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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY - Quarter Report: 2012 July (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

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

For the Quarterly Period Ended July 31, 2012

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. 000-25043

 

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY
(Exact name of registrant as specified in its charter)
 
New Jersey   22-1697095
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
505 Main Street, Hackensack, New Jersey   07601
(Address of principal executive offices)   (Zip Code)

 

201-488-6400

(Registrant's telephone number, including area code)

 

  

(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. Yes ý  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o Accelerated Filer ý Non-Accelerated Filer o Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o  No ý

As of September 10, 2012, the number of shares of beneficial interest outstanding was 6,942,143

 
 

 

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY

 

 

INDEX

 

 

Part I: Financial Information  
        Page
         
  Item 1: Unaudited Condensed Consolidated Financial Statements  
         
    a.) Condensed Consolidated Balance Sheets as at July 31, 2012 and October 31, 2011; 3
         
    b.) Condensed Consolidated Statements of Income for the Nine and Three Months Ended July 31, 2012 and 2011; 4
         
    c.) Condensed Consolidated Statement of Equity for the Nine Months Ended July 31, 2012; 5
         
    d.) Condensed Consolidated Statements of Cash Flows for the Nine Months Ended July 31, 2012 and 2011; 6
         
    e.) Notes to Condensed Consolidated Financial Statements. 7
         
  Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
         
  Item 3: Quantitative and Qualitative Disclosures About Market Risk 22
         
  Item 4: Controls and Procedures 22
         
         
Part II: Other Information  
         
  Item 1: Legal Proceedings 22
         
  Item 1A: Risk Factors 22
         
  Item 6: Exhibits 22
         
  Signatures   23

 

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Index

 

Part I: Financial Information

 

Item 1: Unaudited Condensed Consolidated Financial Statements

 

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   July 31,   October 31, 
   2012   2011 
   (In Thousands of Dollars) 
ASSETS
           
Real estate, at cost, net of accumulated depreciation  $208,410   $211,393 
Construction in progress   5,590    8,768 
Assets related to property held for sale   555     
Cash and cash equivalents   4,960    6,317 
Tenants' security accounts   1,724    1,860 
Receivables arising from straight-lining of rents   4,261    4,255 
Accounts receivable, net of allowance for doubtful accounts   2,551    1,029 
Secured loans receivable   3,323    3,323 
Prepaid expenses and other assets   3,039    3,501 
Acquired over market leases and in-place lease costs   70    388 
Deferred charges, net   2,138    2,386 
Total Assets  $236,621   $243,220 
           
           
LIABILITIES & EQUITY
           
Liabilities:          
Mortgages payable  $200,916   $203,275 
Deferred trustee compensation plan   6,450    5,667 
Accounts payable and accrued expenses   1,492    4,000 
Liabilities related to property held for sale   2,931     
Dividends payable   2,083    2,083 
Tenants' security deposits   2,398    2,509 
Acquired below market value leases and deferred revenue   1,256    3,036 
Total liabilities   217,526    220,570 
           
Commitments and contingencies          
           
           
Equity:          
Common equity:          
   Shares of beneficial interest without par value:          
        8,000,000 shares authorized; 6,993,152 shares issued   24,969    24,969 
   Treasury stock, at cost: 51,009 shares   (1,135)   (1,135)
   Dividends in excess of net income   (13,319)   (9,984)
Total common equity   10,515    13,850 
Noncontrolling interests in subsidiaries   8,580    8,800 
Total equity   19,095    22,650 
Total Liabilities & Equity  $236,621   $243,220 

 

See Notes to Condensed Consolidated Financial Statements.

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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME  

NINE AND THREE MONTHS ENDED JULY 31, 2012 AND 2011

(Unaudited)

 

   Nine Months Ended   Three Months Ended 
   July 31,   July 31, 
   2012   2011   2012   2011 
   (In Thousands of Dollars, Except Per Share Amounts) 
Revenue:                    
Rental income  $27,755   $27,718   $9,250   $9,252 
Reimbursements   3,926    3,911    1,311    1,323 
Income relating to early lease termination   2,950             
Sundry income   367    387    107    104 
    34,998    32,016    10,668    10,679 
                     
Expenses:                    
Operating expenses   7,814    8,002    2,555    2,461 
Management fees   1,429    1,407    462    469 
Real estate taxes   5,683    4,901    1,942    1,626 
Depreciation   4,600    4,531    1,555    1,528 
Deferred project cost write-off   3,726        2,236     
    23,252    18,841    8,750    6,084 
                     
Operating income   11,746    13,175    1,918    4,595 
                     
Investment income   80    77    25    25 
Interest expense including amortization                    
 of deferred financing costs   (8,663)   (8,572)   (2,957)   (2,860)
Income (loss) from continuing operations   3,163    4,680    (1,014)   1,760 
                     
Income from discontinued operations   275    207    123    74 
Net income (loss)   3,438    4,887    (891)   1,834 
                     
Net (income) loss attributable to noncontrolling                    
  interest in subsidiaries   (525)   (1,043)   668   (329)
Net income (loss) attributable to common equity  $2,913   $3,844   $(223)  $1,505 
                     
Earnings per share - basic:                    
Continuing operations  $0.38   $0.52   $(0.05)  $0.21 
Discontinued operations   0.04    0.03    0.02    0.01 
Net income (loss) attributable to common equity  $0.42   $0.55   $(0.03)  $0.22 
                     
Weighted average shares outstanding-basic   6,942    6,942    6,942    6,942 
                     
                     
Amounts attributable to common equity:                    
Income (loss) from continuing operations  $2,638   $3,637   $(346)  $1,431 
Income from discontinued operations   275    207    123    74 
Net income (loss) attributable to common equity  $2,913   $3,844   $(223)  $1,505 

 

See Notes to Condensed Consolidated Financial Statements.

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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

NINE MONTHS ENDED JULY 31, 2012

(Unaudited)

 

   Common Equity         
   Shares of
Beneficial
Interest
   Treasury
Shares at
Cost
   Dividends in
Excess of Net
Income
   Total
Common
Equity
   Noncontrolling
Interests
   Total Equity 
   (In Thousands of Dollars) 
                         
Balance at October 31, 2011  $24,969   $(1,135)  $(9,984)  $13,850   $8,800   $22,650 
                               
Distributions to noncontrolling interests                      (745)   (745)
                               
Net income             2,913    2,913    525    3,438 
                               
Dividends declared ($0.90 per share)             (6,248)   (6,248)        (6,248)
                               
Balance at July 31, 2012  $24,969   $(1,135)  $(13,319)  $10,515   $8,580   $19,095 

 

See Notes to Condensed Consolidated Financial Statements.

