2001
---------
ANNUAL
---------
REPORT
-----
FREIT
-----
FIRST REAL ESTATE
INVESTMENT TRUST
OF NEW JERSEY
Message to Our Shareholders
fter ten years of unprecedented growth and prosperity we are now in the midst of
a recession. During the past year we experienced major economic changes and
challenges to our national security. We have witnessed a weakened national
economy, a downward slide in the stock market, sharp reductions in interest
rates, increases in unemployment, and the start of the war against terrorism.
Most companies were affected; we are no exception.
OPERATING RESULTS
Net income for the year ended October 31, 2001 was $4,700,000 ($1.50 per share)
on revenues of $19,534,000 compared to $4,759,000 ($1.53 per share) on revenues
of $18,158,000 for the prior year. (All references to per share amounts are on a
diluted basis and adjusted to reflect the stock split in the form of the
one-for-one share dividend paid on October 18th, 2001.)
The 7.6% increase in revenues results primarily from the inclusion of the
operations at the Olney Town Center, Olney, MD. (See Retail Properties) The
increase in earnings at the real estate properties were off-set principally by:
(A) reduced investment income of $151,000, as a result of significantly lower
interest rates; (B) $60,000 of increased general expenses, and (C) a $114,000
write-off of deferred costs attributable to expenses in connection with the
abandonment of a property acquisition.
RESIDENTIAL PROPERTIES: Net earnings (before debt service) increased 5.4% to
$3,191,000 on revenues of $6,726,000 compared to prior year's net earnings of
$3,028,000 on revenues of $6,353,000. The revenue increase is a combination of
higher occupancy (94.4% this year, compared to 93.4% the prior year) and higher
average monthly rents. Overall expenses (including depreciation) increased 6.3%
to $3,536,000 from $3,324,000. The principal cause of increased expenses was
higher utility costs resulting from a combination of higher utility rates and a
colder winter than the prior year. Overall expenses were 52.6% of revenues
compared to 52.3% in the prior year. Net Operating Income ("NOI") is one of the
principal property measurement tools utilized in the real estate industry. NOI
is net income before debt service, depreciation and other none cash charges or
deferred rents. NOI at our residential properties increased 5.2% to $3,702,000
from $3,519,000 the prior year.
Our apartment units are continually upgraded to maintain their competitive edge
in their market areas. Our capital improvement programs are designed to be both
offensive and defensive. In good economic climates they are designed to command
the highest rents in their markets. In poor economic climates they are designed
to achieve the highest occupancy rates in their markets. Capital improvements
during the past year totaled $479,000 ($750 per unit).
Average monthly rents at the end of the current fiscal year were 12% higher than
the average rents collected over the course of the fiscal year. If these monthly
rents hold, and if current overall occupancy rates are maintained, approximately
$390,000 will be added to rental revenue over the next fiscal year.
Net Income at our 40% owned affiliate Westwood Hills, increased 9.9% to $476,000
from $433,000 the prior year. Occupancy for the year was 97.4% compared to 97.8%
the prior year. Revenues, as a result of rent increases, increased 6.0% against
an expense increase of 5.3%. As a result of these increases, our share of the
Net Income of Westwood Hills increased 9.8% to $190,000 from $173,000 the prior
year.
(Graph)
FREIT owns 19 +/- acres of undeveloped land in Rockaway, NJ. In January 2002 we
received site plan approval for the construction of 129 garden apartment units.
Development costs are estimated at $13.8 million. We expect construction to
commence during the summer of 2002 after all other governmental approvals are
received. We are excited about this new apartment community and expect it will
enhance the value of our portfolio and increase net income and distributions to
shareholders
RETAIL PROPERTIES: Net earnings (before debt service and minority interest)
increased 5.3% to $6,617,000 on revenues of $11,937,000 vs. net earnings of
$6,283,000 on revenues of $10,798,000 the prior year. The increase in earnings
and revenues is principally attributable to the operations of the Olney Town
Center ("Olney") being included in operations for the full fiscal year ended
October 31, 2001, compared to seven months for the prior fiscal year. Net
earnings at the same properties (excluding Olney) were $5,443,000 on revenues of
$9,672,000 compared to $5,595,000 on revenues of $9,507,000 the prior year. The
increase in revenues at the same properties was more than offset by expenses not
chargeable back to tenants such as a $106,000 account receivable write-off and
$50,000 of roof repairs. Net earnings at Olney this year was $1,174,000 compared
to $688,000 for the partial period the prior year.
NOI at the Retail properties increased 7.9% to $7,905,000 from $7,323,000 the
prior year.
(Graph)
Average occupancy during the year ended October 31, 2001 was 95.8% and occupancy
at year-end was 97.3%. This higher occupancy going into the new year represents
an additional $280,000 in fixed rents, plus additional revenues from tenant
reimbursements.
Olney is the 98,000 sq. ft. neighborhood shopping center we purchased during the
prior year. Occupancy at Olney is 92%. In contemplation of expanding the center
by approximately 52,000 sq. ft. we have not attempted to lease the vacant space.
We are now evaluating the timing of the expansion and may defer it to coincide
with the expiration of particular leases. If we do decide to defer, we will
immediately market the available vacant space.
Retail Property Acquisition: FREIT anticipates it will become the Managing
Member and hold a 40% interest in a joint venture to be formed to acquire a
320,000 sq. ft. neighborhood shopping center in Northern NJ. Total acquisition
costs will approximate $33 million which will be financed in part by a mortgage
and in part by equity contributions by the joint venture partners. We are
currently involved in our due-diligence review and the formation of the joint
venture operating agreement. If this review proves satisfactory and the joint
venture partners agree to the terms of the operating agreement, the purchase
should close sometime during the first half of the year 2002. This is a very
exciting property and we look forward to its acquisition. We feel this property
will add to increased shareholder cash distributions and portfolio value.
FINANCIAL CONDITION: Our financial condition remains strong. Net Cash Provided
by Operating Activities increased 3.8% this year to $6.4 million compared to
$6.2 million the prior year. Funds From Operations ("FFO") increased to $2.05
per share from $1.99 the prior year. This improved financial performance
resulted in dividend distributions increasing 4.2% to $1.38 per share this year
compared to $1.325 per share the prior year.
As at October 31, 2001 we had cash, cash equivalents, and marketable securities
totaling $13.7 million (13.7% of assets) compared to $12.4 million the year
before. These funds are available for construction, property acquisitions and
general needs.
Line Of Credit: During the fourth quarter we reached an agreement in principal
with a financial institution on the terms for a $14 million, secured, two-year
revolving line of credit. This will replace our former $8 million line that
expired during 2000. Interest rates on draws will be 175 basis points over our
choice of the 30, 60, or 90 LIBOR rate and will reset at the end of every
renewal period. While we feel that this credit line (subject to the lenders
satisfaction of appraisals, title searches and environmental reports) will be
formalized shortly, we do not expect to draw on this line in the short term. It
will provide additional liquidity, and be used opportunistically for future
acquisitions and/or development opportunities.
