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EX-31.2 - EX-31.2 - FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEYex31-2.htm
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EX-22 - EX-22 - FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEYex22.htm
EX-21 - EX-21 - FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEYex21.htm

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

 

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

For the Fiscal Year Ended October 31, 2019

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

Trading Symbol(s)

Name of each exchange on which registered

-- -- --

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

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

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 every Interactive Data File required to be submitted 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 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 x

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

Large Accelerated Filer ☐      Accelerated Filer       Non-Accelerated Filer ☐ Smaller Reporting Company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

The aggregate market value of the registrant’s shares of beneficial interest held by non-affiliates was approximately $95 million. Computation is based on the closing sales price of such shares as quoted on the over-the-counter-market on April 30, 2019, the last business day of the registrant’s most recently completed second quarter.

As of January 21, 2020, the number of shares of beneficial interest outstanding was 6,787,540.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement for the Registrant’s 2020 Annual Meeting of Shareholders to be held on April 2, 2020 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 12
  Item 2 Properties 13
  Item 3 Legal Proceedings 16
  Item 4 Mine Safety Disclosures 16
       
PART II      
  Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 17
  Item 6 Selected Financial Data 18
  Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
  Item 7A Quantitative and Qualitative Disclosures About Market Risk 37
  Item 8 Financial Statements and Supplementary Data 37
  Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 37
  Item 9A Controls and Procedures 38
  Item 9B Other Information  40
       
PART III       
Item 10 Directors, Executive Officers and Corporate Governance 40
  Item 11 Executive Compensation 40
  Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 40
  Item 13 Certain Relationships and Related Transactions, and Director Independence 40
  Item 14 Principal Accountant Fees and Services 40
       
PART IV      
Item 15 Exhibits, Financial Statement Schedules 41

 

 

 

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.

On January 14, 2020, FREIT reached a definitive agreement to sell 100% of seven apartment properties (“the Apartment Portfolio”) for an aggregate purchase price of $266.5 million to an affiliate of Kushner Companies (the “Purchaser”), subject to certain adjustments, including reductions for the amount of certain mortgage loans assumed by the Purchaser. The Board of Trustees concurrently approved a plan of voluntary liquidation, pursuant to which the Trust is authorized, upon the effectiveness of the plan of voluntary liquidation, to sell, or otherwise dispose of, all of the Trust’s remaining assets for cash, notes or such other assets, upon such terms as the Board may deem advisable. The sale of the Apartment Portfolio and the plan of voluntary liquidation are subject to the approval of the Trust’s shareholders. (See Note 15 to FREIT’s consolidated financial statements for further details.)

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 2019 Developments

(i) FINANCING
(a)On August 26, 2019, Berdan Court, LLC (“Berdan Court”), (owned 100% by FREIT), refinanced its $17 million loan (which matured on September 1, 2019) with the lender in the amount of $28,815,000. This loan, secured by an apartment building located in Wayne, New Jersey, has a term of ten years and bears a fixed interest rate equal to 3.54%. Interest-only payments are required each month for the first five years of the term and thereafter, principal payments plus accrued interest will be required each month through maturity. This refinancing resulted in: (i) a reduction in the annual interest rate from a fixed rate of 6.09% to a fixed rate of 3.54% and (ii) net refinancing proceeds of approximately $11.6 million which can be used for capital expenditures and general corporate purposes.

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(b)On April 3, 2019, WestFREIT, Corp. (owned 100% by FREIT) exercised its option to extend its loan held by M&T Bank, with an outstanding balance of approximately $22.5 million, for twelve months. Effective beginning on June 1, 2019, the extension of this loan secured by the Westridge Square Shopping Center, requires monthly principal payments of $47,250 plus interest based on a floating interest rate equal to 240 basis points over the one-month LIBOR and has a maturity date of May 1, 2020.
(ii)

ROTUNDA

 

The Rotunda property in Baltimore, Maryland (owned by FREIT’s 60% owned consolidated affiliate Grande Rotunda, LLC) is an 11.5 acre site containing, at the time that the property was acquired, a building with approximately 137,000 sq. ft. of office space and approximately 83,000 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 retail tenant improvements, the redevelopment was substantially completed in the third quarter of Fiscal 2016. 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. The residential section reached a stabilized level of occupancy of approximately 94% by the end of the third quarter of Fiscal 2018. The retail space continues to lease-up and is approximately 86.5% leased and 84.1% occupied as of October 31, 2019. FREIT expects Rotunda’s retail operations to stabilize in 2020.

 

On February 7, 2018, Grande Rotunda, LLC refinanced its $115.3 million construction loan held by Wells Fargo with a new loan held by Aareal Capital Corporation in the amount of approximately $118.5 million with additional funding available for retail tenant improvements and leasing costs in the amount of $3,380,000. This refinancing paid off the loan previously held by Wells Fargo, funded loan closing costs and paid the amount due to Hekemian Development Resources for a development fee of $900,000 plus accrued interest of approximately $45,000 (See Note 8 to FREIT’s consolidated financial statements for further details on this fee). This loan is secured by the Rotunda property, bears a floating interest rate at 285 basis points over the one-month LIBOR rate and has a maturity date of February 6, 2021 with two one-year renewal options. As part of this transaction, Grande Rotunda, LLC purchased an interest rate cap on LIBOR for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan. As of October 31, 2019, approximately $118.5 million of this loan facility was drawn down and the interest rate was approximately 4.84%. (See Note 5 to FREIT’s consolidated financial statements for further details.)

(iii) DISPOSITIONS & ACQUISITIONS
  On February 8, 2019, FREIT sold a commercial building, formerly occupied as a Pathmark supermarket in Patchogue, New York for a sales price of $7.5 million. The sale of this property, which had a carrying value of approximately $6.2 million, resulted in a gain of approximately $0.8 million net of sales fees and commissions. Net cash proceeds of approximately $2 million were realized after paying off the related mortgage on this property in the amount of approximately $5.2 million. FREIT distributed and paid approximately $676,000 of this gain by way of a one-time special dividend in connection with and in anticipation of the closing of the sale of the Patchogue property of $0.10 per share. The sale of this property eliminates an operating loss of approximately $0.8 million ($0.12 per share) incurred, annually, since Pathmark vacated the building in December 2015. (See Note 2 to FREIT’s consolidated financial statements for further details.)
(iv) SPECIAL COMMITTEE FORMATION
  On March 28, 2019, FREIT announced that its Board of Trustees (the “Board”) established a Special Committee of the Board (the “Special Committee”) to explore strategic alternatives focusing on maximizing shareholder value. The Special Committee is comprised solely of independent Trustees and is charged with exploring potential strategic transactions involving FREIT, including, without limitation, a potential sale of FREIT, a business combination involving FREIT or other alternatives for maximizing shareholder value, and determining whether a potential strategic transaction is in the best interests of FREIT and its shareholders. The members of the Special Committee are Ronald J. Artinian, Richard J. Aslanian, David F. McBride and Justin F. Meng. The Special Committee has engaged HFF Securities L.P. as the Special Committee’s financial advisor, and the law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP as legal counsel to the Special Committee. There can be no assurance that the Special Committee’s exploration of potential strategic transactions will result in any transaction being consummated. FREIT does not intend to discuss or disclose any developments with respect to the Special Committee’s functions or activity, unless and until otherwise determined that further disclosure is appropriate or required by regulation or law. There is no formal timetable for the Special Committee’s completion of its exploration of potential strategic transactions.

(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, 2019 is included in Note 13 “Segment Information” to FREIT’s consolidated financial statements.

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(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, 2019, FREIT’s real estate holdings included (i) eight (8) apartment buildings or complexes containing a total of 1,437 apartment units, (ii) eight (8) commercial properties (retail and office) containing a total of approximately 1,280,000 square feet of leasable space, including 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, LLC, which owns a 295,000 square foot mixed use property (office and retail) and a 379-unit residential apartment complex in Baltimore, Maryland that 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 144,000 square foot shopping center in Damascus, Maryland.

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

Station Place on Monmouth, LLC: FREIT owns a 100% membership interest in Station Place on Monmouth, LLC, which owns a 45-unit residential apartment complex located in Red Bank, New Jersey.

Berdan Court, LLC: FREIT owns a 100% membership interest in Berdan Court, LLC, which owns a 176-unit residential apartment complex located in Wayne, New Jersey.

Employees

On October 31, 2019, FREIT and its subsidiaries had thirty-two (32) full-time employees and eleven (11) part-time employees who work solely at the properties owned by FREIT or its subsidiaries. The number of part-time employees varies seasonally.

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Robert S. Hekemian, the Chairman of the Board and Chief Executive Officer of Hekemian, was the former Chairman and Chief Executive Officer of FREIT. Mr. Hekemian retired as Chairman and Chief Executive Officer of FREIT effective upon the conclusion of FREIT’s 2018 Annual Meeting of Shareholders held on April 5, 2018 (the “2018 Annual Meeting”). Robert S. Hekemian, Jr., the President of Hekemian, is a Trustee of FREIT, and succeeded Robert S. Hekemian as Chief Executive Officer of FREIT effective upon the conclusion of the 2018 Annual Meeting. Ronald J. Artinian, a Trustee of FREIT and the Chairman of the Audit Committee of the Board, succeeded Robert S. Hekemian as Chairman of the Board effective upon the conclusion of the 2018 Annual Meeting. On February 7, 2019, Donald W. Barney retired and resigned as President, Chief Financial Officer, Treasurer and a Trustee of FREIT. The Board of Trustees appointed Allan Tubin, the Chief Financial Officer of Hekemian, as the Chief Financial Officer and Treasurer of the Trust and Robert S. Hekemian, Jr. as President of the Trust. As a result, Robert S. Hekemian, Jr. holds the offices of both Chief Executive Officer and President of FREIT.

Pursuant to the terms of a Consulting Agreement between Robert S. Hekemian and the Trust, Mr. Hekemian served the Trust in a consulting capacity effective April 5, 2018 through December 2019. The Consulting Agreement obliged Mr. Hekemian to provide advice and consultation with respect to matters pertaining to FREIT and its subsidiaries, affiliates, assets and business for no fewer than 30 hours per month during the term of the agreement. FREIT paid Mr. Hekemian a consulting fee of $5,000 per month during the term of the Consulting Agreement, which was payable in the form of Shares on a quarterly basis (i.e. in quarterly installments of $15,000). In addition, in connection with the termination of Mr. Hekemian’s service to the Trust under the Consulting Agreement in December 2019, Mr. Hekemian’s accrued plan benefits under the Trust’s Deferred Fee Plan became payable to him. See Note 11 for a more complete description of the Deferred Fee Plan.

Robert S. Hekemian, Jr., Chief Executive Officer and President, Ronald J. Artinian, Chairman of the Board, Allan Tubin, Treasurer and Chief Financial Officer, and John A. Aiello, Esq., Secretary and Executive Secretary, are the executive officers of FREIT. FREIT does not retain the services of its executive officers on an exclusive basis, and accordingly FREIT’s executive officers are permitted to engage in other business activities as all of their business activities are not devoted to FREIT. Please see “Item 10 – Directors, Executive Officers and Corporate Governance,” for additional information about FREIT’s executive officers. 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 executed a Management Agreement whereby Hekemian would continue as Managing Agent for FREIT. The term of the Management Agreement was renewed on November 1, 2019 for a two-year term, which will expire on October 31, 2021. 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 fees and commissions as compensation for its services. From time to time, FREIT engages Hekemian to provide additional services, such as consulting services related to development, property sales and financing activities of FREIT. Separate fee arrangements 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 provided for Resources to receive a fee equal to 6.375% of the development costs as defined in the development agreement, 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 redevelopment project. Grande Rotunda, LLC paid $500,000 of this fee to Resources in Fiscal 2013 and the balance of $900,000 became due upon the issuance of a certificate of occupancy for the multi-family portion of this project. A final certificate of occupancy was issued in Fiscal 2016; however, Resources agreed to defer the payment of the $900,000 balance of this fee. Grande Rotunda, LLC paid the $900,000 portion of this fee to Resources in February 2018 in connection with the refinancing of the Wells Fargo construction loan for the Rotunda property with a new loan from Aareal Capital Corporation. Additionally, Grande Rotunda, LLC paid Resources the amount of approximately $45,000 representing a mutually agreed upon amount of interest on the $900,000 portion of the fee for the period during which Hekemian Resources had agreed to defer payment thereof. The minority ownership interest of Grande Rotunda, LLC is owned by Rotunda 100, LLC, which is principally owned by employees of Hekemian, including Allan Tubin, FREIT’s Chief Financial Officer, and certain members of the immediate family of Robert S. Hekemian, FREIT’s former Chairman, Chief Executive Officer and consultant of FREIT, Robert S. Hekemian, Jr., Chief Executive Officer, President and a Trustee of FREIT, and David

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Hekemian, a Trustee of FREIT. The members of the Hekemian family have majority management control of this entity (Rotunda 100, LLC). (See Note 8 to FREIT’s consolidated financial statements.)

Robert S. Hekemian, a former consultant of FREIT, was the Chairman of the Board and Chief Executive Officer of Hekemian. Mr. Hekemian owned approximately 0.2% of all of the issued and outstanding shares of Hekemian. Robert S. Hekemian, Jr., the Chief Executive Officer and a Trustee of FREIT, is the President of Hekemian, and owns approximately 33.3% of all of the issued and outstanding shares of Hekemian. David Hekemian, a Trustee of FREIT, is a Principal 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, 2019, FREIT’s aggregate outstanding mortgage debt was $352.8 million, which bears a weighted average interest rate of 4.51% and an average life of 4.4 years. 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, 2019 with respect to each of these properties.

FREIT is highly leveraged and will continue to be for the foreseeable future. This level of indebtedness results in increased debt service requirements that could adversely affect the financial condition and results of operations of FREIT. A number of FREIT’s mortgage loans are 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 Amended and Restated Declaration of Trust, as amended, 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 additional secured or unsecured indebtedness in the future 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 internet based marketing and shopping, discount shopping centers, outlet malls, sales through catalogue offerings, discount shopping clubs 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.

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  (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 of October 31, 2019, the following table lists the ten (10) largest commercial tenants, which account for approximately 51.1% of FREIT’s leased commercial rental space and 38.4% of fixed commercial rents.

          
Tenant  Center  Sq. Ft.  % of Revenue
Burlington Stores, Inc.   Westridge Square  85,992  3.5%
Kmart Corporation   Westwood Plaza  84,254  1.7%
Stop & Shop Supermarket Co.   Preakness  61,020  3.3%
Safeway Stores, Inc.   Damascus Center  58,358  5.1%
H-Mart Frederick, LLC   Westridge Square  55,300  3.3%
The Association of Universities for Reseach in Astronomy  Rotunda  51,520  7.8%
Stop & Shop Supermarket Co.   Franklin Crossing  48,673  4.6%
Cobb Theaters IV LLC   Rotunda  35,000  4.3%
TJ MAXX   Westwood Plaza  28,480  3.1%
T-Bowl, Inc.   Preakness  27,195  1.7%

  (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 distributions to its shareholders, could be adversely affected.

