FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY - Quarter Report: 2015 April (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended April 30, 2015

or

Commission File No. 000-25043

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 x 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 x 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):

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

Yes o  No x

As of June 9, 2015, the number of shares of beneficial interest outstanding was 6,726,869

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY

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)

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

SIX AND THREE MONTHS ENDED APRIL 30, 2015 AND 2014

  (Unaudited)

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

SIX AND THREE MONTHS ENDED APRIL 30, 2015 AND 2014

 (Unaudited)

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

SIX MONTHS ENDED APRIL 30, 2015

(Unaudited)

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED APRIL 30, 2015 AND 2014

(Unaudited)

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, 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 six and three-month periods ended April 30, 2015 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, 2014 of First Real Estate Investment Trust of New Jersey (“FREIT”).

Note 2 –Recently issued accounting standards:

In April 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, which amends the definition of a discontinued operation. The new guidance requires discontinued operation treatment for disposals of a component or group of components that represent a strategic shift that has, or will have, a major impact on an entity’s operations or financial results. The ASU is effective prospectively for all disposals that occur in annual periods (and interim periods therein) beginning on or after December 15, 2014, with early adoption permitted. The Company has adopted this guidance effective with its 1st quarter ended January 31, 2015. The adoption of this guidance did not have any impact on our financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2016. Early adoption is not permitted. ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. FREIT is currently assessing the impact this new accounting guidance will have on its consolidated financial statements and footnote disclosures. 

ln February 2015, the FASB issued Accounting Standards Update No. 2015-02, "Amendments to the Consolidation Analysis," ("ASU 2015-02"), which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 with early adoption permitted. ASU 2015-02 amends: the assessment of whether a limited partnership or an LLC is a variable interest entity; the effect that fees paid to a decision maker have on the consolidation analysis; how variable interest held by a reporting entity's related parties or de facto agents affect its consolidation conclusion; and for entities other than limited partnerships or LLCs, clarifies how to determine whether the equity holders as a group have power over an entity. The Company is evaluating the adoption of ASU 2015-02 to determine if it will have any effect on our consolidated financial statements or footnote disclosures.

ln April 2015, the FASB issued ASU 2015-03, "Interest- Imputation of Interest (Subtopic 835-30):

Simplifying the Presentation of Debt Issuance Costs" which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU is effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years with early adoption permitted. The adoption of this guidance, which is required to be applied on a retrospective basis, will not have a material effect on our financial statements.

Note 3 - Earnings per share:

Basic earnings per share is calculated by dividing net income attributable to common equity (numerator) by the weighted average number of shares and vested share units (see Note 15) 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, were issued during the period using the Treasury Stock method. Under the Treasury Stock method, the assumption is that the proceeds received upon exercise of the options, including the unrecognized stock option compensation expense attributed to future services, are used to repurchase FREIT’s stock at the average market price during the period, thereby reducing the number of shares to be added in computing diluted earnings per share. For the six months ended April 30, 2015, the outstanding stock options were anti-dilutive, and for the three months ended April 30, 2015, the outstanding stock options increased the average dilutive shares outstanding by approximately 14,000 shares, with no impact on earnings per share. For the six and three months ended April 30, 2014, no vested options or other potentially dilutive securities were outstanding.

Note 4 - Interest rate swap contracts: 

On December 26, 2012, Damascus Centre, LLC refinanced its $15 million construction loan with a variable rate $25 million mortgage loan of which $19.1 million is outstanding as of April 30, 2015. The new loan will mature on January 3, 2023. In connection therewith, on December 26, 2012, FREIT entered into an interest rate swap contract to reduce the impact of interest rate fluctuations on the LIBOR based variable rate mortgage. At April 30, 2015, the derivative financial instrument had a notional amount of approximately $19.16 million and a current maturity date of January 2023. The contract effectively converts the LIBOR based variable rate to a fixed rate of 3.81%.

On December 29, 2014, FREIT Regency, LLC closed on a $16.2 million mortgage loan with Provident Bank. The new loan bears a floating interest rate equal to 125 basis points over the BBA LIBOR and the loan will mature on December 15, 2024. In order to minimize interest rate volatility during the term of the loan, FREIT Regency, LLC entered into an interest rate swap agreement that in effect, converted the floating interest rate to a fixed interest rate of 3.75% over the term of the loan. At April 30, 2015, the derivative financial instrument has a notional amount of approximately $16.2 million and a current maturity date of December 2024.

In accordance with ASC 815, “Accounting for Derivative Instruments and Hedging Activities”, FREIT is accounting for the Damascus Centre, LLC and the FREIT Regency, LLC interest rate swaps as cash flow hedges and marks to market its fixed pay interest rate swaps, taking into account present interest rates compared to the contracted fixed rate over the life of the contract. For the six and three-months ended April 30, 2015, FREIT recorded an unrealized loss of $1,341,000 and an unrealized gain of $808,000, respectively, in comprehensive income representing the reduction in the fair value of the swap which resulted in a corresponding liability of $848,000, and an asset of $22,000 as of April 30, 2015. As of April 30, 2014, FREIT recorded an asset of $969,000 representing the fair value of the swap, along with a corresponding decrease to accumulated other comprehensive income of $11,000 and $81,000 for the six and three months ended April 30, 2014, respectively. During the year ended October 31, 2014, FREIT recorded an unrealized loss of $465,000 in comprehensive income representing the reduction in the fair value of the swap, which resulted in a $515,000 corresponding asset as of October 31, 2014. The fair values are based on observable inputs (level 2 in the fair value hierarchy).

