Item 2: Management’s Discussion and
Analysis of Financial Condition and Results of Operations
Cautionary Statement Identifying Important Factors
That Could Cause First Real Estate Investment Trust of New Jersey’s (“FREIT”) Actual Results to Differ From Those
Projected in Forward Looking Statements.
Readers of this discussion are advised that
the discussion should be read in conjunction with the unaudited condensed consolidated financial statements of FREIT (including
related notes thereto) appearing elsewhere in this Form 10-Q, and the consolidated financial statements included in FREIT’s
most recently filed Form 10-K. Certain statements in this discussion may constitute “forward-looking statements” within
the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect FREIT’s current expectations
regarding future results of operations, economic performance, financial condition and achievements of FREIT, and do not relate
strictly to historical or current facts. FREIT has tried, wherever possible, to identify these forward-looking statements by using
words such as “believe,” “expect,” “anticipate,” “intend,” “plan,”
“estimate,” or words of similar meaning.
Although FREIT believes that the expectations
reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties,
which may cause the actual results to differ materially from those projected. Such factors include, but are not limited to the
following: general economic and business conditions, which will, among other things, affect demand for rental space, the availability
of prospective tenants, lease rents, the financial condition of tenants and the default rate on leases, operating and administrative
expenses and the availability of financing; adverse changes in FREIT’s real estate markets, including, among other things,
competition with other real estate owners, competition confronted by tenants at FREIT’s commercial properties; governmental
actions and initiatives; environmental/safety requirements; and risks of real estate development and acquisitions. The risks with
respect to the development of real estate include: increased construction costs, inability to obtain construction financing, or
unfavorable terms of financing that may be available, unforeseen construction delays and the failure to complete construction within
budget.
OVERVIEW
FREIT is an equity real estate investment
trust ("REIT") that is self-administered and externally managed. FREIT owns a portfolio of residential apartment and
commercial properties. FREIT’s revenues consist primarily of rental income and other related revenues from its residential
and commercial properties and additional rent in the form of expense reimbursements derived from operating commercial properties.
FREIT’s properties are primarily located in northern New Jersey, Maryland and New York. FREIT acquires existing properties
for investment and properties that FREIT believes have redevelopment potential through changes and capital improvements to these
properties. FREIT develops and constructs properties on its vacant land. FREIT’s policy is to acquire and develop real property
for long-term investment.
The economic and financial environment:
The U.S. economy grew at an annualized rate of approximately 0.7% in the first quarter of calendar year 2017. Employment remained
healthy and real income grew at a solid pace further driving the Federal Reserve to increase lending rates for the first time in
over a year. If the U.S. economy continues to improve, the Federal Reserve may increase lending rates again which may affect refinancing
of mortgages coming due in the short term.
Residential Properties:
FREIT has aggressively increased rental rates on its stabilized properties. As a result, FREIT’s rental rates continue to
show year-over-year increases. FREIT expects increases in rental rates to taper; however, the increased rental rates that are in
place should positively impact future revenues.
Commercial Properties:
There continues to be uncertainty in the retail environment that could have an impact on FREIT’s business.
Development Projects and Capital
Expenditures:
FREIT continues to make only those capital expenditures that are absolutely necessary. The construction at
the Rotunda development project began in September 2013 and with the exception of tenant improvements was substantially completed
in the third quarter of Fiscal 2016 with costs to complete estimated at less than $1 million. As of April 30, 2017, the residential
section is approximately 49% leased and the retail space is approximately 71% leased. FREIT expects the Rotunda’s operations
to stabilize in late 2018 to early 2019.
Debt Financing Availability:
Financing for development projects has been available to FREIT and its affiliates. On December 9, 2013, Grande Rotunda, LLC closed
with Wells Fargo Bank on a construction loan of up to $120 million to be used to redevelop and expand the Rotunda property in Baltimore,
Maryland with a term of four (4) years, with one twelve-month extension, at a rate of 225 basis points over the monthly LIBOR.
On November 23, 2016, the following terms and conditions of this loan were modified: (i) the total amount that may be drawn on
this loan was decreased from $120 million to $116.1 million, allowing for an additional draw of $2.1 million over the then existing
balance of approximately $114 million to be used for retail tenant improvements and leasing commissions; (ii) leasing benchmarks
are no longer required to be met including the waiver of the leasing benchmarks FREIT was not in compliance with as of June 30,
2016; (iii) Grande Rotunda, LLC provided an interest reserve to Wells Fargo Bank in the amount of $2 million for the purpose of
funding interest payments, and is obliged to replenish the account balance to $1 million if it should fall below $500,000; (iv)
the maturity date of the loan was changed from December 31, 2017 to October 31, 2017 with no option to extend; (v) the interest
rate on the amount outstanding on the loan was increased by 25 basis points to 250 basis points over the monthly LIBOR. As of April
30, 2017, $115.3 million of this loan was drawn down (including approximately $1.3 million during Fiscal 2017), of which $19 million
was used to pay off the loan from FREIT, and $96.3 million was used toward the construction at the Rotunda. The loan was fully
drawn down as of April 30, 2017 with a remaining reserve of approximately $0.8 million used as a letter of credit for offsite improvements.
On April 28, 2017, WestFREIT Corp., refinanced
its $22 million mortgage loan held with Wells Fargo Bank, with a new mortgage loan from Manufacturer’s and Traders Trust
Company in the amount of $23.5 million. The new loan, secured by a shopping center in Frederick, Maryland, bears a floating interest
rate equal to 275 basis points over the one-month LIBOR and a maturity date of April 28, 2019 with the option to extend for 12
months. This refinancing resulted in: (i) a reduction in the annual interest rate from a fixed rate of 5.55% to a variable rate
of 3.74% based on the one-month LIBOR as of April 30, 2017, and (ii) net refinancing proceeds of approximately $1.1 million, of
which $250,000 is being held in an escrow for post-closing bank due diligence review. The net refinancing proceeds will be used
for general corporate purposes.
On September 29, 2016, Wayne PSC, LLC
refinanced its $24.2 million mortgage loan held with Metropolitan Life Insurance Company, with a new mortgage loan from People’s
United Bank in the amount of $25.8 million. The new loan, secured by a shopping center in Wayne, New Jersey, bears a floating interest
rate equal to 220 basis points over the one-month BBA LIBOR with a maturity date of October 1, 2026. In order to minimize interest
rate volatility during the term of the loan, Wayne PSC, LLC entered into an interest rate swap agreement that, in effect, converted
the floating interest rate to a fixed interest rate of 3.625% over the term of the loan. This refinancing resulted in: (i) a reduction
in the interest rate from 6.04% to 3.625% and (ii) net refinancing proceeds of approximately $1 million that were distributed to
the partners in Wayne PSC, LLC with FREIT receiving $0.4 million based on its 40% membership interest in Wayne PSC, LLC.
