See Notes to Condensed Consolidated Financial
Statements.
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated
Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of presentation:
First Real Estate Investment Trust of New Jersey
was organized on November 1, 1961 as a New Jersey Business Trust. On July 1, 2021, First Real Estate Investment Trust of New Jersey completed
the change of its form of organization from a New Jersey real estate investment trust to a Maryland corporation (the “Reincorporation”)
which was approved by its stockholders at the annual meeting of stockholders held on May 6, 2021. The Reincorporation changed the law
applicable to First Real Estate Investment Trust of New Jersey’s affairs from New Jersey law to Maryland law and was accomplished
by the merger of First Real Estate Investment Trust of New Jersey with and into its wholly owned subsidiary, First Real Estate Investment
Trust of New Jersey, Inc. (“FREIT”, “Trust”, “us”, “we”, “our” or the “Company”),
a Maryland corporation. As a result of the Reincorporation, the separate existence of First Real Estate Investment Trust of New Jersey
has ceased and FREIT has succeeded to all the business, properties, assets and liabilities of First Real Estate Investment Trust of New
Jersey. Holders of shares of beneficial interest in First Real Estate Investment Trust of New Jersey have received one newly issued share
of common stock of FREIT for each share of First Real Estate Investment Trust of New Jersey that they own, without any action of stockholders
required and all treasury stock held by First Real Estate Investment Trust of New Jersey was retired.
FREIT is organized and will continue to operate
in such a manner as to qualify for taxation as a REIT under the Internal Revenue Code of 1986, as amended, and its stock is traded on
the over-the-counter market under the trading symbol FREVS.
The accompanying interim condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
for interim financial statements and pursuant to the rules of the Securities and Exchange Commission (“SEC”). Accordingly,
certain information and footnotes required by GAAP for complete financial statements have been omitted. It is the opinion of management
that all adjustments considered necessary for a fair presentation have been included, and that all such adjustments are of a normal recurring
nature.
The consolidated results of operations for the
six and three-month periods ended April 30, 2023 are not necessarily indicative of the results to be expected for the full year or any
other period. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial
statements and related notes included in FREIT’s Annual Report on Form 10-K for the year ended October 31, 2022.
Note 2 – Recently issued accounting standard:
In March 2020 and January 2021, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2020-04 “Reference
Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, and ASU 2021-01 “Reference
Rate Reform (ASC 848): Scope” which provides temporary optional guidance to ease the potential burden in accounting for reference
rate reform in contracts and other transactions that reference the London Interbank Offered Rate or another reference rate expected to
be discontinued because of reference rate reform, if certain criteria are met. ASU 2020-04 and ASU 2021-01 are effective for all entities
as of March 12, 2020 through the recently deferred date of December 31, 2024. We currently do not anticipate the need to modify our existing
debt agreements as a result of reference rate reform in the current year, however if any modification is executed as a result of reference
rate reform, the Company will elect the optional expedient available under ASU 2020-04 and ASU 2021-01, which allows entities to account
for the modification as if the modification was not substantial. We will disclose the nature of and reason for electing the optional expedient
in each interim and annual financial statement period if and when applicable through December 31, 2024.
Note 3 – Dividends and earnings (loss)
per share:
The FREIT Board of Directors
(“Board”) declared a dividend of approximately $372,000 ($0.05 per share) in the second quarter of Fiscal 2023, which will
be paid on June 15, 2023 to stockholders of record on June 1, 2023. The Board will continue to evaluate the dividend on a quarterly basis.
Basic earnings (loss) per share is calculated
by dividing net income attributable to common equity (numerator) by the weighted average number of shares and vested share units (See
Note 14) outstanding during each period (denominator). The calculation of diluted earnings per share is similar to that of basic earnings
per share, except that the denominator is increased to include the number of additional shares that would have been outstanding if all
potentially dilutive shares, such as those issuable upon the exercise of stock options, were issued during the period using the Treasury
Stock method. Under the Treasury Stock method, the assumption is that the proceeds received upon exercise of the options, including the
unrecognized stock option compensation expense attributable to future services, are used to repurchase FREIT’s stock at the average
market price during the period, thereby increasing the number of shares to be added in computing diluted earnings per share. For the
six and three months ended April 30, 2023, the outstanding stock options increased the average dilutive shares outstanding by approximately
7,000 and 5,000 shares with no impact on earnings per share. For the six and three months ended April 30, 2022, the outstanding stock
options increased the average dilutive shares outstanding by approximately 71,000 and 0 shares, respectively, with an impact of approximately
$0.06 and $0.00, respectively, on earnings (loss) per share. There were no anti-dilutive shares for the six and three months ended April
30, 2023. There were approximately 0 and 311,000 anti-dilutive shares for the six and three months ended April 30, 2022, respectively.
Anti-dilutive shares consist of out-of-the money stock options under the Equity Incentive Plan (See Note 13).