On October 18, 2001, a two-for-one share split in the form of a share dividend
was paid. This increased the number of our outstanding shares to 3,119,576 from
1,559,788. Our decision to declare this Share dividend was based on our desire
to make the shares more affordable to individual investors and broaden FREIT's
investor base. During the year ended October 31, 2001, the Total Return to our
shareholders from dividends and the increase in share value was 31.3%
GOING FORWARD: We are hopeful that the Recession will be short lived. The effect
a recession has on real estate generally lags the onset of the recession. As a
result, it is still too early to quantify the effects the recession will have on
our real estate portfolio, especially in the retail area. It has no doubt
affected our residential properties. We are experiencing increasing resistance
to rental increases, and a slight decrease in occupancy rates at some
residential properties from the fiscal year end levels. However, we remain
optimistic about the long-range future of the U.S. economy and in FREIT's
ability to continue to increase shareholder value and distributions. The Board
of Trustees looks forward to seeing you at the Annual Meeting scheduled for
Wednesday, April 10, 2002, at 7:30 p.m. at the Trust's headquarters located at
505 Main Street, Hackensack, NJ.
Sincerely,
\S\
\S\Robert S. Hekemian /s/Donald W. Barney
- --------------------- -------------------
Robert S. Hekemian Donald W. Barney
Chairman President
The statements in this report that relate to future earnings or performance are
forward-looking. Actual results might differ materially and be adversely
affected by such factors as longer than anticipated lease-up periods or the
inability of tenants to pay increased rents. Additional information about these
factors is contained in the Trust's filings with the SEC including the Trust's
most recently filed report on Form 10-K under the section "Management's
Discussion and Analysis of Financial Condition and Results of Operations," also
included elsewhere in this report
Properties
Portfolio of Real Estate Investments
Apartment Buildings
BERDAN COURT APARTMENTS Wayne, New Jersey GRANDVIEW APARTMENTS Hasbrouck
Heights, New Jersey HAMMEL GARDENS Maywood, New Jersey HEIGHTS MANOR APARTMENTS
Spring Lake Heights, New Jersey LAKEWOOD APARTMENTS Lakewood, New Jersey
PALISADES MANOR Palisades Park, New Jersey SHERIDAN APARTMENTS Camden, New
Jersey STEUBEN ARMS River Edge, New Jersey WESTWOOD HILLS* Westwood, New Jersey
Shopping Centers/Commercial Buildings
FRANKLIN CROSSING SHOPPING CENTER Franklin Lakes, New Jersey WESTRIDGE SQUARE
SHOPPING CENTER Frederick, Maryland WESTWOOD PLAZA SHOPPING CENTER Westwood, New
Jersey SINGLE TENANT STORE Glen Rock, New Jersey PATHMARK CENTER Patchogue, New
York OLNEY TOWN CENTER** Olney, Maryland
Vacant Land
33 ACRES, INDUSTRIAL ZONE South Brunswick, New Jersey 19.26 ACRES, MULTI-FAMILY
ZONE*** Rockaway, New Jersey 4.27 ACRES, RESIDENTIAL ZONE Franklin Lakes, New
Jersey
** *The Trust holds a 40% interest in Westwood Hills LLC, a New Jersey Limited
Liability Company, which owns the 210-unit apartment community.
****The Trust holds a 75% interest in S and A Commercial Associates LP, which
owns the Olney Town Center.
***The Trust has received site plan approval from the Township for the
construction of a 129 garden apartment unit.
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY
and subsidiary
Consolidated Balance Sheets (in thousands)
October 31, 2001 2000
---- ----
Assets
Real estate and equipment, at cost,
net of accumulated depreciation ............................ $76,955 $78,038
Investments in marketable securities ....................... 500 9,451
Cash and cash equivalents .................................. 13,187 2,925
Due from related party ..................................... -- 1,066
Tenants' security accounts ................................. 873 766
Sundry receivables ......................................... 2,512 1,794
Prepaid expenses and other assets .......................... 1,262 1,361
Deferred charges, net ...................................... 1,206 1,380
Totals ............................................... $96,495 $96,781
------- -------
Liabilities and Shareholders' Equity
Liabilities:
Mortgages payable ....................................... $69,354 $70,214
Accounts payable and accrued expenses ................... 819 854
Cash distributions in excess of investment in affiliate . 386 352
Dividends payable ....................................... 1,497 1,794
Tenants' security deposits .............................. 1,219 1,073
Deferred revenue ........................................ 322 303
Total liabilities .................................... 73,597 74,590
------ ------
Minority interest .......................................... 1,310 1,047
----- -----
Commitments and contingencies
Shareholders' equity:
Shares of beneficial interest without par value; 4,000,000
shares authorized; 3,119,576 shares issued and outstanding 19,314 19,314
Undistributed earnings .................................... 2,274 1,879
Accumulated other comprehensive income (loss) ............. -- (49)
Total shareholders' equity ............................. 21,588 21,144
Totals ................................................. $ 96,495 $ 96,781
See Notes to Consolidated Financial Statements.
5
Consolidated Statements of Income, Comprehensive Income and Undistributed
Earnings (in thousands except per share amounts)
Years ended October 31, ........................................ 2001 2000 1999
Revenue
Rental income ................................................ $ 15,805 $ 14,575 $ 13,083
Reimbursements ............................................... 2,508 2,179 1,750
Equity in income (loss) of affiliate ......................... 190 173 (52)
Net investment income ........................................ 683 834 742
Sundry income ................................................ 348 397 204
Totals ................................................. 19,534 18,158 15,727
Expenses
Operating expenses ........................................... 4,043 3,315 3,118
Management fees .............................................. 771 697 623
Real estate taxes ............................................ 2,348 2,187 1,922
Interest ..................................................... 5,356 5,165 4,620
Depreciation ................................................. 2,215 1,988 1,716
Minority interest ............................................ 85 31 --
Totals ................................................. 14,818 13,383 11,999
Income before state income taxes ............................... 4,716 4,775 3,728
Provision for state income taxes ............................... 16 16 13
Net income ..................................................... $ 4,700 $ 4,759 $ 3,715
Basic earnings per share ....................................... $ 1.51 $1.53 $ 1.19
Diluted earnings per share ..................................... $ 1.50 $1.53 $ 1.19
Basic weighted average shares outstanding ...................... 3,120 3,120 3,120
Diluted weighted average shares outstanding .................... 3,133 3,120 3,120
Comprehensive Income
Net income ..................................................... $ 4,700 $ 4,759 $ 3,715
Other comprehensive income (loss):
Unrealized holding gains (losses) on marketable securities .. 49 (70) (47)
Reclassification adjustment for losses included in net income -- 68 --
Other comprehensive income (loss) .............................. 49 (2) (47)
Comprehensive income ........................................... $ 4,749 $ 4,757 $ 3,668
Undistributed Earnings
Balance, beginning of year ..................................... $ 1,879 $ 1,253 $ 1,048
Basic net income ............................................... 4,700 4,759 3,715
Less dividends ................................................. (4,305) (4,133) (3,510)
Balance, end of year ........................................... $ 2,274 $ 1,879 $ 1,253
Dividends per share ............................................ $ 1.38 $ 1.33 $ 1.13
See Notes to Consolidated Financial Statements
6
Consolidated Statements of Cash Flows (in thousands)
Years ended October 31, 2001 2000 1999
Operating Activities
Net income ....................................................... $ 4,700 $ 4,759 $ 3,715
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................................. 2,445 2,182 1,878
Equity in (income) loss of affiliate ........................... (190) (173) 52
Deferred revenue ............................................... 19 (99) 147
Minority interest .............................................. 85 31 --
Realized loss on marketable securities ......................... -- 68 --
Write-off of abandoned property ................................ 114 -- --
Changes in operating assets and liabilities:
Tenants' security accounts ................................... (107) 5 (19)
Sundry receivables, prepaid expenses and other assets ........ (774) (1,030) (429)
Accounts payable and accrued expenses ........................ (35) 351 102
Tenants' security deposits ................................... 146 73 31
Net cash provided by operating activities .................. 6,403 6,167 5,477
Investing Activities
Capital expenditures ........................................... (1,132) (937) (536)
Distributions from affiliate ................................... 224 231 2,160
Purchase of marketable securities .............................. -- -- (14,500)
Proceeds from sale of marketable securities .................... 9,000 4,932 --
Repayment from affiliate ....................................... -- -- 100
Acquisition of partnership interest ............................ -- (4,728) --
Good faith deposits ............................................ (15) -- --
Net cash used in investing activities ...................... 8,077 (502) (12,776)
Financing Activities
Dividends paid ................................................. (4,602) (3,977) (3,307)
Received from sale of 25% minority interest in Olney ........... 1,066 -- --
Capital contributions by minority interest ..................... 178 -- --
Net proceeds from mortgage refinancing ......................... -- -- 3,671
Proceeds from mortgage borrowings .............................. -- -- 9,275
Repayment of mortgages ......................................... (860) (777) (728)
Deferred mortgage costs ........................................ -- (69) (322)
Net cash provided by (used in) financing activities ........ (4,218) (4,823) 8,589
Net increase in cash and cash equivalents .......................... 10,262 842 1,290
Cash and cash equivalents, beginning of year ....................... 2,925 2,083 793
Cash and cash equivalents, end of year ............................. $ 13,187 $ 2,925 $ 2,083
Supplemental Disclosure of Cash Flow Data
Interest paid .................................................... $ 5,230 $ 5,053 $ 4,530
Income taxes paid ................................................ $ 16 $ 16 $ 13
Supplemental schedule of noncash investing and financing activities:
Dividends declared but not paid amounted to $1,497,000, $1,794,000 and
$1,638,000 in 2001, 2000 and 1999, respectively.