On April 22, 2016, People’s United
Bank agreed to a take-down of the second tranche of its loan with Damascus, Centre, LLC in the amount of $2,320,000, of which approximately
$470,000 was readily available and the remaining $1,850,000 (included in prepaid expenses and other assets in the accompanying
condensed consolidated balance sheets) is held in escrow and available to Damascus Centre, LLC once certain tenants open and begin
paying rent. In order to minimize interest rate volatility during the term of this loan, Damascus Centre, LLC entered into an interest
rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 3.53% over the term of the
second tranche of this loan.
Operating Cash Flow and Dividend
Distributions:
FREIT expects that cash provided by net operating income will be adequate to cover mandatory debt service
payments (excluding balloon payments), necessary capital improvements at stabilized properties and dividends necessary to retain
qualification as a REIT (90% of taxable income). Until the economic climate indicates that a change is appropriate, it is FREIT’s
intention to maintain its quarterly dividend at a level not less than that required to maintain its REIT status for federal income
tax purposes.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Pursuant to the SEC disclosure guidance
for "Critical Accounting Policies," the SEC defines Critical Accounting Policies as those that require the application
of management's most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect
of matters that are inherently uncertain and may change in subsequent periods.
Our discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial statements, the preparation of which takes into account
estimates based on judgments and assumptions that affect certain amounts and disclosures. Accordingly, actual results could differ
from these estimates. The accounting policies and estimates used, which are outlined in Note 1 to our Consolidated Financial Statements
included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2016, have been applied consistently as at April
30, 2017, and for the six and three months ended April 30, 2017 and 2016. We believe that the following accounting policies or
estimates require the application of management's most difficult, subjective, or complex judgments:
Revenue Recognition: Base rents, additional
rents based on tenants' sales volume and reimbursement of the tenants' share of certain operating expenses are generally recognized
when due from tenants. The straight-line basis is used to recognize base rents under leases if they provide for varying rents over
the lease terms. Straight-line rents represent unbilled rents receivable to the extent straight-line rents exceed current rents
billed in accordance with lease agreements. Before FREIT can recognize revenue, it is required to assess, among other things, its
collectability.
Valuation of Long-Lived Assets: We assess
the carrying value of long-lived assets periodically, or whenever events or changes in circumstances indicate that the carrying
amounts of certain assets may not be recoverable. When FREIT determines that the carrying value of long-lived assets may be impaired,
the measurement of any impairment is based on a projected discounted cash flow method determined by FREIT's management. While we
believe that our discounted cash flow methods are reasonable, different assumptions regarding such cash flows may significantly
affect the measurement of impairment.
Real Estate Development Costs: It is
FREIT’s policy to capitalize pre-development costs, which generally include legal and professional fees and other directly
related third-party costs. Real estate taxes and interest costs incurred during the development and construction phases are also
capitalized. FREIT ceases capitalization of these costs when the project or portion thereof becomes operational, or when construction
has been postponed. In the event of postponement, capitalization of these costs will recommence once construction on the project
resumes.
See Note 2 to the condensed consolidated
financial statements for recently issued accounting standards.
RESULTS OF OPERATIONS
Real estate revenue for the six months
ended April 30, 2017 (“Current Six Months”) increased 12.3% to $25,263,000, compared to $22,488,000 for the six months
ended April 30, 2016 (“Prior Year’s Six Months”). For the three months ended April 30, 2017 (“Current Quarter”),
real estate revenue increased 14.4% to $12,664,000, compared to $11,064,000 for the three months ended April 30, 2016 (“Prior
Year’s Quarter”).
Net income (loss) attributable to common
equity (“net income (loss)-common equity”) for the Current Six Months and Current Quarter was net loss of $636,000
($0.09 per share basic and diluted) and net loss of $699,000 ($0.10 per share basic and diluted), compared to net income of $1,811,000
($0.27 per share basic and diluted) and $809,000 ($0.12 per share basic and diluted) for the Prior Year’s comparable periods,
respectively. The schedule below provides a detailed analysis of the major changes that impacted net income (loss)-common equity
for the six and three months ended April 30, 2017 and 2016:
|
|
Six Months Ended
|
|
Three Months Ended
|
|
|
April 30,
|
|
April 30,
|
|
|
2017
|
|
2016
|
|
Change
|
|
2017
|
|
2016
|
|
Change
|
|
|
(In Thousands of Dollars)
|
|
(In Thousands of Dollars)
|
Income from real estate operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial properties
|
|
$
|
6,572
|
|
|
$
|
5,929
|
|
|
$
|
643
|
|
|
$
|
3,225
|
|
|
$
|
2,826
|
|
|
$
|
399
|
|
Residential properties
|
|
|
5,969
|
|
|
|
5,769
|
|
|
|
200
|
|
|
|
2,786
|
|
|
|
2,948
|
|
|
|
(162
|
)
|
Total income from real estate operations
|
|
|
12,541
|
|
|
|
11,698
|
|
|
|
843
|
|
|
|
6,011
|
|
|
|
5,774
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate mortgages
|
|
|
(5,116
|
)
|
|
|
(5,452
|
)
|
|
|
336
|
|
|
|
(2,527
|
)
|
|
|
(2,707
|
)
|
|
|
180
|
|
Floating rate mortgages
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
(8
|
)
|
Floating rate - Rotunda
|
|
|
(1,856
|
)
|
|
|
(1,315
|
)
|
|
|
(541
|
)
|
|
|
(954
|
)
|
|
|
(696
|
)
|
|
|
(258
|
)
|
Credit line
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
(10
|
)
|
Other - Corporate interest
|
|
|
(194
|
)
|
|
|
(154
|
)
|
|
|
(40
|
)
|
|
|
(103
|
)
|
|
|
(72
|
)
|
|
|
(31
|
)
|
Mortgage cost amortization
|
|
|
(538
|
)
|
|
|
(190
|
)
|
|
|
(348
|
)
|
|
|
(254
|
)
|
|
|
(96
|
)
|
|
|
(158
|
)
|
Less amounts capitalized
|
|
|
—
|
|
|
|
1,695
|
|
|
|
(1,695
|
)
|
|
|
—
|
|
|
|
884
|
|
|
|
(884
|
)
|
Total financing costs
|
|
|
(7,722
|
)
|
|
|
(5,416
|
)
|
|
|
(2,306
|
)
|
|
|
(3,856
|
)
|
|
|
(2,687
|
)
|
|
|
(1,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
91
|
|
|
|
62
|
|
|
|
29
|
|
|
|
45
|
|
|
|
23
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General & administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting fees
|
|
|
(275
|
)
|
|
|
(249
|
)
|
|
|
(26
|
)
|
|
|
(125
|
)
|
|
|
(118
|
)
|
|
|
(7
|
)
|
Legal & professional fees
|
|
|
(47
|
)
|
|
|
(29
|
)
|
|
|
(18
|
)
|
|
|
(38
|
)
|
|
|
(24
|
)
|
|
|
(14
|
)
|
Trustee fees
|
|
|
(485
|
)
|
|
|
(447
|
)
|
|
|
(38
|
)
|
|
|
(250
|
)
|
|
|
(244
|
)
|
|
|
(6
|
)
|
Stock option expense
|
|
|
(61
|
)
|
|
|
(47
|
)
|
|
|
(14
|
)
|
|
|
(30
|
)
|
|
|
(23
|
)
|
|
|
(7
|
)
|
Corporate expenses
|
|
|
(289
|
)
|
|
|
(123
|
)
|
|
|
(166
|
)
|
|
|
(190
|
)
|
|
|
(15
|
)
|
|
|
(175
|
)
|
Total general & administrative expenses
|
|
|
(1,157
|
)
|
|
|
(895
|
)
|
|
|
(262
|
)
|
|
|
(633
|
)
|
|
|
(424
|
)
|
|
|
(209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(5,178
|
)
|
|
|
(3,472
|
)
|
|
|
(1,706
|
)
|
|
|
(2,648
|
)
|
|
|
(1,752
|
)
|
|
|
(896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (loss)
|
|
|
(1,425
|
)
|
|
|
1,977
|
|
|
|
(3,402
|
)
|
|
|
(1,081
|
)
|
|
|
934
|
|
|
|
(2,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease termination fee
|
|
|
(620
|
)
|
|
|
—
|
|
|
|
(620
|
)
|
|
|
(620
|
)
|
|
|
—
|
|
|
|
(620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(2,045
|
)
|
|
|
1,977
|
|
|
|
(4,022
|
)
|
|
|
(1,701
|
)
|
|
|
934
|
|
|
|
(2,635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (income) loss attributable to noncontrolling interests in subsidiaries
|
|
|
1,409
|
|
|
|
(166
|
)
|
|
|
1,575
|
|
|
|
1,002
|
|
|
|
(125
|
)
|
|
|
1,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common equity
|
|
$
|
(636
|
)
|
|
$
|
1,811
|
|
|
$
|
(2,447
|
)
|
|
$
|
(699
|
)
|
|
$
|
809
|
|
|
$
|
(1,508
|
)
|
The condensed consolidated results of
operations for the Current Six Months and Current Quarter are not necessarily indicative of the results to be expected for the
full year or any other period.