Note 4 - Interest rate cap
and swap contracts:
In accordance with “Accounting Standards
Codification Topic 815, Derivatives and Hedging ("ASC 815")”, FREIT has been accounting for the Damascus Centre, LLC
(“Damascus Centre”), FREIT Regency, LLC (“Regency”), Wayne PSC, LLC (“Wayne PSC”) and Station Place
on Monmouth (“Station Place”) interest rate swaps and the Grande Rotunda, LLC (“Grande Rotunda”) interest rate
cap as cash flow hedges marking these contracts to market, taking into account present interest rates compared to the contracted fixed
rate over the life of the contract and recording the unrealized gain or loss on the swaps and cap in comprehensive income (loss). On December
30, 2021, the property owned by Grande Rotunda was sold, a portion of the proceeds from the sale was used to pay off the $116.5 million
then outstanding balance of the underlying loan and the corresponding interest rate cap on this loan matured with no settlement due at
maturity. On January 10, 2022, the property owned by Damascus Centre was sold and a portion of the proceeds from the sale was used to
pay off the $18.2 million then outstanding balance of the underlying loan and the corresponding swap breakage fees of approximately $213,000
related to the early termination of the interest rate swap contracts on this loan which was included as interest expense on the accompanying
condensed consolidated statement of operations for the six months ended April 30, 2022. (See Note 7 for further details on the sales of
these properties.) On June 17, 2022, Wayne PSC terminated its interest rate swap contract on its underlying loan held with People’s
United Bank, which had a maturity date of October 2026, for a settlement amount of approximately $1.4 million. People’s United Bank
held the proceeds from this settlement in escrow until the underlying loan was paid off in July 2022. (See Note 9 for further details.)
For the six and three months ended April 30,
2023, FREIT recorded an unrealized loss of approximately $557,000 and $107,000, respectively, in the condensed consolidated statements
of comprehensive loss representing the change in the fair value of these cash flow hedges during such periods. For the six and three months
ended April 30, 2022, FREIT recorded an unrealized gain of approximately $3,801,000 and $2,539,000, respectively, in the condensed consolidated
statements of comprehensive income representing the change in the fair value of these cash flow hedges during such periods. As of April
30, 2023, there was an asset of approximately $423,000 for the Regency swap and $429,000 for the Station Place swap. As of October 31,
2022, there was an asset of approximately $611,000 for the Regency swap and $798,000 for the Station Place swap.
The fair values are based on observable inputs
(level 2 in the fair value hierarchy as provided by authoritative guidance).
Note 5 – Investment in tenancy-in-common:
On February 28, 2020, FREIT reorganized its
subsidiary S and A Commercial Associates Limited Partnership (“S&A”) from a partnership into a tenancy-in-common form
of ownership (“TIC”). Prior to this reorganization, FREIT owned a 65% partnership interest in S&A, which owned 100% of
the Pierre Towers property located in Hackensack, New Jersey through its 100% interest in Pierre Towers, LLC. Pursuant to the TIC agreement,
FREIT ultimately acquired a 65% undivided interest in the Pierre Towers property, which was formerly owned by S&A. Based on the guidance
of Accounting Standards Codification 810, “Consolidation”, FREIT’s investment in the TIC is accounted for under
the equity method of accounting. While FREIT’s effective ownership percentage interest in the Pierre Towers property remained unchanged
after the reorganization to a TIC, FREIT no longer had a controlling interest as the TIC is now under joint control.
FREIT’s investment in the TIC was approximately
$18.6 million and $18.8 million at April 30, 2023 and October 31, 2022, respectively. For the six and three months ended April 30, 2023,
FREIT recognized a loss on investment in TIC of approximately $188,000 and $121,000, respectively, in the accompanying condensed consolidated
statements of income. For the six and three months ended April 30, 2022, FREIT recognized a loss on investment in TIC of approximately
$156,000 and $32,000, in the accompanying condensed consolidated statements of operations.
Hekemian & Co., Inc. (“Hekemian &
Co.”) manages the Pierre Towers property pursuant to a management agreement between the owners of the TIC and Hekemian & Co.
dated as of February 28, 2020, which was for an initial term of one (1) year and which renews for successive one (1) year terms unless
either party gives written notice of termination to the other party at least sixty (60) days prior to the end of the then-current term.
The management agreement renewed for a successive one (1) year term on February 28, 2023 and will expire on February 28, 2024.
The management agreement requires the payment
of management fees equal to 5% of rents collected. Management fees, charged to operations, were approximately $208,000 and $106,000 for
the six and three months ended April 30, 2023, respectively, and $197,000 and $99,000 for the six and three months ended April 30, 2022,
respectively. The Pierre Towers property also uses the resources of the Hekemian & Co. insurance department to secure various insurance
coverages for its property. Hekemian & Co. is paid a commission for these services. There were no such commissions, charged to operations,
for the six and three months ended April 30, 2023 and 2022.
