UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
January 31, 2017
.
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number:
0-8862
First
Hartford Corporation
|
(Exact name of registrant as specified
in its charter)
|
|
Maine
|
01-0185800
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
|
|
149 Colonial Road, Manchester, CT
|
06042
|
(Address of principal executive offices)
|
(Zip
Code)
|
|
|
(Registrant’s telephone number including area code)
|
(Former name, former address and former fiscal year if changed since
last report)
|
Indicate by check mark
whether the registrant (1) has filed all reports 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
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes
No X
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer”, “accelerated filer”, “smaller
reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
|
Accelerated
filer
|
Non-accelerated filer (Do not check if a smaller reporting company)
|
Smaller
reporting company X
|
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
7(a)(2)(B) of the Securities Act).
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No
X
Indicate the number of shares outstanding of each of the issuer’s
classes of common stock as of the latest practicable date.
2,340,799 as of April
24, 2017
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
|
January 31, 2017
|
|
April 30, 2016
|
Real estate and equipment:
|
|
|
|
Developed properties and property under construction (including
$77,145,096 in January and $74,693,823 in April for VIEs)
|
$234,316,115
|
|
$228,733,956
|
Equipment and tenant improvements (including $2,368,733 in
January and $2,425,896 in April for VIEs)
|
3,697,988
|
|
3,763,420
|
|
238,014,103
|
|
232,497,376
|
|
|
|
|
Less accumulated depreciation and amortization (including
$15,395,079 in January and $13,827,009 in April for VIEs)
|
46,112,211
|
|
42,654,076
|
|
191,901,892
|
|
189,843,300
|
Property held for sale
|
6,985,417
|
|
15,422,312
|
Cash and cash equivalents (including $2,554,151 in January
and $1,507,163 in April for VIEs)
|
7,446,671
|
|
5,982,506
|
|
|
|
|
Cash and cash equivalents – restricted (including $398,274
in January and $406,749 in April for VIEs)
|
735,400
|
|
2,070,963
|
|
|
|
|
Marketable securities (including $1,036,716 in January
and $1,601,795 in April for VIEs)
|
1,036,716
|
|
1,601,795
|
|
|
|
|
Accounts and notes receivable, less allowance for
doubtful accounts of
$132,359
as of January 31, 2017 and $769,961 as of April 30, 2016 (including $94,725
in January and $27,651 in April for VIEs)
|
3,309,520
|
|
3,959,574
|
|
|
|
|
Other receivables
|
5,806,387
|
|
5,956,103
|
|
|
|
|
Deposits and escrow accounts (including $9,884,346 in January
and $4,137,450 in April for VIEs)
|
16,744,960
|
|
9,937,588
|
|
|
|
|
Prepaid expenses (including $313,811 in January and $306,547
in April for VIEs)
|
1,652,348
|
|
1,438,759
|
|
|
|
|
Deferred expenses (including $171,488 in January and $184,722
in April for VIEs)
|
5,712,564
|
|
2,952,630
|
|
|
|
|
Investments in affiliates
|
100
|
|
100
|
Due from related parties and affiliates
|
76,731
|
|
159,954
|
Deferred tax asset
|
890,771
|
|
2,130,776
|
|
|
|
|
Total assets
|
$242,299,477
|
|
$241,456,360
|
3
See accompanying notes.
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIENCY)
|
January 31, 2017
|
|
April 30, 2016
|
Liabilities:
|
|
|
|
Mortgages and notes payable:
|
|
|
|
Construction loans payable
|
$26,733,781
|
|
$68,031,502
|
Mortgages payable (including $64,842,756 in January
and $56,580,047 in April for VIEs)
|
195,808,687
|
|
149,119,630
|
Notes payable (including $1,704,697 in January and $1,704,697
in April for VIEs)
|
1,704,697
|
|
1,744,697
|
Lines of credit
|
2,250,000
|
|
2,652,091
|
Less: Deferred debt issuance costs, net (including $1,592,205
in January and $1,151,746 in April for VIEs)
|
(3,247,153)
|
|
(1,837,083)
|
|
223,250,012
|
|
219,710,837
|
|
|
|
|
Accounts payable (including $1,030,302 in January and $961,884
in April for VIEs)
|
3,473,489
|
|
3,701,702
|
Other payables
|
6,846,231
|
|
8,843,015
|
Accrued liabilities (including $3,275,643 in January and
$3,254,953 in April for VIEs)
|
4,503,417
|
|
6,124,930
|
Derivative liability
|
2,266,157
|
|
4,693,209
|
Deferred income (including $229,596 in January and $254,576
in April for VIEs)
|
543,292
|
|
677,694
|
Other liabilities
|
1,378,345
|
|
1,654,361
|
Due to related parties and affiliates (including $466,421
in January and $430,269 in April for VIEs)
|
669,105
|
|
602,121
|
|
242,930,048
|
|
246,007,869
|
|
|
|
|
Shareholders’ Equity (Deficiency):
|
|
|
|
First Hartford Corporation:
|
|
|
|
Preferred stock, $1 par value; $.50 cumulative and
convertible; authorized
4,000,000 shares; no shares issued and outstanding
|
-0-
|
|
-0-
|
Common stock, $1 par value; authorized 6,000,000 shares;
issued 3,273,609 and 3,298,609 shares and outstanding 2,377,565 and 2,404,590
shares as of January 31, 2017 and April 30, 2016
|
3,273,609
|
|
3,298,609
|
Capital in excess of par
|
5,148,928
|
|
5,198,928
|
Accumulated deficit
|
(4,780,855)
|
|
(8,600,495)
|
Accumulated other comprehensive income
|
-0-
|
|
-0-
|
Treasury stock, at cost, 896,044 and 894,019 shares as of
January 31, 2017 and April 30, 2016
|
(4,989,384)
|
|
(4,984,416)
|
Total First Hartford Corporation
|
(1,347,702)
|
|
(5,087,374)
|
Noncontrolling interests
|
717,131
|
|
535,865
|
|
|
|
|
Total shareholders’ equity (deficiency)
|
(630,571)
|
|
(4,551,509)
|
|
|
|
|
Total liabilities and shareholders’ equity (deficiency)
|
$242,299,477
|
|
$241,456,360
|
See accompanying notes.
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
|
Three Months Ended
|
|
Nine Months Ended
|
|
Jan. 31, 2017
|
|
Jan. 31, 2016
|
|
Jan. 31, 2017
|
|
Jan. 31, 2016
|
Operating revenues:
|
|
|
|
|
|
|
|
Rental income
|
$8,095,209
|
|
$7,696,324
|
|
$24,023,744
|
|
$22,686,977
|
Service income
|
1,099,684
|
|
1,123,763
|
|
3,928,067
|
|
4,693,656
|
Sales of real estate
|
15,778,442
|
|
-0-
|
|
34,373,493
|
|
11,350,182
|
Other revenues
|
1,077,452
|
|
1,013,047
|
|
2,984,212
|
|
2,721,605
|
|
26,050,787
|
|
9,833,134
|
|
65,309,516
|
|
41,452,420
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
Rental expenses
|
4,949,847
|
|
5,383,445
|
|
15,115,039
|
|
15,858,695
|
Service expenses
|
1,333,691
|
|
955,683
|
|
3,863,958
|
|
4,033,933
|
Cost of real estate sales
|
13,589,022
|
|
33,246
|
|
27,692,903
|
|
8,708,136
|
Selling, general and administrative
expenses
|
2,460,473
|
|
1,895,622
|
|
6,907,319
|
|
5,274,167
|
|
22,333,033
|
|
8,267,996
|
|
53,579,219
|
|
33,874,931
|
|
|
|
|
|
|
|
|
Income from operations
|
3,717,754
|
|
1,565,138
|
|
11,730,297
|
|
7,577,489
|
|
|
|
|
|
|
|
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
Interest expense
|
(2,524,603)
|
|
(2,201,569)
|
|
(7,707,422)
|
|
(6,853,324)
|
Gain on voluntary foreclosure
|
-0-
|
|
-0-
|
|
-0-
|
|
2,649,850
|
Other income
|
30,745
|
|
216,746
|
|
69,850
|
|
597,962
|
Gain (loss) on derivatives
(non-cash)
|
2,883,917
|
|
606,601
|
|
2,427,052
|
|
(545,078)
|
Loss on impairment
|
-0-
|
|
(330,700)
|
|
-0-
|
|
(330,700)
|
Loss on defeasance
|
(437,776)
|
|
-0-
|
|
(437,776)
|
|
-0-
|
Equity in earnings of unconsolidated
subsidiaries
|
182,654
|
|
195,538
|
|
546,016
|
|
552,666
|
|
134,937
|
|
(1,513,384)
|
|
(5,102,280)
|
|
(3,928,624)
|
|
|
|
|
|
|
|
|
Income before income taxes
|
3,852,691
|
|
51,754
|
|
6,628,017
|
|
3,648,865
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
565,065
|
|
(526,893)
|
|
1,617,159
|
|
1,067,218
|
|
|
|
|
|
|
|
|
Consolidated net income
|
3,287,626
|
|
578,647
|
|
5,010,858
|
|
2,581,647
|
|
|
|
|
|
|
|
|
Net (income) attributable to noncontrolling
interests
|
(1,202,072)
|
|
(706,132)
|
|
(1,191,218)
|
|
(561,725)
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to
First Hartford Corporation
|
$2,085,554
|
|
$(127,485)
|
|
$3,819,640
|
|
$2,019,922
|
|
|
|
|
|
|
|
|
Net income (loss) per share – basic
|
$0.88
|
|
$(0.05)
|
|
$1.60
|
|
$0.84
|
Net income (loss) per share – diluted
|
$0.88
|
|
$(0.05)
|
|
$1.60
|
|
$0.84
|
|
|
|
|
|
|
|
|
Shares used in basic per share
computation
|
2,377,565
|
|
2,406,679
|
|
2,384,321
|
|
2,408,260
|
Shares used in diluted per share
computation
|
2,377,565
|
|
2,406,679
|
|
2,384,321
|
|
2,408,260
|
See accompanying notes.
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
Three Months Ended
|
|
Nine Months Ended
|
|
Jan. 31, 2017
|
|
Jan. 31, 2016
|
|
Jan. 31, 2017
|
|
Jan. 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income
|
$3,287,626
|
|
$578,647
|
|
$5,010,858
|
|
$2,581,647
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net
of taxes:
|
|
|
|
|
|
|
|
Unrealized gains (losses) on
marketable securities
|
160,436
|
|
(416,087)
|
|
77,517
|
|
(572,347)
|
|
|
|
|
|
|
|
|
Consolidated comprehensive income
|
3,448,062
|
|
162,560
|
|
5,088,375
|
|
2,009,300
|
|
|
|
|
|
|
|
|
Amounts attributable to noncontrolling interests:
|
|
|
|
|
|
|
|
Net (income)
|
(1,202,072)
|
|
(706,132)
|
|
(1,191,218)
|
|
(561,725)
|
Unrealized (gains) losses on marketable securities
|
(160,436)
|
|
317,497
|
|
(77,517)
|
|
476,532
|
|
|
|
|
|
|
|
|
|
(1,362,508)
|
|
(388,635)
|
|
(1,268,735)
|
|
(85,193)
|
Comprehensive income (loss) attributable to First
Hartford Corporation
|
$2,085,554
|
|
$(226,075)
|
|
$3,819,640
|
|
$1,924,107
|
See accompanying notes.