SEGMENT INFORMATION
The following table sets forth comparative
net operating income ("NOI") data for FREIT’s real estate segments and reconciles the NOI to condensed consolidated
net income (loss)-common equity for the Current Six Months and Current Quarter as compared to the prior year’s comparable
periods (See below for definition of NOI):
|
|
Commercial
|
|
Residential
|
|
Combined
|
|
|
Six Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
April 30,
|
|
Increase (Decrease)
|
|
April 30,
|
|
Increase (Decrease)
|
|
April 30,
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
2017
|
|
2016
|
|
|
(In Thousands)
|
|
|
|
(In Thousands)
|
|
|
|
(In Thousands)
|
Rental income
|
|
$
|
9,019
|
|
|
$
|
8,742
|
|
|
$
|
277
|
|
|
|
3.2
|
%
|
|
$
|
12,688
|
|
|
$
|
10,964
|
|
|
$
|
1,724
|
|
|
|
15.7
|
%
|
|
$
|
21,707
|
|
|
$
|
19,706
|
|
Reimbursements
|
|
|
2,754
|
|
|
|
2,640
|
|
|
|
114
|
|
|
|
4.3
|
%
|
|
|
19
|
|
|
|
1
|
|
|
|
18
|
|
|
|
1800.0
|
%
|
|
|
2,773
|
|
|
|
2,641
|
|
Other
|
|
|
297
|
|
|
|
36
|
|
|
|
261
|
|
|
|
725.0
|
%
|
|
|
175
|
|
|
|
130
|
|
|
|
45
|
|
|
|
34.6
|
%
|
|
|
472
|
|
|
|
166
|
|
Total revenue
|
|
|
12,070
|
|
|
|
11,418
|
|
|
|
652
|
|
|
|
5.7
|
%
|
|
|
12,882
|
|
|
|
11,095
|
|
|
|
1,787
|
|
|
|
16.1
|
%
|
|
|
24,952
|
|
|
|
22,513
|
|
Operating expenses
|
|
|
5,835
|
|
|
|
5,464
|
|
|
|
371
|
|
|
|
6.8
|
%
|
|
|
6,887
|
|
|
|
5,326
|
|
|
|
1,561
|
|
|
|
29.3
|
%
|
|
|
12,722
|
|
|
|
10,790
|
|
Net operating income
|
|
$
|
6,235
|
|
|
$
|
5,954
|
|
|
$
|
281
|
|
|
|
4.7
|
%
|
|
$
|
5,995
|
|
|
$
|
5,769
|
|
|
$
|
226
|
|
|
|
3.9
|
%
|
|
|
12,230
|
|
|
|
11,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Occupancy %
|
|
|
76.8
|
%
|
|
|
74.7
|
% *
|
|
|
|
|
|
|
2.1
|
%
|
|
|
79.4
|
%
|
|
|
70.2
|
% *
|
|
|
|
|
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
|
Reconciliation to consolidated net income (loss)-common equity:
|
|
Deferred rents - straight lining
|
|
|
311
|
|
|
|
(25
|
)
|
|
Lease termination fee
|
|
|
(620
|
)
|
|
|
—
|
|
|
Investment income
|
|
|
91
|
|
|
|
62
|
|
|
General and administrative expenses
|
|
|
(1,157
|
)
|
|
|
(895
|
)
|
|
Depreciation
|
|
|
(5,178
|
)
|
|
|
(3,472
|
)
|
|
Financing costs
|
|
|
(7,722
|
)
|
|
|
(5,416
|
)
|
|
Net income (loss)
|
|
|
(2,045
|
)
|
|
|
1,977
|
|
|
Net (income) loss attributable to noncontrolling interest
|
|
|
1,409
|
|
|
|
(166
|
)
|
|
Net income (loss) attributable to common equity
|
|
$
|
(636
|
)
|
|
$
|
1,811
|
|
|
|
Commercial
|
|
Residential
|
|
Combined
|
|
|
Three Months Ended
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Three Months Ended
|
|
|
April 30,
|
|
Increase (Decrease)
|
|
April 30,
|
|
Increase (Decrease)
|
|
April 30,
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
2017
|
|
2016
|
|
|
(In Thousands)
|
|
|
|
(In Thousands)
|
|
|
|
(In Thousands)
|
Rental income
|
|
$
|
4,593
|
|
|
$
|
4,346
|
|
|
$
|
247
|
|
|
|
5.7
|
%
|
|
$
|
6,391
|
|
|
$
|
5,507
|
|
|
$
|
884
|
|
|
|
16.1
|
%
|
|
$
|
10,984
|
|
|
$
|
9,853
|
|
Reimbursements
|
|
|
1,397
|
|
|
|
1,118
|
|
|
|
279
|
|
|
|
25.0
|
%
|
|
|
10
|
|
|
|
1
|
|
|
|
9
|
|
|
|
900.0
|
%
|
|
|
1,407
|
|
|
|
1,119
|
|
Other
|
|
|
6
|
|
|
|
29
|
|
|
|
(23
|
)
|
|
|
-79.3
|
%
|
|
|
94
|
|
|
|
65
|
|
|
|
29
|
|
|
|
44.6
|
%
|
|
|
100
|
|
|
|
94
|
|
Total revenue
|
|
|
5,996
|
|
|
|
5,493
|
|
|
|
503
|
|
|
|
9.2
|
%
|
|
|
6,495
|
|
|
|
5,573
|
|
|
|
922
|
|
|
|
16.5
|
%
|
|
|
12,491
|
|
|
|
11,066
|
|
Operating expenses
|
|
|
2,950
|
|
|
|
2,665
|
|
|
|
285
|
|
|
|
10.7
|
%
|
|
|
3,703
|
|
|
|
2,625
|
|
|
|
1,078
|
|
|
|
41.1
|
%
|
|
|
6,653
|
|
|
|
5,290
|
|
Net operating income
|
|
$
|
3,046
|
|
|
$
|
2,828
|
|
|
$
|
218
|
|
|
|
7.7
|
%
|
|
$
|
2,792
|
|
|
$
|
2,948
|
|
|
$
|
(156
|
)
|
|
|
-5.3
|
%
|
|
|
5,838
|
|
|
|
5,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Occupancy %
|
|
|
77.6
|
%
|
|
|
73.2
|
% *
|
|
|
|
|
|
|
4.4
|
%
|
|
|
79.9
|
%
|
|
|
70.7
|
% *
|
|
|
|
|
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
|
Reconciliation to condensed consolidated net income (loss)-common equity:
|
|
Deferred rents - straight lining
|
|
|
173
|
|
|
|
(2
|
)
|
|
Lease termination fee
|
|
|
(620
|
)
|
|
|
—
|
|
|
Investment income
|
|
|
45
|
|
|
|
23
|
|
|
General and administrative expenses
|
|
|
(633
|
)
|
|
|
(424
|
)
|
|
Depreciation
|
|
|
(2,648
|
)
|
|
|
(1,752
|
)
|
|
Financing costs
|
|
|
(3,856
|
)
|
|
|
(2,687
|
)
|
|
Net income (loss)
|
|
|
(1,701
|
)
|
|
|
934
|
|
|
Net (income) loss attributable to noncontrolling interests in subsidiaries
|
|
|
1,002
|
|
|
|
(125
|
)
|
|
Net income (loss) attributable to common equity
|
|
$
|
(699
|
)
|
|
$
|
809
|
|
*
Includes impact to the six and three months ended April 30, 2016 of 75,000 additional square feet of Rotunda retail
leasable space in the commercial segment and 379 leasable units at the Rotunda in the residential segment as the major
redevelopment and expansion project at the Rotunda was substantially completed in the third quarter of Fiscal 2016.
NOI is based on operating revenue and expenses
directly associated with the operations of the real estate properties, but excludes deferred rents (straight lining), depreciation,
financing costs and other items. FREIT assesses and measures segment operating results based on NOI.
Same Property NOI: FREIT considers same
property net operating income (“Same Property NOI”) to be a useful supplemental non-GAAP measure of its operating performance.
