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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY - Quarter Report: 2005 July (Form 10-Q)


SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly period ended July 31, 2005

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________________ to _________________________.

Commission File No.: 2-27018

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY
(Exact name of registrant as specified in its charter)

New Jersey
(State or other jurisdiction of
incorporation or organization) 		22-1697095
(I.R.S. Employer
Identification No.)

505 Main Street, P.O. Box 667, Hackensack, New Jersey
(Address of principal executive offices) 		07602
(Zip Code)

Registrant’s telephone number, including area code 201-488-6400


—————————————————————————————————————————————————————————
Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes o No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

x Yes o No

As of September 8, 2005 there were 6,449,152 shares of beneficial interest issued and outstanding.


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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY

INDEX

Page
Part I: Financial Information        
     
             Item 1: Unaudited Condensed Consolidated Financial Statements    
     
                          a.) Condensed Consolidated Balance Sheets as at July 31, 2005    
                               and October 31, 2004;       3  
     
                          b.) Condensed Consolidated Statements of Income, Comprehensive    
                                Income and Undistributed Earnings for the Nine and Three Months Ended    
                                July 31, 2005 and 2004;       4  
     
                          c.) Condensed Consolidated Statements of Cash Flows for the Nine    
                               Months Ended July 31, 2005 and 2004;       5  
     
                          d.) Notes to Condensed Consolidated Financial Statements       6  
     
              Item 2: Management’s Discussion and Analysis of Financial Condition and Results    
                              of Operations       12  
     
              Item 3: Quantitative and Qualitative Disclosures About Market Risk       21  
     
              Item 4: Controls and Procedures       21  
     
Part II: Other Information       21  
     
              Item 6: Exhibits    


Page 3

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

July 31,
2005
October 31,
2004
(In Thousands of Dollars)
ASSETS            
Real estate, at cost, net of accumulated depreciation     $ 190,517   $ 160,357  
Cash and cash equivalents       7,619     18,843  
Tenants’ security accounts       1,797     1,777  
Sundry receivables       4,402     3,102  
Secured notes receivable       1,658  
Prepaid expenses and other assets       4,341     3,580  
Deferred charges, net       3,740     2,916  
Interest rate swap contract       49  
Totals     $ 214,123   $ 190,575  
     
LIABILITIES AND SHAREHOLDERS’ EQUITY    
Liabilities:    
          Mortgages payable     $ 167,223   $ 148,244  
          Accounts payable and accrued expenses       4,683     3,068  
          Dividends payable       1,612     3,212  
          Tenants’ security deposits       2,415     2,210  
          Deferred revenue       24     247  
          Interest rate swap contract             160  
Total liabilities       175,957     157,141  
     
Minority interest       7,784     2,267  
     
Commitments and contingencies    
     
Shareholders’ equity:    
          Shares of beneficial interest without par value:    
             8,000,000 shares authorized;    
               6,449,152 and 6,423,152 shares issued    
               and outstanding       20,889     20,694  
          Undistributed earnings       9,444     10,633  
          Accumulated other comprehensive income (loss)       49     (160 )
                              Total shareholders’ equity       30,382     31,167  
     
Totals     $ 214,123   $ 190,575  

See Notes to Consolidated Financial Statements.

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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME AND
UNDISTRIBUTED EARNINGS
NINE AND THREE MONTHS ENDED JULY 31, 2005 AND 2004

Nine Months Ended
Three Months Ended
July 31,
July 31,
2005 2004 2005 2004
(In Thousands Of Dollars, Except Per Share Amounts)
                INCOME                    
Revenue:    
    Rental income     $ 21,408   $ 18,857     7,180     7,020  
    Reimbursements       2,980     2,954     1,110     887  
    Sundry income       133     127     38     62  
        Totals       24,521     21,938     8,328     7,969  
Expenses:    
    Operating expenses (a)       5,502     4,683     1,947     1,669  
    Management fees       1,089     901     376     348  
    Real estate taxes       3,510     3,145     1,199     1,117  
    Depreciation       3,138     2,702     1,053     1,122  
    Minority interest       493     312     161     90  
        Totals       13,732     11,743     4,736     4,346  
Operating income       10,789     10,195     3,592     3,623  
     
Investment income       173     127     54     38  
Interest expense including amortization    
  of deferred financing costs       (7,327 )   (6,577 )   (2,420 )   (2,445 )
        Income from continuing operations       3,635     3,745     1,226     1,216  
Discontinued operations:    
    Income from discontinued operations       —     607     —     159  
    Gain on disposal       —     12,754     —     12,754  
    Minority interest in discontinued operations        —     (3,340 )   —     (3,228 )
Income from discontinued operations       —     10,021     —     9,685  
                Net income     $ 3,635   $ 13,766   $ 1,226   $ 10,901  
Basic earnings per share:    
    Continuing operations     $ 0.57   $ 0.59   $ 0.19   $ 0.19  
    Discontinued operations       —     1.57     —     1.51  
        Net income     $ 0.57   $ 2.16   $ 0.19   $ 1.70  
Diluted earnings per share:    
    Continuing operations     $ 0.54   $ 0.56   $ 0.18   $ 0.18  
    Discontinued operations       —     1.51     —     1.44  
        Net income     $ 0.54   $ 2.07   $ 0.18   $ 1.62  
Weighted average shares outstanding:    
   Basic       6,430     6,367     6,436     6,423  
   Diluted       6,750     6,633     6,870     6,748  
     
                COMPREHENSIVE INCOME    
Net Income     $ 3,635   $ 13,766   $ 1,226   $ 10,901  
Other comprehensive income:    
    Unrealized gain on interest    
        rate swap contract       209     108     45     35  
Comprehensive income     $ 3,844   $ 13,874   $ 1,271   $ 10,936  
                UNDISTRIBUTED EARNINGS    
Balance, beginning of period     $ 10,633   $ 2,487   $ 9,830   $ 2,783  
Net income       3,635     13,766     1,226     10,901  
Less dividends       (4,824 )   (3,854 )   (1,612 )   (1,285 )
Balance, end of period     $ 9,444   $ 12,399   $ 9,444   $ 12,399  
Dividends per share     $ 0.75   $ 0.60   $ 0.25   $ 0.20  

(a) See Note 4

See Notes to Consolidated Financial Statements.