The following table summarizes the balance
sheets of the Pierre Towers property as of April 30, 2023 and October 31, 2022, accounted for by the equity method:
| |
April 30, | | |
October 31, | |
| |
2023 | | |
2022 | |
| |
(In Thousands of Dollars) | |
| |
| | |
| |
Real estate, net | |
$ | 75,065 | | |
$ | 76,042 | |
Cash and cash equivalents | |
| 2,360 | | |
| 2,051 | |
Tenants' security accounts | |
| 485 | | |
| 454 | |
Receivables and other assets | |
| 648 | | |
| 583 | |
Total assets | |
$ | 78,558 | | |
$ | 79,130 | |
| |
| | | |
| | |
Mortgages payable, net of unamortized debt issuance costs | |
$ | 49,080 | | |
$ | 49,425 | |
Accounts payable and accrued expenses | |
| 211 | | |
| 178 | |
Tenants' security deposits | |
| 489 | | |
| 462 | |
Deferred revenue | |
| 147 | | |
| 145 | |
Equity | |
| 28,631 | | |
| 28,920 | |
Total liabilities & equity | |
$ | 78,558 | | |
$ | 79,130 | |
| |
| | | |
| | |
FREIT's investment in TIC (65% interest) | |
$ | 18,610 | | |
$ | 18,798 | |
The following table summarizes the statements
of operations of the Pierre Towers property for the six and three months ended April 30, 2023 and 2022, accounted for by the equity method:
| |
Six Months Ended April 30, | | |
Three Months Ended April 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(In Thousands of Dollars) | | |
(In Thousands of Dollars) | |
| |
| | |
| | |
| | |
| |
Revenue | |
$ | 4,096 | | |
$ | 3,923 | | |
$ | 2,027 | | |
$ | 1,969 | |
Operating expenses | |
| 2,485 | | |
| 2,275 | | |
| 1,263 | | |
| 1,074 | |
Depreciation | |
| 1,101 | | |
| 1,087 | | |
| 551 | | |
| 545 | |
Operating income | |
| 510 | | |
| 561 | | |
| 213 | | |
| 350 | |
| |
| | | |
| | | |
| | | |
| | |
Interest expense including amortization of deferred financing costs | |
| 799 | | |
| 801 | | |
| 399 | | |
| 400 | |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
$ | (289 | ) | |
$ | (240 | ) | |
$ | (186 | ) | |
$ | (50 | ) |
| |
| | | |
| | | |
| | | |
| | |
FREIT's loss on investment in TIC (65% interest) | |
$ | (188 | ) | |
$ | (156 | ) | |
$ | (121 | ) | |
$ | (32 | ) |
Note 6 – Termination of Purchase and
Sale Agreement:
On February 4, 2022, the Superior Court of New
Jersey, Monmouth County (“Court”) entered an Order with respect to summary judgment motions filed by the parties in connection
with litigation between certain affiliates of FREIT (the “Sellers” or “Defendant”) and Sinatra Properties, LLC
(“Sinatra” or “Plaintiff”). The litigation relates to a Purchase and Sale Agreement entered into on January 14,
2020 (“PSA”) between the Sellers and Sinatra involving the sale by the Sellers of 100% of their ownership interests in six
(6) real properties held by the Sellers.
The Court Order entered on February 4, 2022
(the “February 4 Order”) with respect to the summary judgment motions provides as follows:
| (1) | The Court finds that the Plaintiff’s have breached the subject contract and the Court dismisses
all claims for relief filed by the Plaintiff in this suit. The Court dismissed the Complaint and dismisses the Lis Pendens. |
| (2) | The Court finds that the liquidated damage provision of the contract is not enforceable and the Court
Orders that the $15 million held in escrow be returned to the Plaintiff. |
| (3) | The Court dismisses the Counterclaims and Third Party Complaint. All pleadings are dismissed. |
On May 31, 2022, Sinatra filed a Motion for
Reconsideration with the Court, requesting that the Court reconsider its February 4, 2022 Order and, among other things, (a) grant Sinatra’s
motion for summary judgment, and (b) reverse the Court’s findings that (1) Sinatra breached the Purchase and Sale Agreement, (2)
the Sellers did not breach the Purchase and Sale Agreement and (3) the Court’s dismissal of the Complaint and Lis Pendens. On July
8, 2022, the Court denied Sinatra’s Motion for Reconsideration.
Following the February 4 Order, the Sellers
and the Purchaser each filed a motion for an award of attorney’s fees and costs pursuant to the applicable provisions of the Purchase
and Sale Agreement. On December 8, 2022 the Court entered an Order awarding Sellers $3,420,422.88 in attorneys’ fees and denying
the Plaintiff’s request for attorneys’ fees (the “December 8 Order”). Upon entering the December 8 Order, the
Court had adjudicated all unresolved issues in the action.
On December 8, 2022, the Sellers filed a Notice
of Appeal, appealing from that portion of the February 4 Order which declined to enforce the liquidated damages provision in the Purchase
and Sale Agreement. As a result of such appeal by the Sellers, the liquidated damage amount of $15 million remains in escrow and has not
been returned to Sinatra.
On December 22, 2022, the Purchaser filed a
Notice of Cross Appeal appealing from all determinations by the Court adverse to the Purchaser, including (i) that portion of the February
4 Order holding that the Purchaser breached the contract; (ii) the denial of the Purchaser’s motion for reconsideration of the February
4 Order; and (iii) the December 8 Order awarding the Sellers $3,420,422.88 in attorneys’ fees and denying the Purchaser’s
request for attorneys’ fees.
The Sellers continue to believe that the allegations
set forth in the Complaint filed by Sinatra and in the Answer to Counterclaims and Third-Party Complaint and Affirmative Defenses filed
by Sinatra and Kushner Realty Acquisition LLC, are without merit.
Through the quarter ended April 30, 2023, the
$15 million deposit and the $3,420,422.88 award of attorney’s fee have not been included in income in the accompanying condensed
consolidated statements of operations. Legal costs attributed to the legal proceeding between FREIT and certain of its affiliates and
Sinatra Properties, LLC have been incurred in the amount of approximately $391,000 and $195,000 for the six and three months ended April
30, 2023, respectively, and $892,000 and $279,000 for the six and three months ended April 30, 2022, respectively, and are included in
operating expenses on the condensed consolidated statements of operations.
Note 7 – Maryland property dispositions:
On November 22, 2021, certain affiliates (the
“Maryland Sellers”) of FREIT entered into a Purchase and Sale Agreement (the “Maryland Purchase and Sale Agreement”)
with MCB Acquisition Company, LLC (the “Maryland Purchaser”), a third party, pursuant to which the Maryland Sellers agreed
to sell three properties to the Maryland Purchaser. The properties consisted of retail and office space and a residential apartment community
owned by Grande Rotunda, LLC (the “Rotunda Property”), a shopping center owned by Damascus Centre, LLC (the “Damascus
Property”), and a shopping center owned by WestFREIT Corp. (the “Westridge Square Property”). FREIT owns 100% of its
subsidiary, WestFREIT Corp. (“WestFREIT”), a 60% interest in Grande Rotunda, LLC (“Grande Rotunda”), the joint
venture that owned the Rotunda Property, and a 70% interest in Damascus Centre, LLC (“Damascus Centre”), the joint venture
that owned the Damascus Property.