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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED JULY 31, 2012 AND 2011

(Unaudited)

   Nine Months Ended 
   July 31, 
   2012   2011 
   (In Thousands of Dollars) 
Operating activities:          
Net income  $3,438   $4,887 
Adjustments to reconcile net income to net cash provided by          
   operating activities (including discontinued operations):          
 Depreciation   4,626    4,560 
 Amortization   466    435 
 Net amortization of acquired leases   (5)   18 
 Income from early lease termination   (2,950)    
 Deferred project cost write-off   3,726     
 Changes in operating assets and liabilities:          
  Tenants' security accounts   45    59 
  Accounts and straight-line rents receivable,          
       prepaid expenses and other assets   269    565 
  Accounts payable, accrued expenses and deferred          
       trustee compensation   949    973 
  Tenants' security deposits   (20)   (78)
  Deferred revenue   (126)   (281)
Net cash provided by operating activities   10,418    11,138 
Investing activities:          
Capital improvements - existing properties   (1,334)   (940)
Construction and pre-development costs   (3,585)(a)   (1,192)(b)
Net cash used in investing activities   (4,919)   (2,132)
Financing activities:          
Repayment of mortgages   (2,628)   (2,290)
Proceeds from construction loans   2,838    254 
Deferred financing costs   (73)   (40)
Dividends paid   (6,248)   (6,248)
Distributions to noncontrolling interests   (745)   (1,144)
Net cash used in financing activities   (6,856)   (9,468)
Net decrease in cash and cash equivalents   (1,357)   (462)
Cash and cash equivalents, beginning of period   6,317    6,769 
Cash and cash equivalents, end of period  $4,960   $6,307 
           
Supplemental disclosure of cash flow data:          
Interest paid  $7,719   $8,046 
Income taxes paid  $   $2 
Supplemental schedule of non cash activities:          
Investing activities:          
   Accrued capital expenditures, construction costs, pre-development costs and interest  $248   $401 
Financing activities:          
   Dividends declared but not paid  $2,083   $2,083 

 

(a)  Includes $2,256 incurred and accrued in fiscal 2011; paid in fiscal 2012.

(b)  Includes $1,000 incurred and accrued in fiscal 2009; paid in fiscal 2011.

See Notes to Condensed Consolidated Financial Statements.

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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 - Basis of presentation:

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

The consolidated results of operations for the nine and three-month periods ended July 31, 2012 are not necessarily indicative of the results to be expected for the full year or any other period. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report on Form 10-K for the year ended October 31, 2011 of First Real Estate Investment Trust of New Jersey (“FREIT”).

Reclassifications: Certain accounts in the prior periods’ condensed consolidated financial statements and footnotes have been reclassified to conform to the current presentation. (See Note 6.)

 

Note 2 – Recently issued accounting standards:

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-10, “Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate-a Scope Clarification”. The purpose of this update is to resolve the diversity in practice about whether the guidance under FASB Accounting Standards Codification (“ASC”) Subtopic 360-20, “Property, Plant, and Equipment-Real Estate Sales”, applies to a parent that ceases to have a controlling financial interest in a subsidiary, as specified under ASC Subtopic 810-10, “Non-Controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51”, that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. The new guidance is intended to emphasize that accounting for such transactions “is based on their substance rather than their form”, specifically that the parent should only deconsolidate the real estate subsidiary when legal title to the real estate is transferred to the lender and the related nonrecourse debt has been extinguished. The standard takes effect for public companies during the annual and interim periods beginning on or after June 15, 2012. The adoption of this guidance is not expected to have any impact on our financial statements.

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income”, which supersedes the presentation options in ASC Topic 220, “Reporting of Comprehensive Income”. The new standard provides guidance for the presentation of comprehensive income and its components in the financial statements. The new guidance only affects the presentation of comprehensive income, and not the components that must be reported therein. The standard takes effect for public companies effective for fiscal years and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance is not expected to have any impact on our financial statements.

Note 3 - Earnings per share:

Basic earnings per share is calculated by dividing net income (numerator) by the weighted average number of shares outstanding during each period (denominator). The calculation of diluted earnings per share is similar to that of basic earnings per share, except that the denominator is increased to include the number of additional shares that would have been outstanding if all potentially dilutive shares, such as those issuable upon the exercise of stock options and warrants, were issued during the period. Since FREIT does not have any outstanding dilutive securities, only basic earnings per share is presented.

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Index

 

Note 4 - Segment information:

FREIT has determined that it has two reportable segments: commercial properties and residential properties. These reportable segments offer different types of space, have different types of tenants, and are managed separately because each requires different operating strategies and management expertise. The commercial segment contains ten (10) separate properties and the residential segment contains eight (8) 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 for the fiscal year ended October 31, 2011.

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

FREIT assesses and measures segment operating results based on net operating income ("NOI"). NOI, a standard used by real estate professionals, is based on operating revenue and expenses directly associated with the operations of the real estate properties, but excludes deferred rents (straight lining), lease amortization, depreciation, financing costs and other items. NOI is not a measure of operating results or cash flows from operating activities as measured by GAAP, and is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity.

Real estate rental revenue, operating expenses, NOI and recurring capital improvements for the reportable segments are summarized below and reconciled to condensed consolidated net income-common equity for the nine and three-month periods ended July 31, 2012 and 2011. Asset information is not reported since FREIT does not use this measure to assess performance.

 

   Nine Months Ended   Three Months Ended 
   July 31,   July 31, 
   2012   2011   2012   2011 
   (In Thousands)   (In Thousands) 
Real estate rental revenue:                    
Commercial  $17,684   $17,893   $5,853   $5,934 
Residential   14,352    13,979    4,825    4,679 
Total real estate revenue   32,036    31,872    10,678    10,613 
Real estate operating expenses:                    
Commercial   7,239    7,198    2,421    2,246 
Residential   6,407    6,130    2,123    1,917 
Total real estate operating expenses   13,646    13,328    4,544    4,163 
Net operating income:                    
Commercial   10,445    10,695    3,432    3,688 
Residential   7,945    7,849    2,702    2,762 
Total net operating income  $18,390   $18,544   $6,134   $6,450 
                     
Recurring capital improvements-residential  $507   $367   $190   $228 
                     
Reconciliation to consolidated net income:                    
Segment NOI  $18,390   $18,544   $6,134   $6,450 
Deferred rents - straight lining   7    162    (3)   72 
Amortization of acquired leases   5    (18)   (7)   (6)
Investment income   80    77    25    25 
Insurance recovery       207         
General and administrative expenses   (1,280)   (1,189)   (415)   (393)
Depreciation   (4,600)   (4,531)   (1,555)   (1,528)
Deferred project cost write-off, net of                     
   income relating to early lease termination   (776)       (2,236)    
Financing costs   (8,663)   (8,572)   (2,957)   (2,860)
   Income (loss) from continuing operations   3,163    4,680    (1,014)   1,760 
                     
Income from discontinued operations   275    207    123    74 
                     
   Net income (loss)   3,438    4,887    (891)   1,834 
                     
Net (income) loss attributable to noncontrolling interests   (525)   (1,043)   668   (329)
                     
Net income (loss) attributable to common equity  $2,913   $3,844   $(223)  $1,505 

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Note 5 – Planned asset dispositions:

On July 7, 2010, FREIT’s Board of authorized management to pursue a sale of the 256,620 sq. ft. Westridge Square Shopping Center (“Westridge”) located in Frederick, Maryland. The decision to sell the property (acquired in 1992) was based on the Board’s desire to re-deploy the net proceeds or other consideration arising from the sale to real estate assets in other areas of FREIT’s operations. On April 15, 2011, FREIT was notified by Giant of Maryland LLC (“Giant”), the former tenant and operator of the 55,330 sq. ft. Giant Supermarket at Westridge, that it would not extend the term of its lease, which expired on October 31, 2011. As a result, FREIT halted its efforts to sell Westridge and will reconsider its decision to market Westridge for sale when the space is re-leased. On July 27, 2012, FREIT signed a lease agreement with G-Mart Frederick, Inc. (“G-Mart”) for the leasing of a significant portion of the space vacated by Giant (40,000 square feet). FREIT expects to incur leasing costs and tenant improvement costs associated with the lease to G-Mart. We anticipate that G-Mart will begin operating at the center during the 1st calendar quarter of 2013.