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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2005 AND 2004

2005
2004
(In Thousands of Dollars)
Operating activities:            
     Net income     $ 3,635   $ 13,766  
     Adjustments to reconcile net income to net cash provided by    
     operating activities (including discontinued operations):    
           Depreciation       3,138     2,702  
           Amortization       259     266  
           Deferred revenue       (223 )   (188 )
           Minority interest       493     3,652  
         Gain on disposal of discontinued operations             (12,754 )
          Changes in operating assets and liabilities:    
                 Tenants’ security accounts       (20 )   (432 )
                 Sundry receivables, prepaid expenses and other assets       (3,144 )   1,184  
                 Accounts payable and accrued expenses       1,615     86  
                 Tenants’ security deposits       205     403  
                        Net cash provided by operating activities       5,958     8,685  
Investing activities:    
     Capital expenditures       (2,408 )   (1,485 )
     Proceeds from disposal of discontinued operations             15,238  
     Acquisition of real estate       (8,390 )(a)   (16,003 )(b)
                   Net cash used in investing activities       (10,798 )   (2,250 )
Financing activities:    
     Repayment of mortgages       (3,521 )   (1,312 )
     Proceeds from notes and mortgage financing             4,542  
     Dividends paid       (6,424 )   (4,936 )
     Proceeds from exercise of stock options       195     840  
     Distribution to minority interest       (558 )   (649 )
     Contribution by minority interest       5,582        
     Secured loans to minority interest       (1,658 )      
              Net cash used in financing activities       (6,384 )   (1,515 )
Net increase (decrease) in cash and cash equivalents       (11,224 )   4,920  
Cash and cash equivalents, beginning of period       18,843     14,437  
Cash and cash equivalents, end of period     $ 7,619   $ 19,357  
     
Supplemental disclosure of cash flow data:    
     Interest paid     $ 7,200   $ 6,433  
     Income taxes paid     $ 28   $ 23  
Supplemental schedule of non cash financing activities:    
     Dividends declared but not paid     $ 1,612   $ 1,285  

  (a) In July 2005, Grande Rotunda, LLC, a 60% owned affiliate of FREIT, completed the acquisition of The Rotunda, a 119,000 square foot office and retail building in Baltimore, MD. The acquisition cost of approximately $30,890,000, was paid for in part with the proceeds of a $22,500,000 acquisition loan.

  (b) In April 2004, S And A Commercial Associates LP, a subsidiary of FREIT, completed the acquisition of a 269 unit high rise apartment building in Hackensack, NJ for approximately $45,586,000, in part with the proceeds of a $29,583,000 mortgage loan.

See Notes to Consolidated Financial Statements.

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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Basis of presentation:

The accompanying condensed consolidated financial statements have been prepared without audit, in accordance with accounting principles generally accepted in the United States of America for interim financial statements and pursuant to the rules of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements have been omitted. It is the opinion of management that all adjustments considered necessary for a fair presentation have been included, and that all such adjustments are of a normal recurring nature.

The consolidated results of operations for the nine and three months ended July 31, 2005 are not necessarily indicative of the results to be expected for the full year. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in FREIT’s Annual Report on Form 10-K for the year ended October 31, 2004.

Reclassification:

Certain accounts in the 2004 financial statements have been reclassified to conform to the current presentation.

Note 2 - Earnings per share:

FREIT has presented “basic” and “diluted” earnings per share in the accompanying condensed consolidated statements of income in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share” (“SFAS 128”). Basic earnings per share is calculated by dividing net income by the weighted average number of shares outstanding during each period. The calculation of diluted earnings per share is similar to that of basic earnings per share, except that the denominator is increased to include the number of additional shares that would have been outstanding if all potentially dilutive shares, such as those issuable upon the exercise of stock options and warrants, were issued during the period.

In computing diluted earnings per share for each of the nine and three month periods ended July 31, 2005 and 2004, the assumed exercise of all of FREIT’s outstanding stock options, adjusted for application of the treasury stock method, would have increased the weighted average number of shares outstanding as shown in the table below. All shares and per share amounts have been restated for the two-for-one stock split which became effective March 31, 2004.

Nine Months Ended
July 31,
Three Months Ended
July 31,
2005
2004
2005
2004
      Basic weighted average                    
           shares outstanding       6,429,652     6,367,152     6,436,152     6,423,152  
     
      Shares arising from assumed    
           exercise of stock options       320,217     266,257     433,920     324,682  
     
Dilutive weighted average shares
           outstanding       6,749,869     6,633,409     6,870,072     6,747,834  

Basic and diluted earnings per share, based on the weighted average number of shares outstanding during each period are comprised of ordinary income.


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Note 3- Equity incentive plan:

All references to the amount of stock options granted, option price, fair value, or shares exercised have been adjusted to reflect the March 31, 2004 two-for-one stock split. On September 10, 1998, the Board of Trustees approved FREIT’s Equity Incentive Plan (the “Plan”) which was ratified by FREIT’s shareholders on April 7, 1999, whereby up to 920,000 of FREIT’s shares of beneficial interest may be granted to key personnel in the form of stock options, restricted share awards and other share-based awards.

Upon ratification of the Plan on April 7,1999, FREIT issued 754,000 stock options (adjusted for stock splits) which it had previously granted to key personnel on September 10, 1998. The fair value of the options on the date of grant was $7.50 per share (adjusted for stock splits). On February 24, 2004 and July 27, 2005 options to purchase 112,000 shares and 26,000 shares respectively, were exercised at $7.50 per share. The remaining options for 544,000 shares are all outstanding at July 31, 2005, and are exercisable through September 2008.

In the opinion of management, if compensation costs for the stock options granted in 1999 had been determined based on the fair value of the options at the grant date under the provisions of SFAS 123 using the Black-Scholes option pricing model, FREIT’s pro forma net income and pro forma basic net income per share arising from such computation would not have differed materially from the corresponding historical amounts.

Note 4- Segment information:

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”, established standards for reporting financial information about operating segments in interim and annual financial reports and provides for a “management approach” in identifying the reportable segments.