Note 5 – Discontinued operations:

On December 20, 2013, FREIT’s South Brunswick property, which consisted of vacant land, was sold for $11 million resulting in a capital gain of approximately $8.7 million net of sales fees and commissions. FREIT structured this sale in a manner that qualified it as a like-kind exchange of real estate pursuant to Section 1031 of the Internal Revenue Code. The 1031 Exchange transaction resulted in a deferral for income tax purposes of the $8.7 million capital gain. The net proceeds from this sale, which were approximately $9.8 million, were held in escrow until a replacement property was purchased. A replacement property related to this like-kind exchange was acquired on June 18, 2014, and the sale proceeds held in escrow were applied to the purchase price of such property.

The gain from the sale of the South Brunswick property described above has been classified as discontinued operations in the accompanying statements of income for the six and three months ended April 30, 2014.

Note 6 – Property acquisition:

On June 18, 2014, FREIT completed the acquisition of the Regency Club (“Regency”), a residential apartment complex located in Middletown, New York. The Regency complex consists of 132 units in 11 buildings and a clubhouse. The acquisition cost was $20,625,000 (exclusive of $648,000 of transaction costs charged to expense), which was funded in part with $9.8 million in net proceeds from the sale of the South Brunswick land, and the remaining balance of $11.5 million (inclusive of the $648,000 of transaction costs) was funded utilizing $10 million of FREIT’s credit line with Provident Bank, and FREIT's available cash. On December 29, 2014, FREIT secured long-term financing for this property in the amount of $16.2 million from Provident Bank.

The acquisition price of $20,625,000 has been allocated as follows: $18.5 million to the buildings and $2.1 million to the land.

FREIT identified the Regency as a replacement property for the vacant land located in South Brunswick, New Jersey that FREIT sold on December 20, 2013 (see Note 5). The Regency is part of FREIT’s Residential segment.

The following unaudited pro forma information shows the results of operations for the six and three-month periods ended April 30, 2014 for FREIT and Subsidiaries as though the Regency had been acquired at the beginning of fiscal 2014:

The pro forma results for the prior year periods reflect the following adjustments: (a) additional depreciation expense based on the purchase price allocated to the buildings and a depreciable life of 40 years, and (b) additional interest expense based on the $10 million loan used towards the purchase of the property at acquisition date.

The 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 2014, or of future results of operations of FREIT’s combined properties.

Note 7 – Capitalized interest

Interest costs associated with amounts expended at the Grande Rotunda development are capitalized and included in the cost of the project. Interest capitalized during the six month periods ended April 30, 2015 and 2014, respectively amounted to $933,000 and $512,000, and $220,000 and $175,000, for the three-month periods ended April 30, 2015 and 2014, respectively.

Note 8 - 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 4% to 5% of rents collected. Such fees were approximately $933,000 and $906,000, for the six-month period ended April 30, 2015 and 2014, respectively, and $473,000 and $463,000, for the three-month period ended April 30, 2015 and 2014, 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 items amounted to approximately $136,000 and $534,000, for the six-months ended April 30, 2015 and 2014, respectively, and $67,000 and $465,000, for the three-months ended April 30, 2015 and 2014, respectively. Fees for the prior year’s six and three-month periods include $396,000 in leasing commissions paid to Hekemian relative to the Safeway lease at the Damascus shopping center. The management agreement expires on October 31, 2015, and is automatically renewed for periods of two years unless either party gives not less than six (6) months prior 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 $56,000 and $34,000, for the six-months ended April 30, 2015 and 2014, respectively, and $11,000 and $5,000, for the three-months ended April 30, 2015 and 2014, respectively.

From time to time, FREIT engages Hekemian to provide certain additional services, such as consulting services related to development, property sales and financing activities of FREIT. Separate fee arrangements are negotiated between Hekemian and FREIT with respect to such additional services. In connection with the development activities at the Rotunda, which is owned and operated by Grande Rotunda, LLC, a definitive agreement for the development services to be provided by Hekemian Development Resources LLC (“Resources”), a wholly owned subsidiary of Hekemian, has been approved and executed. Fees incurred to Hekemian and Resources during the six-months ended April 30, 2015 and 2014 were $793,000 and $429,000, respectively, and $312,000 and $0 for the three-months ended April 30, 2015 and 2014, respectively. Fees paid in the current six-month period relate to fees paid to Resources relative to the Rotunda development project. Fees paid in the prior year’s six-month period relate to $330,000 in commissions paid to Hekemian relative to the sale of FREIT’s South Brunswick, NJ property and $99,000 related to services performed with regard to the Hammel Gardens and Steuben Arms mortgage loan refinancings.

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 six-months ended April 30, 2015 and 2014 was approximately $266,000 and $313,000, respectively, for Mr. Robert S. Hekemian, and $31,000 and $23,000, respectively, for Mr. Robert S. Hekemian, Jr.

