FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC. Cautionary Statement Identifying Important Factors That Could Cause FREIT's Actual Results to Differ From Those Projected in Forward Looking Statements. Readers of this discussion are advised that the discussion should be read in conjunction with the consolidated financial statements of FREIT (including related notes thereto) appearing elsewhere in this Form 10-K. Certain statements in this discussion may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect FREIT's current expectations and are based on estimates, projections, beliefs, data, methods and assumptions of management of FREIT at the time of such statements regarding future results of operations, economic performance, financial condition and achievements of FREIT, and do not relate strictly to historical or current facts. These forward-looking statements are identified through the use of words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," or words of similar meaning. Forward-looking statements involve risks and uncertainties in predicting future results and conditions. 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, including the purchase of retail products over the Internet, 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 rents derived from operating commercial properties. FREIT's properties are primarily located in northernNew Jersey andNew York .
Maryland Property Dispositions:
OnNovember 22, 2021 , certain affiliates (the "Maryland Sellers") of FREIT entered into a Purchase and Sale Agreement (the "Maryland Purchase and Sale Agreement") withMCB 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 byGrande Rotunda, LLC (the "Rotunda Property"), a shopping center owned byDamascus Centre, LLC (the "Damascus Property"), and a shopping center owned byWestFREIT Corp. (the "Westridge Square Property"). FREIT owns 100% of its subsidiary,WestFREIT Corp. ("WestFREIT"), a 60% interest inGrande Rotunda, LLC ("Grande Rotunda"), the joint venture that owned the Rotunda Property, and a 70% interest inDamascus Centre, LLC ("Damascus Centre"), the joint venture that owned the Damascus Property. The original purchase price for the Rotunda Property, the Damascus Property and the Westridge Square Property (collectively the "Maryland Properties ") under the Maryland Purchase and Sale Agreement was reduced by$2,723,000 from$267,000,000 to$248,750,269 , after giving effect to the$15,526,731 escrow deposit described below. This reduction in the sales price of$2,723,000 was to account for improvements and repairs to theMaryland Properties and miscellaneous items identified by the Maryland Purchaser in the course of its due diligence inspection. Additionally, the Maryland Purchaser was obligated under the Maryland Purchase and Sale Agreement to deposit a total of$15,526,731 in escrow with respect to certain leases at theMaryland Properties , which have not been executed or where the rent commencement date has not occurred or economic obligations of the Maryland Sellers under certain leases remain unpaid. Although there can be no assurance, a portion of the$15,526,731 escrow deposit (the "Maryland Purchaser Escrow Payment") may be paid to the Maryland Sellers depending upon the outcome of construction and leasing activities at theMaryland Properties . The Maryland Purchaser Escrow Payment Agreement provides for among other things, monthly disbursements from escrow to the Maryland Purchaser related to the aforementioned tenant lease agreements until the earlier of (i) the rent commencement date of the respective tenant lease agreements or (ii) 5-years from the date of the agreement. The release and amounts of escrowed funds to FREIT, generally, is contingent on the success and timing of future leasing activities at theMaryland Properties . The sale of theMaryland Properties having a total net book value of$172.2 million 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 Maryland Purchaser Escrow Payment. This sale resulted in net proceeds of approximately$53.9 million (inclusive of approximately$1.9 million in funds released from the Maryland Purchaser Escrow Payment during the second quarter of Fiscal 2022), after payment of related 20 Table of Contents 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 toHekemian & Co. of approximately$6.2 million . As ofOctober 31, 2022 , approximately$1,946,000 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$1.2 million due to a change in estimate in the second quarter of Fiscal 2022 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$6.3 million of remaining funds are held in a post-closing escrow for rents anticipated to be fully released in Fiscal 2023 and are included in "Funds held in post-closing escrow" on the accompanying consolidated balance sheet as ofOctober 31, 2022 . The sale of theMaryland Properties resulted in a net gain of approximately$68.8 million (as adjusted) (with a consolidated impact to FREIT of approximately$45.6 million ) which includes approximately$8.2 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 . OnAugust 4, 2022 , the FREIT Board of Directors ("Board") declared a special, extraordinary, non-recurring cash distribution of approximately$51.5 million , or$7.50 per share, which was paid onAugust 30, 2022 , to stockholders of record onAugust 16, 2022 (with an ex-dividend date ofAugust 31, 2022 ). This distribution represented most of the net proceeds of FREIT's sale of its portfolio ofMaryland Properties .
See Note 2 to FREIT's consolidated financial statements for additional details
on the sale of the
The economic and financial environment:As ofOctober 2022 , the annual inflation rate is 7.7%, which is primarily being driven by soaring food prices and energy costs, labor shortages and supply disruptions while theU.S. unemployment rate increased slightly to 3.7%. Though inflation is still running near a 40-year high, it may be showing signs of slowing down since the actual rate for the month ofOctober 2022 came in lower than the prior month, which was at 8.2%. While theFederal Reserve has been continuing to raise interest rates in an effort to lower inflation, the pace at which it may continue to do so is uncertain leading to uncertainties in the financing market and a volatile economy.Residential Properties : Our residential properties continue to generate positive cash flow while average rents on turned units (apartments which were vacated and then re-leased to new tenants) from 2021 to 2022 has increased across the portfolio. Additionally, the rate of increase on renewals for existing tenants has also been robust over the past year with slight signs of this robustness starting to soften. These increases should meaningfully contribute to FREIT's income over time but it is uncertain what impact the significant rise in inflation and rising interest rates may have on these properties over the next year.Commercial Properties : While our retail properties have stabilized from the impact of the COVID-19 pandemic, certain of our properties still have not attained pre-pandemic operating levels despite some recovery in brick and mortar retail. Additionally, the significant rise in inflation and rising interest rates could have an impact on the operating and financial performance of our commercial properties. Debt Financing Availability: Financing has been available to FREIT and its affiliates. In accordance with certain loan agreements, FREIT may be required to meet or maintain certain financial covenants throughout the term of the loan. (See Note 5 to FREIT's consolidated financial statements for additional details.) OnDecember 30, 2021 , FREIT refinanced its$14.4 million loan (which would have matured onFebruary 1, 2022 ) on its Boulders property located inRockaway, New Jersey with a new loan held byConnectOne 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 ofJanuary 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. (See Note 5 to FREIT's consolidated financial statements for additional details.) OnJuly 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 onOctober 1, 2026 , on its Preakness Shopping center located inWayne, New Jersey with a new loan held byConnectOne 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 ofAugust 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 , which has been recorded as a realized gain on the 21
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accompanying consolidated statement of income for the year ended
OnAugust 19, 2022 ,Westwood Hills, LLC exercised its right, pursuant to the loan agreement, to extend the term of its$25 million loan on its property located inWestwood, New Jersey , for an additional six (6) months from an initial maturity date ofOctober 1, 2022 to a new maturity date ofApril 1, 2023 . This loan was extended on the same terms and conditions as stated in the loan agreement and has one remaining six (6) month extension. (See Note 5 to FREIT's consolidated financial statements for additional details.) Operating Cash Flow: 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, which are expected to be refinanced and/or extended), real estate taxes, recurring capital improvements at its properties and other needs to maintain its status as a REIT for at least a period of one year from the date of filing of this annual report on Form 10-K.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Pursuant to theSEC disclosure guidance for "Critical Accounting Policies," theSEC defines Critical Accounting Policies as those that require the application of management's most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, the preparation of which takes into account estimates based on judgments and assumptions that affect certain amounts and disclosures. Accordingly, actual results could differ from these estimates. The accounting policies and estimates used, which are outlined in Note 1 to our Consolidated Financial Statements which is presented elsewhere in this Form 10-K, have been applied consistently as ofOctober 31, 2022 and 2021, and for the years endedOctober 31, 2022 , 2021 and 2020. 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: FREIT assesses the carrying value of long-lived assets periodically, or whenever events or changes in circumstances indicate that the carrying amounts of certain assets may not be recoverable. When FREIT determines that the carrying value of long-lived assets may be impaired, the measurement of any impairment is based on a projected discounted cash flow method determined by FREIT's management. While we believe that our discounted cash flow methods are reasonable, different assumptions regarding such cash flows may significantly affect the measurement of impairment. Real Estate Development Costs: It is FREIT's policy to capitalize pre-development costs, which generally include legal and professional fees and other directly related third-party costs. Real estate taxes and interest costs incurred during the development and construction phases are also capitalized. FREIT ceases capitalization of these costs when the project or portion thereof becomes operational, or when construction has been postponed. In the event of postponement, capitalization of these costs will recommence once construction on the project resumes. See Note 1 to FREIT's consolidated financial statements for recently issued accounting standards. 22 Table of Contents Results of Operations:
Fiscal Years Ended
Summary revenues and net income for the fiscal years ended
Years Ended October 31,
2022 2021 Change
(in thousands, except per share amounts)
Real estate revenues:
Commercial properties $ 10,644 $ 23,317 $ (12,673 )
Residential properties 20,627 26,974 (6,347 )
Total real estate revenues 31,271 50,291 (19,020 )
Operating expenses:
Real estate operating expenses 15,281 22,294 (7,013 )
General and administrative expenses 5,003 5,195 (192 )
Depreciation 3,995 9,300 (5,305 )
Total operating expenses 24,279 36,789 (12,510 )
Operating income 6,992 13,502 (6,510 )
Investment income 358 116 242
Net gain on sale of Maryland properties 68,771 - 68,771
Net realized gain on Wayne PSC interest rate swap termination 1,415
- 1,415
Loss on investment in tenancy-in-common (228 ) (295 ) 67
Financing costs (8,064 ) (12,276 ) 4,212
Net income 69,244 1,047 68,197
Net income attributable to noncontrolling
interests in subsidiaries (23,252 ) (120 ) (23,132 ) Net income attributable to common equity$ 45,992 $ 927$ 45,065 Earnings per share: Basic$ 6.52 $ 0.13 $ 6.39 Diluted$ 6.45 $ 0.13 $ 6.32
Weighted average shares outstanding:
Basic 7,055 7,019 Diluted 7,132 7,022
Real estate revenue for Fiscal 2022 decreased 37.8% to$31,271,000 compared to$50,291,000 for Fiscal 2021. The decline in revenue was primarily attributable to the following: (a) a decrease of approximately$20.2 million attributed to theMaryland Properties sold; offset by (b) an increase from the residential segment of approximately$1.2 million , excluding the Icon at the Rotunda Property sold as part of theMaryland Properties , driven by an increase in base rents across all properties and an increase in the average occupancy rate to 98.2% in Fiscal 2022 from 97.3% in Fiscal 2021.