FREIT has determined that it has two reportable segments: commercial properties and residential properties. These reportable segments offer different products, have different types of customers, and are managed separately because each requires different operating strategies and management expertise. The commercial segment contains eight separate properties and the residential segment contains nine properties. The accounting policies of the segments are the same as those described in Note 1 in FREIT’s Annual Report on Form 10-K.

The chief operating decision-making group of FREIT’s commercial segment, residential segment and corporate/other is comprised of the Board of Trustees.

FREIT assesses and measures segment operating results based on net operating income (“NOI”). 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, and financing costs. NOI is not a measure of operating results or cash flows from operating activities as measured by accounting principles generally accepted in the United States of America, and is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity.

Real estate rental revenue, operating expenses, NOI and recurring capital improvements for the reportable segments are summarized below and reconciled to consolidated net income for the nine and three months ended July 31, 2005 and 2004. Asset information is not reported since FREIT does not use this measure to assess performance.


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Nine Months Ended
July 31, 		Three Months Ended
July 31,
2005
2004
2005
2004
(in thousands of dollars)
      Real estate revenue:                    
           Commercial (a)     $ 12,657   $ 12,603   $ 4,367   $ 4,032  
           Residential       11,630     9,099     3,882     3,856  
                      Totals       24,287     21,702     8,249     7,888  
      Real estate operating expenses:    
           Commercial       4,211     4,220     1,431     1,289  
           Residential       5,158     3,968     1,794     1,637  
                      Totals       9,369     8,188     3,225     2,926  
      Net operating income:    
           Commercial (a)       8,446     8,383     2,936     2,743  
           Residential       6,472     5,131     2,088     2,219  
                      Totals     $ 14,918   $ 13,514   $ 5,024   $ 4,962  
     
      Recurring capital improvements:    
           Residential     $ 650   $ 646   $ 221   $ 444  
     
      Reconciliation to consolidated    
        net income:    
           Segment NOI     $ 14,918   $ 13,514   $ 5,024   $ 4,962  
           Deferred rents - straight-lining       227     235     77     80  
           Net investment income       173     127     54     38  
           General and administrative expenses       (602 )   (540 )   (172 )   (207 )
           Sarbanes-Oxley Act Compliance (b)       (123 )         (123 )
           Depreciation       (3,138 )   (2,702 )   (1,053 )   (1,122 )
           Financing costs       (7,327 )   (6,577 )   (2,420 )   (2,445 )
           Minority interest in earnings of subsidiaries       (493 )   (312 )   (161 )   (90 )
     
             Income from continuing operations       3,635     3,745     1,226     1,216  
      Discontinued operations             10,021           9,685  
                   Net income     $ 3,635   $ 13,766   $ 1,226   $ 10,901  

(a)

A Tenant in FREIT’s Westridge Square shopping center and FREIT have entered into a lease termination agreement whereby Tenant paid FREIT a lump sum payment of approximately $1.8 million ($750,000 as a rent termination payment for past and future rent payments and $1,035,000 for repairing and refurbishing space vacated by Tenant) to terminate the lease. The mortgage lender agreed to the termination agreement and has entered into an escrow agreement with FREIT whereby the entire lump sum payment made by the Tenant has been deposited in an interest bearing escrow account held for the benefit of the mortgage lender. Up to $750,000 will be disbursed to FREIT (a) in monthly installments of $31,595 over approximately twenty four (24) months, or (b) the balance of the un-disbursed $750,000 will be disbursed to FREIT once the mortgage lender is provided with a Certificate of Occupancy (“C of O”) covering all of the space vacated by the Tenant. The balance of the lease termination payment of approximately $1 million representing a Tenant Improvement (“TI”) Reserve, will be disbursed to FREIT in $250,000 increments as



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comparable amounts of TI’s are incurred, or in full at the earlier of when a C of O is obtained and the space vacated by the Tenant leased and re-occupied, or when the mortgage loan has been re-paid. Approximately $300,000, representing the difference between the $750,000 rent termination payment and rents already accrued, was included in revenue for the first quarter of fiscal 2004.


(b)

Accounting costs required in complying with Section 404 of the Sarbanes-Oxley Act.


Note 5 - Acquisitions and Discontinued Operations:

On June 22, 2004, S And A closed on its contract for the sale of the Olney Town Center (“OTC”) in Olney, Maryland. The sale price for the property was $28.2 million. The property was acquired in April 2000 for approximately $15.5 million. S And A utilized part of the selling price to repay the approximate $11 million first mortgage on the property. The operations of OTC are classified as Discontinued Operations. For financial statement proposes, S And A recognized a gain of approximately $12.8 million from the sale.

On April 16, 2004, S And A closed on the purchase of The Pierre apartments. The Pierre is a 269-unit luxury high-rise apartment building located in Hackensack, N.J. The contract purchase price for The Pierre was approximately $44 million. This amount, together with estimated transaction costs of approximately $2 million, resulted in total acquisition costs of approximately $46 million. The acquisition costs were financed in part by a mortgage loan in the approximate amount of $30 million and the balance of approximately $16 million in cash. FREIT provided 75% of the cash required with the balance of approximately $4 million provided by the 25% minority owners of S And A.

The net proceeds from the OTC sale after the repayment of the first mortgage repaid FREIT and the 25% minority owners for their cash advances made to acquire The Pierre.

S And A structured the sale of OTC and the purchase of The Pierre in a manner that would qualify as a like kind exchange of real estate pursuant to Section 1031 of the Internal Revenue Code, and has resulted in a deferral for income tax purposes of the realization of gain on the sale of OTC. Since it is the intention of FREIT to continue to qualify as a real estate investment trust, deferred tax would be minimal.

The acquisition price of The Pierre, including closing costs, was approximately $46 million. Based on a detailed appraisal of the property, the purchase price was allocated as follows: approximately $38 million (82.2%) was allocated to the building and other improvements and approximately $8 million (17.8%) was allocated towards land. Value attributable to leases was considered immaterial due to their short-term nature.

In accordance with its investment policy, on April 29, 2005, FREIT allowed the 25% minority owners in S And A to make an approximate $1.9 million capital contribution into S And A. As a result of this capital contribution, the minority owners have increased their ownership position to 35% effective with the additional capital contribution.

On July 19, 2005 FREIT’s 60% owned affiliate, Grande Rotunda, LLC, completed the acquisition of The Rotunda, a mixed-use property in Baltimore, Maryland. The Rotunda site is approximately 11.5 acres and is in close proximity to John Hopkins University. Its current configuration contains about 119,000 sq. ft. of office space, primarily in the four-story main building, and 97,000 sq. ft. of retail space on the lower level of the main building. A Giant Supermarket anchors the retail space.

The acquisition cost was approximately $31 million (inclusive of transaction costs), which was financed in part from an acquisition loan in the amount of $22.5 million, and the balance in cash. The acquisition mortgage loan bears interest at 150 basis points over LIBOR and has an initial term of three (3) years which makes the loan repayment date July 19, 2008. FREIT contributed 60% of the cash required, with the balance contributed by its joint venture partner, Rotunda 100, LLC, whose equity investors are


Page 10

principally employees of Hekemian & Co., Inc. (“Hekemian”). Hekemian is the managing agent for FREIT’s other properties. In order to incentivize the employees of Hekemian to identify and provide real estate investment opportunities for FREIT, FREIT has agreed to advance, only to the employees of Hekemian, up to 50% of the amount of the equity capital required to be contributed by them to Rotunda 100, LLC, for this transaction. FREIT has advanced $1.7 million to the Hekemian employees (certain of whom are members of the family of FREIT’s Chairman of the Board), and these loans will bear a floating rate of interest payable quarterly and will be secured by the Hekemian employees’ membership equity interest in Rotunda 100, LLC.

The acquisition price of The Rotunda has been preliminarily allocated as follows: $25.4 million (82.3%) to the building and $5.6 million (17.7%) to the land. The purchase price allocation is based on estimates of fair values of the property at the acquisition date, with minimal value currently being assigned to the leases. These allocated values are subject to change as more data becomes available and the fair market value of the property and leases can be more accurately determined. It is FREIT’s policy that initial valuations are finalized, in accordance with the guidelines outlined in SFAS No. 141 and SFAS No. 142, no later than six (6) months from the acquisition date.

The following unaudited pro forma information shows the results of operations for the nine months and three months ended July 31, 2005 and 2004 for FREIT and its Subsidiaries as though The Pierre and The Rotunda had been acquired at the beginning of fiscal 2004:

Nine Months Ended
July 31, 		Three Months Ended
July 31,
2005
2004
2005
2004
(thousands, except per share amounts)
     
      Revenues     $ 27,196   $ 27,344   $ 9,118   $ 8,956  
      Net expenses       (23,449 )    (23,445 )    (7,840 )    (7,751 ) 
      Minority interest       (341 )    (242 )    (117 )    (50 ) 
      Income before discontinued operations       3,406     3,657     1,161     1,155  
      Discontinued operations       —     10,021     —     9,685  
      Net Income     $ 3,406   $ 13,678   $ 1,161   $ 10,840  
     
      Basic Earnings Per Share:    
          Continuing operations     $ 0.53   $ 0.57   $ 0.18   $ 0.18  
          Discontinued operations       —     1.57     —     1.51  
              Net Income     $ 0.53   $ 2.14   $ 0.18   $ 1.69  
     
      Diluted Earnings Per Share:    
          Continuing operations     $ 0.50   $ 0.55   $ 0.17   $ 0.17  
          Discontinued operations       —     1.51     —     1.44  
              Net Income     $ 0.50   $ 2.06   $ 0.17   $ 1.61  

The unaudited pro forma results include adjustments for depreciation based on the purchase price and increased interest expense based on the mortgage loans placed on the properties at the acquisition date.

The unaudited pro forma results of operations set forth above are not necessarily indicative of the results that would have occurred had the acquisition been made at the beginning of fiscal 2004 or of future results of operations of FREIT’s combined properties.

Note 6 - Credit line:

On February 4, 2005, FREIT replaced its expired $14 million line of credit with an $18 million line of credit. The line of credit is for three years but can be cancelled by the bank, at its will, at each anniversary date.


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Draws against the credit line can be used for general corporate purposes, for property acquisitions, construction activities, and letters of credit. Draws against the credit line are secured by mortgages on FREIT’s Franklin Crossing Shopping Center, Franklin Lakes, NJ, retail space in Glen Rock, NJ, Lakewood Apartments, Lakewood, NJ, and Grandview Apartments, Hasbrouck Heights, NJ. Interest rates on draws will be set at the time of each draw for 30, 60, or 90-day periods, based on our choice of the prime rate or at 175 basis points over the 30, 60, or 90-day LIBOR rates at the time of the draws.

FREIT has utilized the credit line for the issuance of a $2 million Letter of Credit in connection with its construction activities.

Note 7 - Subsequent Event:

On September 1, 2005, FREIT’s Board of Trustees authorized an investor group comprised principally of Hekemian employees to contribute sufficient capital to Damascus Centre, LLC to acquire a 30% equity interest in this company which owns the Damascus Shopping Center in Damascus, Maryland. The investment, to be based on the fair market value of the shopping center, will reduce FREIT’s equity interest to 70%. FREIT has agreed to advance, only to employees of Hekemian, up to 50% of the amount of the equity capital required to be contributed by them. These advances will be in the form of secured loans that will bear interest that will float at 255 basis points over LIBOR, in effect from time-to-time.

*    *

Back To Index


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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 unaudited condensed consolidated financial statements of FREIT (including related notes thereto) appearing elsewhere in this Form 10-Q, and the consolidated financial statements included in FREIT’s most recently filed Form 10-K. Certain statements in this discussion may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect FREIT’s current expectations regarding future results of operations, economic performance, financial condition and achievements of FREIT, and do not relate strictly to historical or current facts. FREIT has tried, wherever possible, to identify these forward-looking statements by using words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” or words of similar meaning.
 
Although FREIT believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties, which may cause the actual results to differ materially from those projected. Such factors include, but are not limited to, the following: general economic and business conditions, which will, among other things, affect demand for rental space, the availability of prospective tenants, lease rents and the availability of financing; adverse changes in FREIT’s real estate markets, including, among other things, competition with other real estate owners, risks of real estate development and acquisitions; governmental actions and initiatives; and environmental/safety requirements.