FREIT defines same property within both the commercial and residential segments to be those properties that FREIT has owned and
operated for both the current and prior periods presented, excluding those properties that FREIT has acquired, redeveloped or classified
as discontinued operations during those periods. Any newly acquired property that has been in operation for less than a year, any
property that is undergoing a major redevelopment, but may still be in operation at less than full capacity, and/or any property
that has been sold are not considered same property.
NOI and Same Property NOI are non-GAAP
financial measures and are not measures of operating results or cash flow as measured by GAAP, and are not necessarily indicative
of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity.
COMMERCIAL SEGMENT
The commercial segment contains nine
(9) separate properties. Seven are multi-tenanted retail or office centers, and two are single tenanted – a building formerly
occupied as a supermarket and land located in Rockaway, New Jersey owned by FREIT from which it receives monthly rental income
from a tenant who has built and operates a bank branch on the land. On June 17, 2016, FREIT sold its property at Rochelle Park,
New Jersey having a carrying value of approximately $2.7 million (including a straight line rent receivable of approximately $0.5
million) to Lakeland Bank (as successor by merger to Pascack Community Bank) for a purchase price of $3.1 million resulting in
a gain of approximately $0.3 million net of sales fees. This sale resulted in FREIT’s loss of future annual rents of approximately
$241,000, which would have increased periodically through September 2023.
As indicated in the table above under
the caption Segment Information, total revenue from FREIT’s commercial segment for the Current Six Months and Current Quarter
increased by 5.7% and 9.2%, respectively, and NOI increased by 4.7% and 7.7%, respectively, from the prior year’s comparable
periods. The increase in revenue and NOI for the Current Six Months and the Current Quarter was primarily attributable to an increase
in occupancy at the Rotunda property resulting from the lease-up of the new retail space partially offset by the loss of revenue
from a lease with Pathmark (a subsidiary of the Great Atlantic & Pacific Tea Company “A&P”) at the Patchogue,
New York property which was rejected as of December 31, 2015 as a result of A&P’s bankruptcy filing and a loss of revenue
resulting from the sale of the Rochelle Park property in June 2016. Also contributing to this loss was a $620,000 termination fee
payment made by Wayne PSC, LLC (“Wayne PSC”) to terminate the lease and take possession of the Macy’s space at
the Preakness Shopping Center in Wayne, New Jersey which impacted the consolidated net loss by approximately $250,000 based on
FREIT’s 40% ownership in Wayne PSC. For the Current Six Months and Current Quarter, average occupancy showed an increase
of 2.1% and 4.4%, respectively, as compared to the prior year’s comparable periods.
Same Property Operating Results: FREIT’s
commercial segment currently contains eight (8) same properties. (See definition of same property under Segment Information above.)
Since The Rotunda property was part of a major redevelopment and expansion project that was substantially completed in the third
quarter of Fiscal 2016 and was in operation for less than a full year in the prior year and the Rochelle Park property was sold
in the prior year, both have been excluded from same property results for all periods presented. For the Current Six Months same
property revenue and NOI decreased by approximately 0.5% and 0.6%, respectively, and for the Current Quarter same property revenue
and NOI increased by 2.8% and 2.0%, respectively. The changes resulted from the factors discussed in the immediately preceding
paragraph. Excluding the impact of the Rotunda property, average occupancy for the Current Six Months and Current Quarter decreased
2.9% and 1.7%, respectively, as compared to the prior year’s comparable periods primarily driven by the rejection of the
Pathmark lease at the Patchogue, New York property and the termination of the Macy lease at the Preakness Shopping Center.
Leasing: The following tables reflect
leasing activity at FREIT’s commercial properties for comparable leases (leases executed for spaces in which there was a
tenant at some point during the previous twelve-month period) and non-comparable leases for the Current Six Months:
RETAIL:
|
|
Number of
Leases
|
|
|
Lease Area
(Sq. Ft.)
|
|
|
Weighted
Average Lease
Rate (per Sq. Ft.)
|
|
|
Weighted
Average Prior
Lease Rate (per
Sq. Ft.)
|
|
|
% Increase
(Decrease)
|
|
|
Tenant
Improvement
Allowance (per
Sq. Ft.) (a)
|
|
|
Lease
Commissions
(per Sq. Ft.) (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable leases (b)
|
|
|
16
|
|
|
|
146,121
|
|
|
$
|
10.81
|
|
|
$
|
11.24
|
|
|
|
-3.8
|
%
|
|
$
|
—
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-comparable leases
|
|
|
3
|
|
|
|
7,440
|
|
|
$
|
40.29
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
5.07
|
|
|
$
|
2.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total leasing activity
|
|
|
19
|
|
|
|
153,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFFICE:
|
|
Number of
Leases
|
|
|
Lease Area
(Sq. Ft.)
|
|
|
Weighted
Average Lease
Rate (per Sq.