The sale of the Maryland Properties having a
total net book value of $172.3 million (as adjusted) was consummated by the Maryland Sellers and the Maryland Purchaser for a purchase
price of $248,750,269, after giving effect to the $15,526,731 escrow deposit (the “Maryland Purchaser Escrow Payment”). This
sale resulted in net proceeds of approximately $55 million (inclusive of approximately $1.1 million in funds released during the second
quarter of Fiscal 2023, $0.1 million in funds released during the first quarter of Fiscal 2023 and $1.9 million in funds released in Fiscal
2022 from the Maryland Purchaser Escrow Payment), after payment of related mortgage debt in the amount of $155.8 million and the corresponding
swap breakage fees of approximately $213,000 related to the early termination of the interest rate swap contracts on the Damascus Property
loan, payment of loans (including interest) to each of the equity owners in Grande Rotunda in the amount of approximately $31 million
and certain transactional expenses and transfer taxes including brokerage fees due to Hekemian & Co. of approximately $6.2 million.
As of April 30, 2023, approximately $3,176,000 of the Maryland Purchaser Escrow Payment has been released from escrow to the Maryland
Sellers. The escrow and related gain on sale were reduced by approximately $446,000 and $203,000 for the six and three months ended April
30, 2023, respectively, and $1.2 million for the six and three months ended April 30, 2022 due to a change in estimate related to a change
in the timing of anticipated rent commencement dates for certain tenants, which will reduce the escrowed funds available to be released
to Grande Rotunda. Approximately $4.7 million and $6.3 million of remaining funds are held in a post-closing escrow for rents and are
included in “Funds held in post-closing escrow” on the accompanying condensed consolidated balance sheets as of April 30,
2023 and October 31, 2022, respectively. Approximately $3.7 million of these funds held in post-closing escrow are anticipated to be released
in Fiscal 2023 and the remaining balance is anticipated to be released in Fiscal 2024. The sale of the Maryland Properties resulted in
a net gain of approximately $68.3 million (as adjusted) (with a consolidated impact to FREIT of approximately $45.3 million) which includes
approximately $7.8 million of proceeds released and anticipated to be released from funds held in escrow, a write-off of the straight-line
rent receivable of approximately $2.9 million and a write-off of unamortized lease commissions of approximately $1.7 million.
On August 4, 2022, FREIT’s Board declared
a special, extraordinary, non-recurring cash distribution of approximately $51.5 million, or $7.50 per share, which was paid on August
30, 2022, to stockholders of record on August 16, 2022 (with an ex-dividend date of August 31, 2022). This distribution represented most
of the net proceeds of FREIT’s sale of its portfolio of Maryland Properties.
As the disposal of the Maryland Properties did
not represent a strategic shift that would have a major impact on FREIT’s operations or financial results, the properties’
operations were not reflected as discontinued operations in the accompanying condensed consolidated financial statements.
Note 8 - Management agreement, fees and transactions
with related party:
Hekemian & Co. currently
manages all of the properties owned by FREIT and its affiliates, except for the office building at the Rotunda Property, which was sold
on December 30, 2021 and was formerly managed by an independent third party management company. The management agreement between FREIT
and Hekemian & Co. dated as of November 1, 2001 (“Management Agreement”) expires on October 31, 2023 and is automatically
renewed for successive periods of two years unless either party gives not less than six (6) months prior notice of non-renewal.
The Management Agreement requires the payment
of management fees equal to 4% to 5% of rents collected. Such fees charged to operations were approximately $659,000 and $790,000 for
the six months ended April 30, 2023 and 2022, respectively, and $332,000 and $306,000 for the three months ended April 30, 2023 and 2022,
respectively. In addition, the Management Agreement provides for the payment to Hekemian & Co. of leasing commissions, as well as
the reimbursement of certain operating expenses, such as payroll and insurance costs, incurred on behalf of FREIT. Such commissions and
reimbursements amounted to approximately $322,000 and $348,000 for the six months ended April 30, 2023 and 2022, respectively, and $182,000
and $164,000 for the three months ended April 30, 2023 and 2022, respectively. FREIT also uses the resources of the Hekemian & Co.
insurance department to secure various insurance coverages for its properties and subsidiaries. Hekemian & Co. is paid a commission
for these services. Such commissions, charged to operations, were approximately $65,000 and $59,000 for the six months ended April 30,
2023 and 2022, respectively, and $16,000 and $7,000 for the three months ended April 30, 2023 and 2022, respectively.
From time to time, FREIT engages Hekemian &
Co., or certain affiliates of Hekemian & Co., to provide additional services, such as consulting services related to development,
property sales and financing activities of FREIT. Separate fee arrangements are negotiated between Hekemian & Co. and FREIT with respect
to such additional services. Such fees incurred for the six and three months ended April 30, 2023 were approximately $21,000 and $21,000,
respectively, and for the six and three months ended April 30, 2022 were approximately $6,294,000 and $0, respectively. Fees incurred
during Fiscal 2023 related to commissions to Hekemian & Co. for the modification and extension of the loan on the Westwood Plaza property.