On June 3, 2011, FREIT’s Board authorized management to pursue the sale of the Palisades Manor Apartments, in Palisades Park, NJ, the Grandview Apartments in Hasbrouck Heights, NJ, and the Heights Manor Apartments in Spring Lake Heights, NJ. The decision to pursue the sale of these properties was based on the Board’s desire to re-deploy the net proceeds arising from the sale to real estate assets in other areas of FREIT’s operations. As of August 29, 2012, the Heights Manor property was sold (refer to discussion in Note 6 for more details). However, it is still not possible for management to estimate when a sale of the other two properties will occur, and therefore, the Grandview and Palisades Manor properties are classified as held for use as of July 31, 2012.

On May 2, 2012, FREIT’s Board authorized management to pursue the sale of its South Brunswick, NJ property. The decision to sell this property was based on the Board’s desire to re-deploy the net proceeds arising from the sale to real estate assets in other areas of FREIT’s operations. However, it is still not possible for management to estimate when a sale of the South Brunswick property will occur, and therefore, it is classified as held for use as of July 31, 2012. 

Note 6 – Property held for sale & discontinued operations:

In July 2012, FREIT entered into a contract for the sale of the Heights Manor Apartments in Spring Lake Heights, New Jersey, which closed in August 2012. (See Note 10 for a further discussion of the sale.) As the property was under contract for sale as of July 31, 2012, the assets and liabilities of the Heights Manor Apartments have been reclassified to assets related to property held for sale and liabilities related to property held for sale on FREIT’s condensed consolidated balance sheet as of such date. In addition, the operating results of the Heights Manor apartments have been classified as discontinued operations in the income statements for all periods presented. Revenue attributable to discontinued operations was $776,000 and $262,000 for the current nine month and three month periods ended July 31, 2012, respectively. For the prior year’s nine month and three month periods ended July 31, 2011, revenue from discontinued operations was $746,000 and $255,000, respectively.

 

Note 7 - Management agreement, fees and transactions with related party:

Hekemian & Co., Inc. (“Hekemian”) currently manages all the properties owned by FREIT and its affiliates, except for The Rotunda, a mixed-use office and retail facility located in Baltimore, Maryland, which is managed by an independent third party management company. The management agreement with Hekemian, effective November 1, 2001, requires the payment of management fees equal to a percentage of rents collected. Such fees were approximately $1,373,000 and $1,344,000 for the nine-months ended July 31, 2012 and 2011, respectively. For the three-month periods ended July 31, 2012 and 2011, such fees were approximately $446,000 and $449,000, respectively. In addition, the management agreement provides for the payment to Hekemian of leasing commissions, as well as the reimbursement of operating expenses incurred on behalf of FREIT. Such fees amounted to approximately $328,000 and $239,000 for the nine-months ended July 31, 2012 and 2011, respectively, and $94,000 and $83,000 for the three-months ended July 31, 2012 and 2011, respectively. The management agreement expires on October 31, 2013, and is automatically renewed for periods of two years unless either party gives notice of non-renewal.

FREIT also uses the resources of the Hekemian insurance department to secure various insurance coverages for its properties and subsidiaries. Hekemian is paid a commission for these services. Such commissions amounted to approximately $111,000 and $85,000 for the nine-months ended July 31, 2012 and 2011, respectively, and $72,000 and $19,000 for the three-months ended July 31, 2012 and 2011, respectively.

From time to time, FREIT engages Hekemian to provide certain additional services, such as consulting services related to development and financing activities of FREIT. Separate fee arrangements are negotiated between Hekemian and FREIT with respect to such additional services. Such fees paid to Hekemian during the nine-months ended July 31, 2012 and 2011 were $236,000 and $0, respectively. Fees paid in the current nine month period relate to services performed with regard to the Damascus development project.

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Mr. Robert S. Hekemian, Chairman of the Board, Chief Executive Officer and a Trustee of FREIT, is the Chairman of the Board and Chief Executive Officer of Hekemian. Mr. Robert S. Hekemian, Jr, a Trustee of FREIT, is the President of Hekemian. Trustee fee expense (including interest) incurred by FREIT for the nine-months ended July 31, 2012 and 2011 was approximately $406,000 and $368,000, respectively, for Mr. Robert S. Hekemian, and $33,000 and $28,000, respectively, for Mr. Robert S. Hekemian, Jr.

 

Note 8 – Fair value of long-term debt:

The following table shows the estimated fair value and carrying value of FREIT’s long-term debt at July 31, 2012 and October 31, 2011:

 

   July 31,   October 31, 
($ In Millions)  2012   2011 
         
Fair Value  $216.0   $213.9 
           
Carrying Value  $200.9   $203.3 

 

Fair values are estimated based on market interest rates at July 31, 2012 and October 31, 2011 and on discounted cash flow analysis. Changes in assumptions or estimation methods may significantly affect these fair value estimates. The fair value, which is based on observable inputs, has been characterized as level 2 in the fair value hierarchy as provided by authoritative guidance.

 

Note 9 – Giant lease termination; Rotunda project cost write-off:

On February 3, 2012, Grande Rotunda, LLC (“Grande”), a 60% owned affiliate of FREIT, entered into a lease termination agreement (“Agreement”) with Giant of Maryland LLC (“Giant”), the tenant and operator of the 35,994 sq. ft. Giant supermarket at Grande’s Rotunda property located in Baltimore, Maryland. Giant, under the terms of the Agreement, agreed to (i) waive its right to extend the term of the lease through March 31, 2035, (ii) terminate the lease and surrender the premises to Grande no later than the earlier of commencement of the redevelopment of the property or March 31, 2015, and (iii) notwithstanding any earlier termination date, continue to pay monthly fixed rent payments plus its share of common area maintenance charges and taxes for the Rotunda property through March 31, 2015. Grande has agreed (i) not to lease more than 20,000 sq. ft. of any space in the property for use as a food supermarket through March 31, 2035, and (ii) if Grande decides to lease such space for use as a food supermarket, it must first offer the space for the same use under the terms acceptable to Grande, to Giant, which will have thirty days to accept the offer before the space may be leased to a third party. As a result of the Giant lease termination and the terms of the Agreement, Grande will not be required to construct a lower level Giant supermarket as part of the redevelopment project at the Rotunda, which represented a costly component to the project. In addition, the Giant lease contained significant restrictions on Grande’s ability to make modifications to the property. This development clears the way for Grande to move forward with the redevelopment planning for this property. As a result of Giant terminating its lease and vacating its space at the Grande Rotunda shopping center, the results for the nine months ended July 31, 2012, include income of $2.95 million relating to the Giant early lease termination, offset by a $1.49 million deferred project cost write-off relating to a change in the future development plans for the Rotunda shopping center, specifically the impact that the Giant portion of the project had on the design fees incurred to date and included in Construction in Progress (“CIP”). The early lease termination fee is comprised of the net present value of the monthly rent in accordance with the terms of the terminated lease, projected common area maintenance charges and real estate taxes from April 1, 2012 through March 31, 2015. In light of the Giant lease termination and its potential impact on the scope of the development plans for the Rotunda site, management proposed further revisions to the scope of the Rotunda development project. On July 24, 2012, the Board approved the revisions to the scope of the project, thereby further reducing the complexity and projected cost of the project. As a result of the Board’s decision to move forward with the revised development plans, an additional $2.2 million of certain deferred project costs relating to planning and feasibility costs included in CIP were no longer deemed to have any utility, and were written-off in the Current Quarter.