Note 9 – Mortgage refinancings:

On May 28, 2013, the balance of the Grande Rotunda LLC acquisition loan amounting to $19 million was purchased from the bank by FREIT. The due date of the loan was May 1, 2013. While the bank agreed to an additional extension of ninety (90) days from May 1, 2013, FREIT elected to purchase the Rotunda loan from the bank and have all the bank’s rights assigned to FREIT. It was FREIT’s intention to sell this loan to the lender providing the construction financing for the expansion of the Rotunda project. On December 9, 2013, FREIT’s 60% owned affiliate, Grande Rotunda, LLC, closed with Wells Fargo Bank on a construction loan of up to $120 million to be used to reconfigure and expand its Rotunda property in Baltimore, MD. The construction loan is for a term of four (4) years, with one 12-month extension, at a rate of 225 basis points over the monthly LIBOR. As of April 30, 2015, $69.0 million of this loan was drawn down, of which $19 million was used to pay off the loan from FREIT, and $50.0 million was used toward the construction at the Rotunda.

On November 19, 2013, FREIT refinanced the mortgages on its Hammel Gardens and Steuben Arms properties that were scheduled to mature on December 1, 2013. The mortgages, aggregating $9.4 million, were refinanced for $19.7 million. The new mortgage amounts reflect, in part, the appreciated value of those assets. This refinancing resulted in: (i) a reduction of annual interest costs from 6.4% to 4.54%, and (ii) net refinancing proceeds of approximately $10 million that were available for capital expenditures and general corporate purposes.

On December 29, 2014, FREIT Regency, LLC closed on a $16.2 million mortgage loan with Provident Bank. The new loan bears a floating interest rate equal to 125 basis points over the one-month BBA LIBOR and the loan will mature on December 15, 2024. Interest only payments are required each month through December 15, 2017. Thereafter, principal payments of $27,807 (plus accrued interest) are required each month through maturity. In order to minimize interest rate volatility during the term of the loan, FREIT Regency, LLC entered into an interest rate swap agreement that in effect, converted the floating interest rate to a fixed interest rate of 3.75% over the term of the loan. Proceeds from the loan were used to pay-off the $5 million outstanding balance on FREIT’s credit line, and the remainder of the proceeds will be available to fund future capital expenditures and for general corporate purposes.

Note 10 – Fair value of long-term debt:

The following table shows the estimated fair value and carrying value of FREIT’s long-term debt at April 30, 2015 and October 31, 2014:

Fair values are estimated based on market interest rates at April 30, 2015 and October 31, 2014 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 11 - 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 seven (7) 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, 2014.

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.

Continuing 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 six and three-month periods ended April 30, 2015 and 2014. Asset information is not reported since FREIT does not use this measure to assess performance.

Note 12 – Income taxes:

FREIT distributed as dividends to its shareholders 100% of its ordinary taxable income for the fiscal year ended October 31, 2014 and intends to distribute as dividends 100% of its ordinary taxable income for the fiscal year ending October 31, 2015. Accordingly, no provision for federal or state income taxes related to such ordinary taxable income was recorded in FREIT’s financial statements. As described in Note 5, FREIT completed a like-kind exchange with respect to the sale of the South Brunswick, NJ property, which was sold on December 20, 2013 at a gain of approximately $8.7 million. Accordingly, no provision for federal or state income taxes related to such gain was recorded in FREIT’s financial statements. The tax basis of Regency, which was the replacement property in the like-kind exchange, is approximately $8 million lower than the acquisition cost of approximately $20.6 million recorded for financial reporting purposes. In December 2013, FREIT distributed as dividends the entire capital gain of approximately $3.5 million realized on the sale of its Palisades Manor and Grandview properties in Fiscal 2013. With regard to such capital gain dividend distribution for Fiscal 2013, no provision for federal or state income taxes related to such capital gain income was recorded in FREIT’s financial statements.

As of April 30, 2015, FREIT had no material uncertain income tax positions. The tax years subsequent to and including the fiscal year ended October 31, 2011 remain open to examination by the major taxing jurisdictions to which FREIT is subject.

Note 13 – Share repurchases:

On February 17, 2015, FREIT announced a tender offer to purchase up to 100,000 shares of FREIT’s beneficial interest at a price of $23.00 per share. The tender offer expired on March 20, 2015, and in connection therewith FREIT repurchased 94,302 shares of beneficial interest at $23.00 per share, for an aggregate purchase price of $2,168,946 which it funded principally from cash and cash equivalents. FREIT’s Trustees and executive officers did not tender their shares of beneficial interest in FREIT in the tender offer.

On September 4, 2014, the Board authorized the repurchase of 100,572 FREIT shares held by the pension plan of Hekemian, for an aggregate cash purchase of $1,855,553 or $18.45 per share, which was the closing price of FREIT shares on September 3, 2014. The repurchase which occurred in September 2014 was undertaken in connection with the termination of the pension plan. Mr. Robert S. Hekemian, Chairman and Chief Executive Officer of FREIT, and Mr. Robert S. Hekemian, Jr., a Trustee of FREIT, and members of their family were participants in the pension plan.

On December 4, 2013, the Board authorized the repurchase of up to 24,400 FREIT shares. On December 17, 2013, FREIT repurchased 20,400 shares in a privately-negotiated transaction with an unaffiliated party for an aggregate purchase price of $357,000, or $17.50 per share.

Note 14 – Stock option plan:

On September 4, 2014, the Board approved the grant of a total of 246,000 non-qualified share options under FREIT’s Equity Incentive Plan to certain FREIT Executive Officers, the members of the Board and certain employees of Hekemian & Co., Inc. The options have an exercise price of $18.45 per share, will vest over a 5 year period at 20% per year, and will expire 10 years from the date of grant, which will be September 3, 2024.

