SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended October 31, 2016

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File No. 000-25043

 

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY

(Exact name of registrant as specified in its charter)

 

New Jersey		22-1697095
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
505 Main Street, Hackensack, New Jersey		07601
(Address of principal executive offices)		(Zip Code)

 

                             201-488-6400                             

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each Class		Name of each exchange on which registered
None		Not Applicable

Securities registered pursuant to Section 12(g) of the Act:

                Shares of Beneficial Interest                

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x

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. Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o

Accelerated Filer x

Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

The aggregate market value of the registrant’s shares of beneficial interest held by non-affiliates was approximately $109 million. Computation is based on the closing sales price of such shares as quoted on the over-the-counter-market on April 29, 2016, the last business day of the registrant’s most recently completed second quarter.

As of January 13, 2017, the number of shares of beneficial interest outstanding was 6,740,069.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement for the Registrant’s 2017 Annual Meeting of Shareholders to be held on April 6, 2017 are incorporated by reference in Part III of this Annual Report.

 

 

 

TABLE OF CONTENTS

FORM 10-K

 

 

PART I			Page No.
	Item 1	Business	3
	Item 1A	Risk Factors	10
	Item 1B	Unresolved Staff Comments	13
	Item 2	Properties	14
	Item 3	Legal Proceedings	18
	Item 4	Mine Safety Disclosures	18
PART II
	Item 5	Market for FREIT’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities	18
	Item 6	Selected Financial Data	19
	Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	Item 7A	Quantitative and Qualitative Disclosures About Market Risk	39
	Item 8	Financial Statements and Supplementary Data	39
	Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	39
	Item 9A	Controls and Procedures	39
	Item 9B	Other Information	39
PART III
	Item 10	Directors, Executive Officers and Corporate Governance	41
	Item 11	Executive Compensation	41
	Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	41
	Item 13	Certain Relationships and Related Transactions, and Director Independence	41
	Item 14	Principal Accountant Fees and Services	41
PART IV
	Item 15	Exhibits, Financial Statement Schedules	42

 

FORWARD-LOOKING STATEMENTS

Certain information included in this Annual Report contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The registrant cautions readers that forward-looking statements, including, without limitation, those relating to the registrant’s investment policies and objectives; the financial performance of the registrant; the ability of the registrant to borrow and service its debt; the economic and competitive conditions which affect the registrant’s business; the ability of the registrant to obtain the necessary governmental approvals for the development, expansion or renovation of its properties, the impact of environmental conditions affecting the registrant’s properties, and the registrant’s liquidity and capital resources, are subject to certain risks and uncertainties. Actual results or outcomes may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors, including, without limitation, the registrant’s future financial performance; the availability of capital; general market conditions; national and local economic conditions, particularly long-term interest rates; federal, state and local governmental regulations that affect the registrant; and the competitive environment in which the registrant operates, including, the availability of retail space and residential apartment units in the areas where the registrant’s properties are located. In addition, the registrant’s continued qualification as a real estate investment trust involves the application of highly technical and complex rules of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The forward-looking statements are made as of the date of this Annual Report and the registrant assumes no obligation to update the forward-looking statements or to update the reasons actual results could differ from those projected in such forward-looking statements.

 

PART I

ITEM 1

BUSINESS

(a)	General Business

First Real Estate Investment Trust of New Jersey (“FREIT”) is an equity real estate investment trust (“REIT”) organized in New Jersey in 1961. FREIT acquires, develops, constructs and holds real estate properties for long-term investment and not for resale.

FREIT’s long-range investment policy is to review and evaluate potential real estate investment opportunities for acquisition that it believes will (i) complement its existing investment portfolio, (ii) generate increased income and distributions to its shareholders, and (iii) increase the overall value of FREIT’s portfolio. FREIT’s investments may take the form of wholly-owned fee interests, or if the circumstances warrant diversification of risk, ownership on a joint venture basis with other parties, including employees and affiliates of Hekemian & Co., Inc., FREIT’s managing agent (“Hekemian”) (See “Management Agreement”), provided FREIT is able to maintain management control over the property. While our general investment policy is to hold and maintain properties for the long-term, we may, from time-to-time, sell or trade certain properties in order to (i) obtain capital to be used to purchase, develop or renovate other properties which we believe will provide a higher rate of return and increase the value of our investment portfolio, and (ii) divest properties which we have determined or determine are no longer compatible with our growth strategies and investment objectives for our real estate portfolio.

FREIT Website: All of FREIT’s Securities and Exchange Commission filings for the past three years are available free of charge on FREIT’s website, which can be accessed at http://www.FREITNJ.com.

Fiscal Year 2016 Developments

(i)

FINANCING

(a)

On December 9, 2013, Grande Rotunda, LLC closed with Wells Fargo Bank on a construction loan of up to $120 million to be used to redevelop and expand the Rotunda property in Baltimore, Maryland with a term of four (4) years, with one 12-month extension, at a rate of 225 basis points over the monthly LIBOR. As of October 31, 2016, approximately $114 million of this loan was drawn down (including approximately $21.1 million during Fiscal 2016), of which $19 million was used to pay off the loan from FREIT, and $95 million was used toward the construction at the Rotunda. On November 23, 2016, Wells Fargo Bank modified the following terms and conditions of this loan: (i) the total amount that may be drawn on this loan will be decreased from $120 million to $116.1 million, allowing for an additional draw of $2.1 million over the existing balance of approximately $114 million to be used for retail tenant improvements and leasing commissions; (ii) leasing benchmarks will no longer be required to be met including the waiver of the leasing benchmarks FREIT was not in compliance with as of June 30, 2016; (iii) Grande Rotunda, LLC will provide an interest reserve to Wells Fargo Bank in the amount of $2 million for the purpose of funding interest payments, and will be obliged to replenish the account balance to $1 million if it should fall below $500,000; (iv) the maturity date of the loan was changed from December 31, 2017 to October 31, 2017 with no option to extend; (v) the interest rate on amount outstanding on the loan was increased by 25 basis points to 250 basis points over the monthly LIBOR. (See Notes 5 and 9 to FREIT’s consolidated financial statements.)

(b)

FREIT has a line of credit provided by the Provident Bank in the amount of approximately $12.8 million. The line of credit was for a two year term ending on November 1, 2016, which was extended by the bank to February 1, 2017 while the bank completes its due diligence. FREIT expects the credit line will be extended for an additional period of 24 months. Draws against the credit line can be used for general corporate purposes, for property acquisitions, construction activities, and letters of credit. The interest rate on the line of credit has a floor of 3.25%. As of October 31, 2016, approximately $12.8 million was available under the line of credit. (See Note 5 to FREIT’s consolidated financial statements.)

(c)

On April 22, 2016, People’s United Bank agreed to a take-down of the second tranche of its loan with Damascus Centre, LLC in the amount of $2,320,000, of which approximately $470,000 was readily available and the remaining $1,850,000 (included in prepaid expenses and other assets in the accompanying consolidated balance sheet) is held in escrow and available to Damascus Centre, LLC once certain tenants open and begin paying rent. In order to minimize interest rate volatility during the term of this loan, Damascus Centre, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 3.53% over the term of the second tranche of this loan. (See Note 5 to FREIT’s consolidated financial statements.)

(d)

On September 29, 2016, Wayne PSC, LLC refinanced its $24.2 million mortgage loan held with Metropolitan Life Insurance Company, with a new mortgage loan from People’s United Bank in the amount of $25.8 million. The new loan, secured by a shopping center in Wayne, New Jersey, bears a floating interest rate equal to 220 basis points over the one-month BBA LIBOR with a maturity date of October 1, 2026. In order to minimize interest rate volatility during the term of the loan, Wayne PSC, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 3.625% over the term of the loan. This refinancing resulted in: (i) a reduction in interest rate from 6.04% to 3.625% and (ii) net refinancing proceeds of approximately $1 million that were distributed to the partners in Wayne PSC, LLC with FREIT receiving $0.4 million based on it 40% membership interest in Wayne PSC, LLC. (See Note 5 to FREIT’s consolidated financial statements.)

(ii)

CONSTRUCTION

The Rotunda property in Baltimore, Maryland (owned by FREIT’s 60% owned affiliate Grande Rotunda, LLC) is an 11.5 acre site containing a building with approximately 132,000 sq. ft. of office space and approximately 84,000 sq. ft. of retail space on the lower level of the building. In September 2013, FREIT began construction to redevelop and expand this property and, with the exception of tenant improvements, was substantially completed in the third quarter of Fiscal 2016 with costs to complete estimated at $1 million. The redevelopment and expansion plans included a modernization of the office building and smaller adjacent buildings, construction of 379 residential apartment rental units (referred to as “Icon”), an additional 75,000 square feet of new retail space, and 864 above level parking spaces. As of October 31, 2016, the residential section is approximately 29% leased and the retail space is approximately 71% leased. FREIT expects the Rotunda to generate positive cash flow in the latter half of fiscal year 2017. See “Item 1a-(i) (a)” under the caption Fiscal Year 2016 Developments for details on the financing of this project.

(iii)

PLANNED DISPOSITIONS & ACQUISITIONS

There were no planned acquisitions in Fiscal 2016.

On January 11, 2016, FREIT was notified by Lakeland Bank (as successor by merger to Pascack Community Bank) of its election and exercise of the option to purchase the property leased by FREIT to Lakeland Bank located in Rochelle Park, New Jersey. Pursuant to the Lease Agreement, Lakeland Bank had the right to exercise this option at a price equal to the greater of $3 million or the fair market value of the property as determined by mutual agreement between tenant and landlord. FREIT and Lakeland Bank agreed to a purchase price of $3.1 million. On June 17, 2016, FREIT sold this property, having a carrying amount of approximately $2.7 million (including a straight-line rent receivable in the amount of approximately $0.5 million), to Lakeland Bank for $3.1 million resulting in a gain of approximately $0.3 million net of sales fees. This sale results in FREIT’s loss of future annual rents of approximately $241,000, which would have increased periodically through September 2023. As the disposal of this property did not represent a strategic shift that would have a major impact on FREIT’s operations or financial results, the property’s operations were not reflected as discontinued operations in the accompanying financial statements.

(b)	Financial Information about Segments

FREIT has two reportable segments: Commercial Properties and Residential Properties. These reportable segments have different types of tenants and are managed separately because each requires different operating strategies and management expertise. Segment information for the three years ended October 31, 2016 is included in Note 14 “Segment Information” to FREIT’s consolidated financial statements.

(c)	Narrative Description of Business

FREIT was founded and organized for the principal purpose of acquiring, developing, and owning a portfolio of diverse income producing real estate properties. FREIT’s developed properties include residential apartment communities and commercial properties that consist of multi and single tenanted properties. Our properties are located in New Jersey, Maryland

and New York. We also currently own approximately 7.37 acres of unimproved land in New Jersey. See Item 2, “Properties - Portfolio of Investments.” 

FREIT elected to be taxed as a REIT under the Internal Revenue Code. FREIT operates in such a manner as to qualify for taxation as a REIT in order to take advantage of certain favorable tax aspects of the REIT structure. Generally, a REIT will not be subject to federal income taxes on that portion of its ordinary income or capital gain that is currently distributed to its equity holders.

As an equity REIT, we generally acquire interests in income producing properties to be held as long-term investments. FREIT’s return on such investments is based on the income generated by such properties mainly in the form of rents.

From time to time, FREIT has sold, and may sell again in the future, certain of its properties in order to (i) obtain capital used or to be used to purchase, develop or renovate other properties which we believe will provide a higher rate of return and increase the value of our investment portfolio, and (ii) divest properties which FREIT has determined or determines are no longer compatible with our growth strategies and investment objectives for our real estate portfolio.

We do not hold any patents, registered trademarks, or licenses. 

Portfolio of Real Estate Investments

At October 31, 2016, FREIT’s real estate holdings included (i) eight (8) apartment buildings or complexes containing a total of 1,472 rentable units, (ii) nine (9) commercial properties (retail and office) containing approximately 1,338,000 square feet of leasable space after giving effect to the sale of a property on June 17, 2016 (See Item 1- a(iii) – “Planned Dispositions and Acquisitions”), including one (1) single tenant store – a building located in Patchogue New York formerly occupied as a supermarket, one (1) one-acre parcel subject to a ground lease, and (iii) three (3) parcels of undeveloped land consisting of approximately 7.37 acres in total. FREIT and its subsidiaries own all such properties in fee simple. See Item 2, “Properties - Portfolio of Investments” of this Annual Report for a description of FREIT’s separate investment properties and certain other pertinent information with respect to such properties that is relevant to FREIT’s business.

Investment in Subsidiaries 

The consolidated financial statements (See Note 1 to the Consolidated Financial Statements included in this Form 10-K) include the accounts of the following subsidiaries of FREIT:

Westwood Hills, LLC (“Westwood Hills”): FREIT owns a 40% membership interest in Westwood Hills, which owns and operates a 210-unit residential apartment complex in Westwood, New Jersey.

Wayne PSC, LLC (“Wayne PSC”): FREIT owns a 40% membership interest in Wayne PSC, which owns a 322,000 square foot community shopping center in Wayne, New Jersey.

S And A Commercial Associates Limited Partnership (“S And A”): S And A owns a 100% interest in Pierre Towers, LLC, which owns a 266-unit residential apartment complex in Hackensack, New Jersey. FREIT owns a 65% partnership interest in S And A.

Grande Rotunda, LLC: FREIT owns a 60% membership interest in Grande Rotunda, which owns a 291,000 square foot mixed use property (office and retail) and a 379-unit residential apartment complex in Baltimore, Maryland that has substantially completed a major redevelopment and expansion project at the property in the third quarter of Fiscal 2016.

Damascus Centre, LLC: FREIT owns a 70% membership interest in Damascus Centre, LLC which owns a 143,000 square foot shopping center in Damascus, Maryland.

WestFREIT, Corp: FREIT owns a 100% membership interest in WestFREIT, Corp., which owns Westridge, a 253,000 square foot shopping center in Frederick, Maryland.

WestFredic, LLC: FREIT owns a 100% membership interest in WestFredic, LLC, which assumed a $22 million mortgage loan that is secured by Westridge in Frederick, Maryland.

FREIT Regency, LLC: FREIT owns a 100% membership interest in FREIT Regency, LLC, which owns a 132-unit residential apartment complex located in Middletown, New York.

Employees

On October 31, 2016, FREIT and its subsidiaries had thirty (30) full-time employees and ten (10) part-time employees who work solely at the properties owned by FREIT or its subsidiaries. The number of part-time employees varies seasonally.

Robert S. Hekemian, Chairman of the Board and Chief Executive Officer, Donald W. Barney, President, Treasurer and Chief Financial Officer, and John A. Aiello, Esq., Secretary and Executive Secretary, are the executive officers of FREIT. Mr. Hekemian devotes approximately seventy percent (70%) of his business activities to FREIT, Mr. Barney devotes approximately fifteen percent (15%) of his business activities to FREIT, and Mr. Aiello devotes approximately ten percent (10%) of his business activities to FREIT. Refer to “Item 10 – Directors, Executive Officers and Corporate Governance.” Hekemian & Co., Inc. has been retained by FREIT to manage FREIT’s properties and is responsible for recruiting, on behalf

of FREIT, the personnel required to perform all services related to the operation of FREIT’s properties. See “Management Agreement” below. 

Management Agreement

On April 10, 2002, FREIT and Hekemian & Co. Inc. (“Hekemian”) executed a Management Agreement whereby Hekemian would continue as Managing Agent for FREIT. The term of the Management Agreement was renewed on November 1, 2015 for a two-year term which will expire on October 31, 2017. The Management Agreement automatically renews for successive periods of two years unless either party gives not less than six (6) months prior notice to the other of non-renewal. Hekemian currently manages all the properties owned by FREIT and its affiliates, except for the office building at the Rotunda located in Baltimore, Maryland, which is managed by an independent third party management company. However, FREIT may retain other managing agents to manage properties acquired after April 10, 2002 and to perform various other duties such as sales, acquisitions, and development with respect to any or all properties. Hekemian does not serve as the exclusive property acquisition advisor to FREIT and is not required to offer potential acquisition properties exclusively to FREIT before acquiring those properties for its own account. The Management Agreement includes a detailed schedule of fees for those services, which Hekemian may be called upon to perform. The Management Agreement provides for a termination fee in the event of a termination or non-renewal of the Management Agreement under certain circumstances.

Pursuant to the terms of the Management Agreement, FREIT pays Hekemian certain fees and commissions as compensation for its services. From time to time, FREIT engages Hekemian to provide certain additional services, such as consulting services related to development, property sales and financing activities of FREIT. Separate fee arrangements are negotiated between Hekemian and FREIT with respect to such additional services. In Fiscal 2007, FREIT’s Board of Trustees approved and FREIT executed a development fee agreement for the Rotunda redevelopment project for the development services to be provided by Hekemian Development Resources, LLC (“Resources”), a wholly-owned subsidiary of Hekemian. The development fee agreement, as amended, for the Rotunda provides for Resources to receive a fee equal to 6.375% of the development costs as defined, less the amount of $3 million previously paid to Hekemian for the Rotunda project. In addition, the Board approved the payment of a fee to Resources in the amount of $1.4 million in connection with the revision to the scope of the Rotunda development project. The fee will be paid to Resources upon the following terms: (i) $500,000 of the $1.4 million will be paid on a monthly basis during the design phase (the $500,000 was paid in Fiscal 2013); and (ii) $900,000 of the $1.4 million will be paid upon the issuance of a certificate of occupancy for the multi-family portion of the project (the $900,000 is included in accounts payable on consolidated balance sheets at October 31, 2016 and 2015). The minority ownership interest of Grande Rotunda, LLC is owned by Rotunda 100, LLC, which is principally owned by employees of Hekemian, including certain members of the immediate family of Robert S. Hekemian, FREIT’s Chief Executive Officer and Chairman, and Robert S. Hekemian, Jr., a Trustee of FREIT, and the members of the Hekemian family have majority management control of this entity. (See Note 9 to FREIT’s consolidated financial statements.)

Robert S. Hekemian, Chairman of the Board, Chief Executive Officer and a Trustee of FREIT, is the Chairman of the Board and Chief Executive Officer of Hekemian. Mr. Hekemian owns approximately 0.2% of all of the issued and outstanding shares of Hekemian. Robert S. Hekemian, Jr., a Trustee of FREIT, is the President of Hekemian, and owns approximately 33.3% of all of the issued and outstanding shares of Hekemian.

Real Estate Financing

FREIT funds acquisition opportunities and the development of its real estate properties largely through debt financing, including mortgage loans against certain of its properties. At October 31, 2016, FREIT’s aggregate outstanding mortgage debt was $329.7 million with an average interest cost on a weighted average basis of 4.04%. FREIT has mortgage loans against certain properties which serve as collateral for such loans. See the tables in Item 2, “Properties - Portfolio of Investments” for the outstanding mortgage balances at October 31, 2016 with respect to each of these properties.

FREIT is highly leveraged and will continue to be for the foreseeable future. This level of indebtedness presents an increase in debt service requirements that could adversely affect the financial condition and results of operations of FREIT. A number of FREIT’s mortgage loans are being amortized over a period that is longer than the terms of such loans; thereby requiring balloon payments at the expiration of the terms of such loans. FREIT has not established a cash reserve sinking fund with respect to such obligations and at this time does not expect to have sufficient funds from operations to make such balloon payments when due under the terms of such loans. See “Liquidity and Capital Resources” under Item 7.

FREIT is subject to the normal risks associated with debt financing, including the risk that FREIT’s cash flow will be insufficient to meet required payments of principal and interest; the risk that indebtedness on its properties will not be able to be renewed, repaid or refinanced when due; or that the terms of any renewal or refinancing will not be as favorable as the terms of the indebtedness being replaced. If FREIT were unable to refinance its indebtedness on acceptable terms, or at all, FREIT might be forced to dispose of one or more of its properties on disadvantageous terms which might result in losses to FREIT. These losses could have a material adverse effect on FREIT and its ability to make distributions to shareholders and to pay amounts due on its debt. If a property is mortgaged to secure payment of indebtedness and FREIT is unable to meet mortgage payments, the mortgagee could foreclose upon the property, appoint a receiver and receive an assignment of rents and leases or pursue other remedies, all with a consequent loss of revenues and asset value to FREIT. Further, payment obligations on FREIT’s mortgage loans will not be reduced if there is a decline in the economic performance of any of

FREIT’s properties. If any such decline in economic performance occurs, FREIT’s revenues, earnings, and funds available for distribution to shareholders would be adversely affected.

Neither FREIT’s Declaration of Trust nor any policy statement formally adopted by the Board limits either the total amount of indebtedness or the specified percentage of indebtedness (based on the total capitalization of FREIT), which may be incurred by FREIT. Accordingly, FREIT may incur in the future additional secured or unsecured indebtedness in furtherance of its business activities, including, if or when necessary, to refinance its existing debt. Future debt incurred by FREIT could bear interest at rates which are higher than the rates on FREIT’s existing debt. Future debt incurred by FREIT could also bear interest at a variable rate. Increases in interest rates would increase FREIT’s variable interest costs (to the extent that the related indebtedness was not protected by interest rate protection arrangements), which could have a material adverse effect on FREIT and its ability to make distributions to shareholders and to pay amounts due on its debt or cause FREIT to be in default under its debt. Further, in the future, FREIT may not be able to, or may determine that it is not able to, obtain financing for property acquisitions or for capital expenditures to develop or improve its properties on terms which are acceptable to FREIT. In such event, FREIT might elect to defer certain projects unless alternative sources of capital were available, such as through an equity or debt offering by FREIT.

Competitive Conditions

FREIT is subject to normal competition with other investors to acquire real property and to profitably manage such property. Numerous other REITs, banks, insurance companies and pension funds, as well as corporate and individual developers and owners of real estate, compete with FREIT in seeking properties for acquisition and for tenants. Many of these competitors have significantly greater financial resources than FREIT.

In addition, retailers at FREIT's commercial properties face increasing competition from discount shopping centers, outlet malls, sales through catalogue offerings, discount shopping clubs, marketing and shopping through cable and computer sources, particularly over the internet, and telemarketing. In many markets, the trade areas of FREIT's commercial properties overlap with the trade areas of other shopping centers. Renovations and expansions at those competing shopping centers and malls could negatively affect FREIT's commercial properties by encouraging shoppers to make their purchases at such new, expanded or renovated shopping centers and malls. Increased competition through these various sources could adversely affect the viability of FREIT's tenants, and any new commercial real estate competition developed in the future could potentially have an adverse effect on the revenues of and earnings from FREIT's commercial properties.

(A)

General Factors Affecting Investment in Commercial and Apartment Properties; Effect of Economic and Real Estate Conditions

The revenues and value of FREIT’s commercial and residential apartment properties may be adversely affected by a number of factors, including, without limitation, the national economic climate; the regional economic climate (which may be adversely affected by plant closings, industry slow-downs and other local business factors); local real estate conditions (such as an oversupply of retail space or apartment units); perceptions by retailers or shoppers of the security, safety, convenience and attractiveness of a shopping center; perception by residential tenants of the safety, convenience and attractiveness of an apartment building or complex; the proximity and the number of competing shopping centers and apartment complexes; the availability of recreational and other amenities and the willingness and ability of the owner to provide capable management and adequate maintenance. In addition, other factors may adversely affect the fair market value of a commercial property or apartment building or complex without necessarily affecting the revenues, including changes in government regulations (such as limitations on development or on hours of operation) changes in tax laws or rates, and potential environmental or other legal liabilities.

(B)

Commercial Shopping Center Properties' Dependence on Anchor Stores and Satellite Tenants

FREIT believes that its revenues and earnings, its ability to meet its debt obligations, and its funds available for distribution to shareholders would be adversely affected if space in FREIT's multi-store shopping center properties could not be leased or if anchor store tenants or satellite tenants failed to meet their lease obligations.

The success of FREIT's investment in its shopping center properties is largely dependent upon the success of its tenants. Unfavorable economic, demographic, or competitive conditions may adversely affect the financial condition of tenants and consequently the lease revenues from and the value of FREIT's investments in its shopping center properties. If the sales of stores operating in FREIT's shopping center properties were to decline due to deteriorating economic conditions, the tenants may be unable to pay their base rents or meet other lease charges and fees due to FREIT. In addition, any lease provisions providing for additional rent based on a percentage of sales would not be operative in this economic environment. In the event of default by a tenant, FREIT could suffer a loss of rent and experience extraordinary delays while incurring additional costs in enforcing its rights under the lease, which FREIT may not be able to recapture.

As at October 31, 2016, the following table lists the ten (10) largest commercial tenants, which account for approximately 54.3% of FREIT’s leased commercial rental space and 33.9% of fixed commercial rents.

Tenant	Center	Sq. Ft.		% of Revenue
Burlington Coat Factory	Westridge Square	85,992		3.9%
Kmart Corporation	Westwood Plaza	84,254		1.9%
Macy's Federated Department Stores, Inc.	Preakness	81,160		1.3%
Stop & Shop Supermarket Co.	Preakness	61,020		3.7%
Safeway Stores, Inc.	Damascus Center	58,358		5.6%
H-Mart Frederick, LLC	Westridge Square	55,300		3.7%
Stop & Shop Supermarket Co.	Franklin Crossing	48,673		6.4%
TJ MAXX	Westwood Plaza	28,480		3.2%
T-Bowl, Inc.	Preakness	27,195		2.0%
Gold's Gym	Westridge Square	20,680		2.0%

 

(C)

Renewal of Leases and Reletting of Space

There is no assurance that we will be able to retain tenants at our commercial properties upon expiration of their leases. Upon expiration or termination of leases for space located in FREIT's commercial properties, the premises may not be relet or the terms of reletting (including the cost of concessions to tenants) may not be as favorable as lease terms for the terminated lease. If FREIT were unable to promptly relet all or a substantial portion of this space or if the rental rates upon such reletting were significantly lower than current or expected rates, FREIT's revenues and earnings, FREIT’s ability to service its debt, and FREIT’s ability to make expected distributions to its shareholders, could be adversely affected.

The Great Atlantic and Pacific Tea Company and its affiliates, including Pathmark Stores, Inc. (“A&P”), filed for protection under Chapter 11 of the bankruptcy code as disclosed in the bankruptcy filings and Pathmark’s lease at FREIT’s Patchogue, New York property was rejected as of December 31, 2015. FREIT recorded an expense in the fourth quarter of Fiscal 2015 of $1,046,000 ($0.15 per share basic and diluted) for provision for loss related to the straight line rent receivable for Pathmark. The provision had no impact on cash flow but it did have an impact on funds from operations. As a result of the lease having been rejected, FREIT is losing annual rents of approximately $1.4 million until the store is re-leased. See “Results of Operations – Segment Information – Commercial Segment” under Item 7 for further information

On February 3, 2012, Grande Rotunda, LLC, entered into a lease termination agreement (“Agreement”) with Giant, the tenant and operator of the 35,994 sq. ft. Giant supermarket at the Rotunda. Under the terms of the Agreement, Giant agreed to (i) waive its right to extend the term of the lease through March 31, 2035, (ii) terminate the lease and surrender the premises to Grande Rotunda, LLC no later than the earlier of commencement of the redevelopment of the property or March 31, 2015, and (iii) notwithstanding any earlier termination date, continue to pay monthly fixed rent payments plus its share of common area maintenance charges and taxes for the Rotunda property through March 31, 2015. Grande Rotunda, LLC has agreed (i) not to lease more than 20,000 sq. ft. of any space in the property for use as a food supermarket through March 31, 2035, and (ii) if Grande Rotunda, LLC decides to lease such space for use as a food supermarket, it must first offer Giant the space for the same use under terms acceptable to Grande Rotunda, LLC and Giant will have thirty days to accept the offer before the space may be leased to a third party. In November 2013, FREIT entered into a lease agreement with Mom’s Organic Market Inc., for approximately 14,300 square feet which was subsequently expanded in March 2014 by approximately 3,250 square feet. In accordance with the agreement Grande Rotunda, LLC has with Giant, Grande Rotunda, LLC first offered the lease of this space to Giant which declined the offer.

During Fiscal 2011, FREIT was notified by Giant of Maryland, LLC (“Giant”), the former tenant and operator of the 55,330 sq. ft. supermarket at the Westridge Square shopping center, that it would not extend the term of its lease, which expired on October 31, 2011. On July 27, 2012, FREIT signed a lease agreement with G-Mart Frederick, Inc., the operator of an international grocery store chain (“G-Mart”), for a significant portion (40,000 square feet) of the space previously occupied by Giant. G-Mart opened for business at the center in September 2013. However, effective November 1, 2014, G-Mart notified FREIT that it had vacated its space at the Westridge Square shopping center and would be terminating its lease. A new lease for this 40,000 square foot space was signed by H-Mart, an international grocery store chain, in November 2014 and subsequently H-Mart expanded its space by an additional 15,300 square feet. H-Mart is currently renovating its space but began paying rent in May 2015. All of the tenant improvements related to G-Mart will be utilized for H-Mart.

There were no other material lease expirations during Fiscal 2016 and Fiscal 2015. There are no additional material lease expirations expected during Fiscal 2017.

 

(D)

Illiquidity of Real Estate Investments; Possibility that Value of FREIT's Interests may be less than its Investment

 

Equity real estate investments are relatively illiquid. Accordingly, the ability of FREIT to vary its portfolio in response to changing economic, market or other conditions is limited. Also, FREIT's interests in its partially owned subsidiaries are subject to transfer constraints imposed by the operating agreements which govern FREIT’s investment in these partially owned subsidiaries. Even without such restrictions on the transfer of its interests, FREIT believes that there would be a limited market for its interests in these partially owned subsidiaries.

If FREIT had to liquidate all or substantially all of its real estate holdings, the value of such assets would likely be diminished if a sale were required to be completed in a limited time frame. The proceeds to FREIT from any such sale of the assets in FREIT’s real estate portfolio might be less than the fair market value of those assets.

Impact of Governmental Laws and Regulations on Registrant's Business

FREIT’s properties are subject to various federal, state and local laws, ordinances and regulations, including those relating to the environment and local rent control and zoning ordinances.

(A)

Environmental Matters

Both federal and state governments are concerned with the impact of real estate construction and development programs upon the environment. Environmental legislation affects the cost of selling real estate, the cost to develop real estate, and the risks associated with purchasing real estate.

Under various federal, state and local environmental laws, statutes, ordinances, rules and regulations, an owner of real property may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, in or under such property, as well as certain other potential costs relating to hazardous or toxic substances (including government fines and penalties and damages for injuries to persons and adjacent property). Such laws often impose such liability without regard to whether the owners knew of, or were responsible for, the presence or disposal of such substances. Such liability may be imposed on the owner in connection with the activities of any operator of, or tenant at, the property. The cost of any required remediation, removal, fines or personal injury or property damages and the property owner's liability therefore could exceed the value of the property and/or the aggregate assets of the owner. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. If FREIT incurred any such liability, it could reduce FREIT's revenues and ability to make distributions to its shareholders.

A property can also be negatively impacted by either physical contamination or by virtue of an adverse effect upon value attributable to the migration of hazardous or toxic substances, or other contaminants that have or may have emanated from other properties.

At this time, FREIT is aware of the following environmental matters affecting its properties:

(i)

Westwood Plaza Shopping Center, Westwood, NJ

This property is in a Flood Hazard Zone. FREIT maintains flood insurance in the amount of $500,000 for the subject property, which is the maximum available under the Flood Program for the property. Any reconstruction of that portion of the property situated in the flood hazard zone is subject to regulations promulgated by the New Jersey Department of Environmental Protection ("NJDEP"), which could require extraordinary construction methods.

(ii)

Franklin Crossing, Franklin Lakes, NJ

The redeveloped Franklin Crossing shopping center was completed during the summer of 1997. Also in 1997, a historical discharge of hazardous materials was discovered at Franklin Crossing. The discharge was reported to the NJDEP in accordance with applicable regulations. FREIT completed the remediation required by the NJDEP.

In November 1999, FREIT received a No Further Action Letter from the NJDEP concerning the contaminated soil at Franklin Crossing. Monitoring of the groundwater will continue pursuant to a memorandum of agreement filed with the NJDEP.

(iii)

Preakness Shopping Center, Wayne, NJ

Prior to its purchase, in November 2002 by Wayne PSC, LLC, a Phase I and Phase II Environmental Assessment of the Preakness shopping center revealed soil and ground water contamination with Percloroethylene (Dry Cleaning Fluid) caused by the mishandling of this chemical by a former dry cleaner tenant. The seller of the center to Wayne PSC, LLC has paid for and completed all required remediation work in accordance with the NJDEP standards, and this matter is now closed.

 

(iv)

Other

a) The State of New Jersey has adopted an underground fuel storage tank law and various regulations with respect to underground storage tanks.

FREIT no longer has underground storage tanks on any of its properties.

In prior years, FREIT conducted environmental audits for all of its properties except for its undeveloped land and retail properties in Franklin Lakes (Franklin Crossing) and Glen Rock, New Jersey. Except for the Preakness Shopping center in Wayne, New Jersey which has been remediated by the seller, the environmental reports secured by FREIT have not revealed any environmental conditions on its properties which require remediation pursuant to any applicable federal or state law or regulation.

b) FREIT has determined that several of its properties contain lead based paint (“LBP”). FREIT believes that it complies with all federal, state and local requirements as they pertain to LBP.

FREIT does not believe that the environmental conditions described in subparagraphs (i) - (iv) above will have a material adverse effect upon the capital expenditures, revenues, earnings, financial condition or competitive position of FREIT.

(B)

Rent Control Ordinances

Each of the apartment buildings or complexes owned by FREIT is subject to some form of rent control ordinance which limits the amount by which FREIT can increase the rent for renewed leases, and in some cases, limits the amount of rent which FREIT can charge for vacated units, except for Westwood Hills, The Boulders at Rockaway, and Icon which are not subject to any rent control law or regulation.

(C)

Zoning Ordinances

Local zoning ordinances may prevent FREIT from renovating, expanding or converting its existing properties for their highest and best use as determined by the Board.

(D)

Financial Information about Foreign and Domestic Operations and Export Sale

FREIT does not engage in operations in foreign countries and it does not derive any portion of its revenues from customers in foreign countries.

 

ITEM 1A

RISK FACTORS

Almost all of FREIT’s income and cash flow are derived from the net rental income (revenues after expenses) from our properties. FREIT’s business and financial results are affected by the following fundamental factors:

·

the national and regional economic climate;

·

occupancy rates at the properties;

·

tenant turnover rates;

·

rental rates;

·

operating expenses;

·

tenant improvement and leasing costs;

·

cost of and availability of capital;

·

failure of banking institutions;

·

failure of insurance carriers;

·

new acquisitions and development projects; and

·

changes in governmental regulations, real estate tax rates and similar matters.

A negative or adverse quality change in the above factors could potentially cause a detrimental effect on FREIT’s revenue, earnings and cash flow. If rental revenues decline, we would expect to have less cash available to pay our indebtedness and distribute to our shareholders.

Adverse Changes in General Economic Climate: FREIT derives the majority of its revenues from renting apartments to individuals or families, and from retailers renting space at its shopping centers. The improvement in the U.S. economy has been uneven, but trending data seem to indicate the recovery has finally gained traction. The following U.S. developments and factors are positive: (a) the improvement in the housing market is expected to continue and drag along ancillary services; (b) falling energy prices and slower increases in health care costs are keeping inflation low; (c) increasing consumer confidence should push spending modestly higher in 2017; (d) private sector employment is expected to continue to grow steadily; and (e) credit availability has improved. These factors should aid economic growth in the United States. However, there are factors that can be a drag on long-term economic growth, including, without limitation: (i) continued political gridlock in

Washington; (ii) regulatory uncertainties; (iii) continued infrastructure deterioration; (iv) a dramatic international crisis; (v) increasing concerns regarding terrorism; (vi) continued stagnant economies in Europe and Asia.

FREIT receives a substantial portion of its operating income as rent under long-term leases with commercial tenants. At any time, any of our commercial tenants could experience a downturn in its business that might weaken its financial condition. These tenants might defer or fail to make rental payments when due, delay lease commencement, voluntarily vacate the premises or declare bankruptcy, which could result in the termination of the tenant’s lease, and could result in material losses to us and harm to our results of operations. Also, it might take time to terminate leases of underperforming or nonperforming tenants and FREIT might incur costs to remove such tenants. Also, if tenants are unable to comply with the terms of its leases, FREIT might modify lease terms in ways that are less favorable to FREIT.

Tenants unable to pay rent: Financially distressed tenants may be unable to pay rents and expense recovery charges, where applicable, and may default on their leases. Enforcing FREIT’s rights as landlord could result in substantial costs and may not result in a full recovery of unpaid rent. If a tenant files for bankruptcy, the tenant’s lease may be terminated. In each such instance FREIT’s income and cash flow would be negatively impacted.

Costs of re-renting space: If tenants fail to renew leases, fail to exercise renewal options, or terminate their leases early, the lost rents due to vacancy and the costs of re-renting the space could prove costly to FREIT. In addition to cleaning and renovating the vacated space, we may be required to grant concessions to a new tenant, and may incur leasing brokerage commissions. The lease terms to a new tenant may be less favorable than the prior tenant’s lease terms, and will negatively impact FREIT’s income and cash flow and adversely affect FREIT’s ability to pay mortgage debt and interest or make distributions to its shareholders. A&P filed for protection under Chapter 11 of the bankruptcy code as disclosed in the bankruptcy filings and Pathmark’s lease at FREIT’s Patchogue, New York property was rejected as of December 31, 2015. FREIT recorded an expense in the fourth quarter of Fiscal 2015 of $1,046,000 ($0.15 per share basic and diluted) for provision for loss related to the straight line rent receivable for Pathmark. The provision had no impact on cash flow but did have an impact on funds from operations. As a result of the lease having been rejected, FREIT is losing annual rents of approximately $1.4 million until the store is re-leased. See “Renewal of Leases and Reletting of Space” under Item 1 and “Results of Operations – Segment Information – Commercial Segment” under Item 7 for further information.

Inflation may adversely affect our financial condition and results of operations: Increased inflation could have a pronounced negative impact on FREIT’s operating and administrative expenses, as these costs may increase at a higher rate than FREIT’s rents. While increases in most operating expenses at FREIT’s commercial properties can be passed on to retail tenants, increases in expenses at its residential properties cannot be passed on to residential tenants. Unreimbursed increased operating expenses may reduce cash flow available for payment of mortgage debt and interest, and for distributions to shareholders.

Development and construction risks: As part of its investment strategy, FREIT seeks to acquire property for development and construction, as well as to develop and build on land already in its portfolio. FREIT has recently substantially completed a major redevelopment and expansion project, with the exception of tenant improvements, at the Rotunda property in Baltimore, Maryland. Development and construction activities are challenged with the following risks, which may adversely affect FREIT’s cash flow:

·

financing may not be available in the amounts FREIT seeks, or may not be on favorable terms;

·

long-term financing may not be available upon completion of the construction;

·

failure to complete construction on schedule or within budget may increase debt service costs and construction costs; and

·

abandoned project costs could result in an impairment loss.

Debt financing could adversely affect income and cash flow: FREIT relies on debt financing to fund its growth through acquisitions and development activities. To the extent third party debt financing is not available or not available on acceptable terms, acquisitions and development activities will be curtailed.

As of October 31, 2016, FREIT had approximately $215.8 million of non-recourse mortgage debt subject to fixed interest rates, and approximately $114 million of variable interest rate debt relating to outstanding draws on the Grande Rotunda, LLC construction loan. These mortgages are being repaid over periods (amortization schedules) that are longer than the terms of the mortgages. Accordingly, when the mortgages become due (at various times), significant balloon payments (the unpaid principal amounts) will be required. FREIT expects to refinance the individual mortgages with new mortgages when their terms expire. To this extent FREIT has exposure to capital availability and 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 the mortgage debt being retired. To the extent FREIT is unable to refinance its indebtedness on acceptable terms, FREIT may need to dispose of one or more of its properties upon disadvantageous terms.

FREIT’s revolving $12.8 million credit line (of which $12.8 million was available as of October 31, 2016), and the Grande Rotunda, LLC construction loan, which was entered into on December 9, 2013, contain financial covenants that could restrict FREIT’s acquisition activities and result in a default on these loans if FREIT fails to satisfy these covenants.

Failure of banking and financing institutions: Banking and financing institutions such as insurance companies provide FREIT with credit lines and construction financing. The credit lines available to FREIT may be used for a variety of business purposes, including general corporate purposes, acquisitions, construction, and letters of credit. Construction financing enables FREIT to develop new properties, or renovate or expand existing properties. A failure of the banking institution making credit lines available may render the line unavailable and adversely affect FREIT’s liquidity, and negatively impact FREIT’s operations in a number of ways. A failure of a financial institution unable to fund its construction financing obligations to FREIT may cause the construction to halt or be delayed. Substitute financing may be significantly more expensive, and construction delays may subject FREIT to delivery penalties.

Failure of insurance carriers: FREIT’s properties are insured against unforeseen liability claims, property damages, and other hazards. The insurance companies FREIT uses have good ratings at the time the policies are put into effect. Financial failure of FREIT’s carriers may result in their inability to pay current and future claims. This inability to pay claims may have an adverse impact on FREIT’s financial condition. In addition, a failure of a FREIT insurance carrier may cause FREIT’s insurance renewal or replacement policy costs to increase.

Real estate is a competitive business: FREIT is subject to normal competition with other investors to acquire real property and to profitably manage such property. Numerous other REITs, banks, insurance companies and pension funds, as well as corporate and individual developers and owners of real estate, compete with FREIT in seeking properties for acquisition and for tenants. Many of these competitors have significantly greater financial resources than FREIT. In addition, retailers at FREIT's commercial properties face increasing competition from discount shopping centers, outlet malls, sales through catalogue offerings, discount shopping clubs, marketing and shopping through cable and computer sources, particularly over the internet, and telemarketing. In many markets, the trade areas of FREIT's commercial properties overlap with the trade areas of other shopping centers. Renovations and expansions at those competing shopping centers and malls could negatively affect FREIT's commercial properties by encouraging shoppers to make their purchases at such new, expanded or renovated shopping centers and malls. Increased competition through these various sources could adversely affect the viability of FREIT's tenants, and any new commercial real estate competition developed in the future could potentially have an adverse effect on the revenues of and earnings from FREIT's commercial properties.

FREIT also faces competition with respect to its residential properties based on a variety of factors, including perception by residential tenants of the safety, convenience and attractiveness of an apartment building or complex; the proximity and the number of competing shopping centers and apartment complexes; the availability of recreational and other amenities and the willingness and ability of the owner to provide capable management and adequate maintenance. Certain of these factors, such as the availability of amenities in the area surrounding a residential property, are not within FREIT’s control.

Illiquidity of real estate investment: Real estate investments are relatively difficult to buy and sell quickly. Accordingly, the ability of FREIT to vary its portfolio in response to changing economic, market or other conditions is limited. Also, FREIT’s interests in its partially owned subsidiaries are subject to transfer constraints by the operating agreements that govern FREIT’s investment in these partially owned subsidiaries.

Environmental problems may be costly: Both federal and state governments are concerned with the impact of real estate construction and development programs upon the environment. Environmental legislation affects the cost of selling real estate, the cost to develop real estate, and the risks associated with purchasing real estate.

Under various federal, state and local environmental laws, statutes, ordinances, rules and regulations, an owner of real property may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, in or under such property, as well as certain other potential costs relating to hazardous or toxic substances (including government fines and penalties and damages for injuries to persons and adjacent property). Such laws often impose such liability without regard to whether the owners knew of, or were responsible for, the presence or disposal of such substances. Such liability may be imposed on the owner in connection with the activities of any operator of, or tenant at the property. The cost of any required remediation, removal, fines or personal injury or property damages and the property owner's liability therefore could exceed the value of the property and/or the aggregate assets of the owner. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. If FREIT incurred any such liability, it could reduce FREIT's revenues and ability to make distributions to its shareholders. In prior years, FREIT conducted environmental audits for all of its properties except for its undeveloped land and retail properties in Franklin Lakes (Franklin Crossing) and Glen Rock, New Jersey. Except for the Preakness Shopping center in Wayne, New Jersey which has been remediated by the seller, the environmental reports secured by FREIT have not revealed any environmental conditions on its properties which require remediation pursuant to any applicable federal or state law or regulations.

A property can also be negatively impacted by either physical contamination or by virtue of an adverse effect upon value attributable to the migration of hazardous or toxic substances, or other contaminants that have or may have emanated from other properties.

Qualification as a REIT: Since its inception in 1961, FREIT has elected to qualify as a REIT for federal income tax purposes, and will continue to operate so as to qualify as a REIT. In order to qualify as a REIT, we must satisfy a number of highly technical and complex provisions of the Internal Revenue Code. Governmental legislation, new regulations, and

administrative interpretations may significantly change the tax laws with respect to the requirements for qualification as a REIT, or the federal income tax consequences of qualifying as a REIT. Although FREIT intends to continue to operate in a manner to allow it to qualify as a REIT, future economic, market, legal, tax or other considerations may cause it to revoke the REIT election or fail to qualify as a REIT. Such a revocation would subject FREIT’s income to federal income tax at regular corporate rates, and failure to qualify as a REIT would also eliminate the requirement that FREIT pay dividends to its shareholders.

Change of investment and operating policies: FREIT’s investment and operating policies, including indebtedness and dividends, are exclusively determined by the Board, and not subject to shareholder approval.

ITEM 1B

UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2

PROPERTIES

Portfolio of Investments: The following tables set forth certain information relating to each of FREIT's real estate investments in addition to the specific mortgages encumbering the properties.  

 

Residential Apartment Properties as of October 31, 2016:
Property & Location	Year Acquired	No. of Units	Average Annual Occupancy Rate for the Year Ended 10/31/16	Average Monthly Rent per Unit @ 10/31/16	Average Monthly Rent per Unit @ 10/31/15	Mortgage Balance ($000)	Depreciated Cost of Land, Buildings & Equipment ($000)
Berdan Court	1965	176	96.7%	$1,725	$1,691	$18,054	$1,681
Wayne, NJ
Hammel Gardens	1972	80	94.6%	$1,571	$1,497	$8,087	$735
Maywood, NJ
Regency Club	2014	132	96.6%	$1,515	$1,478	$16,200 (5)	$20,102
Middletown, NY
Steuben Arms	1975	100	97.8%	$1,516	$1,422	$10,659	$866
River Edge, NJ
Westwood Hills (1)	1994	210	96.9%	$1,756	$1,725	$21,098	$9,807
Westwood Hills, NJ
Pierre Towers (2)	2004	266	91.4%	$2,434	$2,432	$29,901	$40,042
Hackensack, NJ
Boulders (3)	2006	129	94.6%	$2,046	$1,990	$17,141	$16,356
Rockaway, NJ
Icon (4)	2016	379	8.5%	$1,629	N/A	$67,126 (6)	$91,771
Baltimore, Maryland

(1) FREIT owns a 40% equity interest in Westwood Hills.

(2) Pierre Towers is 100% owned by S And A Commercial Associates LP, which is 65% owned by FREIT.

(3) Construction completed in August 2006 on land acquired in 1963 / 1964.

(4) FREIT owns a 60% equity interest in Grande Rotunda, LLC.  A major redevelopment and expansion project was substantially completed in the third quarter of Fiscal 2016, in which a 379-unit residential complex was constructed upon property acquired in 2005.

(5) On December 29, 2014, FREIT Regency, LLC closed on a loan in the amount of $16.2 million bearing a floating interest rate equal to 125 basis points over the one-month BBA LIBOR.  In order to minimize interest rate volatility during the term of the loan, FREIT Regency, LLC entered into an interest rate swap agreement that converted the floating interest rate to a fixed interest rate of 3.75% over the term of the loan.

(6) On December 9, 2013, Grande Rotunda, LLC closed with Wells Fargo Bank on a construction loan of up to $120 million to be used to redevelop and expand the Rotunda property in Baltimore, Maryland with a term of four (4) years, with one 12-month extension, at a rate of 225 basis points over the monthly LIBOR. As of October 31, 2016, approximately $114 million of this loan was drawn down (including approximately $21.1 million during Fiscal 2016), of which $19 million was used to pay off the loan from FREIT, and $95 million was used toward the construction at the Rotunda.  Approximately 58.9% of this outstanding loan balance was allocated to the residential segment based on proportionate percentages set forth in the construction loan agreement dated December 9, 2013.  (See Note 5 to FREIT’s consolidated financial statements.)

 

 

Commercial Properties as of October 31, 2016:
Property & Location	Year Acquired	Leasable Space- Approximate Sq. Ft.	Average Annual Occupancy Rate for the Year Ended 10/31/16	Average Annualized Rent per Sq. Ft. @ 10/31/16 *	Average Annualized Rent per Sq. Ft. @ 10/31/15 *	Mortgage Balance ($000)	Depreciated Cost of Land, Buildings & Equipment ($000)
Glen Rock, NJ	1962	4,681	56.4%	$33.04	$25.36	None (1)	$124
Franklin Crossing	1966 (2)	87,661	91.5%	$24.31	$22.24	None (1)	$7,260
Franklin Lakes, NJ
Westwood Plaza	1988	174,275	99.1%	$14.34	$14.06	$20,801	$7,900
Westwood, NJ
Westridge Square (3)	1992	252,733  (11)	89.3%	$14.32	$21.07	$22,000	$15,671
Frederick, MD
Single Tenant Store (4)	1997	63,932	16.7%	$0.00	$20.04	$5,231 (8)	$6,717
Patchogue, NY
Preakness Center (5)	2002	322,065	86.4%	$14.99	$12.97	$25,749 (13)	$25,828
Wayne, NJ
Damascus Center (6)	2003	142,529	79.8%	$17.14	$20.46	$20,831 (9)	$28,143
Damascus, MD
				.	.
The Rotunda (7)	2005	290,510 (12)	41.1%	$36.99	$9.22	$46,841 (10)	$63,781
Baltimore, MD
Rockaway, NJ	1964/1963	1 Acre	100.0%	N/A	N/A	None	$114
		Landlease

 

* Average annualized rent per sq. ft. includes the impact of straight-line rent escalations and the amortization of rent concessions and abatements.

 

(1) Security for draws against FREIT's Credit Line.

(2) The original 33,000 sq. ft. shopping center was replaced with a new 87,661 sq. ft. center that opened in October 1997.

(3) FREIT owns a 100% interest in WestFREIT Corp, that owns the center.

(4) A&P filed for protection under Chapter 11 of the bankruptcy code as disclosed in the bankruptcy filings and Pathmark’s lease at FREIT’s Patchogue, New York property was rejected as of December 31, 2015.   See “Renewal of Leases and Reletting of Space” and “Results of Operations – Segment Information – Commercial Segment” under Item 7 for further information.  See also Note 16 to the consolidated financial statements.

(5) FREIT owns a 40% equity interest in Wayne PSC, LLC, that owns the center.

(6) FREIT owns a 70% equity interest in Damascus Centre, LLC, that owns the center. A major renovation and expansion project was completed in November 2011.

(7) FREIT owns a 60% equity interest in Grande Rotunda, LLC, that owns the center.

(8) Effective January 1, 2016, the monthly debt service has been reduced to interest only.

(9) On December 26, 2012, Damascus Centre, LLC refinanced its construction loan with long-term financing provided by People’s United Bank and the first tranche of the new loan was taken-down in the amount of $20 million.  Based on leasing and net operating income at the shopping center, People’s United Bank agreed to a take-down of the second tranche of this loan on April 22, 2016 in the amount of $2,320,000, of which approximately $470,000 was readily available and the remaining $1,850,000 is held in escrow and available to Damascus Centre, LLC once certain tenants open and begin paying rent.  In order to minimize interest rate volatility during the term of this loan, Damascus Centre, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate on each tranche of this loan, resulting in a fixed rate of 3.81% over the term of the first tranche of this loan and a fixed rate of 3.53% over the term of the second tranche of this loan.

(10) On December 9, 2013, Grande Rotunda, LLC closed with Wells Fargo Bank on a construction loan of up to $120 million to be used to redevelop and expand the Rotunda property in Baltimore, Maryland with a term of four (4) years, with one 12-month extension, at a rate of 225 basis points over the monthly LIBOR. As of October 31, 2016, approximately $114 million of this loan was drawn down (including approximately $21.1 million during Fiscal 2016), of which $19 million was used to pay off the loan from FREIT, and $95 million was used toward the construction at the Rotunda.  Approximately 41.1% of this outstanding loan balance was allocated to the commercial segment based on proportionate percentages set forth in the construction loan agreement dated December 9, 2013.  (See Note 5 to FREIT’s consolidated financial statements.)

(11) Effective November 1, 2014, G-Mart notified FREIT that it had vacated its space at the Westridge Square shopping center and would be terminating its lease. A new lease for this 40,000 sq. ft. space was signed by H-Mart, an international grocery store chain, in November 2014 and subsequently H-Mart expanded its space by an additional 15,300 square feet.  H-Mart is currently renovating its space but began paying rent in May 2015.

(12) A major redevelopment and expansion project was substantially completed in the third quarter of Fiscal 2016, which included modernization of the office building containing 132,000 sq. ft. of office space and approximately 84,000 sq. ft. of retail space on the lower level of the building and an additional 75,000 square feet of new retail space.

(13) On September 29, 2016, Wayne PSC, LLC refinanced its $24.2 million mortgage loan held with Metropolitan Life Insurance Company, with a new mortgage loan from People's United Bank in the amount of $25.8 million.  The new loan bears a floating interest rate equal to 220 basis points over the one-month BBA LIBOR with a maturity date of October 1, 2026.  In order to minimize the interest rate volatility during the term of the loan, Wayne PSC, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 3.625% over the term of the loan.  

 

Supplemental Segment Information:

 

Commercial lease expirations at October 31, 2016 assuming none of the tenants exercise renewal options:
								Annual Rent of Expiring Leases
Year Ending		Number of		Expiring Leases		Percent of
October 31,		Expiring Leases		Sq. Ft.		Commercial Sq. Ft.		Total				Per Sq. Ft.
Month to month		18		42,745		4.2%		$	1,103,823			$	25.82
2017		24		202,193		19.9%		$	2,918,353			$	14.43
2018		24		70,564		6.9%		$	1,644,138			$	23.30
2019		21		153,555		15.1%		$	1,716,126			$	11.18
2020		20		57,516		5.7%		$	1,562,758			$	27.17
2021		31		118,442		11.7%		$	2,917,834			$	24.64
2022		7		95,076		9.4%		$	930,874			$	9.79
2023		9		19,617		1.9%		$	474,154			$	24.17
2024		6		36,278		3.6%		$	830,459			$	22.89
2025		2		6,478		0.6%		$	145,236			$	22.42
2026		5		12,327		1.2%		$	455,297			$	36.93
2027		2		3,682		0.4%		$	118,256			$	32.12
2028		1		61,020		6.0%		$	663,593			$	10.88
2029		1		58,358		5.7%		$	998,505			$	17.11
2030		1		55,300		5.4%		$	663,600			$	12.00
2031		1		17,550		1.7%		$	403,650			$	23.00
2032		1		4,846		0.5%		$	151,356			$	31.23

 

Land Under Development and Vacant Land as of October 31, 2016:

 

Vacant Land			Permitted Use Per	Acreage Per
Location (1)	Acquired	Current Use	Local Zoning Laws	Parcel
Franklin Lakes, NJ	1966	None	Residential	4.27
Wayne, NJ	2002	None	Commercial	2.1
Rockaway, NJ	1964	None	Residential	1.0

(1)       All of the above land is unencumbered, except as noted elsewhere.    

FREIT believes that it has a diversified portfolio of residential and commercial properties. FREIT does not derive 10% or greater of its revenue from any single lease agreement.

In Fiscal 2016, none of FREIT’s properties contributed over 15% of FREIT’s total consolidated revenue. In Fiscal 2015 and 2014, FREIT had one (1) property that contributed over 15% of FREIT’s total consolidated revenue: within FREIT’s residential segment, Pierre Towers in Hackensack, New Jersey accounted for 15.2% for Fiscal 2015 and 15.5% for Fiscal 2014 of total consolidated revenue.

Although FREIT’s general investment policy is to hold properties as long-term investments, FREIT could selectively sell certain properties if it determines that any such sale is in FREIT’s and its shareholders’ best interests. See “Business-Planned Disposition” under Item 1 above. With respect to FREIT’s future acquisition and development activities, FREIT will evaluate various real estate opportunities, which FREIT believes would increase FREIT’s revenues and earnings, as well as complement and increase the overall value of FREIT’s existing investment portfolio.

Except for a building formerly occupied as a supermarket located in Patchogue, New York and the TD Bank branch located in Rockaway, New Jersey, all of FREIT’s and its subsidiaries’ commercial properties have multiple tenants.

FREIT and its subsidiaries’ commercial properties have sixteen (16) anchor/major tenants, which account for approximately 62.3% of the space leased. The balance of the space is leased to one hundred fifty-eight (158) satellite and office tenants. The following table lists the anchor / major tenants at each center and the number of satellite tenants:

Commercial Property								No. of
Shopping Center (SC)				Net Leasable				Additional/Satellite
Office Building (O)				Space		Anchor/Major Tenants		Tenants
Westridge Square		(SC)		252,733		Burlington Coat Factory		22
Frederick, MD (1)						H-Mart
						Gold's Gym
Franklin Crossing		(SC)		87,661		Stop & Shop		18
Franklin, Lakes, NJ
Westwood Plaza		(SC)		174,275		Kmart Corp		20
Westwood, NJ						TJMaxx
Preakness Center (2)		(SC)		322,065		Stop & Shop		30
Wayne, NJ						Macy's
						CVS
						Annie Sez
						Clearview Theaters
Damascus Center (3)		(SC)		142,529		Safeway Stores		22
Damascus, MD
The Rotunda (4)		(O)		132,256		Clear Channel Broadcasting		39
Baltimore, MD						The Association of Universities For Research in Astronomy, Inc.
		(SC)		158,254		Rite Aid Corporation		5
						Mom's Organic Market
Patchogue, NY (5)		(SC)		63,932				-
Glen Rock, NJ		(SC)		4,681				2

(1) Giant vacated in May 2011. Replaced by G-Mart in September 2013. Effective November 1, 2014, G-Mart vacated its space at the center and terminated its lease. A new lease for this space was signed by H-Mart, an international grocery store chain, in November 2014. H-Mart is currently renovating its space but began paying rent in May 2015.

(2) FREIT has a 40% interest in this property.

(3) FREIT has a 70% interest in this property.

(4) FREIT has a 60% interest in this property. A major redevelopment and expansion project was substantially completed in the third quarter of  Fiscal 2016, which included modernization of the office building containing 132,000 sq. ft. of office space and approximately 84,000 sq. ft. of retail space on the lower level of the building and an additional 75,000 square feet of new retail space.

(5) A&P filed for protection under Chapter 11 of the bankruptcy code as disclosed in the bankruptcy filings and Pathmark’s lease at FREIT’s Patchogue, New York property was rejected as of December 31, 2015.   See “Renewal of Leases and Reletting of Space” and “Results of Operations – Segment Information – Commercial Segment” under Item 7 for further information.  See also Note 16 to the consolidated financial statements.    

 

With respect to most of FREIT’s commercial properties, lease terms range from five (5) years to twenty-five (25) years with options, which if exercised would extend the terms of such leases. The lease agreements generally provide for reimbursement of real estate taxes, maintenance, insurance and certain other operating expenses of the properties. During the last three (3) completed fiscal years, occupancy at FREIT’s commercial properties averaged 80.5%, which represents the actual “physical” occupancy rate (based upon possession and use of leased space). The lower average occupancy level is attributed to the additional approximately 75,000 square feet of leasable space at the Rotunda as a result of the major redevelopment and expansion project at the Rotunda which was completed in the third quarter of Fiscal 2016.

On July 27, 2012, FREIT signed a lease agreement with G-Mart, for a significant portion of the space (40,000 of 55,330 square feet of available space) that was vacated by Giant at its Westridge Square property. G-Mart began operations at the center in September 2013. However, effective November 1, 2014, G-Mart notified FREIT that it had vacated its space at the Westridge Square shopping center and would be terminating its lease. A new lease for this 40,000 square foot space was signed by H-Mart, an international grocery store chain, in November 2014 and subsequently H-Mart expanded its space by an additional 15,300 square feet. H-Mart is currently renovating its space but began paying rent in May 2015.

Leases for FREIT’s apartment buildings and complexes are usually one to two years in duration. Even though the residential units are leased on a short-term basis, FREIT has averaged, during the last three (3) completed fiscal years, an 87.7% occupancy rate with respect to FREIT’s available apartment units. The lower average occupancy level is attributed to the inclusion of the additional 379 leasable units at the Rotunda as a result of the major redevelopment and expansion project at the Rotunda which was completed in the third quarter of Fiscal 2016.

FREIT does not believe that any seasonal factors materially affect FREIT’s business operations and the leasing of its commercial and apartment properties.

FREIT believes that its properties are covered by adequate fire and property insurance provided by reputable companies and with commercially reasonable deductibles and limits. 

ITEM 3

LEGAL PROCEEDINGS

There are no material pending legal proceedings to which FREIT is a party, or of which any of its properties is the subject. There is, however, ordinary and routine litigation involving FREIT's business including various tenancy and related matters. Except for the environmental conditions involving remediation disclosed in “Item 1(c) Narrative Description of Business - Impact of Governmental Laws and Regulations on Registrant’s Business; Environmental Matters,” there are no legal proceedings concerning environmental issues with respect to any property owned by FREIT.

 

ITEM 4

MINE SAFETY DISCLOSURES

Not applicable.

 

PART II

ITEM 5

MARKET FOR FREIT'S COMMON EQUITY, RELATED SECURITY HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Shares of Beneficial Interest

Beneficial interests in FREIT are represented by shares without par value (the “Shares”). The Shares represent FREIT’s only authorized issued and outstanding class of equity. As of January 13, 2017, there were approximately 500 holders of record of the Shares.

The Shares are traded in the over-the-counter market through use of the OTC Bulletin Board Service (the “OTC Bulletin Board”) provided by FINRA, Inc. FREIT does not believe that an active United States public trading market exists for the Shares since historically only small volumes of the Shares are traded on a sporadic basis. The following table sets forth, at the end of the periods indicated, the Bid and Asked quotations for the Shares on the OTC Bulletin Board.

 

		Bid				Asked
Fiscal Year Ended October 31, 2016
First Quarter		$	17.35			$	18.00
Second Quarter		$	19.76			$	21.00
Third Quarter		$	20.70			$	22.00
Fourth Quarter		$	20.55			$	21.50

 

		Bid				Asked
Fiscal Year Ended October 31, 2015
First Quarter		$	19.25			$	19.50
Second Quarter		$	20.25			$	21.35
Third Quarter		$	20.05			$	21.00
Fourth Quarter		$	18.60			$	20.00

 

The bid quotations set forth above for the Shares reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions. The source of the bid and asked quotations is Bloomberg.

Dividends

The holders of Shares are entitled to receive distributions as may be declared by the Board. Dividends may be declared from time to time by the Board and may be paid in cash, property, or Shares. The Board’s present policy is to distribute annually at least ninety percent (90%) of FREIT’s REIT taxable income as dividends to the holders of Shares in order to qualify as a REIT for federal income tax purposes. Distributions are made on a quarterly basis. In Fiscal 2016 and Fiscal 2015, FREIT paid or declared aggregate total dividends of $1.20 per share for each fiscal year to the holders of Shares. For the past four (4) years, FREIT has paid an annual dividend of at least $1.20 per share. Based on the loss for the fourth quarter ended October 31, 2016 and the continuing costs required for retail tenant fit-ups and residential lease-up costs at The Rotunda property, FREIT does not expect that it will sustain the payment of dividends at the levels paid in prior years.

 

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Distributions to Shareholders.”

 

Securities Authorized for Issuance Under Equity Compensation Plans

See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

ITEM 6

SELECTED FINANCIAL DATA

The selected consolidated financial data for FREIT for each of the five (5) fiscal years in the period ended October 31, 2016 are derived from financial statements herein or previously filed financial statements. This data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report and with FREIT’s consolidated financial statements and related notes included in this Annual Report. 

 

BALANCE SHEET DATA:
As At October 31,		2016				2015				2014				2013				2012
		(In Thousands)
Total assets		$	367,971			$	352,115			$	301,555			$	244,251			$	242,300
Mortgage loans		$	329,719			$	307,899			$	251,552			$	199,423			$	200,420
Common equity		$	2,834			$	7,544			$	15,727			$	14,869			$	17,564
Weighted average shares outstanding:
Basic			6,783				6,778				6,908				6,942				6,942
Diluted			6,784				6,778				6,908				6,942				6,942

 

INCOME STATEMENT DATA:
Years Ended October 31,		2016				2015				2014				2013				2012
		(In Thousands of Dollars, Except Per Share Amounts)
Revenue:
Revenue from real estate operations		$	46,254			$	44,783			$	42,430			$	41,337			$	42,078
Income relating to early lease termination			—				—				—				—				2,950
Total revenue			46,254				44,783				42,430				41,337				45,028
Expenses:
Real estate operations			21,797				21,062				19,492				18,127				17,968
Straight line rent adjustment - bankrupt tenant			—				1,046				—				—				—
General and administrative expenses			2,034				2,029				1,396				1,623				1,624
Deferred project cost write-off			—				—				—				—				3,726
Depreciation			7,852				6,883				6,346				6,233				6,171
Total expenses			31,683				31,020				27,234				25,983				29,489
Operating income			14,571				13,763				15,196				15,354				15,539
Investment income			150				150				184				191				173
Gain on sale of commercial property			314				—				—				—				—
Acquisition expenses-Regency			—				—				(648	)			—				—
Interest expense including amortization
of deferred financing costs			(11,936	)			(11,001	)			(11,309	)			(11,945	)			(11,704	)
Income from continuing operations			3,099				2,912				3,423				3,600				4,008
Discontinued operations:
Income from discontinued operations			—				—				7				797				460
Gain on sale of discontinued operations			—				—				8,734				3,545				7,528	*
Net income			3,099				2,912				12,164				7,942				11,996
Net income attributable to noncontrolling interests in subsidiaries			(94	)			(281	)			(507	)			(493	)			(645	)
Net income attributable to common equity		$	3,005			$	2,631			$	11,657			$	7,449			$	11,351
Basic and diluted earnings per share:
Continuing operations		$	0.44			$	0.39			$	0.42			$	0.45			$	0.49
Discontinued operations			—				—				1.27				0.62				1.15
Net income		$	0.44			$	0.39			$	1.69			$	1.07			$	1.64
Cash dividends declared per common share		$	1.20			$	1.20			$	1.20			$	1.56			$	1.10

 

* Represents gain of $9,493 net of federal and state income tax of $1,965.

ITEM 7

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Cautionary Statement Identifying Important Factors That Could Cause FREIT’s 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 consolidated financial statements of FREIT (including related notes thereto) appearing elsewhere in this 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 regarding future results of operations, economic performance, financial condition and achievements of FREIT, and do not relate strictly to historical or current facts. FREIT has tried, wherever possible, to identify these forward-looking statements by using words such as “believe,” “expect,” “anticipate,” “intend, “ “plan,” “ estimate,” or words of similar meaning. 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, which may cause the actual results to differ materially from those projected. Such factors include, but are not limited to the following: general economic and business conditions, which will, among other things, affect demand for rental space, the availability of prospective tenants, lease rents, the financial condition of tenants and the default rate on leases, operating and administrative expenses and the availability of financing; adverse changes in FREIT’s real estate markets, including, among other things, competition with other real estate owners, competition confronted by tenants at FREIT’s commercial properties, governmental actions and initiatives; environmental/safety requirements; and risks of real estate development and acquisitions. 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 rent in the form of expense reimbursements derived from operating commercial properties. FREIT’s properties are primarily located in northern New Jersey, Maryland and New York. FREIT acquires existing properties for investment and properties that FREIT believes have redevelopment potential through changes and capital improvements to these properties. FREIT develops and constructs properties on its vacant land. FREIT’s policy is to acquire and develop real property for long-term investment.

The economic and financial environment: The U.S. economy grew throughout the year reaching an average annualized rate of 3.2% in the third quarter of calendar 2016 which is the highest growth rate in almost two years. Employment remains healthy and real income grew at a solid pace. This positive trend should continue to impact favorably on the housing market and consumer spending and continue to raise the growth rate of the U.S. economy. This rising growth rate may trigger the Federal Reserve to raise lending rates that may affect refinancing of mortgages coming due in the short term.

Residential Properties: FREIT has aggressively increased rental rates. As a result, FREIT’s rental rates continue to show year-over-year increases. FREIT expects increases in rental rates to taper; however, the increased rental rates that are in place should positively impact future revenues.

Commercial Properties: While retail sales were tepid during the first quarter of calendar 2016, they rebounded in the latter part of the year increasing to 4.3% by the end of third quarter of calendar 2016. Real consumption growth is expected to continue to rebound over the next couple of years.

Development Projects and Capital Expenditures: FREIT continues to make only those capital expenditures that are absolutely necessary. The construction at the Rotunda development project began in September 2013 and, with the exception of tenant improvements, was substantially completed in the third quarter of Fiscal 2016 with costs to complete estimated at $1 million. As of October 31, 2016, the residential section is approximately 29% leased and the retail space is approximately 71% leased. FREIT expects the Rotunda to generate positive cash flow in the latter half of fiscal year 2017.

Debt Financing Availability: Financing for development projects has been available to FREIT and its affiliates. On December 9, 2013, Grande Rotunda, LLC closed with Wells Fargo Bank on a construction loan of up to $120 million to be used to redevelop and expand the Rotunda property in Baltimore, Maryland with a term of four (4) years, with one 12-month extension, at a rate of 225 basis points over the monthly LIBOR. As of October 31, 2016, approximately $114 million of this loan was drawn down (including approximately $21.1 million during Fiscal 2016), of which $19 million was used to pay off the loan from FREIT, and $95 million was used toward the construction at the Rotunda. On November 23, 2016, Wells Fargo Bank modified the following terms and conditions of this loan: (i) the total amount that may be drawn on this loan will be decreased from $120 million to $116.1 million, allowing for an additional draw of $2.1 million over the existing balance of approximately $114 million to be used for retail tenant improvements and leasing commissions; (ii) leasing benchmarks will no longer be required to be met including the waiver of the leasing benchmarks FREIT was not in compliance with as of June

30, 2016; (iii) Grande Rotunda, LLC will provide an interest reserve to Wells Fargo Bank in the amount of $2 million for the purpose of funding interest payments, and will be obliged to replenish the account balance to $1 million if it should fall below $500,000; (iv) the maturity date of the loan was changed from December 31, 2017 to October 31, 2017 with no option to extend; (v) the interest rate on amount outstanding on the loan was increased by 25 basis points to 250 basis points over the monthly LIBOR.

On December 29, 2014, FREIT Regency, LLC closed on a $16.2 million mortgage loan with Provident Bank. The new loan bears a floating interest rate equal to 125 basis points over the one-month BBA LIBOR and the loan will mature on December 15, 2024. In order to minimize interest rate volatility during the term of this loan, FREIT Regency, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 3.75% over the term of the loan.

On April 22, 2016, People’s United Bank agreed to a take-down of the second tranche of its loan with Damascus Centre, LLC in the amount of $2,320,000, of which approximately $470,000 was readily available and the remaining $1,850,000 (included in prepaid expenses and other assets in the accompanying consolidated balance sheet) is held in escrow and available to Damascus Centre, LLC once certain tenants open and begin paying rent. In order to minimize interest rate volatility during the term of this loan, Damascus Centre, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 3.53% over the term of the second tranche of this loan.

On September 29, 2016, Wayne PSC, LLC refinanced its $24.2 million mortgage loan held with Metropolitan Life Insurance Company, with a new mortgage loan from People’s United Bank in the amount of $25.8 million. The new loan, secured by a shopping center in Wayne, New Jersey, bears a floating interest rate equal to 220 basis points over the one-month BBA LIBOR with a maturity date of October 1, 2026. In order to minimize interest rate volatility during the term of the loan, Wayne PSC, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 3.625% over the term of the loan. This refinancing resulted in: (i) a reduction in interest rate from 6.04% to 3.625% and (ii) net refinancing proceeds of approximately $1 million that were distributed to the partners in Wayne PSC, LLC with FREIT receiving $0.4 million based on it 40% membership interest in Wayne PSC, LLC.

Operating Cash Flow and Dividend Distributions: FREIT expects that cash provided by net operating income will be adequate to cover mandatory debt service payments (excluding balloon payments), necessary capital improvements and dividends necessary to retain qualification as a REIT (90% of taxable income). Until the economic climate indicates that a change is appropriate, it is FREIT’s intention to maintain its quarterly dividend at a level not less than that required to maintain its REIT status for federal income tax purposes. See Item 5 “Dividends” for further details.

 

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 which is presented elsewhere in this Form 10-K, have been applied consistently as at October 31, 2016 and October 31, 2015, and for the years ended October 31, 2016, 2015 and 2014. We believe that the following accounting policies or estimates require the application of management's most difficult, subjective, or complex judgments:

Revenue Recognition: Base rents, additional rents based on tenants' sales volume and reimbursement of the tenants' share of certain operating expenses are generally recognized when due from tenants. The straight-line basis is used to recognize base rents under leases if they provide for varying rents over the lease terms. Straight-line rents represent unbilled rents receivable to the extent straight-line rents exceed current rents billed in accordance with lease agreements. Before FREIT can recognize revenue, it is required to assess, among other things, its collectability. See “Results of Operations – Segment Information – Commercial Segment” under Item 7 regarding the expense in the fourth quarter of Fiscal 2015 related to the Pathmark lease.

Valuation of Long-Lived Assets: We assess 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 we believe 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 a postponement, capitalization of these costs will recommence once construction on the project resumes.

See Note 1 to FREIT’s consolidated financial statements for recently issued accounting standards.

 

Results of Operations:

Fiscal Years Ended October 31, 2016 and 2015

Summary revenues and net income for the fiscal years ended October 31, 2016 (“Fiscal 2016”) and October 31, 2015 (“Fiscal 2015”) are as follows:

 

		Years Ended October 31,
		2016				2015				Change
		(in thousands, except per share amounts)
Real estate revenues:
Commercial properties		$	23,202			$	22,817			$	385
Residential properties			23,052				21,966				1,086
Total real estate revenues			46,254				44,783				1,471
Operating expenses:
Real estate operations			21,797				21,062				735
Straight line rent adjustment - bankrupt tenant			—				1,046				(1,046	)
General and administrative			2,034				2,029				5
Depreciation			7,852				6,883				969
Total operating expenses			31,683				31,020				663
Operating income			14,571				13,763				808
Investment income			150				150				—
Gain on sale of commercial property			314				—				314
Financing costs			(11,936	)			(11,001	)			(935	)
Net income			3,099				2,912				187
Net income attributable to noncontrolling
interests in subsidiaries			(94	)			(281	)			187
Net income attributable to common equity		$	3,005			$	2,631			$	374
Earnings per share - basic and diluted:		$	0.44			$	0.39			$	0.05
Weighted average shares outstanding:
Basic			6,783				6,778
Diluted			6,784				6,778

 

Real estate revenue for Fiscal 2016 increased 3.3% to $46,254,000 compared to $44,783,000 for Fiscal 2015. Net income attributable to common equity (“net income common-equity”) for Fiscal 2016 was $3,005,000 ($0.44 per share basic and diluted), compared to $2,631,000 ($0.39 per share basic and diluted) for Fiscal 2015. Included in net income-common equity for Fiscal 2016 was a net loss of approximately $1.4 million primarily attributed to the substantial completion of the major redevelopment and expansion project at the Rotunda property in the third quarter of Fiscal 2016 resulting in the cessation of capitalization of certain costs and incurring higher operational costs as the property is in the early lease-up phase of the new retail space and residential units. Also included in net income-common equity for Fiscal 2016 was a gain of approximately $0.3 million net of sales fees related to the sale of Rochelle Park, New Jersey. Included in net income common equity for Fiscal 2015 was a $1,046,000 provision for loss related to straight line rent receivable for Pathmark at the Patchogue, New York store as a result of the bankruptcy filing by A&P, of which Pathmark is a subsidiary. (See “Results of Operations – Segment Information – Commercial Segment” for further details.)

 

The schedule below provides a detailed analysis of the major changes that impacted revenue and net income-common equity for Fiscal 2016 and 2015:

 

NET INCOME COMPONENTS
		Years Ended October 31,
		2016				2015				Change
		(thousands of dollars)
Income from real estate operations:
Commercial properties		$	12,541			$	12,381			$	160
Residential properties			11,916				11,340				576
Total income from real estate operations			24,457				23,721				736
Financing costs:
Fixed rate mortgages			(10,871	)			(10,976	)			105
Floating rate - Rotunda			(2,840	)			(1,692	)			(1,148	)
Credit line			—				(35	)			35
Other - Corporate interest			(293	)			(326	)			33
Mortgage cost amortization			(543	)			(419	)			(124	)
Less amounts capitalized			2,611				2,447				164
Total financing costs			(11,936	)			(11,001	)			(935	)
Investment income			150				150				—
General & administrative expenses:
Accounting fees			(535	)			(327	)			(208	)
Legal & professional fees			(76	)			(133	)			57
Trustee fees			(898	)			(862	)			(36	)
Stock option expense			(94	)			(94	)			—
Corporate expenses			(431	)			(613	)			182
Total general & administrative expenses			(2,034	)			(2,029	)			(5	)
Depreciation			(7,852	)			(6,883	)			(969	)
Adjusted income			2,785				3,958				(1,173	)
Gain on sale of commercial property			314				—				314
Straight line rent adjustment - bankrupt tenant			—				(1,046	)			1,046
Net income			3,099				2,912				187
Net income attributable to noncontrolling interests
in subsidiaries			(94	)			(281	)			187
Net income attributable to common equity		$	3,005			$	2,631			$	374

 

Adjusted income for Fiscal 2016 was $2,785,000 ($0.41 per share basic and diluted), compared to $3,958,000 ($0.58 per share basic and diluted) for Fiscal 2015. Adjusted income is a non-GAAP measure, which management believes is a useful and meaningful gauge to investors of our operating performance, since it excludes the impact of unusual and infrequent items specifically: a gain related to the sale of Rochelle Park, New Jersey in Fiscal 2016; a provision for loss related to straight line rent receivable for Pathmark in Fiscal 2015. (Refer to the segment disclosure below for a more detailed discussion on the financial performance of FREIT’s commercial and residential segments.)

 

SEGMENT INFORMATION

The following table sets forth comparative net operating income ("NOI") data for FREIT’s real estate segments and reconciles the NOI to consolidated net income-common equity for Fiscal 2016, as compared to Fiscal 2015 (See below for definition of NOI.):

 

		Commercial																Residential																Combined
		Years Ended																Years Ended																Years Ended
		October 31,								Increase (Decrease)								October 31,								Increase (Decrease)								October 31,
		2016				2015				$				%				2016				2015				$				%				2016				2015
		(In Thousands)																(In Thousands)																(In Thousands)
Rental income		$	17,499			$	17,485			$	14				0.1%			$	22,673			$	21,521			$	1,152				5.4%			$	40,172			$	39,006
Reimbursements			5,148				5,479				(331	)			-6.0%				10				—				10				100.0%				5,158				5,479
Other			47				73				(26	)			-35.6%				269				445				(176	)			-39.6%				316				518
Total revenue			22,694				23,037				(343	)			-1.5%				22,952				21,966				986				4.5%				45,646				45,003
Operating expenses			10,661				10,436				225				2.2%				11,136				10,626				510				4.8%				21,797				21,062
Net operating income		$	12,033			$	12,601			$	(568	)			-4.5%			$	11,816			$	11,340			$	476				4.2%				23,849				23,941
Gain on sale of property		$	314			$	—			$	314				100.0%			$	—			$	—			$	—				0.0%				314				—
Average
Occupancy % *			75.0%				75.9%								-0.9%				72.8%				70.2%								2.6%

 

	Reconciliation to consolidated net income-common equity:
	Deferred rents - straight lining			608				(219	)
	Amortization of acquired leases			—				(1	)
	Investment income			150				150
	General and administrative expenses			(2,034	)			(2,029	)
	Straight line rent adjustment - bankrupt tenant			—				(1,046	)
	Depreciation			(7,852	)			(6,883	)
	Financing costs			(11,936	)			(11,001	)
	Net income			3,099				2,912
	Net income attributable to noncontrolling interests			(94	)			(281	)
	Net income attributable to common equity		$	3,005			$	2,631

 

* Includes impact to both fiscal years of 75,000 additional square feet of Rotunda retail leasable space in the commercial segment and 379 leasable units at the Rotunda in the residential segment as the major redevelopment and expansion project at the Rotunda was substantially completed in the third quarter of Fiscal 2016.

 

NOI is based on operating revenue and expenses directly associated with the operations of the real estate properties, but excludes deferred rents (straight lining), amortization of acquired leases, 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, redeveloped or classified as discontinued operations 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 is under contract for sale are not considered same property.

NOI and Same Property NOI are non-GAAP financial measures and are not measures of operating results or cash flow as measured by GAAP, and are not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity.

 

COMMERCIAL SEGMENT

The commercial segment contains nine (9) separate properties. Seven are multi-tenanted retail or office centers, and two are single tenanted – a building formerly occupied as a supermarket and land located in Rockaway, New Jersey owned by FREIT from which it receives monthly rental income from a tenant who has built and operates a bank branch on the land. On June 17, 2016, FREIT sold its property at Rochelle Park, New Jersey having a carrying value of approximately $2.7 million (including a straight line rent receivable of approximately $0.5 million) to Lakeland Bank (as successor by merger to Pascack Community Bank) for a purchase price of $3.1 million resulting in a gain of approximately $0.3 million net of sales fees. This sale will result in FREIT’s loss of future annual rents of approximately $241,000, which would have increased periodically through September 2023.

As indicated in the table above under the caption Segment Information, total revenue and NOI from FREIT’s commercial segment for Fiscal 2016 decreased by 1.5% and 4.5%, respectively, as compared to Fiscal 2015. The decline in revenue and NOI was primarily attributable to the loss of revenue from Pathmark (a subsidiary of A&P) at the Patchogue, New York

property due to the lease having been rejected as of December 31, 2015 as a result of A&P’s bankruptcy filing partially offset by an increase in revenue at the Rotunda property resulting from the lease-up of the new retail space.

Same Property Operating Results: FREIT’s commercial segment contains eight (8) same properties. (See definition of same property under Segment Information above.) Since the Rotunda property was part of a major redevelopment and expansion project that was substantially completed in the third quarter of Fiscal 2016 and has been in operation for less than a full year, it has been excluded from same property results for all periods presented. For Fiscal 2016, same property revenue and NOI for FREIT’s commercial segment decreased by 6.2% and 6.5%, respectively, as compared to Fiscal 2015. The reasons for the changes mirror the discussion in the previous 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 Fiscal 2016:

 

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)			17				174,772			$	12.79			$	12.42				3.0%			$	0.09			$	0.14
Non-comparable leases			14				56,540			$	21.50				N/A				N/A			$	1.49			$	0.98
Total leasing activity			31				231,312

 

 

OFFICE:		Number of Leases				Lease Area (Sq. Ft.)				Weighted Average Lease Rate (per Sq. Ft.)				Weighted Average Prior Lease Rate (per Sq. Ft.)				% Increase (Decrease)				Tenant Improvement Allowance (per Sq. Ft.)   (a)				Lease Commissions (per Sq. Ft.)   (a)
Comparable leases (b)			10				29,234			$	26.51			$	24.23				9.4%			$	1.89			$	0.79
Non-comparable leases			6				14,643			$	30.50				N/A				N/A			$	3.82			$	1.21
Total leasing activity			16				43,877

 

(a) These leasing costs are presented as annualized costs per square foot and are allocated uniformly over the initial lease term.

(b) This includes new tenant leases and/or modifications/extensions of existing tenant leases.      

 

The US economic recovery continued to show signs of improvement, with retail sales also showing improvement. Average occupancy rates for Fiscal 2016, decreased 0.9% from last year’s comparable period which was primarily attributed to Pathmark’s rejection of the lease at the Patchogue, New York property as of December 31, 2016 offset by the increase in occupancy at the Rotunda property due to the substantial completion of the major development and expansion project in the third quarter of Fiscal 2016. Excluding the impact of the Rotunda property, average occupancy rates for Fiscal 2016 decreased 2.6% from Fiscal 2015.

FREIT is currently in the negotiation process with potential tenants for the new, currently available retail space constructed at the Rotunda property. As of October 31, 2016, approximately 71% of the retail space at the Rotunda property is leased and 24.8% is occupied.

On July 27, 2012, FREIT signed a lease agreement with G-Mart, for a significant portion of the space (40,000 of 55,330 square feet of available space) that was vacated by Giant at its Westridge Square shopping center. G-Mart managed an international grocery store chain. FREIT incurred approximately $940,000 in tenant improvement costs associated with the lease to G-Mart, which began operations at the center in September 2013. However, effective November 1, 2014, G-Mart notified FREIT that it had vacated its space at the Westridge Square shopping center and would be terminating its lease. A new lease for this 40,000 sq. ft. space was signed by H-Mart, an international grocery store chain, in November 2014 and subsequently H-Mart expanded its space by an additional 15,300 square feet. H-Mart is currently renovating its space but began paying rent in May 2015. All of the tenant improvements related to G-Mart will be utilized for H-Mart.

On July 19, 2015, A&P filed for protection under Chapter 11 of the bankruptcy code as disclosed in the bankruptcy filings. A&P announced its intention to sell its assets and wind up its affairs. FREIT owns a 63,932 square foot store in Patchogue, New York with a carrying value of approximately $6.7 million as at October 31, 2016 that was leased to Pathmark, a subsidiary of A&P, and operated as a Pathmark Super Store. This lease was rejected by A&P as of December 31, 2015.

In accordance with GAAP, FREIT accounted for rental income from the store using the straight line method and accrued rent evenly over the lease term after taking into account scheduled future rent increases, with excess rent accrued over amounts received accounted for as a receivable on the consolidated balance sheets. At October 31, 2015, approximately $1,046,000 remained as a straight line rent receivable. FREIT recorded an expense in the fourth quarter of Fiscal 2015 of $1,046,000 ($0.15 per share basic and diluted) for provision for loss related to the straight line rent receivable for Pathmark. The provision had no impact on cash flow but did have an impact on funds from operations. As a result of the lease having been rejected, FREIT is losing annual rents of approximately $1.4 million until the store is re-leased. FREIT has assessed the real

estate for impairment and determined that no impairment exists at October 31, 2016. FREIT is exploring various options for this property.

On January 11, 2016, FREIT was notified by Lakeland Bank (as successor by merger to Pascack Community Bank) of its election and exercise of the option to purchase the property leased by FREIT to Lakeland Bank located in Rochelle Park, New Jersey. Pursuant to the Lease Agreement, Lakeland Bank had the right to exercise this option at a price equal to the greater of $3 million or the fair market value of the property as determined by mutual agreement between tenant and landlord. FREIT and Lakeland Bank agreed to a purchase price of $3.1 million. On June 17, 2016, FREIT sold this property, having a carrying amount of approximately $2.7 million (including a straight-line rent receivable in the amount of approximately $0.5 million), to Lakeland Bank for $3.1 million resulting in a gain of approximately $0.3 million net of sales fees. This sale results in FREIT’s loss of future annual rents of approximately $241,000, which would have increased periodically through September 2023. As the disposal of this property did not represent a strategic shift that would have a major impact on FREIT’s operations or financial results, the property’s operations were not reflected as discontinued operations in the accompanying financial statements.

 

DEVELOPMENT ACTIVITIES

The Rotunda property in Baltimore, Maryland (owned by FREIT’s 60% owned affiliate Grande Rotunda, LLC) is an 11.5 acre site containing a building with approximately 132,000 sq. ft. of office space and approximately 84,000 sq. ft. of retail space on the lower level of the building. In September 2013, FREIT began construction to redevelop and expand this property and, with the exception of tenant improvements, was substantially completed in the third quarter of Fiscal 2016 with costs to complete estimated at $1 million. The redevelopment and expansion plans included a modernization of the office building and smaller adjacent buildings, construction of 379 residential apartment rental units, an additional 75,000 square feet of new retail space, and 864 above level parking spaces. As of October 31, 2016, the residential section is approximately 29% leased and the retail space is approximately 71% leased. FREIT expects the Rotunda to generate positive cash flow in the latter half of fiscal year 2017.

With regard to the Rotunda’s redevelopment project, approximately $128.1 million has been incurred through October 31, 2016, of which $3.7 million was written-off in Fiscal 2012 as a result of revisions to the scope of the redevelopment project. All planning and feasibility study costs, as well as all ongoing construction costs related to the project which were previously capitalized to Construction In Progress (“CIP”) are no longer being capitalized and have been placed into service in the fourth quarter of Fiscal 2016 as the project is now operational. On December 9, 2013, Grande Rotunda, LLC closed with Wells Fargo Bank on a construction loan of up to $120 million to be used to redevelop and expand the Rotunda property in Baltimore, Maryland with a term of four (4) years, with one 12-month extension, at a rate of 225 basis points over the monthly LIBOR. Through October 31, 2016, funding for the construction at the Rotunda was provided by: (a) the Grande Rotunda, LLC members, FREIT and Rotunda 100, LLC, who contributed approximately $14.5 million in accordance with the loan agreement with Wells Fargo Bank (See Note 9 for further information regarding this agreement.); and (b) approximately $114 million in draws on the construction line with Wells Fargo Bank (including approximately $21.1 million during Fiscal 2016), of which $19 million was used to pay off the loan from FREIT, and $95 million was used toward the construction at the Rotunda. On November 23, 2016, Wells Fargo Bank modified the following terms and conditions of this loan: (i) the total amount that may be drawn on this loan will be decreased from $120 million to $116.1 million, allowing for an additional draw of $2.1 million over the existing balance of approximately $114 million to be used for retail tenant improvements and leasing commissions; (ii) leasing benchmarks will no longer be required to be met including the waiver of the leasing benchmarks FREIT was not in compliance with as of June 30, 2016; (iii) Grande Rotunda, LLC will provide an interest reserve to Wells Fargo Bank in the amount of $2 million for the purpose of funding interest payments, and will be obliged to replenish the account balance to $1 million if it should fall below $500,000; (iv) the maturity date of the loan was changed from December 31, 2017 to October 31, 2017 with no option to extend; (v) the interest rate on amount outstanding on the loan was increased by 25 basis points to 250 basis points over the monthly LIBOR.

 

RESIDENTIAL SEGMENT

FREIT currently operates eight (8) multi-family apartment buildings or complexes totaling 1,472 apartment units. As indicated in the table above under the caption Segment Information, total revenue and NOI from FREIT’s residential segment for Fiscal 2016 increased by 4.5% and 4.2%, respectively, as compared to Fiscal 2015. The increase in total revenue and NOI for Fiscal 2016 was primarily attributable to: (a) the addition of the operating results of the Icon (See discussion below), and (b) increased base rent at our residential properties. Average occupancy levels for the Fiscal 2016 increased 2.6%, over last year’s comparable period.

Same Property Operating Results: FREIT’s residential segment currently contains seven (7) same properties. (See definition of same property under Segment Information above.) Since the Icon property was part of a major redevelopment and expansion project that was substantially completed in the third quarter of Fiscal 2016 and has been in operation for less than a full year, it has been excluded from same property results for all periods presented. Same property revenue and NOI increased by 2.2% and 5.5%, respectively, from Fiscal 2015 driven primarily by an increase in base rents and average occupancy rates at

our residential properties. Exclusive of the Icon property, average occupancy rates for Fiscal 2016 increased 0.5% over last year’s comparable period.

FREIT’s residential revenue is principally composed of monthly apartment rental income. Total rental income is a factor of occupancy and monthly apartment rents. Monthly average residential rents, excluding the Rotunda Icon property as it is still in the lease-up period and not operating at full capacity, at the end of Fiscal 2016 and Fiscal 2015 were $1,786 and $1,744, 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 $234,000 and $223,000, respectively.

Capital expenditures: Since all of FREIT’s apartment communities, with the exception of the Boulders, Regency and Icon, were constructed more than 25 years ago, FREIT tends to spend more in any given year on maintenance and capital improvements than may be spent on newer properties. Funds for these capital projects will be available from cash flow from the property's operations and cash reserves.

 

FINANCING COSTS

		Years Ended October 31,
		2016				2015
		(In Thousands of Dollars)
Fixed rate mortgages (a):
1st Mortgages
Existing		$	10,742			$	10,459
New			129				517
2nd Mortgages
Existing			—				—
Variable rate mortgages:
Construction loan-Rotunda			2,840				1,692
Credit line			—				35
Other			293				326
Total financing costs, gross			14,004				13,029
Amortization of mortgage costs			543				419
Total financing costs, net			14,547				13,448
Less amounts capitalized			(2,611	)			(2,447	)
Total financing costs expensed		$	11,936			$	11,001

 

(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 Fiscal 2016 increased 8.2% as compared to Fiscal 2015 which was primarily attributable to the Rotunda construction loan of approximately $114 million. (See Note 5 for more details.)

 

INVESTMENT INCOME

Investment income for Fiscal 2016 was $150,000 with no change from the prior fiscal year. Investment income is principally derived from interest earned from cash on deposit in institutional money market funds and interest earned from secured loans receivable (loans made to Hekemian employees, including certain members of the immediate family of Robert S. Hekemian, FREIT CEO and Chairman of the Board, and Robert S. Hekemian, Jr., a Trustee of FREIT, for their equity investment in Grande Rotunda, LLC, a limited liability company in which FREIT owns a 60% equity interest, and Damascus Centre, LLC, a limited liability company in which FREIT owns a 70% equity interest).

 

GENERAL AND ADMINISTRATIVE EXPENSES (“G & A”)

During Fiscal 2016, G & A was $2,034,000 as compared to $2,029,000 for the prior year’s period. The primary components of G&A are accounting fees, legal and professional fees and Trustees’ fees.

 

DEPRECIATION

Depreciation expense from operations for Fiscal 2016 was $7,852,000 as compared to $6,883,000 for the prior year’s period. The increase in depreciation was primarily attributable to the depreciation related to assets at the Rotunda property becoming operational as the major redevelopment and expansion project at this property was substantially completed in the third quarter of Fiscal 2016.

 

Results of Operations:

Fiscal Years Ended October 31, 2015 and 2014

Summary revenues and net income for the fiscal years ended October 31, 2015 (“Fiscal 2015”) and October 31, 2014 (“Fiscal 2014”) are as follows:

 

		Years Ended October 31,
		2015				2014				Change
		(in thousands, except per share amounts)
Real estate revenues:
Commercial properties		$	22,817			$	22,011			$	806
Residential properties			21,966				20,419				1,547
Total real estate revenues			44,783				42,430				2,353
Operating expenses:
Real estate operations			21,062				19,492				1,570
Straight line rent adjustment - bankrupt tenant			1,046				—				1,046
General and administrative			2,029				1,396				633
Depreciation			6,883				6,346				537
Total operating expenses			31,020				27,234				3,786
Operating income			13,763				15,196				(1,433	)
Investment income			150				184				(34	)
Acquisition costs-Regency			—				(648	)			648
Financing costs			(11,001	)			(11,309	)			308
Income from continuing operations			2,912				3,423				(511	)
Income from discontinued operations			—				7				(7	)
Gain on sale of discontinued operation			—				8,734				(8,734	)
Net income			2,912				12,164				(9,252	)
Net income attributable to noncontrolling
interests in subsidiaries			(281	)			(507	)			226
Net income attributable to common equity		$	2,631			$	11,657			$	(9,026	)
Earnings per share - basic and diluted:
Continuing operations		$	0.39			$	0.42			$	(0.03	)
Discontinued operations			—				1.27				(1.27	)
Net income attributable to common equity		$	0.39			$	1.69			$	(1.30	)
Weighted average shares outstanding:
Basic and diluted			6,778				6,908

 

Real estate revenue for Fiscal 2015 increased 5.5% to $44,783,000 compared to $42,430,000 for Fiscal 2014, inclusive of a $298,000 expense adjustment in Fiscal 2014 to write-off a straight-line rent balance related to the G-Mart early lease termination at the Westridge Square shopping center.

Net income attributable to common equity (“net income-common equity”) for Fiscal 2015 was $2,631,000 ($0.39 per share basic and diluted), compared to $11,657,000 ($1.69 per share basic and diluted) for Fiscal 2014. Included in net income-common equity for Fiscal 2015 was a $1,046,000 provision for loss related to straight line rent receivable for Pathmark at the Patchogue, New York store as a result of the bankruptcy filing by A&P, of which Pathmark is a subsidiary (See “Results of Operations – Segment Information – Commercial Segment” for further details). Included in net income-common equity for Fiscal 2014 was the gain from the sale of the South Brunswick property amounting to $8,734,000. Also included in net income common equity for Fiscal 2014 were acquisition expenses amounting to approximately $648,000 relating to the Regency Club (“Regency”) acquisition in June 2014, and an expense adjustment of $73,000 related to the write-off of the remaining deferred lease commissions related to the G-Mart early lease termination at the Westridge Square shopping center.

 

The schedule below provides a detailed analysis of the major changes that impacted revenue and net income-common equity for Fiscal 2015 and 2014:

 

NET INCOME COMPONENTS
		Years Ended October 31,
		2015				2014				Change
		(thousands of dollars)
Income from real estate operations:
Commercial properties		$	12,381			$	12,647			$	(266	)
Residential properties			11,340				10,662				678
Total income from real estate operations			23,721				23,309				412
Financing costs:
Fixed rate mortgages			(10,976	)			(10,648	)			(328	)
Floating rate - Rotunda			(1,692	)			(560	)			(1,132	)
Credit line			(35	)			(107	)			72
Other - Corporate interest			(326	)			(745	)			419
Mortgage cost amortization			(419	)			(359	)			(60	)
Less amounts capitalized			2,447				1,110				1,337
Total financing costs			(11,001	)			(11,309	)			308
Investment income			150				184				(34	)
General & administrative expenses:
Accounting fees			(327	)			(509	)			182
Legal & professional fees			(133	)			(110	)			(23	)
Trustee fees			(862	)			(504	)			(358	)
Stock option expense			(94	)			(16	)			(78	)
Corporate expenses			(613	)			(257	)			(356	)
Total general & administrative expenses			(2,029	)			(1,396	)			(633	)
Depreciation			(6,883	)			(6,346	)			(537	)
Adjusted income from continuing operations			3,958				4,442				(484	)
Straight line rent adjustment - bankrupt tenant			(1,046	)			—				(1,046	)
G-Mart lease termination expense			—				(371	)			371
Acquisition costs-Regency			—				(648	)			648
Income from continuing operations			2,912				3,423				(511	)
Income from discontinued operations			—				7				(7	)
Gain on sale of discontinued operation			—				8,734				(8,734	)
Net income			2,912				12,164				(9,252	)
Net income attributable to noncontrolling interests
in subsidiaries			(281	)			(507	)			226
Net income attributable to common equity		$	2,631			$	11,657			$	(9,026	)

 

Adjusted income from continuing operations for Fiscal 2015 was $3,958,000 ($0.58 per share basic and diluted), compared to $4,442,000 ($0.64 per share basic and diluted) for Fiscal 2014. Adjusted income from continuing operations 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 provision for loss related to straight line rent receivable for Pathmark in Fiscal 2015, the G-Mart early lease termination expenses and the Regency acquisition expenses in Fiscal 2014, as well as income applicable to discontinued operations. (Refer to the segment disclosure below for a more detailed discussion on the financial performance of FREIT’s commercial and residential segments.)

 

SEGMENT INFORMATION

The following table sets forth comparative net operating income ("NOI") data for FREIT’s real estate segments and reconciles the NOI to consolidated net income-common equity for Fiscal 2015, as compared to Fiscal 2014:

 

		Commercial																Residential																Combined
		Years Ended																Years Ended																Years Ended
		October 31,								Increase (Decrease)								October 31,								Increase (Decrease)								October 31,
		2015				2014				$				%				2015				2014				$				%				2015				2014
		(In Thousands)																(In Thousands)																(In Thousands)
Rental income		$	17,485			$	17,364			$	121				0.7%			$	21,521			$	19,961			$	1,560				7.8%			$	39,006			$	37,325
Reimbursements			5,479				5,054				425				8.4%				—				—				—				0.0%				5,479				5,054
Other			73				6				67				1116.7%				445				458				(13	)			-2.8%				518				464
Total revenue			23,037				22,424				613				2.7%				21,966				20,419				1,547				7.6%				45,003				42,843
Operating expenses			10,436				9,663				773				8.0%				10,626				9,757				869				8.9%				21,062				19,420
Net operating income		$	12,601			$	12,761			$	(160	)			-1.3%			$	11,340			$	10,662			$	678				6.4%				23,941				23,423
Average
Occupancy %			84.3%				82.3%								2.0%				94.8%				95.4%								-0.6%

 

	Reconciliation to consolidated net income-common equity:
	Deferred rents - straight lining			(219	)			(93	)
	Amortization of acquired leases			(1	)			(21	)
	Investment income			150				184
	General and administrative expenses			(2,029	)			(1,396	)
	Straight line rent adjustment - bankrupt tenant			(1,046	)			—
	G-Mart lease termination expense			—				(371	)
	Acquisition costs-Regency			—				(648	)
	Depreciation			(6,883	)			(6,346	)
	Financing costs			(11,001	)			(11,309	)
	Income from continuing operations			2,912				3,423
	Income from discontinued operations			—				7
	Gain on sale of discontinued operation			—				8,734
	Net income			2,912				12,164
	Net income attributable to noncontrolling interest			(281	)			(507	)
	Net income attributable to common equity		$	2,631			$	11,657

 

COMMERCIAL SEGMENT

The commercial segment contains ten (10) separate properties. Seven are multi-tenanted retail or office centers, and three are single tenanted – a building formerly occupied as a supermarket and two bank branches. FREIT owns land in Rockaway, New Jersey and Rochelle Park, New Jersey from which it receives monthly rental income, from tenants who have built and operate bank branches on the land. As indicated in the table above under the caption Segment Information, total revenue and NOI from FREIT’s commercial segment for Fiscal 2015 increased by 2.7% and decreased by 1.3%, respectively, as compared to Fiscal 2014. The increase in total revenue for Fiscal 2015 was primarily attributable to increased rental income from increased rents and increases in the average occupancy percentage as compared to Fiscal 2014. The decline in NOI for Fiscal 2015 was primarily attributable to increases in non-reimbursable operating expenses, principally tenants’ bad debts.

Same Property Operating Results: FREIT’s commercial segment contains nine (9) same properties. Since the Rotunda property is currently undergoing a major redevelopment and is operating at less than full capacity, it has been excluded from same property results for all periods presented. For Fiscal 2015, same property revenue for our commercial segment increased by 2.3% and same property NOI decreased by 0.5%, as compared to Fiscal 2014. The reasons for the changes mirror the discussion in the previous paragraph.

 

Leasing: The following table reflects leasing activity at our 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 Fiscal 2015:

 

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)			19				131,648			$	16.87			$	12.94				30.4%			$	—			$	0.41
Non-comparable leases			5				10,026			$	30.16				N/A				N/A			$	1.33			$	1.50
Total leasing activity			24				141,674

 

OFFICE:		Number of Leases				Lease Area (Sq. Ft.)				Weighted Average Lease Rate (per Sq. Ft.)				Weighted Average Prior Lease Rate (per Sq. Ft.)				% Increase (Decrease)				Tenant Improvement Allowance (per Sq. Ft.)   (a)				Lease Commissions (per Sq. Ft.)   (a)
Comparable leases (b)			1				440			$	20.61			$	21.22				-2.9%			$	1.84			$	—
Non-comparable leases			6				18,687			$	29.84				N/A				N/A			$	4.49			$	1.16
Total leasing activity			7				19,127

 

(a) These leasing costs are presented as annualized costs per square foot and are allocated uniformly over the initial lease term.

(b) This includes new tenant leases and/or modifications/extensions of existing tenant leases.

 

The US economic recovery continued to show signs of improvement, with retail sales also showing slight improvement. Despite minor tenant fall-out at some of our properties, occupancy at our other commercial properties has been on the upswing for Fiscal 2015. Average occupancy rates for Fiscal 2015, increased 2.0% from last year’s comparable period. Excluding the impact of the Rotunda property, which is currently undergoing a major redevelopment project that began in September 2013, average occupancy rates for Fiscal 2015 decreased 1.7% from Fiscal 2014.

Construction related to the expansion and renovation of the Damascus Center was completed in November 2011. We are currently in the negotiation process with potential tenants for the new, currently available space constructed in the final phase (Phase III) of this project. As of October 31, 2015, approximately 84.9% of the space at the Damascus Center is leased and 80.2% is occupied.

On December 20, 2013, FREIT’s South Brunswick property was sold for $11 million resulting in a capital gain of approximately $8.7 million net of sales fees and commissions. FREIT has structured this sale in a manner that qualifies it as a like-kind exchange of real estate pursuant to Section 1031 of the Internal Revenue Code, as amended. Such a transaction will result in a deferral for income tax purposes of the $8.7 million capital gain. On June 18, 2014, FREIT closed on its purchase of the Regency to complete this like-kind exchange transaction. (See Residential Segment below and Note 3 for further details.)

 

RESIDENTIAL SEGMENT

FREIT currently operates seven (7) multi-family apartment communities totaling 1,093 apartment units. As indicated in the table above under the caption Segment Information, total revenue and NOI from FREIT’s residential segment for Fiscal 2015 increased by 7.6% and 6.4%, respectively, as compared to Fiscal 2014. The increase in total revenue and NOI for Fiscal 2015 was primarily attributable to: (a) the addition of the operating results of the Regency (See discussion below), and (b) increased base rent at our residential properties. Average occupancy levels for the Fiscal 2015 decreased 0.6%, as compared to last year’s comparable period.

Same Property Operating Results: FREIT’s residential segment currently contains six (6) same properties. (See definition of same property under Segment Information above.) The Regency property is not included as same property, since it was acquired in June 2014 and was not in operation for the full 2014 fiscal year. Same property revenue increased by 0.4% from Fiscal 2014 while same property NOI remained relatively flat as compared to prior fiscal year, driven primarily by an increase in base rents at our residential properties. Exclusive of the Regency property, average occupancy rates for Fiscal 2015 decreased 0.7% over last year’s comparable period.

Our 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 Fiscal 2015 and Fiscal 2014 were $1,744 and $1,703, 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 $229,000 and $216,000, respectively.

On June 18, 2014, FREIT completed the acquisition of the Regency, a residential apartment complex located in Middletown, New York. The Regency complex consists of 132 units in 11 buildings and a clubhouse. The acquisition cost was $20,625,000 (exclusive of $648,000 of transaction costs), which was funded in part with the $9.8 million in net proceeds from the sale of the South Brunswick land, and the remaining balance of $11.5 million was funded utilizing $10 million of FREIT’s credit line

with Provident Bank, and FREIT’s available cash. On December 29, 2014, FREIT Regency, LLC secured long-term financing for the Regency property in the amount of $16.2 million from Provident Bank (See discussion under Liquidity and Capital Resources). A portion of the loan proceeds was used to replace the funds borrowed from FREIT’s credit line, and the remainder are available to fund FREIT’s future capital expenditures and for general corporate purposes.

FREIT identified the Regency as a replacement property for the vacant land located in South Brunswick, New Jersey that FREIT sold on December 20, 2013. The sale of the South Brunswick land and the subsequent purchase of the Regency were structured in a manner that would qualify as a like-kind exchange of real estate pursuant to Section 1031 of the Internal Revenue Code of 1986, as amended, and resulted in a deferral for income tax purposes of the realization of the $8.7 million gain on the sale of the South Brunswick land. FREIT’s acquisition of the Regency completed this like-kind exchange.

 

FINANCING COSTS

		Years Ended October 31,
		2015				2014
		(In Thousands of Dollars)
Fixed rate mortgages (a):
1st Mortgages
Existing		$	10,459			$	9,810
New			517				826
2nd Mortgages
Existing			—				12
Variable rate mortgages:
Construction loan-Rotunda			1,692				560
Credit line			35				107
Other			326				745
Total financing costs, gross			13,029				12,060
Amortization of mortgage costs			419				359
Total financing costs, net			13,448				12,419
Less amounts capitalized			(2,447	)			(1,110	)
Total financing costs expensed		$	11,001			$	11,309

 

(a) Includes the effect of interest rate swap contracts which effectively convert the floating interest rate to a fixed interest rate over the term of the loan.  

 

Total financing costs for Fiscal 2015 increased 8.3% as compared to Fiscal 2014. The increase for Fiscal 2015 was primarily attributable to the Rotunda construction loan of $92 million and the Regency loan of $16.2 million (See Note 5 for more details.)

 

INVESTMENT INCOME

Investment income for Fiscal 2015 was $150,000 as compared to $184,000 for the prior year’s period. The primary reason for the decrease in investment income for the current fiscal year was due to a lower level of interest income related to the discounting of the Giant lease termination fee at the Rotunda as the lease terminated on March 31, 2015. Investment income is principally derived from interest earned from cash on deposit in institutional money market funds and interest earned from secured loans receivable (loans made to Hekemian employees, including certain members of the immediate family of Robert S. Hekemian, FREIT CEO and Chairman of the Board, and Robert S. Hekemian, Jr., a Trustee of FREIT, for their equity investment in Grande Rotunda, LLC, a limited liability company in which FREIT owns a 60% equity interest, and Damascus Centre, LLC, a limited liability company in which FREIT owns a 70% equity interest).

 

GENERAL AND ADMINISTRATIVE EXPENSES (“G & A”)

During Fiscal 2015, G & A was $2,029,000 as compared to $1,396,000 for the prior year’s period. The primary components of G&A are accounting fees, legal and professional fees and Trustees’ fees. The primary reason for the increase in G&A was the increase in Trustees’ fees, as a result of a change in the Deferred Fee Plan, along with increases in Trustee meeting attendance fees and annual retainer fees effective November 1, 2014.

 

DEPRECIATION

Depreciation expense from operations for Fiscal 2015 was $6,883,000 as compared to $6,346,000 for the prior year’s period. The increase in depreciation was primarily attributable to the depreciation related to the Regency acquisition and certain assets becoming operational in Fiscal 2015.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $8.1 million for Fiscal 2016 compared to $12 million for Fiscal 2015. FREIT expects that cash provided by operating activities and cash reserves will be adequate to cover mandatory debt service payments (including payments of interest, but excluding balloon payments), real estate taxes, recurring capital improvements and dividends necessary to retain qualification as a REIT (90% of taxable income).

As at October 31, 2016, FREIT had cash and cash equivalents totaling $10.9 million compared to $13.5 million at October 31, 2015. The decrease in cash for Fiscal 2016 is primarily attributable to $20.4 million in net cash used in investing activities offset by $9.7 million provided by financing activities and $8.1 million provided by operating activities.

On June 17, 2016, FREIT sold its property held at Rochelle Park, New Jersey to Lakeland Bank (as successor by merger to Pascack Community Bank) for $3.1 million, realizing a gain of approximately $0.3 million net of sales fees. This sale will result in FREIT’s loss of future annual rents of approximately $241,000, which would have increased periodically through September 2023.

Credit Line: FREIT has a line of credit provided by the Provident Bank in the amount of $12.8 million. The line of credit was for a two year term ending on November 1, 2016, which was extended by the bank to February 1, 2017 while the bank completes its due diligence. FREIT expects the credit line will be extended for an additional period of 24 months. Draws against the credit line can be used for general corporate purposes, for property acquisitions, construction activities, and 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. Interest rates on draws will be set at the time of each draw for 30, 60, or 90-day periods, based on FREIT’s choice of the prime rate or at 175 basis points over the 30, 60, or 90-day LIBOR rates at the time of the draws. The interest rate on the line of credit has a floor of 3.25%. As of October 31, 2016, approximately $12.8 million was available under the line of credit.

The modernization and expansion project at the Damascus Center was completed in November 2011. Total construction costs, inclusive of tenant improvement costs, approximated $22.7 million. Total construction and development costs were funded, in part, from a $21.3 million (as modified) construction loan facility, of which approximately $15 million was drawn and advances by FREIT in the approximate aggregate amount of $3.2 million. The construction loan, including the exercise of a one twelve (12) month extension option, was scheduled to mature on February 12, 2013. On December 26, 2012, Damascus Centre, LLC refinanced its construction loan with long-term financing provided by People’s United Bank and the first tranche of the new loan was taken-down in the amount of $20 million. Based on leasing and net operating income at the shopping center, People’s United Bank agreed to a take-down of the second tranche of this loan on April 22, 2016 in the amount of $2,320,000, of which approximately $470,000 was readily available and the remaining $1,850,000 (included in prepaid expenses and other assets in the accompanying consolidated balance sheet) is held in escrow and available to Damascus Centre, LLC once certain tenants open and begin paying rent. The total amount outstanding for both tranches of this loan held with People’s United Bank as of October 31, 2016 was approximately $20.8 million. The loan has a maturity date of January 3, 2023 and bears a floating interest rate equal to 210 points over the one-month BBA LIBOR. In order to minimize interest rate volatility during the term of this loan, Damascus Centre, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate on each tranche of this loan, resulting in a fixed rate of 3.81% over the term of the first tranche of this loan and a fixed rate of 3.53% over the term of the second tranche of this loan. The interest rate swaps are considered a derivative financial instrument that will be used only to reduce interest rate risk, and not held or used for trading purposes. (See Note 6 for additional information relating to the interest rate swaps.)

The Rotunda property in Baltimore, Maryland (owned by FREIT’s 60% owned affiliate Grande Rotunda, LLC) is an 11.5 acre site containing a building with approximately 132,000 sq. ft. of office space and approximately 84,000 sq. ft. of retail space on the lower level of the building. In September 2013, FREIT began construction to redevelop and expand this property and, with the exception of tenant improvements, was substantially completed in the third quarter of Fiscal 2016 with costs to complete estimated at $1 million. The redevelopment and expansion plans included a modernization of the office building and smaller adjacent buildings, construction of 379 residential apartment rental units, an additional 75,000 square feet of new retail space, and 864 above level parking spaces. As of October 31, 2016, the residential section is approximately 29% leased and the retail space is approximately 71% leased. FREIT expects the Rotunda to generate positive cash flow in the latter half of fiscal year 2017.

The original Rotunda acquisition loan for $22.5 million, which was subsequently reduced to $19.5 million on February 1, 2010, was acquired by FREIT on May 28, 2013. FREIT subsequently sold this loan to Wells Fargo Bank. On December 9, 2013, Grande Rotunda, LLC closed with Wells Fargo Bank on a construction loan of up to $120 million to be used to redevelop and expand the Rotunda property in Baltimore, Maryland with a term of four (4) years, with one 12-month extension, at a rate of 225 basis points over the monthly LIBOR. The loan is secured by the Rotunda property, which has a net book value of approximately $155,552,000 as of October 31, 2016. Through October 31, 2016, funding for the construction at the Rotunda was provided by: (a) the Grande Rotunda, LLC members, FREIT and Rotunda 100, LLC, who contributed approximately $14.5 million in accordance with the loan agreement with Wells Fargo Bank (See Note 9 for further information regarding this agreement.); and (b) approximately $114 million in draws on the construction line with Wells Fargo Bank (including approximately $21.1 million during Fiscal 2016), of which $19 million was used to pay off the loan from FREIT, and $95 million was used toward the construction at the Rotunda.

On November 23, 2016, Wells Fargo Bank modified the following terms and conditions of this loan: (i) the total amount that may be drawn on this loan will be decreased from $120 million to $116.1 million, allowing for an additional draw of $2.1 million over the existing balance of approximately $114 million to be used for retail tenant improvements and leasing commissions; (ii) leasing benchmarks will no longer be required to be met including the waiver of the leasing benchmarks FREIT was not in compliance with as of June 30, 2016; (iii) Grande Rotunda, LLC will provide an interest reserve to Wells Fargo Bank in the amount of $2 million for the purpose of funding interest payments, and will be obliged to replenish the account balance to $1 million if it should fall below $500,000; (iv) the maturity date of the loan was changed from December 31, 2017 to October 31, 2017 with no option to extend; (v) the interest rate on amount outstanding on the loan was increased by 25 basis points to 250 basis points over the monthly LIBOR.

With regard to the funding of the Rotunda redevelopment project, Wells Fargo Bank required that the Grande Rotunda, LLC contribute not less than $14,460,000 towards the construction before any construction loan proceeds could be disbursed. To secure these funds Grande Rotunda, LLC made a capital call on its members – FREIT and Rotunda 100, LLC (“Rotunda 100”). FREIT’s share (60%) amounted to approximately $8.7 million, and the Rotunda 100 members’ share (40%) amounted to approximately $5.8 million. FREIT, pursuant to previous agreements, made secured loans to the Rotunda 100 members of approximately $2.1 million towards their share of the $5.8 million capital call. The balance of Rotunda 100’s capital call of approximately $3.7 million was initially made by FREIT until it was repaid by Rotunda 100 in August 2014. These loans bear an interest rate of 225 basis points over the 90 day LIBOR, and had a maturity date of June 19, 2015. On June 4, 2015, the Board approved an extension of the maturity date to occur the earlier of (a) June 19, 2018 or (b) five days after the closing of a permanent mortgage loan secured by the Rotunda property. Rotunda 100 is principally owned by employees of Hekemian, including certain members of the immediate family of Robert S. Hekemian and Robert S. Hekemian, Jr.

As of October 31, 2016, FREIT and Rotunda 100 have made their required capital call contributions of $8.7 million and $5.8 million, respectively, towards the Rotunda construction financing. Both FREIT and the Rotunda 100 members are treating their required capital call contributions as additional investments in Grande Rotunda, LLC.

As at October 31, 2016, FREIT’s aggregate outstanding mortgage debt was $329.7 million, which bears a weighted average interest rate of 4.04% and an average life of approximately 4.9 years. FREIT’s fixed rate mortgages are subject to amortization schedules that are longer than the term of the mortgages. As such, balloon payments (unpaid principal amounts at mortgage due date) for all mortgage debt will be required as follows:  

Fiscal Year	2017	2018	2019	2021	2022	2023	2024	2025	2026
($ in millions)
Mortgage "Balloon" Payments	$136.0	$5.2	$45.2	$19.1	$14.4	$34.5	$15.9	$13.9	$18.2

 

The following table shows the estimated fair value and carrying value of FREIT’s long-term debt at October 31, 2016 and 2015: 

($ in Millions)		October 31, 2016				October 31, 2015
Fair Value		$	331.3			$	313.5
Carrying Value		$	327.2			$	304.8

 

Fair values are estimated based on market interest rates at the end of each fiscal year and on 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 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 October 31, 2016, a 1% interest rate increase would reduce the fair value of FREIT’s debt by $7.5 million, and a 1% decrease would increase the fair value by $8 million.

FREIT believes that the values of its properties will be adequate to command refinancing proceeds equal to or higher than the mortgage debt to be refinanced. FREIT continually reviews its debt levels to determine if additional debt can prudently be utilized for property acquisition additions to our real estate portfolio that will increase income and cash flow to shareholders.

On November 19, 2013, FREIT refinanced the first mortgages on its Hammel Gardens and Steuben Arms properties that were scheduled to mature on December 1, 2013. The mortgages, aggregating $9.4 million, were refinanced for $19.7 million. The new mortgage amounts reflect, in part, the appreciated value of those assets. This refinancing resulted in: (i) a reduction of annual interest costs from 6.4% to 4.54%, and (ii) net refinancing proceeds of approximately $10 million that were available for capital expenditures and general corporate purposes.

On December 29, 2014, FREIT Regency, LLC closed on a $16.2 million mortgage loan from Provident Bank. The new loan bears a floating interest rate equal to 125 basis points over the one-month BBA LIBOR and the loan will mature on December 15, 2024. Interest-only payments are required each month through December 15, 2017. Thereafter, principal payments of

$27,807 (plus accrued interest) are required each month through maturity. In order to minimize interest rate volatility during the term of the loan, FREIT Regency, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 3.75% over the term of the loan. Proceeds from the loan were used to pay off the $5 million outstanding balance on FREIT’s credit line, and the remainder of the proceeds will be available to fund future capital expenditures and for general corporate purposes. The interest rate swap is considered a derivative financial instrument that will be used only to reduce interest rate risk, and not held or used for trading purposes. (See Note 6 for additional information relating to the interest rate swap contract.)

On September 29, 2016, Wayne PSC, LLC refinanced its $24.2 million mortgage loan held with Metropolitan Life Insurance Company, with a new mortgage loan from People’s United Bank in the amount of $25.8 million. The new loan, secured by a shopping center in Wayne, New Jersey, bears a floating interest rate equal to 220 basis points over the one-month BBA LIBOR with a maturity date of October 1, 2026. In order to minimize interest rate volatility during the term of the loan, Wayne PSC, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 3.625% over the term of the loan. This refinancing resulted in: (i) a reduction in interest rate from 6.04% to 3.625% and (ii) net refinancing proceeds of approximately $1 million that were distributed to the partners in Wayne PSC, LLC with FREIT receiving $0.4 million based on it 40% membership interest in Wayne PSC, LLC. The interest rate swap is considered a derivative financial instrument that will be used only to reduce interest rate risk, and not held or used for trading purposes. (See Note 6 for additional information relating to the interest rate swap contract.)

Interest rate swap contracts: To reduce interest rate volatility, FREIT uses a “pay fixed, receive floating” interest rate swap to convert floating interest rates to fixed interest rates over the term of a certain loan. FREIT enters into these swap contracts with a counterparty that is usually a high-quality commercial bank.

In essence, FREIT agrees to pay its counterparties a fixed rate of interest on a dollar amount of notional principal (which corresponds to FREIT’s mortgage debt) over a term equal to the term of the mortgage notes. FREIT’s counterparties, in return, agree to pay FREIT a short-term rate of interest - generally LIBOR - on that same notional amount over the same term as the mortgage notes.

Current GAAP requires FREIT to mark-to-market fixed pay interest rate swaps. 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. These gains or losses will not affect FREIT’s income statement. Changes in the fair value of these swap contracts will be reported in other comprehensive income and appear in the equity section of the balance sheet. This gain or loss represents the economic consequence of liquidating fixed rate swap contracts and replacing them with like-duration funding at current market rates, something FREIT would likely never do. Periodic cash settlements of these swap contracts will be accounted for as an adjustment to interest expense.

FREIT has variable interest rate mortgages securing its Damascus Center, Regency, and Wayne PSC properties. To reduce interest rate fluctuations, FREIT entered into interest rate swap contracts for each of these loans. These interest rate swap contracts effectively converted variable interest rate payments to fixed interest rate payments. The contracts were based on a notional amount of approximately $22,320,000 ($20,868,000 at October 31, 2016) for the Damascus Center swaps, a notional amount of approximately $16,200,000 ($16,200,000 at October 31, 2016) for the Regency swap, and a notional amount of approximately $25,800,000 ($25,800,000 at October 31, 2016) for the Wayne PSC swap. FREIT has the following derivative-related risks with its swap contracts: 1) early termination risk, and 2) counterparty credit risk.

Early Termination Risk: If FREIT wants to terminate its swap 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 swap’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 October 31, 2016, the swap contracts for the Damascus Center and Regency properties were in the counterparties’ favor and the swap contract for the Wayne PSC property was in FREIT’s favor. If FREIT had terminated these contracts at that date it would have realized a loss of approximately $521,000 for the Damascus Center swaps and a loss of approximately $1,361,000 for the Regency swap, both of which have been included as a liability in FREIT’s consolidated balance sheet as at October 31, 2016, and a gain of approximately $91,000 for the Wayne PSC swap which has been included as an asset in FREIT’s consolidated balance sheet as at October 31, 2016. The change for these swaps (gain or loss) during such period has been included in comprehensive income. For the year ended October 31, 2016, FREIT recorded an unrealized loss of $725,000 in comprehensive income representing the change in fair value of the swaps during such period. For the year ended October 31, 2015, FREIT recorded an unrealized loss of $1,581,000 in comprehensive income representing the change in the fair value of the swaps during such period and a corresponding liability of $945,000 for the Regency swap and $121,000 for the Damascus Center swap as of October 31, 2015.

Counterparty Credit Risk: Each party to a swap contract bears the risk that its Counterparty will default on its obligation to make a periodic payment. FREIT reduces this risk by entering into swap contracts only with major financial institutions that are experienced market makers in the derivatives market.

FREIT’s total contractual obligations under its mortgage loan and construction contracts in place as of October 31, 2016 are as follows:  

 

CONTRACTUAL OBLIGATIONS-PRINCIPAL
(in thousands of dollars)
						Within				2 - 3				4 - 5				After 5
		Total				One Year				Years				Years				Years
Long-Term Debt
Annual Amortization		$	27,408			$	3,720			$	8,840			$	7,100			$	7,748
Balloon Payments			302,311				135,967				50,406				19,122				96,816
Total Long-Term Debt			329,719				139,687				59,246				26,222				104,564
Line of Credit (a)			—				—				—				—				—
Total Contractual Obligations		$	329,719			$	139,687			$	59,246			$	26,222			$	104,564

 

(a) Represents draws on line of credit with Provident Bank.      

 

FREIT’s annual estimated cash requirements related to interest on its mortgage loans and construction contracts in place as of October 31, 2016 are as follows:

 

INTEREST OBLIGATIONS
(in thousands of dollars)
		Total				Within One Year				2 - 3 Years				4 - 5 Years				After 5 Years
Interest on Fixed Rate Debt		$	44,185			$	8,845			$	16,196			$	10,242			$	8,902
Interest on Variable Rate Debt			3,450				3,450	(a)			—				—				—
Total Interest Obligations		$	47,635			$	12,295			$	16,196			$	10,242			$	8,902

 

(a) Estimated interest on Rotunda construction loan through maturity.        

  

ADJUSTED FUNDS FROM OPERATIONS

Funds From Operations (“FFO”) is a non-GAAP measure defined by the National Association of Real Estate Investment Trusts (“NAREIT”). 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 their decision making process. These adjustments to GAAP net income are amortization of acquired leases, straight-line rents, acquisition expenses, FFO from discontinued operations 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:

 

		Years Ended October 31,
		2016				2015				2014
		(In Thousands, Except Per Share)
Funds From Operations ("FFO") (a)
Net income		$	3,099			$	2,912			$	12,164
Depreciation of consolidated properties			7,852				6,883				6,346
Amortization of deferred leasing costs			410				260				391
Gain on sale of discontinued operations			—				—				(8,734	)
Gain on sale of commercial property			(314	)			—				—
Distributions to minority interests			(1,095	)			(516	)			(975	)
FFO		$	9,952			$	9,539			$	9,192
Per Share - Basic and Diluted		$	1.47			$	1.41			$	1.33
(a) As prescribed by NAREIT.
Adjusted Funds From Operations ("AFFO")
FFO		$	9,952			$	9,539			$	9,192
Amortization of acquired leases			—				1				21
Deferred rents (Straight lining)			(608	)			219				391
Straight line rent adjustment - bankrupt tenant			—				1,046				—
Acquisition expenses-Regency			—				—				648
Less: FFO from discontinued operations			—				—				(7	)
Capital Improvements - Apartments			(898	)			(424	)			(549	)
AFFO		$	8,446			$	10,381			$	9,696
Per Share - Basic and Diluted		$	1.25			$	1.53			$	1.40
Weighted Average Shares Outstanding:
Basic			6,783				6,778				6,908
Diluted			6,784				6,778				6,908

 

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’s, and therefore FREIT’s FFO and AFFO may not be directly comparable to those of other REITs.

 

Share Repurchases

On December 4, 2013, the Board authorized the repurchase of up to 24,400 FREIT shares. On December 17, 2013, FREIT repurchased 20,400 shares in a privately-negotiated transaction with an unaffiliated party for an aggregate purchase price of $357,000, or $17.50 per share.

On September 4, 2014, the Board authorized the repurchase of 100,572 FREIT shares held by the pension plan of Hekemian & Co., Inc., FREIT’s managing agent, for an aggregate cash purchase of $1,855,553 or $18.45 per share, which was the closing price of FREIT shares on September 3, 2014. The repurchase which occurred in September 2014 was undertaken in connection with the termination of the pension plan. Robert S. Hekemian, Chairman and Chief Executive Officer of FREIT, and Robert S. Hekemian, Jr., a Trustee of FREIT, and members of their family were participants in the pension plan.

On February 17, 2015, FREIT announced a tender offer to purchase up to 100,000 shares of FREIT’s beneficial interest at a price of $23.00 per share. The number of shares proposed to be purchased in the tender offer represented approximately 1.5% of FREIT’s then-outstanding shares. The tender offer expired on March 20, 2015, and in connection therewith FREIT repurchased 94,302 shares of FREIT’s beneficial interest at $23.00 per share for an aggregate purchase price of $2,168,946, which it funded principally from cash and cash equivalents. FREIT’s Trustees and executive officers did not tender their shares of beneficial interest in FREIT in the tender offer. (See Note 15 for further details.)

 

Stock Option Plan

On September 4, 2014, the Board approved the grant of a total of 246,000 non-qualified share options under FREIT’s Equity Incentive Plan to certain FREIT Executive Officers, the members of the Board and certain employees of Hekemian & Co., Inc. The options have an exercise price of $18.45 per share, will vest over a 5 year period at 20% per year, and will expire 10 years from the date of grant, which will be September 3, 2024. (See Note 11 for further details.)

On November 10, 2016, the Board approved the grant of a total of 38,000 non-qualified share options under the Plan to two members of the Board who were appointed to the Board during Fiscal 2016. The options have an exercise price of $21.00 per share, will vest in equal annual installments over a 5-year period, and will expire 10 years from the date of grant, which will be November 9, 2026.

 

Deferred Fee Plan

On September 4, 2014, the Board approved amendments, effective November 1, 2014, to the FREIT Deferred Fee Plan for its Executive Officers and Trustees, one of which provides for the issuance of share units payable in FREIT shares in respect of (i) deferred amounts of all Trustee fees on a prospective basis; (ii) interest on Trustee fees deferred prior to November 1, 2014 (payable at a floating rate, adjusted quarterly, based on the average 10-year Treasury Bond interest rate plus 150 basis points); and (iii) dividends payable in respect of share units allocated to participants in the Deferred Fee Plan as a result of deferrals described above. The number of share units will be determined by the closing price of FREIT shares on the date set forth in the Deferred Fee Plan. (See Note 12 for further details.)

 

Distributions to Shareholders

Since its inception in 1961, FREIT has elected to be treated as a REIT for federal income tax purposes. In order to qualify as a REIT, FREIT must satisfy a number of highly technical and complex operational requirements including that FREIT must distribute to its shareholders at least 90% of its REIT taxable income. FREIT anticipates making distributions to shareholders from operating cash flows. Although cash used to make distributions reduces amounts available for capital investment, FREIT generally intends to distribute not less than the minimum of REIT taxable income necessary to satisfy the applicable REIT requirement as set forth in the Internal Revenue Code. With respect to the Jobs and Growth Tax Relief Reconciliation Act of 2003, the reduction of the tax rate on dividends does not apply to FREIT dividends other than capital gains dividends, which are subject to capital gains rates. FREIT’s policy is to pass on at least 90% of its ordinary taxable income to shareholders. FREIT’s taxable income is untaxed at the trust level to the extent distributed to shareholders. FREIT’s dividends of ordinary taxable income will be taxed as ordinary income to its shareholders and FREIT’s capital gains dividends will be taxed as capital gains to its shareholders. It has been FREIT’s policy to pay fixed quarterly dividends for the first three quarters of each fiscal year, and a final fourth quarter dividend based on the fiscal year’s net income and taxable income. For the past four (4) years, FREIT has paid an annual dividend of at least $1.20 per share. Based on the loss for the fourth quarter ended October 31, 2016 and the continuing costs required for retail tenant fit-ups and residential lease-up costs at The Rotunda property, FREIT does not expect that it will sustain the payment of dividends at the levels paid in prior years.

The following tables list the quarterly dividends declared for the three most recent fiscal years and the dividends as a percentage of taxable income for those periods.

 

		Fiscal Years Ended October 31,
		2016				2015				2014
First Quarter		$	0.30			$	0.30			$	0.30
Second Quarter		$	0.30			$	0.30			$	0.30
Third Quarter		$	0.30			$	0.30			$	0.30
Fourth Quarter		$	0.30			$	0.30			$	0.30
Total For Year		$	1.20			$	1.20			$	1.20

 

						(in thousands of dollars)																Dividends
Fiscal		Per				Total				Ordinary				Capital Gain				Taxable				as a % of
Year		Share				Dividends				Income-Tax Basis				Income-Tax Basis				Income				Taxable Income
2016		$	1.20			$	8,152			$	2,766	*		$	2,569			$	5,335	*			152.8%
2015		$	1.20			$	8,130			$	4,303			$	—			$	4,303				188.9%
2014		$	1.20			$	8,276			$	5,658			$	50			$	5,708				145.0%
*Estimated

 

INFLATION

Inflation can impact the financial performance of FREIT in various ways. FREIT’s commercial tenant leases normally provide that the tenants bear all or a portion of most operating expenses, which can reduce the impact of inflationary increases on FREIT. Apartment leases are normally for a one-year term, which may allow FREIT to seek increased rents as leases renew or when new tenants are obtained, subject to prevailing market conditions.

 

ITEM 7A

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Liquidity and Capital Resources” and “Segment Information” in Item 7 above. 

ITEM 8

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and supplementary data of FREIT are submitted as a separate section of this Form 10-K. See "Index to Consolidated Financial Statements" on page 42 of this Form 10-K.

 

ITEM 9

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

 

ITEM 9A

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 Chairman and Chief Executive Officer and Chief Financial Officer, who concluded that FREIT’s disclosure controls and procedures are effective as of October 31, 2016. There have been no significant changes in FREIT’s internal controls or in other factors, which could significantly affect internal controls subsequent to the date we carried out our evaluation.

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.

Management’s Annual Report on Internal Control Over Financial Reporting — FREIT’s management, under the supervision of FREIT’s Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act). Management evaluated the effectiveness of FREIT’s internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, management has concluded that FREIT’s internal control over financial reporting was effective as of October 31, 2016. EisnerAmper LLP, FREIT’s independent registered public accounting firm for Fiscal 2016, audited FREIT’s financial statements contained in this Form 10-K, and has issued the attestation report on FREIT’s internal control over financial reporting provided on the following page.

Changes in Internal Control Over Financial Reporting — FREIT’s management, with the participation of FREIT’s Chief Executive Officer and Chief Financial Officer, has evaluated whether any change in FREIT’s internal control over financial reporting occurred during the fourth quarter of Fiscal 2016. Based on that evaluation, management concluded that there has been no change in FREIT’s internal control over financial reporting during the fourth quarter of Fiscal 2016 that has materially affected, or is reasonably likely to materially affect, FREIT’s internal control over financial reporting.

ITEM 9B

OTHER INFORMATION

None. 

 

Report of Independent Registered Public Accounting Firm

 

To the Trustees and Shareholders

First Real Estate Investment Trust of New Jersey

 

We have audited First Real Estate Investment Trust of New Jersey and subsidiaries’ (“FREIT”) internal control over financial reporting as of October 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. FREIT’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, included in Item 9A. Our responsibility is to express an opinion on the effectiveness of FREIT’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and Trustees of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, FREIT maintained, in all material respects, effective internal control over financial reporting as of October 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule of FREIT as of and for the year ended October 31, 2016, and our report dated January 13, 2017 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.

 

/s/ EisnerAmper LLP

New York, New York

 

January 13, 2017

 

 

PART III

Certain information required by Part III is incorporated by reference to FREIT's definitive proxy statement (the "Proxy Statement") to be filed with the Securities and Exchange Commission no later than 120 days after the end of FREIT's fiscal year covered by this Annual Report. Only those sections of the Proxy Statement that specifically address the items set forth in this Annual Report are incorporated by reference from the Proxy Statement into this Annual Report.

 

ITEM 10

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is incorporated herein by reference to the sections titled "Election of Trustees" and “Section 16(a) Beneficial Ownership Reporting Compliance" in FREIT's Proxy Statement for its Annual Meeting to be held in April 2017.

 

ITEM 11

EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the section titled “Executive Compensation" in FREIT's Proxy Statement for its Annual Meeting to be held in April 2017.

 

ITEM 12

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated herein by reference to the section titled "Security Ownership of Certain Beneficial Owners and Management" in FREIT's Proxy Statement for its Annual Meeting to be held in April 2017. 

 

ITEM 13

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated herein by reference to the section titled "Certain Relationships and Related Party Transactions; Director Independence" in FREIT's Proxy Statement for its Annual Meeting to be held in April 2017.

 

ITEM 14

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference to the sections titled “Audit Fees,” “Audit-Related Fees,” “Tax Fees” and “All Other Fees” contained in FREIT’s Proxy Statement for its Annual Meeting to be held in April 2017.

 

PART IV

 

ITEM 15:

EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES

 

(a) Financial Statements:	Page
(i) Report of Independent Registered Public Accounting Firm	44
(ii) Consolidated Balance Sheets as of October 31, 2016 and 2015	45
(iii) Consolidated Statements of Income for the years ended October 31, 2016, 2015 and 2014	46
(iv) Consolidated Statements of Comprehensive Income for the years ended October 31, 2016, 2015 and 2014	47
(v) Consolidated Statements of  Equity for the years ended October 31, 2016, 2015 and 2014	48
(vi) Consolidated Statements of Cash Flows for the years ended October 31, 2016, 2015 and 2014	49
(vii) Notes to Consolidated Financial Statements	50
(b) Financial Statement Schedule:
(i) XI - Real Estate and Accumulated Depreciation	65/66
(c) Exhibits:
See Index to Exhibits.	67

 

 

 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, FREIT 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
Dated: January 13, 2017		By:  /s/ Robert S. Hekemian
		Robert S. Hekemian, Chairman of the Board and Chief Executive Officer
		By:  /s/ Donald W. Barney
		Donald W. Barney, President, Treasurer and Chief Financial Officer

 

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Robert S. Hekemian and Donald W. Barney his true and lawful attorney-in-fact and agent for him and in his name, place an stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed by the following persons in the capacities and on the dates stated.

 

Signatures		Title	Date
/s/ Robert S. Hekemian		Chairman of the Board and Chief	January 13, 2017
Robert S. Hekemian		Executive Officer (Principal Executive Officer) and Trustee
/s/ Donald W. Barney		President, Treasurer, Chief Financial	January 13, 2017
Donald W. Barney		Officer (Principal Financial / Accounting Officer) and Trustee
/s/ Herbert C. Klein		Trustee	January 13, 2017
Herbert C. Klein
/s/ Ronald J. Artinian		Trustee	January 13, 2017
Ronald J. Artinian
/s/ Alan L. Aufzien		Trustee	January 13, 2017
Alan L. Aufzien
/s/ Robert S. Hekemian, Jr.		Trustee	January 13, 2017
Robert S. Hekemian, Jr.
/s/ David F. McBride		Trustee	January 13, 2017
David F. McBride
/s/ John A. Aiello		Trustee	January 13, 2017
John A. Aiello
/s/ Justin F. Meng		Trustee	January 13, 2017
Justin F. Meng

 

 

Report of Independent Registered Public Accounting Firm 

 

 

To the Trustees and Shareholders

First Real Estate Investment Trust of New Jersey

 

We have audited the accompanying consolidated balance sheets of First Real Estate Investment Trust of New Jersey and subsidiaries (“FREIT”) as of October 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, equity and cash flows for each of the years in the three-year period ended October 31, 2016. Our audits also included the financial statement schedule listed in the index at item 15(b). These financial statements and schedule are the responsibility of FREIT's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of FREIT as of October 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), FREIT’s internal control over financial reporting as of October 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated January 13, 2017 expressed an unqualified opinion thereon.

 

/s/ EisnerAmper LLP

New York, New York

 

January 13, 2017

 

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		October 31,
		2016				2015
		(In Thousands of Dollars)
ASSETS
Real estate, at cost, net of accumulated depreciation		$	336,770			$	219,430
Construction in progress			128				101,415
Cash and cash equivalents			10,906				13,500
Tenants' security accounts			1,875				1,728
Receivables arising from straight-lining of rents, net of allowance for loss in 2015			2,725				2,604
Accounts receivable, net of allowance for doubtful accounts			1,730				2,105
Secured loans receivable			5,451				5,451
Prepaid expenses and other assets			6,559				4,555
Deferred charges, net			1,736				1,327
Interest rate swap contract			91				—
Total Assets		$	367,971			$	352,115
LIABILITIES AND EQUITY
Liabilities:
Mortgages and construction loan payable		$	329,719			$	307,899
Less unamortized debt issuance costs			2,521				3,129
Mortgages payable, net (Note 5)			327,198				304,770
Deferred trustee compensation payable			9,078				9,078
Accounts payable and accrued expenses			8,379				10,305
Dividends payable			2,022				2,018
Tenants' security deposits			2,817				2,561
Deferred revenue			1,134				1,080
Interest rate swap contracts			1,882				1,066
Total Liabilities			352,510				330,878
Commitments and contingencies (Note 8)
Equity:
Common equity:
Shares of beneficial interest without par value:
8,000,000 shares authorized; 6,993,152 shares issued plus 77,544 and			26,713				25,860
39,350 vested share units granted to Trustees at October 31, 2016
and 2015, respectively
Treasury stock, at cost: 253,083 and 266,283 shares at October 31, 2016
and 2015, respectively			(5,273	)			(5,517	)
Dividends in excess of net income			(16,916	)			(11,769	)
Accumulated other comprehensive loss			(1,690	)			(1,030	)
Total Common Equity			2,834				7,544
Noncontrolling interests in subsidiaries			12,627				13,693
Total Equity			15,461				21,237
Total Liabilities and Equity		$	367,971			$	352,115

 

See Notes to Consolidated Financial Statements.  

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 

		Years Ended October 31,
		2016				2015				2014
		(In Thousands of Dollars, Except Per Share Amounts)
Revenue:
Rental income		$	40,780			$	38,786			$	36,913
Reimbursements			5,158				5,479				5,054
Sundry income			316				518				463
Total revenue			46,254				44,783				42,430
Expenses:
Operating expenses			13,734				13,317				11,405
Straight line rent adjustment - bankrupt tenant			—				1,046				—
Management fees			2,046				2,000				1,968
Real estate taxes			8,051				7,774				7,515
Depreciation			7,852				6,883				6,346
Total expenses			31,683				31,020				27,234
Operating income			14,571				13,763				15,196
Investment income			150				150				184
Gain on sale of commercial property			314				—				—
Acquisition expenses-Regency			—				—				(648	)
Interest expense including amortization
of deferred financing costs			(11,936	)			(11,001	)			(11,309	)
Income from continuing operations			3,099				2,912				3,423
Income from discontinued operations			—				—				7
Gain on sale of discontinued operations			—				—				8,734
Net income			3,099				2,912				12,164
Net income attributable to noncontrolling
interests in subsidiaries			(94	)			(281	)			(507	)
Net income attributable to common equity		$	3,005			$	2,631			$	11,657
Earnings per share - basic and diluted:
Continuing operations		$	0.44			$	0.39			$	0.42
Discontinued operations			—				—				1.27
Net income attributable to common equity		$	0.44			$	0.39			$	1.69
Weighted average shares outstanding:
Basic			6,783				6,778				6,908
Diluted			6,784				6,778				6,908
Amounts attributable to common equity:
Income from continuing operations		$	3,005			$	2,631			$	2,916
Income related to discontinued operations			—				—				8,741
Net income attributable to common equity		$	3,005			$	2,631			$	11,657

 

See Notes to Consolidated Financial Statements.  

 

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

		Years Ended October 31,
		2016				2015				2014
		(In Thousands of Dollars)
Net income		$	3,099			$	2,912			$	12,164
Other comprehensive income (loss):
Unrealized loss on interest rate swap contracts
before reclassifications			(1,346	)			(2,196	)			(774	)
Amount reclassified from accumulated other
comprehensive loss to interest expense			621				615				309
Net unrealized loss on interest rate swap contracts			(725	)			(1,581	)			(465	)
Comprehensive income			2,374				1,331				11,699
Net income attributable to noncontrolling interests			(94	)			(281	)			(507	)
Other comprehensive income (loss):
Unrealized loss on interest rate swap contracts
attributable to noncontrolling interests			65				191				140
Comprehensive income attributable to noncontrolling interests			(29	)			(90	)			(367	)
Comprehensive income attributable to common equity		$	2,345			$	1,241			$	11,332

 

See Notes to Consolidated Financial Statements.  

 

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

 

		Common Equity
		Shares of Beneficial Interest				Treasury Shares at Cost				Dividends in Excess of Net Income				Accumulated Other Comprehensive Income (Loss)				Total Common Equity				Noncontrolling Interests				Total Equity
		(In Thousands of Dollars, Except Share and Per Share Amounts)
Balance at October 31, 2013		$	24,969			$	(1,135	)		$	(9,651	)		$	686			$	14,869			$	8,936			$	23,805
Repurchase of 120,972 shares of beneficial interest							(2,213	)											(2,213	)							(2,213	)
Stock based compensation expense			16																16								16
Distributions to noncontrolling interests																			—				(975	)			(975	)
Net income											11,657								11,657				507				12,164
Dividends declared ($1.20 per share)											(8,276	)							(8,276	)							(8,276	)
Net unrealized loss on interest rate swap															(326	)			(326	)			(140	)			(466	)
Additional investment by noncontrolling interest in Grande Rotunda, LLC																			—				5,791				5,791
Balance at October 31, 2014			24,985				(3,348	)			(6,270	)			360				15,727				14,119				29,846
Repurchase of 94,302 shares of beneficial interest							(2,169	)											(2,169	)							(2,169	)
Stock based compensation expense			94																94								94
Vested share units granted to Trustees			781																781								781
Distributions to noncontrolling interests																			—				(516	)			(516	)
Net income											2,631								2,631				281				2,912
Dividends declared, including $29 payable in share units ($1.20 per share)											(8,130	)							(8,130	)							(8,130	)
Net unrealized loss on interest rate swaps															(1,390	)			(1,390	)			(191	)			(1,581	)
Balance at October 31, 2015			25,860				(5,517	)			(11,769	)			(1,030	)			7,544				13,693				21,237
Stock based compensation expense			94																94								94
Vested share units granted to Trustees			759																759								759
Stock options exercised							244												244								244
Distributions to noncontrolling interests																			—				(1,095	)			(1,095	)
Net income											3,005								3,005				94				3,099
Dividends declared, including $76 payable in share units ($1.20 per share)											(8,152	)							(8,152	)							(8,152	)
Net unrealized loss on interest rate swaps															(660	)			(660	)			(65	)			(725	)
Balance at October 31, 2016		$	26,713			$	(5,273	)		$	(16,916	)		$	(1,690	)		$	2,834			$	12,627			$	15,461

 

See Notes to Consolidated Financial Statements.

 

 

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Years Ended October 31,
		2016				2015				2014
		(In Thousands of Dollars)
Operating activities:
Net income		$	3,099			$	2,912			$	12,164
Adjustments to reconcile net income to net cash provided by
operating activities (including discontinued operations):
Depreciation			7,852				6,883				6,346
Amortization			952				679				750
Stock based compensation expense			94				94				16
Trustee fees and related interest paid in stock units			683				752				—
Gain on sale of commercial property			(314	)			—				—
Deferred rents - straight line rent			(608	)			1,265	(e)			391
Bad debt expense			196				631				26
Net amortization of acquired leases			—				1				21
Gain on sale of discontinued operations			—				—				(8,734	)
Changes in operating assets and liabilities:
Tenants' security accounts			109				104				46
Accounts receivable, prepaid expenses and other assets			(793	)			(1,766	)			(634	)
Accounts payable, accrued expenses and deferred
trustee compensation			(3,264	)			392				1,812
Deferred revenue			54				95				190
Net cash provided by operating activities			8,060				12,042				12,394
Investing activities:
Proceeds from sale of commercial property			3,059				—				—
Capital improvements - existing properties			(9,927	)			(4,158	)			(3,770	)
Construction and pre-development costs			(13,535	)(f)			(48,576	)(d)			(33,579	)(a)
Regency acquisition, net of proceeds held in escrow			—				—				(10,855	)(b)
Secured loans receivable to noncontrolling interest			—				—				(2,128	)
Net cash used in investing activities			(20,403	)			(52,734	)			(50,332	)
Financing activities:
Repayment of mortgages and construction loan			(28,314	)			(4,117	)			(13,260	)
Repayment of credit line			—				(5,000	)			(7,000	)
Proceeds from mortgage loan refinancings			25,800				16,200				19,700
Proceeds from additional tranche of loan			2,320				—				—
Restricted loan proceeds held in escrow			(1,850	)			—				—
Proceeds from construction loan			21,093				47,740				42,129
Proceeds from credit line			—				—				10,000
Proceeds from exercise of stock options			244				—				—
Deferred financing costs			(377	)			(371	)			(2,669	)
Dividends paid			(8,072	)			(8,129	)			(10,812	)
Repurchase of Company stock - Treasury shares			—				(2,169	)			(2,213	)
Additional investment by noncontrolling interest			—				—				5,791	(c)
Distributions to noncontrolling interests			(1,095	)			(516	)			(975	)
Net cash provided by financing activities			9,749				43,638				40,691
Net increase (decrease) in cash and cash equivalents			(2,594	)			2,946				2,753
Cash and cash equivalents, beginning of period			13,500				10,554				7,801
Cash and cash equivalents, end of period		$	10,906			$	13,500			$	10,554
Supplemental disclosure of cash flow data:
Interest paid, net of amounts capitalized		$	11,100			$	11,010			$	10,206
Supplemental schedule of non cash activities:
Investing activities:
Transfer from construction in progress to real estate for completion of Rotunda		$	124,423			$	—			$	—
Proceeds from sale of discontinued operation, held in escrow applied to 1031
replacement property		$	—			$	—			$	9,770
Accrued capital expenditures, construction costs, pre-development costs and
interest		$	3,130			$	8,054			$	8,091
Financing activities:
Dividends declared but not paid		$	2,022			$	2,018			$	2,046
Dividends paid in share units		$	76			$	29			$	—

 

(a) Includes $3,766 that was incurred and accrued in fiscal 2013; paid in fiscal 2014.

(b) Net of $9,770 of proceeds from the sale of South Brunswick property (see Note 2).

(c) Represents $5,791 investment in Grande Rotunda, LLC, of which $2,128 was loaned to noncontrolling interest by FREIT.

(d) Includes $5,523 that was incurred and accrued in fiscal 2014; paid in fiscal 2015.

(e) Includes $1.1M straight line rent adjustment for bankrupt tenant.

(f) Includes $4,213 that was incurred and accrued in fiscal 2015; paid in fiscal 2016.

 

See Notes to Consolidated Financial Statements.      

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 - Organization and significant accounting policies:

Organization:

First Real Estate Investment Trust of New Jersey ("FREIT" or the “Company”) was organized on November 1, 1961 as a New Jersey Business Trust. FREIT is engaged in owning residential and commercial income producing properties located primarily in New Jersey, Maryland and New York.

FREIT has elected to be taxed as a Real Estate Investment Trust under the provisions of Sections 856-860 of the Internal Revenue Code, as amended. Accordingly, FREIT does not pay federal income tax on income whenever income distributed to shareholders is equal to at least 90% of real estate investment trust taxable income. Further, FREIT pays no federal income tax on capital gains distributed to shareholders.

FREIT is subject to federal income tax on undistributed taxable income and capital gains. FREIT may make an annual election under Section 858 of the Internal Revenue Code to apply part of the regular dividends paid in each respective subsequent year as a distribution for the immediately preceding year.

Recently issued accounting standards:

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, which amended the definition of a discontinued operation. The new guidance required discontinued operation treatment for disposals of a component or group of components that represent a strategic shift that has, or will have, a major impact on an entity’s operations or financial results. The ASU was effective prospectively for all disposals that occurred in annual periods (and interim periods therein) beginning on or after December 15, 2014, with early adoption permitted. The Company adopted this guidance effective with its first quarter ended January 31, 2015.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2016. In August 2015, the FASB extended the effective date by one year to years beginning on and after December 15, 2017. The standard may be adopted as early as the original effective date but early adoption prior to that date is not permitted. ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. FREIT is currently assessing the impact this new accounting guidance will have on its consolidated financial statements and footnote disclosures.

In February 2015, the FASB issued ASU No. 2015-02, "Amendments to the Consolidation Analysis", which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 with early adoption permitted. ASU 2015-02 amends the assessment of whether a limited partnership or an LLC is a variable interest entity; the effect that fees paid to a decision maker have on the consolidation analysis; how variable interests held by a reporting entity's related parties or de facto agents affect its consolidation conclusion; and for entities other than limited partnerships or LLCs, clarifies how to determine whether the equity holders as a group have power over an entity. The Company has early adopted this guidance effective with its first quarter ended January 31, 2016. The adoption of this guidance did not have any impact on FREIT’s financial statements or footnote disclosures.

In April 2015, the FASB issued ASU 2015-03, "Interest- Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs", which required that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU was effective for fiscal years beginning after December 15, 2015 and for interim periods within those fiscal years with early adoption permitted. The Company early adopted this guidance on a retrospective basis effective with its fourth quarter ended October 31, 2015. In order to comply with this new standard, unamortized debt issuance costs previously classified on the consolidated balance sheets as a deferred charge within assets was reclassified as a direct deduction from the face amount of mortgages payable within liabilities on the consolidated balance sheets. The adoption of this guidance did not have a material effect on our financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which supersedes the existing guidance for lease accounting, “Leases (Topic 840)”. ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. FREIT is currently assessing the impact this new accounting guidance will have on its consolidated financial statements and footnote disclosures.

 

Principles of consolidation:

The consolidated financial statements include the accounts of FREIT and the following subsidiaries in which FREIT has a controlling financial interest, including two LLCs in which FREIT is the managing member with a 40% ownership interest:

 

Subsidiary		Owning Entity			% Ownership			Year Acquired/Organized
Westwood Hills, LLC			FREIT			40%			1994
S and A Commercial Associates Limited Partnership("S and A")			FREIT			65%			2000
Wayne PSC, LLC			FREIT			40%			2002
Damascus Centre, LLC			FREIT			70%			2003
Pierre Towers, LLC			S and A			100%			2004
Grande Rotunda, LLC			FREIT			60%			2005
WestFREIT, Corp			FREIT			100%			2007
WestFredic, LLC			FREIT			100%			2007
FREIT Regency, LLC			FREIT			100%			2014

 

The consolidated financial statements include 100% of each subsidiary’s assets, liabilities, operations and cash flows, with the interests not owned by FREIT reflected as "noncontrolling interests in subsidiaries”. All significant inter-company accounts and transactions have been eliminated in consolidation.

Use of estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Cash and cash equivalents:

Financial instruments that potentially subject FREIT to concentrations of credit risk consist primarily of cash and cash equivalents. FREIT considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. FREIT maintains its cash and cash equivalents in bank and other accounts, the balances of which, at times, may exceed federally insured limits of $250,000.

Real estate development costs:

It is FREIT’s policy to capitalize pre-development costs, which generally include legal and other 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 a postponement, capitalization of these costs will recommence once construction on the project resumes.

Depreciation:

Real estate and equipment are depreciated on the straight-line method by annual charges to operations calculated to absorb costs of assets over their estimated useful lives.

Impairment of long-lived assets:

Impairment losses on long-lived assets, such as real estate and equipment, are recognized when events or changes in circumstances indicate that the undiscounted cash flows estimated to be generated by such assets are less than their carrying value and, accordingly, all or a portion of such carrying value may not be recoverable. Impairment losses are then measured by comparing the fair value of assets to their carrying amounts. For the fiscal years ended October 31, 2016, 2015 and 2014, there were no impairments of long-lived assets.

Deferred charges:

Deferred charges consist of leasing commissions which are amortized on the straight-line method over the terms of the applicable leases.

Debt issuance costs:

Debt issuance costs are amortized on the straight-line method by annual charges to income over the terms of the mortgages. Amortization of such costs is included in interest expense and approximated $543,000, $419,000 and $359,000 in 2016, 2015 and 2014, respectively. Unamortized debt issuance costs are a direct deduction from mortgages payable on the consolidated balance sheets.

Revenue recognition:

Income from leases is recognized on a straight-line basis regardless of when payment is due. Lease agreements between FREIT and commercial tenants generally provide for additional rentals and reimbursements based on such factors as percentage of tenants' sales in excess of specified volumes, increases in real estate taxes, Consumer Price Indices and common area maintenance charges. These additional rentals are generally included in income when reported to FREIT, when earned, or ratably over the appropriate period.

Interest rate swap contracts:

FREIT utilizes derivative financial instruments to reduce interest rate risk. FREIT does not hold or issue derivative financial instruments for trading purposes. FREIT recognizes all derivatives as either assets or liabilities in the consolidated balance sheets and measures those instruments at fair value. Changes in fair value of those instruments, which qualify as cash flow hedges, are reported in other comprehensive income (see Note 6).

Advertising:

FREIT expenses the cost of advertising and promotions as incurred. Advertising costs charged to operations amounted to approximately $257,000, $162,000 and $133,000 in 2016, 2015 and 2014, respectively.

Stock-based compensation:

FREIT has a stock-based compensation plan that was approved by FREIT’s Board of Trustees (“Board”), and ratified by FREIT’s shareholders. Stock based awards under the plan to employees are accounted for based on their grant-date fair value (see Note 11).

Stock-based awards to nonemployees are accounted for based on the fair value of the equity instruments on the vesting date.

Acquired Over Market and Below Market Value Leases and In-Place Leases:

Capitalized above-market lease values were amortized as a reduction of base rental revenue over the remaining term of the leases, and the capitalized below-market lease values were amortized as an increase to base rental revenue over the remaining terms of the leases, including renewal options. The value ascribed to leases in place was amortized over the weighted average remaining lease terms.

 

Note 2 – Discontinued operations:

On December 20, 2013, FREIT’s South Brunswick property, which consisted of vacant land, was sold for $11 million resulting in a capital gain of approximately $8.7 million net of sales fees and commissions. FREIT structured this sale in a manner that qualifies it as a like-kind exchange of real estate pursuant to Section 1031 of the Internal Revenue Code. The 1031 Exchange transaction resulted in a deferral for income tax purposes of the $8.7 million capital gain. The net proceeds from this sale, which were approximately $9.8 million, were held in escrow until a replacement property was purchased. A replacement property related to this like-kind exchange was acquired on June 18, 2014, and the sale proceeds held in escrow were applied to the purchase price of such property (see Note 3 for further details).

The gain from the sale of the property was classified as discontinued operations in the accompanying statement of income for the fiscal year ended October 31, 2014.

 

Note 3 – Property acquisition:

On June 18, 2014, FREIT completed the acquisition of the Regency Club (“Regency”), a residential apartment complex located in Middletown, New York. The Regency complex consists of 132 units in 11 buildings and a clubhouse. The acquisition cost was $20,625,000 (exclusive of $648,000 of transaction costs charged to expense), which was funded in part with $9.8 million in net proceeds from the sale of the South Brunswick land, and the remaining balance of $11.5 million (inclusive of the $648,000 of transaction costs) was funded utilizing $10 million of FREIT’s credit line with Provident Bank, and FREIT's available cash. On December 29, 2014, FREIT secured long-term financing for this property in the amount of $16.2 million from Provident Bank.

The acquisition price of $20,625,000 has been allocated as follows: $18.5 million to the buildings and $2.1 million to the land.

FREIT identified the Regency as a replacement property for the vacant land located in South Brunswick, New Jersey that FREIT sold on December 20, 2013 (see Note 2). The Regency is part of FREIT’s Residential segment.

 

The following unaudited pro forma information shows the results of operations for the fiscal year ended October 31, 2014 for FREIT and its Subsidiaries as though the Regency had been acquired at the beginning of Fiscal 2014:

 

		Year Ended October 31,
		2014
		(In Thousands of Dollars Except Per Share Amounts)
Revenue		$	44,016
Net expenses			40,033
Income from continuing operations			3,983
Income from discontinued operations			7
Gain on sale of discontinued operation			8,734
Net income			12,724
Net income attributable to noncontrolling interests in subsidiaries			(507	)
Net income attributable to common equity		$	12,217
Earnings per share - basic and diluted:
Continuing operations		$	0.50
Discontinued operations			1.27
Net income attributable to common equity		$	1.77
Weighted average shares outstanding - basic and diluted			6,908

 

The pro forma results reflect the following adjustments: (a) additional depreciation expense based on the purchase price allocated to the buildings and a depreciable life of 40 years, (b) additional interest expense based on the $10 million loan used towards the purchase of the property at acquisition date and (c) exclusion of the $648,000 of non-recurring acquisition expenses in 2014 related to the Regency purchase.

The pro forma results of operations set forth above are not necessarily indicative of the results that would have occurred had the acquisition been made at the beginning of Fiscal 2014, or of future results of operations of FREIT’s combined properties.

 

Note 4 - Real estate:

Real estate consists of the following:

 

		Range of
		Estimated		October 31,
		Useful Lives		2016				2015
				(In Thousands of Dollars)
Land				$	77,744			$	79,384
Unimproved land					405				405
Apartment buildings		7-40 years			190,990				104,040
Commercial buildings/shopping centers		5-40 years			158,413				120,700
Equipment/Furniture		5-15 years			1,765				3,353
					429,317				307,882
Less accumulated depreciation					92,547				88,452
Totals				$	336,770			$	219,430

 

Note 5 – Mortgages, construction loan payable and credit line:

 

		October 31, 2016								October 31, 2015
		Principal				Unamortized Debt Issuance Costs				Principal				Unamortized Debt Issuance Costs
		(In Thousands of Dollars)								(In Thousands of Dollars)
Frederick, MD (A)		$	22,000			$	23			$	22,000			$	62
Rockaway, NJ (B)			17,141				138				17,596				167
Westwood, NJ (C)			20,801				197				21,355				229
Patchogue, NY (D)			5,231				25				5,243				56
Wayne, NJ (E)			18,054				70				18,378				95
River Edge, NJ (F)			10,659				122				10,852				139
Maywood, NJ (G)			8,087				99				8,234				113
Westwood, NJ (H)			21,098				135				21,545				169
Wayne, NJ (I)			25,749				332				25,038				22
Hackensack, NJ (J)			29,901				50				30,567				70
Damascus, MD (K)			20,831				427				18,938				486
Middletown, NY (L)			16,200				269				16,200				301
Total fixed rate mortgage loans			215,752				1,887				215,946				1,909
Baltimore, MD (M)			113,967				634				91,953				1,220
Line of credit - Provident Bank (N)			—				—				—				—
Total		$	329,719			$	2,521			$	307,899			$	3,129

 

	(A)	Payable in monthly installments of interest only computed over the actual number of days in the elapsed monthly interest period at the rate of 5.55% through May 2017 at which time the outstanding balance is due. The mortgage is secured by a retail building in Frederick, Maryland having a net book value of approximately $15,671,000 as of October 31, 2016.
	(B)	Payable in monthly installments of $115,850 including interest at 5.37% through February 2022 at which time the outstanding balance is due. The mortgage is secured by a residential building in Rockaway, New Jersey having a net book value of approximately $16,356,000 as of October 31, 2016.
	(C)	On January 14, 2013, FREIT refinanced its Westwood Plaza mortgage loan in the amount of $8.0 million, with a new mortgage loan in the amount of $22,750,000, which is payable in monthly installments of $129,702 including interest at 4.75% through January 2023 at which time the outstanding balance is due. The new mortgage is secured by a retail building in Westwood, New Jersey having a net book value of approximately $7,900,000 as of October 31, 2016.
	(D)	The loan, modified effective January 31, 2013, is payable in monthly installments of $31,046 including interest at 4.5% through March 2018 at which time the outstanding balance is due. Under the terms of the mortgage loan agreement, FREIT can request, during the term of the loan, additional funding that will bring the outstanding principal balance up to 75% of loan-to-value (percentage of mortgage loan to total appraised value of property securing the loan). Effective January 1, 2016, the monthly debt service payment has been reduced to interest only.  This arrangement will remain in effect until the earlier of the property being re-leased, sold, the full repayment of the mortgage note, or March 1, 2018.  (See Note 16 for additional information.)  The mortgage is secured by a retail building in Patchogue, New York having a net book value of approximately $6,717,000 as of October 31, 2016.
	(E)	Payable in monthly installments of $121,100 including interest at 6.09% through September 1, 2019 at which time the outstanding balance is due. The mortgage is secured by an apartment building in Wayne, New Jersey having a net book value of approximately $1,681,000 as of October 31, 2016.
	(F)	On November 19, 2013, FREIT refinanced mortgage loans scheduled to mature on December 1, 2013 with a new mortgage loan in the amount of $11,200,000 payable in monthly installments of $57,456 including interest at 4.54% through December 1, 2023 at which time the outstanding balance is due. The mortgage is secured by an apartment building in River Edge, New Jersey having a net book value of approximately $866,000 as of October 31, 2016.
	(G)	On November 19, 2013, FREIT refinanced mortgage loans scheduled to mature on December 1, 2013 with a new mortgage loan in the amount of $8,500,000 payable in monthly installments of $43,605 including interest at 4.54% through December 1, 2023 at which time the outstanding balance is due. The mortgage is secured by an apartment building in Maywood, New Jersey having a net book value of approximately $735,000 as of October 31, 2016.
	(H)	Payable in monthly installments of $120,752 including interest of 4.62% through November 1, 2020 at which time the outstanding balance is due. The mortgage is secured by an apartment building in Westwood, New Jersey having a net book value of approximately $9,807,000 as of October 31, 2016.
	(I)	On September 29, 2016, Wayne PSC, LLC refinanced its $24,200,000 mortgage loan held with Metropolitan Life Insurance Company, with a new mortgage loan from People’s United Bank in the amount of $25,800,000.  The new loan bears a floating interest rate equal to 220 basis points over the one-month BBA LIBOR with a maturity date of October 1, 2026.  In order to minimize interest rate volatility during the term of the loan, Wayne PSC, LLC entered into an interest

 

		rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 3.625% over the term of the loan.  This refinancing resulted in: (i) a reduction in interest rate from 6.04% to 3.625% and (ii) net refinancing proceeds of approximately $1 million that were distributed to the partners in Wayne PSC, LLC with FREIT receiving $0.4 million based on it 40% membership interest in Wayne PSC, LLC. (See Note 6 for additional information relating to the interest rate swap.)  The mortgage is secured by a shopping center in Wayne, New Jersey having a net book value of approximately $25,829,000 as of October 31, 2016 including approximately $0.1 million classified as construction in progress.
	(J)	Payable in monthly installments of $191,197 including interest of 5.38% until May 2019 at which time the unpaid balance is due. The mortgage is secured by an apartment building in Hackensack, New Jersey having a net book value of approximately $40,042,000 as of October 31, 2016.
	(K)	On December 26, 2012, Damascus Centre, LLC refinanced its construction loan with long-term financing provided by People’s United Bank and the first tranche of the new loan was taken-down in the amount of $20 million.  Based on leasing and net operating income at the shopping center, People’s United Bank agreed to a take-down of the second tranche of this loan on April 22, 2016 in the amount of $2,320,000, of which approximately $470,000 was readily available and the remaining $1,850,000 (included in prepaid expenses and other assets in the accompanying  consolidated balance sheet) is held in escrow and available to Damascus Centre, LLC once certain tenants open and begin paying rent.  The loan has a maturity date of January 3, 2023 and bears a floating interest rate equal to 210 points over the BBA LIBOR. In order to minimize interest rate volatility during the term of this loan, Damascus Centre, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate on each tranche of this loan, resulting in a fixed rate of 3.81% over the term of the first tranche of this loan and a fixed rate of 3.53% over the term of the second tranche of this loan. (See Note 6 for additional information relating to the interest rate swaps.)  The shopping center securing the loan has a net book value of approximately $28,143,000 as of October 31, 2016.
	(L)	On December 29, 2014, FREIT Regency, LLC closed on a $16.2 million mortgage loan with Provident Bank. The loan bears a floating interest rate equal to 125 basis points over the one-month BBA LIBOR and the loan will mature on December 15, 2024. Interest-only payments are required each month through December 15, 2017. Thereafter, principal payments of $27,807 (plus accrued interest) are required each month through maturity. In order to minimize interest rate volatility during the term of the loan, FREIT Regency, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 3.75% over the term of the loan.  (See Note 6 for additional information relating to the interest rate swap.)  The mortgage is secured by an apartment complex in Middletown, New York having a net book value of $20,102,000 as of October 31, 2016.
	(M)	The original Rotunda acquisition loan for $22.5 million, which was subsequently reduced to $19.5 million on February 1, 2010, was acquired by FREIT on May 28, 2013.  FREIT subsequently sold this loan to Wells Fargo Bank.  On December 9, 2013, Grande Rotunda, LLC closed with Wells Fargo Bank on a construction loan of up to $120 million to be used to redevelop and expand the Rotunda property in Baltimore, Maryland with a term of four (4) years, with one 12-month extension, at a rate of 225 basis points over the monthly LIBOR.  The loan is secured by the Rotunda property, which has a net book value of approximately $155,552,000 as of October 31, 2016.  As of October 31, 2016, approximately $114 million of this loan was drawn down (including approximately $21.1 million during Fiscal 2016), of which $19 million was used to pay off the loan from FREIT, and $95 million was used toward the construction at the Rotunda. On November 23, 2016, Wells Fargo Bank modified the following terms and conditions of this loan:  (i) the total amount that may be drawn on this loan will be decreased from $120 million to $116.1 million, allowing for an additional draw of $2.1 million over the existing balance of approximately $114 million to be used for retail tenant improvements and leasing commissions; (ii) leasing benchmarks will no longer be required to be met including the waiver of the leasing benchmarks FREIT was not in compliance with as of June 30, 2016; (iii) Grande Rotunda, LLC will provide an interest reserve to Wells Fargo Bank in the amount of $2 million for the purpose of funding interest payments, and will be obliged to replenish the account balance to $1 million if it should fall below $500,000; (iv) the maturity date of the loan was changed from December 31, 2017 to October 31, 2017 with no option to extend; (v) the interest rate on amount outstanding on the loan was increased by 25 basis points to 250 basis points over the monthly LIBOR.
	(N)	Credit Line: FREIT has a line of credit provided by the Provident Bank in the amount of $12.8 million. The line of credit was for a two year term ending on November 1, 2016, which was extended by the bank to February 1, 2017 while the bank completes its due diligence. FREIT expects the credit line will be extended for an additional period of 24 months. Draws against the credit line can be used for general corporate purposes, for property acquisitions, construction activities, and 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. Interest rates on draws will be set at the time of each draw for 30, 60, or 90-day periods, based on FREIT’s choice of the prime rate or at 175 basis points over the 30, 60, or 90-day LIBOR rates at the time of the draws. The interest rate on the line of credit has a floor of 3.25%. The Palisades Manor and the Grandview Apartment properties had been part of the collateral for the line of credit prior to FREIT’s sales of these properties in April 2013 and August 2013, respectively. Provident Bank released these properties as collateral for the credit line in connection with these dispositions, and as a result, the credit line was reduced from $18 million to approximately $13 million as of July 2013. The $5 million that was outstanding as of October 31, 2014, was repaid to the bank in January 2015 from the proceeds of a $16.2 million mortgage loan from the Provident Bank.  As of October 31, 2016 and 2015, approximately $12.8 million was available under the line of credit and no amount was outstanding.

Certain of the Company’s mortgage loans and the Credit Line contain financial covenants. The Company was in compliance with all of its financial covenants as of October 31, 2016.

Fair Value of Long-Term Debt:

The following table shows the estimated fair value and carrying value of FREIT’s long-term debt at October 31, 2016 and 2015:

		October 31,				October 31,
($ in Millions)		2016				2015
Fair Value		$	331.3			$	313.5
Carrying Value		$	327.2			$	304.8

 

 

Fair values are estimated based on market interest rates at the end of each fiscal year and on 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).

Principal amounts (in thousands of dollars) due under the above obligations in each of the five years subsequent to October 31, 2016 are as follows: 

Year Ending  October 31,		Amount
2017		$	139,687	(a)
2018		$	9,751
2019		$	49,495
2020		$	3,750
2021		$	22,472

(a)

Includes approximately $114 million relating to the Rotunda construction loan due October 2017. (See Note 5(M).)

 

Note 6 - Interest rate swap contracts: 

On September 29, 2016, Wayne PSC, LLC refinanced its $24.2 million mortgage loan held with Metropolitan Life Insurance Company, with a new mortgage loan from People’s United Bank in the amount of $25.8 million. The new loan bears a floating interest rate equal to 220 basis points over the one-month BBA LIBOR with a maturity date of October 1, 2026. At October 31, 2016, the total amount outstanding on this loan was approximately $25.7 million. In order to minimize interest rate volatility during the term of the loan, Wayne PSC, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 3.625% over the term of the loan. At October 31, 2016, the derivative financial instrument has a notional amount of approximately $25.8 million and a current maturity date of October 2026.

On December 26, 2012, Damascus Centre, LLC refinanced its construction loan with long-term financing provided by People’s United Bank and the first tranche of the new loan was taken-down in the amount of $20 million. Based on leasing and net operating income at the shopping center, People’s United Bank agreed to a take-down of the second tranche of this loan on April 22, 2016 in the amount of $2,320,000. The total amount outstanding for both tranches of this loan held with People’s United Bank as of October 31, 2016 was approximately $20.8 million. The loan has a maturity date of January 3, 2023 and bears a floating interest rate equal to 210 points over the BBA LIBOR. In order to minimize interest rate volatility during the term of this loan, Damascus Centre, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate on each tranche of this loan, resulting in a fixed rate of 3.81% over the term of the first tranche of this loan and a fixed rate of 3.53% over the term of the second tranche of this loan. At October 31, 2016, the derivative financial instrument has a notional amount of approximately $20.9 million and a current maturity date of January 2023.

On December 29, 2014, FREIT Regency, LLC closed on a $16.2 million mortgage loan with Provident Bank. The loan bears a floating interest rate equal to 125 basis points over the one-month BBA LIBOR and the loan will mature on December 15, 2024. At October 31, 2016, the total amount outstanding on this loan was $16.2 million. In order to minimize interest rate volatility during the term of the loan, FREIT Regency, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 3.75% over the term of the loan. At October 31, 2016, the derivative financial instrument has a notional amount of approximately $16.2 million and a current maturity date of December 2024.

In accordance with ASC 815, “Accounting for Derivative Instruments and Hedging Activities”, FREIT is accounting for the Damascus Centre, LLC, FREIT Regency, LLC, and Wayne PSC, LLC interest rate swaps as cash flow hedges and marks to market its fixed pay interest rate swaps, taking into account present interest rates compared to the contracted fixed rate over the life of the contract. For the year ended October 31, 2016, FREIT recorded an

unrealized loss of $725,000 in comprehensive income representing the change in the fair value of the swaps during such period and a corresponding liability of $521,000 for the Damascus Center swaps, $1,361,000 for the Regency swap and an asset of $91,000 for the Wayne PSC swap as of October 31, 2016. For the year ended October 31, 2015, FREIT recorded an unrealized loss of $1,581,000 in comprehensive income representing the change in the fair value of the swaps during such period and a corresponding liability of $945,000 for the Regency swap and $121,000 for the Damascus Center swap as of October 31, 2015. For the year ended October 31, 2014, FREIT recorded an unrealized loss of $465,000 for the Damascus Center swap in comprehensive income representing the change in fair value of the swap during such period and a corresponding asset of $515,000 as of October 31, 2014. The fair values are based on observable inputs (level 2 in the fair value hierarchy as provided by authoritative guidance).

Note 7 - Capitalized interest

Interest costs associated with amounts expended at the Grande Rotunda development were capitalized and included in the cost of the project. Interest capitalized during the year ended October 31, 2016, 2015 and 2014, amounted to approximately $2,611,000, $2,447,000 and $1,110,000, respectively. Capitalization of interest ceased upon substantial completion of the project which occurred as of the end of the third quarter of Fiscal 2016.

 

Note 8 - Commitments and contingencies:

Leases:

Commercial tenants:

FREIT leases commercial space having a net book value of approximately $155.5 million at October 31, 2016 to tenants for periods of up to twenty-five years. Most of the leases contain clauses for reimbursement of real estate taxes, maintenance, insurance and certain other operating expenses of the properties.

Minimum rental income (in thousands of dollars) to be received from non-cancelable operating leases in years subsequent to October 31, 2016 is as follows:

 

Year Ending October 31,		Amount
2017		$	17,228
2018			15,713
2019			14,087
2020			12,795
2021			10,720
Thereafter			54,936
Total		$	125,479

The above amounts assume that all leases which expire are not renewed and, accordingly, neither minimal rentals nor rentals from replacement tenants are included.

Minimum future rentals do not include contingent rentals, which may be received under certain leases on the basis of percentage of reported tenants' sales volume or increases in Consumer Price Indices. Rental income that is contingent on future events is not included in income until the contingency is resolved. Contingent rentals included in income for each of the three years for the period ended October 31, 2016 were not material.

Residential tenants:

Lease terms for residential tenants are usually one to two years.

Environmental concerns:

The Westwood Plaza Shopping Center property is in a Flood Hazard Zone. FREIT maintains flood insurance in the amount of $500,000 for the subject property, which is the maximum available under the Flood Program for the property. Any reconstruction of that portion of the property situated in the flood hazard zone is subject to regulations promulgated by the New Jersey Department of Environmental Protection ("NJDEP"), which could require extraordinary construction methods.

Prior to its purchase in November 2002 by Wayne PSC, LLC, a 40% owned affiliate of FREIT (“Wayne PSC”), a Phase I and Phase II Environmental Assessment of the Preakness shopping center revealed soil and ground water contamination with Percloroethylene (Dry Cleaning Fluid) caused by the mishandling of this chemical by a former dry cleaner tenant. The seller of the center to Wayne PSC has paid for and completed all required remediation work in accordance with the NJDEP standards, and this matter is now closed. In prior years, FREIT conducted environmental audits for all of its properties except for its undeveloped land and retail properties in Franklin Lakes (Franklin Crossing) and Glen Rock, New Jersey. Except as noted above, the environmental reports secured by FREIT have not revealed any environmental conditions on its properties, which require remediation pursuant to any applicable federal or state law or regulation.

FREIT has determined that several of its properties contain lead based paint (“LBP”). FREIT believes that it complies with all federal, state and local requirements as they pertain to LBP.

FREIT does not believe that the environmental conditions described above will have a material adverse effect upon the capital expenditures, revenues, earnings, financial condition or competitive position of FREIT.

Letters of credit:

In connection with the renovation and expansion at the Rotunda, performance letters of credit totaling approximately $1 million were issued to guarantee the completion of off-site improvements.

Note 9 - Management agreement, fees and transactions with related party:

On April 10, 2002, FREIT and Hekemian & Co., Inc. (“Hekemian”) executed a Management Agreement whereby Hekemian would continue as Managing Agent for FREIT. The term of the Management Agreement was renewed on November 1, 2015 for a two-year term which will expire on October 31, 2017. The Management Agreement automatically renews for successive periods of two years unless either party gives not less than six (6) months prior notice to the other of non-renewal.

Hekemian currently manages all the properties owned by FREIT and its affiliates, except for the office building at The Rotunda located in Baltimore, Maryland, which is managed by an independent third party management company. However, FREIT may retain other managing agents to manage properties acquired after April 10, 2002 and to perform various other duties such as sales, acquisitions, and development with respect to any or all properties. Hekemian does not serve as the exclusive property acquisition advisor to FREIT and is not required to offer potential acquisition properties exclusively to FREIT before acquiring those properties for its own account. The Management Agreement includes a detailed schedule of fees for those services, which Hekemian may be called upon to perform. The Management Agreement provides for a termination fee in the event of a termination or non-renewal of the Management Agreement under certain circumstances.

The Management Agreement with Hekemian, effective November 1, 2001, requires the payment of management fees equal to 4% to 5% of rents collected. Such fees, charged to operations, were approximately $1,930,000, $1,899,000, and $1,866,000 in Fiscal 2016, 2015 and 2014, respectively. In addition, the Management Agreement provides for the payment to Hekemian of leasing commissions, as well as the reimbursement of operating expenses incurred on behalf of FREIT. Such commissions and reimbursements amounted to approximately $577,000, $465,000 and $673,000 in Fiscal 2016, 2015 and 2014, respectively. Fees for Fiscal 2014 include $396,000 in leasing commissions paid to Hekemian relative to the Safeway lease at the Damascus shopping center. Total Hekemian management fees outstanding at October 31, 2016 and 2015 were $181,000 and $163,000, respectively, and included in accounts payable on the accompanying consolidated balance sheets. FREIT also uses the resources of the Hekemian insurance department to secure various insurance coverages for its properties and subsidiaries. Hekemian is paid a commission for these services. Such commissions were charged to operations and amounted to approximately $164,000, $166,000 and $133,000 in Fiscal 2016, 2015 and 2014, respectively.

Grande Rotunda, LLC owns and operates the Rotunda property. FREIT owns a 60% equity interest in Grande Rotunda, LLC and Rotunda 100, LLC (“Rotunda 100”) owns a 40% equity interest Grande Rotunda, LLC.

Damascus Centre, LLC owns and operates the Damascus Center. During Fiscal 2005, the Board authorized an investor group, Damascus 100, LLC (“Damascus 100”), to acquire a 30% equity interest in Damascus Centre, LLC. The sale price, based on the fair market value of the shopping center, reduced FREIT’s equity interest to 70%. The sale was completed on October 31, 2006, at a sales price of $3,224,000, of which FREIT financed approximately $1,451,000. The sale price was equivalent to the book value of the interest sold.

With regard to the funding of the Rotunda redevelopment project, Wells Fargo Bank required that Grande Rotunda, LLC contribute not less than $14,460,000 towards the construction before any construction loan proceeds could be disbursed. To secure these funds, Grande Rotunda, LLC made a capital call on its members – FREIT and Rotunda 100. FREIT’s share (60%) amounts to approximately $8.7 million, and the Rotunda 100 members’ share (40%) amounts to approximately $5.8 million. FREIT, pursuant to previous agreements, made secured loans to the Rotunda 100 members of approximately $2.1 million towards their share of the $5.8 million capital call. The balance of Rotunda 100’s capital call of approximately $3.7 million was initially made by FREIT until it was repaid by Rotunda 100 in August 2014. As of October 31, 2016, FREIT and Rotunda 100 have made their required capital call contributions of $8.7 million and $5.8 million, respectively, towards the Rotunda construction financing. Both FREIT and the Rotunda 100 members are treating their required capital call contributions as additional investments in Grande Rotunda, LLC.

The equity owners of Rotunda 100 and Damascus 100 are principally employees of Hekemian. To incentivize the employees of Hekemian, FREIT advanced, only to employees of Hekemian, up to 50% of the amount of the equity contributions that the Hekemian employees were required to invest in Rotunda 100 and Damascus 100. These advances were in the form of secured loans that bear interest that will float at 225 basis points over the ninety (90) day LIBOR, as adjusted each November 1, February 1, May 1 and August 1. These loans were secured by the Hekemian employees’ interests in Rotunda 100 and Damascus 100, and were full recourse loans. Interest only payments are required to be made when billed.

No principal payments are required during the term of the notes, except that the borrowers are required to pay to FREIT all refinancing proceeds and other cash flow they receive from their interests in Damascus Centre, LLC and Grande Rotunda, LLC. These payments shall be applied first to accrued and unpaid interest and then any outstanding principal. The notes had maturity dates at the earlier of (a) ten (10) years after issue (Grande Rotunda, LLC– 6/19/2015, Damascus Centre, LLC – 9/30/2016), or, (b) at the election of FREIT, ninety (90) days after the borrower terminates employment with Hekemian, at which time all outstanding unpaid principal is due. On May 8, 2008, the Board approved amendments to the existing loan agreements with the Hekemian employees, relative to their interests in Rotunda 100, to increase the aggregate amount that FREIT may advance to such employees from $2 million to $4 million. On June 4, 2015, the Board approved an extension of the maturity date of the secured loans to occur the earlier of (a) June 19, 2018 or (b) five days after the closing of a permanent mortgage loan secured by the Rotunda property.

The aggregate outstanding principal balance of the notes at October 31, 2016 and 2015 was $5,451,000. The accrued but unpaid interest related to these notes for Fiscal 2016 and Fiscal 2015 amounted to approximately $886,000 and $732,000, respectively, and is included in accounts receivable on the accompanying consolidated balance sheets.

From time to time, FREIT engages Hekemian to provide certain additional services, such as consulting services related to development, property sales and financing activities of FREIT. Separate fee arrangements are negotiated between Hekemian and FREIT with respect to such additional services. In Fiscal 2007, FREIT’s Board of Trustees approved and FREIT executed a development fee agreement for the Rotunda redevelopment project for the development services to be provided by Hekemian Development Resources, LLC (“Resources”), a wholly-owned subsidiary of Hekemian. The development fee agreement, as amended, for the Rotunda provides for Resources to receive a fee equal to 6.375% of the development costs as defined, less the amount of $3 million previously paid to Hekemian for the Rotunda project. In addition, the Board approved the payment of a fee to Resources in the amount of $1.4 million in connection with the revision to the scope of the Rotunda development project. The fee will be paid to Resources upon the following terms: (i) $500,000 of the $1.4 million will be paid on a monthly basis during the design phase (the $500,000 was paid in Fiscal 2013); and (ii) $900,000 of the $1.4 million will be paid upon the issuance of a certificate of occupancy for the multi-family portion of the project (the $900,000 is included in accounts payable on consolidated balance sheets at October 31, 2016 and 2015). Such fees incurred to Hekemian and Resources during Fiscal 2016, 2015 and 2014 were $443,000, $1,546,000 and $1,998,000, respectively. Fees incurred in Fiscal 2016 and Fiscal 2015 relate to the Rotunda development project. Included within the $2.0 million in fees for Fiscal 2014 are: (a) development fees of approximately $1 million paid to Resources, relating to the Rotunda development project, and (b) commissions of $880,000 relating to the sale of the South Brunswick land and the subsequent acquisition of the Regency apartment complex. All such fees, except for those related to sale of property and acquisition of the Regency apartment complex, were capitalized.

Robert S. Hekemian, Chairman of the Board, Chief Executive Officer and a Trustee of FREIT, is the Chairman of the Board and Chief Executive Officer of Hekemian. Robert S. Hekemian, Jr., a Trustee of FREIT, is the President of Hekemian. Trustee fee expense (including interest) incurred by FREIT for Fiscal 2016, 2015 and 2014 was approximately $532,000, $538,000 and $642,000, respectively, for Robert S. Hekemian, and $65,000, $65,000 and $46,000, respectively, for Robert S. Hekemian, Jr.

 

Note 10 - Income taxes:

FREIT distributed 100% of its ordinary taxable income for each of the fiscal years ended October 31, 2016, 2015 and 2014 to shareholders as dividends. FREIT distributed 100% of the capital gain in Fiscal 2016 from the sale of the property in Rochelle Park, New Jersey (See Note 17) to its shareholders as dividends. Accordingly, no provision for federal or state income taxes related to such taxable income was recorded in FREIT’s financial statements. Of the $1.20 per share dividend paid to shareholders for Fiscal 2016 approximately 51% was treated as ordinary income, 32% was treated as capital gain (resulting from a lower tax basis than financial statement basis on the sale of the Rochelle Park, New Jersey property) and 17% was treated as return of capital to shareholders. As described in Note 2, FREIT completed a like-kind exchange with respect to the sale of the South Brunswick, New Jersey property, which was sold on December 20, 2013 at a gain of approximately $8.7 million. Accordingly, no provision for federal or state income taxes related to such gain was recorded in FREIT’s financial statements. The tax basis of Regency, which was the replacement property in the like-kind exchange, is approximately $8 million lower than the acquisition cost of approximately $20.6 million recorded for financial reporting purposes.

As of October 31, 2016, FREIT had no material uncertain income tax positions. The tax years subsequent to and including the fiscal year ended October 31, 2013 remain open to examination by the major taxing jurisdictions to which FREIT is subject.

 

Note 11- Equity incentive plan:

On September 10, 1998, the Board approved FREIT's Equity Incentive Plan (the "Plan") which was ratified by FREIT's shareholders on April 7, 1999, whereby up to 920,000 of FREIT's shares of beneficial interest (adjusted for stock splits) may be granted to key personnel in the form of stock options, restricted share awards and other share-

based awards. In connection therewith, the Board approved an increase of 920,000 shares in FREIT's number of authorized shares of beneficial interest. Key personnel eligible for these awards include trustees, executive officers and other persons or entities including, without limitation, employees, consultants and employees of consultants, who are in a position to make significant contributions to the success of FREIT. Under the Plan, the exercise price of all options will be the fair market value of the shares on the date of grant. The consideration to be paid for restricted share and other share-based awards shall be determined by the Board, with the amount not to exceed the fair market value of the shares on the date of grant. The maximum term of any award granted may not exceed ten years. The Board will determine the actual terms of each award.

On April 4, 2007, FREIT shareholders approved amendments to the Plan as follows: (a) reserving an additional 300,000 shares for issuance under the Plan; and (b) extending the term of the Plan until September 10, 2018. As of October 31, 2016, 222,920 shares are available for issuance under the Plan.

On September 4, 2014, the Board approved the grant of a total of 246,000 non-qualified share options under the Plan to certain FREIT executive officers, the members of the Board and certain employees of Hekemian & Co., Inc., FREIT’s managing agent. The options have an exercise price of $18.45 per share, will vest in equal annual installments over a 5-year period, and will expire 10 years from the date of grant, which will be September 3, 2024.

The following table summarizes stock option activity for Fiscal 2016:

 

		Year Ended October 31,
		2016
		No. of Options				Exercise
		Outstanding				Price
Options outstanding beginning of period			243,900			$	18.45
Options exercised during period			(13,200	)		$	18.45
Options forfeited/cancelled during period			(820	)		$	18.45
Options outstanding end of period			229,880			$	18.45
Options vested and expected to vest			225,420
Options exercisable at end of period			84,080

 

The estimated fair value of options granted during Fiscal 2014 was $1.91 per option. Such value was estimated on the grant date using a binomial lattice option pricing model using the following assumptions:

 

·

Expected volatility – 30.50%

·

Risk-free interest rate – 2.50%

·

Imputed option life – 6.81 years

·

Expected dividend yield – 6.60%

 

The expected volatility over the options’ expected life was based on the historical volatility of the weekly closing price of the Company’s stock over a five (5) year period. The risk-free interest rate was based on the annual yield on the grant date of a zero-coupon U.S. Treasury Bond the maturity of which equals the option’s expected life. The imputed option life was based on the simplified expected term calculation permitted by the SEC, which defines the expected life as the average of the contractual term of the options and the weighted-average vesting period for all option tranches. The expected dividend yield was based on the Company’s historical dividend yield, exclusive of capital gain dividends.

For Fiscal 2016, 2015 and 2014, compensation expense related to stock options granted amounted to $94,000, $94,000 and $16,000, respectively. At October 31, 2016, there was approximately $266,000 of unrecognized compensation cost relating to outstanding non-vested stock options to be recognized over the remaining vesting period.

 

The aggregate intrinsic value of options vested and expected to vest and options exercisable at October 31, 2016 was $473,382 and $176,568, respectively.

 

Note 12- Deferred fee plan:

During Fiscal 2001, the Board adopted a deferred fee plan for its officers and trustees, which was amended and restated in Fiscal 2009 to make the deferred fee plan compliant with Section 409A of the Internal Revenue Code and the regulations promulgated thereunder (the "Deferred Fee Plan"). Pursuant to the Deferred Fee Plan, any officer or trustee may elect to defer receipt of any fees that would be due them. These fees include annual retainer and meeting attendance fees as determined by the full Board of Trustees. FREIT has agreed to pay any participant (the "Participant") in the Deferred Fee Plan interest on any deferred fee at 9% per annum, compounded quarterly. Any such deferred fee is to be paid to the Participants at the later of: (i) the retirement age specified in the deferral election; (ii) actual retirement; or (iii) upon cessation of a Participant's duties as an officer or trustee.

On September 4, 2014, the Board approved amendments, effective November 1, 2014, to the FREIT Deferred Fee Plan for its Executive Officers and Trustees, one of which provides for the issuance of share units payable in FREIT shares in respect of (i) deferred amounts of all Trustee fees on a prospective basis; (ii) interest on Trustee fees deferred prior to November 1, 2014 (payable at a floating rate, adjusted quarterly, based on the average 10-year Treasury Bond interest rate plus 150 basis points); and (iii) dividends payable in respect of share units allocated to participants in the Deferred Fee Plan as a result of deferrals described above. The number of share units credited to a participant’s account will be determined by the closing price of FREIT shares on the date as set forth in the Deferred Fee Plan. All fees payable to Trustees for the year ended October 31, 2016 were deferred under the Deferred Fee Plan except for the fees payable to two Trustees, who elected to receive such fees in cash. All fees payable to Trustees for the year ended October 31, 2015 were deferred under the Deferred Fee Plan. As a result of the amendment to the Deferred Fee Plan described above, for the year ended October 31, 2016 and 2015, the aggregate amounts of deferred Trustee fees together with related interest and dividends were approximately $759,100 and $781,200, respectively, which have been paid through the issuance of 38,194 and 39,350, vested FREIT share units, respectively, based on the closing price of FREIT shares on the dates as set forth in the Deferred Fee Plan.

For the year ended October 31, 2016 and 2015, FREIT has charged as expense approximately $683,100 and $752,200 of the aggregate amounts of deferred Trustee fees and related interest and dividends for these periods, respectively, representing Trustee fees and interest to expense and the balance of approximately $76,000 and $29,000, respectively, representing dividends payable in respect of share units allocated to Plan participants, has been charged to equity.

The Deferred Fee Plan, as amended, provides that cumulative fees together with accrued interest deferred as of November 1, 2014 will be paid in a lump sum or in annual installments over a period not to exceed 10 years, at the election of the Participant. As of October 31, 2016 and 2015, approximately $5,224,000 of fees have been deferred together with accrued interest of approximately $3,854,000 for each fiscal year ended.

 

Note 13- Dividends and earnings per share:

FREIT declared dividends of approximately $8,152,000 ($1.20 per share), $8,130,000 ($1.20 per share) and $8,276,000 ($1.20 per share) to shareholders of record during Fiscal 2016, 2015 and 2014.

Basic earnings per share is calculated by dividing net income attributable to common equity (numerator) by the weighted average number of shares and vested share units (See Note 12) 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 attributed to future services, are used to repurchase FREIT’s stock at the average market price during the period, thereby reducing the number of shares to be added in computing diluted earnings per share.

For Fiscal 2016, the outstanding stock options increased the average dilutive shares outstanding by approximately 1,627 shares with no impact on earnings per share. For Fiscal 2015 and 2014, the outstanding stock options were anti-dilutive with no impact on diluted earnings per share.

 

Note 14- Segment information:

ASC 280-10, "Disclosures about Segments of an Enterprise and Related Information", established standards for reporting financial information about operating segments in interim and annual financial reports and provides for a "management approach" in identifying the reportable segments.

FREIT has determined that it has two reportable segments: commercial properties and residential properties. These reportable segments offer different types of space, have different types of tenants, and are managed separately because each requires different operating strategies and management expertise.

During the fiscal year ended October 31, 2016, the commercial segment is comprised of nine (9) properties after giving effect to the sale of a property on June 17, 2016 (See Note 17). The commercial segment is comprised of ten (10) properties during the fiscal years ended October 31, 2015 and 2014. The residential segment is comprised of eight (8) properties during the fiscal year ended October 31, 2016, which includes the 379-unit apartment complex constructed as part of the redevelopment and expansion project at the Rotunda which was completed in the third quarter of Fiscal 2016. The residential segment is comprised of seven (7) properties during the fiscal years ended October 31, 2015 and 2014.

The accounting policies of the segments are the same as those described in Note 1. The chief operating decision-making group of FREIT's commercial segment, residential segment and corporate/other is comprised of FREIT’s Board of Trustees.

FREIT assesses and measures segment operating results based on net operating income ("NOI"). NOI, a standard used by real estate professionals, is based on operating revenue and expenses directly associated with the operations of the real estate properties, but excludes: deferred rents (straight lining), depreciation, financing costs, amortization of acquired lease values and other items. NOI is not a measure of operating results or cash flows from operating activities as measured by accounting principles generally accepted in the United States of America, 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.

Continuing real estate rental revenue, operating expenses, NOI and recurring capital improvements for the reportable segments are summarized below and reconciled to consolidated net income attributable to common equity for each of the years in the three-year period ended October 31, 2016. Asset information is not reported since FREIT does not use this measure to assess performance.

 

		Years Ended October 31,
		2016				2015				2014
		(In Thousands of Dollars)
Real estate rental revenue:
Commercial		$	22,694			$	23,037			$	22,424
Residential			22,952				21,966				20,419
Total real estate rental revenue			45,646				45,003				42,843
Real estate operating expenses:
Commercial			10,661				10,436				9,663
Residential			11,136				10,626				9,757
Total real estate operating expenses			21,797				21,062				19,420
Net operating income:
Commercial			12,033				12,601				12,761
Residential			11,816				11,340				10,662
Total net operating income		$	23,849			$	23,941			$	23,423
Recurring capital improvements - residential		$	(898	)		$	(424	)		$	(549	)
Reconciliation to consolidated net income attributable to common equity:
Segment NOI		$	23,849			$	23,941			$	23,423
Gain on sale of commercial property			314				—				—
Deferred rents - straight lining			608				(219	)			(93	)
Amortization of acquired leases			—				(1	)			(21	)
Investment income			150				150				184
General and administrative expenses			(2,034	)			(2,029	)			(1,396	)
Straight line rent adjustment - bankrupt tenant			—				(1,046	)			—
G-Mart lease termination expenses			—				—				(371	)
Acquisition costs-Regency			—				—				(648	)
Depreciation			(7,852	)			(6,883	)			(6,346	)
Financing costs			(11,936	)			(11,001	)			(11,309	)
Income from continuing operations			3,099				2,912				3,423
Income from discontinued operations			—				—				7
Gain on sale of discontinued operation			—				—				8,734
Net income			3,099				2,912				12,164
Net income attributable to  noncontrolling interests			(94	)			(281	)			(507	)
Net income attributable to common equity		$	3,005			$	2,631			$	11,657

Note 15- Share repurchases:

On December 4, 2013, the Board authorized the repurchase of up to 24,400 FREIT shares. On December 17, 2013, FREIT repurchased 20,400 shares in a privately-negotiated transaction with an unaffiliated party for an aggregate purchase price of $357,000, or $17.50 per share.

On September 4, 2014, the Board authorized the repurchase of 100,572 FREIT shares held by the pension plan of Hekemian & Co., Inc., FREIT’s managing agent, for an aggregate cash purchase of $1,855,553 or $18.45 per share, which was the closing price of FREIT shares on September 3, 2014. The repurchase which occurred in September 2014 was undertaken in connection with the termination of the pension plan. Robert S. Hekemian, Chairman and

Chief Executive Officer of FREIT, and Robert S. Hekemian, Jr., a Trustee of FREIT, and members of their family were participants in the pension plan.

On February 17, 2015, FREIT announced a tender offer to purchase up to 100,000 shares of FREIT’s beneficial interest at a price of $23.00 per share. The number of shares proposed to be purchased in the tender offer represented approximately 1.5% of FREIT’s then-outstanding shares. The tender offer expired on March 20, 2015, and in connection therewith FREIT repurchased 94,302 shares of FREIT’s beneficial interest at $23.00 per share for an aggregate purchase price of $2,168,946, which it funded principally from cash and cash equivalents. FREIT’s Trustees and executive officers did not tender their shares of beneficial interest in FREIT in the tender offer.

 

Note 16- Pathmark Stores, Inc. bankruptcy filing

On July 19, 2015, A&P filed for protection under Chapter 11 of the bankruptcy code as disclosed in the bankruptcy filings. A&P announced its intention to sell its assets and wind up its affairs. FREIT owns a 63,932 square foot store in Patchogue, New York with a carrying value of approximately $6.7 million as at October 31, 2016 that was leased to Pathmark, a subsidiary of A&P, and operated as a Pathmark Super Store. This lease was rejected by A&P as of December 31, 2015.

In accordance with GAAP, FREIT accounted for rental income from the store using the straight line method and accrued rent evenly over the lease term after taking into account scheduled future rent increases, with excess rent accrued over amounts received accounted for as a receivable on the consolidated balance sheets. At October 31, 2015, approximately $1,046,000 remained as a straight line rent receivable. FREIT recorded an expense in the fourth quarter of Fiscal 2015 of $1,046,000 ($0.15 per share basic and diluted) for provision for loss related to the straight line rent receivable for Pathmark. The provision had no impact on cash flow but did have an impact on funds from operations. As a result of the lease having been rejected, FREIT is losing annual rents of approximately $1.4 million until the store is re-leased. FREIT has assessed the real estate for impairment and determined that no impairment exists at October 31, 2016. FREIT is exploring various options for this property.

 

Note 17- Sale of property

On January 11, 2016, FREIT was notified by Lakeland Bank (as successor by merger to Pascack Community Bank) of its election and exercise of the option to purchase the property leased by FREIT to Lakeland Bank located in Rochelle Park, New Jersey. Pursuant to the Lease Agreement, Lakeland Bank had the right to exercise this option at a price equal to the greater of $3 million or the fair market value of the property as determined by mutual agreement between tenant and landlord. FREIT and Lakeland Bank agreed to a purchase price of $3.1 million. On June 17, 2016, FREIT sold this property, having a carrying amount of approximately $2.7 million (including a straight-line rent receivable in the amount of approximately $0.5 million), to Lakeland Bank for $3.1 million resulting in a gain of approximately $0.3 million net of sales fees. This sale results in FREIT’s loss of future annual rents of approximately $241,000, which would have increased periodically through September 2023. As the disposal of this property did not represent a strategic shift that would have a major impact on FREIT’s operations or financial results, the property’s operations were not reflected as discontinued operations in the accompanying financial statements.

 

Note 18- Subsequent event

On November 10, 2016, the Board approved the grant of a total of 38,000 non-qualified share options under the Plan to two members of the Board who were appointed to the Board during Fiscal 2016. The options have an exercise price of $21.00 per share, will vest in equal annual installments over a 5-year period, and will expire 10 years from the date of grant, which will be November 9, 2026.

 

Note 19- Selected quarterly financial data (unaudited):

The following summary represents the results of operations for each quarter for the years ended October 31, 2016 and 2015 (in thousands, except per share amounts):

 

2016:		Quarter Ended																Year Ended
		January 31,				April 30,				July 31,				October 31,				October 31,
Revenue		$	11,424			$	11,064			$	11,590			$	12,176			$	46,254
Expenses			10,381				10,130				10,133	(a)			12,511				43,155
Net income (loss)			1,043				934				1,457				(335	)			3,099
Net (income) loss attributable to noncontrolling interests in subsidiaries			(41	)			(125	)			(211	)			283				(94	)
Net income (loss) attributable to common equity		$	1,002			$	809			$	1,246			$	(52	)		$	3,005
Earnings (loss) per share - basic and diluted		$	0.15			$	0.12			$	0.18	(a)		$	(0.01	)		$	0.44
Dividends declared per share		$	0.30			$	0.30			$	0.30			$	0.30			$	1.20

 

2015:		Quarter Ended																Year Ended
		January 31,				April 30,				July 31,				October 31,				October 31,
Revenue		$	11,280			$	11,252			$	11,143			$	11,108			$	44,783
Expenses			9,967				10,791				10,086				11,027	(b)			41,871
Net income			1,313				461				1,057				81				2,912
Net (income) loss attributable to noncontrolling interests in subsidiaries			(265	)			71				(89	)			2				(281	)
Net income attributable to common equity		$	1,048			$	532			$	968			$	83			$	2,631
Earnings per share - basic and diluted		$	0.15			$	0.08			$	0.14			$	0.02	(b)		$	0.39
Dividends declared per share		$	0.30			$	0.30			$	0.30			$	0.30			$	1.20

 

(a) Includes $0.3M gain on sale of commercial property in Rochelle Park, New Jersey which was sold on June 17, 2016 ($0.05 per share)

(b) Includes $1.1M provision for loss related to straight line rent receivable for Pathmark at the Patchogue, New York store, as a result of the bankruptcy filing of A&P, of which Pathmark is a subsidiary ($0.15 per share)  

 

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

SCHEDULE XI – REAL ESTATE AND ACCUMULATED DEPRECIATION

OCTOBER 31, 2016

(In Thousands of Dollars)

 

Column A		Column B				Column C								Column D												Column E												Column F				Column G		Column H		Column I
						Initial Cost								Costs Capitalized												Gross Amount at Which
						to Company								Subsequent to Acquisition												Carried at Close of Period
																																														Life on
										Buildings																				Buildings																Which
		Encum-								and								Improve-				Carrying								and								Accumulated				Date of		Date		Depreciation
Description		brances				Land				Improvements				Land				ments				Costs				Land				Improvements				Total (1)				Depreciation				Construction		Acquired		is Computed
Residential Properties:
Hammel Gardens, Maywood, NJ		$	8,087			$	312			$	728			$	—			$	1,276							$	312			$	2,004			$	2,316			$	1,581			1949		1972		7-40 years
Steuben Arms, River Edge, NJ			10,659				364				1,773				—				1,453								364				3,226				3,590				2,724			1966		1975		7-40 years
Berdan Court, Wayne, NJ			18,054				250				2,206				—				4,302								250				6,508				6,758				5,077			1964		1965		7-40 years
Westwood Hills, Westwood, NJ			21,098				3,849				11,546				—				2,397								3,849				13,943				17,792				7,985			1965-70		1994		7-39 years
Pierre Towers, Hackensack, NJ			29,901				8,390				37,486				19				8,994								8,409				46,480				54,889				14,847			1970		2004		7-40 years
Boulders - Rockaway, NJ			17,141				1,632				—				3,386				15,756								5,018				15,756				20,774				4,469			2005-2006		1963/1964		7-40 years
Regency Club - Middletown, NY			16,200				2,833				17,792				—				578								2,833				18,370				21,203				1,101			2003		2014		7-40 years
Icon - Baltimore, MD			67,126				5,871				—				—				86,441								5,871				86,441				92,312				541			2016		2005		7-40 years
Commercial Properties:
Damascus Shopping Center,
Damascus, MD			20,831				2,950				6,987				6,296				17,197								9,246				24,184				33,430				5,287			1960's		2003		5-39.5 years
Franklin Crossing, Franklin Lakes, NJ			—				29				—				3,382				7,409								3,411				7,409				10,820				3,628			1963/75/97		1966		5-39.5 years
Glen Rock, NJ			—				12				36				—				230								12				266				278				154			1940		1962		5-25 years
Building formerly occupied by supermarket
Patchogue, NY			5,231				2,128				8,818				—				(8	)							2,128				8,810				10,938				4,221			1997		1997		15-39.5 years
Westridge Square S/C, Frederick, MD			22,000				9,135				19,159				(1	)			4,366								9,134				23,525				32,659				16,988			1986		1992		5-31.5 years
Westwood Plaza, Westwood, NJ			20,801				6,889				6,416				—				2,547								6,889				8,963				15,852				7,952			1981		1988		5-31.5 years
Preakness S/C, Wayne, NJ			25,749				9,280				24,217				—				1,723								9,280				25,940				35,220				9,678			1955/89/00		2002		5-39.5 years
The Rotunda, Baltimore, MD			46,841				10,392				14,634				232				44,837								10,624				59,471				70,095				6,314			1920/2016		2005		5-40 years
Land Leased:
Rockaway, NJ			—				114				—				—				—								114				—				114				—					1963/1964
Vacant Land:															`
Franklin Lakes, NJ			—				224				—				(156	)			—								68				—				68				—					1966/93
Wayne, NJ			—				286				—				—				—								286				—				286				—					2002
Rockaway, NJ			—				51				—				—				—								51				—				51				—					1963/1964
		$	329,719			$	64,991			$	151,798			$	13,158			$	199,498			$	—			$	78,149			$	351,296			$	429,445			$	92,547

 

(1)

Total cost for each property is the same for federal income tax purposes, with the exception of Pierre Towers, Preakness S/C, the Regency Club and the Rotunda properties (Icon and The Rotunda) whose cost for federal income tax purposes is approximately $42.5 million, $35.1 million, $13.1 million and $159.5 million, respectively.

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION

(In Thousands of Dollars)

 

Reconciliation of Real Estate and Accumulated Depreciation:
		2016				2015				2014
Real estate:
Balance, Beginning of year		$	409,297			$	354,032			$	292,769
Additions:
Buildings and improvements			26,206				55,265				62,340
Disposal:
Buildings and improvements			(3,513	)			—				—
Sale of commercial property			(2,545	)			—				—
Sale of discontinued operation			—				—				(1,077	)
Balance, end of year		$	429,445			$	409,297			$	354,032
Accumulated depreciation:
Balance, beginning of year		$	88,452			$	81,569			$	75,226
Additions - Charged to operating expenses			7,852				6,883				6,346
Disposal - Buildings and improvements			(3,466	)			—				—
Sale of commercial property			(291	)			—				—
Sale of discontinued operation			—				—				—
Adjustments			—				—				(3	)
Balance, end of year		$	92,547			$	88,452			$	81,569

 

 

 

 

 

 

 

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY (“FREIT”)

EXHIBIT INDEX

Exhibit No.
3.1		Amended and Restated Declaration of Trust of FREIT. (Incorporated by reference to Exhibit 3.1 to FREIT’s Form 8-K filed with the SEC on March 10, 2008)
3.2		Amendment to Amended and Restated Declaration of Trust, dated May 31, 1994. (Incorporated by reference to Exhibit 3.2 to FREIT’s Form 10-K for the year ended October 31, 2013 and filed with the SEC on January 14, 2014.)
3.3		Amendment to Amended and Restated Declaration of Trust, dated September 10, 1998. (Incorporated by reference to Exhibit 3.3 to FREIT’s Form 10-K for the year ended October 31, 2013 and filed with the SEC on January 14, 2014.)
3.4		Amendment to Amended and Restated Declaration of Trust, dated January 21, 2004. (Incorporated by reference to Exhibit 3.4 to FREIT’s Form 10-K for the year ended October 31, 2013 and filed with the SEC on January 14, 2014.)
3.5		Amendment to Amended and Restated Declaration of Trust, dated May 15, 2007. (Incorporated by reference to Exhibit 3.5 to FREIT’s Form 10-K for the year ended October 31, 2013 and filed with the SEC on January 14, 2014.)
3.6		Amendment to Amended and Restated Declaration of Trust, dated March 4, 2008. (Incorporated by reference to Exhibit 3.6 to FREIT’s Form 10-K for the year ended October 31, 2013 and filed with the SEC on January 14, 2014.)
3.7		Amendment to Amended and Restated Declaration of Trust, dated December 4, 2013. (Incorporated by reference to Exhibit 3.7 to FREIT’s Form 10-K for the year ended October 31, 2013 and filed with the SEC on January 14, 2014.)
4		Form of Specimen Share Certificate, Beneficial Interest in FREIT. (Incorporated by reference to Exhibit 4 to FREIT’s Annual Report on Form 10-K for the fiscal year ended October 31, 1998)
10.1		Management Agreement dated April 10, 2002, by and between FREIT and Hekemian & Co., Inc. (Incorporated by reference to Exhibit 10.1 to FREIT’s Form 10-K for the fiscal year ended October 31, 2009 and filed with the SEC on January 14, 2010)
10.2		Indemnification Agreements by Damascus 100, LLC and Rotunda 100, LLC to FREIT. (Incorporated by reference to Exhibits 10.1 and 10.2, respectively, to FREIT’s 10-Q for the quarter ended April 30, 2008 and filed with the SEC on June 9, 2008)
10.3		Notes to Hekemian employees relative to their investments in each of Grande Rotunda, LLC and Damascus Centre, LLC and the related documents (pledge and security agreements and amendments).  (Incorporated by reference to Exhibits 10.3 and 10.4, respectively, to FREIT’s 10-Q for the quarter ended April 30, 2008 and filed with the SEC on June 9, 2008)
10.4		Agency Agreement dated August 13, 2008 between Damascus Centre, LLC and Hekemian Development Resources, LLC. (Incorporated by reference to Exhibit 10.1 to FREIT’s 10-Q for the quarter ended July 31, 2008 and filed with the SEC on September 9, 2008)
10.5		Agency Agreement dated November 10, 2009 between Grande Rotunda, LLC and Hekemian Development Resources, LLC. (Incorporated by reference to Exhibit 10.1 to FREIT’s Form 10-Q for the quarter ended April 30, 2010 and filed with the SEC on June 9, 2010)
10.6		Amendment No. 1 to Agency Agreement dated as of July 24, 2012 between Grande Rotunda, LLC and Hekemian Resources Development, LLC. (Incorporated by reference to Exhibit 10.6 to FREIT’s Form 10-K for the year ended October 31, 2013 and filed with the SEC on January 14, 2014)
10.7		Line of Credit Note in the principal amount of $18 million executed by FREIT as Borrower, and delivered to The Provident Bank, as Lender, in connection with the Credit Facility provided by The Provident Bank to FREIT. (Incorporated by reference to Exhibit 10.6 to FREIT’s Form 10-K for the fiscal year ended October 31, 2009 and filed with the SEC on January 14, 2010.)
10.8		Amended and Restated Deferred Fee Plan, adopted as of October 31, 2014. (Incorporated by reference to Exhibit 10.8 to FREIT’s Form 10-K for the year ended October 31, 2014 and filed with the SEC on January 14, 2015)

 

10.9		Amendment No.2 to Amended and Restated Deferred Fee Plan, adopted May 7, 2015. (Incorporated by reference to Exhibit 10.1 to FREIT’s Form 10-Q for the quarter ended July 31, 2015 and filed with the SEC on September 9, 2015)
21		Subsidiaries of FREIT
22		Consent of EisnerAmper LLP
31.1		Rule 13a-14(a) - Certification of Chief Executive Officer.
31.2		Rule 13a-14(a) - Certification of Chief Financial Officer
32.1		Section 1350 Certification of Chief Executive Officer
32.2		Section 1350 Certification of Chief Financial Officer.
101		The following materials from FREIT’s annual report on Form 10-K for the fiscal year ended October 31, 2016, formatted in Extensible Business Reporting Language (“XBRL”): (i) consolidated balance sheets; (ii) consolidated statements of income; (iii) consolidated statements of comprehensive income; (iv) consolidated statements of equity; (v) consolidated statements of cash flows; and (vi) notes to consolidated financial statements.