Fees incurred during Fiscal 2022 related to commissions to Hekemian & Co. for the following: $4,777,000 for the sale of the Rotunda
Property; $917,000 for the sale of the Damascus Property; $525,000 for the sale of the Westridge Square Property; and $75,000 for the
refinancing of the loan on the Boulders property. The commissions related to the sale of the Rotunda Property, the Damascus Property and
the Westridge Square Property were charged against the gain on sale of the Maryland Properties (See Note 7) in the accompanying condensed
consolidated statement of operations for the six months ended April 30, 2022. The commission for the refinancing of the loan on the Boulders
property and the modification and extension of the loan on the Westwood Plaza property was accounted for as a deferred mortgage cost included
in the unamortized debt issuance costs in the accompanying condensed consolidated balance sheets as of April 30, 2023 and October 31,
2022.
The Management Agreement provides for a termination
fee (“Termination Fee”) in the event of a termination by FREIT without cause and a termination fee of 1.25 times the Termination
Fee if the Management Agreement terminates following a merger or acquisition of FREIT (the “M&A Termination Fee”). On
March 9, 2023, the Board approved an amendment to the Management Agreement (the “Second Amendment”) which provides, among
other things, that the M&A Termination Fee shall be increased from 1.25 times the Termination Fee to 2.5 times the Termination Fee.
Robert S. Hekemian, Jr., Chief Executive Officer,
President and a Director of FREIT, is the Chief Executive Officer of Hekemian & Co. David B. Hekemian, a Director of FREIT, is the
President of Hekemian & Co. Allan Tubin, Chief Financial Officer and Treasurer of FREIT, is the Chief Financial Officer of Hekemian
& Co.
Director fee expense and/or executive compensation
(including interest, dividends and stock awards) incurred by FREIT for the six months ended April 30, 2023 and 2022 was approximately
$314,000 and $279,000, respectively, for Robert S. Hekemian, Jr., $21,000 and $20,000, respectively, for Allan Tubin and $46,000 and $29,000,
respectively, for David Hekemian. Director fee expense and/or executive compensation (including interest, dividends and stock awards)
incurred by FREIT for the three months ended April 30, 2023 and 2022 was approximately $173,000 and $144,000, respectively, for Robert
S. Hekemian, Jr., $11,000 and $10,000, respectively, for Allan Tubin and $33,000 and $14,000, respectively, for David Hekemian (See Notes
13 and 14). Such costs are included within operating expenses on the accompanying condensed consolidated statements of operations.
Note 9 – Mortgage financings and line
of credit:
On August 19, 2022, Westwood Hills, LLC (“Westwood Hills”) exercised its right, pursuant to the loan agreement, to extend the term of its $25 million loan on its property located in Westwood, New Jersey, for an additional six (6) months from an initial maturity date of October 1, 2022 to a new maturity date of April 1, 2023. On March 1, 2023, Westwood Hills exercised its right, pursuant to the loan agreement, to extend the term of its loan, for an additional six (6) months to a new maturity date of October 1, 2023 on the same terms and conditions as stated in the loan agreement. As of April 30, 2023, $25,000,000 of this loan was drawn and outstanding and the interest rate was 8.84%. Westwood Hills is in the process of refinancing this loan with a new lender in the amount of $25,500,000 for a term of three (3) years and based on a fixed rate of interest of 6.05%. This financing is expected to close by August 2023. Until such time as a definitive agreement is entered into, there can be no assurance this loan will be entered into.
Effective February 1, 2023, FREIT entered into
a loan extension and modification agreement with Valley National Bank on its loan secured by the Westwood Plaza shopping center in Westwood,
New Jersey with a then outstanding balance of approximately $16,864,361. Under the terms and conditions of this loan extension and modification,
the maturity date of the loan was extended for a term of one (1) year from February 1, 2023 to February 1, 2024 with the option of FREIT
to extend for one additional year from the extended maturity date, subject to certain provisions of the loan agreement. The loan is payable
based on monthly installments of approximately $157,347 based on a fixed rate of interest of 7.5%. Additionally, FREIT funded an interest
reserve escrow account (“Escrow”) at closing representing the annualized principal and interest payments for one (1) year,
amounting to approximately $1,888,166. This Escrow is held at Valley National Bank and in the event of a default on this loan, the bank
shall be permitted to use the proceeds from the escrow account to make monthly debt service payments on the loan.
On July 22, 2022, Wayne PSC, LLC (“Wayne
PSC”) refinanced its $22.1 million loan (inclusive of deferred interest of approximately $136,000), which would have matured on
October 1, 2026, on its Preakness Shopping center located in Wayne, New Jersey with a new loan held by ConnectOne Bank in the amount of
$25,000,000. This loan is interest-only based on a fixed interest rate of 5% and has a term of three years with a maturity date of August
1, 2025. Additionally, an interest reserve escrow was established at closing representing twelve months of interest of $1,250,000, which
can be used to pay monthly interest on this loan with a requirement to replenish the escrow account back to $1,250,000 when the balance
in the escrow account is reduced to three months of interest. This refinancing resulted in (i) annual debt service savings of approximately
$340,000 due to interest-only payments; (ii) an increase in the interest rate from a fixed interest rate of 3.625% to a fixed interest
rate of 5%; and (iii) net refinancing proceeds of approximately $1.1 million which can be used for capital expenditures and general corporate
purposes. As part of the refinancing, Wayne PSC terminated the interest rate swap contract on the underlying loan resulting in a realized
gain on the swap breakage of approximately $1.4 million (See Note 4 for additional details.) As of April 30, 2023, the interest reserve
escrow account has a balance of approximately $302,000. In May 2023, Wayne PSC funded the escrow account in the amount of $950,000 to
replenish the balance in the account back to $1,250,000.