The following table summarizes stock option activity for the six-month period ended April 30, 2015:

For the six and three-month periods ended April 30, 2015, compensation expense related to stock options granted amounted to $47,000 and $24,000, respectively. At April 30, 2015, there was approximately $408,000 of unrecognized compensation cost relating to outstanding non-vested stock options to be recognized over a vesting period of approximately five (5) years.

The aggregate intrinsic value of options outstanding at April 30, 2015 was $442,800.

Note 15 – Deferred fee plan:

On September 4, 2014, the Board approved amendments, effective November 1, 2014, to the FREIT Deferred Fee Plan for its Executive Officers and Trustees, one of which provides for the issuance of share units payable in FREIT shares in respect of (i) deferred amounts of all Trustee fees on a prospective basis; (ii) interest on Trustee fees deferred prior to November 1, 2014 (payable at a floating rate, adjusted quarterly, based on the average 10-year Treasury Bond interest rate plus 150 basis points); and (iii) dividends payable in respect of share units allocated to participants in the Deferred Fee Plan as a result of deferrals described above. The number of share units will be determined by the closing price of FREIT shares on the date as set forth in the Deferred Fee Plan . As a result of the plan amendment described above, all Trustee fees and related interest for the six-months ended April 30, 2015, which amounted to approximately $383,000, have been paid through the issuance of 19,371 FREIT share units based on the closing price of FREIT shares on the dates as set forth in the Deferred Fee Plan. The dollar amount of vested units are reflected in “Shares of beneficial interest” in FREIT’s Condensed Consolidated Balance Sheet as of April 30, 2015.

For the six month period ended April 30, 2015, FREIT has charged $375,000 of this amount, representing Trustee fees and interest, to expense and the balance of $8,600, representing dividends payable in respect of share units allocated to Plan participants, has been charged to equity.

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

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, Maryland and New York. We acquire existing properties for investment. We also acquire properties that we feel have redevelopment potential, and we 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: The U.S. economy slowed to a crawl during the first quarter, but is expected to rebound during the balance of the year. The rebound is expected to show improvement in the housing market, consumer spending and private sector employment, while inflation is expected to remain in check.

Residential Properties: We have aggressively increased rental rates. As a result, our rental rates continue to show year-over-year increases. We expect increases in rental rates to taper; however, the increased rental rates that are in place should positively impact future revenues.

Commercial Properties: The retail outlook has shown improvement because of increases in consumer spending over the past year and this improvement is expected to continue over the next couple of years.

Development Projects and Capital Expenditures: We continue to make only those capital expenditures that are absolutely necessary. On July 24, 2012, the Board approved revisions to the scope of the Rotunda redevelopment project, thereby reducing the complexity and projected cost of the project. Rotunda began construction in September 2013, and is moving forward with the completion of this construction project.

Debt Financing Availability: Financing for development projects has become more available. As a result, on December 9, 2013, Grande Rotunda, LLC closed with Wells Fargo Bank on a construction loan of up to $120 million to be used for the purpose of funding the major redevelopment and expansion project at the Rotunda. On November 19, 2013, FREIT refinanced the first mortgages on its Hammel Gardens and Steuben Arms properties that were scheduled to mature on December 1, 2013. The mortgages, aggregating $9.4 million, were refinanced for $19.7 million.

On December 29, 2014, FREIT Regency, LLC closed on a $16.2 million mortgage loan with Provident Bank. The new loan bears a floating interest rate equal to 125 basis points over the BBA LIBOR and the loan will mature on December 15, 2024.

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

SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

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

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, the preparation of which takes into account estimates based on judgments and assumptions that affect certain amounts and disclosures. Accordingly, actual results could differ from these estimates. The accounting policies and estimates used, which are outlined in Note 1 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2014, have been applied consistently as at April 30, 2015, and for the six and three-months ended April 30, 2015 and 2014. 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.

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

RESULTS OF OPERATIONS

Real estate revenue for the six months ended April 30, 2015 (“Current Six Months”) increased 6.3% to $22,532,000, compared to $21,204,000 for the six months ended April 30, 2014 (“Prior Six Months”). For the three months ended April 30, 2015 (“Current Quarter”) real estate revenue increased 5.8% to $11,252,000, compared to $10,632,000 for the three months ended April 30, 2014 (“Prior Year’s Quarter”). Income from continuing operations for the Current Six Months and Current Quarter was $1,774,000 and $461,000, respectively, compared to $2,009,000 and $890,000 for the prior year’s comparable periods, respectively. The decrease in income from continuing operations for the Current Six Months and Current Quarter was primarily attributable to higher operating expenses and an increase in bad debt expense incurred during the Current Quarter.

Net income attributable to common equity (“net income-common equity”) for the Current Six Months was $1,580,000 ($0.23 per share basic and diluted), compared to $10,459,000 ($1.51 per share basic and diluted) for the Prior Six Months. Net income attributable to common equity (“net income-common equity”) for the Current Quarter was $532,000 ($0.08 per share basic and diluted), compared to $833,000 ($0.12 per share basic and diluted) for the Prior Year’s Quarter. Included in net income-common equity for the Prior Six Months was a gain of approximately $8.7 million relating to the sale of the South Brunswick property in December 2013. The schedule below provides a detailed analysis of the major changes that impacted net income-common equity for the six and three months ended April 30, 2015 and 2014:

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

SEGMENT INFORMATION

The following tables set forth comparative net operating income ("NOI") data for FREIT’s real estate segments and reconciles the NOI to consolidated net income-common equity for the Current Quarter, and the Current Years six month period as compared to the Prior Year’s comparable period’s. Quarter. (See below for definition of 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), lease amortization, depreciation, financing costs and other items. FREIT assesses and measures segment operating results based on NOI.