FREIT owns and operates an 87,661 square foot shopping center located in Franklin Lakes, New Jersey, the anchor tenant of which is The Stop & Shop Supermarket Company, LLC (“Stop & Shop”). On July 26, 2017, Stop & Shop entered into a lease modification with FREIT whereby the tenant exercised its option to renew the lease for a ten-year period with a right of the tenant to terminate the lease at any time during the fifth year if the store does not meet certain sales volume levels set forth in the modification. This lease modification provided for a $250,000 reduction in annual rent over the renewed term. (See Note 14 to FREIT’s consolidated financial statements.)

On January 4, 2017, Macy’s, Inc. announced its intention to close several of its department stores across the United States, including the approximately 81,160 square foot Macy’s anchor store located at the Preakness Shopping Center in Wayne, New Jersey. Wayne PSC, a 40% owned consolidated affiliate of FREIT, owns and operates this shopping center in which Macy’s operated its store under a long-term lease and was paying annual rent of approximately $234,000 ($2.88 per square foot) with no future rent escalations for the remaining term and option periods of the lease. On April 25, 2017, Wayne PSC announced it had agreed to a termination of Macy’s lease effective as of April 15, 2017. To terminate the lease and take possession of the space, Wayne PSC paid Macy’s a termination fee of $620,000, which was fully expensed in the second quarter of Fiscal 2017.

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Wayne PSC expects to re-position this space and re-lease it to a new tenant (or multiple tenants) at market rents, which are currently higher than the rent provided for under the terminated Macy’s lease. FREIT will lose total consolidated annual rental income, including reimbursements, of approximately $0.2 million until such time as the space is fully re-leased. FREIT anticipates increased revenue from the space when it is re-leased. (See Note 14 to FREIT’s consolidated financial statements.)

There were no other material lease expirations during Fiscal 2019 and Fiscal 2018. There are no additional material lease expirations expected during Fiscal 2020.

  (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 would therefore 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 for same 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. FREIT acquired the Westwood Plaza property in 1988, and the property has not experienced any flooding that gave rise to any claims under FREIT’s flood insurance in this time period.

 

  (ii) 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.

Within the last twelve months, FREIT has conducted environmental audits for all of its properties. The environmental reports secured by FREIT have not revealed any environmental conditions on its properties which require any further remediation pursuant to any applicable federal or state law or regulation.

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b) FREIT has determined that several of its properties contain lead based paint (“LBP”). FREIT has obtained lead-free interior certifications with respect to all properties that were found to contain LBP, certifying that such properties contain no LBP on the interior surfaces. 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) - (ii) 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 or an affiliate of FREIT, is subject to some form of rent control ordinance which limits the amount by which FREIT or an affiliate of FREIT, can increase the rent for renewed leases, and in some cases, limits the amount of rent which FREIT or an affiliate of FREIT can charge for vacated units, except for The Regency, Westwood Hills, The Boulders at Rockaway, Station Place 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 U.S. economy has continued to show signs of growth and improvement over the past year. 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 helping keep inflation low; (c) increasing consumer confidence should continue to push spending modestly higher; (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 the federal government; (ii) regulatory uncertainties; (iii) continued infrastructure deterioration; (iv) a dramatic international crisis; (v) increasing concerns regarding terrorism; (vi) rising healthcare costs; and (vii) impact of trade policies.

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 their 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.

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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.

On April 25, 2017, Wayne PSC announced it had agreed to a termination of Macy’s lease effective as of April 15, 2017. To terminate the lease and take possession of the space, Wayne PSC paid Macy’s a termination fee of $620,000, which was fully expensed in the second quarter of Fiscal 2017. Wayne PSC expects to re-position this space and re-lease it to a new tenant (or multiple tenants) at market rents, which are currently higher than the rent provided for under the terminated Macy’s lease. FREIT will lose total consolidated annual rental income, including reimbursements, of approximately $0.2 million until such time as the space is fully re-leased. FREIT anticipates increased revenue from the space when it 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. 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, 2019, FREIT had approximately $212.1 million of non-recourse mortgage debt subject to fixed interest rates, and approximately $140.7 million of variable interest rate debt of which $118.5 million related to the outstanding loan balance on the Grande Rotunda, LLC loan with Aareal Capital. 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 might need to dispose of one or more of its properties upon disadvantageous terms.

FREIT’s revolving $13 million credit line (of which $13 million was available as of October 31, 2019), and several of its loan agreements are required to meet or maintain certain financial covenants that could restrict FREIT’s acquisition activities and result in a default on these loans if FREIT fails to satisfy these covenants. (See Note 5 to FREIT’s consolidated financial statements.)

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. Substantially all of FREIT’s insurance coverage is provided by one carrier. 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.

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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 apartment complexes; the proximity of commercial shopping centers; 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 diversify 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 under 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 for same 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. Within the last twelve months, FREIT has conducted environmental audits for all of its properties. The environmental reports secured by FREIT have not revealed any environmental conditions on its properties which require any further 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.

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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, 2019:      
Property & Location Year
Acquired
No.
of
Units
Average Annual
Occupancy Rate for
the Year Ended
10/31/19
Average
Monthly Rent
per Unit @
10/31/19
Average
Monthly Rent
per Unit @
10/31/18
Mortgage
Balance ($000)
Depreciated Cost of
Land, Buildings &
Equipment ($000)
               
Berdan Court (1) 1965 176 95.6% $1,844 $1,869 $28,815 (7) $1,622
Wayne, NJ              
               
Regency Club 2014 132 97.7% $1,702 $1,672 $15,588 $18,735
Middletown, NY              
               
Steuben Arms 1975 100 97.4% $1,611 $1,563 $10,021 $755
River Edge, NJ              
               
Westwood Hills (2) 1994 210 95.6% $1,936 $1,872 $19,617 $8,934
Westwood Hills, NJ              
               
Pierre Towers (3) 2004 266 93.6% $2,448 $2,444 $48,000 (8) $36,661
Hackensack, NJ              
               
Boulders (4) 2006 129 94.6% $2,130 $2,110 $15,615 $15,276
Rockaway, NJ              
               
Icon (5) 2016 379 95.1% $2,132 $2,070  $65,186 (9) $86,462
Baltimore, Maryland              
               
Station Place (6) 2017 45 92.8% $2,975 $2,985 $12,350 (10) $19,035
Red Bank, NJ              
               
(1) Berdan Court is 100% owned by Berdan Court, LLC, which is 100% owned by FREIT.
(2) FREIT owns a 40% equity interest in Westwood Hills. 
(3) Pierre Towers is 100% owned by S And A Commercial Associates LP, which is 65% owned by FREIT.
(4) Construction completed in August 2006 on land acquired in 1963 / 1964.
(5) 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.
(6) Station Place is 100% owned by Station Place on Monmouth, LLC, which is 100% owned by FREIT.
(7) On August 26, 2019, Berdan Court, LLC (“Berdan Court”), refinanced its $17 million loan (which matured on September 1, 2019) with the lender in the amount of $28,815,000.  This loan has a term of ten years and bears a fixed interest rate equal to 3.54%. Interest-only payments are required each month for the first five years of the term and thereafter, principal payments plus accrued interest will be required each month through maturity.  (See Note 5 to FREIT’s consolidated financial statements.)
(8) On January 8, 2018, Pierre Towers, LLC (“Pierre”), refinanced its $29.1 million loan held by State Farm with a new mortgage loan from New York Life Insurance in the amount of $48 million. The new loan has a term of ten years and bears a fixed interest rate equal to 3.88%. Interest-only payments are required each month for the first five years of the term and thereafter, principal payments plus accrued interest will be required each month through maturity. (See Note 5 to FREIT’s consolidated financial statements.)
(9) On February 7, 2018, Grande Rotunda, LLC, refinanced its $115.3 million construction loan held by Wells Fargo with a new loan held by Aareal Capital Corporation in the amount of approximately $118.5 million with additional funding available for retail tenant improvements and leasing costs in the amount of $3,380,000. This loan bears a floating interest rate at 285 basis points over the one-month LIBOR rate and has a maturity date of February 6, 2021. At October 31, 2019, the total amount outstanding on this loan was approximately $118.5 million. As part of this transaction, Grande Rotunda, LLC purchased an interest rate cap on LIBOR for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan. Approximately 55% of this outstanding loan balance was allocated to the residential segment based on the appraisal.  (See Note 5 to FREIT’s consolidated financial statements.)
(10) On December 7, 2017, Station Place on Monmouth, LLC closed on a mortgage loan in the amount of $12,350,000 held by Provident Bank to purchase the Station Place property in Red Bank, New Jersey. Interest-only payments are required each month for the first two years of the term and thereafter, principal payments plus accrued interest will be required each month through maturity. The loan bears a floating interest rate equal to 180 basis points over the one-month BBA LIBOR with a maturity date of December 15, 2027.  In order to minimize interest rate volatility during the term of the loan, Station Place on Monmouth, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 4.35% over the term of the loan.  (See Note 5 to FREIT’s consolidated financial statements.)

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Commercial Properties as of October 31, 2019:      
Property & Location Year
Acquired
Leasable
Space-
Approximate
Sq.Ft.
Average Annual
Occupancy Rate for
the Year Ended
10/31/19
Average
Annualized
Rent per Sq. Ft.
@ 10/31/19*
Average
Annualized Rent
per Sq. Ft. @
10/31/18 *
Mortgage
Balance ($000)
Depreciated Cost
of Land,
Buildings &
Equipment ($000)
               
Glen Rock, NJ 1962 4,672 100.0% $24.30 $24.85 None (1) $85
               
               
Franklin Crossing 1966 (2) 87,661 91.6% $21.87 $22.15 None (1) $6,714
Franklin Lakes, NJ              
               
Westwood Plaza 1988 174,275 92.7% $13.28 $13.15 $18,973 $7,121
Westwood, NJ              
               
Westridge Square (3) 1992 252,733 92.0% $13.01 $13.43 $22,200 (7) $13,398
Frederick, MD              
               
Preakness Center (4) 2002 322,142 60.9% $18.51 $17.97 $23,737 $24,787
Wayne, NJ              
               
Damascus Center (5) 2003 143,815 85.6% $22.57 $21.45 $19,354 $26,136
Damascus, MD              
               
The Rotunda (6) 2005 294,500 83.3% $28.41 $28.24 $53,334 (8) $64,668
Baltimore, MD              
               
Rockaway, NJ 1964/1963 1 Acre 100.0% N/A N/A None $114
    Land lease          
               
* Average annualized rent per sq. ft. includes the impact of straight-line rent escalations and the amortization of rent concessions and abatements. The average rent per square foot at October 31, 2018 has been adjusted for comparability purposes to conform to the presentation at October 31, 2019.
               
(1) Security for draws against FREIT's Credit Line.  As of October 31, 2019, there was no amount outstanding and $13 million was available under the line of credit. 
(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) FREIT owns a 40% equity interest in Wayne PSC, LLC, that owns the center.  
(5) 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.
(6) FREIT owns a 60% equity interest in Grande Rotunda, LLC, that owns the center. A major redevelopment and expansion project was substantially completed in the third quarter of Fiscal 2016, which included modernization of the office building containing 137,000 sq. ft. of office space and approximately 83,000 sq. ft. of retail space on the lower level of the building and an additional 75,000 square feet of new retail space.
(7) On April 3, 2019, WestFREIT, Corp. (owned 100% by FREIT) exercised its option to extend its loan held by M&T Bank, with an outstanding balance of approximately $22.5 million, for twelve months. The extension of this loan requires monthly principal payments of $47,250 plus interest based on a floating interest rate equal to 240 basis points over the one-month LIBOR and has a maturity date of May 1, 2020. (See Note 5 to FREIT’s consolidated financial statements.)  
(8) On February 7, 2018, Grande Rotunda, LLC, refinanced its $115.3 million construction loan held by Wells Fargo with a new loan held by Aareal Capital Corporation in the amount of approximately $118.5 million with additional funding available for retail tenant improvements and leasing costs in the amount of $3,380,000. This loan bears a floating interest rate at 285 basis points over the one-month LIBOR rate and has a maturity date of February 6, 2021. At October 31, 2019, the total amount outstanding on this loan was approximately $118.5 million. As part of this transaction, Grande Rotunda, LLC purchased an interest rate cap on LIBOR for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan. Approximately 45% of this outstanding loan balance was allocated to the commercial segment based on the appraisal.  (See Note 5 to FREIT’s consolidated financial statements.)

14 

Supplemental Segment Information:

 

Commercial lease expirations at October 31, 2019 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 13 13,243 1.3%  $                323,686  $                     24.44
2020 13 37,738 3.6%  $                952,337  $                     25.24
2021 31 120,021 11.5%  $             3,010,707  $                     25.08
2022 27 252,567 24.1%  $             2,735,047  $                     10.83
2023 24 67,828 6.5%  $             1,943,880  $                     28.66
2024 20 89,865 8.6%  $             1,955,738  $                     21.76
2025 10 37,928 3.6%  $                928,136  $                     24.47
2026 10 81,729 7.8%  $             1,354,132  $                     16.57
2027 9 67,432 6.4%  $             1,532,473  $                     22.73
2028 15 47,476 4.5%  $             1,278,950  $                     26.94
2029 11 95,101 9.1%  $             1,689,925  $                     17.77
2030 1 55,300 5.3%  $                663,600  $                     12.00
2031 1 17,550 1.7%  $                403,650  $                     23.00
2032 2 24,846 2.4%  $                459,876  $                     18.51
2033 1 4,365 0.4%  $                130,950  $                     30.00
2037 1 35,000 3.3%  $                875,000  $                     25.00

Land Under Development and Vacant Land as of October 31, 2019:

 

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 2019, 2018 and 2017, FREIT had one (1) property that contributed over 15% of FREIT’s total consolidated revenue: within both the residential and commercial segment, the Rotunda property in Baltimore, Maryland, accounted for 29.3% for Fiscal 2019, 26.8% for Fiscal 2018 and 19.1% for Fiscal 2017 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- 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. See “Business - Special Committee Formation” under Item 1(a)(iv) above and “Special Committee Formation” under Item 7 for additional information.

Except for the TD Bank branch located in Rockaway, New Jersey, all of FREIT’s and its subsidiaries’ commercial properties have multiple tenants.

 

15 

FREIT and its subsidiaries’ commercial properties have sixteen (16) anchor/major tenants, which account for approximately 58.6% of the space leased. The balance of the space is leased to one hundred sixty-seven (167) 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 Stores, Inc.  19
 Frederick, MD        H-Mart   
       Gold's Gym   
 Franklin Crossing   (SC)  87,661  Stop & Shop  18
 Franklin, Lakes, NJ         
 Westwood Plaza   (SC)  174,275  Kmart Corp  13
 Westwood, NJ       TJMaxx   
 Preakness Center (1)   (SC)  322,142  Stop & Shop  28
 Wayne, NJ       CVS   
       Annie Sez   
       Wayne Movietown   
 Damascus Center (2)   (SC)  143,815  Safeway Stores  26
 Damascus, MD         
 The Rotunda (3)   (O)  137,307  iHeartMedia+Entertainment, Inc. (f/k/a Clear Channel Broadcasting Inc.)  40
 Baltimore, MD       The Association of Universities For Research in Astronomy, Inc.   
         