Note 10 – Subsequent events:

On August 29, 2012, FREIT closed on its contract for the sale of the Heights Manor Apartments in Spring Lake Heights, New Jersey and recognized a net gain of approximately $9.5 million from the sale. Since the sale closed subsequent to the close of FREIT’s 3rd Quarter ended July 31, 2012, the sale and related gain will be recognized in FREIT’s financials in the 4th Quarter of this year and will be classified as discontinued operations. In addition, FREIT is required to pay off the related mortgage loan on the Heights Manor property in the amount of approximately $2.8 million from the proceeds of the sale.

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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 First Real Estate Investment Trust of New Jersey’s (“FREIT”) Actual Results to Differ From Those Projected in Forward Looking Statements.
 
Readers of this discussion are advised that the discussion should be read in conjunction with the unaudited condensed consolidated financial statements of FREIT (including related notes thereto) appearing elsewhere in this Form 10-Q, and the consolidated financial statements included in FREIT’s most recently filed Form 10-K. Certain statements in this discussion may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect FREIT’s current expectations regarding future results of operations, economic performance, financial condition and achievements of FREIT, and do not relate strictly to historical or current facts. FREIT has tried, wherever possible, to identify these forward-looking statements by using words such as “believe,”  “expect,” “anticipate,” “intend,” “plan,” “estimate,” or words of similar meaning. 
Although FREIT believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties, which may cause the actual results to differ materially from those projected. Such factors include, but are not limited to the following: general economic and business conditions, which will, among other things, affect demand for rental space, the availability of prospective tenants, lease rents, the financial condition of tenants and the default rate on leases, operating and administrative expenses and the availability of financing; adverse changes in FREIT’s real estate markets, including, among other things, competition with other real estate owners, competition confronted by tenants at FREIT’s commercial properties; governmental actions and initiatives; environmental/safety requirements; and risks of real estate development and acquisitions. The risks with respect to the development of real estate include: increased construction costs, inability to obtain construction financing, or unfavorable terms of financing that may be available, unforeseen construction delays and the failure to complete construction within budget.

 

OVERVIEW

FREIT is an equity real estate investment trust ("REIT") that is self-administered and externally managed. FREIT owns a portfolio of residential apartment and commercial properties. 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. Our properties are primarily located in northern New Jersey and Maryland. We acquire existing properties for investment. We also acquire properties, which we feel have redevelopment potential, and make changes and capital improvements to these properties. We develop and construct properties on our vacant land. Our policy is to acquire and develop real property for long-term investment.

The economic and financial environment: Although the U.S. economy has recovered from the recession, the rate of recovery has been much slower than anticipated. Forecasts for economic growth and job gains over the next year have been adjusted downward, due in large part to the recent turbulence in the US and global markets. While bank earnings and liquidity are on the rebound, the potential of significant future credit losses clouds the lending outlook. Credit availability has improved, but still lags pre-recession levels, hampering business expansion and new development activities.

Residential Properties: Occupancy and rental rates in our areas of operation are on the up swing, reflecting the increasing preference towards rental housing. The speed of recovery at our residential properties will likely mirror job growth and reduced unemployment in our areas of operation.

Commercial Properties: The retail outlook, while still challenged, has shown improvement over the past year, although due to the lag in job growth, consumers are still nervous about their jobs and remain frugal with their discretionary spending. Tenant fall-out and rent reductions are expected to abate. However, re-leasing of vacated space will be challenging and at rates below pre-recession levels.

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Development Projects and Capital Expenditures: We continue to make only those capital expenditures that are absolutely necessary. As of November 2011, the expansion and renovation of the Damascus Center was completed. No date has been determined for the commencement of construction at our Rotunda project.

Debt Financing Availability: The dislocations in the credit markets have caused significant price volatility and liquidity disruptions. High pricing spreads and very conservative debt service ratio requirements have made certain financing unattractive and, in certain instances, unavailable. Additionally, construction financing for large, mixed use projects is virtually unavailable, or too costly. As a result of this difficult financing environment and reduced end user demand (see above), FREIT placed the Rotunda redevelopment activity on hold during the fourth quarter of FREIT’s 2008 fiscal year. Due to Giant vacating its space at the Rotunda property in April 2012, management determined that certain aspects relative to the future redevelopment of the Rotunda property were no longer required, and modified the scope of the project, resulting in a write-off of deferred project costs, relating to planning and feasibility studies, of $1.49 million. In addition, management took this opportunity to revisit the Rotunda redevelopment plans, and as a result, further revisions to the scope of the project were proposed to the Board. On July 24, 2012, the Board approved the revisions to the scope of the Rotunda redevelopment project, thereby further reducing the complexity and projected cost of the project. The Board’s decision to move forward with the revised development plans, resulted in an additional $2.2 million of certain deferred project costs relating to planning and feasibility costs included in CIP were no longer deemed to have any utility, and were written-off in the Current Quarter. FREIT intends to resume the redevelopment of the Rotunda in accordance with the revised plans, upon improvement in the economic and financing climate. To that end, FREIT has had, from time to time, ongoing discussions with potential sources of financing and potential major national and local tenants.

Operating Cash Flow and Dividend Distributions: We expect that cash provided by net operating income will be adequate to cover mandatory debt service payments, necessary capital improvements and dividends necessary to retain qualification as a REIT (90% of taxable income). It is FREIT’s intention to maintain its quarterly dividend at $.30 per share until the economic climate indicates a change is appropriate, but not less than the level required to maintain its REIT status for Federal income tax purposes.

 

SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

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

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, the preparation of which takes into account estimates based on judgments and assumptions that affect certain amounts and disclosures. Accordingly, actual results could differ from these estimates. The accounting policies and estimates used, which are outlined in Note 1 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2011, have been applied consistently as at July 31, 2012 and October 31, 2011, and for the nine and three-months ended July 31, 2012 and 2011. 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.

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.

Reclassifications: Certain accounts in the prior periods’ condensed consolidated financial statements and footnotes have been reclassified to conform to the current presentation. (See Note 6.)

 

Recently issued accounting standards: See Note 2 to the Condensed Consolidated Financial Statements.