Same Property NOI: FREIT considers same property net operating income (“Same Property NOI”) to be a useful supplemental non-GAAP measure of our operating performance. We define same property within both our commercial and residential segments to be those properties that we have owned and operated for both the current and prior periods presented, excluding those properties that we acquired, redeveloped or classified as discontinued operations during those periods. Any newly acquired property that has been in operation for less than a year, any property that is undergoing a major redevelopment, but may still be in operation at less than full capacity, and/or any property that is under contract for sale are not considered same property.

NOI and Same Property NOI are non-GAAP financial measures and are not measures of operating results or cash flow as measured by generally accepted accounting principles, and are not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity.

COMMERCIAL SEGMENT

The commercial segment contains 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 Six Months and Current Quarter increased by 1.5% and 2.4%, respectively, from the prior year’s comparable periods. The increase in total revenue for the Current Six Months and Current Quarter was primarily attributable to increased rental income at the Damascus, Westwood Plaza and Franklin Crossing shopping centers, due to an increase in occupancy over last year’s comparable periods. NOI for the Current Six Months and Current Quarter decreased by 4.2% and 6.3%, respectively, from the prior year’s comparable periods The decrease in NOI was attributable to an increase in operating expense, primarily a $200,000 increase in bad debt expense relating to: (a) a $116,000 receivable write-off, resulting from a tenant filing for bankruptcy at the Wayne Preakness shopping center, and (b) an $84,000 receivable write-off, resulting from G-Mart Frederick, Inc. (“G-Mart”) notifying FREIT that it had vacated its space at the Westridge Square shopping center and would be terminating its lease effective November 1, 2014.

Same Property Operating Results: FREIT’s commercial segment currently contains nine (9) same properties. (See definition of same property under Segment Information above.) Since The Rotunda property is currently undergoing a major redevelopment and is operating at less than full capacity, it has been excluded from same property results for all periods presented. For the Current Six Months and Current Quarter, same property revenue for the commercial segment increased by 1.7% and 1.3%, respectively, from the prior year’s comparable periods. The increase in same property revenue for the current year was primarily attributable to increased rental income at the Damascus, Westwood Plaza and Franklin Crossing shopping centers, due to an increase in occupancy for the Current Six Months and Current Quarter over last year’s comparable periods. For the Current Six Months and Current Quarter, same property NOI decreased by 3.8% and 6.1%, respectively, from the prior year’s comparable periods. The decrease in NOI was attributable to an increase in operating expense, primarily a $200,000 increase in bad debt expense relating to: (a) a $116,000 receivable write-off, resulting from a tenant filing for bankruptcy at the Wayne Preakness shopping center, and (b) an $84,000 receivable write-off, resulting from G-Mart notifying FREIT that it had vacated its space at the Westridge Square shopping center and would be terminating its lease effective November 1, 2014.

Leasing: The following table reflects leasing activity at our commercial properties for comparable leases (leases executed for spaces in which there was a tenant at some point during the previous twelve-month period) and non-comparable leases for the Current Six Months:

            (a) These leasing costs are presented as annualized costs per square foot and are allocated uniformly over the initial lease term.    

For the Current Quarter, average occupancy showed a slight decrease of 0.5%, as compared to the Prior Year’s Quarter. Excluding the impact of the Rotunda property, which is currently undergoing a major redevelopment project that began in September, 2013, average occupancy rates for the Current Six Months decreased 3.3% over last year’s comparable period, which was primarily due to the G-Mart vacancy at Westridge Square as of November 1, 2014.

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. As of April 30, 2015, approximately 85.6% of the space at the Damascus Center is leased and 81.6% is occupied.

On July 27, 2012, FREIT signed a lease agreement with G-Mart for a significant portion (40,000 square feet) of the space previously occupied by Giant of Maryland, LLC (“Giant”). G-Mart managed an international grocery store chain. FREIT incurred approximately $940,000 in tenant improvement costs associated with the lease to G-Mart, which began operations at the center in September 2013. Effective November 1, 2014, G-Mart notified FREIT that it had vacated its space at the Westridge Square shopping center and would be terminating its lease. A new lease for this 40,000 square foot space was signed by H-Mart, an international grocery store chain, in November 2014. H-Mart is currently renovating their space but began paying rent in May 2015. All of the tenant improvements related to G-Mart will be utilized for H-Mart.