Ft.)
|
|
|
Weighted
Average Prior
Lease Rate (per
Sq. Ft.)
|
|
|
% Increase
(Decrease)
|
|
|
Tenant
Improvement
Allowance (per
Sq. Ft.) (a)
|
|
|
Lease
Commissions
(per Sq. Ft.) (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable leases (b)
|
|
|
3
|
|
|
|
3,258
|
|
|
$
|
22.96
|
|
|
$
|
23.17
|
|
|
|
-0.9
|
%
|
|
$
|
0.08
|
|
|
$
|
0.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-comparable leases
|
|
|
2
|
|
|
|
16,400
|
|
|
$
|
28.14
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
6.00
|
|
|
$
|
1.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total leasing activity
|
|
|
5
|
|
|
|
19,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) These leasing costs are presented as annualized costs per square foot and are allocated uniformly over the initial lease term.
(b) This includes new tenant leases and/or modifications/extensions/renewals of existing tenant leases.
DEVELOPMENT ACTIVITIES
The Rotunda property in Baltimore, Maryland
(owned by FREIT’s 60% owned affiliate Grande Rotunda, LLC) is an 11.5 acre site containing a building with approximately
132,000 sq. ft. of office space and approximately 84,000 sq. ft. of retail space on the lower level of the building. In September
2013, FREIT began construction to redevelop and expand this property and, with the exception of tenant improvements, was substantially
completed in the third quarter of Fiscal 2016 with costs to complete estimated at less than $1 million. The redevelopment and expansion
plans included a modernization of the office building and smaller adjacent buildings, construction of 379 residential apartment
rental units, an additional 75,000 square feet of new retail space, and 864 above level parking spaces. As of April 30, 2017, the
residential section is approximately 49% leased and the retail space is approximately 71% leased. FREIT expects the Rotunda’s
operations to stabilize in late 2018 to early 2019.
With regard to the Rotunda’s redevelopment
project, approximately $132.1 million has been incurred through April 30, 2017, of which $3.7 million was written-off in Fiscal
2012 as a result of revisions to the scope of the redevelopment project. All planning and feasibility study costs, as well as all
ongoing construction costs related to the project which were previously capitalized to Construction In Progress (“CIP”)
are no longer being capitalized and have been placed into service in the fourth quarter of Fiscal 2016 as the project became operational.
On December 9, 2013, Grande Rotunda,
LLC closed with Wells Fargo Bank on a construction loan of up to $120 million to be used to redevelop and expand the Rotunda property
with a term of four (4) years, with one 12-month extension, at a rate of 225 basis points over the monthly LIBOR. On November 23,
2016, the following terms and conditions of this loan were modified: (i) the total amount that may be drawn on this loan was decreased
from $120 million to $116.1 million, allowing for an additional draw of $2.1 million over the then existing balance of approximately
$114 million to be used for retail tenant improvements and leasing commissions; (ii) leasing benchmarks are no longer required
to be met including the waiver of the leasing benchmarks FREIT was not in compliance with as of June 30, 2016; (iii) Grande Rotunda,
LLC provided an interest reserve to Wells Fargo Bank in the amount of $2 million for the purpose of funding interest payments,
and is obliged to replenish the account balance to $1 million if it should fall below $500,000; (iv) the maturity date of the loan
was changed from December 31, 2017 to October 31, 2017 with no option to extend; (v) the interest rate on the amount outstanding
on the loan was increased by 25 basis points to 250 basis points over the monthly LIBOR.
Through April 30, 2017, funding for the
construction at the Rotunda was provided by: (a) the Grande Rotunda, LLC members, who are FREIT and Rotunda 100, LLC, and who contributed
approximately $14.5 million in accordance with the loan agreement with Wells Fargo Bank; and (b) approximately $115.3 million in
draws on the construction line with Wells Fargo Bank (including approximately $1.3 million during Fiscal 2017), of which $19 million
was used to pay off the loan from FREIT, and $96.3 million was used toward the construction at the Rotunda. The loan was fully
drawn down as of April 30, 2017 with a remaining reserve of approximately $0.8 million used as a letter of credit for offsite improvements.
Grande Rotunda, LLC continues to incur
substantial expenditures at the Rotunda property. These expenditures include tenant improvements, leasing costs and operating expenditures
which, in the aggregate, exceed revenues as the property is still in the rent up phase. The construction loan is at its maximum
level resulting in no additional funding available to draw. Accordingly, the equity owners in Grande Rotunda, LLC (FREIT with a
60% ownership and Rotunda 100, LLC with a 40% ownership) are contributing their respective pro-rata share of any cash needs. As
of April 30, 2017, Rotunda 100, LLC has funded Grande Rotunda, LLC with approximately $2.8 million which is included in “Due
to affiliate” on the accompanying condensed consolidated balance sheet.
RESIDENTIAL SEGMENT
FREIT currently operates eight (8) multi-family
apartment buildings or complexes totaling 1,472 apartment units. As indicated in the table above under the caption Segment Information,
total revenue from FREIT’s residential segment for the Current Six Months and Current Quarter increased by 16.1% and 16.5%,
respectively, and NOI increased by 3.9% and decreased by 5.3%, respectively, as compared to the prior year’s comparable periods.
The increase in revenue and NOI for the Current Six Months was primarily attributable to: (a) the addition of the operating results
of the Icon, which is the residential property located at the Rotunda in Baltimore, Maryland (See discussion below), (b) increased
base rent and (c) an increase in the average occupancy level as compared to the prior year’s comparable periods. The increase
in revenue and decline in NOI for the Current Quarter was primarily attributed to FREIT incurring higher operational costs as the
Icon is in the lease-up phase for the new residential units.
Same Property Operating Results: FREIT’s
residential segment currently contains seven (7) same properties. (See definition of same property under Segment Information above.)
Since the Icon property was part of a major redevelopment and expansion project that was substantially completed in the third quarter
of Fiscal 2016 and was in operation for less than a full year in the prior year, it has been excluded from same property results
for all periods presented. For the Current Six Months and Current Quarter same property revenue increased by 3.9% and 3.5%, respectively,
and same property NOI increased by 5.2% and 2.8%, respectively, from the prior year’s comparable periods which was driven
primarily by an increase in base rents at our residential properties. Exclusive of the Icon property, average occupancy increased
0.6% for the Current Six Months and declined 0.3% for the Current Quarter over the prior year’s comparable periods.