 

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RESULTS OF OPERATIONS

Real Estate revenue for the nine months ended July 31, 2012 (“Current Nine Months”), exclusive of income relating to the Giant early lease termination, increased 0.1% to $32,048,000 compared to $32,016,000 for the nine months ended July 31, 2011 (“Prior Nine Months”). Real Estate revenue for the three months ended July 31, 2012 (“Current Quarter”), decreased 0.1% to $10,668,000 compared to $10,679,000 for the three months ended July 31, 2011 (“Prior Year’s Quarter”). On August 29, 2012, FREIT sold its Heights Manor Apartments in Spring Lake Heights, NJ. Since this property was under contract for sale as of the end of the Current Quarter, current accounting guidance requires that the related current and prior year’s operating results of Heights Manor be classified as “Income from discontinued operations” in FREIT’s income statement. (See discussion under Residential Segment for additional information.) Income from continuing operations (net of income attributable to noncontrolling interests) for the Current Nine Months and Current Quarter was $2,638,000 ($0.38 per share basic) and a loss of $(346,000) ($0.05 per share basic), respectively, compared to $3,637,000 ($0.52 per share basic) and $1,431,000 ($0.21 per share basic), respectively, for the prior year’s comparable periods. Net income attributable to common equity (“net income-common equity”) for the Current Nine Months and Current Quarter was $2,913,000 ($0.42 per share basic) and a loss of $(223,000) ($0.03 per share basic), respectively, compared to $3,844,000 ($0.55 per share basic) and $1,505,000 ($0.22 per share basic) for the Prior Nine Months and Prior Year’s Quarter. Included in net income-common equity for the Current Nine Months was the recognition of income relating to the Giant early lease termination, which was more than offset by a write-off of a portion of the deferred project costs relating to revisions to the development plans at the Grande Rotunda shopping center (“Rotunda”). (See discussion under Commercial Segment for additional information.) The schedule below provides a detailed analysis of the major changes that impacted net income-common equity for the nine and three months ended July 31, 2012 and 2011:

   

NET INCOME COMPONENTS        
   Nine Months Ended   Three Months Ended 
   July 31,   July 31, 
   2012   2011   Change   2012   2011   Change 
   (In thousands)   (In thousands) 
Income from real estate operations:                              
   Commercial properties  $10,457   $10,839   $(382)  $3,422   $3,754   $(332)
                               
   Residential properties   7,945    7,849    96    2,702    2,762    (60)
     Total income from real estate operations   18,402    18,688    (286)   6,124    6,516    (392)
                               
Financing costs:                              
Fixed rate mortgages   (7,669)   (7,535)   (134)   (2,623)   (2,513)   (110)
Floating rate - Rotunda & Damascus   (591)   (700)   109    (193)   (228)   35 
Other - Corporate interest   (403)   (337)   (66)   (141)   (119)   (22)
 Total financing costs   (8,663)   (8,572)   (91)   (2,957)   (2,860)   (97)
                               
Investment income   80    77    3    25    25     
                               
Insurance recovery       207    (207)            
                               
General & administrative expenses:                              
   Accounting fees   (368)   (364)   (4)   (114)   (100)   (14)
   Legal & professional fees   (77)   (70)   (7)   (40)   (36)   (4)
   Trustee fees   (417)   (392)   (25)   (140)   (131)   (9)
   Corporate expenses   (418)   (363)   (55)   (121)   (126)   5 
 Total general & administrative expenses   (1,280)   (1,189)   (91)   (415)   (393)   (22)
                               
Depreciation   (4,600)   (4,531)   (69)   (1,555)   (1,528)   (27)
                               
Deferred project cost write-off, net of                              
      income relating to early lease termination   (776)       (776)   (2,236)       (2,236)
   Income (loss) from continuing operations   3,163    4,680    (1,517)   (1,014)   1,760    (2,774)
                               
Income from discontinued operations   275    207    68    123    74    49 
                               
   Net income (loss)   3,438    4,887    (1,449)   (891)   1,834    (2,725)
Net (income) loss attributable to noncontrolling interests                              
    in subsidiaries   (525)   (1,043)   518   668   (329)   997 
                               
   Net Income (loss) attributable to common equity  $2,913   $3,844   $(931)  $(223)  $1,505   $(1,728)

The consolidated results of operations for the Current Nine Months and Current Quarter are not necessarily indicative of the results to be expected for the full year or any other period.

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SEGMENT INFORMATION

The following tables set forth comparative net operating income ("NOI") data for FREIT’s real estate segments and reconcile the NOI to consolidated net income-common equity for the Current Nine Months and Current Quarter, as compared to the prior year’s comparable periods:

 

   Commercial   Residential   Combined 
   Nine Months Ended           Nine Months Ended           Nine Months Ended 
   July 31,   Increase (Decrease)   July 31,   Increase (Decrease)   July 31, 
   2012   2011   $   %   2012   2011   $   %   2012   2011 
   (In thousands)       (In thousands)       (In thousands) 
Rental income  $13,635   $13,842   $(207)   -1.5%  $14,108   $13,732   $376    2.7%  $27,743   $27,574 
Reimbursements   3,926    3,911    15    0.4%                    3,926    3,911 
Other   123    140    (17)   -12.1%   244    247    (3)   -1.2%   367    387 
Total revenue   17,684    17,893    (209)   -1.2%   14,352    13,979    373    2.7%   32,036    31,872 
                                                   
Operating expenses   7,239    7,198    41    0.6%   6,407    6,130    277    4.5%   13,646    13,328 
Net operating income  $10,445   $10,695   $(250)   -2.3%  $7,945   $7,849   $96    1.2%   18,390    18,544 
Average                                                  
Occupancy %   83.9%   89.7%        -5.8%   95.6%   95.1%        0.5%          

             
  Reconciliation to consolidated net income:          
  Deferred rents - straight lining   7    162 
  Amortization of acquired leases   5    (18)
  Investment income   80    77 
  Insurance recovery       207 
  General and administrative expenses   (1,280)   (1,189)
  Depreciation   (4,600)   (4,531)
  Deferred project cost write-off , net of          
     income relating to early lease termination   (776)    
  Financing costs   (8,663)   (8,572)
  Income from continuing operations   3,163    4,680 
  Income from discontinued operations   275    207 
     Net income   3,438    4,887 
  Net income attributable to noncontrolling interests   (525)   (1,043)
     Net income attributable to common equity  $2,913   $3,844 

 

   Commercial   Residential   Combined 
   Three Months Ended           Three Months Ended           Three Months Ended 
   July 31,   Increase (Decrease)   July 31,   Increase (Decrease)   July 31, 
   2012   2011   $   %   2012   2011   $   %   2012   2011 
   (In thousands)       (In thousands)       (In thousands) 
Rental income  $4,503   $4,571   $(68)   -1.5%  $4,757   $4,615   $142    3.1%  $9,260   $9,186 
Reimbursements   1,311    1,323    (12)   -0.9%                    1,311    1,323 
Other   39    40   (1)   -2.5%   68    64    4    6.3%   107    104 
Total revenue   5,853    5,934    (81)   -1.4%   4,825    4,679    146    3.1%   10,678    10,613 
                                                   
Operating expenses   2,421    2,246    175    7.8%   2,123    1,917    206    10.7%   4,544    4,163 
Net operating income  $3,432   $3,688   $(256)   -6.9%  $2,702   $2,762   $(60)   -2.2%   6,134    6,450 
Average                                                  
Occupancy %   81.4%   89.6%        -8.2%   95.9%   96.4%        -0.5%          

 

  Reconciliation to consolidated net income:          
  Deferred rents - straight lining   (3)   72 
  Amortization of acquired leases   (7)   (6)
  Investment income   25    25 
  General and administrative expenses   (415)   (393)
  Depreciation   (1,555)   (1,528)
  Deferred project cost write-off   (2,236)   —  
  Financing costs   (2,957)   (2,860)
       Income (loss) from continuing operations   (1,014)   1,760 
  Income from discontinued operations   123    74 
       Net income (loss)   (891)   1,834 
  Net (income) loss attributable to noncontrolling interests   668  (329)
       Net income (loss) attributable to common equity  $(223)  $1,505 

 

NOI is based on operating revenue and expenses directly associated with the operations of the real estate properties, but excludes deferred rents (straight lining), lease amortization, depreciation, financing costs and other items. 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

The commercial segment contains ten (10) separate properties. Seven are multi-tenanted retail or office centers, and one is a single tenanted store. In addition, FREIT owns land in Rockaway, NJ and Rochelle Park, NJ from which it receives monthly rental income, from tenants who have built and operate bank branches on the land. As indicated in the table above under the caption Segment Information, total revenue from FREIT’s commercial segment for the Current Nine Months and Current Quarter, exclusive of income relating to the Giant of Maryland, LLC (“Giant”) lease termination at the Rotunda, decreased by 1.2% and 1.4%, respectively, as compared to the prior year’s comparable periods. NOI for the Current Nine Months and Current Quarter decreased 2.3% and 6.9%, respectively, as compared to the Prior Nine Months and Prior Year’s Quarter. The primary reasons for the decrease in revenue and NOI for the current year were Giant vacating its space at the Westridge Square shopping center (see discussion below), and higher real estate taxes at the Damascus Center, a portion of which could not be billed back to the tenants, since the center is not fully occupied.