Net income attributable to common equity ("net income-common equity") for Fiscal
2022 was
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The schedule below provides a non-GAAP detailed analysis of the major changes that impacted net income-common equity for Fiscal 2022 and Fiscal 2021:
NON-GAAP NET INCOME COMPONENTS
Years Ended October 31,
2022 2021 Change
(In Thousands)Income from real estate operations:
Commercial properties$ 4,217 $ 12,094 $ (7,877 ) Residential properties 11,773 15,903 (4,130 ) Total income from real estate operations 15,990 27,997 (12,007 ) Financing costs: Fixed rate mortgages (4,765 ) (5,783 ) 1,018 Floating rate mortgages (1,978 ) (5,159 ) 3,181 Other - Corporate interest (137 ) (225 ) 88
Interest rate swap contracts breakage fee (213 ) -
(213 )
Mortgage cost amortization (971 ) (1,109 ) 138
Total financing costs (8,064 ) (12,276 ) 4,212
Investment income 358 116 242
General & administrative expenses:
Accounting fees (469 ) (426
) (43 )
Legal and professional fees (1,452 ) (2,477
) 1,025
Directors and consultant fees (1,076 ) (950 ) (126 ) Stock compensation expense (1,192 ) (42 ) (1,150 ) Corporate expenses (814 ) (1,300 ) 486 Total general & administrative expenses (5,003 ) (5,195
) 192
Depreciation (3,995 ) (9,300 ) 5,305 Loss on investment in tenancy-in-common (228 ) (295 ) 67 Adjusted net (loss) income (942 ) 1,047
(1,989 )
Net gain on sale of Maryland properties 68,771 -
68,771
Net realized gain on Wayne PSC interest rate swap termination 1,415 - 1,415 Net income 69,244 1,047 68,197
Net income attributable to noncontrolling
interests in subsidiaries (23,252 ) (120 ) (23,132 ) Net income attributable to common equity$ 45,992 $ 927
Adjusted net (loss) income for Fiscal 2022 was adjusted net (loss) of ($942,000 ) (($0.13 ) per share basic and diluted) compared to adjusted net income of$1,047,000 ($0.15 per share basic and diluted) for Fiscal 2021. Adjusted net (loss) income is a non-GAAP measure, which management believes is a useful and meaningful gauge to investors of our operating performance, since it excludes the impact of unusual and infrequent items specifically: a gain on sale ofMaryland Properties in Fiscal 2022; a realized gain on the Wayne PSC interest rate swap contract termination in Fiscal 2022. The decrease in adjusted net (loss) income for Fiscal 2022 was primarily driven by the following: (a) a decrease of approximately$3.9 million (with a consolidated impact to FREIT of approximately$2.8 million ) attributed to theMaryland Properties sold; offset by (b) an increase in revenue of approximately$1.2 million (with a consolidated impact to FREIT of approximately$1.1 million ), excluding theMaryland Properties sold; (c) a decrease in the reserve for uncollectible rents of approximately$0.3 million (with a consolidated impact to FREIT of approximately$0.3 million ), excluding theMaryland Properties sold, primarily due to rental revenue being deemed uncollectible and classified as a reduction in rental revenue in Fiscal 2022; (d) a decrease in general and administrative expenses ("G&A") of approximately$0.2 million primarily driven by a decline in legal costs of approximately$1 million primarily attributed to the legal proceeding between FREIT and certain of its affiliates andSinatra Properties, LLC , reincorporation expenses of approximately$0.5 million incurred in Fiscal 2021, offset by incremental stock compensation expense of approximately$1.2 million related to the stock option modification recorded in Fiscal 2022; (e) a decrease in snow removal costs of approximately$0.1 million (with a consolidated impact to FREIT of approximately$0.1 million ); and (f) an increase in investment income of approximately$0.2 million resulting from a higher interest rate and cash balance in Fiscal 2022 due to the sale of theMaryland Properties .
(Refer to the segment disclosure below for a more detailed discussion of the financial performance of FREIT's commercial and residential segments.)
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SEGMENT INFORMATION
The following table sets forth comparative net operating income ("NOI") data for
FREIT's real estate segments and reconciles the NOI to consolidated net
income-common equity for Fiscal 2022, as compared to Fiscal 2021 (See below for
definition of NOI):
Commercial Residential Combined
Years Ended Years Ended Years Ended
October 31, Increase (Decrease) October 31, Increase (Decrease) October 31,
2022 2021 $ % 2022 2021 $ % 2022 2021
(In Thousands) (In Thousands) (In Thousands)
Rental income $ 8,232 $ 17,875 $ (9,643 ) -53.9% $ 20,203 $ 26,515 $ (6,312 ) -23.8% $ 28,435 $ 44,390
Reimbursements 2,364 5,311 (2,947 ) -55.5% 19 157 (138 ) -87.9% 2,383 5,468
Other 30 361 (331 ) -91.7% 405 302 103 34.1% 435 663
Total revenue 10,626 23,547 (12,921 ) -54.9% 20,627 26,974 (6,347 ) -23.5% 31,253 50,521
Operating expenses 6,427 11,223 (4,796 ) -42.7%
8,854 11,071 (2,217 ) -20.0% 15,281 22,294
Net operating income
Average Occupancy % * 66.8% 69.0% -2.2%
98.2% 97.3% 0.9%
Reconciliation to consolidated net income-common equity:
Deferred rents - straight lining
18 (230 )
Investment income 358 116 Loss on investment in tenancy-in-common
(228 ) (295 )
General and administrative expenses
(5,003 ) (5,195 )
Depreciation
(3,995 ) (9,300 )
Net gain on sale of Maryland properties 68,771 -
Net realized gain on Wayne PSC interest rate swap termination 1,415 -
Financing costs (8,064 ) (12,276 )
Net income 69,244 1,047Net income attributable to noncontrolling interests in subsidiaries (23,252 ) (120 )
Net income attributable to common equity $ 45,992 $ 927
*Average occupancy rate excludes the Rotunda Property, the Damascus Property and
the Westridge Square Property from all periods presented as the properties were
sold in Fiscal 2022. See Note 2 to FREIT's consolidated financial statements for
further details.
NOI is based on operating revenue and expenses directly associated with the operations of the real estate properties, but excludes deferred rents (straight lining), depreciation, financing costs and other items. FREIT assesses and measures segment operating results based on NOI.
Same Property NOI: FREIT considers same property net operating income ("Same
Property NOI") to be a useful supplemental non-GAAP measure of its operating
performance. FREIT defines same property within both the commercial and
residential segments to be those properties that FREIT has owned and operated
for both the current and prior periods presented, excluding those properties
that FREIT acquired, sold or redeveloped during those periods. Any newly
acquired property that has been in operation for less than a year, any property
that is undergoing a major redevelopment but may still be in operation at less
than full capacity, and/or any property that has been sold or deconsolidated is
not considered same property.
NOI and Same Property NOI are non-GAAP financial measures and are not measures
of operating results or cash flow as measured by GAAP, and are not necessarily
indicative of cash available to fund cash needs and should not be considered an
alternative to cash flows as a measure of liquidity.