FREIT’s
residential revenue is principally composed of monthly apartment rental income. Total rental income is a factor of occupancy and
monthly apartment rents. Monthly average residential rents, excluding the Rotunda Icon property as it is still in the
lease-up
period and not operating at full capacity, at the end of the Current Quarter and the Prior Year’s Quarter were $1,820 and
$1,755, respectively. A 1% decline in annual average occupancy, or a 1% decline in average rents from current levels, results in
an annual revenue decline of approximately $239,000 and $227,000, respectively.
Capital expenditures: Since all of FREIT’s
apartment communities, with the exception of the Boulders, Regency and Icon properties, were constructed more than 25 years ago,
FREIT tends to spend more in any given year on maintenance and capital improvements than may be spent on newer properties. Funds
for these capital projects will be available from cash flow from the property's operations and cash reserves.
FINANCING COSTS
|
|
Six Months Ended April 30,
|
|
|
Three Months Ended April 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In Thousands of Dollars)
|
|
|
(In Thousands of Dollars)
|
|
Fixed rate mortgages (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Mortgages
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing
|
|
$
|
5,116
|
|
|
$
|
5,452
|
|
|
$
|
2,527
|
|
|
$
|
2,707
|
|
New
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
2nd Mortgages
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Variable rate mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Mortgages
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
|
|
|
8
|
|
|
|
—
|
|
|
|
8
|
|
|
|
—
|
|
Construction loan-Rotunda
|
|
|
1,856
|
|
|
|
1,315
|
|
|
|
954
|
|
|
|
696
|
|
Credit line
|
|
|
10
|
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
Other
|
|
|
194
|
|
|
|
154
|
|
|
|
103
|
|
|
|
72
|
|
Total financing costs, gross
|
|
|
7,184
|
|
|
|
6,921
|
|
|
|
3,602
|
|
|
|
3,475
|
|
Amortization of mortgage costs
|
|
|
538
|
|
|
|
190
|
|
|
|
254
|
|
|
|
96
|
|
Total financing costs, net
|
|
|
7,722
|
|
|
|
7,111
|
|
|
|
3,856
|
|
|
|
3,571
|
|
Less amounts capitalized
|
|
|
—
|
|
|
|
(1,695
|
)
|
|
|
—
|
|
|
|
(884
|
)
|
Total financing costs expensed
|
|
$
|
7,722
|
|
|
$
|
5,416
|
|
|
$
|
3,856
|
|
|
$
|
2,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Includes the
effect of interest rate swap contracts which effectively convert the floating interest rate to a fixed interest rate over the
term of the loan.
Total net
financing costs for the Current Six Months and Current Quarter increased 8.6% and 8%, respectively, from the prior year’s
comparable period which was primarily attributable to the Rotunda construction loan of approximately $115.3 million. (See discussions
under Liquidity and Capital Resources below.)
GENERAL AND ADMINISTRATIVE EXPENSES (“G & A”)
G&A expense for the Current Six Months
and Current Quarter was $1,157,000 and $633,000, respectively, compared to $895,000 and $424,000, respectively, for the prior year’s
comparable periods. The primary components of G&A are accounting fees, legal & professional fees and Trustees’ fees.
DEPRECIATION
Depreciation
expense from operations for the Current Six Months and Current Quarter was $5,178,000 and $2,648,000, respectively, compared to
$3,472,000 and $1,752,000, respectively, for the prior year’s comparable periods. The increase in depreciation was primarily
attributable to the depreciation related to the assets at the Rotunda property becoming operational as the major redevelopment
and expansion project at this property was substantially completed in the third quarter of Fiscal 2016.
LIQUIDITY AND CAPITAL RESOURCES
Net
cash provided by operating activities was $3.6 million for the Current Six Months compared to $6.9 million for the Prior Six Months.
FREIT expects that cash provided by operating activities and cash reserves will be adequate to cover mandatory debt service payments
(including payments of interest, but excluding balloon payments), real estate taxes, recurring capital improvements at stabilized
properties and dividends necessary to retain qualification as a REIT (90% of taxable income).
As
at April 30, 2017, FREIT had cash and cash equivalents totaling $8.2 million, compared to $10.9 million at October 31, 2016. The
decrease in cash for the Current Six Months is primarily attributable to $8.3 million in net cash used in investing activities,
including capital expenditures, offset by $2 million provided by financing activities and $3.6 million provided by operating activities.
On
March 23, 2017, FREIT entered into an agreement to sell its residential property, Hammel Gardens, located in Maywood, New Jersey,
which has a carrying value of approximately $0.7 million, for a sales price of $17 million. The sale of this property will result
in a capital gain of approximately $16 million net of sales fees and commissions and is expected to close in June 2017. As a result
of the sale FREIT will incur a mortgage prepayment penalty of approximately $1 million. FREIT has structured this sale in a manner
that qualifies it as a like-kind exchange of real estate pursuant to Section 1031 of the Internal Revenue Code. Such a transaction,
if completed, will result in a deferral for income tax purposes of the $16 million capital gain. The net proceeds from this sale,
which are expected to be approximately $7.7 million, will be held in escrow until a replacement property is purchased.
On April 25, 2017, Wayne PSC announced
it had agreed to a termination of Macy’s lease effective as of April 15, 2017. To terminate the lease and take possession
of the space, Wayne PSC paid Macy’s a termination fee of $620,000. Wayne PSC expects to re-position this space and re-lease
to a new tenant (or multiple tenants) at market rents, which are currently higher than the rent provided for under the terminated
Macy’s lease. FREIT will lose total consolidated annual rental income, including reimbursements, of approximately $0.2 million
until such time as the space is fully re-leased. FREIT anticipates increased revenue from the space when it is fully re-leased.
Longer term, we expect the Trust to
benefit from substantially improved cash flow both at the Preakness Shopping Center and the Rotunda, where we are currently
in the rent up period. We are encouraged that Rotunda apartment units are leasing at a rate faster than
originally anticipated, accelerating our expected stabilization. However, known vacancies and capital commitments continue to pressure
revenues, earnings and cash flow this year. In addition, uncertainty in the retail environment could affect our revenues.
Accordingly, the Board did not declare a dividend for the second quarter in order to give the Trust more flexibility with its
liquidity to navigate the challenges we are facing in 2017. Delivering value to shareholders remains a paramount objective
for the Board and the Trust. The Board will continue to evaluate the dividend on a quarterly basis.
Credit Line: FREIT has a line of credit
provided by the Provident Bank in the amount of approximately $12.8 million. The line of credit was for a two-year term ending
on November 1, 2016, which was extended by the bank to August 1, 2017 while the bank completes its due diligence. FREIT expects
the credit line will be extended for an additional period of 36 months. Draws against the credit line can be used for general corporate
purposes, for property acquisitions, construction activities, and letters of credit. Draws against the credit line are secured
by mortgages on FREIT’s Franklin Crossing Shopping Center in Franklin Lakes, New Jersey and retail space in Glen Rock, New
Jersey. Interest rates on draws will be set at the time of each draw for 30, 60, or 90-day periods, based on FREIT’s choice
of the prime rate or at 175 basis points over the 30, 60, or 90-day LIBOR rates at the time of the draws. The interest rate on
the line of credit has a floor of 3.25%. During the second quarter of Fiscal 2017, FREIT utilized $3 million of its credit line
to fund tenant improvements for new retail tenants at the Rotunda property. As of April 30, 2017, approximately $9.8 million was
available under the line of credit.