On December 30, 2021, FREIT refinanced its $14.4
million loan secured by its Boulders property located in Rockaway, New Jersey (which would have matured on February 1, 2022) with a new
loan held by ConnectOne Bank in the amount of $7,500,000, with additional funding available to be drawn upon in the amount of $7,500,000
for corporate needs. This loan is interest-only and has a maturity date of January 1, 2024 with the option of FREIT to extend for one
year from the maturity date, subject to certain provisions of the loan agreement. This refinancing will provide annual debt service savings
of approximately $1,173,000 as a result of the reduction in the principal amount, a reduction in the annual interest rate from a fixed
rate of 5.37% to a fixed rate of 2.85% and interest-only payments being required under this new loan. As of April 30, 2023, $7,500,000
of this loan was drawn and outstanding.
FREIT’s revolving line of credit provided
by the Provident Bank was renewed for a three-year term ending on October 31, 2023. Draws against the credit line can be used for working
capital needs and standby letters of credit. Draws against the credit line are secured by mortgages on FREIT’s Franklin Crossing
Shopping Center in Franklin Lakes, New Jersey and retail space in Glen Rock, New Jersey. The total line of credit is $13 million and the
interest rate on the amount outstanding is based on a floating interest rate of prime minus 25 basis points with a floor of 3.75%. As
of April 30, 2023 and October 31, 2022, there was no amount outstanding and $13 million was available under the line of credit.
While FREIT intends to renew or refinance its
debt obligations as they become due, there can be no assurance that it will be successful or, if successful, that the new terms will be
similar to the terms of its existing debt obligations or as favorable.
Note 10 – Fair value of long-term debt:
The following table shows the estimated fair
value and net carrying value of FREIT’s long-term debt at April 30, 2023 and October 31, 2022:
($ in Millions) |
|
April 30, 2023 |
|
October 31, 2022 |
|
|
|
|
|
Fair Value |
|
$134.1 |
|
$132.2 |
|
|
|
|
|
Carrying Value, Net |
$137.2 |
|
$138.1 |
Fair values are estimated based on market interest
rates at April 30, 2023 and October 31, 2022 and on a discounted cash flow analysis. Changes in assumptions or estimation methods may
significantly affect these fair value estimates. The fair value is based on observable inputs (level 2 in the fair value hierarchy as
provided by authoritative guidance).
Note 11 - Segment information:
ASC 280-10, "Disclosures about Segments
of an Enterprise and Related Information", establishes standards for reporting financial information about operating segments
in interim and annual financial reports and provides for a "management approach" in identifying the reportable segments. FREIT
has determined that it has two reportable segments: commercial properties and residential properties. These reportable segments offer
different types of space, have different types of tenants, and are managed separately because each requires different operating strategies
and management expertise. The commercial segment is comprised of five (5) properties, excluding the Rotunda Property, the Westridge Square
Property and the Damascus Property, which were sold on December 30, 2021, January 7, 2022 and January 10, 2022, respectively. The residential
segment is comprised of six (6) properties, excluding the Icon at the Rotunda Property, which was sold as part of the Maryland Properties
on December 30, 2021. (See Note 7 for further details.)
The accounting policies of the segments are
the same as those described in Note 1 in FREIT’s Annual Report on Form 10-K for the fiscal year ended October 31, 2022. The chief
operating and decision-making group responsible for oversight and strategic decisions of FREIT's commercial segment, residential segment
and corporate/other is comprised of FREIT’s Board.
FREIT, through its chief operating and decision
making group, assesses and measures segment operating results based on net operating income ("NOI"). NOI, a standard used by
real estate professionals, is based on operating revenue and expenses directly associated with the operations of the real estate properties,
but excludes: deferred rents (straight lining), depreciation, financing costs and other items. NOI is not a measure of operating results
or cash flows from operating activities as measured by GAAP, and is not necessarily indicative of cash available to fund cash needs and
should not be considered an alternative to cash flows as a measure of liquidity.
Real estate rental revenue, operating expenses,
NOI and recurring capital improvements for the reportable segments are summarized below and reconciled to condensed consolidated net
income (loss) attributable to common equity for the six and three months ended April 30, 2023 and 2022. Asset information is not reported
since FREIT does not use this measure to assess performance.