DEVELOPMENT ACTIVITIES

The Rotunda property in Baltimore, MD (owned by our 60% owned affiliate Grande Rotunda, LLC) is an 11.5 acre site containing a 138,000 sq. ft. office building and approximately 78,000 sq. ft. of retail space on the lower level of the office building. The original plans for the renovation and expansion of the property were completed in 2008. As a result of Giant vacating its space, the scope of the project and the development plans were revised to include, in addition to the office building, 379 residential apartment units, approximately 153,000 sq. ft. of retail space, and over 864 above level parking spaces. With regard to the Rotunda’s redevelopment project, approximately $79.6 million has been incurred through April 30, 2015, of which $3.7 million was written-off in Fiscal 2012 as a result of revisions to the scope of the redevelopment project. All planning and feasibility study costs, as well as ongoing construction costs related to the project are being capitalized to Construction In Progress (“CIP”) until the project is completed and becomes operational. On December 9, 2013, Grande Rotunda, LLC, closed with Wells Fargo Bank on a construction loan of up to $120 million to be used to reconfigure and expand its Rotunda property in Baltimore, MD. The construction loan is for a term of four (4) years, with one 12-month extension, at a rate of 225 basis points over the monthly LIBOR. FREIT started construction in September 2013.

Through April 30, 2015, funding for the construction at the Rotunda was provided by: (a) the Grande members, FREIT and Rotunda 100, LLC, who contributed approximately $14.5 million in accordance with the loan agreement with Wells Fargo Bank; and (b) $69.0 million in draws on the construction line with Wells Fargo Bank, of which $19 million of the draw was used to pay off the loan from FREIT, and $50.0 million was used towards the construction at the Rotunda. (See discussion under Liquidity and Capital resources for further details regarding the Rotunda financing.)

RESIDENTIAL SEGMENT

FREIT currently operates seven (7) multi-family apartment communities totaling 1,093 apartment units. As indicated in the table above under the caption Segment Information, total revenue and NOI from FREIT’s residential segment for the Current Six Months increased by 12.3% and 8.2%, respectively, as compared to the Prior Six Months. For the Current Quarter, total revenue and NOI increased by 10.4% and 4.4%, respectively, as compared to the Prior Year’s Quarter. The increase in total revenue and NOI for the Current Six Months and Current Quarter was primarily attributable to: (a) the addition of the operating results of the Regency (see discussion below), and (b) increased base rent at all of our residential properties. The increase in revenue for the current period was tempered by an increase in operating expenses at several of our properties. Average occupancy levels for the Current Six Months increased 0.3%, as compared to last year’s comparable period. For the Current Quarter, average occupancy decreased by 2.0% from the Prior Year’s Quarter, primarily due to higher vacancies at the Pierre Towers and Westwood Hills properties

Same Property Operating Results: FREIT’s residential segment currently contains six (6) same properties. (See definition of same property under Segment Information above.) The Regency property is not included as same property, since it is a newly acquired property that has been in operation for less than a year. Same property revenue for FREIT’s residential segment for the Current Six Months increased by 0.8% as compared to the Prior Six Months, whereas, same property NOI for the Current Six Months decreased by 1.3% from last year’s comparable period. Same property revenue and same property NOI for the Current Quarter decreased by 1.0% and 6.2%, respectively, as compared to the Prior Year’s Quarter. Despite the overall increase in base rent for the current year, higher vacancies at several of FREIT’s residential properties for the Current Quarter, along with higher operating expenses were the primary contributors to the decrease in same property revenue and same property NOI.

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 Quarter and the Prior Year’s Quarter were $1,732 and $1,685, respectively. For comparability purposes, the average residential rent for the Prior Year’s Quarter has been restated to include the impact of the Regency. 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 $227,000 and $213,000, respectively.

On June 18, 2014, FREIT completed the acquisition of the Regency, a residential apartment complex located in Middletown, New York. The Regency complex consists of 132 units in 11 buildings and a clubhouse. The acquisition cost was $20,625,000 (exclusive of $648,000 of transaction costs), which was funded in part with the $9.8 million in net proceeds from the sale of the South Brunswick land, and the remaining balance of $11.5 million was funded utilizing $10 million of FREIT’s credit line with Provident Bank, and FREIT’s available cash. On December 29, 2014, FREIT Regency, LLC secured long-term financing for the Regency property in the amount of $16.2 million from Provident Bank (see discussion under Liquidity and Capital Resources). A portion of the loan proceeds was used to replace the funds borrowed from FREIT’s credit line, and the remainder are available to fund FREIT’s future capital expenditures and for general corporate purposes.

Capital expenditures: Since all of our apartment communities, with the exception of The Boulders and the Regency, 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, parking structure restoration, air conditioning system replacement, and heating/cooling riser pipe replacement) have been undertaken at The Pierre. The parking structure restoration project, as well as, the replacement of the A/C system, was completed in Fiscal 2014 at a cost of approximately $750,000 and $1 million, respectively. We have substantially completed modernizing, where required, all apartments. The remaining apartments will be renovated as they become vacant. In addition, we have begun a major project to replace the heating and cooling riser pipe system at The Pierre, which is expected to be completed within the next year, at an estimated cost of $1.5 million. Funds for these capital projects will be available from cash flow from the property's operations and cash reserves.

FINANCING COSTS

Total financing costs for the Current Six Months and Current Quarter increased 7.4% and 8.7%, respectively, compared to the prior year’s comparable periods. The increase for both the Current Six Months and Current Quarter was primarily attributable to the Rotunda construction loan of $69.0 million, and the Regency loan of $16.2 million. (See discussions under Liquidity and Capital Resources below).

GENERAL AND ADMINISTRATIVE EXPENSES (“G & A”)

G&A expense for the Current Six Months and Current Quarter was $1,144,000 and $652,000, respectively, compared to $803,000 and $401,000, respectively, for the prior year’s comparable periods. The primary components of G&A are accounting fees, legal & professional fees and Trustees’ fees. The primary reason for the increase in G&A for the Current Six Months and Current Quarter is the increase in Trustee fees, as a result of a change in the Deferred Fee Plan, along with increases in Trustee meeting attendance fees and annual retainer fees effective November 1, 2014.

