SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended July 31, 2002 Commission File No. 2-27018
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY
------------------------------------------------
(exact name of registrant as specified in its charter)
New Jersey 22-1697095
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(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
505 Main Street, P.O. Box 667, Hackensack, New Jersey 07602
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 201-488-6400
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- --------------------------------------------------------------------------------
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 [XX] No [ ]
As of September 13, 2002, there were 3,119,576 shares of beneficial interest
issued and outstanding.
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY
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INDEX
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Part I: Financial Information
Item 1: Unaudited Condensed Consolidated Financial Statements
a.) Condensed Consolidated Balance Sheets as at July 31, 2002 and October
31, 2001;
b.) Condensed Consolidated Statements of Income, Comprehensive Income and
Undistributed Earnings for the Nine and Three Months Ended July 31,
2002 and 2001;
c.) Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended July 31, 2002 and 2001;
d.) Notes to Condensed Consolidated Financial Statements.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Item 3: Quantitative and Qualitative Disclosures about Market Risk.
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K
Item 1: Financial Statements
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
July 31, October 31,
2002 2001
(Unaudited) (See Note 1)
--------- ----------
(In Thousands of Dollars)
-----------------------
ASSETS
------
Real estate, at cost, net of accumulated
depreciation $75,011 $76,955
Real estate held for sale, net of depreciation 509
Investment in marketable securities - 500
Cash and cash equivalents 13,838 13,187
Tenants' security accounts 905 873
Sundry receivables 3,137 2,512
Prepaid expenses and other assets 1,510 1,262
Deferred charges, net 1,317 1,206
------- -------
Totals $96,227 $96,495
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgages payable $68,632 $69,354
Accounts payable and accrued expenses 706 819
Cash distributions in excess of earnings and investment in affiliate 269 386
Dividends payable 935 1,497
Tenants' security deposits 1,248 1,219
Deferred revenue 517 322
------- -------
Total liabilities 72,307 73,597
------- -------
Minority interest 1,162 1,310
------- -------
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 3,444 2,274
------- -------
Total shareholders' equity 22,758 21,588
------- -------
Totals $96,227 $96,495
======= =======
See Notes to Consolidated Financial Statements
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
NINE AND THREE MONTHS ENDED JULY 31, 2002 AND 2001
Nine Months Three Months
Ended July 31, Ended July 31,
2002 2001 2002 2001
---- ---- ---- ----
(In Thousands of Dollars,
Except Per Share Amounts)
Revenue:
Rental income $ 11,801 $ 11,323 $ 3,995 $ 3,807
Reimbursements 2,060 1,996 665 671
Equity in income of affiliate 197 118 88 56
Net Investment Income 183 593 60 189
Sundry income 149 195 23 153
-------- -------- -------- --------
Totals 14,390 14,225 4,831 4,876
-------- -------- -------- --------
Expenses:
Operating expenses 2,630 2,707 960 821
Management fees 594 552 199 181
Real estate taxes 1,781 1,704 598 573
Financing costs 3,661 4,074 1,220 1,300
Depreciation 1,609 1,595 538 531
Minority interest 89 47 (3) 31
-------- -------- -------- --------
Totals 10,364 10,679 3,512 3,437
-------- -------- -------- --------
Income before state income taxes
and discontinued operations 4,026 3,546 1,319 1,439
Provision for state income taxes 15 11 5 4
-------- -------- -------- --------
Income before discontinued operations 4,011 3,535 1,314 1,435
Discontinued operations (33) (11) (10) 11
-------- -------- -------- --------
Net Income $ 3,978 $ 3,524 $ 1,304 $ 1,446
======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share
Earnings before discontinued operations $ 1.29 $ 1.13 $ 0.42 $ 0.46
Discontinued operations (0.01) (0.00) (0.00) 0.00
-------- -------- -------- --------
$ 1.28 $ 1.13 $ 0.42 $ 0.46
======== ======== ======== ========
Diluted earnings per share
Earnings before discontinued operations $ 1.26 $ 1.13 $ 0.41 $ 0.46
Discontinued operations (0.01) (0.00) (0.00) 0.00
-------- -------- -------- --------
$ 1.25 $ 1.13 $ 0.41 $ 0.46
======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Basic weighted average shares outstanding 3,120 3,120 3,120 3,120