| |
Six Months Ended | | |
Three Months Ended | |
| |
April 30, | | |
April 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
(In Thousands of Dollars) | | |
(In Thousands of Dollars) | |
Real estate rental revenue: | |
| | | |
| | | |
| | | |
| | |
Commercial | |
$ | 4,338 | | |
$ | 6,266 | | |
$ | 2,084 | | |
$ | 1,945 | |
Residential | |
| 9,633 | | |
| 11,059 | | |
| 4,880 | | |
| 4,721 | |
Total real estate rental revenue | |
| 13,971 | | |
| 17,325 | | |
| 6,964 | | |
| 6,666 | |
| |
| | | |
| | | |
| | | |
| | |
Real estate operating expenses: | |
| | | |
| | | |
| | | |
| | |
Commercial | |
| 2,488 | | |
| 3,919 | | |
| 1,241 | | |
| 1,234 | |
Residential | |
| 4,337 | | |
| 4,687 | | |
| 2,197 | | |
| 2,046 | |
Total real estate operating expenses | |
| 6,825 | | |
| 8,606 | | |
| 3,438 | | |
| 3,280 | |
| |
| | | |
| | | |
| | | |
| | |
Net operating income: | |
| | | |
| | | |
| | | |
| | |
Commercial | |
| 1,850 | | |
| 2,347 | | |
| 843 | | |
| 711 | |
Residential | |
| 5,296 | | |
| 6,372 | | |
| 2,683 | | |
| 2,675 | |
Total net operating income | |
$ | 7,146 | | |
$ | 8,719 | | |
$ | 3,526 | | |
$ | 3,386 | |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Recurring capital improvements - residential | |
$ | (290 | ) | |
$ | (206 | ) | |
$ | (145 | ) | |
$ | (158 | ) |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Reconciliation to condensed consolidated net income (loss) attributable to common equity: | |
| | | |
| | | |
| | | |
| | |
Segment NOI | |
$ | 7,146 | | |
$ | 8,719 | | |
$ | 3,526 | | |
$ | 3,386 | |
Deferred rents - straight lining | |
| (76 | ) | |
| (61 | ) | |
| (48 | ) | |
| (51 | ) |
Investment income | |
| 407 | | |
| 64 | | |
| 218 | | |
| 38 | |
General and administrative expenses | |
| (1,802 | ) | |
| (2,196 | ) | |
| (975 | ) | |
| (869 | ) |
Loss on investment in tenancy-in-common | |
| (188 | ) | |
| (156 | ) | |
| (121 | ) | |
| (32 | ) |
Depreciation | |
| (1,454 | ) | |
| (2,534 | ) | |
| (732 | ) | |
| (714 | ) |
Net (loss) gain on sale of Maryland properties | |
| (446 | ) | |
| 68,771 | | |
| (203 | ) | |
| (1,232 | ) |
Financing costs | |
| (3,827 | ) | |
| (4,455 | ) | |
| (1,951 | ) | |
| (1,527 | ) |
Net (loss) income | |
| (240 | ) | |
| 68,152 | | |
| (286 | ) | |
| (1,001 | ) |
Net loss (income) attributable to noncontrolling interests in subsidiaries | |
| 756 | | |
| (22,727 | ) | |
| 383 | | |
| 649 | |
Net income (loss) attributable to common equity | |
$ | 516 | | |
$ | 45,425 | | |
$ | 97 | | |
$ | (352 | ) |
Note 12 – Income
taxes:
FREIT has elected to be treated as a REIT for
federal income tax purposes and as such intends to distribute at least 90% of its ordinary taxable income (to maintain its status as a
REIT) to its stockholders as dividends for the fiscal year ending October 31, 2023. FREIT distributed approximately 143.8% of its ordinary
taxable income and 100% of its capital gains from the sale of the Maryland Properties to its stockholders as dividends for the fiscal
year ended October 31, 2022. Accordingly, no provision for federal or state income taxes related to such ordinary taxable income and such
gains were recorded in FREIT’s condensed consolidated financial statements for the six and three months ended April 30, 2023 and
2022.
As of April 30, 2023, FREIT had no material
uncertain income tax positions. The tax years subsequent to and including the fiscal year ended October 31, 2019 remain open to examination
by the major taxing jurisdictions.
Note 13 – Equity
Incentive Plan:
On March 9, 2023, in accordance with FREIT’s
Equity Incentive Plan, the Compensation Committee of the FREIT Board of Directors (the “Board”) recommended to the Board and
the Board approved that for services rendered and to be rendered in Fiscal 2023, in lieu of cash compensation in the amount of $20,000,
each director was awarded shares of Common Stock, $0.01 par value, (the “Shares”) in FREIT. Based on the closing price of
FREIT’s Shares on March 9, 2023 of $15.50 per Share, the Board has approved an award of 1,290 Shares of FREIT to each director serving
on FREIT’s Board. As such, 1,290 Shares were issued to each director on March 9, 2023 and upon issuance were deemed fully paid and
non-assessable. Additionally, the Compensation Committee recommended to the Board and the Board approved other adjustments to the compensation
to be paid to directors and the executive officers of FREIT.
As of April 30, 2023, 433,030 shares are available
for issuance under the FREIT Equity Incentive Plan (the “Plan”).
The following table summarizes stock option
activity for the six and three months ended April 30, 2023 and 2022:
| |
Six Months Ended April 30, | | |
Three Months Ended April 30, | |
| |
2023 | | |
2023 | |
| |
No. of Options | | |
Weighted Average | | |
No. of Options | | |
Weighted Average | |
| |
Outstanding | | |
Price | | |
Outstanding | | |
Price | |
Options outstanding at beginning of period | |
| 126,140 | | |
$ | 10.64 | | |
| 13,240 | | |
$ | 8.74 | |
Options granted during period | |
| — | | |
| — | | |
| — | | |
| — | |
Options forfeited/cancelled during period | |
| — | | |
| — | | |
| — | | |
| — | |
Options exercised during period | |
| (113,900 | ) | |
| (10.83 | ) | |
| (1,000 | ) | |
| (7.50 | ) |
Options outstanding at end of period | |
| 12,240 | | |
$ | 8.84 | | |
| 12,240 | | |
$ | 8.84 | |
Options vested and expected to vest | |
| 11,100 | | |
| | | |
| 11,100 | | |
| | |
Options exercisable at end of period | |
| 3,640 | | |
| | | |
| 3,640 | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
| |
Six and Three Months Ended April 30, 2022 | |
| |
No. of Options | | |
Weighted Average | |
| |
Outstanding | | |
Price | |
Options outstanding at beginning of period | |
| 310,740 | | |
$ | 18.35 | |
Options granted during period | |
| — | | |
| — | |
Options forfeited/cancelled during period | |
| — | | |
| — | |
Options exercised during period | |
| — | | |
| — | |
Options outstanding at end of period | |
| 310,740 | | |
$ | 18.35 | |
Options vested and expected to vest | |
| 309,450 | | |
| | |
Options exercisable at end of period | |
| 293,540 | | |
| | |
For the six and three months ended April 30,
2023, compensation expense related to stock options vested amounted to approximately $10,000 and $5,000, respectively. For the six and
three month periods ended April 30, 2022, compensation expense related to stock options vested amounted to approximately $10,000 and $5,000,
respectively. At April 30, 2023, there was approximately $2,000 of unrecognized compensation cost relating to outstanding non-vested stock
options to be recognized over the remaining weighted average vesting period of approximately 0.1 years. The aggregate intrinsic value
of options vested and expected to vest and options exercisable at April 30, 2023 was approximately $62,700 and $13,200, respectively.