Overview

FREIT is an equity real estate investment trust (“REIT”) that owns a portfolio of residential apartment and commercial properties. Our revenues consist primarily of fixed rental income from our residential and commercial properties and additional rent in the form of expense reimbursements derived from our income producing commercial properties. We also receive income from our 40% owned Affiliate, Westwood Hills, LLC which owns a residential apartment property and from our 40% owned affiliate Wayne PSC, LLC that owns the Preakness Shopping Center. Our policy has been to acquire real property for long-term investment.

Effects of recent accounting pronouncements:

In December 2003, the FASB issued revised FIN 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51.” (“FIN 46R”). FIN 46R requires the consolidation of an entity in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity (variable interest entities, or “VIEs”). Currently, entities are generally consolidated by an enterprise when it has a controlling financial interest through ownership or a majority voting interest in the entity. FIN 46R is applicable for financial statements of public entities that have interests in VIEs or potential VIEs referred to as special-purpose entities for periods ending after December 31, 2003. Applications by public entities for all other types of entities are required in financial statements for periods ending after March 15, 2004.

In accordance with the definition of related parties as defined in paragraph 16 of FIN 46R and the guidance in paragraph 4h, it is the belief of the management of FREIT that FIN 46R is applicable to all of FREIT’s majority and minority owned affiliates.

In December 2004, the FASB issued SFAS No.123 (R) “Accounting for Stock-Based Compensation.” SFAS 123 (R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123 (R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS 123 (R), only certain pro forma disclosures of fair value were required. SFAS 123 (R) shall be effective for FREIT as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. The adoption of this new accounting pronouncement is not expected to have a material impact on FREIT’s consolidated financial statements.


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SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

Pursuant to the SEC disclosure guidance for “Critical Accounting Policies,” the SEC defines Critical Accounting Policies as those that require the application of Management’s most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, the preparation of which takes into account estimates based on judgments and assumptions that affect certain amounts and disclosures. Accordingly, actual results could differ from these estimates. The accounting policies and estimates used, which are outlined in Note 1 to our Consolidated Financial Statements included in our annual report on Form 10-K for the year ended October 31, 2004, have been applied consistently as at July 31, 2005 and October 31, 2004, and for the nine and three months ended July 31, 2005 and 2004. 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 collectibility. If we incorrectly determine the collectibility of revenue, our net income and assets could be overstated.

Real Estate: Real estate is carried at cost, net of accumulated depreciation. As at July 31, 2005, FREIT’s carrying amount of its real estate, net of depreciation, is $190.5 million. Maintenance and repairs are charged to operations as incurred. Depreciation requires an estimate by management of the useful life of each property and improvement as well as an allocation of the costs associated with a property to its various components. If FREIT does not allocate these costs appropriately or incorrectly estimates the useful lives of its real estate, depreciation expense may be misstated.

When we acquire real estate assets, we assess the fair value of the acquired assets (in accordance with Statements of Financial Accounting Standards (“SFAS”) Nos. 141 and 142) and allocate the purchase price to the asset’s components - land, building, leases, etc. - based on these assessments. FREIT assesses fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information, or independent appraisals. Initial valuation assessments are subject to change until such information is finalized no later than six months from the acquisition date.

Valuation of Long-Lived Assets: We periodically assess the carrying value of long-lived assets whenever we determine that events or changes in circumstances indicate that their carrying amount 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.

In October 2001, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 requires the reporting of discontinued operations to include components of an entity that have either been disposed of or are classified as held for sale. FREIT has adopted SFAS No. 144. During 2004 FREIT sold its Olney, MD property. FREIT has reclassified the operations of this property as Discontinued Operations for fiscal year 2004. The adoption of SFAS No. 144 did not have an impact on net income, but only impacted the presentation of this property within the consolidated statements of income.

Overview

We believe that income from continuing operations, which excludes the operations of Only Town Center (“OTC”), is the most significant element of net income. Accordingly, all references and comparisons refer to income from continuing operations unless otherwise stated.

All references to per share amounts are on a diluted basis unless otherwise indicated and have been restated for the March 31, 2004 two-for-one stock split.


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Results of Operations:

Nine and three months ended July 31, 2005 and 2004

Revenues for the nine months ended July 31, 2005 (“Current Nine Months”) increased 11.8% to $24,521,000 compared to $21,938,000 for the nine months ended July 31, 2004 (“Prior Year’s Nine Months”). Revenues for the three months ended July 31, 2005 (“Current Quarter”) increased 4.5% to $8,328,000 from $7,969,000 for the three months ended July 31, 2004 (“Prior Year’s Quarter”). The increases in revenues from the prior periods are wholly attributable to the operations at The Pierre that was acquired in April 2004 (see chart below).

Income from continuing operations declined 2.9% to $3,635,000 for the Current Nine Months from $3,745,000 for the Prior Year’s Nine Months. For the Current Quarter income from continuing operations increased slightly to $1,226,000 from $1,216,000 for the Prior Year’s Quarter.

In June 2004 FREIT’s subsidiary, S And A, sold the OTC. This sale resulted in a gain for financial statement purposes of approximately $12.8 million, which was reported during the third quarter of fiscal 2004. The operations of OTC, less the share attributable to the minority interest, have been classified as income from Discontinued Operations for the Prior Year’s nine and three months ended July 31, 2004.

The consolidated results of operations for the nine and three months ended July 31, 2005 are not necessarily indicative of the results to be expected for the full year.

SEGMENT INFORMATION

The following table sets forth comparative operating data for FREIT’s real estate segments from continuing operations:


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Commercial
Nine Months Ended
Three Months Ended
July 31,
Increase (Decrease)
July 31,
Increase (Decrease)
2005 2004 $ % 2005 2004 $ %
(in thousands)
(in thousands)
Rental revenues:                                    
   Same Properties     $ 12,546   $ 12,603   $ (57 )   -0.5 % $ 4,256   $ 4,032   $ 224     5.6 %
   New Properties       111     —     111           111     —     111        
      Total Revenues       12,657     12,603     54     0.4 %   4,367     4,032     335     8.3 %
     
Operating expenses    
   Same Properties       4,176     4,220     (44 )   -1.0 %   1,396     1,289     107     8.3 %
   New Properties       35           35           35     —     35        
      Total Expenses       4,211     4,220     (9 )   -0.2 %   1,431     1,289     142     11.0 %
     
Net operating income     $ 8,446   $ 8,383   $ 63     0.8 % $ 2,936   $ 2,743   $ 193     7.0 %
Average    
Occupancy %       92.6 %   91.8 %         0.8 %   92.4 %   94.3 %         -1.9 %

Residential
Nine Months Ended
Three Months Ended
July 31,
Increase (Decrease)
July 31,
Increase (Decrease)
2005 2004 $ % 2005 2004 $ %
(in thousands)
(in thousands)
Rental Revenues:                                    
   Same properties     $ 7,552   $ 7,478   $ 74     1.0 % $ 2,516   $ 2,515   $ 1     0.0 %
   New properties       4,078     1,621     2,457     151.6 %   1,366     1,341     25     2 %
      Total Revenues       11,630     9,099   $ 2,531     27.8 %   3,882     3,856   $ 26     0.7 %
     
Operating expenses    
   Same properties       3,109     3,261     (152 )   -4.7 %   988     1,049     (61 )   -5.8 %
   New properties       2,049     707     1,342     189.8 %   806     588     218     37.1 %
      Total Expenses       5,158     3,968     1,190     30.0 %   1,794     1,637     157     9.6 %
     
Net operating income     $ 6,472   $ 5,131   $ 1,341     26.1 % $ 2,088   $ 2,219   $ (131 )   -5.9 %
Average    
Occupancy %       93.4 %   94.5 %         -1.1 %   90.6 %   95.0 %         -4.4 %

Nine Months Ended
Three Months Ended
July 31,
July 31,
2005
2004
2005
2004
Reconciliation to                    
consolidated net income:    
Segment NOI:    
    Commercial     $ 8,446   $ 8,383   $ 2,936   $ 2,743  
    Residential       6,472     5,131     2,088     2,219  
        Total       14,918     13,514     5,024     4,962  
    Deferred rents       227     235     77     80  
    Net investment income       173     127     54     38  
    Gen’l and admin. Exp       (602 )   (540 )   (172 )   (207 )
    SOX 404 compliance (a)       (123 )         (123 )
    Depreciation       (3,138 )   (2,702 )   (1,053 )   (1,122 )
    Financing costs       (7,327 )   (6,577 )   (2,420 )   (2,445 )
    Minority interest       (493 )   (312 )   (161 )   (90 )
        Net income from    
        continuing operations       3,635     3,745     1,226     1,216  
    Discontinued operations       —     10,021     —     9,685  
Net income     $ 3,635   $ 13,766   $ 1,226   $ 10,901  

(a)

See Note 4- Segment information, and below - General And Administrative Expenses.


The above table details the comparative NOI for FREIT’s Commercial and Residential Segments, and reconciles the combined NOI to consolidated net income. 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, and financing costs. FREIT assesses and measures segment operating results based on NOI. NOI is not a measure of operating results or cash flow as measured by generally accepted accounting principles, and is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity.


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COMMERCIAL SEGMENT

FREIT’s commercial properties for continuing operations consist of eight properties (including the acquisition of The Rotunda on July 19, 2005) totaling approximately 1,147,000 sq. ft. of retail space and 119,000 sq. ft. of office space. Seven are multi-tenanted retail centers and one is a single tenanted store. In addition, FREIT has leased land and receives rental income from a tenant who has built and operates a bank branch on land FREIT owns in Rockaway, NJ.

As indicated in the above table revenues from our same properties declined .5% and NOI is down .1% for the Current Nine Months compared to the Prior Year’s Nine Months. The decline was caused by one time adjustment to commercial tenant’s reimbursable charge backs resulting in reduced revenues and income. Revenue and net operating income for the Prior Year’s Nine Months includes a one-time item of $308,000 representing the gain from a lease termination payment made by a former tenant located at FREIT’s Westridge Square shopping center. (See Note 4-”Segment information”, to the financial statements.)

For the same properties Current Quarter revenues and NOI increased 5.6% and 4.3%, respectively. The increases are attributable to higher expense reimbursement received during the Current Quarter compared to Prior Year’s Quarter.

ACQUISITION

On July 19, 2005 FREIT’s 60% owned affiliate, Grande Rotunda, LLC closed on the purchase of The Rotunda, a mixed-use property in Baltimore, MD. See Note 5- Acquisitions and Discontinued Operations. The operations of The Rotunda have been included in operations for the period from acquisition to July 31, 2005.

ASSET SALE

On June 22, 2004, S And A closed on its contract for the sale of the OTC in Olney, Maryland. The sale price for the property was $28.2 million. The property was acquired in April 2000 for approximately $15.5 million. During the third quarter of fiscal 2004 FREIT recognized a gain of approximately $12.8 million from the sale. The operations of OTC have been classified as Discontinued Operations.

RESIDENTIAL SEGMENT

FREIT operates nine (9) multi-family apartment communities totaling 986 apartment units. The NOI of our residential properties is summarized in the above table.

On April 16, 2004, S And A closed on the purchase of The Pierre apartments. The Pierre is a 269-unit high-rise apartment building located in Hackensack, N.J. The contract purchase price for The Pierre was approximately $44 million. This amount, together with estimated transaction costs of approximately $2 million, resulted in total acquisition costs of approximately $46.0 million. The acquisition costs were financed in part by a mortgage loan in the approximate amount of $30 million and the balance of approximately $16 million in cash.

During the Current Nine Months NOI from Same Properties (properties operated since the start of fiscal 2004) increased 5.4% or $226,000. This increase resulted from a modest increase (1%) in revenues and decreases in operating expenses (4.7%) during the Current Nine Months. Average occupancy for Same Properties decreased slightly to 94.1% for the Current Nine Months from 95.1% for the Prior Year’s Nine Months. The decrease in occupancy was offset by slightly higher rent collections and reduced occupancy, resulting in an increase in NOI. Average occupancy at The Pierre, the 269 unit high-rise apartment house in Hackensack, NJ, for the Current Nine Months was 91.6%. As apartments at The Pierre turnover, they are being refurbished. While we have experienced a spike in vacancies during the last fiscal quarter, we continue to be optimistic that the rental housing demand will continue to improve throughout the balance of this fiscal year.


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Our residential revenue is principally composed of monthly apartment rental income. Total rental income is a factor of occupancy and monthly apartment rents. A 1% decline in annual average occupancy, or a 1% decline in average rents, results in an annual revenue decline of approximately $165,000 and $144,000 respectively.

DEPRECIATION

Depreciation expense increased approximately 16% ($436,000) during the Current Nine Months and decreased .6% ($69,000) during the Current Quarter compared to the prior reported periods, respectively, over the Prior Year’s Nine Months and Prior Year’s Quarter. The increase was principally attributable to the acquisition of The Pierre in April 2004.

FINANCING COSTS

Financing Costs (as detailed in the table below) for the Current Nine Month period increased $750,000 (11.4%) to $7,327,000 from $6,577,000 for the Prior Year’s Nine Months. The increase is principally attributable to the increased financing costs on The Pierre property ($939,000), which was acquired in April 2004, and onThe Rotunda ($44,000), which was acquired on July 19, 2005, and the pre-payment fee paid the mortgage holder on the Damascus property when the $2.3 million mortgage on the property was prepaid.

Nine Months Ended
July 31,
Three Months Ended
July 31,
2005
2004
2005
2004
(thousands or dollars)
      Fixed rate Mortgages                    
          1st Mortgages    
              Existing     $ 5,199   $ 5,353   $ 1,715   $ 1,771  
              Prepaid       46     170     —     55  
              New (1)       1,418     479     500     408  
          2nd Mortgages    
              Existing       359     366     119     122  
              New (1)       44           19     —  
      Other       67     65     26     45  
              7,133     6,433     2,379     2,401  
      Amortization of    
          Mortgage Costs       127     144     41     44  
      Prepayment Fee       67           —     —  
     
      Total Financing Costs From    
           Continuing Operations     $ 7,327   $ 6,577   $ 2,420   $ 2,445  

(1)

Mortgages not in place at beginning of fiscal 2004.


GENERAL AND ADMINISTRATIVE EXPENSES

For the Current Nine Months and Current Quarter, General and Administrative Expenses increased $185,000 (34%) to $725,000 and $88,000 (42.5%) to $295,000, respectively. The principal reason for the increases was the Sarbanes-Oxley Act accounting compliance costs aggregating $123,000 during the Current Nine Months and Current Quarter. These costs, expected to reach approximately $200,000 - $225,000 in fiscal 2005, will for the most part, not be on-going. However, overall on-going accounting costs will be higher than experienced historically to comply with the Sarbanes-Oxley Act.


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FUNDS FROM OPERATIONS (“FFO”)

FFO is considered by many as a standard measurement of a REIT’s performance. We compute FFO as follows (in thousands of dollars):

Nine Months Ended
Three Months Ended
July 31,
July 31,
2005
2004
2005
2004
     
Net income     $ 3,635   $ 13,766   $ 1,226   $ 10,901  
Depreciation       3,138     2,702     1,053     1,122  
Amortization of deferred mortgage costs       127     144     41     44  
Mortgage prepayment penalty       67           —     —  
Deferred rents - straight-lining       (224 )   (235 )   (74 )   (66 )
Capital improvements - Apartments       (650 )   (646 )   (221 )   (444 )
Discontinued operations             (10,021 )   —     (9,685 )
Minority interests:    
     Equity in earnings of affiliates       493     312     161     90  
     Distributions to minority interest       (558 )   (649 )   (271 )   (239 )
            Funds From Operations     $ 6,028   $ 5,373   $ 1,915   $ 1,723  

FFO does not represent cash generated from operating activities in accordance with accounting principles generally accepted in the United States of America, 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 by certain other REITs may vary materially from that of FREIT’s, and therefore FREIT’s FFO and the FFO of other REITs may not be directly comparable.

LIQUIDITY AND CAPITAL RESOURCES

Our financial condition remains strong. Net Cash Provided By Operating Activities was $6 million for the Current Nine Months compared to $8.7 million for the Prior Year’s Nine Months (reflecting the Olney sale). We expect that cash provided by operating activities will be adequate to cover mandatory debt service payments, recurring capital improvements and dividends necessary to retain qualification as a REIT (90% of taxable income).

As at July 31, 2005, we had cash and cash equivalents totaling $7.6 million compared to $18.8 million at October 31, 2004, and $14.3 million at April 30, 2005. During the Current Nine Month period we used approximately $2.3 million of our cash reserves to prepay the 9.25% mortgage on the Damascus property, $5.1 million for the acquisition of The Rotunda, and approximately $2.4 million on development and construction activities, and capital improvements.

Credit Line:

On February 4, 2005, FREIT replaced its expired $14 million line of credit with an $18 million line of credit. The line of credit is for three years but can be cancelled by the bank, at its will, at each anniversary date. Draws against the credit line can be used for general corporate purposes, for property acquisitions, construction activities, and letters of credit (See below). Draws against the credit line are secured by mortgages on FREIT’s Franklin Crossing Shopping Center, Franklin Lakes, NJ, retail space in Glen Rock, NJ, Lakewood Apartments, Lakewood, NJ, and Grandview Apartments, Hasbrouck Heights, NJ. Interest rates on


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draws will be set at the time of each draw for 30, 60, or 90-day periods, based on our choice of the prime rate or at 175 basis points over the 30, 60, or 90-day LIBOR rates at the time of the draws.

We’ve started the construction of 129 apartment rental units in Rockaway, NJ. The total capital required for this project is estimated at $17.7 million (exclusive of the value of the land). Through July 31, 2005 approximately $1.1 million has been expended. FREIT has received a $20.7 million financing commitment from an institutional lender to provide construction financing that will be converted into a permanent mortgage loan when construction is completed. The loan will bear interests as follows: during the construction loan period at 140 basis points over LIBOR on all construction advances, and when the loan is converted to a permanent loan, interest to be fixed at 5.37% over the 15 year life of the permanent loan. This loan is expected to close during September 2005.

During January 2005 we utilized our credit line for the issuance of a $2 million Letter of Credit for the benefit of the Township of Rockaway to secure our obligations to the Township in connection with this construction project. The Letter of Credit guarantees FREIT’s completion of off-site improvements. We expect construction to be completed in eighteen months with initial occupancy estimated to begin during early 2006.

It is FREIT’s intention to redevelop and expand its Damascus Shopping Center. The total capital requirement for this project is estimated at $13 million, which will be financed, in part, from construction and mortgage financing and, in part, from funds available in our institutional money market investments.

At July 31, 2005, FREIT’s aggregate outstanding mortgage debt was $167.2 million and bears a weighted average interest rate of 6.2%, and an average life of approximately 7.1 years. FREIT’s fixed rate mortgages are subject to amortization schedules that are longer than the term of the mortgages. As such, balloon payments (unpaid principal amounts at mortgage due date) for all mortgage debt will be required as follows:

Fiscal Year
$ Millions
 
      2007     $ 15.7  
      2008     $ 28.4  
      2010     $ 12.3  
      2013     $ 8.0  
      2014     $ 26.1  
      2016     $ 24.6  
      2019     $ 28.3  

The following table shows the estimated fair value and carrying value of our long-term debt at July 31, 2005 and October 31, 2004:

July 31, October 31,
2005
2004
(In Millions)
    Fair Value   $172.8   $158.1  
    Carrying Value   $167.2   $148.2  

Fair values are estimated based on market interest rates at July 31, 2005 and October 31, 2004 and on discounted cash flow analysis. Changes in assumptions or estimation methods may significantly affect these fair value estimates.

FREIT expects to re-finance the individual mortgages with new mortgages when their terms expire. To this extent we have exposure to interest rate risk on our fixed rate debt obligations. If interest rates, at the time any


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individual mortgage note is due, are higher than the current fixed interest rate, higher debt service may be required, and/or re-financing proceeds may be less than the amount of mortgage debt being retired. For example, at July 31, 2005 a 1% interest rate increase would reduce the fair value of our debt by $5.8 million, and a 1% decrease would increase the fair value by $6.2 million.

We believe that the values of our properties will be adequate to command re-financing proceeds equal to, or higher, than the mortgage debt to be re-financed. We continually review our debt levels to determine if additional debt can prudently be utilized for property acquisition additions to our real estate portfolio that will increase income and cash flow to shareholders.

Interest rate swap contract: To reduce interest rate volatility, FREIT uses “pay fixed, receive floating” interest rate swaps to convert floating interest rates to fixed interest rates over the terms of certain loans. We enter into these swap contracts with a counterparty that is usually a high-quality commercial bank.

In essence, we agree to pay our counterparty a fixed rate of interest on a dollar amount of notional principal (which corresponds to our mortgage debt) over a term equal to the terms of the mortgage note. Our Counterparty, in return, agrees to pay us a short-term rate of interest - generally LIBOR - on that same notional amount over the same term as our mortgage note.

FASB 133 requires us to mark-to-market fixed pay interest rate swaps. As the floating interest rate varies from time-to-time over the term of the contract, the value of the contract will change upward or downward. If the floating rate is higher than the fixed rate, the value of the contract goes up and there is a gain and an asset. If the floating rate is less than the fixed rate, there is a loss and a liability. These gains or losses will not affect our income statement. Changes in the fair value of these swap contracts will be reported in earnings of other comprehensive income and appear in the equity section of our balance sheet. This gain or loss represents the economic consequence of liquidating our fixed rate swap contracts and replacing them with like-duration funding at current market rates, something we would likely never do.

FREIT had a variable interest rate mortgage securing its Patchogue, NY property. To reduce interest rate fluctuations FREIT entered into an interest rate swap contract. This rate swap contract effectively converted variable interest rate payments to fixed interest rate payments. The contract was initially based on a notional amount of approximately $6,769,000 ($6,384,000 at July 31, 2005). FREIT has the following derivative-related risks with its swap contract: 1) early termination risk, and 2) Counterparty credit risk.

Early Termination Risk: If FREIT wants to terminate its swap contract before maturity, it would be bought out or terminated at market value; i.e., the difference in the present value of the anticipated net cash flows from each of the swap’s parties. If current variable interest rates are significantly below FREIT’s fixed interest rate payments, this could be costly. Conversely, if interest rates rise above FREIT’s fixed interest payments and FREIT wished early termination, FREIT would realize a gain on termination. At July 31, 2005, FREIT’s swap contract was in-the-money. If FREIT had terminated its contract at that date it would have realized a gain of about $49,000. This amount has been included as an asset in FREIT’s balance sheet as at July 31, 2005, and the change (gain or loss) between reporting periods included in comprehensive income.

Counterparty Credit Risk: Each party to a swap contract bears the risk that its Counterparty will default on its obligation to make a periodic payment. FREIT reduces this risk by entering swap contracts only with major financial institutions that are experienced market makers in the derivatives market.

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Page 21

INFLATION

Inflation can impact the financial performance of FREIT in various ways. Our retail 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 normally for a one-year term, which may allow us to seek increased rents as leases renew or when new tenants are obtained.

Item 3: Quantitative And Qualitative Disclosures About Market Risk

See “Liquidity and Capital Resources” above.

Item 4: Controls and Procedures

As at the end of the period covered by this quarterly report on Form 10-Q, we carried out an evaluation of the effectiveness of the design and operation of FREIT’s disclosure controls and procedures. This evaluation was carried out under the supervision and with participation of FREIT’s management, including FREIT’s Chairman and Chief Executive Officer and Chief Financial Officer, who concluded that FREIT’s disclosure controls and procedures are effective. There has been no change in FREIT’s internal control over financial reporting that occurred during FREIT’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, FREIT’s internal control over financial reporting.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in FREIT’s reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in FREIT’s reports filed under the Exchange Act is accumulated and communicated to management, including FREIT’s Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.

Part II Other Information

          None

Item 6. Exhibits

          None

Exhibit Index

           Exhibit 31.1 Section 302 Certification of Chief Executive Officer

           Exhibit 31.2 Section 302 Certification of Chief Financial Officer

           Exhibit 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350

           Exhibit 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350

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Page 22

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FIRST REAL ESTATE INVESTMENT
TRUST OF NEW JERSEY
(Registrant)

Date: September 9, 2005

/s/ Robert S. Hekemian
——————————————
        (Signature)
Robert S. Hekemian
Chairman of the Board and Chief Executive
Officer


/s/ Donald W. Barney
——————————————
        (Signature)
Donald W. Barney
President, Treasurer and Chief Financial Officer
(Principal Financial/Accounting Officer)