We expect the fragile US recovery to grind along during 2012 and retail sales to continue to show slight improvement. Exclusive of the Giant space at both the Westridge Square and the Rotunda shopping centers (see discussions below), tenant fall-out at our other properties has been minor, as average occupancy rates for the Current Nine Months and Current Quarter decreased 1.6% and 1.9%, respectively, from last year’s comparable periods.

On February 3, 2012, Grande Rotunda, LLC (“Grande”), a 60% owned affiliate of FREIT, entered into a lease termination agreement (“Agreement”) with Giant, the tenant and operator of the 35,994 sq. ft. Giant supermarket at Grande’s property located in Baltimore, Maryland. Giant, under the terms of the Agreement, agreed to (i) waive its right to extend the term of the lease through March 31, 2035, (ii) terminate the lease and surrender the premises to Grande no later than the earlier of commencement of the redevelopment of the property or March 31, 2015, and (iii) notwithstanding any earlier termination date, continue to pay monthly fixed rent payments plus its share of common area maintenance charges and taxes for the Rotunda property through March 31, 2015. Grande has agreed (i) not to lease more than 20,000 sq. ft. of any space in the property for use as a food supermarket through March 31, 2035, and (ii) if Grande decides to lease such space for use as a food supermarket, it must first offer the space for the same use under the terms acceptable to Grande, to Giant, which will have thirty days to accept the offer before the space may be leased to a third party. As a result of the Giant lease termination and the terms of the Agreement, Grande will not be required to construct a lower level Giant supermarket as part of the redevelopment project at the Rotunda, which represented a costly component of the project. In addition, the Giant lease contained significant restrictions on Grande’s ability to make modifications to the property. This development clears the way for Grande to move forward with the redevelopment planning for this property. As a result of Giant terminating its lease and vacating its space at the Grande Rotunda shopping center in April 2012, the results for the Current Nine Months include income of $2.95 million relating to the Giant early lease termination, offset by a $1.49 million deferred project cost write-off relating to a change in development plans for the Rotunda, specifically the write-off of the design fees relating to the Giant portion of the project incurred to date and included in CIP. The early lease termination fee is comprised of the net present value of the monthly rent in accordance with the terms of the terminated lease, projected common area maintenance charges, and real estate taxes from April 1, 2012 through March 31, 2015. In addition, included in the $2.95 million lease termination fee are the write-off of the balances in Below Market Value Lease Acquisition Costs, and In-Place Lease Costs relating to the Giant lease. In light of the Giant lease termination and its potential impact on the scope of the development plans for the Rotunda site, management proposed further revisions to the scope of the Rotunda development project. On July 24, 2012, the Board approved the revisions to the scope of the project, thereby further reducing the complexity and projected cost of the project. As a result of the Board’s decision to move forward with the revised development plans, an additional $2.2 million of certain deferred project costs relating to planning and feasibility costs included in CIP were no longer deemed to have any utility, and were written-off in the Current Quarter.

At Westridge Square, a major tenant, Giant, elected not to extend its lease beyond October 31, 2011, and vacated its space at the center during May 2011. Since Giant vacated its space at Westridge Square, FREIT has been endeavoring to re-lease the space to a new tenant or tenants that would enhance the shopping experience at Westridge Square. However, no rent has been generated from the space since November 1, 2011. This vacancy has adversely affected Westridge Square’s operating results for the current fiscal year, resulting in revenue reductions for the Westridge Square property of 18% for the Current Nine Months, as well as the Current Quarter. The potential impact on FREIT’s per share earnings for Fiscal 2012 is estimated at approximately $0.10 per share assuming the vacant space is not leased for the entire year.

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On July 27, 2012, FREIT signed a lease agreement with G-Mart Frederick, Inc. (“G-Mart”) for a significant portion (40,000 square feet) of the space previously occupied by Giant. G-Mart manages an international grocery store chain, and the operation of a G-Mart International Foods store at Westridge Square is expected to complement other retailers in the center and be a welcome addition to the surrounding neighborhood. FREIT expects to incur leasing costs and tenant improvement costs associated with the lease to G-Mart. We anticipate that G-Mart will begin operating at the center during the 1st calendar quarter of 2013.

On May 2, 2012, FREIT’s Board authorized management to pursue the sale of its South Brunswick, NJ property. The decision to sell this property was based on the Board’s desire to re-deploy the net proceeds arising from the sale to real estate assets in other areas of FREIT’s operations. However, it is still not possible for management to estimate when a sale of the South Brunswick property will occur, and therefore, it is classified as held for use as of July 31, 2012.

Construction related to the expansion and renovation of the Damascus Center was completed in November 2011. We are currently in the negotiation process with potential tenants for the new, currently available space constructed in the final phase (Phase III) of this project. Approximately 80% of the space at the Damascus Center is leased or under letters-of-intent, and 72% of the space is occupied.

 

DEVELOPMENT ACTIVITIES

The modernization and expansion project at the Damascus Center was completed in November 2011. Total construction costs, inclusive of tenant improvement costs, approximated $22.7 million. The building plans incorporated an expansion of retail space from 140,000 sq. ft. to approximately 150,000 sq. ft., anchored by a modern 58,000 sq. ft. Safeway supermarket. Construction was completed in three phases. Phase III construction began in June 2011, and was completed in November 2011. Additional tenant fit-up costs are expected, once the new space is leased and occupied. Total construction costs were funded from a $21.3 million construction loan entered into on February 12, 2008. The construction loan is secured by the shopping center owned by Damascus Centre, LLC. This loan was drawn upon as needed to fund construction costs at the Damascus Center. Because of this expansion, leases for certain tenants were allowed to expire and were not renewed. This has caused occupancy to decline, on a temporary basis, during the construction phase. However, with the completion of each of the three phases of construction, certain tenant leases have been renewed and occupancy is beginning to increase. Approximately 80% of the space at the Damascus Center is leased or under letters-of-intent, and 72% of the space is occupied.