For the six and three months ended April 30, 2023, 113,900 and 1,000 options, respectively, were exercised for an aggregate amount of
approximately $1.2 million and $7,500, respectively. There were no options exercised for the six and three months ended April 30, 2022.
Note 14 – Deferred
fee plan:
On September 4, 2014, the Board approved amendments,
effective November 1, 2014, to the FREIT Deferred Fee Plan for its executive officers and directors, one of which provides for the issuance
of share units payable in FREIT shares in respect of (i) deferred amounts of all director fees on a prospective basis; (ii) interest on
director fees deferred prior to November 1, 2014 (payable at a floating rate, adjusted quarterly, based on the average 10-year Treasury
Bond interest rate plus 150 basis points); and (iii) dividends payable in respect of share units allocated to participants in the Deferred
Fee Plan as a result of deferrals described above. The number of share units credited to a participant’s account was determined
by the closing price of FREIT shares on the date as set forth in the Deferred Fee Plan.
For the six months ended April 30, 2023 and
2022, the aggregate amounts of deferred director fees together with related interest and dividends were approximately $26,500 and $100,500,
respectively, which have been paid through the issuance of 1,630 and 4,080 vested FREIT share units, respectively, based on the closing
price of FREIT shares on the dates as set forth in the Deferred Fee Plan. For the six months ended April 30, 2023 and 2022, FREIT has
charged as expense approximately $26,500 and $65,200, respectively, representing deferred director fees and interest, and the balance
of approximately $0 and $35,300, respectively, representing dividends payable in respect of share units allocated to Plan participants,
has been charged to equity.
On November 4, 2021 (the “Adoption Date”),
the Board approved the termination of the Deferred Fee Plan resulting in the termination of the deferral of fees on December 31, 2021
with any subsequent fees earned by a participant being paid in cash. Consistent with the termination of the Deferred Fee Plan, payment
related to each participant’s cash account (in the form of a cash lump sum payment) and share unit account (in the form of the issuance
of common stock) (collectively “the Deferred Fee Plan Termination Payment”) must be made to each participant no earlier than
twelve (12) months and one day after, and no later than twenty-four (24) months, after the Adoption Date. Any interest earned on the participant’s
cash account along with dividends (if any) earned on share units, will continue to accrue in share units on each participant’s account
until final payment is made. On November 3, 2022, the Board determined that the Deferred Fee Plan Termination Payment would be made to
the participants in the Deferred Fee Plan on January 20, 2023.
As of October 31, 2022, the total payment related
to each participant’s cash account was approximately $2,317,000 (consisting of approximately $1,366,000 of cumulative fees and approximately
$951,000 of accrued interest) which had been deferred as of November 1, 2014 and was included in the “Deferred director compensation
payable” in the condensed consolidated balance sheet as of October 31, 2022. On January 20, 2023, in accordance with the Deferred
Fee Plan Termination Payment, this amount was paid in full to each respective participant with no remaining balance due. Additionally,
payment related to each participant’s share unit account was made in the form of the issuance of stock to each respective participant
resulting in the issuance of 274,509 shares of common stock for each of the 274,509 vested share units. As of April 30, 2023, there were
no remaining vested share units to be paid in the form of the issuance of stock.
Note 15 – Rental Income:
Commercial tenants:
Fixed lease income under our commercial operating
leases generally includes fixed minimum lease consideration, which is accrued on a straight-line basis over the terms of the leases. Variable
lease income includes consideration based on sales, as well as reimbursements for real estate taxes, maintenance, insurance and certain
other operating expenses of the properties.
Minimum fixed lease consideration (in thousands
of dollars) under non-cancelable tenant operating leases for each of the next five years and thereafter, excluding variable lease consideration
and rents from tenants for which collectability is deemed to be constrained, for the years ending October 31, as of April 30, 2023, is
as follows:
Year Ending October 31, | |
Amount | |
2023 | |
$ | 5,639 | |
2024 | |
| 5,019 | |
2025 | |
| 4,327 | |
2026 | |
| 3,493 | |
2027 | |
| 2,353 | |
Thereafter | |
| 4,221 | |
Total | |
$ | 25,052 | |
The above amounts assume that all leases which
expire are not renewed and, accordingly, neither month-to-month nor rentals from replacement tenants are included.
Minimum future rentals do not include contingent
rentals, which may be received under certain leases on the basis of percentage of reported tenants' sales volume. Rental income that is
contingent on future events is not included in income until the contingency is resolved. Contingent rentals included in income for the
six and three months ended April 30, 2023 and 2022 were not material.
Residential tenants:
Lease terms for residential tenants are usually
one to two years.