point during the previous twelve-month period) and non-comparable leases for the Current 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) | 6 | 11,627 | $ | 26.26 | $ | 28.23 | -7.0% | $ | — | $ | 0.89 | |||||||||||||||||
| Non-comparable leases | — | — | $ | — | N/A | N/A | $ | — | $ | — | ||||||||||||||||||
| Total leasing activity | 6 | 11,627 | ||||||||||||||||||||||||||
(a) These leasing costs are presented as annualized costs per square foot and are allocated uniformly over the lease term.
(b) This includes new tenant leases and/or modifications/extensions/renewals of existing tenant leases.
On June 24, 2023, the owner/operator of the 84,254 square foot Kmart store located at our Westwood Plaza shopping center in Westwood, New Jersey informed FREIT of its intent to sublet its space to three unidentified retail tenants. The term of the lease for Kmart expired on October 31, 2027 with two 5-year renewal options remaining. The lease agreement provided that base rent payments were fixed at $4.00 per square foot ($336,720 annually) and additional rent for common area maintenance and insurance costs were based on an amount less than Kmart’s pro rata share of the shopping center. After reviewing the Kmart space, management determined that the space has a fair market rental rate of between $15 and $24 per square foot. While significant tenant and/or capital improvements will be necessary to fit-up this space for a new tenant or tenants, the higher rent potentially realizable equates to annual revenues in excess of approximately $930,000 to $1,685,000. FREIT believes potentially higher rent amounts, if achieved, will more than offset lost rent from Kmart and other tenants with co-tenancy clauses and will only increase the overall value of the shopping center. Accordingly, on July 24, 2023, FREIT denied Kmart’s request and elected pursuant to the lease to terminate the Kmart lease effective October 19, 2023. Thus, FREIT now has full control of this space instead of waiting another 14 years to renegotiate or re-lease this space at a higher market rent. As management is unable to predict the length of time it may take to re-lease this space, the Westwood Plaza shopping center will incur losses of annual base rent revenues of approximately $726,000 to
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$962,000 until such time as this space is re-leased. (See Note 17 to FREIT’s condensed consolidated financial statements for further details.)
RESIDENTIAL SEGMENT
FREIT currently operates six (6) multi-family apartment buildings or complexes totaling 792 apartment units, excluding the Pierre Towers property, which was converted to a TIC (see Note 5 to FREIT’s condensed consolidated financial statements).
As indicated in the tables above under the caption Segment Information, total revenue from FREIT’s residential segment for the Current Six Months and Current Quarter increased by 6.6% and 7%, respectively, and NOI increased by 9.8% and 9.9%, respectively, as compared to the Prior Year’s comparable periods. Average occupancy for all residential properties for the Current Six Months and Current Quarter decreased by 1.3% and 1%, respectively, as compared to the Prior Year’s comparable periods.
The increase in revenue for the Current Six Months was primarily attributable to an increase in base rents across most properties while the average occupancy rate declined from 97.2% in the Prior Year’s Six Months to 95.9% in the Current Six Months. The increase in NOI was primarily attributed to the increase in revenue of approximately $635,000 offset by an increase in real estate tax expense across all the residential properties of approximately $94,000.
The increase in revenue and NOI for the Current Quarter was primarily attributable to an increase in base rents across most properties.
Same Property Operating Results: FREIT’s residential segment currently contains six (6) same properties. (See definition of same property under Segment Information above.) Since all of FREIT’s residential properties are considered same properties in the current fiscal year, refer to the preceding paragraph for discussion of changes in same property results.
FREIT’s residential revenue is principally composed of monthly apartment rental income. Total rental income is a factor of occupancy and monthly apartment rents. Monthly average residential rents at the end of the Current Quarter and the Prior Year’s Quarter were $2,255 and $2,116, 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 $214,000 and $207,000, respectively.
Capital expenditures: FREIT tends to spend more in any given year on maintenance and capital improvements at its residential properties which were constructed more than 25 years ago (Steuben Arms, Berdan Court and Westwood Hills properties) than on its newer properties (Boulders, Regency and Station Place properties). Funds for these capital projects are available from cash flow from the property's operations and cash reserves.
FINANCING COSTS
| Six Months Ended April 30, | Three Months Ended April 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (In Thousands of Dollars) | (In Thousands of Dollars) | |||||||||||||||
| Fixed rate mortgages (a): | ||||||||||||||||
| 1st Mortgages | ||||||||||||||||
| Existing | $ | 3,343 | $ | 2,499 | $ | 1,656 | $ | 1,288 | ||||||||
| New | — | — | — | — | ||||||||||||
| Variable rate mortgages: | ||||||||||||||||
| 1st Mortgages | ||||||||||||||||
| Existing | — | 1,056 | — | 538 | ||||||||||||
| New | — | — | — | — | ||||||||||||
| Other | — | 26 | — | — | ||||||||||||
| Total financing costs, gross | 3,343 | 3,581 | 1,656 | 1,826 | ||||||||||||
| Amortization of mortgage costs | 281 | 246 | 126 | 125 | ||||||||||||
| Total financing costs, net | $ | 3,624 | $ | 3,827 | $ | 1,782 | $ | 1,951 | ||||||||
| (a) Includes the effect of interest rate swap contracts which effectively convert the floating interest rate to a fixed interest rate over the term of the loan. | ||||||||||||||||
Total net financing costs for the Current Six Months decreased by approximately $203,000, or 5.3%, compared to the Prior Year’s Six Months which was primarily attributable to the following: (a) a decrease of approximately $216,000 attributed to the refinancing of the loan on the Westwood Hills property in August 2023 from a $25 million variable interest rate loan with an average interest rate of approximately 8.4% in the Prior Year’s Six Months to a $25.5 million fixed interest rate loan with an interest rate of 6.05%; (b) a decrease of approximately $96,000 resulting from the pay-off of the loan on the Boulders property in January 2024; offset by (c) an increase of approximately $146,000 attributed to the extension and modification of the loan on the Westwood Plaza Shopping
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Center modified effective February 2023 from a fixed interest rate of 4.75% to 7.5% and further extended effective February 2024 from a fixed interest rate of 7.5% to 8.5%.
Total net financing costs for the Current Quarter decreased by approximately $169,000, or 8.7%, compared to the Prior Year’s Quarter which was primarily attributable to the following: (a) a decrease of approximately $119,000 attributed to the refinancing of the loan on the Westwood Hills property in August 2023 from a $25 million variable interest rate loan with an average interest rate of approximately 8.7% in the Prior Year’s Quarter to a $25.5 million fixed interest rate loan with an interest rate of 6.05%; and (b) a decrease of approximately $90,000 resulting from the pay-off of the loan on the Boulders property in January 2024.
INVESTMENT INCOME
Investment income for the Current Six Months and Current Quarter was approximately $686,000 and $279,000, compared to $407,000 and $218,000 for the Prior Year’s comparable periods. Investment income is principally derived from interest earned from cash on deposit in institutional money market funds and short-term U.S. treasury securities. The increase in investment income was primarily driven by higher interest rates in the Current Six Months and Current Quarter.
GENERAL AND ADMINISTRATIVE EXPENSES
G&A for the Current Six Months and Current Quarter was approximately $2,823,000 and $1,015,000, compared to $1,802,000 and $975,000, respectively, for the Prior Year’s comparable periods. The primary components of G&A are legal and professional fees, directors’ fees, corporate expenses and accounting/auditing fees. The increase in G&A for the Current Six Months of approximately $1,021,000 was primarily driven by the following: (a) an increase in corporate expenses of approximately $866,000 primarily related to work performed for the Company by a financial advisory firm in the Current Six Months and (b) an increase in legal costs of approximately $145,000 primarily attributed to the legal proceeding between FREIT and certain of its affiliates and Sinatra Properties, LLC.
DEPRECIATION
Depreciation expense for the Current Six Months and Current Quarter was approximately $1,514,000 and $789,000, compared to $1,454,000 and $732,000, respectively, for the Prior Year’s comparable periods.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $1,507,000 for the Current Six Months as compared to approximately $308,000 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, dividends, recurring capital improvements at its properties and other needs to maintain its status as a REIT for at least a period of one year from the date of filing of this quarterly report on Form 10-Q.
As of April 30, 2024, FREIT had cash, cash equivalents and restricted cash totaling approximately $16,709,000, compared to approximately $18,356,000 at October 31, 2023. The decrease in cash, cash equivalents and restricted cash in the Current Six Months of approximately $1,647,000 was primarily attributable to $10,113,000 in net cash used in financing activities offset by $7,000,000 in net cash provided by investing activities and $1,507,000 in net cash provided by operating activities. The decrease in cash, cash equivalents and restricted cash was primarily attributed to the following: (a) purchase of investments in U.S. Treasury securities of approximately $19,135,000; (b) repayment of the mortgage on the Boulders property of approximately $7,500,000; (c) net recurring repayment of mortgages of approximately $923,000; (d) distributions to noncontrolling interests in subsidiaries of approximately $780,000; (e) capital improvements on existing properties of approximately $456,000; offset by (f) proceeds received from maturities of U.S. Treasury securities of approximately $26,315,000; and (g) a distribution from the Pierre TIC of approximately $455,000.
Credit Line: FREIT’s revolving line of credit provided by Provident Bank was renewed for a three-year term ending on October 31, 2026. 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 6.75%. As of April 30, 2024 and October 31, 2023, there was no amount outstanding and $13 million was available under the line of credit.
Dividend: FREIT’s Board declared a dividend of approximately $373,000 ($0.05 per share) in the second quarter of Fiscal 2024, which will be paid on June 14, 2024 to stockholders of record on May 31, 2024. FREIT’s Board will continue to evaluate the dividend on a quarterly basis.
As of April 30, 2024, FREIT’s aggregate outstanding mortgage debt was $129.8 million, which bears a weighted average interest rate of 5.25% and an average life of approximately 2.4 years. FREIT’s mortgages are subject to amortization schedules that are
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longer than the terms of the mortgages. As such, balloon payments (unpaid principal amounts at the mortgage due date) for all mortgage debt will be required as follows:
| Fiscal Year | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | |
| ($ in millions) | |||||||
| Mortgage "Balloon" Payments | $0.0 | $54.7 | $24.5 | $8.6 | $10.5 | $26.0 |
The following table shows the estimated fair value and net carrying value of FREIT’s long-term debt at April 30, 2024 and October 31, 2023:
| ($ in Millions) | April 30, 2024 | October 31, 2023 | ||
| Fair Value | $123.8 | $130.8 | ||
| Carrying Value, Net | $128.7 | $137.1 | ||
Fair values are estimated based on market interest rates at April 30, 2024 and October 31, 2023 and on a discounted cash flow analysis. Changes in assumptions or estimation methods may significantly affect these fair value estimates. The fair value is based on observable inputs (level 2 in the fair value hierarchy as provided by authoritative guidance).
FREIT expects to refinance the individual mortgages with new mortgages or exercise extension options when their terms expire. To this extent, FREIT has exposure to interest rate risk. If interest rates, at the time any individual mortgage note is due, are higher than the current fixed interest rate, higher debt service may be required, and/or refinancing proceeds may be less than the amount of mortgage debt being retired. For example, at April 30, 2024, a 1% interest rate increase would reduce the fair value of FREIT’s debt by $2.7 million, and a 1% decrease would increase the fair value by $2.8 million.
On December 1, 2023, the mortgage secured by an apartment building located in River Edge, New Jersey in the amount of approximately $9 million came due. Provident Bank extended the initial maturity date of this loan for a 90-day period with a maturity date of March 1, 2024 and further extended this loan for another 60-day period with a new maturity date of June 1, 2024, based on the same terms and conditions of the existing loan agreement. On May 1, 2024, FREIT entered into a loan extension and modification agreement with Provident Bank, effective June 1, 2024, which will extend the loan for three years to May 31, 2027, will require monthly installments of principal and interest of approximately $58,016 and will be based on a fixed interest rate of 6.75%. (See Notes 9 and 18 to FREIT’s condensed consolidated financial statements for further details.)
Effective February 1, 2023, FREIT entered into a loan extension and modification agreement with Valley National Bank on its loan secured by the Westwood Plaza shopping center located in Westwood, New Jersey with a then outstanding balance of approximately $16,864,361. Under the terms and conditions of this loan extension and modification, the maturity date of the loan was extended for a term of one (1) year from February 1, 2023 to February 1, 2024 with the option of FREIT to extend for one additional year from the extended maturity date, subject to certain provisions of the loan agreement. The loan was based on a fixed interest rate of 7.5% and was payable based on monthly installments of principal and interest of approximately $157,347. Additionally, FREIT funded an interest reserve escrow account (“Escrow”) at closing representing the annualized principal and interest payments for one (1) year, amounting to approximately $1,888,166. On October 31, 2023, FREIT exercised its right, pursuant to the loan agreement, to extend the term of this loan for one additional year from an initial maturity date of February 1, 2024 to a new maturity date of February 1, 2025. This loan extension is based on a fixed interest rate of 8.5% and is payable based on monthly installments of principal and interest of approximately $166,727. Additionally, FREIT funded the Escrow with an additional $112,556 increasing the Escrow balance to $2,000,722, which represents the annualized principal and interest payments for one (1) year under this loan extension. This Escrow is held at Valley National Bank and in the event of a default on this loan, the bank shall be permitted to use the proceeds from the Escrow to make monthly debt service payments on the loan. (See Note 9 to FREIT’s condensed consolidated financial statements for further details.)
On October 31, 2023, FREIT exercised its right, pursuant to the loan agreement, to extend the term of its $7.5 million loan on its property located in Rockaway, New Jersey, for an additional one year from an initial maturity date of January 1, 2024 to a new maturity date of January 1, 2025. The loan extension would have been based on a fixed interest rate of approximately 7.44%. On January 11, 2024, FREIT used cash on hand to fully repay this loan with a balance of $7.5 million. This will result in annual debt service savings of approximately $558,000. (See Note 9 to FREIT’s condensed consolidated financial statements for further details.)
On August 3, 2023, Westwood Hills refinanced its $25,000,000 loan (which would have matured on October 1, 2023) with a new loan held by Minnesota Life Insurance Company in the amount of $25,500,000. This loan is based on a fixed interest rate of 6.05%, provides for monthly payments of principal and interest of $153,706 and has a term of three years with a maturity date of September 1, 2026. This refinancing resulted in a decrease in the interest rate from a variable interest rate of approximately 9.21% (at the time of the refinancing) to a fixed interest rate of 6.05% and annual debt service savings of approximately $535,000. (See Note 9 to FREIT’s condensed consolidated financial statements for further details.)
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Interest rate swap contracts: To reduce interest rate volatility, FREIT uses a “pay fixed, receive floating” interest rate swap to convert floating interest rates to fixed interest rates over the term of a certain loan. FREIT enters into these interest rate swap contracts with a counterparty that is usually a high-quality commercial bank. In essence, FREIT agrees to pay its counterparties a fixed rate of interest on a dollar amount of notional principal (which generally corresponds to FREIT’s mortgage debt) over a term equal to the term of the mortgage notes. FREIT’s counterparties, in return, agree to pay FREIT a short-term rate of interest - generally LIBOR - on that same notional amount over the same term as the mortgage notes.
FREIT has variable interest rate loans secured by its Regency and Station Place properties. To reduce interest rate fluctuations, FREIT entered into interest rate swap contracts for each of these loans. These interest rate swap contracts effectively converted variable interest rate payments to fixed interest rate payments. The interest rate swap contracts were based on a notional amount of approximately $16,200,000 ($14,087,000 at April 30, 2024) for the Regency swap and a notional amount of approximately $12,350,000 ($11,402,000 at April 30, 2024) for the Station Place swap.
In accordance with ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities to Accounting Standards Codification Topic 815, Derivatives and Hedging ("ASC 815")”, FREIT marks-to-market its interest rate swap 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 swap contracts 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 interest rate swaps and replacing them with like-duration funding at current market rates, something we would likely never do. Periodic cash settlements of these contracts will be accounted for as an adjustment to interest expense.
FREIT has the following derivative-related risks with its interest rate swap contracts (“contract”): 1) early termination risk, and 2) counterparty credit risk.
Early Termination Risk: If FREIT wants to terminate its contract before maturity, it would be bought out or terminated at market value; i.e., the difference in the present value of the anticipated net cash flows from each of the contract’s parties. If current variable interest rates are significantly below FREIT’s fixed interest rate payments, this could be costly. Conversely, if interest rates rise above FREIT’s fixed interest payments and FREIT elected early termination, FREIT would realize a gain on termination. At April 30, 2024, the contracts for Regency and Station Place were in FREIT’s favor. If FREIT had terminated these contracts at that date, it would have realized a gain of approximately $267,000 for the Regency swap and $796,000 for the Station Place swap, which amounts have been included in FREIT’s condensed consolidated balance sheet as at April 30, 2024. The change in the fair value for the contract (gain or loss) during such period has been included in comprehensive (loss) income and for the six and three months ended April 30, 2024, FREIT recorded an unrealized loss of approximately $273,000 and an unrealized gain of $257,000, respectively, in the condensed consolidated statements of comprehensive loss. For the six and three months ended April 30, 2023, FREIT recorded an unrealized loss of approximately $557,000 and $107,000, respectively, in the condensed consolidated statements of comprehensive (loss) 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.
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ADJUSTED FUNDS FROM OPERATIONS
Funds From Operations (“FFO”) is a non-GAAP measure defined by the National Association of Real Estate Investment Trusts (“NAREIT”). FREIT does not include distributions from equity/debt/capital gain sources in its computation of FFO. Although many consider FFO as the standard measurement of a REIT’s performance, FREIT modified the NAREIT computation of FFO to include other adjustments to GAAP net income that are not considered by management to be the primary drivers of its decision making process. These adjustments to GAAP net income are straight-line rents and recurring capital improvements on FREIT’s residential apartments. The modified FFO computation is referred to as Adjusted Funds From Operations (“AFFO”). FREIT believes that AFFO is a superior measure of its operating performance. FREIT computes FFO and AFFO as follows:
| For the Six Months Ended April 30, | For the Three Months Ended April 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (In Thousands, Except Per Share) | (In Thousands Except Per Share) | |||||||||||||||
| Funds From Operations ("FFO") (a) | ||||||||||||||||
| Net (loss) income | $ | (267 | ) | $ | (240 | ) | $ | 399 | $ | (286 | ) | |||||
| Depreciation of consolidated properties | 1,514 | 1,454 | 789 | 732 | ||||||||||||
| Amortization of deferred leasing costs | 64 | 40 | 38 | 21 | ||||||||||||
| Distributions to non-controlling interests | (180 | ) (b) | — | (c) | — | (b) | — | (c) | ||||||||
| Net loss on sale of Maryland properties | 171 | 446 | 92 | 203 | ||||||||||||
| Adjustment to loss on investment in tenancy-in-common for depreciation | 725 | 716 | 363 | 358 | ||||||||||||
| FFO | $ | 2,027 | $ | 2,416 | $ | 1,681 | $ | 1,028 | ||||||||
| Per Share - Basic | $ | 0.27 | $ | 0.33 | $ | 0.23 | $ | 0.14 | ||||||||
| Per Share - Diluted | $ | 0.27 | $ | 0.32 | $ | 0.23 | $ | 0.14 | ||||||||
| (a) As prescribed by NAREIT. | ||||||||||||||||
| (b) FFO excludes the additional distribution of proceeds to non-controlling interests in the amount of approximately $0.6 million for the six and three months ended April 30, 2024 related to the sale of the Rotunda property. See Note 7 to FREIT's condensed consolidated financial statements for further details. | ||||||||||||||||
| (c) FFO excludes the additional distribution of proceeds to non-controlling interests in the amount of approximately $2.1 million and $0.2 million for the six and three months ended April 30, 2023, respectively, related to the sale of the Damascus and Rotunda properties. See Note 7 to FREIT's condensed consolidated financial statements for further details. | ||||||||||||||||
| Adjusted Funds From Operations ("AFFO") | ||||||||||||||||
| FFO | $ | 2,027 | $ | 2,416 | $ | 1,681 | $ | 1,028 | ||||||||
| Deferred rents (Straight lining) | 58 | 76 | 29 | 48 | ||||||||||||
| Capital Improvements - Apartments | (265 | ) | (290 | ) | (169 | ) | (145 | ) | ||||||||
| AFFO | $ | 1,820 | $ | 2,202 | $ | 1,541 | $ | 931 | ||||||||
| Per Share - Basic and Diluted | $ | 0.24 | $ | 0.30 | $ | 0.21 | $ | 0.13 | ||||||||
| Weighted Average Shares Outstanding: | ||||||||||||||||
| Basic | 7,451 | 7,433 | 7,453 | 7,441 | ||||||||||||
| Diluted | 7,455 | 7,440 | 7,457 | 7,446 | ||||||||||||
FFO and AFFO do not represent cash generated from operating activities in accordance with GAAP, and therefore should not be considered a substitute for net income as a measure of results of operations or for cash flow from operations as a measure of liquidity. Additionally, the application and calculation of FFO and AFFO by certain other REITs may vary materially from that of FREIT, and therefore FREIT’s FFO and AFFO may not be directly comparable to those of other REITs.
INFLATION
Inflation can impact the financial performance of FREIT in various ways. FREIT’s commercial tenant leases normally provide that the tenants bear all or a portion of most operating expenses, which can reduce the impact of inflationary increases on FREIT. Apartment leases are normally for one to two-years in term, which may allow FREIT to seek increased rents as leases renew or when new tenants are obtained, subject to prevailing market conditions.
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Item 3: Quantitative and Qualitative Disclosures About Market Risk
See “Commercial Segment”, “Residential Segment” and “Liquidity and Capital Resources” under Item 2 above for a detailed discussion of FREIT’s quantitative and qualitative market risk disclosures.
Item 4: Controls and Procedures
At the end of the period covered by this report, we carried out an evaluation of the effectiveness of the design and operation of FREIT’s disclosure controls and procedures. This evaluation was carried out under the supervision and with participation of FREIT’s management, including FREIT’s Chief Executive Officer and Chief Financial Officer, who concluded that FREIT’s disclosure controls and procedures are effective as of April 30, 2024. There has been no change in FREIT’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, FREIT’s internal control over financial reporting.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in FREIT’s reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in FREIT’s reports filed under the Exchange Act is accumulated and communicated to management, including FREIT’s Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.
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Part II:
Item 1: Legal Proceedings
FREIT previously reported in connection with litigation between FREIT and certain of its affiliates and Sinatra Properties, LLC (“Sinatra”) that on December 8, 2022 it had filed a Notice of Appeal with the Appellate Division of the New Jersey Superior Court (the “Appellate Division”) appealing that portion of the trial court’s February 4, 2022 ruling which declined to enforce the liquidated damages provision in the Purchase and Sale Agreement between FREIT and certain of its affiliates and Sinatra (the “Purchase Agreement”). On December 22, 2022, Sinatra filed a Notice of Cross Appeal appealing from all determinations by the trial court adverse to Sinatra, including (i) that portion of the trial court’s order holding that Sinatra breached the Purchase Agreement; (ii) the denial of Sinatra’s motion for reconsideration of the trial court’s order; and (iii) the trial court’s order awarding FREIT and certain of its affiliates $3,420,422.88 in attorneys’ fees and denying Sinatra’s request for attorneys’ fees.
On May 1, 2024, the Appellate Division issued its opinion affirming the trial court’s order that (1) held that Sinatra breached the Purchase Agreement; and (2) dismissed all of Sinatra’s other claims and lis pendens on the properties, and reversed that portion of the trial court’s ruling that held the liquidated damages provision of the Purchase Agreement unenforceable. The case was remanded by the Appellate Division to the trial court with direction that the trial court enter an order enforcing the liquidated damages provision and directing Sinatra or the escrow agent to pay to FREIT and certain of its affiliates $15 million in liquidated damages. In addition, the Appellate Division affirmed the trial court’s order denying Sinatra’s motion for reconsideration and the order of the trial court granting the motion made by FREIT and certain of its affiliates for attorney’s fees and costs though there can be no assurance as to the amount of timing of any actual collections.
FREIT and its affiliates that are parties to this litigation intend to take the necessary actions to collect the $15 million in liquidated damages and the attorney’s fees and costs awarded to them.
As previously disclosed, FREIT and certain of its affiliates filed a complaint against Kushner Companies LLC (“Kushner”) asserting that Kushner used Sinatra as a shell to evade its debts and obligations and asking the Court to pierce the corporate veil and hold Kushner liable for Sinatra’s debts and obligations under the Purchase Agreement. Kushner filed a motion with the Court seeking to dismiss the complaint with prejudice. By Order of the Court dated February 2, 2024 (the “Order”), Kushner’s motion to dismiss the complaint was granted without prejudice for failure to join an indispensable party, Sinatra; the Court rejected all of Kushner’s other arguments seeking dismissal of the complaint with prejudice, and expressly granted FREIT the right to file an amended complaint adding Sinatra as a defendant. On February 8, 2024, FREIT filed the amended complaint naming Sinatra as an additional defendant and asserting the same claims as against Kushner. On March 11, 2024, Kushner and Sinatra filed a motion to dismiss FREIT’s amended complaint and seeking reconsideration of the Court’s order dismissing the initial complaint without prejudice. The Court denied the motion made by Kushner and Sinatra to dismiss and for reconsideration. On May 23, 2024, Kushner and Sinatra answered the veil piercing complaint, asserted several affirmative defenses to the claims made in the veil piercing complaint and filed a counterclaim against FREIT and its affiliates. In their counterclaim, Kushner and Sinatra contend that to the extent that they prevail in the veil piercing litigation, they are entitled to a monetary judgment in the amount of their reasonable attorney’s fees and costs incurred in connection with the defense of that action. FREIT will vigorously oppose the affirmative defenses and counterclaim asserted by Kushner and Sinatra.
Also, as previously disclosed, FREIT has incurred substantial costs in legal fees and related costs through April 30, 2024 in connection with the Sinatra litigation. FREIT expects to continue to incur additional costs until such time as (i) the appeal is resolved with respect to the Court’s decision to deny FREIT’s liquidated damages claim, and (ii) FREIT also resolves the additional claims to collect on its $3.42 million Judgment and obtain reimbursement of its ongoing legal costs and expenses. Although it is not possible to forecast the final outcome of this litigation, to date FREIT has successfully avoided Sinatra’s claim for specific performance under the Purchase Agreement and was awarded a favorable $3.42 million Judgement to be reimbursed for certain of its legal fees and expenses.
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Item 1A: Risk Factors
There were no material changes in any risk factors previously disclosed in FREIT’s Annual Report on Form 10-K for the year ended October 31, 2023, that was filed with the Securities and Exchange Commission on January 29, 2024.
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, 2024, 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 (loss) income; (iv) condensed consolidated statements of equity; (v) condensed consolidated statements of cash flows; and (vi) notes to condensed consolidated financial statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FIRST REAL ESTATE INVESTMENT | |
| TRUST OF NEW JERSEY, INC. | |
| (Registrant) | |
| Date: June 14, 2024 | |
| /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) |