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
Nine Months
Ended
|
|
January 31, 2017
|
|
January 31, 2016
|
Operating activities:
|
|
|
|
|
|
|
|
Consolidated net income
|
$5,010,858
|
|
$2,581,647
|
|
|
|
|
Adjustments to reconcile consolidated net income to net
cash provided by / (used in) operating activities:
|
|
|
|
Equity in earnings of unconsolidated subsidiaries,
net of distributions of
$270,000 in 2017 and $270,000 in 2016
|
(276,016)
|
|
(282,666)
|
Gain on voluntary foreclosure
|
-0-
|
|
(2,649,850)
|
Gain on sale of real estate
|
(6,680,590)
|
|
(2,642,046)
|
Loss on impairment
|
-0-
|
|
330,700
|
Depreciation of real estate and equipment
|
4,064,791
|
|
3,918,524
|
Amortization of deferred expenses
|
541,234
|
|
280,963
|
Deferred income taxes
|
1,240,005
|
|
751,835
|
Loss / (gain) on derivatives
|
(2,427,052)
|
|
545,078
|
Changes in operating assets and liabilities:
|
|
|
|
Accounts, notes and other receivables
|
799,770
|
|
8,062,456
|
Deposits and escrow accounts
|
3,705,133
|
|
658,663
|
Prepaid expenses
|
(213,589)
|
|
(342,823)
|
Deferred expenses
|
(4,711,238)
|
|
860,782
|
Cash and cash equivalents – restricted
|
1,335,563
|
|
(1,610,716)
|
Accrued liabilities
|
(1,621,513)
|
|
(580,280)
|
Deferred income
|
(134,402)
|
|
61,767
|
Accounts and other payables
|
(2,224,997)
|
|
(3,978,261)
|
|
|
|
|
Net cash provided by / (used in) operating activities
|
(1,592,043)
|
|
5,965,773
|
|
|
|
|
Investing activities:
|
|
|
|
Investments in marketable securities
|
-0-
|
|
(3,059,611)
|
Proceeds from sale of marketable securities
|
642,596
|
|
5,084,737
|
Purchase of equipment and tenant improvements
|
(125,762)
|
|
(70,894)
|
Proceeds from sale of real estate
|
34,373,493
|
|
11,350,182
|
Additions to developed properties and properties under
construction
|
(25,253,629)
|
|
(36,662,700)
|
|
|
|
|
Net cash provided by / (used in) investing activities
|
9,636,698
|
|
(23,358,286)
|
See accompanying notes.
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
|
Nine Months
Ended
|
|
January 31, 2017
|
|
January 31, 2016
|
Financing activities:
|
|
|
|
Distributions to noncontrolling interests
|
$(1,087,469)
|
|
$(1,388,895)
|
Repurchase of common stock
|
(79,968)
|
|
(13,084)
|
Proceeds from:
|
|
|
|
Construction loans
|
10,086,324
|
|
19,552,513
|
Mortgage loans
|
10,564,657
|
|
1,312,500
|
Notes
|
-0-
|
|
-0-
|
Credit lines
|
1,625,000
|
|
1,682,928
|
Principal payments on:
|
|
|
|
Construction loans
|
(13,051,475)
|
|
(6,106,437)
|
Mortgage loans
|
(12,720,675)
|
|
(2,497,505)
|
Notes
|
(40,000)
|
|
-0-
|
Credit lines
|
(2,027,091)
|
|
-0-
|
Payments (to) / from related parties and affiliates, net
|
150,207
|
|
616,838
|
|
|
|
|
Net cash provided by / (used in) financing activities
|
(6,580,490)
|
|
13,158,858
|
|
|
|
|
Net change in cash and cash equivalents
|
1,464,165
|
|
(4,233,655)
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
5,982,506
|
|
9,698,341
|
|
|
|
|
Cash and cash equivalents, end of period
|
$7,446,671
|
|
$5,464,686
|
Cash paid during the period for interest
|
$7,532,799
|
|
$6,689,475
|
|
|
|
|
Cash paid during the period for income taxes
|
$346,316
|
|
$727,223
|
|
|
|
|
Debt refinancing in 1
st
quarter:
|
$14,300,000
|
|
$39,000,000
|
New mortgage loans
|
(5,359,713)
|
|
(39,723,828)
|
Debt reduced
|
(8,019,977)
|
|
-0-
|
Escrow funded
|
$920,310
|
|
$(723,828)
|
Net cash from
refinancing in 1
st
quarter
|
|
|
|
|
|
|
|
Debt refinancing in 2
nd
quarter:
|
|
|
|
New mortgage loan
|
$32,500,000
|
|
$-0-
|
Debt reduced
|
(31,030,767)
|
|
(-0-)
|
Escrow funded
|
(1,100,000)
|
|
(-0-)
|
Net cash from
refinancing in 2
nd
quarter
|
$369,233
|
|
$-0-
|
|
|
|
|
Debt refinancing in 3
rd
quarter:
|
|
|
|
New mortgage loan
|
$21,186,745
|
|
$-0-
|
Debt reduced
|
(18,139,103)
|
|
(-0-)
|
Escrow funded
|
(1,392,528)
|
|
(-0-)
|
Net cash from refinancing in 3
rd
quarter
|
$1,655,114
|
|
$-0-
|
|
|
|
|
See accompanying notes.
8
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Business and Significant Accounting Policies:
Business
First Hartford Corporation,
which was incorporated in Maine in 1909, and its subsidiaries (the Company), is
engaged in two business segments: 1) the purchase, development, ownership,
management and sale of real estate and 2) providing preferred developer services
for two corporate franchise operators (i.e., “Fee for Service”).
Principles
of Consolidation
The accompanying unaudited
condensed consolidated financial statements include the accounts of the
Company, its wholly owned subsidiaries, and all other entities in which the
Company has a controlling financial interest, including those where the Company
has been determined to be a primary beneficiary of a variable interest entity
or meets certain criteria as a sole general partner or managing member in accordance
with the consolidation guidance of the Financial Accounting Standards Board
Accounting Standards Codification. As such, included in the unaudited
condensed consolidated financial statements are the accounts of Rockland Place
Apartments Limited Partnership and Clarendon Hill Somerville Limited
Partnership, in which the Company is the sole general partner. The Company’s
ownership percentage in these variable interest entity partnerships is
nominal. All significant intercompany balances and transactions have been
eliminated.
Basis
of Presentation
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 8.03 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by U.S. generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals and adjustments) considered necessary
for a fair presentation have been included. Operating results for the interim
periods are not necessarily indicative of the results that may be expected for
the entire year. The condensed consolidated balance sheet as of April 30, 2016
was derived from the audited financial statements for the year then ended. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company’s annual report on Form 10-K for the
fiscal year ended April 30, 2016.
Because the Company is engaged
in the development and sale of real estate at various stages of construction,
the operating cycle may extend beyond one year. Accordingly, following the
usual practice of the real estate industry, the accompanying condensed
consolidated balance sheets are unclassified.
In February 2016, the
FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases, (Topic
842), which is intended to improve financial reporting around leasing
transactions. The ASU affects all companies and other organizations that engage
in lease transactions (both lessee and lessor) that lease assets such as real
estate and manufacturing equipment. This ASU will require organizations that
lease assets—referred to as “leases”—to recognize on the balance sheet the
assets and liabilities for the rights and obligations created by those leases.
ASU No. 2016-02 is effective for fiscal years and
interim periods within those years beginning January 1, 2019. The Company
is in process of assessing the impact of the adoption of ASU No. 2016-02
on its financial position, results of operations and cash flows.
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Business and Significant Accounting Policies (continued):
Basis
of Presentation (concluded)
In August 2016, the FASB
issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments. The ASU provides guidance on how
certain cash receipts and cash payments are to be presented and classified in
the statement of cash flows. For public entities, ASU 2016-15 is effective for
fiscal years beginning after December 15, 2017, and interim periods within
those fiscal years. Early adoption is permitted. The Company is currently
evaluating the potential impact of adopting this guidance on its consolidated
financial statements.
For further discussions on
Accounting Standard Updates, refer to the Company’s annual report on Form 10-K
for the fiscal year ended April 30, 2016.
Net
Income (Loss) Per Common Share
Basic income
(loss) per share is computed by dividing the net income (loss) attributable to
the common stockholders (the numerator) by the weighted average number of
shares of common stock outstanding (the denominator) during the reporting
periods. Diluted income (loss) per share is computed by increasing the
denominator by the weighted average number of additional shares that could have
been outstanding from securities convertible into common stock, such as stock
options and warrants (using the “treasury stock” method).
There were
no common stock equivalents outstanding at January 31, 2017 or January 31, 2016.
Financial
Instruments and Fair Value
The Company’s financial
instruments include cash and cash equivalents, accounts receivable, marketable
securities, accounts payable, accrued expenses, and debt. The fair values of
accounts receivable, accounts payable and accrued expenses are estimated to
approximate their carrying amounts because of their relative short-term
nature. In general, the carrying amount of variable rate debt approximates its
fair value. Further, the carrying amount of fixed rate debt approximates fair
value since the interest rates on the debt approximates the Company’s current
incremental borrowing rate. Marketable securities consist of equity securities
and are stated at fair value based on the last sale of the period obtained from
recognized stock exchanges (i.e. Level 1). Accumulated other comprehensive
(loss) income consists solely of unrealized gains (losses) on marketable
securities.
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Business and Significant Accounting Policies (concluded):
Segment Information
The factors used by the
Company to identify reportable segments include differences in products and
services and segregated operations within the Company. The first segment, “Real
Estate Operations” participates in the purchase, development, management, ownership
and sale of real estate. Within its second segment, “Fee for Service”, the
Company provides preferred developer services to CVS and Cumberland Farms Inc.
in certain geographic areas. Summary financial information for the two
reportable segments is as follows:
|
Three Months
Ended
|
|
Nine Months Ended
|
|
January 31
|
|
January 31
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues:
|
|
|
|
|
|
|
|
Real
Estate Operations
|
$25,115,037
|
|
$8,864,634
|
|
$61,809,016
|
|
$37,141,920
|
Fee for
Service
|
935,750
|
|
968,500
|
|
3,500,500
|
|
4,310,500
|
Total
|
$26,050,787
|
|
$9,833,134
|
|
$65,309,516
|
|
$41,452,420
|
|
|
|
|
|
|
|
|
Operating
Costs & Expenses:
|
|
|
|
|
|
|
|
Real
Estate Operations
|
$18,534,933
|
|
$5,235,185
|
|
$42,844,271
|
|
$24,626,681
|
Fee for
Service
|
1,337,627
|
|
1,137,189
|
|
3,827,629
|
|
3,974,083
|
Administrative
Expenses
|
2,460,473
|
|
1,895,622
|
|
6,907,319
|
|
5,274,167
|
Total
|
$22,333,033
|
|
$8,267,996
|
|
$53,579,219
|
|
$33,874,931
|
All costs after operating
expenses are costs of the real estate operation.
The only assets in the balance
sheet belonging to the Fee for Service segment is restricted cash of $337,126
on January 31, 2017 and $1,664,214 on April 30, 2016 and receivables of $5,806,387
on January 31, 2017 and $5,956,103 on April 30, 2016.
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2.
Consolidated Variable Interest Entities and Investments in
Affiliated Partnerships:
The Company has consolidated both Rockland
and Clarendon based on the express legal rights and obligations provided to it
by the underlying partnership agreements and its control of their business
activity. The assets of these partnerships that can only be used to settle
their obligations and their liabilities for which creditors (or beneficial
interest holders) do not have recourse to the general credit of the Company are
shown parenthetically in the line items of the consolidated balance sheets. A
summary of the assets and liabilities of Rockland and Clarendon included in the
Company’s condensed consolidated balance sheets follows:
|
January
31, 2017
|
|
April
30, 2016
|
|
|
|
|
Real estate and equipment, net
|
$66,474,882
|
|
$65,735,521
|
Other assets
|
14,436,390
|
|
8,195,007
|
Total assets
|
80,911,272
|
|
73,930,528
|
Intercompany profit elimination
|
(2,748,037)
|
|
(2,863,451)
|
Total assets
|
$78,163,235
|
|
$71,067,077
|
|
|
|
|
Mortgages and other notes payable
|
$64,955,248
|
|
$57,132,998
|
Other liabilities
|
4,529,199
|
|
4,471,413
|
Total liabilities
|
$69,484,447
|
|
$61,604,411
|
The Company accounts for its
50% ownership interest in Dover Parkade, LLC under the equity method of
accounting. A summary of the operating results for this entity follows:
|
Three Months
Ended
|
|
Nine Months
Ended
|
|
January 31, 2017
|
|
January 31, 2016
|
|
January 31, 2017
|
|
January 31, 2016
|
|
|
|
|
|
|
|
|
Dover Parkade, LLC:
|
|
|
|
|
|
|
|
Revenue
|
$673,655
|
|
$639,762
|
|
$2,069,918
|
|
$1,964,558
|
Expenses
|
488,348
|
|
428,685
|
|
1,517,886
|
|
1,399,226
|
Net income
|
$185,307
|
|
$211,077
|
|
$552,032
|
|
$565,332
|
3.
Income Taxes:
The Company files a Federal consolidated tax return to report
all income and deductions for its subsidiaries. The Company and its
subsidiaries file income tax returns in several states. The tax returns are
filed by the entity that owns the real estate or provides services in such
state. Some states do not allow a consolidated or combined tax filing. This sometimes creates income taxes to be greater
than expected as income for some subsidiaries cannot be offset by other
subsidiaries with operating losses.
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4.
Litigation:
On September 7, 2016, the
Company was notified it lost the first of two companion lawsuits against a
former tenant for wrongful termination of its separate leases at two of the
Company’s commercial shopping centers. After evaluating its options, the
Company settled both lawsuits with the plaintiff by agreeing to pay $200,000 to
cover all claims, including reimbursement of defendant’s claimed legal fees and
costs. The parties mutually released each other from any other liability
relating to this case.
There were no other changes in
litigation since April 30, 2016.
5.
Refinancings:
Rockland Place Apartments
LP – Refinance:
On June 3, 2016, Rockland Place Apartments LP executed a
First Mortgage Note payable with the Massachusetts Housing Finance Agency in
the amount of $14,300,000. The note is nonrecourse, has a 40-year term and
requires monthly payments of principal and interest of $54,628. The interest
rate is fixed at 3.41%. The proceeds of the note were used to repay its bridge
mortgage note with a principal balance of $591,174, its Fourth Mortgage Note
with a principal balance of $500,000, and it’s Flexible Subsidy Capital
Improvement Loan with a principal balance of $4,268,539. The proceeds also
funded closing costs and certain escrows that are being used to redevelop the
complex.
Edinburg, TX - Refinance:
On
September 7, 2016, the Company partially refinanced its loans on its shopping
center property in Edinburg, TX. The new loan with Goldman Sachs is for
$32,500,000 and is secured by the shopping center. Proceeds from this new loan
were used to pay off $31,030,767 of existing debt with Protective Life and to
establish a $1,100,000 Earnout Reserve Account (ERA), with the balance used to
fund escrows and pay closing costs. The remainder of the existing debt of $15,926,740
is secured by vacant land of approximately 50 acres attached to the shopping
center. The $1,100,000 ERA will be returned to the Company if, within two
years, it can provide evidence that two significant named tenants have renewed
their lease options for an additional five years (or the Company has entered
into Approved Substitute Lease(s) for same) and the Earnout Debt Yield (EDY),
as defined, is equal to or greater than 8.30%. If the Company fails to do so,
a minimum of $1,000,000 of the ERA will be used to reduce the principal balance
of the loan and up to $100,000 will be used to pay the applicable yield
maintenance premium. The loan has a 30 year amortization and duration of 10
years (i.e., maturity date of September 6, 2026) with an interest rate of
4.604%. For the first year, interest only is paid monthly; beginning in
October 2017, principal and interest are paid monthly. Prepayment of the loan
is generally prohibited. The Company receives income directly to its operating
account unless a “trigger event” occurs in which case the cash goes into a
lockbox account controlled by the lender. Basic “trigger events” include:
-
Failure to maintain a 12 month-rolling Debt-Service Coverage
Ratio (DSCR), as defined, of 1.1:1.0,
-
Failure to maintain a market-based Net Worth, as defined, of
$20,000,000,
-
Failure to maintain Liquid Assets, as defined, of $2,000,000,
-
Loan default,
-
Various Rollover Trigger Events, which include certain
significant named tenants vacating, terminating or not renewing their leases,
or filing for bankruptcy and not replaced with an Approved Substitute Lease, as
defined.
In addition, if a significant named tenant
goes dark, vacates, or is not in occupancy of substantially all of its current
space, the Company would have to deposit either a $2,000,000 reserve or letter
of credit with the lender until such time as agreed upon lease conditions being
met.
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5.
Refinancings
(concluded):
With respect to the remaining
balance of $15,926,740 from the original loans with Protective Life now secured
by vacant land of approximately 50 acres directly adjacent to the shopping
center, the Company and the lender have agreed that once the Company repays
$2,000,000 of the balance, the interest rate on the remaining balance will be
reduced from 5.0% to 4.0%. The lender has also agreed that if the Company pays
off the entire loan by September 6, 2017, its 50% Additional Interest Agreement
(AIA) rights will terminate. This remaining loan is personally guaranteed by
the Chairman of the Company.
New Orleans, LA – Refinance
: On
November 18, 2016, the Company refinanced one of its construction loans on its
shopping center property in New Orleans, LA. The construction loan, which had
a principal balance of $7,301,803, was replaced by a mortgage loan of
$7,436,745. The new mortgage loan has an interest rate of One Month ICE LIBOR,
as defined, plus 2.50% and an initial maturity date of November 18, 2017 with
an option to extend the maturity to November 18, 2018 at an interest rate of
5.0% if it meets certain requirements. The loan is interest-only until
November 18, 2017; if the loan is extended an additional year, principal
payments will be made using a 25-year amortization.
Lubbock, TX – Refinance
: On November
21, 2016, the Company refinanced its mortgage loan on its shopping center in
Lubbock, TX. The new mortgage loan has a principal balance of $13,750,000,
which was used to pay off the previous mortgage loan balance of $10,837,300,
pay a defeasance premium of $432,776, pay closing costs, and fund escrows. The
new mortgage loan has an interest rate of 4.974%, monthly payments of $76,540
based on a 27.5-year amortization, and a ten year term expiring on December 6,
2026. Prepayment is not permitted until six months before the maturity date.
6.
Purchase
of Real Estate:
Buda, TX Land Purchases
: On April
29, 2016, the Company purchased a parcel of land in Buda, TX adjacent to
another parcel owned by the Company for $686,167 including closing costs. On
May 13, 2016, the Company purchased three additional parcels of land adjacent
to these parcels for $1,051,034 including closing costs. These purchases were
financed by a new land loan of $1,505,000 with the balance funded by working
capital. Key terms of the loan are as follows:
Loan Amount:
|
$1,505,000
|
Maturity Date:
|
September 24,
2017
|
Interest Rate:
|
The lower of
a) the Prime Rate per Wall Street Journal plus 1.00% or b) 4.25%.
|
Payments:
|
Interest only
payable monthly. At maturity, outstanding principal plus any
accrued interest will be payable.
|
Guarantors:
|
Both the
Company (Corporate) and Chairman of the Company (Individual).
|
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6.
Purchase
of Real Estate (concluded):
Austin, TX – Land Purchase
: On
December 19, 2016, the Company purchased a parcel of land in Austin, TX for
$3,732,223. This purchase, along with related closing costs, was financed by
an existing line of credit of $1,250,000 and a new land loan of $2,500,000.
This land is being held for potential future development. Key terms of the
loan are as follows:
Loan Amount:
|
$2,500,000
|
Maturity Date:
|
December 19, 2018
|
Interest Rate:
|
The greater of a)
the Prime Rate per Wall Street Journal plus 0.75% or b) 4.25%.
|
Payments:
|
Interest
only payable monthly. At maturity, outstanding principal plus any accrued
interest will be payable.
|
Guarantors:
|
Both
the Company (Corporate) and Chairman of the Company (Individual).
|
Brentwood, NY – Land Purchase:
On
December 23, 2016, the Company purchased a parcel of land in Brentwood, NY for
$5,000,000, which along with closing costs was financed by a new acquisition
mortgage loan of $5,000,000 and working capital. The Company is going to build
a single entity build-to-suit on this land. This construction will be financed
by a building mortgage loan of $4,775,000 and a project mortgage loan of
$875,000. The total amount of these three loans is $10,650,000. Key terms of
the loans are as follows:
Loan Amount:
|
$10,650,000
|
Maturity Date:
|
December 1, 2027
|
Interest Rate:
|
One
month LIBOR, as defined, plus 2.75% through December 1, 2017 (the “Construction
Phase”); thereafter, one month LIBOR plus 1.95% (the “Permanent Phase”).
|
Payments:
|
Interest
only payable monthly during the Construction Phase. Thereafter, principal and
interest payable monthly using a 30-year amortization.
|
Guarantor:
|
The
Company (Corporate).
|
Prepayment
Penalties:
|
Prior to December 1, 2017, 0.50% of the principal balance
prepaid; from January 1, 2018 – December 1, 2019, 1.00% of the principal
balance prepaid.
|
St. Louis, MO – Property Purchase
: On January 20,
2017, the Company purchased a property with a single retail tenant in St.
Louis, MO for $6,444,768 including closing costs. The Company plans to resell
it by the end of the calendar year. This purchase, along with closing costs,
was financed with a new loan of $5,120,000, advances from one
of the Company’s line of credit of $1,000,000, and working capital of $324,768.
Key terms of the loan are as follows:
Loan Amount:
|
$5,120,000
|
Maturity Date:
|
October 20, 2017
|
Interest Rate:
|
One month LIBOR,
as defined, plus 2.20%.
|
Payments:
|
Interest
only payable monthly with full principal payment due at maturity. Principal
prepayments are permitted.
|
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7.
Subsequent
Events:
Austin, TX – Financing:
On February 28, 2017, the Company modified an existing line of credit loan to $4,000,000
of which up to $1,600,000 is available to finance construction of a building on
a parcel of land it owns in Austin, TX. This loan has an interest rate of 1.50%
plus the Prime Rate, as defined, with a Floor Rate of 5.00% and has a maturity
date of December 27, 2017 with an option to extend for six months if certain
criteria are met.
Cedar Park, TX – Property Purchase
: On March 29, 2017,
the Company purchased a property with a single retail tenant in Cedar Park, TX
for $1,625,000 including closing costs. The Company plans to resell it by the
end of the fiscal year ending April 30, 2018. This purchase was financed with proceeds
from a new loan of $1,365,000 and working capital of $260,000. Key terms of the
loan are as follows:
Loan Amount:
|
$1,365,000
|
Maturity Date:
|
March
29, 2022
|
Interest Rate:
|
The
greater of a) the Prime Rate per Wall Street Journal plus 0.75% or b) 4.50%.
|
Payments:
|
Interest
only payable monthly through September 2017, followed by monthly principal and
interest payments using a 25 year amortization period with a final balloon
payment at maturity.
|
Guarantors:
|
Both
the Company (Corporate) and Chairman of the Company (Individual).
|
New Unsecured Credit Line:
On April 19, 2017, the Company entered into a $2,000,000 unsecured line of
credit with a regional bank. Terms of the line of credit are as follows:
Term:
|
3
years
|
Rate:
|
LIBOR
+ 3.25%
|
Fee:
|
0.50%
(One Time)
|
Unused Fee:
|
0.25%
annually on the unused line
|
Guarantee:
|
Full
guarantee by the Chairman of the Company (Individual)
|
Deposits:
|
Must
maintain a minimum of $500,000 at bank
|
Other:
|
Each
funding request to be at the sole discretion of the bank and only to acquire
credit tenanted properties.
|
Clean Up:
|
Borrower
to be out of debt once each year for at least 30 days.
|
Item
2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The financial and business analysis below provides
information which the Company believes is relevant to an assessment and
understanding of the Company’s financial position, results of operations and
cash flows. This analysis should be read in conjunction with the condensed
consolidated financial statements and related notes.
The following discussion and certain other sections of this
Report on Form 10-Q contain statements reflecting the Company’s views about its
future performance and constitute “forward-looking statements” under the
Private Securities Litigation Reform Act of 1995. These views may involve risk
and uncertainties that are difficult to predict and may cause the Company’s
actual results to differ materially from the results discussed in such
forward-looking statements. Readers should consider how various factors
including changes in general economic conditions, cost of materials, interest
rates and availability of funds, and the nature of competition and relationship
with key tenants may affect the Company’s performance. The Company undertakes
no obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or other.
Critical Accounting
Policies
There have been no significant changes in the Company’s
critical accounting policies from those included in Item 7 of its Annual Report
on Form 10-K for the year ended April 30, 2016 under the subheading “Critical
Accounting Policies and Estimates”.
Results of Operations:
Rental Income
Rental income for the
three and nine months ended January 31, 2017 and 2016, by type of tenant,
follows:
|
Three Months
Ended
|
|
Nine Months
Ended
|
|
January 31,
|
|
January 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Residential
|
$3,084,436
|
|
$3,128,168
|
|
$9,171,804
|
|
$9,130,176
|
Commercial
|
5,010,773
|
|
4,568,156
|
|
14,851,940
|
|
13,556,801
|
|
$8,095,209
|
|
$7,696,324
|
|
$24,023,744
|
|
$22,686,977
|
Residential rental income was flat compared to the prior
year comparable periods. An increase of vacancies at the Rockland, MA property
needed as part of the renovation project taking place there were offset by a decrease
in vacancies at the Somerville, MA (i.e., Clarendon) property.
The increase in commercial rental income was caused by rents
received on the Company’s development properties (e.g., New Orleans, LA;
Stanhope, NJ; Olathe, KS; Conroe, TX; etc.) and additional rents from new
tenants at the West Springfield, MA and Edinburg, TX properties, partially
offset by the impact of the voluntary foreclosure of the Putnam, CT property on
June 5, 2015.
Item 2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(continued):
Service Income
Service income for the
three and nine months ended January 31, 2017 and 2016 follows:
|
Three Months
Ended
|
|
Nine Months
Ended
|
|
January 31,
|
|
January 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Management
fees
|
$163,934
|
|
$155,263
|
|
$427,567
|
|
$383,156
|
Preferred developer fees
|
935,750
|
|
968,500
|
|
3,500,500
|
|
4,310,500
|
|
$1,099,684
|
|
$1,123,763
|
|
$3,928,067
|
|
$4,693,656
|
The decrease in preferred developer fees reflected lower
fees received from both CVS and Cumberland Farms. The decrease in CVS fees was
the result of a recent acquisition that has impacted in the slowing of their
pipeline for new stores. The smaller decrease in Cumberland Farms was the
result of timing of closings based on the construction schedule.
Sales (and Cost of
Sales) of Real Estate
Nine months ended January 31, 2017:
On June 29, 2016, the Company sold a property in Stanhope,
NJ for $10,000,051 (cost of $8,280,570). A construction loan with a balance of
$6,329,667 was paid off with the proceeds.
On June 30, 2016, the Company sold a portion of its
property in Edinburg, TX (i.e., Texas Roadhouse) for $2,210,000 (cost of
$1,355,597). A mortgage loan with a balance of $1,279,136 was paid off with
the proceeds.
On August 16, 2016, the Company sold a condominium in
Wethersfield, CT for $285,000 (cost of $277,191). The net proceeds were used
to reduce a mortgage loan on this property. The Company currently owns three
other condominiums at this site.
On September 20, 2016, the Company sold a parcel of land in
Austin, TX for $6,100,000 (cost of $4,190,523) that was previously ground
leased. The Company continues to own land attached to the sold parcel and is
currently overseeing construction of a single-tenant retail building of
approximately 6,900 square feet on this property.
On December 14, 2016, the Company
sold a property in Conroe, TX for $8,778,442 (cost of $6,721,794). A mortgage
loan with a balance of $5,363,913 was paid off with the proceeds.
On December 28, 2016, the Company
sold a property in Olathe, KS for $7,000,000 (cost of $6,867,228). A mortgage
loan with a balance of $5,335,000 was paid off with the proceeds.
Nine months ended January 31, 2016:
On May 28, 2015, the Company sold a parcel of land in
Pearland, TX for $1,104,161 (cost of $747,610).
On August 6, 2015, the Company sold a property in Austin,
TX for $10,246,021 (cost of $7,761,449). A construction loan with a balance of
$6,106,437 was paid off with the proceeds.
There were also costs related to property sales that
occurred in the fiscal year ended April 30, 2015 totaling $199,077 that were
not anticipated as of the prior fiscal year end.
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(continued):
Other Income
The increase in other income was primarily at the liquor
store, which obtained a liquor license in December 2014. The sales at the
store have been increasing steadily as previously the store only sold beer and
wine.
Operating Costs and
Expenses:
Rental Expenses
Rental expenses for the
three and nine months ended January 31, 2017 and 2016, by type of tenant,
follows:
|
Three Months
Ended
|
|
Nine Months
Ended
|
|
January 31,
|
|
January 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Residential
|
$2,723,486
|
|
$2,624,714
|
|
$7,836,393
|
|
$7,961,559
|
Commercial
|
2,226,361
|
|
2,758,731
|
|
7,278,646
|
|
7,897,136
|
|
$4,949,847
|
|
$5,383,445
|
|
$15,115,039
|
|
$15,858,695
|
Residential rental expenses were slightly higher for the
three months and slightly lower for the nine months compared to the prior
year. The most notable year-over-year items were voucher incentive payments
made to tenants at the Rockland, MA property in the prior year that did not re-occur
this year and some higher expenses at the Somerville, MA (i.e., Clarendon) property
(e.g., higher insurance, utility, elevator repairs, and decorating expenses).
The decrease in commercial rental expenses was mainly due
to higher costs related to the initial expansion of our shopping center in
Edinburg, TX in the prior year. Also impacting the nine month comparison were prior
year professional and legal expenses incurred as part of the initial effort to
refinance the debt at the Cranston, RI shopping center, largely offset by a
legal settlement of $200,000 with a former tenant (see Note 4 of the Financial
Statements included within for discussion) and accelerated amortization expense
of deferred commissions arising from the sale of a portion of its property in
Edinburg, TX (i.e., Texas Roadhouse).
Service Expenses
Service expenses were higher for the three months and lower
for the nine months compared to the prior year. These variances reflect lower
commissions paid commensurate with the lower service revenue offset by higher
compensation expense.
Selling, General and
Administrative (“SG&A”)
The increase in SG&A expenses was primarily due to
writing-off costs relating to abandoned projects, higher expenses at the liquor
store commensurate with the higher volume, expenses related to the Company’s
development properties (e.g., New Orleans, LA, Stanhope, NJ, Olathe, KS, Conroe,
TX, etc.), and higher legal and professional fees.
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(continued):
Non-Operating Income
(Expense):
Interest Expense
Interest expense for the three and nine months ended January
31, 2017 and 2016, by type of tenant, follows:
|
Three Months
Ended
|
|
Nine Months
Ended
|
|
January 31,
|
|
January 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Commercial
|
$1,793,277
|
|
$1,589,866
|
|
$5,546,685
|
|
$5,020,149
|
Residential
|
731,326
|
|
611,703
|
|
2,160,737
|
|
1,833,175
|
|
$2,524,603
|
|
$2,201,569
|
|
$7,707,422
|
|
$6,853,324
|
The increase in commercial interest expense was the result
of expense related to loans for the Company’s development properties (e.g., New
Orleans, LA, Stanhope, NJ, Olathe, KS, etc.), partially offset by savings from
the prior year refinancings at Cranston and CP Associates.
The increase in residential interest expense was the result
of the refinancing at Rockland as discussed in Note 5 of the Financial
Statements included within. Note the loans paid off as part of this
refinancing did not accrue interest.
Gain on Voluntary
Foreclosure
Putnam, CT – Transfer to Lender:
On November 1,
2014, a payment was due for the mortgage of the shopping center in Putnam,
Connecticut in the amount of approximately $4,700,000. The rentable space of
the shopping center is 57,529 square feet, 46% of which was leased to one
store. That store informed the Company that they were not renewing their
lease, which expired on January 31, 2015, and, as a result, the Company found
it impossible to refinance the mortgage without finding a replacement tenant.
Therefore, on June 5, 2015, the Company agreed to transfer title of the
property to the lender. The Company recognized a gain of $2,649,850 since the
mortgage was non-recourse and was in excess of the book value. Pre-tax income
for this shopping center was $44,645 for the three and nine months ended January
31, 2016.
Other Income
Other income for the three and nine months ended January
31, 2017 and 2016 follows:
|
Three Months
Ended
|
|
Nine Months
Ended
|
|
January 31,
|
|
January 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Clarendon
residual funds
|
$-0-
|
|
$-0-
|
|
$-0-
|
|
$189,912
|
Investment
income
|
30,745
|
|
216,746
|
|
69,850
|
|
408,050
|
|
$30,745
|
|
$216,746
|
|
$69,850
|
|
$597,962
|
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(continued):
The decrease in
investment income reflected realized gains on sales of securities in the prior
year that did not repeat in the current year.
During the three and nine months ended January 31, 2016,
the Company received $189,912 of residual funds that remained in a reserve
account after payoff of the underlying bondholders securitized by the mortgage
that was refinanced at Clarendon in February 2015.
Gain (Loss) on
Derivatives
The Company, through its 50% owned consolidated
subsidiaries, has entered into two separate floating-to-fixed interest rate
swap agreements with banks that expire in May 2025 and July 2031. The Company
has determined that these derivative instruments do not meet the requirements
of hedge accounting and have therefore recorded the change in fair value of
these derivative instruments through income. Note that the change in fair
value recorded through income is a non-cash item.
Loss on Impairment
During the three and nine months ended January 31, 2016,
the Company recorded an impairment loss of $330,700 on a non-core property it
owns in Wethersfield, CT. The amount of the impairment loss represented the
excess of the cost over the estimated net sales proceeds from the property.
Loss on Defeasance
During the three and nine months ended January 31, 2017,
the Company paid a defeasance premium of $437,776 when refinancing its mortgage
loan on its shopping center in Lubbock, TX as discussed in Note 5 of the Financial
Statements included within.
Equity in Earnings
of Unconsolidated Subsidiary
The equity in earnings
of unconsolidated subsidiary for the three and nine months ended January 31,
2017 and 2016 follows:
|
Three Months
Ended
|
|
Nine Months
Ended
|
|
January 31,
|
|
January 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Income
from Operations
|
$92,654
|
|
$105,538
|
|
$276,016
|
|
$282,666
|
Distributions
|
90,000
|
|
90,000
|
|
270,000
|
|
270,000
|
|
$182,654
|
|
$195,538
|
|
$546,016
|
|
$552,666
|
The Company has an investment in an affiliated limited
liability entity Dover Parkade, LLC, (Dover). The Company has a 50% interest
in Dover which owns a shopping center in Dover Township, NJ. The operating and
financial policies of Dover are not controlled by the Company. For the years
prior to May 1, 2009, the Company was committed to providing funding to this
equity method investee. The Company’s investment was recorded at cost and
subsequently adjusted for its share of their net income and losses and distributions.
To 2009, losses and distributions from Dover exceeded the Company’s
investment. Since then, distributions from Dover have been credited to
income. The Company does not control the rate of
distributions of Dover. Such distributions are in excess of Dover’s net assets
since its accumulated net losses (including significant amounts for
depreciation and amortization) have exceeded capital contributions.
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(continued):
Income Taxes
The
Company files a Federal consolidated tax return to report all income and
deductions for its subsidiaries. The Company and its subsidiaries file income
tax returns in several states. The tax returns are filed by the entity that
owns the real estate or provides services in such state. Some states do not
allow a consolidated or combined tax filing. This sometimes creates income
taxes to be greater than expected as income for some subsidiaries cannot be
offset by other subsidiaries with operating losses.
Capital Resource and Liquidity
At January 31, 2017, the Company had $7,446,671 of
unrestricted cash and cash equivalents. This includes $5,449,571 belonging to
partnership entities in which the Company’s financial interests range from .01%
(VIEs) to 50%. Funds received from CVS, which are to be paid out in connection
with CVS developments, amounted to $337,126 and tenant security deposits held
by VIEs of $398,274 are included in restricted cash and cash equivalents.
At January 31, 2017, the Company had $1,036,716 of
investments in marketable securities, all of which belongs to partner entities.
The sources of future borrowings that may be needed for new
construction loans, property purchases, or balloon payments on existing loans
are unclear at this time. On December 7, 2015, the Company entered into a
$2,000,000 revolving demand loan agreement (“line of credit”) with a regional
bank. The interest rate on this loan is Wall Street Journal Prime, with a
floor of 3.25%. The loan is unsecured and there are no guarantors. Interest
is to be paid monthly; principal is to be repaid within twelve months or on
demand, at the bank’s discretion. There are no prepayment penalties. This
line of credit will primarily be used from time to time to fund initial
investments related to development opportunities. As of January 31, 2017, the
Company had borrowings of $1,000,000 against this credit line. The Company
also obtained another credit line as part of a purchase of land in Austin, TX
as described in Note 17 to the Company’s financial statements included in the
Company’s annual report on Form 10-K for the fiscal year ended April 30, 2016. This
$2,760,000 line of credit will primarily be used from time to time to fund
initial investments related to development opportunities. As of January 31,
2017, the Company had borrowings of $1,250,000 against this credit line.