During 2000, the Trust completed its acquisition of a 98,800 square foot retail
property in Olney, Maryland for approximately $15,648,000, in part, with the
proceeds of a $10,920,000 mortgage. In connection with the acquisition, the
Trust advanced the holders of the 25% interest which is not owned by the Trust
approximately $1,016,000 in order for them to fund their pro rata portion of the
purchase price See Notes to Consolidated Financial Statements.
7
Notes to Consolidated Financial Statements
note 1 - Organization and significant accounting policies:
Organization:
First Real Estate Investment Trust of New Jersey (the "Trust") was organized
November 1, 1961 as a New Jersey Business Trust. The Trust is engaged in owning
residential and commercial income producing properties located primarily in New
Jersey, Maryland and New York.
The Trust has elected to be taxed as a Real Estate Investment Trust under the
provisions of Sections 856-860 of the Internal Revenue Code, as amended.
Accordingly, the Trust does not pay Federal income tax on income whenever income
distributed to shareholders is equal to at least 95% of real estate investment
trust taxable income. Further, the Trust pays no Federal income tax on capital
gains distributed to shareholders.
The Trust is subject to Federal income tax on undistributed taxable income and
capital gains. The Trust may make an annual election under Section 858 of the
Internal Revenue Code to apply part of the regular dividends paid in each
respective subsequent year as a distribution for the immediately preceding year.
For fiscal 2001, 2000 and 1999, the Trust made such an election.
Principles of consolidation:
The consolidated financial statements include the accounts of the Trust and,
subsequent to March 29, 2000, its 75%-owned subsidiary, S and A Commercial
Associates Limited Partnership ("S and A"). The consolidated financial
statements include 100% of S and A's assets, liabilities, operations and cash
flows with the 25% interest not owned by the Trust reflected as "minority
interest", a group consisting principally of employees of Hekemian & Co., Inc.
("Hekemian"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of estimates:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Investment in affiliate:
The Trust's 40% investment in Westwood Hills, LLC ("WHLLC") is accounted for
using the equity method.
Investments in marketable securities:
Investments in marketable debt securities classified as "available for sale" are
recorded at fair value and unrealized gains and losses are reported as
accumulated other comprehensive income within shareholders' equity. The cost of
securities sold is based on the specific identification method.
Cash and cash equivalents:
Financial instruments which potentially subject the Trust to concentrations of
credit risk consist primarily of cash and cash equivalents. The Trust considers
all highly liquid investments purchased with a maturity of three months or less
to be cash equivalents. The Trust maintains its cash and cash equivalents in
bank and other accounts, the balances of which, at times, may exceed Federally
insured limits. At October 31, 2001, such cash and cash equivalent balances
exceeded Federally insured limits by approximately $9,233,000. Exposure to
credit risk is reduced by placing such deposits with high credit quality
financial institutions.
Depreciation:
Real estate and equipment are depreciated on the straight-line method by annual
charges to operations calculated to absorb costs of assets over their estimated
useful lives.
Deferred charges:
Deferred charges consist of mortgage costs and leasing commissions. Deferred
mortgage costs are amortized on the straight-line method by annual charges to
operations over the terms of the mortgages. Amortization of such costs is
included in interest expense and approximated $126,000, $112,000 and $90,000 in
2001, 2000 and 1999, respectively. Deferred leasing commissions are amortized on
the straight-line method over the terms of the applicable leases.
8
Revenue recognition:
Income from leases is recognized on a straight-line basis regardless of when
payment is due. Lease agreements between the Trust and commercial tenants
generally provide for additional rentals based on such factors as percentage of
tenants' sales in excess of specified volumes, increases in real estate taxes,
Consumer Price Indices and common area maintenance charges. These additional
rentals are generally included in income when reported to the Trust, when billed
to tenants or ratably over the appropriate period.
Advertising:
The Trust expenses the cost of advertising and promotions as incurred.
Advertising costs charged to operations amounted to approximately $47,000 in
2001 and $58,000 in both 2000 and 1999.
Earnings per share:
The Trust has presented "basic" and "diluted" earnings per share in the
accompanying statements of income in accordance with the provisions of Statement
of Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128").
Recent accounting pronouncements:
The Financial Accounting Standards Board has issued certain pronouncements as of
October 31, 2001 that will become effective in subsequent periods; however,
management does not believe that any of those pronouncements will effect any
financial accounting measurements or disclosures the Trust will be required to
make.
Note 2 - Investment in affiliates:
The Trust is a 40% member of WHLLC, a limited liability company that is managed
by Hekemian, a company which manages all of the Trust's properties and in which
one of the trustees of the Trust is the chairman of the board. Certain other
members of WHLLC are either trustees of the Trust or their families or officers
of Hekemian. WHLLC owns a residential apartment complex located in Westwood, New
Jersey.
Summarized financial information of WHLLC as of October 31, 2001 and 2000 and
for each of the three years in the period ended October 31, 2001 is as follows
2001 2000
(In Thousands
of Dollars)
Balance sheet data:
Assets:
Real estate and equipment, net ................ $ 13,806 $ 13,942
Other ......................................... 676 756
Total assets ............................ $ 14,482 $ 14,698
Liabilities and members' deficiency:
Liabilities:
Mortgage payable (A) ........................ $ 14,996 $ 15,185
Other ....................................... 455 398
Totals .................................. 15,451 15,583
Members' deficiency:
Trust ....................................... (386) (352)
Others ...................................... (583) (533)
Totals .................................. (969) (885)
Total liabilities and members' deficiency $ 14,482 $ 14,698
(A) The chairman of the Trust, who is also a member of WHLLC, has personally
guaranteed the mortgage in certain limited circumstances. The Trust and the
other members of WHLLC have indemnified the chairman to the extent of their
ownership percentage in WHLLC with respect to this guarantee.
9
2001 2000 1999
(In Thousands of Dollars)
Income statement data:
Rental revenue ........................... $ 3,035 $ 2,863 $ 2,728
Rental expenses .......................... 2,559 2,430 2,415
Income from rental operations ............ 476 433 313
Prepayment penalty on mortgage refinancing -- -- (442)
Net income (loss) ........................ $ 476 $ 433 $ (129)
Note 3 - Investments In Marketable Securities:
At October 31, 2001 and 2000, the Trust's investment in marketable debt
securities, all of which were classified as available for sale, consisted of
government agency bonds. The maturities for all securities held at October 31,
2001 and 2000 are as follows:
2001 2000
(In Thousands of Dollars)
Amortized Amortized
Cost Fair ValueCost Fair Value
One to five years -- -- $9,000 $8,978
Five to ten years $ 500 $ 500 500 473
Totals ...... $ 500 $ 500 $9,500 $9,451
Note 4 - Real estate and equipment: Real estate and equipment consists of the
following:
Range
of Estimated
Useful Lives 2001 2000
(In Thousands of Dollars)
Land ................................ $23,831 $23,831
Unimproved land ..................... 2,636 2,384
Apartment buildings 7-40 years11,464 11,045
Commercial buildings and
shopping centers .................. 15-50 years 57,443 56,510
Construction in progress ............ 263 795
Equipment 3-15 years642 ............ 582
96,279 95,147
Less accumulated depreciation ....... 19,324 17,109
Totals .................. $76,955 $78,038
Note 5 - Mortgages payable:
Mortgages payable consist of the following:
2001 2000
(In Thousands of Dollars)
Northern Life Insurance Cos. - Frederick, MD (A) ..... $18,004 $18,319
National Realty Funding L.C. - Westwood, NJ (B) ...... 10,184 10,306
Larson Financial Resources, Inc. - Spring Lake, NJ (C) 3,576 3,621
Fleet Bank - Patchogue, NY (D) ....................... 7,057 7,191
Larson Financial Resources, Inc. - Wayne, NJ (E) ..... 10,645 10,777
Larson Financial Resources, Inc. - River Edge, NJ (F) 5,197 5,262
Larson Financial Resources, Inc. - Maywood, NJ (G) ... 3,771 3,818
Fleet Bank - Olney, MD (H) ........................... 10,920 10,920
Totals ................................... $69,354 $70,214
(A) Payable in monthly installments of $152,153 including interest at 8.31%
through June 2007 at which time the outstanding balance is due. The mortgage is
secured by a retail building in Frederick, Maryland having a net book value of
approximately $22,681,000.
(B) Payable in monthly installments of $73,248 including interest at 7.38%
through February 2013 at which time the outstanding balance is due. The mortgage
is secured by a retail building in Westwood, New Jersey having a net book value
of approximately $10,945,000.
(C) Payable in monthly installments of $23,875 including interest at 6.70%
through December 2013 at which time the outstanding balance is due. The mortgage
is secured by an apartment building in Spring Lake, New Jersey having a net book
value of approximately $487,000.
(D) Payable in monthly installments of $54,816 including interest at 7.375%
through January 2005 at which time the outstanding balance is due. The mortgage
is secured by a retail building in Patchogue, New York having a net book value
of approximately $10,050,000.
(E) Payable in monthly installments of $76,023 including interest at 7.29%
through July 2010 at which time the outstanding balance is due. The mortgage is
secured by an apartment building in Wayne, New Jersey having a net book value of
approximately $1,714,000.
(F) Payable in monthly installments of $34,862 including interest at 6.75%
through December 2013 at which time the outstanding balance is due. The mortgage
is secured by an apartment building in River Edge, New Jersey having a net book
value of approximately $1,282,000.
(G) Payable in monthly installments of $25,295 including interest at 6.75%
through December 2013 at which time the outstanding balance is due. The mortgage
is secured by an apartment building in Maywood, New Jersey having a net book
value of approximately $880,000.
(H) Interest only is payable monthly at 175 basis points over the 90 day LIBOR
rate (an effective rate of 5.25% at October 31, 2001) and resets every 90 days.
The mortgage, which is due in March 2002 (and may be extended for one year), is
secured by a shopping center in Olney, Maryland having a net book value of
$15,406,000.
Principal amounts (in thousands of dollars) due under the above obligations in
each of the five years subsequent to October 31, 2001 are as follows:
Year Ending
October 31, Amount
2002 $11,836
2003 990
2004 1,068
2005 7,627
2006 1,063
The fair value of the Trust's long-term debt, which approximates $71,701,000 at
October 31, 2001, is estimated based on the quoted market prices for the same or
similar issues or on the current rates offered to the Trust for debt of the
similar remaining maturities.
Note 6 - Line of credit agreement:
The Trust had an $8,000,000 revolving line of credit agreement with Fleet
(formerly Summit) Bank which expired during May 2000. The Trust is currently
negotiating with another financial institution for a $14,000,000 two-year
revolving line of credit.
Note 7 - Commitments and contingencies:
Leases:
Retail tenants:
The Trust leases retail space having a net book value of approximately
$69,143,000 at October 31, 2001 to tenants for periods of up to twenty-five
years. Most of the leases contain clauses for reimbursement of real estate
taxes, maintenance, insurance and certain other operating expenses of the
properties. Minimum rental income (in thousands of dollars) to be received from
noncancelable operating leases in years subsequent to October 31, 2001 are as
follows:
Year Ending
October 31, Amount
2002 $ 8,519
2003 7,999
2004 7,345
2005 6,757
2006 6,159
Thereafter 41,845
Total $78,624
The above amounts assume that all leases which expire are not renewed and,
accordingly, neither minimal rentals nor rentals from replacement tenants are
included.
Minimum future rentals do not include contingent rentals which may be received
under certain leases on the basis of percentage of reported tenants' sales
volume or increases in Consumer Price Indices. Rental income that is contingent
on future events is not included in income until the contingency is resolved.
Contingent rentals included in income for each of the three years in the period
ended October 31, 2001 were not material.
Residential tenants:
Lease terms for residential tenants are usually one year or less.
Environmental concerns:
IIn accordance with applicable regulations, the Trust reported to the New Jersey
Department of Environmental Protection ("NJDEP") that a historical discharge of
hazardous material was discovered in 1997 at the renovated Franklin Lakes
shopping center (the "Center").
In November 1999, the Trust received a no further action letter from the NJDEP
concerning the historical discharge at the Center. However, the Trust is
required to continue monitoring such discharge, the cost of which will not be
material.
Note 8 - Management agreement and related party transactions:
The properties owned by the Trust are currently managed by Hekemian. The
management agreement requires fees equal to a percentage of rents collected.
Such fees were approximately $771,000, $697,000 and $623,000 in 2001, 2000 and
1999, respectively. In addition, Hekemian charged the Trust fees and commissions
in connection with the acquisitions of the commercial buildings in Olney,
Maryland in 2000 and various mortgage refinancing and lease acquisition fees.
Such fees and commissions amounted to approximately $472,000, $527,000 and
$208,000 in 2001, 2000 and 1999, respectively.
The Trust earned approximately $48,000 and $49,000 in 2001 and 2000,
respectively, on the advance it made in 2000 on behalf of the minority interest
in Olney which was repaid in 2001.
Note 9 - Earnings per share:
Basic and diluted earnings per share, based on the weighted average number of
shares outstanding during each period, are comprised of ordinary income.
The Trust has adopted the provisions of SFAS 128, which require the presentation
of "basic" earnings per share and, if appropriate, "diluted" earnings per share.
Basic earnings per share is calculated by dividing net income by the weighted
average number of shares outstanding during each period. The calculation of
diluted earnings per share is similar to that of basic earnings per share,
except that the denominator is increased to include the number of additional
shares that would have been outstanding if all potentially dilutive shares, such
as those issuable upon the exercise of stock options and warrants, were issued
during the period.
In computing diluted earnings per share for each of the three years in the
period ended October 31, 2001, the assumed exercise of all of the Trust's
outstanding stock options, adjusted for application of the treasury stock
method, would have increased the weighted average number of shares outstanding
as shown in the table below:
2001 2000 1999
Basic weighted average shares
outstanding 3,119,576 3,119,576 3,119,576
Shares arising from assumed
exercise of stock options 13,759 -- --
Dilutive weighted average shares
outstanding 3,133,335 3,119,576 3,119,576
Note 10 - Equity incentive plan:
On September 10, 1998, the Board of Trustees approved the Trust's Equity
Incentive Plan (the "Plan") which was ratified by the Trust's shareholders on
April 7, 1999, whereby up to 460,000 of the Trust's shares of beneficial
interest may be granted to key personnel in the form of stock options,
restricted share awards and other share-based awards. In connection therewith,
the Board of Trustees approved an increase of 460,000 shares in the Trust's
number of authorized shares of beneficial interest. Key personnel eligible for
these awards include trustees, executive officers and other persons or entities
including, without limitation, employees, consultants and employees of
consultants, who are in a position to make significant contributions to the
success of the Trust. Under the Plan, the exercise price of all options will be
the fair market value of the shares on the date of grant. The consideration to
be paid for restricted share and other share-based awards shall be determined by
the Board of Trustees, with the amount not to exceed the fair market value of
the shares on the date of grant. The maximum term of any award granted may not
exceed ten years. The actual terms of each award will be determined by the Board
of Trustees.
Upon ratification of the Plan on April 7, 1999, the Trust issued 377,000 stock
options which it had previously granted to key personnel on September 10, 1998.
The fair value of the options on the date of grant was $15 per share. The
options, all of which are outstanding at October 31, 2001, are exercisable
through September 2008.
In accordance with the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), the Trust will recognize
compensation costs as a result of the issuance of restricted share and other
share-based awards based on the excess, if any, of the fair value of the
underlying stock at the date of grant or award (or at an appropriate subsequent
measurement date) over the amount the recipient must pay to acquire the stock.
Therefore, the Trust will not be required to recognize compensation expense as a
result of any grants of stock options, restricted share and other share-based
awards at an exercise price that is equivalent to or greater than fair value.
The Trust will also make proforma disclosures, as required by Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS 123"), of net income or loss as if a fair value based method of
accounting for stock options had been applied instead if such amounts differ
materially from the historical amounts.
In the opinion of management, if compensation cost for the stock options granted
in 1999 had been determined based on the fair value of the options at the grant
date under the provisions of SFAS 123 using the Black-Scholes option pricing
model and assuming a risk-free interest rate of 4.27%, expected option lives of
ten years, expected volatility of 1.65% and expected dividends of 8.59%, the
Trust's pro forma net income and pro forma basic net income per share arising
from such computation would not have differed materially from the corresponding
historical amounts.
Note 11- Share split:
On September 26, 2001, the Board of Trustees approved a two-for-one share split
in the form of a share dividend. In connection with the share dividend, the
Board of Trustees also approved an increase in the authorized number of shares
of beneficial interest from 1,790,000 to 4,000,000. Financial information
contained herein, including the number of options, has been adjusted to
retroactively reflect the impact of the split. The number of shares of
beneficial interest issued at October 31, 2001, after giving effect to the
split, was 3,119,576 (1,559,788 shares before the split).
Note 12- Deferred fee plan:
During fiscal 2001, the Board of Trustees adopted a deferred fee plan (the
"Plan") for its officers and trustees. Pursuant to the Plan, any officer or
trustee may elect to defer receipt of any fees that would be due them. The Trust
has agreed to pay any participant (the "Participant") in the Plan interest on
any deferred fee at 9% per annum, compounded quarterly. Any such deferred fee is
to be paid to the Participants at the later of: (i) the retirement age specified
in the deferral election; (ii) actual retirement; or (iii) upon cessation of a
Participant's duties as an officer or trustee. The Plan provides that any such
deferral fee will be paid in a lump sum or in annual installments over a period
not to exceed 10 years, at the election of the Participant. As of October 31,
2001, approximately $96,000 of fees have been deferred along with accrued
interest of approximately $4,000.
Note 13- Segment information:
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," established standards for reporting financial information about
operating segments in interim and annual financial reports and provides for a
"management approach" in identifying the reportable segments.
The Trust has determined that it has two reportable segments: retail properties
and residential properties. These reportable segments offer different products,
have different types of customers and are managed separately because each
requires different operating strategies and management expertise. The retail
segment contains six separate properties and the residential segment contains
eight properties. The accounting policies of the segments are the same as those
described in Note 1.
The chief operating decision-making group of the Trust's retail segment,
residential segment and corporate/other is comprised of the Trust's Executive
Committee of the Board of Trustees.
The Trust assesses and measures segment operating results based on net operating
income ("NOI"). NOI is based on operating revenue and expenses directly
associated with the operations of the real estate properties, but excludes
deferred rents (straight lining), depreciation and financing costs. NOI is not a
measure of operating results or cash flows from operating activities as measured
by accounting principles generally accepted in the United States of America, and
is not necessarily indicative of cash available to fund cash needs and should
not be considered an alternative to cash flows as a measure of liquidity.
Real estate rental revenue, operating expenses, NOI and recurring capital
improvements for the reportable segments are summarized below and reconciled to
consolidated net income for each of the three years in the period ended October
31, 2001. Asset information is not reported since the Trust does not use this
measure to assess performance.
2001 2000 1999
(In Thousands of Dollars)
Real estate rental revenue:
Retail ............................. $ 11,522 $ 10,338 $ 8,472
Residential ........................ 6,726 6,353 6,167
Totals ........................... 18,248 16,691 14,639
Real estate operating expenses:
Retail ............................. 3,617 3,015 2,526
Residential ........................ 3,024 2,834 2,717
Totals ........................... 6,641 5,849 5,243
Net operating income:
Retail ............................. 7,905 7,323 5,946
Residential ........................ 3,702 3,519 3,450
Totals ............................. $ 11,607 $ 10,842 $ 9,396
Recurring capital improvements -
residential ........................ $ 479 $ 342 $ 261
Reconciliation to consolidated net
income:
Segment NOI ........................ $ 11,607 $ 10,842 $ 9,396
Deferred rents - straight lining ... 415 436 399
Net investment income .............. 683 834 742
Other income ....................... 23
Equity in income (loss) of affiliate 190 173 (52)
General and administrative expenses (539) (365) (434)
Depreciation ....................... (2,215) (1,988) (1,716)
Financing costs .................... (5,356) (5,165) (4,620)
Minority interest .................. (85) (31)
Net income ............................. $ 4,700 $ 4,759 $ 3,715
Note 14- Quarterly data (unaudited):
The following summary represents the results of operations for each quarter for
the years ended October 31, 2001 and 2000 (in thousands, except per share data):
Quarter Ended
31-Jan 30-Apr 31-Jul 31-Oct
2001
Revenue $ 4,818 $ 4,793 $ 5,036 $ 4,887
Expenses 3,701 3,832 3,590 3,711
Net Income $ 1,117 $ 961 $ 1,446 $ 1,176
Earnings per Share (1)
Basic $ 0.36 $ 0.31 $ 0.47 $ 0.38
Diluted 0.36 0.31 0.46 0.37
Dividends per share (1) 0.30 0.30 0.30 0.48
Quarter Ended
31-Jan 30-Apr 31-Jul 31-Oct
2000
Revenue $ 4,138 $ 4,280 $ 4,892 $ 4,848
Expenses 3,183 3,226 3,483 3,507
Net Income $ 955 $ 1,054 $ 1,409 $ 1,341
Earnings per Share (1)
Basic $ 0.31 $ 0.34 $ 0.45 $ 0.43
Diluted 0.31 0.34 0.45 0.43
Dividends per share (1) 0.25 0.25 0.25 0.58
(1) Per share amounts prior to October 18, 2001, the date that the
two-for-one share distribution was made, have been adjusted to reflect the share
distribution.
(2) The sum of quarterly earnings per share may differ from annual earnings
per share due to rounding.
Note 15- Acquisition:
The Trust is in the process of finalizing a 40% managing member interest in a
joint venture to be formed with a group consisting principally of employees of
Hekemian. The purpose of this joint venture is the acquisition of a 320,000
square foot shopping center in Northern New Jersey for approximately
$33,000,000. The Trust and its joint venture partner are currently completing
its due diligence. If the due diligence process proves satisfactory, it is
anticipated the acquisition will close sometime during the first half of the
year ending October 31, 2002.
Report of Independent Public Accountants
J. H. Cohn LLP BRONXVILLE, NY
75 EISENHOWER PARKWAY LAWRENCEVILLE, NJ
ROSELAND, NJ 07068-1697 METRO PARK, NJ
(973) 228-3500 NEW YORK, NY
OCEAN, NJ
ROSELAND, NJ
SAN DIEGO, CA
To the Trustees and Shareholders
First Real Estate Investment Trust of New Jersey and Subsidiary
We have audited the accompanying consolidated balance sheets of FIRST REAL
ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARY as of October 31, 2001 and
2000, and the related consolidated statements of income, comprehensive income,
undistributed earnings and cash flows for each of the three years in the period
ended October 31, 2001. These financial statements are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Real Estate
Investment Trust of New Jersey and Subsidiary as of October 31, 2001 and 2000,
and their results of operations and cash flows for each of the three years in
the period ended October 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
Roseland, New Jersey
November 21, 2001 J. H. Cohn LLP
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY
Selected Financial Data (in thousands except per share amounts) Income Statement
Data:
Year ended October 31, 2001 2000 1999 1998 1997
Revenues:
Revenues from Real Estate Operations $ 18,661 $ 17,151 $ 15,037 $ 14,213 $ 11,553
Net Investment Income .............. 683 834 742 6 6
Equity In Income (Loss) of Affiliate 190 173 (52) 213 139
19,534 18,158 15,727 14,432 11,698
Expenses:
Real Estate Operations ............. 6,639 5,850 5,275 5,026 4,499
Financing Costs .................... 5,356 5,165 4,620 3,762 2,629
General Expenses ................... 539 365 401 309 288
Depreciation ....................... 2,215 1,988 1,716 1,650 1,319
Minority Interest .................. 85 31 -- -- --
14,834 13,399 12,012 10,747 8,735
Net Income ......................... $ 4,700 $ 4,759 $ 3,715 $ 3,685 $ 2,963
Earnings Per Share:
Basic ............................ $ 1.51 $ 1.53 $ 1.19 $ 1.18 $ 0.95
Diluted .......................... $ 1.50 $ 1.53 $ 1.19 $ 1.18 $ 0.95
Cash Dividends Declared Per
Common Share ..................... $ 1.38 $ 1.33 $ 1.13 $ 1.06 $ 0.95
Balance Sheet Data:
Total Assets ....................... $ 96,495 $ 96,781 $ 84,428 $ 71,275 $ 59,233
Long-Term Obligations .............. $ 69,354 $ 70,214 $ 60,071 $ 47,853 $ 24,429
Secured Note Payable ............... $ -- $ -- $ -- $ -- $ 11,429
Shareholders' Equity ............... $ 21,588 $ 21,144 $ 20,520 $ 20,362 $ 19,984
Weighted Average Number of
Shares Outstanding:
Basic .......................... 3,120 3,120 3,120 3,120 3,120
Diluted ........................ 3,133 3,120 3,120 3,120 3,120
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Cautionary Statement Identifying Important Factors That Could Cause FREIT's
Actual Results to Differ From Those Projected in Forward Looking Statements.