COMMERCIAL SEGMENT
The commercial segment contains five (5) separate properties, excluding the Rotunda Property, the Westridge Square Property and the Damascus Property, which were sold onDecember 30, 2021 ,January 7, 2022 andJanuary 10, 2022 , respectively. Three of these properties are multi-tenanted retail centers, one is a single tenanted retail center located inGlen Rock, New Jersey and one is single tenanted on land located inRockaway, 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. (See Note 2 to FREIT's consolidated financial statements for additional details on the sale of theMaryland Properties .) As indicated in the table above under the caption Segment Information, total revenue and NOI from FREIT's commercial segment for Fiscal 2022 decreased by 54.9% and 65.9%, respectively, as compared to Fiscal 2021. Average occupancy for all commercial properties, excluding theMaryland Properties sold, for Fiscal 2022 decreased by 2.2% as compared to Fiscal 2021. The decline in revenue for Fiscal 2022 was primarily attributable to theMaryland Properties sold. The decrease in NOI for Fiscal 2022 was primarily attributable to the following: (a) a decrease of approximately$8.4 million attributed to theMaryland Properties sold; offset by (b) a decline in snow removal costs of approximately$0.1 million , excluding theMaryland Properties sold; and (c) a decrease in the reserve for uncollectible rents of approximately$0.2 million , excluding theMaryland Properties sold. 25
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Same Property Operating Results: FREIT's commercial segment currently contains
five (5) same properties. (See definition of same property under Segment
Information above.) The Rotunda Property, the Westridge Square Property and the
Damascus Property were excluded from same property results for all periods
presented because these properties were sold in Fiscal 2022. Same property
revenue and NOI for Fiscal 2022 decreased by 1.6% and increased by 6.5%,
respectively, as compared to Fiscal 2021. The changes resulted from the factors
discussed in the immediately preceding paragraph.
Leasing: The following table reflects leasing activity at FREIT's commercial
properties for comparable leases (leases executed for spaces in which there was
a tenant at some point during the previous twelve-month period) and
non-comparable leases for Fiscal 2022.
Tenant
Weighted Weighted Improvement Lease
Average Average Prior Allowance Commissions
Number of Lease Area Lease Rate Lease Rate % Increase (per Sq. Ft.) (per Sq. Ft.)
RETAIL: Leases (Sq. Ft.) (per Sq. Ft.) (per Sq. Ft.) (Decrease) (a) (a)
Comparable leases (b) 9 137,634 $ 6.74 $ 6.37 5.8% $ - $ 0.02
Non-comparable leases 5 11,875 $ 26.37 N/A N/A $ 1.07 $ 1.32
Total leasing activity 14 149,509
(a) These leasing costs are presented as annualized costs per square foot and
are allocated uniformly over the lease term.
(b) This includes new tenant leases and/or modifications/extensions/renewals of
existing tenant leases.
RESIDENTIAL SEGMENT
FREIT currently operates six (6) multi-family apartment buildings or complexes
totaling 792 apartment units, excluding the Icon at the Rotunda Property, which
was sold as part of the Maryland Properties on December 30, 2021 (see Note 2 to
FREIT's consolidated financial statements) and the Pierre Towers property, which
was converted to a TIC (see Note 3 to FREIT's consolidated financial
statements).
As indicated in the table above under the caption Segment Information, total
revenue and NOI from FREIT's residential segment for Fiscal 2022 decreased by
23.5% and 26%, respectively, as compared to Fiscal 2021. Average occupancy for
all residential properties, excluding the Icon at the Rotunda Property sold, for
Fiscal 2022 increased by 0.9% as compared to Fiscal 2021.
The decrease in revenue for Fiscal 2022 was primarily attributable to the
following: (a) a decrease of approximately $7.5 million attributed to the Icon
at the Rotunda Property sold; offset by (b) an increase of approximately $1.2
million , excluding the Icon at the Rotunda Property sold, primarily driven by an
increase in base rents across all properties and an increase in the average
occupancy rate to 98.2% in Fiscal 2022 from 97.3% in Fiscal 2021. The decrease
in NOI for Fiscal 2022 was primarily attributable to the following: (a) a
decrease of approximately $5.2 million attributed to the Icon at the Rotunda
Property sold; (b) an increase in utilities expense of approximately $0.1
million , excluding the Icon at the Rotunda Property sold; offset by (c) an
increase in revenue of approximately $1.2 million , excluding the Icon at the
Rotunda Property sold; and (d) a decrease in the reserve for uncollectible rents
of approximately $0.1 million , excluding the Icon at the Rotunda Property sold.
Same Property Operating Results: FREIT's residential segment currently contains
six (6) same properties. (See definition of same property under Segment
Information above.) The Icon at the Rotunda Property was excluded from same
property results for all periods presented because this property was sold in
Fiscal 2022. Same property revenue and NOI for Fiscal 2022 increased by 6.9% and
11.2%, respectively, as compared to Fiscal 2021. The changes resulted from the
factors discussed in the immediately preceding paragraph.
FREIT's residential revenue is principally composed of monthly apartment rental
income. Total rental income is a factor of occupancy and monthly apartment
rents. Monthly average residential rents (excluding from both periods presented
for comparability purposes the Icon at the Rotunda Property, which was sold in
Fiscal 2022) at the end of Fiscal 2022 and Fiscal 2021 were $2,085 and $1,939 ,
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 $198,000 and $191,000 , respectively.
Capital expenditures: FREIT tends to spend more in any given year on maintenance
and capital improvements at its residential properties which were constructed
more than 25 years ago (Steuben Arms, Berdan Court and Westwood Hills
properties) than on its newer properties (Boulders, Regency and Station Place
properties). Funds for these capital projects are available from cash flow from
the property's operations and cash reserves.
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FINANCING COSTS
Years Ended October 31,
2022 2021
(In Thousands of Dollars)
Fixed rate mortgages (a):
1st Mortgages
Existing $ 4,229 $ 5,783
New 536 -
Variable rate mortgages:
1st Mortgages
Existing 1,978 5,159
New - -
Interest rate swap contracts breakage fee 213 -
Other 137 225
Total financing costs, gross 7,093 11,167
Amortization of mortgage costs 971 1,109
Total financing costs, net $ 8,064 $ 12,276
(a) Includes the effect of interest rate swap contracts which effectively convert the floating interest rate to a fixed interest rate over the term of the loan.
Total net financing costs for Fiscal 2022 decreased by approximately$4,212,000 or 34.3%, compared to Fiscal 2021 which was primarily attributable to the following: (a) a decline of approximately$4,513,000 attributed to the pay-down of the loans outstanding on theMaryland Properties sold in Fiscal 2022; (b) a decrease of approximately$382,000 attributed to the refinancing of the loan on the Boulders property in Fiscal 2022 resulting in a reduction in the interest rate from 5.37% to 2.85% and in the principal balance from approximately$14.4 million to$7.5 million ; offset by (c) an increase of approximately$213,000 attributed to a breakage fee on the early termination of the interest rate swap contracts relating to the underlying loan on the Damascus Property, which was repaid from the net proceeds of the sale of the Damascus Property in Fiscal 2022; and (d) an increase of approximately$148,000 related to the write-off of deferred mortgage costs on the Wayne PSC mortgage loan previously held withPeople's United Bank which was refinanced with a new lender in Fiscal 2022. (See Note 2 to FREIT's consolidated financial statements for additional details on the sale of theMaryland Properties .)
INVESTMENT INCOME
Investment income for Fiscal 2022 was$358,000 as compared to$116,000 for Fiscal 2021. Investment income is principally derived from interest earned from cash on deposit in institutional money market funds and interest earned from secured loans receivable (loans made toHekemian & Co. employees, includingRobert S. Hekemian , Jr., the Chief Executive Officer, President and a Director of FREIT,David B. Hekemian , a Director of FREIT,Allan Tubin , the Chief Financial Officer and Treasurer of FREIT and certain other members of the immediate family of the lateRobert S. Hekemian , FREIT's former Chairman, Chief Executive Officer and consultant of FREIT) for their equity investments (through Rotunda 100, LLC) inGrande Rotunda, LLC , a limited liability company in which FREIT owns a 60% equity interest. In Fiscal 2022, the secured loans receivable was repaid with proceeds received from the sale of the Rotunda Property. (See Note 8 to FREIT's consolidated financial statements for additional details.) The increase in investment income for Fiscal 2022 was primarily driven by a higher interest rate and cash balance in Fiscal 2022 due to the sale of theMaryland Properties . (See Note 2 to FREIT's consolidated financial statements for additional details on the sale of theMaryland Properties .)
GENERAL AND ADMINISTRATIVE EXPENSES ("G&A")
G&A expense for Fiscal 2022 was$5,003,000 as compared to$5,195,000 for Fiscal 2021. The primary components of G&A are legal and professional fees, directors' fees, corporate expenses and accounting/auditing fees. The decrease in G&A for Fiscal 2022 was primarily driven by a decline in legal costs of approximately$1 million primarily attributed to the legal proceeding between FREIT and certain of its affiliates andSinatra Properties, LLC , reincorporation expenses of approximately$0.5 million incurred in Fiscal 2021, offset by incremental stock compensation expense of approximately$1.2 million related to the stock option modification recorded in Fiscal 2022 (see Note 10 to FREIT's consolidated financial statements for additional details on the compensation expense).
DEPRECIATION
Depreciation expense from operations for Fiscal 2022 was$3,995,000 as compared to$9,300,000 for Fiscal 2021. The decline in depreciation expense for Fiscal 2022 was primarily attributable the sale of theMaryland Properties . (See Note 2 to FREIT's consolidated financial statements for additional details on the
sale of theMaryland Properties .) 27 Table of Contents Results of Operations:
Fiscal Years Ended
Summary revenues and net income for Fiscal 2021 andOctober 31, 2020 ("Fiscal 2020") are as follows: Years Ended October 31, 2021 2020 Change (in thousands, except per share amounts) Real estate revenues: Commercial properties$ 23,317 $ 24,089 $ (772 ) Residential properties 26,974 28,638 (1,664 ) Total real estate revenues 50,291 52,727 (2,436 ) Operating expenses:
Real estate operating expenses 22,294 22,922 (628 ) Third party transaction costs - 4,606 (4,606 ) General and administrative expenses 5,195 3,821 1,374 Depreciation 9,300 10,341 (1,041 ) Tenant improvement write-off due to COVID-19 -
7,277 (7,277 ) Total operating expenses 36,789 48,967 (12,178 ) Operating income 13,502 3,760 9,742 Investment income 116 204 (88 )
Gain on deconsolidation of subsidiary - 27,680 (27,680 ) Loss on investment in tenancy-in-common (295 )
(202 ) (93 )
Financing costs (12,276 ) (14,122 ) 1,846
Net income 1,047 17,320 (16,273 )
Net (income) loss attributable to noncontrolling
interests in subsidiaries (120 ) 3,233 (3,353 ) Net income attributable to common equity $ 927 $
20,553
Earnings per share - basic and diluted:$ 0.13 $
2.94
Weighted average shares outstanding:
Basic 7,019 6,992 Diluted 7,022 6,994
Real estate revenue for Fiscal 2021 decreased 4.6% to$50,291,000 compared to$52,727,000 for Fiscal 2020. The decline in revenue was primarily attributable to the following: (a) a decline in revenue of approximately$2.7 million resulting from the deconsolidation of the operating results of thePierre Towers property from FREIT's operating results due to the conversion to a tenancy-in-common form of ownership ("TIC") as ofFebruary 28, 2020 ; (b) a decrease in reimbursement revenue of approximately$0.4 million primarily attributed to the settle-ups of Common Area Maintenance with commercial tenants in the fiscal quarter endedOctober 31, 2021 ; (c) a decline in revenue from the commercial segment of approximately$0.4 million , (net of lease termination payments received from PetValu in the amount of approximately$0.3 million and a settlement payment in the amount of approximately$0.2 million received fromCobb Theatre at the Rotunda retail property), primarily driven by a decline in the average occupancy rate to 76.3% in Fiscal 2021 from 79.7% in Fiscal 2020; (d) an insurance reimbursement received at the Icon property in Fiscal 2020 in the amount of approximately$0.2 million ; offset by (e) an increase in revenue from the residential segment of approximately$1.2 million primarily driven by an increase in the average occupancy rate to 96.5% in Fiscal 2021 from 94.0% in Fiscal 2020 and an increase in base rents across most properties. Net income attributable to common equity ("net income-common equity") for Fiscal 2021 was$927,000 ($0.13 per share basic and diluted), compared to$20,533,000 ($2.94 per share basic and diluted) for Fiscal 2020. 28
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The schedule below provides a non-GAAP detailed analysis of the major changes that impacted net income-common equity for Fiscal 2021 and Fiscal 2020:
NON-GAAP NET INCOME COMPONENTS
Years Ended October 31,
2021 2020 Change
(In Thousands)Income from real estate operations:
Commercial properties$ 12,094 $ 12,755 $ (661 ) Residential properties 15,903 17,050 (1,147 ) Total income from real estate operations 27,997 29,805 (1,808 ) Financing costs: Fixed rate mortgages (5,783 ) (7,401 ) 1,618 Floating rate mortgages (5,159 ) (5,303 ) 144 Other - Corporate interest (225 ) (329 ) 104 Mortgage cost amortization (1,109 ) (1,089 ) (20 ) Total financing costs (12,276 ) (14,122 ) 1,846 Investment income 116 204 (88 )
General & administrative expenses:
Accounting fees (426 ) (558
) 132
Legal and professional fees (2,477 ) (1,074
) (1,403 )
Directors and consultant fees (950 ) (1,205
) 255 Stock compensation expense (42 ) (46 ) 4 Corporate expenses (1,300 ) (938 ) (362 ) Total general & administrative expenses (5,195 ) (3,821 ) (1,374 ) Third party transaction costs - (4,606 ) 4,606 Depreciation (9,300 ) (10,341 ) 1,041
Loss on investment in tenancy-in-common (295 ) (202
) (93 )
Adjusted net income (loss) 1,047 (3,083
) 4,130
Tenant improvement write-off due to COVID-19 - (7,277 ) 7,277 Gain on deconsolidation of subsidiary - 27,680
(27,680 )
Net income 1,047 17,320
(16,273 )
Net (income) loss attributable to noncontrolling
interests in subsidiaries (120 ) 3,233 (3,353 ) Net income attributable to common equity$ 927 $ 20,553
Adjusted net income (loss) for Fiscal 2021 was net income of$1,047,000 ($0.15 per share basic and diluted) compared to net (loss) of ($3,083,000 ) (($0.44 ) per share basic and diluted) for Fiscal 2020. Adjusted net income (loss) is a non-GAAP measure, which management believes is a useful and meaningful gauge to investors of our operating performance, since it excludes the impact of unusual and infrequent items specifically: a gain on deconsolidation of thePierre Towers property in Fiscal 2020; and a tenant improvement write-off due to COVID-19 in Fiscal 2020. The increase in adjusted net income (loss) for Fiscal 2021 was primarily driven by the following: (a) third party transaction costs incurred in Fiscal 2020 of approximately$4.6 million ; (b) a decrease in net financing costs of approximately$1.2 million (with a consolidated impact to FREIT of approximately$0.9 million ), (excluding the impact of the deconsolidation of the operating results of thePierre Towers from FREIT's operating results of approximately$0.6 million in interest expense), primarily driven by a decline in interest rates on variable mortgage loans; (c) a decline in depreciation expense of approximately$0.6 million (with a consolidated impact to FREIT of approximately$0.3 million ), (excluding the impact of the deconsolidation of the operating results of thePierre Towers from FREIT's operating results of approximately$0.5 million in depreciation expense), primarily driven by the tenant improvements written off in Fiscal 2020; (d) a decline in expense for the reserve of uncollectible rents for commercial tenants of approximately$0.4 million (with a consolidated impact to FREIT of approximately$0.3 million ); (e) an increase in revenue, excluding the impact of the conversion of thePierre Towers property to a TIC, in the amount of approximately$0.2 million (with a consolidated impact to FREIT of approximately$0.3 million ); (f) a decrease in leasing costs in the amount of approximately$0.2 million (with a consolidated impact to FREIT of approximately$0.1 million ) resulting from the write-off of unamortized lease commissions in Fiscal 2020 due to theCobb Theatres' rejection of its lease; offset by (g) an increase in general & administrative expenses of approximately$1.4 million primarily driven by an increase in legal costs in Fiscal 2021 attributed to the legal proceeding between FREIT and certain of its affiliates andSinatra Properties, LLC and reincorporation expenses incurred in Fiscal 2021 to reincorporate in the state of Maryland; (h) an increase in snow removal costs due to a harsher winter in Fiscal 2021 of approximately$0.5 million (with a consolidated impact to FREIT of approximately$0.4 million ); (i) an increase in repairs and maintenance expense of approximately$0.5 million (with a 29 Table of Contents
consolidated impact to FREIT of approximately$0.3 million ), (excluding the impact of the deconsolidation of the operating results of thePierre Towers from FREIT's operating results of approximately$0.2 million in repairs and maintenance expense); and (j) a decrease in adjusted net income with an impact of approximately$0.3 million attributed to thePierre Towers deconsolidation from FREIT's operating results in Fiscal 2020 (with a consolidated impact to FREIT of approximately$0.2 million ). (Refer to the segment disclosure below for a more detailed discussion of the financial performance of FREIT's commercial and residential segments.) SEGMENT INFORMATION The following table sets forth comparative net operating income ("NOI") data for FREIT's real estate segments and reconciles the NOI to consolidated net income-common equity for Fiscal 2021, as compared to Fiscal 2020 (See below for definition of NOI): Commercial Residential Combined Years Ended Years Ended Years Ended October 31, Increase (Decrease) October 31, Increase (Decrease) October 31, 2021 2020 $ % 2021 2020 $ % 2021 2020 (In Thousands) (In Thousands) (In Thousands)
Rental income
$ 26,515 $ 27,812 $ (1,297 ) -4.7%$ 44,390 $ 46,581 Reimbursements 5,311 5,690 (379 ) -6.7% 157 150 7 4.7% 5,468 5,840 Other 361 27 334 1237.0% 302 676 (374 ) -55.3% 663 703 Total revenue 23,547 24,486 (939 ) -3.8%
26,974 28,638 (1,664 ) -5.8% 50,521 53,124
Operating expenses 11,223 11,334 (111 ) -1.0%
11,071 11,588 (517 ) -4.5% 22,294 22,922
Net operating income
Average Occupancy % 76.3% 79.7% -3.4% 96.5% * 94.0%* 2.5%
Reconciliation to consolidated net income-common equity:
Deferred rents - straight lining (230 ) (397 )
Investment income 116 204
Third party transaction costs - (4,606 )
Gain on deconsolidation of subsidiary - 27,680
Loss on investment in tenancy-in-common (295 ) (202 )
General and administrative expenses (5,195 ) (3,821 )
Depreciation (9,300 ) (10,341 )
Tenant improvement write-off due to COVID-19 - (7,277 )
Financing costs (12,276 ) (14,122 )
Net income 1,047 17,320
Net (income) loss attributable to noncontrolling
interests in subsidiaries (120 ) 3,233
Net income attributable to common equity $ 927 $ 20,553
*Average occupancy rate excludes the Pierre Towers property from all periods
presented as the property was deconsolidated and converted to a TIC effective
February 28, 2020 .