DEPRECIATION

Depreciation expense from operations for the Current Six Months and Current Quarter was $3,295,000 and $1,648,000, respectively, as compared to $3,040,000 and $1,520,000 for the prior year’s comparable periods. The increase in depreciation was primarily attributable to depreciation related to the Regency acquisition and certain assets becoming operational as of the end of Fiscal 2014.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $5.1 million for the Current Six Months compared to $5.2 million for the Prior Six Months. We expect that cash provided by operating activities and cash reserves will be adequate to cover mandatory debt service payments (including payments of interest, but excluding balloon payments), real estate taxes, recurring capital improvements and dividends necessary to retain qualification as a REIT (90% of taxable income).

As at April 30, 2015, FREIT had cash and cash equivalents totaling $15.9 million, compared to $10.6 million at October 31, 2014. The increase in cash for the Current Six Months is primarily attributable to net proceeds of approximately $15.8 million related to the securing of long-term financing for the Regency property, offset by the repayment of $5 million related to FREIT’s outstanding credit line balance. (See discussion below for additional information relating to this loan.)

Credit Line: FREIT has a line of credit provided by the Provident Bank in the amount of approximately $13 million. The line of credit is for a two year term ending on November 1, 2016, 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, and retail space in Glen Rock, 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. The interest rate on the line of credit has a floor of 3.5%. The $5 million that was outstanding as of October 31, 2014, was repaid to the bank in January 2015. As of April 30, 2015, approximately $13 million was available under the line of credit, and no amount was outstanding.

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. Total construction and development costs were funded, in part, from a $21.3 million (as modified) construction loan facility, of which approximately $15 million was drawn, and advances by FREIT in the approximate aggregate amount of $3.2 million. The construction loan, including the exercise of one twelve (12) month extension option, was scheduled to mature on February 12, 2013. On December 26, 2012, Damascus Centre, LLC refinanced the construction loan with long-term financing provided by People’s United Bank. The amount of the new loan is $25 million, of which $20 million has been drawn as of January 31, 2014. The balance, up to an additional $5 million, will be available as a one-time draw over a 36 month period from the closing date, and the amount available will depend on future leasing at the shopping center. The new loan will mature on January 3, 2023. The loan bears a floating interest rate equal to 210 basis points over the BBA LIBOR. In order to minimize interest rate volatility during the term of the loan, Damascus Centre, LLC entered into an interest rate swap agreement that in effect, converted the floating interest rate to a fixed interest rate of 3.81% over the term of the loan. The interest rate swap is considered a derivative financial instrument that will be used only to reduce interest rate risk, and not held or used for trading purposes. (See Note 4 for additional information relating to the interest rate swap.)

At April 30, 2015, FREIT’s aggregate outstanding mortgage debt was $287.0 million, which bears a weighted average interest rate of 4.33% and an average life of approximately 5.5 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:

The following table shows the estimated fair value and carrying value of our long-term debt at April 30, 2015 and October 31, 2014:

Fair values are estimated based on market interest rates at April 30, 2015 and October 31, 2014 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 April 30, 2015, a 1% interest rate increase would reduce the fair value of our debt by $9.4 million, and a 1% decrease would increase the fair value by $10.0 million.

On November 19, 2013, FREIT refinanced the first mortgages on its Hammel Gardens and Steuben Arms properties that were scheduled to mature on December 1, 2013. The mortgages, aggregating $9.4 million, were refinanced for $19.7 million. The new mortgage amounts reflect, in part, the appreciated value of those assets. This refinancing resulted in: (i) a reduction of annual interest costs from 6.4% to 4.54%, and (ii) net refinancing proceeds of approximately $10 million that were available for capital expenditures and general corporate purposes.

On December 9, 2013, FREIT’s 60% owned affiliate, Grande Rotunda, LLC, closed with Wells Fargo Bank on a construction loan of up to $120 million to be used to reconfigure and expand its Rotunda property in Baltimore, MD. The construction loan is for a term of four (4) years, with one 12-month extension, at a rate of 225 basis points over the monthly LIBOR. As of April 30, 2015, $69.0 million of this loan was drawn down, of which $19 million was used to pay off the loan from FREIT, and $50.0 million was used towards the construction at the Rotunda.

On December 29, 2014, FREIT Regency, LLC closed on a $16.2 million mortgage loan with Provident Bank. The new loan bears a floating interest rate equal to 125 basis points over the one-month BBA LIBOR and the loan will mature on December 15, 2024. Interest only payments are required each month through December 15, 2017. Thereafter, principal payments of $27,807 (plus accrued interest) are required each month through maturity. In order to minimize interest rate volatility during the term of the loan, FREIT Regency, LLC entered into an interest rate swap agreement that in effect, converted the floating interest rate to a fixed interest rate of 3.75% over the term of the loan. Proceeds from the loan were used to pay-off the $5 million outstanding balance on FREIT’s credit line, and the remainder of the proceeds will be available to fund future capital expenditures and for general corporate purposes. The interest rate swap is considered a derivative financial instrument that will be used only to reduce interest rate risk, and not held or used for trading purposes. (See Note 4 for additional information relating to the interest rate swap.)