On December 9, 2013, Grande Rotunda,
LLC closed with Wells Fargo Bank on a construction loan of up to $120 million to be used to redevelop and expand the Rotunda property
in Baltimore, Maryland with a term of four (4) years, with one twelve-month extension, at a rate of 225 basis points over the monthly
LIBOR. On November 23, 2016, the following terms and conditions of this loan were modified: (i) the total amount that may be drawn
on this loan was decreased from $120 million to $116.1 million, allowing for an additional draw of $2.1 million over the then existing
balance of approximately $114 million to be used for retail tenant improvements and leasing commissions; (ii) leasing benchmarks
are no longer required to be met including the waiver of the leasing benchmarks FREIT was not in compliance with as of June 30,
2016; (iii) Grande Rotunda, LLC provided an interest reserve to Wells Fargo Bank in the amount of $2 million for the purpose of
funding interest payments, and is obliged to replenish the account balance to $1 million if it should fall below $500,000; (iv)
the maturity date of the loan was changed from December 31, 2017 to October 31, 2017 with no option to extend; (v) the interest
rate on the amount outstanding on the loan was increased by 25 basis points to 250 basis points over the monthly LIBOR. As of April
30, 2017, $115.3 million of this loan was drawn down (including approximately $1.3 million during Fiscal 2017), of which $19 million
was used to pay off the loan from FREIT, and $96.3 million was used toward the construction at the Rotunda. The loan was fully
drawn down as of April 30, 2017 with a remaining reserve of approximately $0.8 million used as a letter of credit for offsite improvements.
Grande Rotunda, LLC continues to incur
substantial expenditures at the Rotunda property. These expenditures include tenant improvements, leasing costs and operating expenditures
which, in the aggregate, exceed revenues as the property is still in the rent up phase. The construction loan is at its maximum
level resulting in no additional funding available to draw. Accordingly, the equity owners in Grande Rotunda, LLC (FREIT with a
60% ownership and Rotunda 100, LLC with a 40% ownership) are contributing their respective pro-rata share of any cash needs. As
of April 30, 2017, Rotunda 100, LLC has funded Grande Rotunda, LLC with approximately $2.8 million which is included in “Due
to affiliate” on the accompanying condensed consolidated balance sheet.
As at April 30, 2017, FREIT’s
aggregate outstanding mortgage debt was $333.5 million, which bears a weighted average interest rate of 4.16% and an average life
of approximately 4 years. FREIT’s fixed rate mortgages are subject to amortization schedules that are longer than the term
of the mortgages. As such, balloon payments (unpaid principal amounts at mortgage due date) for all mortgage debt will be required
as follows:
Fiscal Year
|
2017
|
2018
|
2019
|
2021
|
2022
|
2023
|
2024
|
2025
|
2026
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
Mortgage "Balloon" Payments
|
$115.3
|
$5.2
|
$67.7
|
$19.1
|
$14.4
|
$34.5
|
$15.9
|
$13.9
|
$18.2
|
The following table shows the estimated
fair value and carrying value of FREIT’s long-term debt at April 30, 2017 and October 31, 2016:
($ in Millions)
|
|
April 30, 2017
|
|
|
October 31, 2016
|
|
|
|
|
|
|
|
|
Fair Value
|
|
$
|
328.9
|
|
|
$
|
331.3
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
$
|
331.2
|
|
|
$
|
327.2
|
|
Fair values are estimated based on market interest
rates at April 30, 2017 and October 31, 2016 and on discounted cash flow analysis. Changes in assumptions or estimation methods
may significantly affect these fair value estimates. The fair value is based on observable inputs (level 2 in the fair value hierarchy
as provided by authoritative guidance).
FREIT expects to refinance the individual
mortgages with new mortgages when their terms expire. To this extent FREIT has exposure to interest rate risk. If interest rates,
at the time any individual mortgage note is due, are higher than the current fixed interest rate, higher debt service may be required,
and/or refinancing proceeds may be less than the amount of mortgage debt being retired. For example, at April 30, 2017, a 1% interest
rate increase would reduce the fair value of FREIT’s debt by $7.4 million, and a 1% decrease would increase the fair value
by $7.8 million.
FREIT believes that the values of its
properties will be adequate to command refinancing proceeds equal to or higher than the mortgage debt to be refinanced. FREIT continually
reviews its debt levels to determine if additional debt can prudently be utilized for property acquisitions for its real estate
portfolio that will increase income and cash flow to shareholders.
On April 28, 2017, WestFREIT Corp., refinanced
its $22 million mortgage loan held with Wells Fargo Bank, with a new mortgage loan from Manufacturer’s and Traders Trust
Company in the amount of $23.5 million. The new loan, secured by a shopping center in Frederick, Maryland, bears a floating interest
rate equal to 275 basis points over the one-month LIBOR and a maturity date of April 28, 2019 with the option to extend for 12
months. This refinancing resulted in: (i) a reduction in the annual interest rate from a fixed rate of 5.55% to a variable rate
of 3.74% based on the one-month LIBOR as of April 30, 2017, and (ii) net refinancing proceeds of approximately $1.1 million, of
which $250,000 is being held in an escrow for post-closing bank due diligence review. The net refinancing proceeds will be used
for general corporate purposes.
On September 29, 2016, Wayne PSC, LLC
refinanced its $24.2 million mortgage loan held with Metropolitan Life Insurance Company, with a new mortgage loan from People’s
United Bank in the amount of $25.8 million. The new loan, secured by a shopping center in Wayne, New Jersey, bears a floating interest
rate equal to 220 basis points over the one-month BBA LIBOR with a maturity date of October 1, 2026. In order to minimize interest
rate volatility during the term of the loan, Wayne PSC, LLC entered into an interest rate swap agreement that, in effect, converted
the floating interest rate to a fixed interest rate of 3.625% over the term of the loan. This refinancing resulted in: (i) a reduction
in the interest rate from 6.04% to 3.625% and (ii) net refinancing proceeds of approximately $1 million that were distributed to
the partners in Wayne PSC, LLC with FREIT receiving $0.4 million based on its 40% membership interest in Wayne PSC, LLC. The interest
rate swap is considered a derivative financial instrument that will be used only to reduce interest rate risk, and not held or
used for trading purposes. (See Note 4 for additional information relating to the interest rate swap contract.)