NOI is based on operating revenue and expenses directly associated with the operations of the real estate properties, but excludes deferred rents (straight lining), depreciation, financing costs and other items. FREIT assesses and measures segment operating results based on NOI.
Same Property NOI: FREIT considers same property net operating income ("Same
Property NOI") to be a useful supplemental non-GAAP measure of its operating
performance. FREIT defines same property within both the commercial and
residential segments to be those properties that FREIT has owned and operated
for both the current and prior periods presented, excluding those properties
that FREIT acquired, sold or redeveloped during those periods. Any newly
acquired property that has been in operation for less than a year, any property
that is undergoing a major redevelopment but may still be in operation at less
than full capacity, and/or any property that has been sold or deconsolidated is
not considered same property.
NOI and Same Property NOI are non-GAAP financial measures and are not measures
of operating results or cash flow as measured by GAAP, and are not necessarily
indicative of cash available to fund cash needs and should not be considered an
alternative to cash flows as a measure of liquidity.
COMMERCIAL SEGMENT
The commercial segment contains eight (8) separate properties. Seven of these properties are multi-tenanted retail or office centers, and one is single tenanted on land located inRockaway, New Jersey owned by FREIT from which it receives monthly rental income from a tenant who has built and operates a bank branch on the land. As indicated in the table above under the caption Segment Information, total revenue and NOI from FREIT's commercial segment for Fiscal 2021 decreased by 3.8% and 6.3%, respectively, as compared to Fiscal 2020. The decline in revenue for Fiscal 2021 was primarily attributed to the following: (a) a decrease in reimbursement revenue of approximately$0.4 million primarily attributed to the settle-ups of Common Area Maintenance with commercial tenants in the fiscal quarter endedOctober 31, 2021 ; and (b) a decline in revenue in the amount of approximately$0.6 million (net of lease termination payments received from PetValu in the amount of approximately$0.3 million and a settlement payment in the amount of approximately$0.2 30
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million received fromCobb Theatre at the Rotunda retail property) primarily attributable to a decline in the average occupancy rate to 76.3% in Fiscal 2021 from 79.7% in Fiscal 2020. The decline in NOI for Fiscal 2021 was primarily attributable to the following: (a) a decline in revenue of approximately$0.9 million as described above; (b) an increase in snow removal costs due to a harsher winter in Fiscal 2021 of approximately$0.3 million ; (c) an increase in repairs and maintenance expense of approximately$0.2 million ; offset by (d) a decline in expense for the reserve of uncollectible rents of approximately$0.4 million ; and (e) a decrease in leasing costs in the amount of approximately$0.2 million resulting from the write-off of unamortized lease commissions in Fiscal 2020 due to theCobb Theatres' rejection of its lease. Same Property Operating Results: FREIT's commercial segment currently contains eight (8) same properties. (See definition of same property under Segment Information above.) Since all of FREIT's commercial properties are considered same properties in Fiscal 2021 and Fiscal 2020, refer to the preceding paragraph for discussion of changes in same property results. Leasing: The following tables reflect leasing activity at FREIT's commercial properties for comparable leases (leases executed for spaces in which there was a tenant at some point during the previous twelve-month period) and non-comparable leases for Fiscal 2021. Tenant Weighted Weighted Improvement Lease Average Average Prior Allowance Commissions Number of Lease Area Lease Rate Lease Rate % Increase (per Sq. Ft.) (per Sq. Ft.) RETAIL: Leases (Sq. Ft.) (per Sq. Ft.) (per Sq. Ft.) (Decrease) (a) (a)
Comparable leases (b) 23 148,190 $ 13.83 $ 16.64 -16.9% $ - $ 0.21
Non-comparable leases 7 12,514 $ 32.79 N/A N/A $ 1.27 $ 1.63
Total leasing activity 30 160,704
Tenant
Weighted Weighted Improvement
Average Average Prior Allowance Lease
Number of Lease Area Lease Rate Lease Rate % Increase (per Sq. Ft.) Commissions
OFFICE: Leases (Sq. Ft.) (per Sq. Ft.) (per Sq. Ft.) (Decrease) (a) (per Sq. Ft.)(a) Comparable leases (b) 13 30,605 $ 33.01 $ 32.07 2.9% $ - $ 0.34 Non-comparable leases 2 4,053 $ 23.72 N/A N/A $ - $ 1.34 Total leasing activity 15 34,658 (a) These leasing costs are presented as annualized costs per square foot and are allocated uniformly over the lease term. (b) This includes new tenant leases and/or modifications/extensions/renewals of existing tenant leases. During the first quarter of Fiscal 2021,Pet Valu, Inc. , a pet store tenant, vacated several stores located in shopping centers owned by FREIT affiliates (Wayne PSC, Damascus Centre and Grande Rotunda) and terminated the related leases early paying an aggregate lease termination fee in the amount of approximately$260,000 (with a consolidated impact to FREIT of approximately$140,000 ). OnMay 4, 2021 ,Burlington amended its lease at theWestridge Square Shopping Center (owned by WestFREIT) extending the term of the lease for a period of one (1) year and ninety (90) days commencing onDecember 1, 2021 and expiring onFebruary 28, 2023 ("Fourth Extension Period"). The fixed rent during this Fourth Extension Period was reduced from$59,120 per month to$35,830 per month. Additionally,Burlington has the right to terminate the lease at any time prior to the last day of the Fourth Extension Period by providing at least twelve (12) months prior written notice of such termination (the "Termination Notice"). In the event thatBurlington delivers the Termination Notice, the term of the lease shall automatically end on the last day of the twelfth (12th) full calendar month immediately following receipt of the Termination Notice. OnJanuary 7, 2022 , the property owned by WestFREIT was sold. (See Note 2 to FREIT's consolidated financial statements for additional details.) OnApril 26, 2020 ,CB Theatre Experience, LLC filed for protection under Chapter 11 of the bankruptcy code as disclosed in the bankruptcy filings.The CB Theatre Experience, LLC (known as "Cobb Theatre ") at the Rotunda retail property inBaltimore, Maryland has been closed sinceApril 2020 due to the mandated shut down related to the COVID-19 pandemic and onJuly 14, 2020 rejected its lease at this property as ofJune 30, 2020 . During the first quarter endedJanuary 31, 2021 , FREIT received a settlement payment fromCobb Theatre in the amount of approximately$0.2 million (with a consolidated impact to FREIT of approximately$0.1 million ). The properties owned by Grande Rotunda, WestFREIT and Damascus Centre were sold onDecember 30, 2021 ,January 7, 2022 andJanuary 10, 2022 , respectively. See Note 2 to FREIT's consolidated financial statements for additional details.
RESIDENTIAL SEGMENT
FREIT currently operates seven (7) multi-family apartment buildings or complexes
totaling 1,171 apartment units. On
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Towers property located inHackensack, New Jersey through its 100% interest inPierre Towers, LLC . Accordingly, FREIT consolidated the financial statements of S&A and its subsidiary to include 100% of the subsidiary's assets, liabilities, operations and cash flows with the interest not owned by FREIT reflected as "noncontrolling interests in subsidiary" and all significant intercompany accounts and transactions were eliminated in consolidation. 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 remains unchanged after the reorganization to a TIC, FREIT no longer has a controlling interest as the TIC is now under joint control. (See Note 3 to FREIT's consolidated financial statements for further details.) As indicated in the table above under the caption Segment Information, total revenue and NOI from FREIT's residential segment for Fiscal 2021 decreased by 5.8% and 6.7%, respectively, as compared to Fiscal 2020. The decline in revenue for Fiscal 2021 was primarily attributable to the following: (a) a deconsolidation of the operating results of the Pierre Towers property from FREIT's operating results due to the conversion to a TIC as ofFebruary 28, 2020 resulting in a decline in revenue of approximately$2.7 million ; (b) an insurance reimbursement received at the Icon property in Fiscal 2020 in the amount of approximately$0.2 million ; offset by (c) an increase in revenue of approximately$1.2 million driven by an increase in the average occupancy rate by approximately 2.5% over Fiscal 2020 and an increase in base rent across most properties. The decline in NOI for Fiscal 2021 was primarily attributable to the following: (a) a deconsolidation of the operating results of the Pierre Towers property from FREIT's operating results due to the conversion to a TIC as ofFebruary 28, 2020 resulting in a decline in NOI of approximately$1.3 million ; (b) an increase in repairs and maintenance expense of approximately$0.3 million ; (c) an increase in operating expenses of approximately$0.3 million primarily driven by an increase in snow removal costs due to a harsher winter in Fiscal 2021 and an increase in janitorial costs; (d) an increase in advertising expense of approximately$0.1 million ; and (e) an increase in expense for the reserve of uncollectible rents of approximately$0.1 million ; offset by (f) an increase in revenue of approximately$1 million (excluding the impact of the Pierre Towers deconsolidation). Same Property Operating Results: FREIT's residential segment currently contains seven (7) same properties. (See definition of same property under Segment Information above.)The Pierre Towers property was excluded from same property results for both fiscal years because this property was deconsolidated and converted to a TIC as ofFebruary 28, 2020 . Same property revenue and NOI increased by 3.8% and 1.1%, respectively, from Fiscal 2020. The changes resulted from the factors discussed in the immediately preceding paragraph. FREIT's residential revenue is principally composed of monthly apartment rental income. Total rental income is a factor of occupancy and monthly apartment rents. Monthly average residential rents at the end of Fiscal 2021 and Fiscal 2020 were$1,998 and$1,953 , 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$281,000 and$276,000 , respectively. Capital expenditures: Since all of FREIT's apartment communities, with the exception of the Boulders, Regency, Icon andStation Place properties, were constructed more than 25 years ago, FREIT tends to spend more in any given year on maintenance and capital improvements than may be spent on newer properties. As a result of the COVID-19 global pandemic, only capital improvements deemed essential are being made at this time. Funds for these capital projects will be available from cash flow from the property's operations and cash reserves.