   (SC)  157,193  Walgreen Corporation  21
       Mom's Organic Market   
       Cobb Theatres   
         
 Glen Rock, NJ   (SC)  4,672  — 2
         
(1) FREIT has a 40% interest in this property. 
(2) FREIT has a 70% interest in this property.
(3) FREIT has a 60% interest in this property. 

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 continued lease-up of 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 and the vacancy at Preakness Shopping Center located in Wayne, New Jersey due to Macy’s vacating its space in April 2017.

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 91.1% occupancy rate with respect to FREIT’s available apartment units. The lower average occupancy level is attributed to the continued lease-up at the Icon over the past three years as a result of the major redevelopment and expansion project at the Rotunda which was completed in the third quarter of Fiscal 2016. The Icon reached a stabilized level of occupancy of approximately 94% by the end of the third quarter of Fiscal 2018.

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.

 

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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 21, 2020, 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, 2019          
First Quarter   $ 15.80   $ 16.50  
Second Quarter   $ 16.75   $ 17.50  
Third Quarter   $ 17.25   $ 18.40  
Fourth Quarter   $ 17.25   $ 18.20  

 

    Bid   Asked  
Fiscal Year Ended October 31, 2018          
First Quarter   $ 14.80   $ 16.00  
Second Quarter   $ 15.30   $ 16.00  
Third Quarter   $ 16.55   $ 17.15  
Fourth Quarter   $ 15.62   $ 16.00  

 

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. For Fiscal 2019, FREIT paid/declared an annual dividend of $0.60 per share. In Fiscal 2018 and Fiscal 2017, FREIT paid/declared an annual dividend of $0.15 per share for each fiscal year. For Fiscal 2016 and Fiscal 2015, FREIT paid/declared an annual dividend of $1.20 per share for each fiscal year.

 

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.”

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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, 2019 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,  2019   2018   2017   2016   2015 
   (In Thousands) 
Total assets  $390,618   $392,073   $372,957   $367,971   $352,115 
                          
Mortgage loans  $352,790   $350,504   $323,435   $329,719   $307,899 
                          
Common equity  $15,715   $21,488   $17,838   $2,834   $7,544 
                          
Weighted average shares outstanding:                         
Basic   6,940    6,883    6,833    6,783    6,778 
Diluted   6,940    6,883    6,833    6,784    6,778 
                          

 

INCOME STATEMENT DATA:                    
Years Ended October 31,  2019   2018   2017   2016   2015 
   (In Thousands of Dollars, Except Per Share Amounts) 
Revenue from real estate operations  $60,277   $57,997   $51,634   $46,254   $44,783 
                          
Expenses:                         
Real estate operations   26,062    24,883    26,233    21,797    21,062 
Lease termination fee           620         
Straight line rent adjustment - bankrupt tenant                   1,046 
General and administrative expenses   4,049    2,305    2,129    2,034    2,029 
Depreciation   11,339    11,515    10,669    7,852    6,883 
Total expenses   41,450    38,703    39,651    31,683    31,020 
                          
Operating income   18,827    19,294    11,983    14,571    13,763 
                          
Investment income   360    267    206    150    150 
Unrealized (loss) gain on interest rate cap contract   (160)   72             
Gain on sale of property   836        15,395    314     
Loan prepayment costs relating to property sale           (1,139)        
Interest expense including amortization                         
of deferred financing costs   (18,070)   (18,667)   (15,762)   (11,936)   (11,001)
Net income   1,793    966    10,683    3,099    2,912 
                          
Net (income) loss attributable to noncontrolling interests in subsidiaries   (6)   517    2,433    (94)   (281)
Net income attributable to common equity  $1,787   $1,483   $13,116   $3,005   $2,631 
                          
Earnings per share - basic and diluted  $0.26   $0.21   $1.92   $0.44   $0.39 
                          
Cash dividends declared per common share  $0.60   $0.15   $0.15   $1.20   $1.20 

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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’s policy is to acquire and develop real property for long-term investment.

The economic and financial environment: The U.S. economy grew an average annualized rate of 2.1% in the third quarter of 2019. Employment remains healthy with an unemployment rate at 3.6% in October 2019 and real income continues to grow at a solid pace. If the U.S. economy improves, the Federal Reserve may continue to increase lending rates which may affect the refinancing of mortgages coming due in the short-term and borrowings for other purposes.

Residential Properties: FREIT has aggressively increased rental rates on its stabilized properties resulting in FREIT’s rental rates continuing to show year-over-year increases at most of its properties. FREIT expects increases in rental rates to taper; however, the increased rental rates that are in place should positively impact future revenues.

Commercial Properties: There continues to be uncertainty in the retail environment that could have an adverse impact on FREIT’s retail tenants, which could have an adverse impact on FREIT.

Special Committee Formation: On March 28, 2019, FREIT announced that its Board established a Special Committee to explore strategic alternatives focusing on maximizing shareholder value. The Special Committee is comprised solely of independent Trustees and is charged with exploring potential strategic transactions involving FREIT, including, without limitation, a potential sale of FREIT, a business combination involving FREIT or other alternatives for maximizing shareholder value, and determining whether a potential strategic transaction is in the best interests of FREIT and its shareholders. The members of the Special Committee are Ronald J. Artinian, Richard J. Aslanian, David F. McBride and Justin F. Meng. The Special Committee has engaged HFF Securities L.P. as the Special Committee’s financial advisor, and the law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP as legal counsel to the Special Committee. There can be no assurance that the Special Committee’s exploration of potential strategic transactions will result in any transaction being consummated. FREIT does not intend to discuss or disclose any developments with respect to the Special Committee’s functions or activity, unless and until otherwise determined that further disclosure is appropriate or required by regulation or law. There is no formal timetable for the Special Committee’s completion of its exploration of potential strategic transactions.

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 retail tenant improvements, the redevelopment was substantially completed in the third quarter of Fiscal 2016. By the end of the third quarter of Fiscal 2018, the residential section reached a stabilized level of occupancy of approximately 94%. The retail

19

space continues to lease-up and is approximately 86.5% leased and 84.1% occupied as of October 31, 2019. FREIT expects Rotunda’s retail operations to stabilize in 2020.

Debt Financing Availability: Financing has been available to FREIT and its affiliates. On February 7, 2018, Grande Rotunda, LLC refinanced its $115.3 million construction loan held by Wells Fargo with a new loan held by Aareal Capital Corporation in the amount of approximately $118.5 million with additional funding available for retail tenant improvements and leasing costs in the amount of $3,380,000. This refinancing paid off the loan previously held by Wells Fargo, funded loan closing costs and paid the amount due to Hekemian Development Resources for a development fee of $900,000 plus accrued interest of approximately $45,000 (See Note 8 to FREIT’s consolidated financial statements for further details on this fee). This loan is secured by the Rotunda property, bears a floating interest rate at 285 basis points over the one-month LIBOR rate and has a maturity date of February 6, 2021 with two one-year renewal options. As part of this transaction, Grande Rotunda, LLC purchased an interest rate cap on LIBOR for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan. As of October 31, 2019, approximately $118.5 million of this loan facility was drawn down and the interest rate was approximately 4.84%.

On August 26, 2019, Berdan Court, LLC (“Berdan Court”), (owned 100% by FREIT), refinanced its $17 million loan (which matured on September 1, 2019) with the lender in the amount of $28,815,000. This loan, secured by an apartment building located in Wayne, New Jersey, has a term of ten years and bears a fixed interest rate equal to 3.54%. Interest-only payments are required each month for the first five years of the term and thereafter, principal payments plus accrued interest will be required each month through maturity. This refinancing resulted in: (i) a reduction in the annual interest rate from a fixed rate of 6.09% to a fixed rate of 3.54% and (ii) net refinancing proceeds of approximately $11.6 million which can be used for capital expenditures and general corporate purposes.

On April 3, 2019, WestFREIT, Corp. (owned 100% by FREIT) exercised its option to extend its loan held by M&T Bank, with an outstanding balance of approximately $22.5 million, for twelve months. Effective beginning on June 1, 2019, the extension of this loan secured by the Westridge Square Shopping Center, requires monthly principal payments of $47,250 plus interest based on a floating interest rate equal to 240 basis points over the one-month LIBOR and has a maturity date of May 1, 2020.

On January 8, 2018, Pierre Towers, LLC (“Pierre”), owned by S And A Commercial Associates Limited Partnership (“S&A”), which is a consolidated subsidiary, refinanced its $29.1 million loan held by State Farm with a new mortgage loan from New York Life Insurance in the amount of $48 million. Pierre paid New York Life Insurance a good faith deposit in the amount of $960,000, which was reimbursed by New York Life when the loan closed in January 2018. The new loan has a term of ten years and bears a fixed interest rate equal to 3.88%. Interest-only payments are required each month for the first five years of the term and thereafter, principal payments plus accrued interest will be required each month through maturity. This refinancing resulted in: (i) a reduction in the annual interest rate from a fixed rate of 5.38% to a fixed rate of 3.88%; and (ii) net refinancing proceeds of approximately $17.2 million (after giving effect to a $1.2 million loan prepayment cost to pay-off the loan held by State Farm) that were distributed to the partners in S&A with FREIT receiving approximately $11.2 million, based on its 65% membership interest in S&A, which can be used for capital expenditures and general corporate purposes.

On December 7, 2017, Station Place on Monmouth, LLC (owned 100% by FREIT) closed on a mortgage loan in the amount of $12,350,000 held by Provident Bank to purchase the Station Place property in Red Bank, New Jersey. Interest-only payments are required each month for the first two years of the term and thereafter, principal payments plus accrued interest will be required each month through maturity. The loan bears a floating interest rate equal to 180 basis points over the one-month BBA LIBOR with a maturity date of December 15, 2027. In order to minimize interest rate volatility during the term of the loan, Station Place on Monmouth, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 4.35% over the term of the loan.

On January 21, 2019, Station Place on Monmouth, LLC entered into a modification agreement with Provident Bank. The material terms of the modification were: (i) FREIT guarantees $2,350,000 of the outstanding principal balance of the loan; and (ii) the loan’s Debt Service Coverage Ratio (“DSCR”) covenants are reduced to a single test that will be tested semi-annually (commencing with the six-month period ending April 30, 2019) and require a DSCR of 1.2 / 1.0 based on actual debt service. Prior to this modification, the loan’s DSCR covenants were calculated using the greater of the actual debt service or other hypothetical debt service measures, as provided in the loan agreement, that were to be tested quarterly. As previously disclosed in FREIT’s current report on Form 8-K filed with the SEC on January 24, 2019, Station Place had not been in compliance with the loan covenants as of October 31, 2018, and the modification waives all previous non-compliance. If the DSCR should fall below 1.2 / 1.0, Provident Bank, at its discretion, may require a current appraisal of the Station Place property. If the loan balance exceeds 85% loan-to-value (“L-T-V”) based on the appraised value, Station Place may be required to resize the loan to bring the L-T-V into compliance by paying down the outstanding principal balance of the loan, posting a letter of credit, or providing additional collateral to Provident Bank. As of October 31, 2019, Station Place was in compliance with this covenant.

On October 27, 2017, FREIT’s revolving line of credit provided by the Provident Bank was renewed for a three-year term ending on October 27, 2020 at which point no further advances shall be permitted and provided the line of credit is not renewed by the lender, the outstanding principal balance of the line of credit shall convert to a commercial term loan maturing

20

on October 31, 2022. Draws against the credit line can be used for working capital needs and standby letters of credit. Draws against the credit line are secured by mortgages on FREIT’s Franklin Crossing Shopping Center in Franklin Lakes, New Jersey and retail space in Glen Rock, New Jersey. The total line of credit was increased from $12.8 million to $13 million and the interest rate on the amount outstanding will be at a floating rate of 275 basis points over the 30-day LIBOR with a floor of 3.75%. As of October 31, 2019, there was no amount outstanding and $13 million was available under the line of credit.

In accordance with the loan agreement for each of the loans described above, FREIT may be required to meet or maintain certain financial covenants throughout the term of the loan.

Operating Cash Flow: FREIT expects that cash provided by net operating income will be adequate to cover mandatory debt service payments (excluding balloon payments), necessary capital improvements at stabilized properties and other needs as may be required to maintain its status as a REIT.

 

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 of October 31, 2019 and October 31, 2018, and for the years ended October 31, 2019, 2018 and 2017. We believe that the following accounting policies or estimates require the application of management's most difficult, subjective, or complex judgments:

Revenue Recognition: Base rents, additional rents based on tenants' sales volume and reimbursement of the tenants' share of certain operating expenses are generally recognized when due from tenants. The straight-line basis is used to recognize base rents under leases if they provide for varying rents over the lease terms. Straight-line rents represent unbilled rents receivable to the extent straight-line rents exceed current rents billed in accordance with lease agreements. Before FREIT can recognize revenue, it is required to assess, among other things, its collectability.

Valuation of Long-Lived Assets: 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 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.

 

21

Results of Operations:

Fiscal Years Ended October 31, 2019 and 2018

Summary revenues and net income for the fiscal years ended October 31, 2019 (“Fiscal 2019”) and October 31, 2018 (“Fiscal 2018”) are as follows: 

   Years Ended October 31, 
   2019   2018   Change 
   (in thousands, except per share amounts) 
Real estate revenues:               
  Commercial properties  $27,122   $26,149   $973 
  Residential properties   33,155    31,848    1,307 
      Total real estate revenues   60,277    57,997    2,280 
                
Operating expenses:               
  Real estate operations   26,062    24,883    1,179 
  General and administrative   4,049    2,305    1,744 
  Depreciation   11,339    11,515    (176)
      Total operating expenses   41,450    38,703    2,747 
                
Operating income   18,827    19,294    (467)
                
Investment income   360    267    93 
Unrealized (loss) gain on interest rate cap contract   (160)   72    (232)
Gain on sale of property   836        836 
Financing costs   (18,070)   (18,667)   597 
      Net income   1,793    966    827 
                
Net (income) loss attributable to noncontrolling               
   interests in subsidiaries   (6)   517    (523)
Net income attributable to common equity  $1,787   $1,483   $304 
                
Earnings per share - basic and diluted:  $0.26   $0.21   $0.05 
                
Weighted average shares outstanding:               
  Basic and diluted   6,940    6,883      

Real estate revenue for Fiscal 2019 increased 3.9% to $60,277,000 compared to $57,997,000 for Fiscal 2018. The increase in revenue was primarily attributable to an increase in the average occupancy rate at the Rotunda property resulting from the lease-up of the residential units and retail space at the property.

Net income attributable to common equity (“net income-common equity”) for Fiscal 2019 was $1,787,000 ($0.26 per share basic and diluted), compared to $1,483,000 ($0.21 per share basic and diluted) for Fiscal 2018.

 

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The schedule below provides a detailed analysis of the major changes that impacted revenue and net income-common equity for Fiscal 2019 and 2018:

 

NET INCOME COMPONENTS            
   Years Ended October 31, 
   2019   2018   Change 
   (thousands of dollars) 
Income from real estate operations:               
    Commercial properties  $15,427   $14,288   $1,139 
    Residential properties   18,788    18,826    (38)
  Total income from real estate operations   34,215    33,114    1,101 
                
Financing costs:               
Fixed rate mortgages   (8,953)   (10,248)   1,295 
Floating rate mortgages   (7,384)   (5,368)   (2,016)
Floating rate - Rotunda construction loan       (1,321)   1,321 
Credit line       (28)   28 
Other - Corporate interest   (594)   (652)   58 
Mortgage cost amortization   (1,139)   (1,050)   (89)
  Total financing costs   (18,070)   (18,667)   597 
                
Investment income   360    267    93 
Unrealized (loss) gain on interest rate cap contract   (160)   72    (232)
                
General & administrative expenses:               
    Accounting fees   (654)   (544)   (110)
    Legal & professional fees   (135)   (121)   (14)
    Trustees and consultant fees   (1,164)   (989)   (175)
    Stock option expense   (124)   (130)   6 
    Special committee expenses   (1,416)       (1,416)
    Corporate expenses   (556)   (521)   (35)
  Total general & administrative expenses   (4,049)   (2,305)   (1,744)
                
Depreciation   (11,339)   (11,515)   176 
    Adjusted net income   957    966    (9)
                
Gain on sale of property   836        836 
    Net income   1,793    966    827 
                
Net (income) loss attributable to noncontrolling               
     interests in subsidiaries   (6)   517    (523)
    Net income attributable to common equity  $1,787   $1,483   $304 

 

Adjusted net income for Fiscal 2019 was $957,000 ($0.14 per share basic and diluted) compared to $966,000 ($0.14 per share basic and diluted) for Fiscal 2018. 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 the property in Patchogue, New York in Fiscal 2019. The slight decrease in adjusted net income for Fiscal 2019 was primarily driven by the following: real estate tax credits and refunds related to the Icon at the Rotunda property in the amount of approximately $1.1 million received in Fiscal 2018 related to Fiscal 2017 (with a consolidated impact to FREIT of approximately $0.7 million); general and administrative expense increase in the amount of approximately $1.7 million, primarily attributable to $1.4 million in Special Committee expenses related to advisory and legal fees incurred in Fiscal 2019; interest expense increase on the loan on the Rotunda property in the amount of approximately $0.6 million resulting primarily from an increase in interest rates as compared to the prior year; offset by an increase in revenue of approximately $2.3 million as explained above and Fiscal 2018 being burdened by a $1.2 million loan prepayment cost (with a consolidated impact to FREIT of $0.8 million) related to the Pierre Towers, LLC loan refinancing. Refer to the segment disclosure below for a more detailed discussion on the financial performance of FREIT’s commercial and residential segments.)

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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 2019, as compared to Fiscal 2018 (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,
   2019  2018  $  %  2019  2018  $  %  2019  2018
   (In Thousands)     (In Thousands)     (In Thousands)
Rental income  $20,324   $19,379   $945    4.9%  $32,592   $31,283   $1,309    4.2%  $52,916   $50,662 
Reimbursements   6,295    5,989    306    5.1%   134    104    30    28.8%   6,429    6,093 
Other   73    96    (23)   -24.0%   449    541    (92)   -17.0%   522    637 
Total revenue   26,692    25,464    1,228    4.8%   33,175    31,928    1,247    3.9%   59,867    57,392 
                                                   
Operating expenses   11,694    11,861    (167)   -1.4%   14,368    13,022    1,346    10.3%   26,062    24,883 
Net operating income  $14,998   $13,603   $1,395    10.3%  $18,807   $18,906   $(99)   -0.5%   33,805    32,509 
Gain on sale of property  $836   $   $836    100.0%  $   $   $    0.0%   836     
                                                   
Average Occupancy %   81.5%*   80.6%*        0.9%   95.2%   94.4%        0.8%          

 

  Reconciliation to consolidated net income-common equity:
  Deferred rents - straight lining   410    605 
  Investment income   360    267 
  Unrealized (loss) gain on interest rate cap contract   (160)   72 
  General and administrative expenses   (4,049)   (2,305)
  Depreciation   (11,339)   (11,515)
  Financing costs   (18,070)   (18,667)
             Net income   1,793    966 
  Net (income) loss attributable to noncontrolling interests   (6)   517 
             Net income attributable to common equity  $1,787   $1,483 

 

 *Average occupancy rate excludes the Patchogue, New York property from all periods presented as the property was sold in February 2019.

NOI is based on operating revenue and expenses directly associated with the operations of the real estate properties, but excludes deferred rents (straight lining), depreciation, financing costs and other items. FREIT assesses and measures segment operating results based on NOI.

Same Property NOI: FREIT considers same property net operating income (“Same Property NOI”) to be a useful supplemental non-GAAP measure of its operating performance. FREIT defines same property within both the commercial and residential segments to be those properties that FREIT has owned and operated for both the current and prior periods presented, excluding those properties that FREIT acquired or redeveloped during those periods. Any newly acquired property that has been in operation for less than a year, any property that is undergoing a major redevelopment but may still be in operation at less than full capacity, and/or any property that has been sold is not considered same property.

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

 

COMMERCIAL SEGMENT

The commercial segment contains eight (8) separate properties. Seven of these properties are multi-tenanted retail or office centers, and one is single tenanted on land located in Rockaway, New Jersey owned by FREIT from which it receives monthly rental income from a tenant who has built and operates a bank branch on the land. On February 8, 2019, FREIT sold a commercial building, formerly occupied as a Pathmark supermarket in Patchogue, New York for a sales price of $7.5 million. The sale of this property, which had a carrying value of approximately $6.2 million, resulted in a gain of approximately $0.8 million net of sales fees and commissions. Net cash proceeds of approximately $2 million were realized after paying off the related mortgage on this property in the amount of approximately $5.2 million. The sale of this property eliminates an operating loss of approximately $0.8 million ($0.12 per share) incurred, annually, since Pathmark vacated the building in December 2015 (see Note 2 to FREIT’s consolidated financial statements for further details).

As indicated in the table above under the caption Segment Information, total revenue and NOI from FREIT’s commercial segment for Fiscal 2019 increased by 4.8% and 10.3%, respectively, as compared to Fiscal 2018. Average occupancy for all commercial properties increased by 0.9% as compared to Fiscal 2018. The increase in revenue and NOI was primarily attributable to an increase in occupancy at the Rotunda property resulting from the lease-up of the new retail space from an average annual occupancy of 73.8% in Fiscal 2018 to 82.3% in Fiscal 2019.

Same Property Operating Results: FREIT’s commercial segment currently contains eight (8) same properties. (See definition of same property under Segment Information above.) The Patchogue property was excluded from same property results for Fiscal 2019 and 2018 because this property was sold in February 2019. Same property revenue and NOI for Fiscal 2019

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increased by 4.8% and 8.2%, respectively, as compared to Fiscal 2018. The changes resulted from the factors discussed in the immediately preceding paragraph. 

Leasing: The following tables reflect leasing activity at FREIT’s commercial properties for comparable leases (leases executed for spaces in which there was a tenant at some point during the previous twelve-month period) and non-comparable leases for Fiscal 2019.

 

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)   23    83,812   $16.99   $16.26    4.5%  $0.20   $0.50 
                                    
Non-comparable leases   8    10,708   $33.35     N/A      N/A    $2.32   $1.62 
                                    
Total leasing activity   31    94,520                          
                                    

 

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)   15    28,845   $31.68   $29.06    9.0%  $0.40   $0.85 
                                    
Non-comparable leases   4    14,590   $25.76     N/A      N/A    $5.16   $1.77 
                                    
Total leasing activity   19    43,435                          

 

 

(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.        

 

RESIDENTIAL SEGMENT

FREIT currently operates eight (8) multi-family apartment buildings or complexes totaling 1,437 apartment units. On December 7, 2017, FREIT completed the acquisition of Station Place, a residential apartment complex consisting of one building with 45 units, located in Red Bank, New Jersey through Station Place on Monmouth, LLC (FREIT’s 100% owned consolidated subsidiary). FREIT identified Station Place as the replacement property for the Hammel Gardens property located in Maywood, New Jersey that FREIT sold on June 12, 2017, which completed the like-kind exchange pursuant to Section 1031 of the Internal Revenue Code (see Notes 2 and 3 to FREIT’s consolidated financial statements for further details).

As indicated in the table above under the caption Segment Information, total revenue and NOI from FREIT’s residential segment for Fiscal 2019 increased by 3.9% and decreased by 0.5%, respectively, as compared to Fiscal 2018. Average occupancy for all residential properties increased by 0.8% as compared to Fiscal 2018. The increase in revenue for Fiscal 2019 was primarily attributable to: (a) an increase in the average occupancy at the Icon (the residential portion of the Rotunda property in Baltimore, Maryland) to 95.1% in Fiscal 2019 from 91.9% in Fiscal 2018; and (b) an increase in base rent across the residential properties. The slight decrease in NOI for Fiscal 2019 was primarily attributed to the real estate tax credits and refunds related to the Icon property at the Rotunda in the amount of $1.1 million received in Fiscal 2018 related to Fiscal 2017 (with a consolidated impact to FREIT of approximately $0.7 million) offset by a $1.2 million increase in revenue as explained above.

Same Property Operating Results: FREIT’s residential segment currently contains seven (7) same properties. (See definition of same property under Segment Information above.) The Station Place property is not included as same property, since it is a newly acquired property that had been in operation for less than a year in Fiscal 2018. Same property revenue and NOI increased by 3.8% and decreased by 0.3%, respectively, from Fiscal 2018. Average occupancy for same properties increased by approximately 0.9% as compared to Fiscal 2018. The changes resulted from the factors discussed in the immediately preceding paragraph.

FREIT’s residential revenue is principally composed of monthly apartment rental income. Total rental income is a factor of occupancy and monthly apartment rents. Monthly average residential rents, (excluding from both periods presented for comparability purposes, the Station Place property which was a newly acquired property that had been in operation for less than a year in Fiscal 2018), at the end of Fiscal 2019 and Fiscal 2018 were $1,949 and $1,902, respectively. For comparability purposes, the average residential rent for Fiscal 2018 has been restated to include the impact of the Icon. 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 $326,000 and $304,000, respectively.

Capital expenditures: Since all of FREIT’s apartment communities, with the exception of the Boulders, Regency, Icon and Station Place properties, were constructed more than 25 years ago, FREIT tends to spend more in any given year on maintenance and capital improvements than may be spent on newer properties. Funds for these capital projects will be available from cash flow from the property's operations and cash reserves. In April 2018, Pierre Towers, LLC (“Pierre”), a consolidated subsidiary, entered into an agreement with Public Service Electric & Gas Company (“PSE&G”), whereby PSE&G funded a project to make certain upgrades at the Pierre property located in Hackensack, New Jersey, which included

25

boiler replacement, replacement of interior and exterior lighting fixtures and minor lighting controls in apartment lighting. PSE&G funded 100% of this project at a total cost of approximately $926,000 and the project was completed in December 2018. Per the reimbursement agreement, Pierre Towers, LLC will reimburse PSE&G for approximately $314,000 of this cost on a monthly basis over a five-year term with no interest.

 

FINANCING COSTS

 

   Years Ended October 31, 
   2019   2018 
   (In Thousands of Dollars) 
Fixed rate mortgages (a):          
    1st Mortgages          
    Existing  $8,763   $8,353 
    New   190    1,895 
Variable rate mortgages:          
    1st Mortgages          
    Existing   7,384    1,071 
    New       4,297 
Construction loan-Rotunda       1,321 
Credit line       28 
Other   594    652 
Total financing costs, gross   16,931    17,617 
     Amortization of mortgage costs   1,139    1,050 
Total financing costs, net  $18,070   $18,667 

 

(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 2019 decreased 3.2% as compared to Fiscal 2018 which was primarily driven by Fiscal 2018 being burdened by a $1.2 million loan prepayment cost (with a consolidated impact to FREIT of $0.8 million) related to the Pierre Towers, LLC loan refinancing offset by an increase in Fiscal 2019 of approximately $0.6 million in interest expense on the Grande Rotunda, LLC loan resulting from an increase in the one-month LIBOR interest rate. (See Note 5 to FREIT’s consolidated financial statements for more details.)

 

INVESTMENT INCOME

Investment income for Fiscal 2019 was $360,000 as compared to $267,000 for Fiscal 2018. 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’s former Chairman, Chief Executive Officer and consultant of FREIT, Robert S. Hekemian, Jr., the Chief Executive Officer, President and a Trustee of FREIT, and David Hekemian, a Trustee of FREIT, for their equity investments (through Rotunda 100, LLC) in Grande Rotunda, LLC, a limited liability company in which FREIT owns a 60% equity interest, and for their equity investments (through Damascus 100, LLC) in Damascus Centre, LLC, a limited liability company in which FREIT owns a 70% equity interest). The secured loan receivable (including accrued interest) from Damascus 100 was repaid in the fourth quarter of Fiscal 2018.

 

GENERAL AND ADMINISTRATIVE EXPENSES (“G&A”)

During Fiscal 2019, G&A was $4,049,000 as compared to $2,305,000 for Fiscal 2018. The primary components of G&A are accounting/auditing fees, legal and professional fees, Trustees’ and consultant fees, and Special Committee fees. The increase in G&A expense in Fiscal 2019 was primarily attributed to expenses incurred by the Special Committee related to advisory and legal fees incurred.

 

DEPRECIATION

Depreciation expense from operations for Fiscal 2019 was $11,339,000 as compared to $11,515,000 for Fiscal 2018. The slight decrease in depreciation in Fiscal 2019 was primarily attributable to lower depreciation expense resulting from the sale of the Patchogue property in February 2019. (See Note 2 to FREIT’s consolidated financial statements for further details.)

 

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Fiscal Years Ended October 31, 2018 and 2017

Summary revenues and net income for the fiscal years ended October 31, 2018 and October 31, 2017 (“Fiscal 2017”) are as follows:

 

   Years Ended October 31, 
   2018   2017   Change 
   (in thousands, except per share amounts) 
Real estate revenues:               
  Commercial properties  $26,149   $24,748   $1,401 
  Residential properties   31,848    26,886    4,962 
      Total real estate revenues   57,997    51,634    6,363 
                
Operating expenses:               
  Real estate operations   24,883    26,233    (1,350)
  Lease termination fee       620    (620)
  General and administrative   2,305    2,129    176 
  Depreciation   11,515    10,669    846 
      Total operating expenses   38,703    39,651    (948)
                
Operating income   19,294    11,983    7,311 
                
Investment income   267    206    61 
Unrealized gain on interest rate cap contract   72        72 
Gain on sale of property       15,395    (15,395)
Loan prepayment costs relating to property sale       (1,139)   1,139 
Financing costs   (18,667)   (15,762)   (2,905)
      Net income   966    10,683    (9,717)
                
Net loss attributable to noncontrolling               
   interests in subsidiaries   517    2,433    (1,916)
Net income attributable to common equity  $1,483   $13,116   $(11,633)
                
Earnings per share - basic and diluted:  $0.21   $1.92   $(1.71)
                
Weighted average shares outstanding:               
  Basic and diluted   6,883    6,833      

 

Real estate revenue for Fiscal 2018 increased 12.3% to $57,997,000 compared to $51,634,000 for Fiscal 2017. The increase in revenue was primarily attributable to an increase in the average occupancy rate at the Rotunda property resulting from the lease-up of the new residential units and retail space at the property offset partially by the loss of revenue from Macy’s vacating the Preakness Shopping Center in Wayne, New Jersey in April 2017.

Net income attributable to common equity (“net income-common equity”) for Fiscal 2018 was $1,483,000 ($0.21 per share basic and diluted), compared to $13,116,000 ($1.92 per share basic and diluted) for Fiscal 2017. Excluding the $14.3 million net impact of the sale of the Hammel Gardens property, net income for Fiscal 2017 was a net loss of $1.1 million or ($0.17) per share.

Included in net income for Fiscal 2018 was the following: a consolidated net loss of $1.8 million at the Rotunda property as the property continues to lease-up the new retail space and residential units (inclusive of $2.2 million of real estate tax refunds and credits attributed to the residential development at the Rotunda Icon property with a consolidated impact to FREIT of approximately $1.3 million based on FREIT’s 60% ownership); a loan prepayment cost of $1.2 million related to the Pierre Towers, LLC loan refinancing (which is included in interest expense on the accompanying consolidated statement of income for the year ended October 31, 2018) with a consolidated impact to FREIT of approximately $0.8 million based on FREIT’s 65% ownership. Included in net income for Fiscal 2017 was the following: a consolidated net loss of $4.6 million at the Rotunda property driven by higher operational costs as the property was leasing up the new retail space and residential units and increased real estate taxes related to the reassessment resulting from completion of the project; and a $620,000 lease termination fee payment made by Wayne PSC, LLC, owner of the Preakness Shopping Center in Wayne, New Jersey, with a consolidated impact to FREIT of approximately ($250,000) based on FREIT’s 40% ownership. (Refer to the segment disclosure below for a more detailed discussion on the financial performance of FREIT’s commercial and residential segments.)

 

27 

The schedule below provides a detailed analysis of the major changes that impacted revenue and net income-common equity for Fiscal 2018 and 2017:

 

NET INCOME COMPONENTS            
   Years Ended October 31, 
   2018   2017   Change 
   (thousands of dollars) 
Income from real estate operations:               
    Commercial properties  $14,288   $12,957   $1,331 
    Residential properties   18,826    12,444    6,382 
      Total income from real estate operations   33,114    25,401    7,713 
                
Financing costs:               
Fixed rate mortgages   (10,248)   (9,462)   (786)
Floating rate mortgages   (5,368)   (476)   (4,892)
Floating rate - Rotunda construction loan   (1,321)   (4,014)   2,693 
Credit line   (28)   (69)   41 
Other - Corporate interest   (652)   (443)   (209)
Mortgage cost amortization   (1,050)   (1,298)   248 
  Total financing costs   (18,667)   (15,762)   (2,905)
                
Investment income   267    206    61 
Unrealized gain on interest rate cap contract   72        72 
                
General & administrative expenses:               
    Accounting fees   (544)   (521)   (23)
    Legal & professional fees   (121)   (74)   (47)
    Trustees and consultant fees   (989)   (947)   (42)
    Stock option expense   (130)   (122)   (8)
    Corporate expenses   (521)   (465)   (56)
  Total general & administrative expenses   (2,305)   (2,129)   (176)
                
Depreciation   (11,515)   (10,669)   (846)
    Adjusted net income (loss)   966    (2,953)   3,919 
                
Gain on sale of property       15,395    (15,395)
Loan prepayment costs relating to property sale       (1,139)   1,139 
Lease termination fee       (620)   620 
    Net income   966    10,683    (9,717)
                
Net loss attributable to noncontrolling interests               
     in subsidiaries   517    2,433    (1,916)
    Net income attributable to common equity  $1,483   $13,116   $(11,633)

 

Adjusted net income for Fiscal 2018 was $966,000 ($0.14 per share basic and diluted), compared to a loss of $2,953,000 or ($0.43) per share basic and diluted) for Fiscal 2017. 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 and loan prepayment costs related to the sale of Hammel Gardens in Maywood, New Jersey in Fiscal 2017; and a lease termination fee paid in Fiscal 2017.

 

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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 2018, as compared to Fiscal 2017:

   Commercial  Residential  Combined
   Years Ended        Years Ended        Years Ended
   October 31,  Increase (Decrease)  October 31,  Increase (Decrease)  October 31,
   2018  2017  $  %  2018  2017  $  %  2018  2017
   (In Thousands)     (In Thousands)     (In Thousands)
Rental income  $19,379   $18,247   $1,132    6.2%  $31,283   $26,476   $4,807    18.2%  $50,662   $44,723 
Reimbursements   5,989    5,550    439    7.9%   104    47    57    121.3%   6,093    5,597 
Other   96    317    (221)   -69.7%   541    363    178    49.0%   637    680 
Total revenue   25,464    24,114    1,350    5.6%   31,928    26,886    5,042    18.8%   57,392    51,000 
                                                   
Operating expenses   11,861    11,791    70    0.6%   13,022    14,442    (1,420)   -9.8%   24,883    26,233 
Net operating income  $13,603   $12,323   $1,280    10.4%  $18,906   $12,444   $6,462    51.9%   32,509    24,767 
Gain on sale of property  $   $   $    0.0%  $   $15,395   $(15,395)   -100.0%       15,395 
Loan prepayment costs relating to property sale  $   $   $    0.0%  $   $(1,139)  $1,139    100.0%       (1,139)
                                                   
Average Occupancy %   76.8%   75.7%        1.1%   94.4%   83.8%*        10.6%          
                                                   

 

  Reconciliation to consolidated net income-common equity:     
  Deferred rents - straight lining   605    634 
  Lease termination fee       (620)
  Investment income   267    206 
  Unrealized gain on interest rate cap contract   72     
  General and administrative expenses   (2,305)   (2,129)
  Depreciation   (11,515)   (10,669)
  Financing costs   (18,667)   (15,762)
             Net income   966    10,683 
  Net loss attributable to noncontrolling interests   517    2,433 
             Net income attributable to common equity  $1,483   $13,116 

 

* Average occupancy rate excludes the Maywood, New Jersey ("Hammel Gardens") as the property was sold in June 2017.

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.

As indicated in the table above under the caption Segment Information, total revenue and NOI from FREIT’s commercial segment for Fiscal 2018 increased by 5.6% and 10.4%, respectively, as compared to Fiscal 2017. The increase in revenue and NOI was primarily attributable to an increase in occupancy at the Rotunda property resulting from the lease-up of the new retail space offset partially by the loss of revenue from Macy’s vacating the Preakness Shopping Center in Wayne, New Jersey in April 2017.

Same Property Operating Results: FREIT’s commercial segment currently contains nine (9) same properties. (See definition of same property under Segment Information above.) Since all of FREIT’s commercial properties are considered same properties in the current fiscal year, refer to the preceding paragraph for discussion of changes in same property results.

Leasing: The following tables reflect leasing activity at FREIT’s commercial properties for comparable leases (leases executed for spaces in which there was a tenant at some point during the previous twelve-month period) and non-comparable leases for Fiscal 2018.

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    75,158   $23.74   $23.82    -0.3%  $0.20   $0.46 
                                    
Non-comparable leases   7    12,400   $40.64     N/A      N/A    $4.32   $1.99 
                                    
Total leasing activity   26    87,558                          
                                    

 

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)   5    7,870   $26.24   $23.78    10.3%  $0.27   $0.15 
                                    
Non-comparable leases          $     N/A      N/A    $   $ 
                                    
Total leasing activity   5    7,870                          
                                    

 

(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.        

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The US economic recovery continued to show signs of improvement while there continues to be some uncertainty in the retail environment. Average occupancy rates for Fiscal 2018, increased 1.1% from last year’s comparable period which was primarily attributed to an increase in occupancy at the Rotunda property due to continued lease up at the property offset by the decline in occupancy at Wayne PSC due to Macy’s vacating its space at the Preakness Shopping Center in April 2017.

 

RESIDENTIAL SEGMENT

FREIT operates eight (8) multi-family apartment buildings or complexes totaling 1,437 apartment units, which is inclusive of the Station Place property in Red Bank New Jersey, which was acquired in December 2017. On June 12, 2017, FREIT sold its Hammel Gardens property, a residential property located in Maywood, New Jersey, for a sales price of $17 million. The sale of this property, which had a carrying value of approximately $0.7 million, resulted in a capital gain of approximately $15.4 million net of sales fees and commissions. As a result of this sale, FREIT incurred a loan prepayment cost of approximately $1.1 million and paid off the related mortgage on the Hammel Gardens property in the amount of approximately $8 million from the proceeds of the sale. FREIT structured this sale in a manner that qualified 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 $15.4 million capital gain. The net proceeds from this sale, which were approximately $7 million, were held in escrow until a replacement property was purchased. A replacement property related to this like-kind exchange (Station Place) was acquired on December 7, 2017, and the sale proceeds held in escrow were applied to the purchase price of such property. (See Note 2 and 3 to FREIT’s consolidated financial statements.)

As indicated in the table above under the caption Segment Information, total revenue and NOI from FREIT’s residential segment for Fiscal 2018 increased by 18.8% and 51.9%, respectively, as compared to Fiscal 2017. The increase in revenue and NOI for Fiscal 2018 was primarily attributable to: (a) an increase in the average annual occupancy at the Icon (the residential portion of the Rotunda property in Baltimore, Maryland) to 91.9% in Fiscal 2018 from 51.3% in Fiscal 2017; (b) an increase in base rent; (c) $2.2 million in real estate tax refunds and credits attributed to the residential development at the Rotunda Icon property (with a consolidated impact to FREIT of approximately $1.3 million based on FREIT’s 60% ownership).

Same Property Operating Results: FREIT’s residential segment currently contains seven (7) same properties. (See definition of same property under Segment Information above.) The Station Place property is not included as same property, since it is a newly acquired property that has been in operation for less than a year. The Hammel Gardens property was excluded from same property results for all periods presented because this property was sold in the prior fiscal year. Same property revenue and NOI increased by 17.6% and 50%, respectively, from Fiscal 2017. The changes resulted from the factors discussed in the immediately preceding paragraph.

FREIT’s residential revenue is principally composed of monthly apartment rental income. Total rental income is a factor of occupancy and monthly apartment rents. Monthly average residential rents, (excluding from both periods presented for comparability purposes, the Station Place property which was a newly acquired property that has been in operation for less than a year and the Icon which reached a stabilized occupancy rate in the third quarter of Fiscal 2018), at the end of Fiscal 2018 and Fiscal 2017 were $1,902 and $1,863, 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 $231,000 and $220,000, respectively.

 

FINANCING COSTS

 

         
   Years Ended October 31, 
   2018   2017 
   (In Thousands of Dollars) 
Fixed rate mortgages (a):          
    1st Mortgages          
    Existing  $8,353   $9,462 
    New   1,895     
Variable rate mortgages:          
    1st Mortgages          
    Existing   1,071     
    New   4,297    476 
Construction loan-Rotunda   1,321    4,014 
Credit line   28    69 
Other   652    443 
Total financing costs, gross   17,617    14,464 
     Amortization of mortgage costs   1,050    1,298 
Total financing costs, net  $18,667   $15,762 

 

(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 2018 increased 18.4% as compared to Fiscal 2017 which was primarily attributable to a $1.2 million loan prepayment cost related to the Pierre Towers, LLC loan refinancing with a consolidated impact to FREIT of

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approximately $0.8 million and an increase in interest associated with the refinancing of Grande Rotunda LLC’s loan on the Rotunda property. (See Note 5 to FREIT’s consolidated financial statements for more details.)

 

INVESTMENT INCOME

Investment income for Fiscal 2018 was $267,000 as compared to $206,000 for the prior year’s period. 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’s former Chairman, Chief Executive Officer and consultant of FREIT, Robert S. Hekemian, Jr., the Chief Executive Officer and a Trustee of FREIT, and David Hekemian, a Trustee of FREIT, for their equity investments (through Rotunda 100, LLC) in Grande Rotunda, LLC, a limited liability company in which FREIT owns a 60% equity interest, and for their equity investments (through Damascus 100, LLC) in Damascus Centre, LLC, a limited liability company in which FREIT owns a 70% equity interest). The secured loan receivable (including accrued interest) from Damascus 100 was repaid in the fourth quarter of Fiscal 2018.

 

GENERAL AND ADMINISTRATIVE EXPENSES (“G&A”)

During Fiscal 2018, G&A was $2,305,000 as compared to $2,129,000 for the prior year’s period. The primary components of G&A are accounting/auditing fees, legal and professional fees, Trustees’ and consulting fees.

 

DEPRECIATION

Depreciation expense from operations for Fiscal 2018 was $11,515,000 as compared to $10,669,000 for the prior year’s period. The increase in depreciation was primarily attributable to additional retail tenant improvements at the Rotunda property being placed into service as the property continues to lease-up and the acquisition of Station Place in December 2017.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $13.8 million for Fiscal 2019 compared to $12.9 million for Fiscal 2018. FREIT expects that cash provided by operating activities and cash reserves will be adequate to cover mandatory debt service payments (including payments of interest, but excluding balloon payments), real estate taxes, recurring capital improvements at properties and other needs to maintain its status as a REIT for at least a period of one year from the date of filing of this Form 10-K.

As at October 31, 2019, FREIT had cash, cash equivalents and restricted cash totaling $42.5 million compared to $26.4 million at October 31, 2018. The increase in cash for Fiscal 2019 is primarily attributable to $13.8 million in net cash provided by operating activities and $4 million in net cash provided by investing activities after capital expenditures, offset by $1.7 million used in financing activities.

On February 8, 2019, FREIT sold a commercial building, formerly occupied as a Pathmark supermarket in Patchogue, New York for a sales price of $7.5 million. The sale of this property, which had a carrying value of approximately $6.2 million, resulted in a gain of approximately $0.8 million net of sales fees and commissions. Net cash proceeds of approximately $2 million were realized after paying off the related mortgage on this property in the amount of approximately $5.2 million. In connection with and in anticipation of the closing of the sale of the Patchogue property, FREIT declared a one-time special dividend of $0.10 per share in the first quarter of Fiscal 2019. The sale of this property eliminates an operating loss of approximately $0.8 million ($0.12 per share) incurred, annually, since Pathmark vacated the building in December 2015. (See Note 2 to FREIT’s consolidated financial statements.)