Readers of this discussion are advised that the discussion should be read in
conjunction with the consolidated financial statements of FREIT (including
related notes thereto) appearing elsewhere in this Annual Report. Certain
statements in this discussion may constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements reflect FREIT's current expectations regarding future
results of operations, economic performance, financial condition and
achievements of FREIT, and do not relate strictly to historical or current
facts. FREIT has tried, wherever possible, to identify these forward-looking
statements by using words such as "believe," "expect," "anticipate," "intend,"
"plan," "estimate," or words of similar meaning.
Although FREIT believes that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, such statements are subject to
risks and uncertainties, which may cause the actual results to differ materially
from those projected. Such factors include, but are not limited to, the
following: general economic and business conditions, which will, among other
things, affect demand for rental space, the availability of prospective tenants,
lease rents and the availability of financing; adverse changes in FREIT's real
estate markets, including, among other things, competition with other real
estate owners, risks of real estate development and acquisitions; governmental
actions and initiatives; and environmental/safety requirements.
Overview
FREIT is an equity real estate investment trust ("REIT") that owns a portfolio
of residential apartment and retail properties. Our revenues consist primarily
of fixed rental income and additional rent in the form of expense reimbursements
derived from our income producing retail properties. We also receive income from
our 40% owned affiliate, Westwood Hills, which owns a residential apartment
property. Our policy has been to acquire real property for long-term investment.
All references to per share amounts are on a diluted basis (unless otherwise
indicated) and adjusted to reflect the one-for-one share dividend paid in
October 2001.
Results of Operations:
Fiscal Years ended October 31 ,2001 and 2000
Revenues for the year ended October 31, 2001 increased 7.6% to $19,534,000 from
$18,158,000 last year. The increase was primarily attributable to increased
revenues from real estate operations (see discussions below). Net Income for the
year decreased 1.2% to $4,700,000 from $4,759,000. This decrease is primarily
attributable to a $114,000 charge to expenses in connection with the abandonment
of a property acquisition.
Retail Segment
Changes in the Retail Segment Revenue and Net Operating Income ("NOI") have been
effected principally by the acquisition of the Olney Town Center, Olney, MD
("Olney") on March 29, 2000. NOI as used in this discussion reflects operating
revenue and expenses directly associated with the operations of the real estate
properties, but excludes straight lining of rents, depreciation and financing
costs (See Note 13 to the consolidated financial statements). The following
table sets forth comparative operating data separately for the Retail properties
owned before the Olney acquisition ("Same Properties") and Olney:
Year Ended October 31,
2001 2000
Rental Revenue: ($000)
Same Properties $ 9,328 $ 9,126
Olney (purchased 3/29/00) 2,194 1,212
Total Retail $11,522 $10,338
Operating Expenses:
Same Properties $ 2,903 $ 2,611
Olney (purchased 3/29/00) 714 404
Total Retail $ 3,617 $ 3,015
Net Operating Income
Same Properties $ 6,425 $ 6,515
Olney (purchased 3/29/00) 1,480 808
Total Retail $ 7,905 $ 7,323
Rental revenue at FREIT's Same Properties increased modestly by 2.2% for the
year ended October 31, 2001 to $9.3 million from $9.1 million last year. Average
occupancy for the current year was 95.8% compared to 81.7% last year. Occupancy
at October 31, 2001 was 97.3% compared to 82% at October 31, 2000. This increase
in occupancy % is expected to add an estimated $280,000 in fixed rents to next
year's revenues, plus additional revenues as a result of increases in expense
reimbursements of Common Area Maintenance ("CAM") and real estate taxes. While
our current leases project the above increases in revenues, the apparent
negative effect on consumer spending caused by the horrific events of September
11th, and current US recession, may eliminate the ability of weaker tenants to
pay rents, or even stay in business. The affect at this time is too uncertain to
quantify.
On January 21, 2002 Kmart Corporation, a major tenant in our Westwood Shopping
Center, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Due
to the below market rent they are paying for their space, it is highly unlikely
that FREIT will suffer any rent loss. We anticipate that Kmart will keep this
space or assign their lease to another tenant.
The increase in revenues at the Same Properties was more than offset by expenses
not chargeable back to tenants via CAM charges such as: $106,000 of tenant
account receivable write-offs, $50,000 of expensed roof repairs, and CAM and
real estate charges not reimbursed because of vacancies.
Occupancy at Olney remains unchanged at 92%, as the vacant space is being kept
vacant pending the expansion (see below).
Olney Expansion
Olney is a 98,900 sq. ft. neighborhood shopping center. We are planning an
approximately 52,000 sq. ft. expansion and modernization that is expected to add
to revenues, net earnings, and value to FREIT's real estate portfolio. The
expansion is subject to the expansion plans being approved by the required
governmental agencies, satisfactory pre-leasing of the new expanded space, and
the agreement of current tenants to be relocated. The expansion and
modernization costs are estimated at $12 million, including lost rents during
construction and from the relocation of tenants. Through 10/31/01 approximately
$237,000 of pre-construction development costs have been expended and deferred.
If all governmental approvals are received and tenant leasing acceptable, we
expect to finance the expansion, in part, from construction financing and, in
part, from funds available from our institutional money market investment.
We are now evaluating the economics of the timing of the expansion and may defer
it to coincide with the expiration of particular leases. If we do decide to
defer, we will immediately make the space we have kept vacant available for
leasing.
Residential Segment
Year Ended October 31,
2001 2000
($000)
Rental Revenue $ 6,726 $ 6,353
Operating Expenses 3,024 2,834
Net Operating Income $ 3,702 $ 3,519
Recurring Capital Improvements $ 479 $ 342
Residential revenue increased 5.9% to $6.7 million from $6.4 million last year.
Revenue is principally composed of monthly apartment rental income. Total
apartment rental income is a factor of occupancy and monthly apartment rents.
For the year ended 10/31/01, average occupancy was 94.4% and average monthly
apartment rents were $892. This compares to last year's average occupancy of
93.4% and average monthly rents were $844. Average monthly rents at 10/31/01
were $946. If these current average monthly rents and current occupancy hold,
approximately $390,000 will be added to revenues over the next fiscal year.
However, we are finding that the economic downturn is causing increased
resistance to rental increases, and may, over the next six months result in
higher vacancies than we have experienced over the past three years. For
instance, a 1% decline in annual average occupancy results in a $65,400 decline
in revenues.
During the year ended 10/31/01 Residential operating expenses increased 6.7% to
$3.0 million from $2.8 million over last year. The principal causes were higher
utility costs. The higher utility costs resulted from a combination of higher
utility rates and a colder winter than last year. As a percentage of revenue,
operating costs were about flat at 44.9% this year compared to 44.6% last year.
Capital improvements this year increased by $137,000 over last year. The
increase resulted from major apartment renovation programs at two of our
apartment communities to maintain their competitiveness in their markets. Since
our apartment communities 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.
We own 20+/-acres of undeveloped land in Rockaway, NJ, and have received
building
plan approval from the Township for the construction of 129 garden apartment
units. Development costs are estimated at $13.8 million that we will finance, in
part, from construction financing and, in part, from funds available from our
institutional money market investment. Through 10/31/01 approximately $251,000
of pre-construction development costs have been expended and deferred.
Net Investment Income
Net investment income is principally interest earned from our investments in
Government Agency Bonds, and an Institutional Money Market fund, and from
advances (now repaid) to related parties for the sale to them of a 25% interest
in S&A Commercial Associates LP (which owns Olney). Earnings received from these
sources for the last two fiscal years are as follows (in thousands of dollars):
Year Ended October 31,
2001 2000
Government Agency Bonds And
Institutional Money Market:
Interest Income $ 632 $ 849
Realized Losses -- (68)
Related Party Loans 48 49
Other 3 4
$ 683 $ 834
As a result of the lower interest rate environment over the course of this
fiscal year than existed at the beginning of our fiscal year, $9 million of
Government Agency Bonds were called. The one remaining $500,000 bond as at
October 31, 2001, was called on 11/17/01. All proceeds from the redemptions have
been invested in an institutional money market fund. As a result of the
redemptions, our annualized yield has been reduced as of 10/31/01 to
approximately 2.9% from 6.5% at the end of our last fiscal year. These interest
rate yield reductions coupled with the repayment of the related party loan is
expected to result in lower Net Investment Income over the up-coming fiscal year
than this past year. (See "Financing Costs" below for partial offsetting
benefits.)
Equity Income of Affiliate
FREIT's share of earnings of its 40% owned affiliate, Westwood Hills LLC, which
owns a 210 unit apartment community in Westwood, NJ, increased 9.8% to $190,000
from $173,000 last year. The increase is principally attributable to average
monthly rents increasing 6.4% to $1,227 from $1,153 last year. Average monthly
rents as at 10/31/01 were $1,267. Average occupancy over the year was 97.4%
compared to 97.8% last year. Cash distributions we received from our affiliate
this year and last year were $224,000 and $231,000 respectively.
Financing Costs
Financing Costs for the year increased 3.7% to $5.4 million from $5.2 million
last year. The increase is wholly attributable to the Olney financing costs.
Olney was acquired on March 29, 2000, and was included in operations for only
seven months last year. The increase attributable to Olney of $256,000 was
partially offset by reduced interest costs at the Same Properties as a result of
lower mortgage balances from normal loan amortization. In addition FREIT's $10.9
million floating rate mortgage benefited from the lower interest rate
environment this year compared to last year (interest charged on this loan was
5.25% at 10/31/01 compared to 8.03% at 10/31/00.
General Administrative Expenses
Our G & A expenses increased to $539,000 from $365,000 last year. Included in
this year's expense was a charge for $114,000, which represents expenses in
connection with the abandonment of a property acquisition we felt, should no
longer be pursued under the current purchase structure. Legal fees increased
approximately $35,000, principally in connection with SEC reporting matters; and
we made a $5,000 contribution to NJ victims of the September 11th events.
Depreciation
Depreciation expense this year increased 11.4% to $2.2 million compared to $2.0
million last year. Most all of this increase is primarily attributable to Olney
being included in operations for a full year this year and only seven months
last year.
Results of Operations:
Fiscal Years ended October 31 ,2000 and 1999
Acquisition
On March 29, 2000, FREIT acquired the Olney Town Center ("Olney"), in Olney, MD.
Olney is a 98,800 sq. ft. neighborhood shopping center with expansion potential
to 131,000 sq. ft. The center is 91.5% occupied. The shopping center is situated
on approximately 13 acres of land. Approximately 11 acres are subject to a
ground lease expiring in 2078, and approximately 2 acres are owned in Fee
simple.
The center was acquired by purchasing 100% ownership interest of S And A
Commercial Associates Limited Partnership ("S and A"). S and A's only asset at
the closing date was the shopping center. The purchase price of the center,
approximately $15,648,000, was financed, in part, with the proceeds of a
$10,920,000 mortgage, with the balance of the purchase price being supplied by
the proceeds from liquidating a portion of the Trust's marketable securities.
FREIT has agreed in principal to sell, as of March 29, 2000, a 25% interest in S
and A to a group consisting principally of employees of Hekemian on the same
basis and cost to FREIT. The accompanying financial statements include the
operations of Olney since the acquisition date which are summarized as follows:
Period From % Of
3/29/00 Consolidated
To Year Ended
10/31/00 10/31/00
($000)
Selected Income Statement Data:
Revenues $1,291 7.1%
Operating Expenses 384 6.2%
Financing Costs 567 11.0%
Depreciation 218 11.0%
Minority Interest 31 103.3%
Total Expenses 1,200 9.0%
Net Earnings $ 91 1.9%
Earnings Per Share $ 0.06 1.9%
Revenues
For the fiscal year ended October 31, 2000 ("Fiscal 2000"), total revenues
increased $2,431,000 (15.4%) to $18,158,000 from $15,727,000 for fiscal ended
October 31, 1999 ("Fiscal 1999"). $2,110,000 or 86.9% of this increase is
attributable to revenues from real estate operations. The balance of the revenue
increase is from FREIT's share of the earnings from its affiliate ($226,000) and
from increased investment income ($92,000).
Real Estate Operations: The $2,110,000 (14%) increase in revenues from real
estate operations is primarily attributable to Olney ($1,291,000), which has
been included in operations since March 29, 2000, and increased revenues from
Franklin Crossing ($309,000) as a result of higher occupancy. Revenue at retail
properties other than Olney and Franklin Crossing increased 4.4%, and included a
$150,000 lease termination fee at the Westridge Square Shopping Center.
Revenue at the residential properties increased 3% despite a modest decline in
occupancy. The decline in occupancy having been offset by increased apartment
rentals.
Net Investment Income: Net investment income, which is principally derived from
FREIT's investment in marketable securities (U.S. Treasury Notes and Government
Agency bonds), and money market funds, increased 12.4% to $834,000.
Earnings from 40% Owned Affiliate: Equity in Earnings of FREIT's 40% owned
affiliate, Westwood Hills L.L.C. was $173,000 for Fiscal 2000 compared to a loss
of $52,000 for Fiscal 1999. This positive swing of $225,000 resulted from an 8%
increase in the affiliate's NOI (Net Income before depreciation and debt
service), and the non-reoccurrence of mortgage refinancing costs of $440,000
incurred during Fiscal 1999.
Expenses:
For Fiscal 2000 overall expenses increased $1,387,000 (11.5%) to $13,399,000
from $12,012,000 for Fiscal 1999. The principal areas of increase and percentage
increase were in the following areas: Real estate operations $271,000 (8.2%),
real estate taxes $265,000 (13.8%), financing costs $545,000 (11.8%), and
depreciation $272,000 (15.9%). The inclusion of Olney's operations during Fiscal
2000 accounted for $1,200,000 (87%) of the overall expense increase - see table
above for the amount and % of the categories attributed to Olney. Administrative
costs declined 15.3% in Fiscal 2000.
Net Income:
Net Income for Fiscal 2000 increased 28.1% to $4,759,000 ($.77 per share)
compared to $3,715,000 ($.60 per share) for Fiscal 1999. The earnings component
increases during Fiscal 2000 over Fiscal 1999 are as follows:
Current Year
Changes
Real Estate Operations $1,203,000
Net Investment Income 93,000
Equity in Income of Affiliate 225,000
Financing Costs (545,000)
Administrative Costs 67,000
$1,043,000
The increase in Net Income from Real Estate Operations is attributable to a 2.1%
increase at FREIT's residential properties and a 22.4% increase at the Retail
properties. The increase in Net Income at the Retail properties is principally
attributable to the inclusion of Olney and increased occupancy at Franklin
Crossing.
Funds From Operations ("FFO")
FFO is considered by many as a standard measurement of a REIT's performance. We
compute FFO as follows (in thousands of dollars):
Year Ended October 31,
2001 2000
Net Income $4,700 $4,759
Depreciation - Real Estate 2,215 1,988
Amortization of Deferred
Mortgage Costs 126 111
Deferred Rents (415) (436)
Capital Improvements -
Apartments (479) (342)
Project Abandoned 114 --
Minority Interest 85 31
Other 61 104
Funds From Operations $6,407 $6,215
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, and therefore FREITS's FFO and the
FFO of other REITs may not be directly comparable.
Liquidity and Capital Resources
Our financial condition remains strong. Net Cash Provided By Operating
Activities increased 3.8% this year to $6.4 million compared to $6.2 million
last year. We expect that cash provided by operating activities will be adequate
to cover mandatory debt service payments, recurring capital improvements and
dividends necessary to retain qualification as a REIT (95% of taxable income for
fiscal year 2001 and 90% of taxable income thereafter).
As at 10/31/01 we had cash, cash equivalents, and marketable securities totaling
$13.7 million compared to $12.4 million at 10/31/00. These funds are available
for construction, property acquisitions, and general needs.
As described in the segment analysis above, we are planning the expansion of
Olney and the construction of apartment rental units in Rockaway, NJ. The total
capital required for these two projects is estimated at $25.8 million. We expect
to finance these costs, in part, from construction and mortgage financing and,
in part, from funds available in our institutional money market investment.
At 10/31/01 FREIT's aggregate outstanding mortgage debt was $69.4 million.
Approximately $58.4 million bears a fixed weighted average interest rate of
7.511%, and an average life of approximately 9.2 years. Approximately $10.9
million of mortgage debt bears an interest rate equal to 175 basis points over
LIBOR and resets every 90 days. This mortgage note is due in March 2002, but can
be extended for one year. The fixed rate mortgages are subject to repayment
(amortization) schedules that are longer than the term of the mortgages. As
such, balloon payments for all mortgage debt will be required as follows:
Year
(In Millions)
2002 $ 10.9
2005 $ 6.6
2007 $ 15.7
2010 $ 9.2
2013 $ 17.5
The following table shows the estimated fair value and carrying value of our
long-term debt at October 31, 2001 and 2000:
October 31,
2001 2000
(In Millions)
Fair Value$ 71.7 $ 71.0
Carrying Value $ 69.3 $ 70.2
Fair values are estimated based on market interest rates at the end of each
fiscal year and on discounted cash flow analysis. Changes in assumptions or
estimation methods may significantly affect these fair value estimates.
FREIT expects to re-finance the individual mortgages with new mortgages when
their terms expire. To this extent we have exposure to interest rate risk on our
fixed rate debt obligations. If interest rates, at the time any individual
mortgage note is due, are higher than the current fixed interest rate, higher
debt service may be required, and/or re-financing proceeds may be less than the
amount of mortgage debt being retired. For example, a one percent interest rate
increase would reduce the Fair Value of our debt by $3.3 million, and a one
percent decrease would increase the Fair Value by $3.0 million.
Additionally, we have exposure on our floating rate debt. A one percent change
in rates, up or down, will decrease or increase income and cash flow by
$109,200.
We believe that the values of our properties will be adequate to command
re-financing proceeds equal to, or higher than the mortgage debt to be
re-financed. We continually review our debt levels to determine if additional
debt can prudently be utilized for property acquisition additions to our real
estate portfolio that will increase income and cash flow to shareholders.
$14 Million Line of Credit: During the fourth quarter FREIT reached an agreement
in principle with a financial institution on the terms for a $14 million,
two-year revolving line of credit. Interest rates on draws will be 175 basis
points over our choice of the 30, 60, or 90-day LIBOR rate and will reset at the
end of every rate renewal period. The line of credit will be secured by
mortgages on several of our un-leveraged (debt free) properties. While we feel
this line of credit will be formalized shortly, it is subject to the lender's
satisfaction of appraisals, title searches, and environmental reports. While the
line of credit may shortly be formalized, we do not expect to draw down on this
line in the short term. We plan to use it opportunistically, for future
acquisitions and/or development opportunities.
Distributions to Shareholders
Since its inception in 1961, FREIT has elected to be treated as a REIT for
Federal income tax purposes. In order to qualify as a REIT, we must satisfy a
number of highly technical and complex operational requirements including that
we must distribute to our shareholders at least 95% (ninety percent (90%) for
taxable years beginning after 2000) of our REIT taxable income. We anticipate
making distributions to shareholders from operating cash flows, which are
expected to increase from future growth in rental revenues. Although cash used
to make distributions reduces amounts available for capital investment, we
generally intend to distribute not less than the minimum of REIT taxable income
necessary to satisfy the applicable REIT requirement as set forth in the
Internal Revenue Code.
It has been our policy to pay fixed quarterly dividends for the first three
quarters of each fiscal year, and a final fourth quarter dividend based on the
fiscal year's net income and taxable income. The following tables list the
quarterly dividends paid or declared for the three most recent fiscal years and
the percent the dividends were of taxable income. Per share amounts have been
adjusted to reflect the one-for-one share dividend paid on October 18, 2001
.
FISCAL FISCAL FISCAL
2001 2000 1999
First Quarter $ .30 $ .25 $ .20
Second Quarter $ .30 $ .25 $ .20
Third Quarter $ .30 $ .25 $ .20
Fourth Quarter $ .48 $ .575 $ .525
Total For Year $1.38 $1.325 $1.125
Dividends
($000) as a % of
Total Taxable Taxable
Per Share Dividends Income Income
2001 $1.38 $4,305 $4,120 104.5%
2000 $1.325 $4,133 $4,122 100.3%
1999 $1.125 $3,510 $3,332 105.3%
Inflation
Inflation can impact the financial performance of FREIT in various ways. Our
retail tenant leases normally provide that the tenants bear all or a portion of
most operating expenses, which can reduce the impact of inflationary increases
on FREIT. Apartment leases are normally for a one-year term, which may allow us
to seek increased rents as leases renew or when new tenants are obtained.
Acquisition
FREIT anticipates it will become the Managing Member and hold a 40% interest in
a joint venture to be formed (to the satisfaction of the parties) for the
acquisition of a 320,000 sq. ft. neighborhood shopping center in Northern NJ.
Total acquisition costs will approximate $33 million. We and our joint venture
partner, an LLC that will consist primarily of employees of Hekemian, are
currently involved in our due-diligence review and reviewing acquisition
financing alternatives. If the due-diligence review proves satisfactory, the
purchase will close sometime during the first half of the year 2002. Depending
on the mortgage acquisition financing alternative selected, FREIT's 40% equity
participation will be between $3.2 million and $4.2 million. These funds will be
provided from FREIT's money market investments.
Beneficial interests in FREIT are represented by shares without par value (the
"Shares"). The Shares represent FREIT's only authorized, issued and outstanding
class of equity. As of January 23, 2002 there were approximately 500 holders of
record of the Shares. The Shares are traded in the over-the-counter market
through use of the OTC Bulletin Board(R) Service (the "OTC Bulletin Board")
provided by NASD, Inc. FREIT does not believe that an active United States
public trading market exists for the Shares since historically only small
volumes of the Shares are traded on a sporadic basis. The following table sets
forth, for the periods indicated, the high and low bid quotations for the Shares
on the OTC Bulletin Board. Quotations prior to October 18, 2001, the date the
one-for-one share distribution was made, have been adjusted to reflect the share
distribution.
High Low
Fiscal Year Ended October 31, 2001
First Quarter $19 $14 3/4
Second Quarter $17 1/4 $15 1/2
Third Quarter $19 $15 1/2
Fourth Quarter $18 1/2 $15 1/2
Fiscal Year Ended October 31, 2000
First Quarter $14 $13
Second Quarter $12 3/4 $12 1/2
Third Quarter $13 $12 1/4
Fourth Quarter $15 $13
The bid quotations set forth above for the Shares reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. The source of the bid quotations is Janney
Montgomery Scott, Inc., members of the New York Stock Exchange and other
national securities exchanges.