FINANCING COSTS
Years Ended October 31,
2021 2020
(In Thousands of Dollars)
Fixed rate mortgages (a):
1st Mortgages
Existing $ 5,783 $ 7,401
New - -
Variable rate mortgages:
1st Mortgages
Existing 5,159 5,211
New - 92
Other 225 329
Total financing costs, gross 11,167 13,033
Amortization of mortgage costs 1,109 1,089
Total financing costs, net $ 12,276 $ 14,122 (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.
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Total net financing costs for Fiscal 2021 decreased by approximately $1,846,000
or 13.1%, compared to Fiscal 2020 which is attributable to the following: (a) a
decline in interest on the variable mortgage loans for the Rotunda and WestFREIT
properties of approximately $1,105,000 resulting from lower interest rates (See
Note 2 to FREIT's consolidated financial statements for further details); and
(b) the deconsolidation of the Pierre Towers property from FREIT's operating
results due to the conversion to a TIC as of February 28, 2020 resulting in a
decrease in net financing costs of approximately $645,000 . (See Note 3 to
FREIT's consolidated financial statements for further details on the
deconsolidation of the Pierre Towers property.)
INVESTMENT INCOME
Investment income for Fiscal 2021 was$116,000 as compared to$204,000 for Fiscal 2020. Investment income is principally derived from interest earned from cash on deposit in institutional money market funds and interest earned from secured loans receivable (loans made toHekemian & Co. employees, includingRobert S. Hekemian , Jr., the Chief Executive Officer, President and a Director of FREIT,David B. Hekemian , a Director of FREIT,Allan Tubin , the Chief Financial Officer and Treasurer of FREIT and certain other members of the immediate family of the lateRobert S. Hekemian , FREIT's former Chairman, Chief Executive Officer and consultant of FREIT) for their equity investments (through Rotunda 100, LLC) inGrande Rotunda, LLC , a limited liability company in which FREIT owns a 60% equity interest. (See Note 8 to FREIT's consolidated financial statements for additional details.)
GENERAL AND ADMINISTRATIVE EXPENSES ("G&A")
G&A expense for Fiscal 2021 was$5,195,000 as compared to$3,821,000 for Fiscal 2020. The primary components of G&A are accounting/auditing fees, legal and professional fees, directors' and consultant fees and corporate expenses. The increase in G&A costs for Fiscal 2021 was primarily driven by the following: (a) an increase in legal costs of approximately$1,403,000 primarily resulting from the legal proceeding between FREIT and certain of its affiliates andSinatra Properties, LLC ; (b) an increase in corporate expenses of approximately$362,000 primarily attributed to reincorporation expenses incurred in Fiscal 2021 of approximately$493,000 to reincorporate in the state of Maryland offset by costs incurred in Fiscal 2020 for the formation and transfer of the Pierre subsidiary to a TIC of approximately$293,000 ; offset by (c) a decline in directors' and consultant fees of approximately$255,000 .
THIRD PARTY TRANSACTION COSTS
The Special Committee of the Board ("Special Committee") incurred on behalf of
the Company third party transaction costs for advisory, legal and other expenses
primarily related to the Purchase and Sale Agreement and the Plan of Liquidation
(See Notes 14 and 15 for additional details) in the amount of approximately $0
for Fiscal 2021 as compared to approximately $4,606,000 for Fiscal 2020. On
April 30, 2020 , the Sellers delivered written notice to the Purchaser of the
Sellers' termination of the Purchase and Sale Agreement (See Note 14 for
details) and on May 7, 2020 , the Board approved the elimination of the Special
Committee. No further transaction costs were incurred thereafter.
DEPRECIATION
Depreciation expense from operations for Fiscal 2021 was$9,300,000 as compared to$10,341,000 for Fiscal 2020. The decline in depreciation expense in Fiscal 2021 was primarily attributable to the following: (a) a decline in the amount of approximately$460,000 resulting from the deconsolidation of the operating results of the Pierre Towers property from FREIT's operating results as ofFebruary 28, 2020 (See Note 3 to FREIT's consolidated financial statements for further details); and (b) the remainder of the decline is primarily related to tenant improvements written off in Fiscal 2020. 33
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LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was$7.3 million for Fiscal 2022 compared to net cash provided by operating activities of$12.2 million for Fiscal 2021. 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 which are expected to be refinanced and/or extended), real estate taxes, dividends, recurring capital improvements at its properties and other needs to maintain its status as a REIT for at least a period of one year from the date of filing of this annual report on Form 10-K. As ofOctober 31, 2022 , FREIT had cash, cash equivalents and restricted cash totaling$58.5 million , compared to$39 million atOctober 31, 2021 . The increase in cash in Fiscal 2022 was primarily attributable to approximately$249.7 million in net cash provided by investing activities including capital expenditures and$7.3 million in net cash provided by operating activities offset by approximately$237.6 million in net cash used in financing activities. The increase in cash of approximately$19.5 million was primarily attributed to the following: (a) a distribution of net proceeds received from the sale of the Rotunda Property of approximately$54.4 million (inclusive of a loan repayment from Grande Rotunda of approximately$27.7 million and repayment of secured loans receivable including accrued interest by certain members in Rotunda 100 of approximately$5.3 million ); (b) a distribution of net proceeds received from the sale of the Damascus Property of approximately$11.8 million ; (c) net proceeds received from the sale of the Westridge Square Property of approximately$0.1 million ; (d) anticipated funds to be released of approximately$6.3 million and funds released of approximately$1.9 million from the funds held in post-closing escrow for rents related to the sale of theMaryland Properties ; (e) net proceeds received from the refinancing of theWayne PSC loan of approximately$3.4 million (inclusive of an interest reserve escrow balance of approximately$0.9 million as ofOctober 31, 2022 ); (f)$2 million in proceeds received from the exercise of stock options inOctober 2022 ; offset by (g) a loan pay-down including closing costs of approximately$7.6 million attributed to the refinancing of the loan on the Boulders property; and (h) dividends paid in Fiscal 2022 of approximately$53.5 million (inclusive of a$51.5 million dividend distribution of capital gain/proceeds received from sale ofMaryland Properties ). (See Note 2 to FREIT's consolidated financial statements for additional details on the sale of theMaryland Properties .) In Fiscal 2017, Grande Rotunda incurred substantial expenditures at the Rotunda Property related to retail tenant improvements, leasing costs and operating expenditures which, in the aggregate, exceeded revenues as the property was still in the rent up phase and the construction loan held with Wells Fargo at that time was at its maximum level, with no additional funding available to draw. Accordingly, during Fiscal 2017 the equity owners in Grande Rotunda contributed their respective pro-rata share of any cash needs through loans to Grande Rotunda. In Fiscal 2021, Grande Rotunda repaid$7 million to the equity owners in Grande Rotunda based on their respective pro-rata share resulting in a loan repayment to Rotunda 100 of approximately$2.8 million . As ofOctober 31, 2021 , Rotunda 100 had funded Grande Rotunda with approximately$3.3 million (including interest) which was included in "Due to affiliate" on the accompanying consolidated balance sheet. OnDecember 30, 2021 , the Rotunda Property was sold and Grande Rotunda repaid approximately$31 million to the equity owners in Grande Rotunda resulting in a loan repayment to Rotunda 100 of approximately$3.3 million . As ofOctober 31, 2022 , all loans were repaid in full to each of the equity owners in Grande Rotunda. Credit Line: FREIT's revolving line of credit provided byProvident Bank was renewed for a three-year term ending onOctober 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 onFREIT's Franklin Crossing Shopping Center inFranklin Lakes, New Jersey and retail space inGlen 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 ofOctober 31, 2022 and 2021, there was no amount outstanding and$13 million was available under the line of credit. (See Note 5 to FREIT's consolidated financial statements for additional details.) Dividend: OnAugust 4, 2022 , the FREIT Board of Directors ("Board") declared a special, extraordinary, non-recurring cash distribution of approximately$51.5 million , or$7.50 per share, which was paid onAugust 30, 2022 , to stockholders of record onAugust 16, 2022 (with an ex-dividend date ofAugust 31, 2022 ). (See Note 2 to FREIT's consolidated financial statements for additional details.) OnSeptember 28, 2022 , the Board declared an ordinary dividend of$1.50 per share, which was paid onDecember 15, 2022 to stockholders of record onDecember 1, 2022 . The Board declared dividends totaling approximately$65,163,000 ($9.20 per share) to stockholders of record during Fiscal 2022. The Board will continue to evaluate the dividend on a quarterly basis and there can be no assurance that dividends will be declared for any future period. In addition, the amount of the dividend declared onSeptember 28, 2022 is not necessarily indicative of the amount of any dividends that may be declared in the future. 34
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As ofOctober 31, 2022 , FREIT's aggregate outstanding mortgage debt was$139.2 million , which bears a weighted average interest rate of 4.72% and an average life of approximately 2.46 years. FREIT's mortgages are subject to amortization schedules that are longer than the terms of the mortgages. As such, balloon payments (unpaid principal amounts at mortgage due date) for all mortgage debt will be required as follows: Fiscal Year 2023 2024 2025 2026 2027 2028 2029 ($ in millions)$42.1
Mortgage "Balloon" Payments (A)
$10.5 $26.0 (A) Includes the following: (1) A loan on theWestwood Hills property, which is a residential property located inWestwood, New Jersey , in the amount of approximately$25 million . Pursuant to the loan agreement, this loan was extended for an additional six (6) months from an initial maturity date ofOctober 1, 2022 to a new maturity date ofApril 1, 2023 . This loan was extended on the same terms and conditions as stated in the loan agreement and has one remaining six (6) month extension. (See Note 5 to FREIT's consolidated financial statements for additional details.) (2) A loan on theWestwood Plaza shopping center, located inWestwood, New Jersey , in the amount of approximately$17.1 million , which is maturing onFebruary 1, 2023 . The Company is in the process of extending this loan with the current lender,Valley National Bank , for one (1) year. Under the terms and conditions of this loan modification, the loan will be payable based on the existing monthly installments of$129,702 including a fixed interest rate based on the Wall Street Journal Prime at the time of the closing on this extension (currently approximately 7.00%). Additionally, FREIT will be required to prepay the annualized principal and interest payments for one (1) year, which will be held in an account atValley National Bank and will be used to make monthly payments on the loan. Management expects this loan to be modified/extended, however, until such time as a definitive agreement providing for a modification/extension of this loan is entered into, there can be no assurance this loan will be modified/extended. (See Note 5 to FREIT's consolidated financial statements for additional details.)
The following table shows the estimated fair value and carrying value of FREIT's
long-term debt, net at
($ in Millions)
Fair Value$132.2 $301.6 Carrying Value, Net$138.1 $299.9
Fair values are estimated based on market interest rates at the end of each fiscal year and on a discounted cash flow analysis. Changes in assumptions or estimation methods may significantly affect these fair value estimates. The fair value is based on observable inputs (level 2 in the fair value hierarchy as provided by authoritative guidance). FREIT expects to refinance the individual mortgages with new mortgages or exercise extension options 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, atOctober 31, 2022 , a 1% interest rate increase would reduce the fair value of FREIT's debt by$3 million , and a 1% decrease would increase the fair value by$3.1 million . 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 stockholders. OnSeptember 30, 2020 ,Westwood Hills, LLC ("Westwood Hills"), a consolidated subsidiary, refinanced its$19.2 million loan (which would have matured onNovember 1, 2020 ) with a new loan held byConnectOne Bank in the amount of$25,000,000 , with additional funding available in the amount of$250,000 for legal fees potentially incurred by the lender related to the lis pendens on this property. This loan, secured by an apartment building inWestwood, New Jersey , is interest-only based on a floating rate at 400 basis points over the one-month LIBOR rate with a floor of 4.15% and had a maturity date ofOctober 1, 2022 . This refinancing resulted in: (i) a change in the annual interest rate from a fixed rate of 4.62% to a variable rate with a floor of 4.15% and (ii) net refinancing proceeds of approximately$5.6 million that were distributed to
the partners inWestwood 35 Table of Contents Hills with FREIT receiving approximately$2.2 million based on its 40% membership interest inWestwood Hills . OnAugust 19, 2022 ,Westwood Hills, LLC exercised its right, pursuant to the loan agreement, to extend the term of its$25 million loan on its property located inWestwood, New Jersey , for an additional six (6) months from an initial maturity date ofOctober 1, 2022 to a new maturity date ofApril 1, 2023 . This loan was extended on the same terms and conditions as stated in the loan agreement and has one remaining six (6) month extension. As ofOctober 31, 2022 ,$25,000,000 of this loan was drawn and outstanding and the interest rate was 7.13%. (See Note 5 to FREIT's consolidated financial statements for additional details.) OnDecember 30, 2021 , FREIT refinanced its$14.4 million loan (which would have matured onFebruary 1, 2022 ) on its Boulders property located inRockaway, New Jersey with a new loan held byConnectOne 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 ofJanuary 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. OnJuly 22, 2022 , Wayne PSC refinanced its$22.1 million loan (inclusive of deferred interest of approximately$136,000 ), which would have matured onOctober 1, 2026 , on its Preakness Shopping center located inWayne, New Jersey with a new loan held byConnectOne 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 ofAugust 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 , which has been recorded as a realized gain on the accompanying consolidated statement of income for the year endedOctober 31, 2022 . (See Notes 5 and 6 to FREIT's consolidated financial statements for additional details.) 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 generally corresponds to FREIT's mortgage debt) over a term equal to the term of the mortgage notes. FREIT's counterparties, in return, agree to pay FREIT a short-term rate of interest - generally LIBOR - on that same notional amount over the same term as the mortgage notes. FREIT had variable interest rate loans secured by its Damascus Centre andWayne PSC properties and currently has variable interest rate loans secured by its Regency andStation Place properties. To reduce interest rate fluctuations, FREIT entered into interest rate swap contracts for each of these loans. These interest rate swap contracts effectively converted variable interest rate payments to fixed interest rate payments. The contracts were based on a notional amount of approximately$16,200,000 ($14,587,000 atOctober 31, 2022 ) for the Regency swap and a notional amount of approximately$12,350,000 ($11,751,000 atOctober 31, 2022 ) for theStation Place swap. OnJanuary 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 consolidated statement of income for the year endedOctober 31, 2022 . (See Note 2 to FREIT's consolidated financial statements for further details on the sale of this property.) OnJune 17, 2022 , Wayne PSC terminated its interest rate swap contract on its underlying loan held withPeople's United Bank , which had a maturity date ofOctober 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 inJuly 2022 and has been included as a realized gain on interest rate swap termination on the accompanying consolidated statement of income for the year endedOctober 31, 2022 . (See Note 6 to FREIT's consolidated financial statements for further details.) Interest rate cap contract: To limit exposure on interest rate volatility, FREIT uses an interest rate cap contract to cap a floating interest rate at a set pre-determined rate. FREIT enters into cap contracts with a counterparty that is usually a high-quality commercial bank. In essence, so long as the floating interest rate is below the cap rate, FREIT agrees to pay its counterparties a variable rate of interest on a dollar amount of notional principal (which generally corresponds to FREIT's mortgage debt). Once the floating interest rate rises above the cap rate, FREIT's counterparties, in return, agree to pay FREIT a short-term rate of interest above the cap on that same notional amount. FREIT had a variable interest rate loan secured by its Rotunda Property. As part of the refinancing of Grande Rotunda's construction loan with a new loan fromAareal Capital Corporation , Grande Rotunda had purchased an interest rate cap contract on LIBOR for the full amount that could have been drawn on this loan of$121.9 million , capping the one-month LIBOR rate at 3% for the first two years of this loan which matured onMarch 5, 2020 . OnFebruary 28, 2020 , Grande Rotunda had purchased an interest rate cap on LIBOR, with an effective date ofMarch 5, 2020 , for the full amount that could have been drawn on this 36
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loan of$121.9 million , capping the one-month LIBOR rate at 3% for one year, maturing onMarch 5, 2021 . EffectiveFebruary 6, 2021 , Grande Rotunda exercised the first extension option on this loan with a balance of approximately$118.5 million , extending the loan one year with a new maturity date ofFebruary 6, 2022 . Additionally, Grande Rotunda purchased an interest rate cap contract on LIBOR, with an effective date ofMarch 5, 2021 , for the loan amount of approximately$118.5 million , capping the one-month LIBOR rate at 3% for one year expiring onFebruary 6, 2022 . OnDecember 30, 2021 , the Rotunda 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. (See Note 2 to FREIT's consolidated financial statements for further details.) In accordance with ASU 2017-12, "Targeted Improvements to Accounting for Hedging Activities to Accounting Standards Codification Topic 815, Derivatives and Hedging ("ASC 815")"which was adopted by FREIT in the first quarter of Fiscal 2020 (see Note 1 to FREIT's consolidated financial statements for further details), FREIT marks-to-market its interest rate swap and cap contracts. As the floating interest rate varies from time-to-time over the term of the contract, the value of the contract will change upward or downward. If the floating rate is higher than the fixed rate, the value of the contract goes up and there is a gain and an asset. If the floating rate is less than the fixed rate, there is a loss and a liability. The interest rate swaps and cap are accounted for as cash flow hedges with the corresponding gains or losses on these contracts not affecting FREIT's consolidated statement of income; changes in the fair value of these cash flow hedges will be reported in other comprehensive income and appear in the equity section of the consolidated balance sheet. This gain or loss represents the economic consequence of liquidating fixed rate swaps or the cap contract and replacing them with like-duration funding at current market rates, something we would likely never do. Periodic cash settlements of these contracts will be accounted for as an adjustment to interest expense..
FREIT has the following derivative-related risks with its swap contracts ("contract"): 1) early termination risk, and 2) counterparty credit risk.
Early Termination Risk: If FREIT wants to terminate its contract before maturity, it would be bought out or terminated at market value; i.e., the difference in the present value of the anticipated net cash flows from each of the contract's parties. If current variable interest rates are significantly below FREIT's fixed interest rate payments, this could be costly. Conversely, if interest rates rise above FREIT's fixed interest payments and FREIT elected early termination, FREIT would realize a gain on termination. AtOctober 31, 2022 , the contracts for Regency andStation Place were in FREIT's favor. If FREIT had terminated these contracts at that date, it would have realized a gain of approximately$611,000 for the Regency swap and$798,000 for theStation Place swap all of which have been included in FREIT's consolidated balance sheet as atOctober 31, 2022 . The change in the fair value for the contract (gain or loss) during such period has been included in comprehensive income (loss) and for the years endedOctober 31, 2022 and 2021, FREIT recorded an unrealized gain of approximately$3,717,000 and$2,616,000 , respectively, in the consolidated statement of comprehensive income.
Counterparty Credit Risk: Each party to a contract bears the risk that its counterparty will default on its obligation to make a periodic payment. FREIT reduces this risk by entering into a contract only with major financial institutions that are experienced market makers in the derivatives market.
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FREIT's total contractual obligations under its line of credit and mortgage
loans in place as of
CONTRACTUAL OBLIGATIONS-PRINCIPAL
(in thousands of dollars)
Within 2 - 3 4 - 5 After 5
Total One Year Years Years Years
Long-Term Debt
Annual Amortization $ 5,190 $ 886 $ 1,482 $ 1,666 $ 1,156
Balloon Payments 134,027 42,149 (A) 55,415 - 36,463
Total Long-Term Debt * $ 139,217 $ 43,035 $ 56,897 $ 1,666 $ 37,619 * Includes deferred interest in the amount of approximately
5 to FREIT's consolidated financials for additional details.
Includes the
(A) following:
(1) A loan on the
located in
million. Pursuant to the loan agreement, this loan was extended for an
additional six (6) months from an initial maturity date of
a new maturity date of
terms and conditions as stated in the loan agreement and has one remaining
six (6) month extension. (See Note 5 to FREIT's consolidated financial
statements for additional details.)
(2) A loan on the
Jersey, in the amount of approximately
the current lender,
and conditions of this loan modification, the loan will be payable based on
the existing monthly installments of
based on the Wall Street Journal Prime at the time of the closing on this
extension (currently approximately 7.00%). Additionally, FREIT will berequired to prepay the annualized principal and interest payments for one (1)
year, which will be held in an account at
used to make monthly payments on the loan. Management expects this loan to be
modified/extended, however, until such time as a definitive agreement
providing for a modification/extension of this loan is entered into, there
can be no assurance this loan will be modified/extended. (See Note 5 to
FREIT's consolidated financial statements for additional details.)
FREIT's annual estimated cash requirements related to interest on its line of
credit and mortgage loans in place as of
INTEREST OBLIGATIONS
(in thousands of dollars)
Within 2 - 3 4 - 5 After 5
Total One Year Years Years Years
Interest on Fixed Rate Debt
- -
Total Interest Obligations $ 16,572 $ 5,503 $ 6,181 $ 2,941 $ 1,947
Interest based on rates as of
* October 31, 2022 (A) Assumed the exercise of the second loan extension on the
pursuant to the loan agreement, which will extend the loan from
consolidated financial statements for additional details.)
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ADJUSTED FUNDS FROM OPERATIONS
Funds From Operations ("FFO") is a non-GAAP measure defined by the National
Association of Real Estate Investment Trusts ("NAREIT"). FREIT does not include
distributions from equity/debt/capital gain sources in its computation of FFO.
Although many consider FFO as the standard measurement of a REIT's performance,
FREIT modified the NAREIT computation of FFO to include other adjustments to
GAAP net income that are not considered by management to be the primary drivers
of its decision making process. These adjustments to GAAP net income are
straight-line rents and recurring capital improvements on FREIT's residential
apartments. The modified FFO computation is referred to as Adjusted Funds From
Operations ("AFFO"). FREIT believes that AFFO is a superior measure of its
operating performance. FREIT computes FFO and AFFO as follows:
Years Ended October 31,
2022 2021 2020
(In Thousands, Except Per Share)
Funds From Operations ("FFO") (a)
Net income $ 69,244 $ 1,047 $ 17,320
Net gain on sale of Maryland properties (68,771 ) - -
Net gain on Wayne PSC interest rate swap
termination (1,415 ) - -
Gain on deconsolidation of subsidiary - - (27,680 )
Depreciation of consolidated properties 3,995 9,300 10,341
Tenant improvement write-off due to COVID-19 - - 7,277
Amortization of deferred leasing costs 133 544 730
Distributions to non-controlling interests (735 )(b) (1,350 ) (583 )(c)
Adjustment to loss in investment in
tenancy-in-common for depreciation 1,419
1,408 933
FFO $ 3,870 $ 10,949 $ 8,338
Per Share - Basic $ 0.55 $ 1.56 $ 1.19
Per Share - Diluted $ 0.54 $ 1.56 $ 1.19
(a) As prescribed by NAREIT.
(b) FFO excludes the distribution of proceeds to non-controlling interests in the amount of approximately $19.4
million related to the sale of the Damascus and Rotunda properties. See Note 2 to FREIT's consolidated financial
statements for further details.
(c) FFO excludes the distribution of proceeds to non-controlling interests in the amount of approximately $3.3
million related to the refinancing of the loan for the Westwood Hills property. See Note 5 to FREIT's consolidated
financial statements for further details.
Adjusted Funds From Operations ("AFFO")
FFO $ 3,870 $ 10,949 $ 8,338
Deferred rents (Straight lining) (18 ) 230 397
Capital Improvements - Apartments (1,034 )
(625 ) (347 )
AFFO $ 2,818 $ 10,554 $ 8,388
Per Share - Basic and Diluted $ 0.40 $ 1.50 $ 1.20
Weighted Average Shares Outstanding:
Basic 7,055 7,019 6,992
Diluted 7,132 7,022 6,994
FFO and AFFO do not represent cash generated from operating activities in
accordance with GAAP, and therefore should not be considered a substitute for
net income as a measure of results of operations or for cash flow from
operations as a measure of liquidity. Additionally, the application and
calculation of FFO and AFFO by certain other REITs may vary materially from that
of FREIT, and therefore FREIT's FFO and AFFO may not be directly comparable
to
those of other REITs.
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DISTRIBUTIONS TO STOCKHOLDERS
Since its inception in 1961, FREIT has elected to be treated as a REIT for
federal income tax purposes. In order to qualify as a REIT, FREIT must satisfy a
number of highly technical and complex operational requirements of the Internal
Revenue Code, including a requirement that FREIT must distribute to its
stockholders at least 90% of its REIT taxable income. Although cash used to make
distributions reduces amounts available for capital investment, FREIT generally
intends to distribute not less than the minimum of REIT taxable income necessary
to satisfy the applicable REIT requirement as set forth in the Internal Revenue
Code. With respect to the Jobs and Growth Tax Relief Reconciliation Act of 2003,
the reduction of the tax rate on dividends does not apply to FREIT dividends
other than capital gains dividends, which are subject to capital gains rates.
FREIT's policy is to pass on at least 90% of its ordinary taxable income to
stockholders. FREIT's taxable income is untaxed at the FREIT level to the extent
distributed to stockholders. FREIT's dividends of ordinary taxable income will
be taxed as ordinary income to its stockholders and FREIT's capital gains
dividends will be taxed as capital gains to its stockholders. FREIT's Board
evaluates the dividend to be declared/paid (if any) on a quarterly basis.
The following tables list the quarterly dividends declared for the three most
recent fiscal years and the dividends as a percentage of taxable income for
those periods.
Fiscal Years Ended October 31,
2022 2021 2020
First Quarter $ 0.10 $ 0.05 $ -
Second Quarter $ 0.10 $ 0.05 $ -
Third Quarter $ - $ 0.05 $ -
Fourth Quarter $ 9.00 $ 0.10 $ -
Total For Year $ 9.20 $ 0.25 $ -
(in thousands of dollars) Dividends
Fiscal Per Total Ordinary Capital Gain Taxable as a % of
Year Share Dividends Income-Tax Basis Income-Tax Basis Income Taxable Income
2022 $ 9.20 $ 65,163 $ - * $ 45,307 * $ 45,307 * 143.8%
2021 $ 0.25 $ 1,755 $ 1,900 $ - $ 1,900 92.4%
2020 $ - $ - $ - $ - $ - 0.0%
*Estimated
INFLATION
Inflation can impact the financial performance of FREIT in various ways.
FREIT's commercial tenant leases normally provide that the tenants bear all or a
portion of most operating expenses, which can reduce the impact of inflationary
increases on FREIT. Apartment leases are generally for a one-year term, which
may allow FREIT to seek increased rents as leases renew or when new tenants are
obtained, subject to prevailing market conditions.
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