Diluted weighted average shares outstanding 3,181 3,120 3,215 3,120
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND UNDISTRIBUTED
EARNINGS
NINE AND THREE MONTHS ENDED JULY 31, 2002 AND 2001
Nine Months Three Months
Ended July 31, Ended July 31,
2002 2001 2002 2001
---- ---- ---- ----
(In Thousands Of Dollars)
COMPREHENSIVE INCOME
--------------------
Net income $ 3,978 $ 3,524 $ 1,304 $ 1,446
Other comprehensive income -
Unrealized gain (loss) on marketable securities - 67 (12)
------- ------- ------- -------
Comprehensive income $ 3,978 $ 3,591 $ 1,304 $ 1,434
======= ======= ======= =======
UNDISTRIBUTED EARNINGS
Balance, beginning of period $ 2,274 $ 1,879 $ 3,076 $ 2,085
Net income 3,978 3,524 1,304 1,446
Less dividends (2,808) (2,808) (936) (936)
------- ------- ------- -------
Balance, end of period $ 3,444 $ 2,595 $ 3,444 $ 2,595
======= ======= ======= =======
Dividends per share $ 0.90 $ 0.90 $ 0.30 $ 0.30
======= ======= ======= =======
See Notes to Consolidated Financial Statements
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2002 AND 2001
2002 2001
---- ----
(In thousands of Dollars)
-------------------------
Operating activities:
Net Income $ 3,978 $ 3,524
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization, including discontinued operation 1,838 1,813
Equity in (income) of affiliate (197) (118)
Deferred revenue 195 127
Minority interest 89 47
Development costs written-off 190
Changes in operating assets and liabilities:
Tenants' security accounts (32) (104)
Sundry receivables, prepaid expenses and other assets (873) (1,295)
Deferred charges (289) (45)
Accounts payable and accrued expenses (113) 596
Tenants' security deposits 29 149
-------- --------
Net cash provided by operating activities 4,815 4,694
-------- --------
Investing activities:
Capital expenditures (415) (862)
Distributions from affiliate 80 144
Marketable securities redeemed 500 5,000
Good faith deposits (129)
-------- --------
Net cash provided by investing activities 165 4,153
-------- --------
Financing activities:
Received from sale of 25% minority interest in Olney 1,066
Cash contributed by minority interest in Olney 179
Repayment of mortgages (722) (639)
Dividends Paid (3,370) (3,666)
Distribution to Minority Interest (237)
-------- --------
Net cash used in financing activities (4,329) (3,060)
-------- --------
Net increase in cash and cash equivalents 651 5,787
Cash and cash equivalents, beginning of period 13,187 2,925
-------- --------
Cash and cash equivalents, end of period $ 13,838 $ 8,712
======== ========
Supplemental disclosure of cash flow data:
Interest paid $ 3,572 $ 3,980
======== ========
Income taxes paid $ 15 $ 11
======== ========
Dividends declared but not paid $ 936 $ 936
======== ========
See Notes to Consolidated Financial Statements.
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of presentation:
The accompanying condensed consolidated financial statements have been
prepared without audit, in accordance with accounting principles generally
accepted in the United States of America for interim financial statements
and pursuant to the instructions to Form 10-Q and Rule 10-01 of regulation
S-X. Accordingly, certain information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements have been omitted. It is the opinion of management
that all adjustments considered necessary for a fair presentation have been
included, and that all such adjustments are of a normal recurring nature.
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current year presentation.
The consolidated results of operations for the nine and three months ended
July 31, 2002 are not necessarily indicative of the results to be expected
for the full year. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes included in FREIT's Annual Report on Form 10-K
for the year ended October 31, 2001.
In October 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 requires the reporting of discontinued operations to include components
of an entity that have either been disposed of or are classified as held
for sale. FREIT has adopted SFAS No. 144. On August 9, 2002 FREIT sold its
Camden, NJ property (see Note 9 - Subsequent Event), which is a component
of FREIT's Residential Segment. FREIT has reclassified the Camden property
to real estate held for sale and has reclassified the net income (loss)
from the Camden property as Discontinued Operations for all periods
presented. The gain on the sale will be reported as a component of
discontinued operations during the quarter ending October 31, 2002. The
adoption of SFAS No. 144 did not have an impact on net income, but only
impacted the presentation of this property within the consolidated
statements of income.
Note 2 - Investment in affiliate:
FREIT is a 40% member of Westwood Hills, LLC ("WHLLC"), a limited liability
company that is managed by Hekemian & Co., Inc. ("Hekemian"), a company
which manages all of FREIT's properties and in which one of the trustees of
FREIT is the chairman of the board. Certain other members of WHLLC are also
trustees of FREIT. WHLLC owns a residential apartment complex located in
Westwood, New Jersey.
Summarized unaudited financial information of WHLLC as of July 31, 2002 and
October 31, 2001, and for the nine and three months ended July 31, 2002 and
2001 is as follows:
July 31, October 31,
2002 2001
---- ----
(In thousands of dollars)
Balance sheet data:
Assets:
Real estate and equipment, net $ 13,752 $ 13,806
Other 829 676
------- --------
Total assets $ 14,581 $ 14,482
========== ========
Liabilities and members' deficiency:
Liabilities:
Mortgage payable $14,846 $ 14,996
Other 410 455
------- --------
Total liabilities 15,256 15,451
------- --------
Members' deficiency:
FREIT (269) (386)
Others (406) (583)
------- --------
Total members' deficiency (675) (969)
------- --------
Total liabilities and members' deficiency $ 14,581 $ 14,482
========== ========
Nine Months Ended Three Months Ended
July 31, July 31,
-------------------------------- ------------------------------
2002 2001 2002 2001
(In thousands of dollars)
Income statement data:
Rental revenue $ 2,377 $ 2,256 $ 807 $ 765
Real estate operating expenses (845) (923) (240) (281)
-------------------------------- ------------------------------
Net operating Income 1,532 1,333 567 484
Financing costs (760) (769) (253) (255)
Depreciation (280) (268) (95) (90)
-------------------------------- ------------------------------
Net income $ 492 $ 296 $ 219 $ 139
================================ ==============================
Note 3 - Line of credit:
On June 20, 2002, FREIT obtained a two-year $14 million revolving credit
line with The Provident Bank. Draws against the credit line can be used for
general corporate purposes, or for property acquisitions, construction
activities, Letters-of-Credit, and other related business purposes. Draws
are secured by mortgages on FREIT's Franklin Crossing Shopping Center,
Franklin Lakes, NJ, single tenanted retail space in Glen Rock, NJ, Lakewood
Apartments, Lakewood, NJ, and Grandview Apartments, Hasbrouck Heights, NJ.
Interest rates on draws will be set at the time of each draw, based on
FREIT's 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.
Note 4 - Earnings per share:
FREIT 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.
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 the nine and three months ended
July 31, 2002 and 2001, the assumed exercise of all of FREIT's outstanding
stock options, adjusted for application of the treasury stock method, would
have increased the weighted average number of shares outstanding as shown
in the table below:
Nine Months Ended Three Months Ended
July 31, July 31,
-------------------------------- ------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Basic weighted average shares
outstanding 3,119,576 3,119,576 3,119,576 3,119,576
Shares arising from assumed
exercise of stock options
61,403 - 95,106 -
Dilutive weighted average shares
-------------------------------- ------------------------------
outstanding 3,180,979 3,119,576 3,214,682 3,119,576
================================ ==============================
Basic and diluted earnings per share, based on the weighted average number
of shares outstanding during each period, are comprised of ordinary income.
Note 5- Equity incentive plan:
On September 10, 1998, the Board of Trustees approved FREIT's Equity
Incentive Plan (the "Plan") which was ratified by the FREIT's shareholders
on April 7, 1999, whereby up to 460,000 of the FREIT's shares of beneficial
interest may be granted to key personnel in the form of stock options,
restricted share awards and other share-based awards.
Upon ratification of the Plan on April 7,1999, FREIT issued 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 July 31, 2002, are exercisable
through September 2008.
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, FREIT'S pro forma net income and pro forma basic net
income per share arising from such computation would not have differed
materially from the corresponding historical amounts.
Note 6- 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.
Note 7- Segment information:
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", established standards for reporting financial information
about operating segments in interim and annual financial reports and
provides for a "management approach" in identifying the reportable
segments.
FREIT has determined that it has two reportable segments: 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 (See Note 9 below regarding
the sale of FREIT's Camden property). 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 year ended October 31, 2001.
The chief operating decision-making group of FREIT's retail segment,
residential segment and corporate/other is comprised of the Trust's
Executive Committee of the Board of Trustees.
FREIT assesses and measures segment operating results based on net
operating income ("NOI"). NOI is based on operating revenue and expenses
directly associated with the operations of the real estate properties, but
excludes deferred rents (straight-lining), depreciation, and financing
costs. NOI is not a measure of operating results or cash flows from
operating activities as measured by accounting principles generally
accepted in the United States of America, and is not necessarily indicative
of cash available to fund cash needs and should not be considered an
alternative to cash flows as a measure of liquidity.
Real estate rental revenue, operating expenses, NOI and recurring capital
improvements for the reportable segments are summarized below and
reconciled to consolidated net income for the nine and three months ended
July 31, 2002 and 2001. Asset information is not reported since FREIT does
not use this measure to assess performance.
Nine Months Ended Three Months Ended
July 31, July 31,
2002 2001 2002 2001
---- ---- ---- ----
(in thousands of dollars)
Real estate revenue:
Retail $ 9,020 $ 8,648 $ 2,997 $2,985
Residential 4,727 4,565 1,608 1,546
-------------------------- -------------------------
Totals 13,747 13,213 4,605 4,531
-------------------------- -------------------------
Real estate operating expenses:
Retail 2,854 2,751 1,090 894
Residential 1,820 1,932 543 594
-------------------------- -------------------------
Totals 4,674 4,683 1,633 1,488
-------------------------- -------------------------
Net operating income: `
Retail 6,166 5,897 1,907 2,091
Residential 2,907 2,633 1,065 952
-------------------------- -------------------------
Totals $ 9,073 $ 8,530 $ 2,972 $3,043
========================== =========================
Recurring capital improvements:
Residential $ 209 $ 325 $ 85 $ 123
========================== =========================
Reconciliation to consolidated
net income:
Segment NOI $ 9,073 $ 8,530 $ 2,972 $3,043
Deferred rents - straight-lining 266 301 79 99
Net investment income 183 593 60 189
Equity in income of affiliate 197 118 88 56
General and administrative expenses (349) (291) (131) (90)
Depreciation (1,609) (1,595) (538) (531)
Discontinued operations (33) (11) (10) 11
Financing costs (3,661) (4,074) (1,220) (1,300)
Minority interest (89) (47) 3 (31)
-------------------------- -------------------------
Net Income $ 3,978 $ 3,524 $ 1,303 $1,446
========================== =========================
Note 8- Contingency:
In connection with FREIT's plans to develop 129 rental apartment units in
Rockaway, NJ, FREIT posted an $80,000 Letter of Credit with the township to
guarantee completion of certain improvements.
Note 9 - Subsequent event:
On August 9, 2002, FREIT closed on the sale of its Sheridan Apartment
property in Camden, NJ. The selling price of the property was $1,050,000
and resulted in a capital gain of approximately $475,000. FREIT's Board of
Trustees declared a special long-term capital gain dividend of $.15 per
share, which will distribute approximately all of the gain to shareholders.
This dividend is payable on September 6, 2002 to shareholders of record on
August 23, 2002 and will aggregate $467,936. The sale will not have a
material financial affect on FREIT's future continuing operating results.
#########
Item 2:
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Cautionary Statement Identifying Important Factors That Could Cause FREIT's
Actual Results to Differ From Those Projected in Forward Looking Statements.
Readers of this discussion are advised that the discussion should be read
in conjunction with the condensed consolidated financial statements of
FREIT (including related notes thereto) appearing elsewhere in this Form
10-Q, and in FREIT's most recently filed Form 10-K. Certain statements in
this discussion may constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 and under
Section 21E of the Securities Exchange Act of 1934, as amended.
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 its 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.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
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
those estimates. The accounting policies and estimates used and outlined in
FREIT's previously filed Form 10-K for the fiscal year ended 10/31/01 have been
applied consistently for the nine and three months ended July 31, 2002.
In October 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No.144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No.144 requires the reporting
of discontinued operations to include components of an entity that have either
been disposed of or are classified as held for sale. FREIT has adoped SFAS No.