On December 26, 2012, Damascus Centre,
LLC refinanced its construction loan with long-term financing provided by People’s United Bank and the first tranche of the
new loan was taken-down in the amount of $20 million. Based on leasing and net operating income at the shopping center, People’s
United Bank agreed to a take-down of the second tranche of this loan on April 22, 2016 in the amount of $2,320,000, of which approximately
$470,000 was readily available and the remaining $1,850,000 (included in prepaid expenses and other assets in the accompanying
condensed consolidated balance sheets) is held in escrow and available to Damascus Centre, LLC once certain tenants open and begin
paying rent. The loan has a maturity date of January 3, 2023 and bears a floating interest rate equal to 210 basis points over
the BBA LIBOR. In order to minimize interest rate volatility during the term of this loan, Damascus Centre, LLC entered into an
interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate on each tranche of
this loan, resulting in a fixed rate of 3.81% over the term of the first tranche of this loan and a fixed rate of 3.53% over the
term of the second tranche of this loan. The interest rate swaps are considered a derivative financial instrument that will be
used only to reduce interest rate risk, and not held or used for trading purposes. (See Note 4 for additional information relating
to the interest rate swap contracts.)
Interest rate swap contracts: To reduce
interest rate volatility, FREIT uses a “pay fixed, receive floating” interest rate swap to convert floating interest
rates to fixed interest rates over the term of a certain loan. FREIT enters into these swap contracts with a counterparty that
is usually a high-quality commercial bank.
In essence, FREIT agrees to pay its counterparties
a fixed rate of interest on a dollar amount of notional principal (which corresponds to FREIT’s mortgage debt) over a term
equal to the term of the mortgage notes. FREIT’s counterparties, in return, agree to pay FREIT a short-term rate of interest
- generally LIBOR - on that same notional amount over the same term as the mortgage notes.
Current GAAP requires FREIT to mark-to-market
fixed pay interest rate swaps. As the floating interest rate varies from time-to-time over the term of the contract, the value
of the contract will change upward or downward. If the floating rate is higher than the fixed rate, the value of the contract goes
up and there is a gain and an asset. If the floating rate is less than the fixed rate, there is a loss and a liability. These gains
or losses will not affect our income statement. Changes in the fair value of these swap contracts will be reported in other comprehensive
income and appear in the equity section of the balance sheet. This gain or loss represents the economic consequence of liquidating
fixed rate swap contracts and replacing them with like-duration funding at current market rates, something we would likely never
do. Periodic cash settlements of the swap contracts will be accounted for as an adjustment to interest expense.
FREIT has variable interest rate mortgages
securing its Damascus Centre, Regency and Wayne PSC properties. To reduce interest rate fluctuations, FREIT entered into interest
rate swap contracts for each of these loans. These interest rate swap contracts effectively converted variable interest rate payments
to fixed interest rate payments. The contracts were based on a notional amount of approximately $22,320,000 ($20,633,000 at April
30, 2017) for the Damascus Centre swaps, a notional amount of approximately $16,200,000 ($16,200,000 at April 30, 2017) for the
Regency swap and a notional amount of approximately $25,800,000 ($25,480,000 at April 30, 2017) for the Wayne PSC swap. FREIT has
the following derivative-related risks with its swap contracts: 1) early termination risk, and 2) counterparty credit risk.
Early Termination Risk: If FREIT
wants to terminate its swap contract before maturity, it would be bought out or terminated at market value; i.e., the difference
in the present value of the anticipated net cash flows from each of the swap’s parties. If current variable interest rates
are significantly below FREIT’s fixed interest rate payments, this could be costly. Conversely, if interest rates rise above
FREIT’s fixed interest payments and FREIT elected early termination, FREIT would realize a gain on termination. At April
30, 2017, the swap contract for the Regency property was in the counterparties’ favor and the swap contracts for the Damascus
Centre and Wayne PSC properties were in FREIT’s favor. If FREIT had terminated these contracts at that date it would have
realized a loss of approximately $572,000 for the Regency swap which has been included as a liability in FREIT’s condensed
consolidated balance sheet as at April 30, 2017 and a gain of approximately $180,000 for the Damascus Centre swaps and a gain of
approximately $1,207,000 for the Wayne PSC swap, both of which have been included as an asset in FREIT’s condensed consolidated
balance sheet as at April 30, 2017. For the six months ended April 30, 2017, FREIT recorded an unrealized gain of $2,606,000 in
comprehensive income representing the change in fair value of the swaps during such period. For the six months ended April 30,
2016, FREIT recorded an unrealized loss of $841,000 in comprehensive income representing the change in the fair value of the swaps
during such period and a corresponding liability of approximately $1,386,000 for the Regency swap and $521,000 for the Damascus
Centre swap as of April 30, 2016. For the year ended October 31, 2016, FREIT recorded an unrealized loss of $725,000 in comprehensive
income representing the change in the fair value of the swaps during such period with a corresponding liability of $521,000 for
the Damascus Centre swaps and $1,361,000 for the Regency swap and with a corresponding asset of $91,000 for the Wayne PSC swap
as of October 31, 2016.
Counterparty Credit Risk: Each party
to a swap contract bears the risk that its counterparty will default on its obligation to make a periodic payment. FREIT reduces
this risk by entering into swap contracts only with major financial institutions that are experienced market makers in the derivatives
market.
STOCK OPTION PLAN
On September 4, 2014, the Board approved
the grant of a total of 246,000 non-qualified share options under FREIT’s Equity Incentive Plan to certain FREIT Executive
Officers, the members of the Board and certain employees of Hekemian & Co., Inc. The options have an exercise price of $18.45
per share, will vest over a 5 year period at 20% per year, and will expire 10 years from the date of grant, which will be September
3, 2024. (See Note 12 for further details.)
On
November 10, 2016, the Board approved the grant of a total of 38,000 non-qualified share options under the Plan to two members
of the Board who were appointed to the Board during Fiscal 2016. The options have an exercise price of $21.00 per share, will vest
in equal annual installments over a 5-year period, and will expire 10 years from the date of grant, which will be November 9, 2026.
(See Note 12 for further details.)
DEFERRED FEE PLAN
On September 4, 2014, the Board approved
amendments, effective November 1, 2014, to the FREIT Deferred Fee Plan for its Executive Officers and Trustees, one of which provides
for the issuance of share units payable in FREIT shares in respect of (i) deferred amounts of all Trustee fees on a prospective
basis; (ii) interest on Trustee fees deferred prior to November 1, 2014 (payable at a floating rate, adjusted quarterly, based
on the average 10-year Treasury Bond interest rate plus 150 basis points); and (iii) dividends payable in respect of share units
allocated to participants in the Deferred Fee Plan as a result of deferrals described above. The number of share units credited
to a participant’s account will be determined by the closing price of FREIT shares on the date as set forth in the Deferred
Fee Plan. (See Note 13 for further details.)
ADJUSTED FUNDS FROM OPERATIONS
Funds From Operations (“FFO”)
is a non-GAAP measure defined by the National Association of Real Estate Investment Trusts (“NAREIT”). Although many
consider FFO as the standard measurement of a REIT’s performance, FREIT modified the NAREIT computation of FFO to include
other adjustments to GAAP net income that are not considered by management to be the primary drivers of their decision making
process. These adjustments to GAAP net income are straight-line rents and recurring capital improvements on FREIT’s residential
apartments. The modified FFO computation is referred to as Adjusted Funds From Operations (“AFFO”). FREIT believes
that AFFO is a superior measure of our operating performance. FREIT computes FFO and AFFO as follows: