FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC.
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 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. These and certain other uncertainties, factors and
risks, including those risk factors set forth and further described in Part I,
Item 1A entitled "Risk Factors" of our Annual Report on Form 10-K for the fiscal
year ended October 31, 2022 , and other risks described in our subsequent filings
with the SEC , may cause our 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; risks
of real estate development and acquisitions; and public health crises, epidemics
and pandemics. 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 northern New Jersey and New York .
The economic and financial environment: As of January 2023 , the annual inflation
rate is at 6.4%, which is primarily being driven by soaring food prices and
energy costs, labor shortages and supply disruptions, while the U.S.
unemployment rate decreased to 3.4%. Though inflation still remains at a high
level, it is showing signs of slowing down as the inflation rate has come down
from a 40-year high of 9.1% in June 2022 . The Federal Reserve continues to raise
interest rates in an effort to lower inflation. However, 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) has continued to increase across the portfolio.
Additionally, the rate of increase on renewals for existing tenants has
continued to be robust, but could begin to soften in the current year. 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. Certain recent refinancings and loan modifications/extensions have been at higher interest rates and for shorter terms.
EffectiveFebruary 1, 2023 , FREIT entered into a loan extension and modification agreement withValley National Bank on its loan secured by theWestwood Plaza shopping center inWestwood, New Jersey with a then outstanding balance of approximately$16,864,361 . Under the terms and conditions of this loan extension and modification, the maturity date of the loan will be extended for a term of one (1) year fromFebruary 1, 2023 toFebruary 1, 2024 with the option of FREIT to extend for one additional year from the maturity date, subject to certain provisions of the loan agreement. The loan will be payable based on monthly
installments
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of approximately
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 . OnMarch 1, 2023 ,Westwood Hills, LLC exercised its right, pursuant to the loan agreement, to extend the term of its loan, for an additional six (6) months to a new maturity date ofOctober 1, 2023 on the same terms and conditions as stated in the loan agreement. As ofJanuary 31, 2023 ,$25,000,000 of this loan was drawn and outstanding and the interest rate was 8.37%. 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 quarterly report on Form 10-Q.
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 included in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2022 , have been applied consistently as ofJanuary 31, 2023 , and for the three months endedJanuary 31, 2023 and 2022. 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 receivable 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 FREIT believes 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 FREIT's condensed consolidated financial statements for recently issued accounting standards. Index Page 20 RESULTS OF OPERATIONS Real estate revenue for the three months endedJanuary 31, 2023 ("Current Quarter ") decreased 34.5% to$6,979,000 compared to$10,649,000 for the three months endedJanuary 31, 2022 ("Prior Year's Quarter"). The decrease in revenue for theCurrent Quarter was primarily attributable to theMaryland Properties sold in the Prior Year's Quarter. Net income attributable to common equity ("net income-common equity") for theCurrent Quarter was$419,000 ($0.06 per share basic and diluted) compared to$45,777,000 ($6.51 per share basic and$6.45 per share diluted) for the Prior Year's Quarter.
The schedule below provides a detailed analysis of the major changes that
impacted net income-common equity for the three months ended
NON-GAAP NET INCOME COMPONENTS Three Months
Ended
January 31,
2023 2022 Change
(In Thousands of Dollars)
Income from real estate operations:
Commercial properties $ 979 $ 1,626 $ (647 )
Residential properties 2,613 3,697 (1,084 )
Total income from real estate operations 3,592 5,323
(1,731 )
Financing costs:
Fixed rate mortgages (1,211 ) (1,342 ) 131
Floating rate mortgages (518 ) (952 ) 434Interest rate swap contracts breakage fee - (213
) 213 Other - corporate interest (26 ) (58 ) 32 Mortgage cost amortization (121 ) (363 ) 242 Total financing costs (1,876 ) (2,928 ) 1,052 Investment income 189 26 163 General & administrative expenses: Accounting fees (135 ) (138 ) 3 Legal and professional fees (225 ) (713 ) 488 Directors fees (269 ) (273 ) 4 Stock compensation expense (5 ) (5 ) - Corporate expenses (193 ) (198 ) 5
Total general & administrative expenses (827 ) (1,327
) 500
Depreciation (722 ) (1,820 ) 1,098 Loss on investment in tenancy-in-common (67 ) (124 ) 57 Adjusted net income (loss) 289 (850
) 1,139
Net (loss) gain on sale of
(70,246 )
Net income 46 69,153(69,107 )
Net loss (income) attributable to noncontrolling interests in subsidiaries 373 (23,376
) 23,749
Net income attributable to common equity
The condensed consolidated results of operations for theCurrent Quarter are not necessarily indicative of the results to be expected for the full year or any other period. The table above includes income from real estate operations, which is a non-GAAP financial measure and is not a measure of operating results or cash flow as measured by GAAP, and is not necessarily indicative of cash available to fund cash needs. Adjusted net income (loss) for theCurrent Quarter was adjusted net income of$289,000 ($0.04 per share basic and diluted) compared to adjusted net loss of ($850,000 ) (($0.12 ) per share basic and diluted) for the Prior Year's Quarter. 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 (loss) gain on sale ofMaryland Properties . The increase in adjusted net income for theCurrent Quarter was primarily driven by the following: (a) a decrease in General & Administrative expenses ("G&A") of approximately$500,000 primarily driven by a decline in legal costs attributed to the legal proceeding between FREIT and certain of its affiliates andSinatra Properties, LLC of approximately$411,000 and a decrease in Index Page 21 legal costs incurred in the Prior Year's Quarter of approximately$77,000 related to the sale of theMaryland Properties ; (b) an increase in adjusted net income of approximately$444,000 (with a consolidated impact to FREIT of approximately$257,000 ) attributed to theMaryland Properties sold; (c) an increase in investment income of approximately$163,000 resulting from higher interest rates in theCurrent Quarter ; (d) a decrease in snow removal costs at the commercial properties, excluding theMaryland Properties sold in the Prior Year's Quarter, of approximately$93,000 (with a consolidated impact to FREIT of approximately$46,000 ) due to a milder winter compared to the Prior Year's Quarter; (e) a decrease in depreciation, excluding theMaryland Properties sold in the Prior Year's Quarter, of approximately$72,000 (with a consolidated impact to FREIT of approximately$24,000 ) primarily attributed to the write-off of a tenant improvement at theWayne Preakness Shopping Center in the Prior Year's Quarter; and (f) a decrease in loss on investment in tenancy-in-common of approximately$57,000 ; offset by (g) an increase in interest expense of approximately$193,000 (with a consolidated impact to FREIT of approximately$77,000 ) attributed to the increase in the variable interest rate on theWestwood Hills loan as compared to the Prior Year's Quarter. (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 condensed consolidated
net income-common equity for the Current Quarter as compared to the Prior Year's
Quarter (see below for definition of NOI):
Commercial Residential Combined
Three Months Ended Three Months Ended Three Months Ended
January 31, Increase (Decrease) January 31, Increase (Decrease) January 31,
2023 2022 $ % 2023 2022 $ % 2023 2022
(In Thousands) (In Thousands) (In Thousands)
Rental income $ 1,592 $ 3,576 $ (1,984 ) -55.5% $ 4,658 $ 6,197 $ (1,539 ) -24.8% $ 6,250 $ 9,773
Reimbursements 637 727 (90 ) -12.4% 9 30 (21 ) -70.0% 646 757
Other 25 18 7 38.9% 86 111 (25 ) -22.5% 111 129
Total revenue 2,254 4,321 (2,067 ) -47.8% 4,753 6,338 (1,585 ) -25.0% 7,007 10,659
Operating expenses 1,247 2,685 (1,438 ) -53.6% 2,140 2,641 (501 ) -19.0% 3,387 5,326
Net operating income $ 1,007 $ 1,636 $ (629 ) -38.4% $ 2,613 $ 3,697 $ (1,084 ) -29.3% 3,620 5,333
Average Occupancy % * 66.4% 68.9% -2.5% 96.8% 98.9% -2.1%
Reconciliation to condensed consolidated net income-common equity:
Deferred rents - straight lining (28 ) (10 )
Investment income 189 26
Net (loss) gain on sale of Maryland properties (243 ) 70,003
General and administrative expenses (827 ) (1,327 )
Loss on investment in tenancy-in-common (67 ) (124 )
Depreciation (722 ) (1,820 )
Financing costs (1,876 ) (2,928 )
Net income 46 69,153
Net loss (income) attributable tononcontrolling interests in
subsidiaries 373 (23,376 )
Net income attributable to common equity $ 419 $ 45,777
* 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 the three
months ended January 31, 2022. See Note 7 to FREIT's condensed
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 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 on
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are multi-tenanted retail centers and one is single tenanted on land located in
Rockaway, New Jersey owned by FREIT from which it receives monthly rental income
from a tenant who has built and operates a bank branch on the land. (See Note 7
to FREIT's condensed consolidated financial statements for additional details on
the sale of the Maryland Properties .)
As indicated in the table above under the caption Segment Information, total
revenue and NOI from FREIT's commercial segment for the Current Quarter
decreased by 47.8% and 38.4%, respectively, as compared to the Prior Year's
Quarter. Average occupancy for all commercial properties, excluding the Maryland
Properties sold, for the Current Quarter decreased by 2.5% as compared to the
Prior Year's Quarter.
The decline in revenue for the Current Quarter was primarily attributable to the
Maryland Properties sold in the Prior Year's Quarter. The decrease in NOI for
the Current Quarter was primarily attributable to the following: (a) a decrease
of approximately $778,000 attributed to the Maryland Properties sold in the
Prior Year's Quarter; offset by (b) a decline in snow removal costs of
approximately $93,000 , excluding the Maryland Properties sold, due to a milder
winter compared to the Prior Year's Quarter.
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 the Prior Year's Quarter. Same
property revenue and NOI for the Current Quarter increased by 2.8% and 16.5%,
respectively, as compared to the Prior Year's Quarter. 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 the Current Quarter :
Weighted Weighted Tenant
Average Lease Average Prior Improvement Lease
Number of Lease Area Rate (per Sq. Lease Rate (per % Increase Allowance (per Commissions
RETAIL: Leases (Sq. Ft.) Ft.) Sq. Ft.) (Decrease) Sq. Ft.) (a) (per Sq. Ft.) (a)
Comparable leases (b) - - $ - $ - 0.0% $ - $ -
Non-comparable leases 1 1,384 $ 29.14 N/A N/A $ - $ 1.17
Total leasing activity 1 1,384
(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.
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 7 to
FREIT's condensed consolidated financial statements) and the Pierre Towers
property, which was converted to a TIC (see Note 5 to FREIT's condensed
consolidated financial statements).
As indicated in the table above under the caption Segment Information, total
revenue and NOI from FREIT's residential segment for the Current Quarter
decreased by 25% and 29.3%, respectively, as compared to the Prior Year's
Quarter. Average occupancy for all residential properties, excluding the Icon at
the Rotunda property sold, for the Current Quarter decreased by 2.1% as compared
to the Prior Year's Quarter. The decrease in revenue and NOI for the Current
Quarter was primarily attributable to the Icon at the Rotunda Property sold in
the Prior Year's Quarter.
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 the
Prior Year's Quarter. Same property revenue and NOI for the Current Quarter
increased by 0.8% and 0.9%, respectively, as compared to the Prior Year's
Quarter. 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 the Current Quarter and
the Prior Year's Quarter were $2,080 and $1,958 , 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
Three Months Ended
2023 2022
(In Thousands of Dollars)
Fixed rate mortgages (a):
1st Mortgages
Existing $ 1,211 $ 1,322
New - 20
Variable rate mortgages:
1st Mortgages
Existing 518 952
New - -Interest rate swap contracts breakage fee - 213 Other 26 58 Total financing costs, gross 1,755 2,565 Amortization of mortgage costs 121 363 Total financing costs, net $ 1,876 $ 2,928
(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 financing costs for theCurrent Quarter decreased by approximately$1,052,000 , or 35.9%, compared to the Prior Year's Quarter which was primarily attributable to the following: (a) a decline of approximately$1,304,000 attributed to the pay-down of the loans outstanding on theMaryland Properties sold in the Prior Year's Quarter; offset by (b) an increase of approximately$193,000 primarily attributed to the increase in the variable interest rate on theWestwood Hills loan as compared to the Prior Year's Quarter. (See Note 7 to FREIT's condensed consolidated financial statements for additional details on the sale of theMaryland properties.)
GENERAL AND ADMINISTRATIVE EXPENSES
G&A for theCurrent Quarter was approximately$827,000 compared to$1,327,000 for the Prior Year's Quarter. 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 theCurrent Quarter was primarily driven by a decline in legal costs attributed to the legal proceeding between FREIT and certain of its affiliates andSinatra Properties, LLC .
DEPRECIATION
Depreciation expense for theCurrent Quarter was approximately$722,000 compared to$1,820,000 for the Prior Year's Quarter. The decline in depreciation expense for theCurrent Quarter was primarily attributable the following: (a) a decline of approximately$1,026,000 attributed to theMaryland Properties sold in the Prior Year's Quarter; and (b) a decrease of approximately$72,000 , excluding theMaryland Properties sold in the Prior Year's Quarter, primarily attributed to the write-off of a tenant improvement at theWayne Preakness Shopping Center in the Prior Year's Quarter. (See Note 7 to FREIT's condensed consolidated financial statements for additional details on the sale of theMaryland Properties .)
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was approximately$0.9 million for theCurrent Quarter compared to net cash provided by operating activities of approximately$2.9 million for the Prior Year's Quarter. 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 quarterly report on Form 10-Q. As ofJanuary 31, 2023 , FREIT had cash, cash equivalents and restricted cash totaling$45.6 million , compared to$58.5 million atOctober 31, 2022 . The decrease in cash in theCurrent Quarter was primarily attributable to$11.8 million in net cash used in financing activities,$0.9 million in net cash used in operating activities and$0.4 million in net cash used in investing activities including capital expenditures. The decrease in cash of approximately$13 million in theCurrent Quarter was primarily attributed to the following: (a) dividends paid of approximately$10.7 million ; (b) deferred compensation paid to respective directors of approximately$2.3 million ; (c) a distribution of additional net proceeds received from the sale of the Rotunda Property to the minority interest of approximately$1.6 million ; and (d) a distribution of additional net proceeds received from the sale of the Damascus Property to the minority interest of approximately$0.3 million ; offset by (e) proceeds received from the exercise of stock Index Page 24 options inNovember 2022 of approximately$1.2 million . (See Note 7 to FREIT's condensed consolidated financial statements for additional details on the sale of theMaryland properties.) 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 ofJanuary 31, 2023 andOctober 31, 2022 , there was no amount outstanding and$13 million was available under the line of credit. Dividend: After careful consideration of FREIT's projected operating results and cash needs, the FREIT Board of Directors ("Board") declared a dividend of approximately$372,000 ($0.05 per share) in the first quarter of Fiscal 2023 which was paid onMarch 15, 2023 to stockholders of record onMarch 1, 2023 . The Board will continue to evaluate the dividend on a quarterly basis. As ofJanuary 31, 2023 , FREIT's aggregate outstanding mortgage debt was$138.9 million , which bears a weighted average interest rate of 5.22% and an average life of approximately 2.4 years. FREIT's mortgages are subject to amortization schedules that are longer than the terms of the mortgages. As such, balloon payments (unpaid principal amounts at the mortgage due date) for all mortgage debt will be required as follows: Fiscal Year 2023 2024 2025 2026 2027 2028 2029 ($ in millions)$25.0 $33.0 Mortgage "Balloon" Payments (A) (B)$38.9 $0.0 $0.0 $10.5 $26.0 Includes the following: (A) A loan on the Westwood Hills property, which is a residential property located in Westwood, 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 of October 1, 2022 to a new maturity date of April 1, 2023. On March 1, 2023, Westwood Hills, LLC exercised its right, pursuant to the loan agreement, to extend the term of its loan, for an additional six (6) months to a new maturity date of October 1, 2023 on the same terms and conditions as stated in the loan agreement. (See Note 9 to FREIT's condensed consolidated financial statements for additional details.) (B) Effective February 1, 2023, FREIT entered into a loan extension and modification agreement with Valley National Bank on its loan secured by the Westwood Plaza shopping center in Westwood, New Jersey with a then outstanding balance of approximately$16,864,361 . Under the terms and conditions of this loan extension and modification, the loan will be extended for a term of one (1) year from February 1, 2023 to February 1, 2024 with the option of FREIT to extend for one year from the maturity date, subject to certain provisions of the loan agreement. (See Note 16 to FREIT's condensed consolidated financial statements for additional details.)
The following table shows the estimated fair value and net carrying value of
FREIT's long-term debt at
($ in Millions) January 31, 2023 October 31, 2022 Fair Value$133.8 $132.2 Carrying Value, Net$137.8 $138.1 Fair values are estimated based on market interest rates atJanuary 31, 2023 andOctober 31, 2022 and on a discounted cash flow analysis. Changes in assumptions or estimation methods may significantly affect these fair value estimates. The fair value is based on observable inputs (level 2 in the fair value hierarchy as provided by authoritative guidance). 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
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mortgage debt being retired. For example, at January 31, 2023 , a 1% interest
rate increase would reduce the fair value of FREIT's debt by $2.8 million , and a
1% decrease would increase the fair value by $3 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.
Effective February 1, 2023 , FREIT entered into a loan extension and modification
agreement with Valley National Bank on its loan secured by the Westwood Plaza
shopping center in Westwood, New Jersey with a then outstanding balance of
approximately $16,864,361 . Under the terms and conditions of this loan extension
and modification, the maturity date of the loan will be extended for a term of
one (1) year from February 1, 2023 to February 1, 2024 with the option of FREIT
to extend for one additional year from the maturity date, subject to certain
provisions of the loan agreement. The loan will be payable based on monthly
installments of approximately $157,347 based on a fixed rate of interest of
7.5%. Additionally, FREIT funded an interest reserve escrow account ("Escrow")
at closing representing the annualized principal and interest payments for one
(1) year, amounting to approximately $1,888,166 . This Escrow is held at Valley
National Bank and in the event of a default on this loan, the bank shall be
permitted to use the proceeds from the escrow account to make monthly debt
service payments on the loan.
On August 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 in Westwood, New Jersey , for an additional six (6) months from an
initial maturity date of October 1, 2022 to a new maturity date of April 1,
2023 . On March 1, 2023 , Westwood Hills, LLC exercised its right, pursuant to the
loan agreement, to extend the term of its loan, for an additional six (6) months
to a new maturity date of October 1, 2023 on the same terms and conditions as
stated in the loan agreement. As of January 31, 2023 , $25,000,000 of this loan
was drawn and outstanding and the interest rate was 8.37%.
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 and Wayne
PSC properties and currently has a variable interest rate loan secured by its
Regency and Station Place properties. To reduce interest rate fluctuations,
FREIT entered into interest rate swap contracts for each of these loans. These
interest rate swap contracts effectively converted variable interest rate
payments to fixed interest rate payments. The contracts were based on a notional
amount of approximately $16,200,000 ($14,504,000 at January 31, 2023 ) for the
Regency swap and a notional amount of approximately $12,350,000 ($11,695,000 at
January 31, 2023 ) for the Station Place swap. On January 10, 2022 , the property
owned by Damascus Centre was sold and a portion of the proceeds from the sale
was used to pay off the $18.2 million then outstanding balance of the underlying
loan and the corresponding swap breakage fees of approximately $213,000 related
to the early termination of the interest rate swap contracts on this loan which
was included as interest expense on the accompanying condensed consolidated
statement of income for the three months ended January 31, 2022 . (See Note 7 to
FREIT's condensed consolidated financial statements for further details on the
sale of this property.) On June 17, 2022 , Wayne PSC terminated its interest rate
swap contract on its underlying loan held with People's United Bank , which had a
maturity date of October 2026 , for a settlement amount of approximately $1.4
million . People's United Bank held the proceeds from this settlement in escrow
until the underlying loan was paid off in July 2022 . (See Note 9 to FREIT's
condensed consolidated financial statements for further details.)
Interest rate cap contract: To limit exposure on interest rate volatility, FREIT
may use 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.
In accordance with ASU 2017-12, "Targeted Improvements to Accounting for Hedging
Activities to Accounting Standards Codification Topic 815, Derivatives and
Hedging ("ASC 815")", 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 condensed 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 condensed
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 interest rate swap
contracts ("contract"): 1) early termination risk, and 2) counterparty credit
risk.
Index
Page 26
Early Termination Risk: If FREIT wants to terminate its contract before
maturity, it would be bought out or terminated at market value; i.e., the
difference in the present value of the anticipated net cash flows from each of
the contract's parties. If current variable interest rates are significantly
below FREIT's fixed interest rate payments, this could be costly. Conversely, if
interest rates rise above FREIT's fixed interest payments and FREIT elected
early termination, FREIT would realize a gain on termination. At January 31,
2023 , the contracts for Regency and Station Place were in FREIT's favor. If
FREIT had terminated these contracts at that date, it would have realized a gain
of approximately $482,000 for the Regency swap and $477,000 for the Station
Place swap all of which have been included in FREIT's condensed consolidated
balance sheet as at January 31, 2023 . The change in the fair value for the
contract (gain or loss) during such period has been included in comprehensive
(loss) income and for the three months ended January 31, 2023 and 2022, FREIT
recorded an unrealized loss of approximately $450,000 and unrealized gain of
$1,262,000 , respectively, in the condensed consolidated statements of
comprehensive (loss) 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.
Index
Page 27
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:
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