144. On August 9,2002 FREIT sold its Camden, NJ property (see Note 9- Subsequent
Event). FREIT has reclassified the Camden property to real estate held for sale
and has reclassified the net income(loss)from the Camden property as
Discontinued Operations for all periods presented. The gain on the sale will be
reported as a component of discontinued operations during the quarter ending
October 31, 2002. The adoption of SFAS No. 144 did not have an impact on net
income, but only impacted the presentation of this property within the
consolidated statements of income.
Results of Operations:
Nine Months and Quarters Ended July 31, 2002 and 2001
Net Income for the nine months ended July 31, 2002 ("Current Year") increased
12.9% to $3,978,000 on revenues of $14,900,000 compared to Net Income of
$3,524,000 on revenues of $14,647,000 for the nine months ended July 31, 2001
("Prior Year"). The $253,000 revenue increase is composed of increases in real
estate operating revenues of $584,000 (4.2%), and a $79,000 (66.9%) increase in
FREIT's equity in the earnings of its affiliate, offset by a $410,000 (-69.1%)
reduction in Net Investment Income.
For the three months ended July 31, 2002 ("Current Quarter") Net Income
decreased $142,000 (9.8%) to $1,304,000 on revenues of $5,012,000 compared to
Net Income for the three months ended July 31, 2001 ("Prior Quarter") of
$1,446,000 on revenues of $5,036,000. Net Income was negatively impacted during
the Current Quarter by the write-off of $190,000 of deferred expansion expenses
incurred at the Olney center (See below).
RETAIL SEGMENT
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 7 to the
condensed consolidated financial statements).
FREIT's retail properties consist of six (6) properties totaling approximately
685,000 sq. ft. Four are multi-tenanted shopping centers and two are single
tenanted stores. Their operations are summarized below.
Retail Segment Nine Months Ended Three Months Ended
July 31, July 31,
2002 2001 2002 2001
---- ---- ---- ----
(in thousands of dollars)
Revenues
Minimum & Percentage Rents $6,871 $6,511 $2,330 $2,182
Reimbursements 2,060 1,996 665 671
Other 89 141 2 132
------ ------ ------ ------
Total Revenues 9,020 8,648 2,997 2,985
------ ------ ------ ------
Operating Expenses 2,664 2,751 900 894
Expansion Costs Written-off 190 190
------ ------ ------ ------
Total Expenses 2,854 2,751 1,090 894
------ ------ ------ ------
Net operating income $6,166 $5,897 $1,907 $2,091
====== ====== ====== ======
Average Occupancy % 97.1% 95.3% 96.7% 96.3%
====== ====== ====== ======
The increases in rental income for the Current Year (5.5%) and Current Quarter
(6.8%) over the prior comparable periods are principally due to the higher
average occupancy during the current periods coupled with scheduled rent
increases.
Our retail tenant leases normally provide that tenants bear all or a portion of
their pro rata share of most operating expenses, real estate taxes and
insurance. These reimbursements vary since they are based on actual expenses
incurred. During the Current Year and Current Quarter operating expenses and
utility costs decreased by 25.6% and 24.9% when compared against operating
expenses and utility costs for the Prior Year and Prior Quarter, principally a
result of the mild 2001/2002 winter. These expense reductions were offset, in
part, by increased real estate taxes and insurance costs.
Recent Events:
(A) Westwood Plaza S/C - Stop and Shop
As previously reported, Stop & Shop closed its 28,000 sq. ft. supermarket in
Westwood Plaza Shopping Center and has continued fulfilling its rental
obligations with no plans to reopen the store. Effective July 31, 2002 FREIT and
Stop & Shop reached a Lease Termination Agreement whereby, in return for the
termination of this below-market-rent lease at no cost to FREIT, FREIT has
agreed to not lease or allow this space or any other space in the Shopping
Center to be used for a supermarket or for a store using more than 15,000 sq.ft.
for the sale of food or food products for off-premises consumption. This use
restriction, less restrictive than the one in the Stop & Shop lease, shall
expire on May 31, 2032, which corresponds with the expiration of the final
option period contained in the Stop & Shop lease.
This 28,000 sq.ft. space is now vacant and not leased, but FREIT anticipates
leasing this space to a non-food retailer(s) at rental rates we feel will be far
in excess of the rent pursuant to the terminated Stop & Shop lease. We feel that
the new rental rates will increase income, cash flow, and value. However, we
expect to receive no rental income or expense reimbursements from this space
from August 1, 2002 until sometime during the second calendar quarter of 2003- a
revenue loss estimated at approximately $180,000.
(B) Olney Town Center - Expansion
Olney is a 98,900 sq. ft. neighborhood shopping center in Olney, MD. We planned
an approximate 50,000 sq. ft. expansion and modernization subject to the
expansion plans being approved by the required governmental agencies,
satisfactory pre-leasing of the new expanded space, and the acceptance of
current tenants to be relocated in the expanded center. FREIT's Board of
Trustees, based on the status of negotiations with certain current tenants, has
determined that it is not likely the expansion will take place in the
short-term, and that it will be more economical to defer the expansion /
modernization to coincide with the expiration of particular current tenant
leases in approximately seven years.
Through 7/31/02 approximately $270,000 had been expended and deferred for
pre-construction development costs, building plans, and building permits. The
Board of Trustees has decided to write-off all costs that cannot currently be
recaptured although some of these costs may be usable when the expansion is
undertaken. These costs, which aggregate $190,000, were written off during July
2002.
Occupancy at Olney remains unchanged at 92%, as the vacant space was being kept
vacant pending the expansion. This vacant space, approximately 7,600 sq. ft.,
will now be available for leasing.
RESIDENTIAL SEGMENT
FREIT operates seven (7) multi-family apartment communities totaling 507
apartment units. The NOI of our continuing residential properties is summarized
below
Residential Segment Nine Months Ended Three Months Ended
July 31, July 31,
2002 2001 2002 2001
---- ---- ---- ----
(in thousands of dollars)
Revenues
Rents $ 4,667 $ 4,511 $ 1,587 $1,525
Other 60 54 21 21
--------------------------- ------------------------
Total Revenues 4,727 4,565 1,608 1,546
Operating Expenses 1,820 1,932 543 594
--------------------------- ------------------------
Net operating income: $ 2,907 $ 2,633 $ 1,065 $ 952
=========================== ========================
Average Occupancy % 96.4% 97.8% 96.8% 98.0%
=========================== ========================
Recurring capital
improvements $ 209 $ 325 $ 85 $ 123
=========================== ========================
Residential rents increased 3.5% to 4,667,000 for the Current Year from
$4,511,000 for the Prior Year; and 4.1% to $1,587,000 for the Current Quarter
from $1,525,000 for the Prior Quarter. Revenue is principally composed of
monthly apartment rental income. Total apartment rental income is a factor of
occupancy and monthly apartment rents. For instance, at our current rental rates
and occupancy levels at 7/31/02, a 1% increase or decrease in average occupancy
will cause an annual $63,000 increase or reduction in revenues. A 1% rental rate
increase or decrease over the 7/31/02 average rental rates will increase or
decrease annual revenues by $65,000.
While average occupancy declined modestly, average monthly rents have increased
sufficiently to offset the occupancy decline. Average monthly rents have
increased 4.7% for the Current Year over the Prior Year, and 4.3% for the
Current Quarter over the Prior Quarter.
During the Current Year operating expenses decreased .6% from the Prior Year;
and decreased 8.6% for the Current Quarter compared to the Prior Quarter. As a
result of the mild winter, significant savings were experienced in the areas of
snow removal costs and heating costs. As a percentage of revenue, operating
expenses were 38.5% of revenue for the Current Year compared to 42.3% for the
Prior Year.
We own 20 +/- acres of undeveloped land in Rockaway, NJ. Site plan approval has
been received 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 in our
institutional money market fund. Construction is expected to commence during
late 2002 or early 2003, and is /expected to last twelve to eighteen months.
Through 7/31/02, approximately $364,000 of pre-construction development costs
have been expended and deferred.
SUBSEQUENT EVENT
On August 9, 2002, FREIT sold its Sheridan Apartment property in Camden, NJ.
FREIT has owned and operated the property since 1964. The sale of the property
will not have a material financial affect on FREIT's future operating results.
The selling price of the property was $1,050,000 and resulted in a capital gain
of approximately $475,000. The Board of Trustees has declared a special capital
gain dividend of $.15 per share, which will distribute approximately all of the
gain to the shareholders. This dividend was paid on September 6, 2002 to
shareholders of record on August 23, 2002.
The remaining sale proceeds have been retained by FREIT to increase its
liquidity.
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 nine and three months ended July 31, 2002 and 2001 are as
follows:
Nine Months Ended Three Months Ended
July 31, July 31,
---------------------------------- ---------------------------------
2002 2001 2002 2001
(thousands of dollars)
Government agency bonds and
Money Market / Savings accounts $ 181 $ 545 $ 60 $ 179
Related Party Loans 48 10
Other 2
---------------------------------- ---------------------------------
$ 183 $ 593 $ 60 $ 189
================================== =================================
As a result of the lower interest rate environment over the course of the last
fiscal year, all of FREIT's higher yielding government agency bonds were called
and the funds invested in an institutional money market and savings account. Our
annualized yield on these funds was approximately 1.8% as of July 31, 2002. This
interest rate yield reduction coupled with the repayment of the related party
loan is expected to result in lower Net Investment Income during the current
fiscal year when compared against the past year. (See "FINANCING COSTS" below
for partial offsetting benefits.)
EQUITY IN 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 66.9% to $197,000
during the Current Year from $118,000 for the Prior Year; and increased 57.1% to
$88,000 for the Current Quarter compared to $56,000 for the Prior Quarter. The
increase is principally attributable to revenues for the Current Year increasing
5.3%, because of higher rents during the Current Quarter and expenses being 1.2%
lower as a result of the mild winter. Average occupancy for the Current Year was
97.2% compared to 97.4% for the Prior Year.
FINANCING COSTS
Financing costs are summarized as follows:
Nine Months Ended Three Months Ended
July 31, July 31,
-------------------------------- -------------------------------
2002 2001 2002 2001
(thousands of dollars)
Fixed rate mortgages $ 3,342 $ 3,392 $ 1,110 $ 1,127
Floating rate mortgage 310 680 106 172
Other 9 2 4 1
-------------------------------- -------------------------------
$ 3,661 $ 4,074 $ 1,220 $ 1,300
================================ ===============================
Financing Costs for the Current Year and Current Quarter decreased 10.1% and
6.2% respectively, when compared against financing costs for the Prior Year and
Prior Quarter. The decrease is principally attributable to reduced interest
costs resulting from lower mortgage balances from normal loan amortization and
because of FREIT's $10.9 million floating rate mortgage (Olney) benefiting from
the lower interest rate environment this year compared to last year.
GENERAL ADMINISTRATIVE EXPENSES
Our G & A expenses increased to $349,000 during the Current Year from $291,000
during the Prior Year. During the Current Quarter, G & A expenses increased to
$131,000 from $90,000 for the Prior Quarter. Professional fees accounted for the
bulk of the increase
FUNDS FROM OPERATIONS ("FFO")
FFO is considered by many as a standard measurement of a REIT's performance. We
compute FFO as follows (in thousands of dollars):
Nine Months Ended Three Months Ended
7/31/02 7/31/01 7/31/02 7/31/01
------- ------- ------- -------
($000)
Net Income $ 3,978 $ 3,524 $ 1,304 1,446
Depreciation - Real Estate
Including Discontinued Operations 1,660 1,653 556 551
Amortization of Deferred Mtg Costs 89 94 27 31
Discontinued Operations 33 11 10 (11)
Deferred Rents (266) (301) (79) (99)
Capital Improvements - Apartments (209) (325) (85) (123)
Project abandoned 190 190 -
Minority Interest 89 47 (3) 31
Other 25 80 36 54
------- ------- ------- --------
Total FFO $ 5,589 $ 4,783 $ 1,956 $ 1,880
======= ======= ======= ========
FFO does not represent cash generated from operating activities in accordance
with accounting principles generally accepted in the United States of America,
and therefore should not be considered a substitute for net income as a measure
of results of operations or for cash flow from operations as a measure of
liquidity. Additionally, the application and calculation of FFO by certain other
REITs may vary materially from that of FREIT's, and therefore FREIT's FFO and
the FFO of other REITs may not be directly comparable.
LIQUIDITY AND CAPITAL RESOURCES
Our financial condition remains strong. Net Cash Provided By Operating
Activities increased 2.6% to $4.8 million during the Current Year compared to
$4.7 million for the Prior 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
(90% of taxable income).
As at 7/31/02 we had cash and cash equivalents totaling $13.8 million compared
to $13.2 million (including Marketable Securities) at 10/31/01. These funds are
available for construction, property acquisitions, and general needs.
As described in the segment analysis above, we are planning the construction of
apartment rental units in Rockaway, NJ. The total capital required for this
project is estimated at $13.8 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 July 31, 2002 FREIT's aggregate outstanding mortgage debt was $68.6 million.
Approximately $57.8 million bears a fixed weighted average interest rate of
7.512%, and an average life of approximately 9 years. Approximately $10.9
million of mortgage debt bears an interest rate equal to 175 basis points over
LIBOR and resets at our option every 30, 60 or 90 days. The rate in effect at
7/31/02 was 3.647%. This mortgage note was due at the end of March 2002, but was
extended for one year. The fixed rate mortgages are subject to 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 $ Millions
---- ----------
2003 $ 10.9
2005 $ 6.6
2007 $ 15.7
2010 $ 9.2
2013 $ 7.9
2014 $ 9.6
The following table shows the estimated fair value and carrying value of our
long-term debt at July 31, 2002 and October 31, 2001:
July 31, October 31,
(In Millions) 2002 2001
------------- ---- ----
Fair Value $71.8 $71.7
Carrying Value $68.6 $69.3
Fair values are estimated based on market interest rates at July 31, 2002 and
October 31, 2001 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 $3.1 million, and a one
percent decrease would increase the Fair Value by $3.2 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
approximately $109,000.
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 prudentially 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 - On June 20, 2002, FREIT finalized the terms of and
- --------------------------
entered into a two-year $14 million revolving credit line with the Provident
Bank. Draws against the credit line can be used for general corporate purposes,
or for property acquisitions, construction activities, Letters-of-Credit, and
other business purposes. Draws are secured by mortgages on FREIT's Franklin
Crossing Shopping Center, Franklin Lakes, NJ, single tenanted retail space in
Glen Rock, NJ, Lakewood Apartments, Lakewood, NJ, and Grandview Apartments,
Hasbrouck Heights, NJ. Interest rates on draws will be at set at the time of
each draw, 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.
This line of credit increases FREIT's short-term liquidity giving it flexibility
to pursue additional property acquisitions or development opportunities. There
are no plans to utilize funds available under the credit line in the near term
other than for Letters-of-Credit required from time-to-time in connection with
FREIT's construction activities in Rockaway, NJ.
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
On April 10, 2002, FREIT entered into a joint venture agreement with H-TPKE,
LLC, a group consisting primarily of Hekemian & Co., Inc. employees to become
the Managing Member and acquire a 40% interest in a limited liability company
formed to acquire a 320,000 square foot neighborhood shopping center in northern
New Jersey. Total acquisition costs will approximate $33 million. Hekemian &
Co., Inc. is currently involved in the due-diligence analysis, and is reviewing
acquisition financing alternatives. The results will be submitted to the joint
venture partners for their review and approval. If the due-diligence review
proves satisfactory, the purchase will close during this calendar year.
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. Hekemian & Co.,
Inc. will be designated Managing Agent of the property.
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Liquidity and Capital Resources" above.
#######
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K.
Exhibit Index
The following reports on Form 8-K are incorporated herein by reference
Exhibit 99.1. Certification
-----------------------------
(a) On June 7, 2002, FREIT filed a report on Form 8-K that included a copy
of the press release that was sent to shareholders reporting FREIT's
operating results for the quarter ended April 30, 2002 and announced
the dividend for the second quarter.
(b) On June 16, 2002, FREIT filed a report on Form 8-K which reported the
finalization of a two-year revolving credit line with the Provident
Bank.
Exhibit 10. Line of Credit
Exhibit 99.1 Certification
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST REAL ESTATE INVESTMENT
TRUST OF NEW JERSEY
----------------------
(Registrant)
Date: September 13, 2002
BY: /s/ Robert S. Hekemian
--------------------------------------------------
(Signature)
Robert S. Hekemian.
Chairman of the Board, Chief Executive
Officer, Trustee, and Financial/Accounting Officer