Development plans and studies for the expansion and renovation of our Rotunda property in Baltimore, MD (owned by our 60% owned affiliate Grande Rotunda, LLC) were substantially completed during Fiscal 2008. The Rotunda property, on an 11.5-acre site, currently consists of an office building containing 138,000 sq. ft. of office space and 78,000 sq. ft. of retail space on the lower floor of the main building. The revised building plans incorporate an expansion of approximately 115,000 sq. ft. of retail space, approximately 350 residential rental apartments, and structured parking. As of July 31, 2012, we have incurred approximately $8.0 million for planning and feasibility studies, which have been capitalized in CIP. As a result of Giant vacating its space at the Rotunda property in April 2012, management determined that certain aspects relative to the future redevelopment of the Rotunda property were no longer required, and modified the scope of the project, resulting in a write-off of deferred project costs, relating to planning and feasibility studies, of $1.49 million. In light of the Giant lease termination and its potential impact on the scope of the development plans for the Rotunda site, management proposed further revisions to the scope of the Rotunda development project. On July 24, 2012, the Board approved the revisions to the scope of the project, thereby further reducing the complexity and projected cost of the project. As a result of the Board’s decision to move forward with the revised development plans, an additional $2.2 million of certain planning and feasibility costs included in CIP were no longer deemed to have any utility, and were written-off in the Current Quarter. Due to the difficult economic environment, FREIT placed the Rotunda redevelopment activity on hold during the fourth quarter of Fiscal 2008. The delay notwithstanding, at this time, FREIT currently intends, upon improvement in the economic and financing climate, to resume the redevelopment of the Rotunda in accordance with the revised plans. To that end, FREIT has had, from time to time, ongoing discussions with potential sources of financing and potential major national and local tenants.

 

RESIDENTIAL SEGMENT

FREIT currently operates eight (8) multi-family apartment communities totaling 996 apartment units. As indicated in the table above under the caption Segment Information, total revenue from FREIT’s residential segment for the Current Nine Months and Current Quarter increased by 2.7% and 3.1%, respectively, as compared to the prior year’s comparable periods. The increase in total revenue for the Current Nine Months and Current Quarter is primarily attributable to higher base rental income at many of our residential properties. In addition, occupancy levels for the Current Nine Months increased 0.5% over last year’s comparable period, further contributing to the positive increase in revenue. For the Current Quarter, average occupancy decreased 0.5% as compared to the Prior Year’s Quarter, however, higher base rental income realized during the Current Quarter more than offset the decline in income associated with the slight decrease in occupancy. NOI for the Current Nine Months increased by 1.2%, as compared to the Prior Nine Months. The increase in NOI was primarily due to the increase in rental revenue for the current year. However, for the Current Quarter, NOI decreased by 2.2% primarily attributable to higher real estate taxes for the Current Quarter, which more than offset the positive increase in rental revenue for the Current Quarter.

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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. Monthly average residential rents at the end of the Current Nine Months and the Prior Nine Months were $1,630 and $1,596, 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 $195,000 and $187,000, respectively.

In July 2012, FREIT entered into a contract for the sale of the Heights Manor Apartments in Spring Lake Heights, New Jersey, which closed in August 2012. (See Note 10 for a further discussion on the sale.) As the property was under contract for sale as of July 31, 2012, the assets and liabilities of the Heights Manor Apartments have been reclassified to assets related to property held for sale and liabilities related to property held for sale on FREIT’s condensed consolidated balance sheet as of such date. In addition, the operating results of the Heights Manor apartments have been classified as discontinued operations in the income statements for all periods presented. Revenue attributable to discontinued operations was $776,000 and $262,000 for the current nine month and three month periods ended July 31, 2012, respectively. For the prior year’s nine month and three month periods ended July 31, 2011 revenue from discontinued operations was $746,000 and $255,000, respectively.

FREIT continues to pursue the sale of the Palisades Manor Apartments, in Palisades Park, NJ, and the Grandview Apartments in Hasbrouck Heights, NJ. The decision to pursue the sale of these properties was based on the Board’s desire to re-deploy the net proceeds arising from the sale to real estate assets in other areas of FREIT’s operations. It is not possible for management to estimate when a sale of any of these properties will occur, and therefore, the properties continue to be classified as held for use as of July 31, 2012.

Capital expenditures: Since all of our apartment communities, with the exception of The Boulders, were constructed more than 25 years ago, we tend to spend more in any given year on maintenance and capital improvements than may be spent on newer properties. Major renovation programs (apartment renovations and parking structure restoration) are underway at The Pierre. We have substantially completed modernizing, where required, all apartments and some of the building’s mechanical services. As of July 31, 2012, approximately $5.2 million was expended at The Pierre for these capital improvements, of which $542,000 relates to the Current Nine Months. The remaining apartments will be renovated as they become temporarily vacant at an estimated cost of $1 - $1.5 million. We are also in the planning stages of a major parking structure restoration project at The Pierre, which is expected to be completed within the next 2 years, at an expected cost of approximately $1.5 - $2.5 million. These costs will be financed from operating cash flow and cash reserves.

 

FINANCING COSTS

 

   Nine Months Ended   Three Months Ended 
   July 31,   July 31, 
   2012   2011   2012   2011 
   (In thousands)   (In thousands) 
 Fixed rate mortgages:                    
   1st Mortgages                    
   Existing  $7,286   $7,201   $2,487   $2,403 
   2nd Mortgages                    
   Existing   113    117    37    38 
Variable rate mortgages:                    
   Acquisition loan-Rotunda   518    578    193    188 
   Construction loan-Damascus   73    122        40 
 Other   403    337    141    119 
    8,393    8,355    2,858    2,788 
 Amortization of Mortgage Costs   270    217    99    72 
 Total Financing Costs  $8,663   $8,572   $2,957   $2,860 

 

Total financing costs, before capitalized amounts, for the Current Nine Months increased 1.1%, compared to the prior year’s comparable period. For the Current Quarter, total financing costs increased 3.4% as compared to the Prior Year’s Quarter.

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GENERAL AND ADMINISTRATIVE EXPENSES (“G & A”)

G&A expense for the Current Nine Months and Current Quarter was $1,280,000 and $415,000, respectively, as compared to $1,189,000 and $393,000 for the prior year’s comparable periods. The primary components of G&A are accounting fees, legal & professional fees and Trustees’ fees amounting in the aggregate to $862,000 and $294,000, for the Current Nine Months and the Current Quarter, respectively, as compared to $826,000 and $267,000 for the prior year’s comparable periods.

 

DEPRECIATION

Depreciation expense from operations for the Current Nine Months and Current Quarter was $4,600,000 and $1,555,000, respectively, as compared to $4,531,000 and $1,528,000 for the prior year’s comparable periods. The increase was primarily attributable to depreciation related to the Phase III portion of the Damascus redevelopment project becoming operational.

 

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $10.4 million for the Current Nine Months compared to $11.1 million for the Prior Nine Months. We expect that cash provided by operating activities and cash reserves 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, 2012, FREIT had cash and cash equivalents totaling $5.0 million, compared to $6.3 million at October 31, 2011.

Credit Line: FREIT has an $18 million line of credit provided by the Provident Bank. The line of credit is for a two year term ending in January 2014, but can be cancelled by the bank, at its will, within 60 days before or after each anniversary date. The credit line will automatically be extended at the termination date of the current term and each subsequent term for an additional period of 24 months, provided there is no default and the credit line has not been cancelled. 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, Palisades Manor Apartments, Palisades Park, 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 at the time of the draws. The interest rate on the line of credit has a floor of 4%. As of July 31, 2012, $18 million is available under the line of credit, and no amount is outstanding.

The redevelopment project at the Damascus Center has been completed. The total capital required for this project approximated $22.7 million. On February 12, 2008, Damascus Centre, LLC, a 70% owned affiliate of FREIT, closed on a $27.3 million construction loan that is available to fund already expended and future construction costs. As a result of a reevaluation of the future funding needs for this project, on May 6, 2010, Damascus Centre, LLC reduced the amount of the construction loan facility to $21.3 million. This loan has a term of forty-eight (48) months, with one twelve (12) month extension option. On February 8, 2012, FREIT exercised its option to extend the loan 12 months. The construction loan is now due February 8, 2013. FREIT has guaranteed 30% of the loan, and the minority interests, who have a 30% investment in Damascus Centre, LLC, have agreed to indemnify FREIT for their share of the guarantee. Through February 29, 2012, draws against this loan were charged interest at the BBA LIBOR daily floating rate plus 135 basis points. As a result of exercising the twelve (12) month loan extension option, the interest rate was converted to a fixed rate. Effective March 1, 2012, the new interest rate is fixed at 3.32%, which is 150 basis points over the 10 year Treasury rate. As of July 31, 2012, the outstanding balance on the construction loan is $14.7 million. We intend to refinance this construction loan with permanent financing prior to its February 8, 2013 due date. We expect this development project to add to revenues, income, cash flow, and shareholder value.

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At July 31, 2012, FREIT’s aggregate outstanding mortgage debt was $200.9 million and bears a weighted average interest rate of 5.32%, and an average life of approximately 3.76 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 2012 2013 2014 2016 2017 2018 2019 2021 2022
(In millions)                   
Mortgage "Balloon" Payments    $2.8 $41.8 $9.4 $24.5 $22.0 $5.0 $45.2 $19.1 $14.4

 

The following table shows the estimated fair value and carrying value of our long-term debt at July 31, 2012 and October 31, 2011:

 

   July 31,   October 31, 
($ in Millions)  2012   2011 
         
Fair Value  $216.0   $213.9 
           
Carrying Value  $200.9   $203.3 

 

Fair values are estimated based on market interest rates at July 31, 2012 and October 31, 2011 and on discounted cash flow analysis. Changes in assumptions or estimation methods may significantly affect these fair value estimates. The fair value, which is based on observable inputs, has been characterized as level 2 in the fair value hierarchy as provided by authoritative guidance.

FREIT expects to refinance the individual mortgages with new mortgages when their terms expire. To this extent we have exposure to interest rate risk. If interest rates, at the time any individual mortgage note is due, are higher than the current fixed interest rate, higher debt service may be required, and/or refinancing proceeds may be less than the amount of mortgage debt being retired. For example, at July 31, 2012, a 1% interest rate increase would reduce the fair value of our debt by $8.8 million, and a 1% decrease would increase the fair value by $9.4 million.

The $22.5 million mortgage loan entered into by Grande Rotunda, LLC for the acquisition of the Rotunda was scheduled to come due on July 19, 2009, and was extended by the bank until February 1, 2010. On February 1, 2010, a principal payment of $3 million was made reducing the original loan amount of $22.5 million to $19.5 million and the due date was extended until February 1, 2013. As part of the terms of the loan extension agreement, the loan is further collateralized by a first mortgage lien and the assignment of the ground lease on FREIT’s Rochelle Park, NJ land parcel. Under the restructured terms, the interest rate is now 350 basis points above the BBA LIBOR rate with a floor of 4%, and monthly principal payments of $10,000 are required. An additional principal payment of $110,000 was required on February 1, 2012 in order to reduce the loan to achieve the stipulated debt service coverage ratio. Under the agreement with the equity owners of Grande Rotunda, LLC, FREIT would be responsible for 60% of any cash required by Grande Rotunda, LLC, and 40% would be the responsibility of the minority interest. We intend to refinance this mortgage prior to its February 1, 2013 due date.

FREIT also has interest rate exposure on its floating rate loan. Currently, FREIT has $19.1 million in floating rate loan outstanding, which relates to the acquisition loan for The Rotunda.. As of March 1, 2012, the Damascus construction loan was converted to a fixed rate loan. A 1% rate fluctuation would impact FREIT’s annual interest cost by approximately $191,000.

We believe that the values of our properties will be adequate to command refinancing proceeds equal to or higher than the mortgage debt to be refinanced. 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 our shareholders.

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FUNDS FROM OPERATIONS (“FFO”):

Many consider FFO, which is a non-GAAP financial measure, as the standard measurement of a REIT’s performance. We compute FFO as follows:

 

  Nine Months Ended   Three Months Ended 
  July 31,   July 31, 
   2012   2011   2012   2011 
  (In thousands, except per share)   (In thousands, except per share) 
Net income  $3,438   $4,887   $(891)  $1,834 
Depreciation   4,600    4,531    1,555    1,528 
Amortization of deferred leasing costs   193    215    71    72 
Deferred rents (Straight lining)   (7)   (162)   3    (72)
Amortization of acquired leases   (5)   18    7    6 
Under market lease amortization re: Giant                    
   lease termination   (1,344)            
Deferred project cost write-off   3,726        2,236     
Discontinued operations   (275)   (207)   (123)   (74)
Capital Improvements - Apartments   (507)   (367)   (190)   (228)
Distributions to noncontrolling interests   (745)   (1,144)   (240)   (380)
FFO  $9,074   $7,771   $2,428   $2,686 
 Per Share - Basic  $1.31   $1.12   $0.35   $0.39 
 Weighted Average Shares Outstanding   6,942    6,942    6,942    6,942 

 

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.

 

INFLATION

Inflation can impact the financial performance of FREIT in various ways. Our commercial tenant leases normally provide that the tenants bear all or a portion of most operating expenses, which can reduce the impact of inflationary increases on FREIT. Apartment leases are normally for a one-year term, which may allow us to seek increased rents as leases renew or when new tenants are obtained, subject to prevailing market conditions.

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Item 3: Quantitative and Qualitative Disclosures About Market Risk

See “Commercial Segment”, “Residential Segment” and “Liquidity and Capital Resources” under Item 2 above for a detailed discussion of FREIT’s quantitative and qualitative market risk disclosures.

 

Item 4: Controls and Procedures

At the end of the period covered by this report, 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 as of July 31, 2012. There has been no change in FREIT’s internal control over financial reporting during the three months ended July 31, 2012 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

 

Item 1: Legal Proceedings

None.

 

Item 1A: Risk Factors

There were no material changes in any risk factors previously disclosed in FREIT’s Annual Report on Form 10-K for the year ended October 31, 2011, that was filed with the Securities and Exchange Commission on January 13, 2012.

 

Item 6: Exhibits

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

 

Exhibit 101 - The following materials from FREIT’s quarterly report on Form 10-Q for the period ended July 31, 2012, formatted in Extensible Business Reporting Language (“XBRL”): (i) condensed consolidated balance sheets; (ii) condensed consolidated statements of income; (iii) condensed consolidated statement of equity; (iv) condensed consolidated statements of cash flows; and (v) notes to condensed consolidated financial statements.

 

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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 10, 2012  
  /s/ Robert S. Hekemian
          (Signature)
  Robert S. Hekemian
  Chairman of the Board and Chief Executive Officer
  (Principal Executive Officer)
   
   
  /s/ Donald W. Barney
          (Signature)
  Donald W. Barney
  President, Treasurer and Chief Financial Officer
  (Principal Financial/Accounting Officer)

 

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