On June 12, 2017, FREIT sold its Hammel Gardens property, a residential property located in Maywood, New Jersey, for a sales price of $17 million. The sale of this property, which had a carrying value of approximately $0.7 million, resulted in a capital gain of approximately $15.4 million net of sales fees and commissions. As a result of this sale, FREIT incurred a loan prepayment cost of approximately $1.1 million and paid off the related mortgage on the Hammel Gardens property in the amount of approximately $8 million from the proceeds of the sale. FREIT structured this sale in a manner that qualified 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 $15.4 million capital gain. The net proceeds from this sale, which were approximately $7 million, were held in escrow until a replacement property was purchased. (See Note 2 to FREIT’s consolidated financial statements.)

On December 7, 2017, FREIT completed the acquisition of Station Place, a residential apartment complex consisting of one building with 45 units, located in Red Bank, New Jersey through Station Place on Monmouth, LLC (FREIT’s 100% owned consolidated subsidiary). FREIT identified Station Place as a replacement property for the Hammel Gardens property that FREIT sold on June 12, 2017 to complete the like-kind exchange transaction under Section 1031 of the Internal Revenue Code. Station Place is part of FREIT’s residential segment. The acquisition cost was $19,550,000 (inclusive of approximately $550,000 of transaction costs capitalized as part of the asset acquisition), which was funded in part with $7 million in net proceeds from the sale of the Hammel Gardens property, and the remaining balance of $12,350,000 (inclusive of the transaction costs) was funded by Station Place on Monmouth, LLC through long-term financing for this property from Provident Bank. (See Note 3 to FREIT’s consolidated financial statements.)

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On April 25, 2017, Wayne PSC announced it had agreed to a termination of Macy’s lease for the 81,160 square foot Macy’s store at the Preakness Shopping Center, effective as of April 15, 2017. To terminate the lease and take possession of the space, Wayne PSC paid Macy’s a termination fee of $620,000. Wayne PSC expects to re-position this space and re-lease to a new tenant (or multiple tenants) at market rents, which are currently higher than the rent provided for under the terminated Macy’s lease. FREIT will lose total consolidated annual rental income, including reimbursements, of approximately $0.2 million until such time as the space is fully re-leased. FREIT anticipates increased revenue from the space when it is re-leased. (See Note 14 to FREIT’s consolidated financial statements.)

FREIT owns and operates an 87,661 square foot shopping center located in Franklin Lakes, New Jersey, the anchor tenant of which is Stop & Shop. On July 26, 2017, Stop  & Shop entered into a lease modification with FREIT whereby the tenant exercised its option to renew the lease for a ten-year period with a right of the tenant to terminate the lease at any time during the fifth year if the store does not meet certain sales volume levels set forth in the modification. This lease modification provided for a $250,000 reduction in annual rent over the renewed term. (See Note 14 to FREIT’s consolidated financial statements.)

The Rotunda property in Baltimore, Maryland (owned by FREIT’s 60% owned consolidated affiliate Grande Rotunda, LLC) is an 11.5 acre site containing, at the time that the property was acquired, a building with approximately 137,000 sq. ft. of office space and approximately 83,000 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 retail tenant improvements, the redevelopment was substantially completed in the third quarter of Fiscal 2016. 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. By the end of the third quarter of Fiscal 2018, the residential section reached a stabilized level of occupancy of approximately 94%. The retail space continues to lease-up and is approximately 86.5% leased and 84.1% occupied as of October 31, 2019. FREIT expects Rotunda’s retail operations to stabilize in 2020.

With regard to the funding of the Rotunda redevelopment project, Wells Fargo Bank, a previous lender, required that Grande Rotunda, LLC contribute not less than $14,460,000 toward the construction before any construction loan proceeds could be disbursed. To secure these funds Grande Rotunda, LLC made a capital call on its members, which are 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, FREIT’s Board of Trustees 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. On December 7, 2017, the Board approved a further extension of the maturity dates of these loans to the date or dates upon which distributions of cash are made by Grande Rotunda, LLC to its members as a result of the refinancing or sale of Grande Rotunda, LLC or the Rotunda property. Rotunda 100 is principally owned by employees of Hekemian & Co., including Allan Tubin, FREIT’s Chief Financial Officer, and certain members of the immediate family of Robert S. Hekemian, FREIT’s former Chairman, Chief Executive Officer and consultant of FREIT, Robert S. Hekemian, Jr., Chief Executive Officer, President and a Trustee of FREIT, and David Hekemian, a Trustee of FREIT. As of October 31, 2019, FREIT and Rotunda 100 have made their required capital 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 contributions as additional investments in Grande Rotunda, LLC.

In Fiscal 2017, Grande Rotunda, LLC incurred substantial expenditures at the Rotunda property related to retail tenant improvements, leasing costs and operating expenditures which, in the aggregate, exceeded revenues as the property was still in the rent up phase and the construction loan previously held with Wells Fargo was at its maximum level resulting in no additional funding available to draw. Accordingly, during Fiscal 2017 the equity owners in Grande Rotunda, LLC (FREIT with a 60% ownership and Rotunda 100 with a 40% ownership) contributed their respective pro-rata share of any cash needs through loans to Grande Rotunda, LLC. As of October 31, 2019 and 2018, Rotunda 100, LLC has funded Grande Rotunda, LLC with approximately $5.7 million and $5.4 million (including interest), respectively, which is included in “Due to affiliate” on the accompanying consolidated balance sheets.

On February 7, 2018, Grande Rotunda, LLC refinanced its $115.3 million construction loan held by Wells Fargo with a new loan held by Aareal Capital Corporation in the amount of approximately $118.5 million with additional funding available for retail tenant improvements and leasing costs in the amount of $3,380,000. This refinancing paid off the loan previously held by Wells Fargo, funded loan closing costs and paid the amount due to Hekemian Development Resources for a development fee of $900,000 plus accrued interest of approximately $45,000 (See Note 8 to FREIT’s consolidated financial statements for further details on this fee). This loan is secured by the Rotunda property, bears a floating interest rate at 285 basis points over the one-month LIBOR rate and has a maturity date of February 6, 2021 with two one-year renewal options. As part of this transaction, Grande Rotunda, LLC purchased an interest rate cap on LIBOR for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan. As of October 31, 2019,

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approximately $118.5 million of this loan facility was drawn down and the interest rate was approximately 4.84%. (See Notes 5 and 6 to FREIT’s consolidated financial statements for further details).

On April 22, 2016, Damascus Centre, LLC was able to take-down a second tranche of its loan held with People’s United Bank in the amount of $2,320,000, of which approximately $470,000 was readily available and the remaining $1,850,000 was held in escrow. In July 2018, these funds totaling $1,850,000 were released from escrow by the bank and became readily available to Damascus, Centre LLC. Damascus Centre, LLC distributed amounts due to FREIT and Damascus 100 and Damascus 100 in turn repaid FREIT the secured loans receivable plus accrued interest in the amount of approximately $1.9 million.

Credit Line: On October 27, 2017, FREIT’s revolving line of credit provided by the Provident Bank was renewed for a three-year term ending on October 27, 2020 at which point no further advances shall be permitted and provided the line of credit is not renewed by the lender, the outstanding principal balance of the line of credit shall convert to a commercial term loan maturing on October 31, 2022. Draws against the credit line can be used for working capital needs and standby letters of credit. Draws against the credit line are secured by mortgages on FREIT’s Franklin Crossing Shopping Center in Franklin Lakes, New Jersey and retail space in Glen Rock, New Jersey. The total line of credit was increased from $12.8 million to $13 million and the interest rate on the amount outstanding will be at a floating rate of 275 basis points over the 30-day LIBOR with a floor of 3.75%. During Fiscal 2017, FREIT utilized $3 million of its credit line to fund tenant improvements for new retail tenants at the Rotunda property. In February 2018, FREIT repaid the line of credit in the amount of $3.1 million. As of October 31, 2019 and 2018, there was no amount outstanding and $13 million was available under the line of credit.

Dividend: After careful consideration of FREIT’s Fiscal 2019 financial results, cash flow and projected cash needs, the Board of Trustees declared a fourth quarter dividend of $0.20 per share, which was paid on December 13, 2019 to shareholders of record on December 1, 2019. Specifically, over the course of the Trust’s history, the fourth quarter dividend takes into consideration the full fiscal year results, and as such, may not be indicative of future quarterly dividends. The Board will continue to evaluate the dividend on a quarterly basis.

As at October 31, 2019, FREIT’s aggregate outstanding mortgage debt was $352.8 million, which bears a weighted average interest rate of 4.51% and an average life of approximately 4.4 years. FREIT’s fixed rate mortgages are subject to amortization schedules that are longer than the terms of the mortgages. As such, balloon payments (unpaid principal amounts at mortgage due date) for all mortgage debt will be required as follows:  

Fiscal Year 2020 2021 2022 2023 2024 2025 2026 2028 2029
($ in millions)                   
Mortgage "Balloon" Payments    $21.9 $137.6 (A) $14.4 $34.4 $9.0 $13.9 $18.2 $53.9 $25.9
                   
(A) Includes loan on the Rotunda property located in Baltimore, Maryland in the amount of approximately $118.5 million refinanced with Aareal Capital Corporation on February 7, 2018.

The following table shows the estimated fair value and carrying value of FREIT’s long-term debt, net at October 31, 2019 and 2018: 

($ in Millions)   October 31, 2019   October 31, 2018
         
Fair Value   $352.9   $338.3
         
Carrying Value, Net $349.9   $347.0

Fair values are estimated based on market interest rates at the end of each fiscal year and on a discounted cash flow analysis. Changes in assumptions or estimation methods may significantly affect these fair value estimates. The fair value is based on observable inputs (level 2 in the fair value hierarchy as provided by authoritative guidance).

FREIT expects to refinance the individual mortgages with new mortgages 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, 2019, a 1% interest rate increase would reduce the fair value of FREIT’s debt by $10 million, and a 1% decrease would increase the fair value by $10.7 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 acquisitions for its real estate portfolio that will increase income and cash flow to shareholders.

On August 26, 2019, Berdan Court, LLC (“Berdan Court”), (owned 100% by FREIT), refinanced its $17 million loan (which matured on September 1, 2019) with the lender in the amount of $28,815,000. This loan, secured by an apartment building located in Wayne, New Jersey, has a term of ten years and bears a fixed interest rate equal to 3.54%. Interest-only payments are required each month for the first five years of the term and thereafter, principal payments plus accrued interest will be required each month through maturity. This refinancing resulted in: (i) a reduction in the annual interest rate from a fixed rate of 6.09% to a fixed rate of 3.54% and (ii) net refinancing proceeds of approximately $11.6 million which can be used for capital expenditures and general corporate purposes.

On April 3, 2019, WestFREIT, Corp. (owned 100% by FREIT) exercised its option to extend its loan held by M&T Bank, with an outstanding balance of approximately $22.5 million, for twelve months. Effective beginning on June 1, 2019, the

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extension of this loan secured by the Westridge Square Shopping Center, requires monthly principal payments of $47,250 plus interest based on a floating interest rate equal to 240 basis points over the one-month LIBOR and has a maturity date of May 1, 2020.

On January 8, 2018, Pierre Towers, LLC (“Pierre”), owned by S And A Commercial Associates Limited Partnership (“S&A”), which is a consolidated subsidiary, refinanced its $29.1 million loan held by State Farm with a new mortgage loan from New York Life Insurance in the amount of $48 million. Pierre paid New York Life Insurance a good faith deposit in the amount of $960,000, which was reimbursed by New York Life when the loan closed in January 2018. The new loan has a term of ten years and bears a fixed interest rate equal to 3.88%. Interest-only payments are required each month for the first five years of the term and thereafter, principal payments plus accrued interest will be required each month through maturity. This refinancing resulted in: (i) a reduction in the annual interest rate from a fixed rate of 5.38% to a fixed rate of 3.88%; and (ii) net refinancing proceeds of approximately $17.2 million (after giving effect to a $1.2 million loan prepayment cost to pay-off the loan held by State Farm) that were distributed to the partners in S&A with FREIT receiving approximately $11.2 million, based on its 65% membership interest in S&A, which can be used for capital expenditures and general corporate purposes.

On December 7, 2017, Station Place on Monmouth, LLC (owned 100% by FREIT) closed on a mortgage loan in the amount of $12,350,000 held by Provident Bank to purchase the Station Place property in Red Bank, New Jersey. Interest-only payments are required each month for the first two years of the term and thereafter, principal payments plus accrued interest will be required each month through maturity. The loan bears a floating interest rate equal to 180 basis points over the one-month BBA LIBOR with a maturity date of December 15, 2027. In order to minimize interest rate volatility during the term of the loan, Station Place on Monmouth, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 4.35% over the term of the loan. 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. On January 21, 2019, Station Place on Monmouth, LLC entered into a modification agreement with Provident Bank to modify the loan’s DSCR covenants. (See Note 5 to the consolidated financial statements.)

Interest rate swap contracts: To reduce interest rate volatility, FREIT uses a “pay fixed, receive floating” interest rate swap to convert floating interest rates to fixed interest rates over the term of a certain loan. FREIT enters into these swap contracts with a counterparty that is usually a high-quality commercial bank. In essence, FREIT agrees to pay its counterparties a fixed rate of interest on a dollar amount of notional principal (which corresponds to FREIT’s mortgage debt) over a term equal to the term of the mortgage notes. FREIT’s counterparties, in return, agree to pay FREIT a short-term rate of interest - generally LIBOR - on that same notional amount over the same term as the mortgage notes.

FREIT has variable interest rate mortgages securing its Damascus Centre, Regency, Preakness Shopping Center and Station Place properties. To reduce interest rate fluctuations, FREIT entered into interest rate swap contracts for each of these loans. These interest rate swap contracts effectively converted variable interest rate payments to fixed interest rate payments. The contracts were based on a notional amount of approximately $22,320,000 ($19,396,000 at October 31, 2019) for the Damascus Centre swaps, a notional amount of approximately $16,200,000 ($15,588,000 at October 31, 2019) for the Regency swap, a notional amount of approximately $25,800,000 ($23,794,000 at October 31, 2019) for the Preakness Shopping Center swap and a notional amount of approximately $12,350,000 ($12,350,000 at October 31, 2019) for the Station Place swap.

Interest rate cap contract: To limit exposure on interest rate volatility, FREIT uses an interest rate cap contract to cap a floating interest rate at a set pre-determined rate. FREIT enters into cap contracts with a counterparty that is usually a high-quality commercial bank. In essence, so long as the floating interest rate is below the cap rate, FREIT agrees to pay its counterparties a variable rate of interest on a dollar amount of notional principal (which corresponds to FREIT’s mortgage debt). Once the floating interest rate rises above the cap rate, FREIT’s counterparties, in return, agree to pay FREIT a short-term rate of interest above the cap on that same notional amount.

FREIT has a variable interest rate loan securing its Rotunda property. As part of the refinancing of Grande Rotunda, LLC’s construction loan held by Wells Fargo with a new loan from Aareal Capital Corporation, Grande Rotunda, LLC purchased an interest rate cap on LIBOR for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan. The cap contract was based on a notional amount of approximately $121,900,000 ($121,900,000 at October 31, 2019) and a term of two years with the loan being hedged against having a balance of approximately $118,520,000 and a term of three years.

Current GAAP requires FREIT to mark-to-market its interest rate swap and cap contracts. As the floating interest rate varies from time-to-time over the term of the contract, the value of the contract will change upward or downward. If the floating rate is higher than the fixed rate, the value of the contract goes up and there is a gain and an asset. If the floating rate is less than the fixed rate, there is a loss and a liability. The interest rate swaps are accounted for as effective cash flow hedges with the corresponding gains or losses on these contracts not affecting FREIT’s income statement; changes in the fair value of these cash flow hedges will be reported in other comprehensive income and appear in the equity section of the balance sheet. The interest rate cap is, for accounting purposes, deemed to be accounted for as an ineffective cash flow hedge with a corresponding gain or loss being recorded in FREIT’s income statement. This gain or loss represents the economic consequence of liquidating fixed rate swaps or the cap contract and replacing them with like-duration funding at current

34

market rates, something we would likely never do. Periodic cash settlements of these contracts will be accounted for as an adjustment to interest expense.

FREIT has the following derivative-related risks with its swap and cap contracts (“contract”): 1) early termination risk, and 2) counterparty credit risk.

Early Termination Risk: If FREIT wants to terminate its contract before maturity, it would be bought out or terminated at market value; i.e., the difference in the present value of the anticipated net cash flows from each of the contract’s parties. If current variable interest rates are significantly below FREIT’s fixed interest rate payments, this could be costly. Conversely, if interest rates rise above FREIT’s fixed interest payments and FREIT elected early termination, FREIT would realize a gain on termination. At October 31, 2019, the interest rate cap contract for the Rotunda property, the swap contracts for the Damascus Centre, Regency, Station Place and Preakness Shopping Center properties were in the counterparties’ favor. If FREIT had terminated these contracts at that date, it would have realized losses of approximately $0 for the Rotunda cap, $179,000 for the Damascus Centre swaps, $860,000 for the Regency swap, $1,034,000 for the Station Place swap and $53,000 for the Preakness Shopping Center swap, all of which have been included as a liability in FREIT’s consolidated balance sheet as at October 31, 2019. The change in the fair value for the interest rate swap contracts (gain or loss) during such period has been included in comprehensive income and for the year ended October 31, 2019, FREIT recorded an unrealized loss of $6,400,000 in comprehensive income. The change in the fair value of the Rotunda interest rate cap contract (gain or loss) during such period has been included in the consolidated statement of income and for the year ended October 31, 2019, FREIT recorded an unrealized loss of approximately $160,000. For the year ended October 31, 2018, FREIT recorded an unrealized gain of $3,113,000 in comprehensive income representing the change in fair value of the swaps during such period with a corresponding asset of approximately $2,452,000 for the Preakness Shopping Center swap, $955,000 for the Damascus Center swaps, $408,000 for the Regency swap and $460,000 for the Station Place swap as of October 31, 2018. For the year ended October 31, 2018, FREIT recorded an unrealized gain of $72,000 in the consolidated statement of income representing the change in the fair value of the Rotunda interest rate cap contract during such period with a corresponding asset of approximately $160,000 as of October 31, 2018.

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

FREIT’s total contractual obligations under its line of credit and mortgage loans in place as of October 31, 2019 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  $23,522   $3,722   $6,412   $4,843   $8,545 
Balloon Payments   329,268    21,916    151,993    43,413    111,946 
Total Long-Term Debt  $352,790   $25,638   $158,405   $48,256   $120,491 

 

FREIT’s annual estimated cash requirements related to interest on its line of credit and mortgage loans in place as of October 31, 2019 are as follows:

 

INTEREST OBLIGATIONS               
(in thousands of dollars)               
   Within  2 - 3  4 - 5  After 5
   Total  One Year  Years  Years  Years
                
Interest on Fixed Rate Debt  $46,265   $7,969   $14,710   $10,285   $13,301 
Interest on Variable Rate Debt (a)   7,778    6,238    1,540         
Total Interest Obligations  $54,043   $14,207   $16,250   $10,285   $13,301 
                          

 

(a) Includes estimated interest on the Rotunda loan held with Aareal Capital through maturity.    

35

  

ADJUSTED FUNDS FROM OPERATIONS

Funds From Operations (“FFO”) is a non-GAAP measure defined by the National Association of Real Estate Investment Trusts (“NAREIT”). FREIT does not include sources or distributions from equity/debt sources in its computation of FFO. Although many consider FFO as the standard measurement of a REIT’s performance, FREIT modified the NAREIT computation of FFO to include other adjustments to GAAP net income that are not considered by management to be the primary drivers of its decision making process. These adjustments to GAAP net income are straight-line rents, recurring capital improvements on FREIT’s residential apartments and lease termination fees paid to buyout a lease. 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, 
   2019   2018   2017 
   (In Thousands, Except Per Share) 
Funds From Operations ("FFO") (a)               
Net income  $1,793   $966   $10,683 
Depreciation of consolidated properties   11,339    11,515    10,669 
Amortization of deferred leasing costs   611    739    634 
Distributions to minority interests   (686)   (626)(b)   (420)
Gain on sale of property   (836)       (15,395)
Loan prepayment costs relating to property sale           1,139 
FFO  $12,221   $12,594   $7,310 
                
 Per Share - Basic and Diluted  $1.76   $1.83   $1.07 
                

(a) As prescribed by NAREIT.

(b) FFO excludes the distribution of proceeds to minority interest in the amount of approximately $6 million related to the refinancing of the loan for Pierre Towers, LLC, owned by S And A Commercial Associates Limited Partnership which is a consolidated subsidiary and the distribution of funds to minority interest in the amount of approximately $1.6 million received from Damascus Centre, LLC for funds which were previously held in escrow. See Note 5 to the consolidated financial statements for further details.

 

Adjusted Funds From Operations ("AFFO")            
FFO  $12,221   $12,594   $7,310 
Deferred rents (Straight lining)   (410)   (605)   (634)
Capital Improvements - Apartments   (685)   (738)   (798)
Lease termination fee           620 
AFFO  $11,126   $11,251   $6,498 
                
 Per Share - Basic and Diluted  $1.60   $1.63   $0.95 
                
 Weighted Average Shares Outstanding:               
 Basic and Diluted   6,940    6,883    6,833 

FFO and AFFO do not represent cash generated from operating activities in accordance with GAAP, and therefore should not be considered a substitute for net income as a measure of results of operations or for cash flow from operations as a measure of liquidity. Additionally, the application and calculation of FFO and AFFO by certain other REITs may vary materially from that of FREIT, and therefore FREIT’s FFO and AFFO may not be directly comparable to those of other REITs.

 

STOCK OPTION PLAN

On April 5, 2018, FREIT shareholders approved amendments to FREIT’s Equity Incentive Plan (the “Plan”) to (a) increase the number of shares reserved for issuance thereunder by an additional 300,000 shares and (b) further extend the term of the Plan from September 10, 2018 to September 10, 2028. As of October 31, 2019, 442,060 shares are available for issuance under the Plan.

On May 3, 2018, the Board approved the grant of an aggregate of 38,000 non-qualified share options under the Plan to two members of the Board who were appointed to the Board during Fiscal 2018. The options have an exercise price of $15.50 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 May 2, 2028. (See Note 10 to FREIT’s consolidated financial statements for further details.)

On March 4, 2019, the Board approved the grant of an aggregate of 5,000 non-qualified share options under the Plan to the Chairman of the Board. The options have an exercise price of $15.00 per share, will vest in equal annual installments over a 5-year period and will expire 10 years from the date of grant, which will be March 3, 2029. (See Note 10 to FREIT’s consolidated financial statements for further details.)

 

36 

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 a requirement that FREIT must distribute to its shareholders at least 90% of its REIT taxable income. 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. FREIT’s Board of Trustees evaluates the dividend to be paid (if any) on a quarterly basis. After careful consideration of FREIT’s Fiscal 2019 financial results, cash flow and projected cash needs, the Board of Trustees declared a fourth quarter dividend of $0.20 per share, which was paid on December 13, 2019 to shareholders of record on December 1, 2019. Specifically, over the course of the Trust’s history, the fourth quarter dividend takes into consideration the full fiscal year results, and as such, may not be indicative of future quarterly dividends. The Board will continue to evaluate the dividend on a quarterly basis.

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, 
   2019   2018   2017 
First Quarter  $0.150   $   $0.15 
Second Quarter  $0.125   $0.05   $ 
Third Quarter  $0.125   $0.05   $ 
Fourth Quarter  $0.200   $0.05   $ 
Total For Year  $0.600   $0.15   $0.15 

 

        (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
 2019   $0.60   $4,173   $3,150*  $910   $2,700*   154.6%
 2018   $0.15   $1,035   $1,035   $   $630    164.3%
 2017   $0.15   $1,024   $   $   $    0.0%
 *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 41 of this Form 10-K.

 

ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

37 

 

 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 Chief Executive Officer and Chief Financial Officer, who concluded that FREIT’s disclosure controls and procedures are effective as of October 31, 2019. The Company implemented a new accounting and reporting system and updated the relevant controls in the third quarter of Fiscal 2019. The change in FREIT’s internal control over financial reporting during the period covered by this report has neither materially affected, nor is reasonably likely to materially affect, FREIT’s internal control over financial reporting.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in FREIT’s reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in FREIT’s reports filed under the Exchange Act is accumulated and communicated to management, including FREIT’s Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.

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, 2019. EisnerAmper LLP, FREIT’s independent registered public accounting firm for Fiscal 2019, 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 2019. 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 2019 that has materially affected, or is reasonably likely to materially affect, FREIT’s internal control over financial reporting.

 

 

38 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Trustees and Shareholders

First Real Estate Investment Trust of New Jersey

 

 

Opinion on Internal Control over Financial Reporting

 

We have audited First Real Estate Investment Trust of New Jersey and Subsidiaries' (the "Company") internal control over financial reporting as of October 31, 2019, based on criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2019, based on criteria established in the Internal Control - Integrated Framework (2013) issued by COSO.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated balance sheets of First Real Estate Investment Trust of New Jersey and Subsidiaries as of October 31, 2019 and 2018, and the related consolidated statements of income, comprehensive (loss) income, equity, and cash flows for each of the years in the three-year period ended October 31, 2019, and the related notes and the financial statement schedule identified in Item 15 and our report dated January 21, 2020 expressed an unqualified opinion.

 

Basis for Opinion

 

The Company'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. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting 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.

 

Definition and Limitations of Internal Control over Financial Reporting

 

An entity'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. An entity'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 entity; (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 entity are being made only in accordance with authorizations of management and trustees of the entity; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity'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.

 

 

 

/s/ EisnerAmper LLP

 

EISNERAMPER LLP

New York, New York

January 21, 2020

 

39 

ITEM 9B OTHER INFORMATION

None.

 

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 2020.

 

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 2020.

 

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 2020. 

 

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 2020.

 

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 2020.

 

40 

PART IV

 

ITEM 15: EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES

 

(a) Financial Statements: Page
   
(i) Report of Independent Registered Public Accounting Firm 43
   
(ii) Consolidated Balance Sheets as of October 31, 2019 and 2018 44
   
(iii) Consolidated Statements of Income for the years ended October 31, 2019, 2018 and 2017 45
   
(iv) Consolidated Statements of Comprehensive (Loss) Income for the years ended October 31, 2019, 2018 and 2017 46
   
(v) Consolidated Statements of Equity for the years ended October 31, 2019, 2018 and 2017 47
   
(vi) Consolidated Statements of Cash Flows for the years ended October 31, 2019, 2018 and 2017 48
   
(vii) Notes to Consolidated Financial Statements 49
   
(b) Financial Statement Schedule:  
   
(i) III - Real Estate and Accumulated Depreciation 67/68
   
(c) Exhibits:  
   
See Index to Exhibits. 69

 

41 

 

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 21, 2020   By:  /s/ Robert S. Hekemian, Jr.   
   

Robert S. Hekemian, Jr.

President and Chief Executive Officer

(Principal Executive Officer)

 

 
     By:  /s/ Allan Tubin    
   

Allan Tubin

Chief Financial Officer and Treasurer

(Principal Financial/Accounting Officer)

 

 

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Robert S. Hekemian, Jr. and Allan Tubin 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, Jr.

President, Chief Executive Officer January 21, 2020
            Robert S. Hekemian, Jr. (Principal Executive Officer) and
Trustee
 

/s/ Allan Tubin

Chief Financial Officer and January 21, 2020
            Allan Tubin Treasurer (Principal Financial /
Accounting Officer)
 

/s/ Ronald J. Artinian

Chairman of the Board and Trustee January 21, 2020
            Ronald J. Artinian    

/s/ David F. McBride

Trustee January 21, 2020
            David F. McBride    

/s/ John A. Aiello

Trustee January 21, 2020
            John A. Aiello    

/s/ Justin F. Meng

Trustee January 21, 2020
            Justin F. Meng    

/s/ David B. Hekemian

Trustee January 21, 2020
            David Hekemian    

/s/ Richard J. Aslanian

Trustee January 21, 2020
            Richard J. Aslanian    

 

42 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Trustees and Shareholders of

First Real Estate Investment Trust of New Jersey

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of First Real Estate Investment Trust of New Jersey and Subsidiaries (the "Company") as of October 31, 2019 and 2018, and the related consolidated statements of income, comprehensive (loss) income, equity, and cash flows for each of the years in the three-year period ended October 31, 2019, and the related notes and the financial statement schedule identified in Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of October 31, 2019 and 2018, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of October 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"), and our report dated January 21, 2020 expressed an unqualified opinion.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

 

/s/ EisnerAmper LLP

 

We have served as the Company's auditor since 2006.

 

EISNERAMPER LLP

New York, New York

January 21, 2020

 

43 

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   October 31, 
   2019   2018 
   (In Thousands of Dollars) 
ASSETS        
         
Real estate, at cost, net of accumulated depreciation  $330,108   $344,532 
Construction in progress   395    159 
Cash and cash equivalents   38,075    21,747 
Tenants' security accounts   2,278    2,212 
Receivables arising from straight-lining of rents   4,374    3,964 
Accounts receivable, net of allowance for doubtful accounts of $379 and          
    $276 as of October 31, 2019 and 2018, respectively   1,741    1,436 
Secured loans receivable   5,053    4,862 
Prepaid expenses and other assets   5,951    6,034 
Deferred charges, net   2,643    2,693 
Interest rate cap and swap contracts       4,434 
Total Assets  $390,618   $392,073 
           
           
LIABILITIES AND EQUITY          
           
Liabilities:          
Mortgages payable  $352,790   $350,504 
Less unamortized debt issuance costs   2,886    3,498 
Mortgages payable, net (Note 5)   349,904    347,006 
           
Due to affiliate   5,705    5,417 
Deferred trustee compensation payable   7,610    8,457 
Accounts payable and accrued expenses   3,097    1,910 
Dividends payable   1,357    338 
Tenants' security deposits   3,381    3,232 
Deferred revenue   1,390    1,369 
Interest rate swap contract   2,126     
Total Liabilities   374,570    367,729 
           
Commitments and contingencies (Note 7)          
           
           
Equity:          
Common equity:          
    Shares of beneficial interest without par value:          
         8,000,000 shares authorized; 6,993,152 shares issued plus 192,122 and   28,847    28,288 
         157,395 vested share units granted to Trustees at October 31, 2019          
         and 2018, respectively          
    Treasury stock, at cost: 206,408 and 235,536 shares at October 31, 2019   (4,330)   (4,941)
         and 2018, respectively          
    Dividends in excess of net income   (6,762)   (4,376)
    Accumulated other comprehensive (loss) income   (2,040)   2,517 
Total Common Equity   15,715    21,488 
Noncontrolling interests in subsidiaries   333    2,856 
Total Equity   16,048    24,344 
Total Liabilities and Equity  $390,618   $392,073 

 

See Notes to Consolidated Financial Statements.  

44 

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 

   Years Ended October 31, 
   2019   2018   2017 
   (In Thousands of Dollars,  Except Per Share Amounts) 
Revenue:            
Rental income  $53,326   $51,267   $45,357 
Reimbursements   6,429    6,093    5,597 
Sundry income   522    637    680 
       Total revenue   60,277    57,997    51,634 
                
Expenses:               
Operating expenses   17,917    16,245    15,848 
Lease termination fee           620 
Management fees   2,603    2,547    2,375 
Real estate taxes   9,591    8,396    10,139 
Depreciation   11,339    11,515    10,669 
       Total expenses   41,450    38,703    39,651 
                
Operating income   18,827    19,294    11,983 
                
Investment income   360    267    206 
Unrealized (loss) gain on interest rate cap contract   (160)   72     
Gain on sale of property   836        15,395 
Loan prepayment costs relating to property sale           (1,139)
Interest expense including amortization               
  of deferred financing costs   (18,070)   (18,667)   (15,762)
    Net income   1,793    966    10,683 
                
Net (income) loss attributable to noncontrolling               
   interests in subsidiaries   (6)   517    2,433 
                
    Net income attributable to common equity  $1,787   $1,483   $13,116 
                
Earnings per share - basic and diluted:  $0.26   $0.21   $1.92 
                
Weighted average shares outstanding:               
    Basic and diluted   6,940    6,883    6,833 

 

See Notes to Consolidated Financial Statements.  

45 

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 

   Years Ended October 31, 
   2019   2018   2017 
   (In Thousands of Dollars) 
             
Net income  $1,793   $966   $10,683 
                
Other comprehensive (loss) income:               
    Unrealized (loss) gain on interest rate swap contracts               
               before reclassifications   (6,081)   3,043    2,424 
   Amount reclassified from accumulated other               
               comprehensive income to interest expense   (319)   70    528 
        Net unrealized (loss) gain on interest rate swap contracts   (6,400)   3,113    2,952 
Comprehensive (loss) income   (4,607)   4,079    13,635 
Net (income) loss attributable to noncontrolling interests   (6)   517    2,433 
Other comprehensive income (loss):               
    Unrealized loss (gain) on interest rate swap contracts               
        attributable to noncontrolling interests   1,843    (880)   (978)
Comprehensive income (loss) attributable to noncontrolling interests   1,837    (363)   1,455 
Comprehensive (loss) income attributable to common equity  $(2,770)  $3,716   $15,090 

 

See Notes to Consolidated Financial Statements.  

46 

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

 

   Common Equity         
   Shares of
Beneficial
Interest
   Treasury
Stock 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, 2016  $26,713   $(5,273)  $(16,916)  $(1,690)  $2,834   $12,627   $15,461 
                                    
Stock based compensation expense   122                   122         122 
                                    
Vested share units granted to Trustees   816                   816         816 
                                    
Distributions to noncontrolling interests                           (420)   (420)
                                    
Net income (loss)             13,116         13,116    (2,433)   10,683 
                                    
Dividends declared, including $13 payable in share units ($0.15 per share)             (1,024)        (1,024)        (1,024)
                                    
Net unrealized gain on interest rate swaps                  1,974    1,974    978    2,952 
                                    
Balance at October 31, 2017   27,651    (5,273)   (4,824)   284    17,838    10,752    28,590 
                                    
Stock based compensation expense   130                   130         130 
                                    
Vested share units granted to Trustees and consultant   839                   839         839 
                                    
Vested share units issued to consultant and retired Trustee *   (332)   332                        
                                    
Distributions to noncontrolling interests                           (8,259)   (8,259)
                                    
Net income (loss)             1,483         1,483    (517)   966 
                                    
Dividends declared, including $21 payable in share units ($0.15 per share)             (1,035)        (1,035)        (1,035)
                                    
Net unrealized gain on interest rate swaps                  2,233    2,233    880    3,113 
                                    
Balance at October 31, 2018   28,288    (4,941)   (4,376)   2,517    21,488    2,856    24,344 
                                    
Stock based compensation expense   124                   124         124 
                                    
Vested share units granted to Trustees and consultant   1,046                   1,046         1,046 
                                    
Vested share units issued to consultant and retired Trustees *   (611)   611                        
                                    
Distributions to noncontrolling interests                           (686)   (686)
                                    
Net income             1,787         1,787    6    1,793 
                                    
Dividends declared, including $106 payable in share units ($0.60 per share)             (4,173)        (4,173)        (4,173)
                                    
Net unrealized loss on interest rate swaps                  (4,557)   (4,557)   (1,843)   (6,400)
                                    
Balance at October 31, 2019  $28,847   $(4,330)  $(6,762)  $(2,040)  $15,715   $333   $16,048 

 

 * Represents the issuance of treasury shares to consultant and retired Trustee(s) for share units earned.  

 

See Notes to Consolidated Financial Statements.

47 

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Years Ended October 31, 
   2019   2018   2017 
   (In Thousands of Dollars) 
Operating activities:               
Net income  $1,793   $966   $10,683 
Adjustments to reconcile net income to net cash provided by               
    operating activities:               
Depreciation   11,339    11,515    10,669 
Amortization   1,750    1,789    1,932 
Unrealized loss (gain) on interest rate cap contract   160    (72)    
Stock based compensation expense   124    130    122 
Trustee fees, consultant fee and related interest paid in stock units   940    818    803 
Gain on sale of property   (836)       (15,395)
Deferred rents - straight line rent   (410)   (605)   (634)
Bad debt expense   263    198    196 
Changes in operating assets and liabilities:               
   Tenants' security accounts   149    272    142 
   Accounts receivable, prepaid expenses and other assets   (1,537)   (371)   (4,160)
   Accounts payable, accrued expenses and deferred               
        trustee compensation   64    (1,808)   (1,021)
   Deferred revenue   21    93    142 
        Net cash provided by operating activities   13,820    12,925    3,479 
Investing activities:               
Proceeds from sale of property, net   7,060        16,100 
Capital improvements - existing properties   (3,087)   (5,335)   (10,058)
Acquisition of Station Place       (19,550)    
Proceeds from payment of secured loans receivable inclusive of accrued interest       1,870     
        Net cash provided by (used in) investing activities   3,973    (23,015)   6,042 
Financing activities:               
Repayment of mortgages and construction loan   (26,529)   (148,680)   (34,254)
(Repayment of)/proceeds from credit line       (3,121)   3,121 
Proceeds from mortgage loan refinancings   28,815    166,520    23,500 
Proceeds from acquisition mortgage loan       12,350     
Proceeds from construction loan           1,349 
Deferred financing costs   (539)   (2,685)   (640)
Interest rate cap contract cost       (88)    
Dividends paid   (3,048)   (676)   (3,033)
Due to affiliate   288    245    5,172 
Distributions to noncontrolling interests   (686)   (8,259)   (420)
        Net cash (used in)  provided by financing activities   (1,699)   15,606    (5,205)
Net increase in cash, cash equivalents and restricted cash   16,094    5,516    4,316 
Cash, cash equivalents and restricted cash, beginning of year   26,394    20,878    16,562 
Cash, cash equivalents and restricted cash, end of year  $42,488   $26,394   $20,878 
                
Supplemental disclosure of cash flow data:               
Interest paid, net of amounts capitalized including $1,139 in loan prepayment costs related to property sale in 2017  $16,337   $17,040   $15,160 
Supplemental schedule of non cash activities:               
Investing activities:               
     Accrued capital expenditures, construction costs, pre-development costs and interest  $157   $82   $413 
Financing activities:               
    Dividends declared but not paid  $1,357   $338   $ 
    Dividends paid in share units  $106   $21   $13 
                
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the balance sheet:               
                
Cash and cash equivalents  $38,075   $21,747   $7,899 
Tenants' security accounts   2,278    2,212    2,007 
Qualified intermediary deposit           6,965 
Mortgage escrows (included in prepaid expenses and other assets)   2,135    2,435    4,007 
  Total cash, cash equivalents and restricted cash  $42,488   $26,394   $20,878 

 

See Notes to Consolidated Financial Statements.

48 

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 May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, which is codified as ASC 606 and effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2017. ASC 606 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.

On November 1, 2018, FREIT adopted ASU No. 2014-09 using the modified retrospective approach. Since FREIT’s primary source of revenue is operating leases, which fall under the scope of “Leases, Topic 840” and will be under the scope of “Leases, Topic 842” once adopted in November 2019, the adoption of ASU No. 2014-09 did not have a significant impact on its consolidated financial statements and footnote disclosures. Additionally, the Company has elected to adopt the practical expedient under ASU 2018-11, to not separate nonlease components from the associated lease and, instead, to account for those non-lease components as a single lease component if the nonlease components otherwise would be accounted for under the new revenue guidance. The adoption of ASU No. 2014-09 did not have a significant impact on the consolidated financial statements and FREIT did not record any cumulative adjustment as of the adoption date of November 1, 2018 in connection with the implementation of ASU No. 2014-09.

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. The Leasing Standard was amended by ASU 2018-11, “Targeted Improvements (the “Practical Expedient Amendment”)” in July of 2018 by allowing lessors to elect to combine lease and associated nonlease components, by classes of underlying asset, in contracts meeting certain criteria. The Company expects to qualify for the practical expedient as allowed by the Practical Expedient Amendment. Given that this standard has minimal impact on real estate operating lessors, FREIT does not expect the adoption of this new accounting guidance to have a significant impact on its consolidated financial statements and footnote disclosures. Based on this new accounting guidance, the Company will no longer be able to capitalize certain leasing costs, such as legal expenses, as it relates to activities before a lease is entered into.

In June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments – Credit Losses (Topic 326)", which amends the current approach to estimate credit losses on certain financial assets, including trade and other receivables, available-for-sale securities, and other financial instruments. Generally, this amendment requires entities to establish a valuation allowance for the expected lifetime losses of these certain financial assets. Subsequent changes in the valuation allowance are recorded in current earnings and reversal of previous losses are permitted. Currently, U.S. GAAP requires entities to write down credit losses only when losses are probable and loss reversals are not permitted. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. FREIT does not expect the adoption of this new accounting guidance to have a significant impact on its consolidated financial statements and footnote disclosures.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”, which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and interim periods within those years and early adoption is permitted including adoption in an

49

interim period. The standard should be applied using a retrospective transition method to each period presented. FREIT adopted this new accounting guidance in the first quarter of Fiscal 2019, which changed the presentation of cash and cash equivalents to include restricted cash on the consolidated statement of cash flows.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations: Clarifying the Definition of a Business”, which amends guidance that assists preparers in evaluating whether a transaction will be accounted for as an acquisition of an asset or a business, likely resulting in more acquisitions being accounted for as asset acquisitions. There are certain differences in accounting under these models, including the capitalization of transaction expenses and application of a cost accumulation model in an asset acquisition. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those periods with early adoption permitted for certain transactions. Early application of this new accounting guidance is allowed for transactions for which the acquisition date occurs before the effective date of the amendment, only when the transaction has not been previously reported in financial statements. FREIT acquired a new property, Station Place, located in Red Bank, New Jersey on December 7, 2017. As such, FREIT early adopted this new accounting guidance in the first quarter of Fiscal 2018 and accounted for this transaction as an acquisition of an asset capitalizing approximately $550,000 of transaction expenses.

In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities to ASC Topic 815, Derivatives and Hedging ("ASC 815")” which amends the hedge accounting recognition and presentation requirements in ASC 815. The update is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting and increase transparency as to the scope and results of hedge programs. ASU 2017-12 requires subsequent changes in fair value of a hedging instrument that has been designated and qualifies as a cash flow hedge to be recognized as a component of "other comprehensive income (loss)." ASU 2017-12 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018, with early adoption permitted. FREIT does not expect the adoption of this new accounting guidance to have a significant impact on its consolidated financial statements and footnote disclosures.

The SEC's Disclosure Update and Simplification rule (Release 33-10532) amends the interim financial statement requirements to require a reconciliation of changes in stockholders' equity in the notes or as a separate statement. This analysis should reconcile the beginning balance to the ending balance of each caption in stockholders' equity for each period for which an income statement is required to be filed and comply with the remaining content requirements of Rule 3-04 of Regulation S-X. As a result, registrants will have to provide the reconciliation for both the year-to-date and quarterly periods and comparable periods in Form 10-Q but only for the year-to-date periods in registration statements. The rule does not prescribe the format of the presentation as long as the appropriate periods are provided. Per a Compliance and Disclosure Interpretation (Q 105.09, Exchange Act Forms, 10-Q), "The amendments are effective for all filings made on or after November 5, 2018. In light of the timing of effectiveness of the amendments and proximity of effectiveness to the filing date for most filers' quarterly reports, the staff would not object if the filer's first presentation of the changes in shareholders' equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments." This essentially made the requirements effective for the Company's first quarter 2019 filing. FREIT has adopted this guidance in the first quarter of Fiscal 2019 by presenting a reconciliation of changes in stockholders’ equity for the current and prior period as a separate statement.

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  
FREIT Regency, LLC      FREIT     100%     2014  
Station Place on Monmouth, LLC     FREIT     100%     2017  
Berdan Court, LLC     FREIT     100%     2019  

 

The consolidated financial statements include 100% of each subsidiary’s assets, liabilities, o