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

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

Current GAAP 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 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. Periodic cash settlements of the swap contract will be accounted for as an adjustment to interest expense.

FREIT had variable interest rate mortgages securing its Damascus Center and Regency properties. To reduce interest rate fluctuations FREIT entered into interest rate swap contracts for each of these loans. These interest rate swap contracts effectively converted variable interest rate payments to fixed interest rate payments. The contracts were initially based on a notional amount of approximately $20,000,000 ($19,164,000 at April 30, 2015) for the Damascus Center swap, and a notional amount of approximately $16,200,000 at April 30, 2015 for the Regency swap. FREIT has the following derivative-related risks with its swap contracts: 1) early termination risk, and 2) counterparty credit risk.

Early Termination Risk: If FREIT wants to terminate its swap contract before maturity, it would be bought out or terminated at market value; i.e., the difference in the present value of the anticipated net cash flows from each of the swap’s parties. If current variable interest rates are significantly below FREIT’s fixed interest rate payments, this could be costly. Conversely, if interest rates rise above FREIT’s fixed interest payments and FREIT elected early termination, FREIT would realize a gain on termination. At April 30, 2015, the Damascus Center’s swap contract was in our favor and the Regency’s swap contract was in the counterparties’ favor. If FREIT had terminated its contracts at that date it would have realized a gain of approximately $22,000 for the Damascus Center swap, and a loss of approximately $848,000 for the Regency swap. These amounts have been included as a liability in FREIT’s balance sheet as at April 30, 2015, and the change (gain or loss) between reporting periods included in comprehensive income. At October 31, 2014, FREIT’s Damascus Center swap contract was in-the-money. If FREIT had terminated its contract at that date it would have realized a gain of approximately $515,000. This amount has been included as an asset in FREIT’s balance sheet as at October 31, 2014.

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.

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.

SHARE REPURCHASES

On February 17, 2015, FREIT announced a tender offer to purchase up to 100,000 shares of beneficial interest at a price of $23.00 per share, which it funded principally from cash and cash equivalents. The tender offer expired on March 20, 2015. The number of shares proposed to be purchased in the tender offer represents approximately 1.5% of FREIT’s currently outstanding shares. As a result of the tender offer, FREIT repurchased 94,302 shares of beneficial interest at $23.00 per share, for an aggregate purchase price of $2,168,946. FREIT’s Trustees and executive officers did not tender any of their shares of beneficial interest in FREIT in the tender offer. (See Note 13 for further details.)

On December 4, 2013, the Board authorized the repurchase of up to 24,400 FREIT shares. On December 17, 2013, FREIT repurchased 20,400 shares in a privately-negotiated transaction with an unaffiliated party for an aggregate purchase price of $357,000, or $17.50 per share.

On September 4, 2014, the Board authorized the repurchase of 100,572 FREIT shares held by the pension plan of Hekemian & Co., Inc., FREIT’s managing agent, for an aggregate cash purchase of $1,855,553 or $18.45 per share, which was the closing price of FREIT shares on September 3, 2014. The repurchase which occurred in September 2014 was undertaken in connection with the termination of the pension plan. Mr. Robert S. Hekemian, Chairman and Chief Executive Officer of FREIT, and Mr. Robert S. Hekemian, Jr., a Trustee of FREIT, and members of their family were participants in the pension plan.

STOCK OPTION PLAN

On September 4, 2014, the Board approved the grant of a total of 246,000 non-qualified share options under FREIT’s Equity Incentive Plan to certain FREIT Executive Officers, the members of the Board and certain employees of Hekemian & Co., Inc. The options have an exercise price of $18.45 per share, will vest over a 5 year period at 20% per year, and will expire 10 years from the date of grant, which will be September 3, 2024. (See Note 14 for further details.)

DEFERRED FEE PLAN

On September 4, 2014, the Board approved amendments, effective November 1, 2014, to the FREIT Deferred Fee Plan for its Executive Officers and Trustees, one of which provides for the issuance of share units payable in FREIT shares in respect of (i) deferred amounts of all Trustee fees on a prospective basis; (ii) interest on Trustee fees deferred prior to November 1, 2014 (payable at a floating rate, adjusted quarterly, based on the average 10-year Treasury Bond interest rate plus 150 basis points); and (iii) dividends payable in respect of share units allocated to participants in the Deferred Fee Plan as a result of deferrals described above. The number of share units will be determined by the closing price of FREIT shares on the date set forth in the Deferred Fee Plan. (See Note 15 for further details.)

ADJUSTED FUNDS FROM OPERATIONS

Funds From Operations (“FFO”) is a non-GAAP measure defined by the National Association of Real Estate Investment Trusts (“NAREIT”). Effective with the 3^rd Quarter of Fiscal 2013, FREIT revised its FFO calculation to be in conformance with the NAREIT definition. Although many consider FFO as the standard measurement of a REIT’s performance, FREIT modified the NAREIT computation of FFO to include other adjustments to GAAP net income that are not considered by management to be the primary drivers of their decision making process. These adjustments to GAAP net income are amortization of acquired leases, straight-line rents, FFO from discontinued operations and recurring capital improvements on our residential apartments. The modified FFO computation is referred to as Adjusted Funds From Operations (“AFFO”). FREIT believes that AFFO is useful to investors as a supplemental gauge of our operating performance. We compute FFO and AFFO as follows: