SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended April 30, 2003
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No.: 2-27018
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY
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(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
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(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.
[XX]Yes [__] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[_] Yes [XX] No
As of June 13, 2003 there were 3,155,576 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 April 30, 2003
and October 31, 2002;
b.) Condensed Consolidated Statements of Income, Comprehensive
Income and Undistributed Earnings for the Six and Three
Months Ended April 30, 2003 and 2002;
c.) Condensed Consolidated Statements of Cash Flows for the Six
Months Ended April 30, 2003 and 2002;
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 of Market Risk.
Item 4: Controls and Procedures.
Part II: Other Information
Item 4. Submission of Matters to a Vote of Security Holders.
Item 6: Exhibits and Reports on Form 8-K.
Certifications.
Item 1: Financial Statements
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
April 30, October 31,
2003 2002
---- ----
(Unaudited) (See Note 1)
----------- ------------
(In Thousands of Dollars)
---------------------------
ASSETS
------
Real estate, at cost, net of accumulated
depreciation $ 73,933 $ 74,687
Investment in affiliates 2,144 3,283
Cash & cash equivalents 12,451 11,930
Tenants' security accounts 815 788
Sundry receivables 2,761 2,555
Prepaid expenses and other assets 1,387 1,306
Deferred charges, net 1,149 1,166
-------- --------
Totals $ 94,640 $ 95,715
------ ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Mortgages payable $ 67,925 $ 68,393
Accounts payable and accrued expenses 835 778
Dividends payable 1,092 2,090
Tenants' security deposits 1,127 1,122
Deferred revenue 161 332
Interest rate swap contract 308 --
-------- --------
Total liabilities 71,448 72,715
-------- --------
Minority interest 1,114 1,097
-------- --------
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 3,072 2,589
Accumulated other comprehensive loss (308) --
-------- --------
Total shareholders' equity 22,078 21,903
-------- --------
Totals $ 94,640 $ 95,715
======== ========
See Notes to Consolidated Financial Statements.
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
SIX AND THREE MONTHS ENDED APRIL 30, 2003 AND 2002
Six Months Three Months
Ended April 30, Ended April 30,
2003 2002 2003 2002
---- ---- ---- ----
(In Thousands of Dollars,
Except Per Share Amounts)
Revenue:
Rental income $ 8,010 $ 7,806 $ 4,032 $ 3,922
Reimbursements 1,469 1,355 805 610
Equity in income of affiliates 221 109 140 58
Net Investment Income 94 123 41 55
Sundry income 99 167 43 120
------- ------- ------- -------
Totals 9,893 9,560 5,061 4,765
------- ------- ------- -------
Expenses:
Operating expenses 2,107 1,670 1,149 849
Management fees 400 395 199 195
Real estate taxes 1,175 1,183 554 592
Financing costs 2,338 2,441 1,144 1,225
Depreciation 1,067 1,071 535 536
Minority interest 132 92 83 45
------- ------- ------- -------
Totals 7,219 6,852 3,664 3,442
------- ------- ------- -------
Income from continuing operations
before state income taxes 2,674 2,708 1,397 1,323
Provision for state income taxes 8 10 1 5
------- ------- ------- -------
Income from continuing operations 2,666 2,698 1,396 1,318
Discontinued operations -- (24) -- 18
------- ------- ------- -------
Net Income $ 2,666 $ 2,674 $ 1,396 $ 1,336
======= ======= ======= =======
- -------------------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Earnings before discontinued operations $ 0.85 $ 0.87 $ 0.45 $ 0.42
Discontinued operations -- (0.01) -- 0.01
------- ------- ------- -------
$ 0.85 $ 0.86 $ 0.45 $ 0.43
------- ------- ------- -------
Diluted earnings (loss) per share:
Earnings before discontinued operations $ 0.81 $ 0.85 $ 0.43 $ 0.41
Discontinued operations -- (0.01) -- 0.01
------- ------- ------- -------
$ 0.81 $ 0.84 $ 0.43 $ 0.42
- -------------------------------------------------------------------------------------------------
Basic weighted average shares outstanding 3,120 3,120 3,120 3,120
Diluted weighted average shares outstanding 3,277 3,178 3,284 3,188
- -------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND UNDISTRIBUTED EARNINGS
SIX AND THREE MONTHS ENDED APRIL 30, 2003 AND 2002
Six Months Three Months
Ended April 30, Ended April 30,
2003 2002 2003 2002
---- ---- ---- ----
(In Thousands of Dollars)
COMPREHENSIVE INCOME
Net income $ 2,666 $ 2,674 $ 1,396 $ 1,336
Other comprehensive income (loss):
Unrealized loss on interest rate swap contract (308) (72)
------- ------- ------- -------
Comprehensive income $ 2,358 $ 2,674 $ 1,324 $ 1,336
======= ======= ======= =======
UNDISTRIBUTED EARNINGS
Balance, beginning of period $ 2,589 $ 2,274 $ 2,767 $ 2,676
Net income 2,666 2,674 1,396 1,336
Less dividends (2,183) (1,872) (1,091) (936)
------- ------- ------- -------
Balance, end of period $ 3,072 $ 3,076 $ 3,072 $ 3,076
======= ======= ======= =======
Dividends per share $ 0.70 $ 0.60 $ 0.35 $ 0.30
======= ======= ======= =======
See Notes to Consolidated Financial Statements.
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 2003 AND 2002
2003 2002
---- ----
(In Thousands of Dollars)
Operating activities: -----------------------
Net Income $ 2,666 $ 2,674
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,299 1,219
Equity in income of affiliates (221) (109)
Deferred revenue 5 (229)
Minority interest 132 92
Changes in operating assets and liabilities:
Tenants' security accounts (27) 45
Sundry receivables, prepaid expenses and other assets (394) 66
Accounts payable and accrued expenses 57 (156)
Tenants' security deposits (171) (26)
-------- --------
Net cash provided by operating activities 3,346 3,576
-------- --------
Investing activities:
Capital expenditures (421) (270)
Distributions from affiliate 1,360 40
Marketable securities redeemed 500
-------- --------
Net cash provided by investing activities 939 270
-------- --------
Financing activities:
Repayment of mortgages (468) (488)
Dividends paid (3,181) (2,433)
Distribution to minority interest (115) (177)
-------- --------
Net cash used in financing activities (3,764) (3,098)
-------- --------
Net increase in cash and cash equivalents 521 748
Cash and cash equivalents, beginning of period 11,930 13,187
-------- --------
Cash and cash equivalents, end of period $ 12,451 $ 13,935
======== ========
Supplemental disclosure of cash flow data:
Interest paid $ 2,274 $ 2,379
======== ========
Income taxes paid $ 8 $ 10
======== ========
Dividends declared but not paid $ 1,092 $ 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 rules of the
Securities and Exchange Commission. Accordingly, certain
information and footnotes required by accounting principles
generally accepted in the United States of America for complete
financial statements have been omitted. It is the opinion of
management that all adjustments considered necessary for a fair
presentation have been included, and that all such adjustments
are of a normal recurring nature.
The consolidated results of operations for the six and three
months ended April 30, 2003 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, 2002.
Certain accounts in the 2002 financial statements have been
reclassified to conform to the current presentation.
Note 2 - Investment in Affiliates:
Certain investments, where FREIT's ownership interest is 50% or
less, but can exercise significant influence, are accounted for
by the equity method. Under the equity method, the investment,
originally recorded at cost, is adjusted to recognize FREIT's
share of the net earnings or losses of the affiliates as they
occur. These investments include:
Ownership
Interest
--------
Westwood Hills, LLC 40%
(owns a 210 unit apartment community
in Westwood, NJ)
Wayne PSC, LLC 40%
(effective November 1, 2002 acquired
the 323,000 +/- sq. ft. Preakness Shopping Center
in Wayne, NJ)
Summarized combined balance sheets as at April 30, 2003 and October
31, 2002, and income statement information for the six and three
months ended April 30, 2003 and 2002 of the above affiliates that are
accounted for using the equity method are as follows:
April 30, October 31,
2003 2002
---- ----
(In thousands of dollars)
Balance sheet data:
Assets:
Real estate and equipment, net $ 46,621 $ 13,673
Other 3,581 9,779
-------- --------
Total assets $ 50,202 $ 23,452
======== ========
Liabilities and members' equity:
Liabilities:
Mortgage payable $ 44,292 $ 14,794
Other 551 455
-------- --------
Total liabilities 44,843 15,249
-------- --------
Members' equity:
Westwood Hills - deficiency (4,007) (797)
Wayne PSC equity 9,366 9,000
-------- --------
Total members' equity 5,359 8,203
-------- --------
Total liabilities and members' equity $ 50,202 $ 23,452
======== ========
FREIT - Investment in affiliates equity $ 2,144 $ 3,283
======== ========
Six Months Ended Three Months Ended
April 30, April 30,
--------------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----
(In thousands of dollars)
Income Statement Data:
Rental revenue $ 3,974 $ 1,570 $ 2,101 $ 786
Real estate operating expenses (1,668) (605) (858) (294)
------- ------- ------- -------
Net operating Income 2,306 965 1,243 492
Financing costs, net (1,389) (507) (710) (253)
Depreciation (364) (185) (182) (93)
------- ------- ------- -------
Net income $ 553 $ 273 $ 351 $ 146
======= ======= ======= =======
FREIT - Equity in income $ 221 $ 109 $ 140 $ 58
======= ======= ======= =======
On November 1, 2002, our newly formed 40% owned affiliate, Wayne PSC,
LLC, completed the acquisition of the 323,000 sq. ft. Preakness
Shopping Center in Wayne, NJ. Total acquisition costs of $35.5 million
(including a $1.3 million capital improvement reserve) were financed
in part by a $26.5 million first mortgage loan, and by $9 million of
equity contributions provided pro rata by the members of Wayne PSC,
LLC, with FREIT's contribution being $3.6 million.
During January 2003, Westwood Hill placed a second mortgage in the
amount of $3.4 million on its garden apartment property. The net
proceeds of the second mortgage was distributed to its members, of
which FREIT received approximately $1.4 million.
Note 3 - 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 ("SFAS 128"). Basic earnings per share is
calculated by dividing net income by the weighted average number
of shares outstanding during each period. The calculation of
diluted earnings per share is similar to that of basic earnings
per share, except that the denominator is increased to include
the number of additional shares that would have been outstanding
if all potentially dilutive shares, such as those issuable upon
the exercise of stock options and warrants, were issued during
the period.
In computing diluted earnings per share for each of the six and
three month periods ended April 30, 2003 and 2002, 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:
Six Months Ended Three Months Ended
April 30, April 30,
------------------------------- ------------------------------
2003 2002 2003 2002
---- ---- ---- ----
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 157,074 58,851 164,865 67,957
Dilutive weighted average shares
------------------------------- ------------------------------
outstanding 3,276,650 3,178,427 3,284,441 3,187,533
=============================== ==============================
Basic and diluted earnings per share, based on the weighted
average number of shares outstanding during each period, are
comprised of ordinary income.
Note 4- Equity incentive plan:
On September 10, 1998, the Board of Trustees approved FREIT's
Equity Incentive Plan (the "Plan") which was ratified by FREIT's
shareholders on April 7, 1999, whereby up to 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.
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 January 31, 2003, 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, 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 5- 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. The accounting policies of the segments are the
same as those described in Note 1 in FREIT's Annual Report on
Form 10-K.
The chief operating decision-making group of the Trust's retail
segment, residential segment and corporate/other is comprised of
the Board of Trustees.
FREIT assesses and measures segment operating results based on
net operating income ("NOI"). NOI is based on operating revenue
and expenses directly associated with the operations of the real
estate properties, but excludes deferred rents (straight lining),
depreciation, and financing costs. NOI is not a measure of
operating results or cash flows from operating activities as
measured by accounting principles generally accepted in the
United States of America, and is not necessarily indicative of
cash available to fund cash needs and should not be considered an
alternative to cash flows as a measure of liquidity.
Real estate rental revenue, operating expenses, NOI and recurring
capital improvements for the reportable segments are summarized
below and reconciled to consolidated net income for the six and
three months ended April 30, 2003 and 2002. Asset information is
not reported since the Trust does not use this measure to assess
performance.
Six Months Ended Three Months Ended
April 30, April 30,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands of dollars)
Real estate revenue:
Retail $ 6,230 $ 6,023 $ 3,199 $ 2,990
Residential 3,253 3,118 1,641 1,576
------- ------- ------- -------
Totals 9,483 9,141 4,840 4,566
------- ------- ------- -------
Real estate operating expenses:
Retail 1,957 1,764 985 896
Residential 1,387 1,278 669 646
------- ------- ------- -------
Totals 3,344 3,042 1,654 1,542
------- ------- ------- -------
Net operating income:
Retail 4,273 4,259 2,214 2,094
Residential 1,866 1,840 972 930
------- ------- ------- -------
Totals $ 6,139 $ 6,099 $ 3,186 $ 3,024
======= ======= ======= =======
Recurring capital improvements:
Residential $ 167 $ 125 $ 63 $ 46
======= ======= ======= =======
Reconciliation to consolidated
net income:
Segment NOI $ 6,139 $ 6,099 $ 3,186 $ 3,024
Deferred rents - straight-lining 95 187 47 94
Net investment income 94 123 41 55
Equity in income of affiliates 221 109 140 58
General and administrative expenses (346) (216) (256) (107)
Depreciation (1,067) (1,071) (535) (536)
Discontinued operatons -- (24) -- 18
Financing costs (2,338) (2,441) (1,144) (1,225)
Minority interest (132) (92) (83) (45)
------- ------- ------- -------
Net Income $ 2,666 $ 2,674 $ 1,396 $ 1,336
======= ======= ======= =======
Note 6- Interest Rate Swap Contract:
During November 2002, FREIT negotiated to lower the fixed
interest rate on a first mortgage secured by its Patchogar, NY
property and was offered a lower, floating interest rate by the
lender. To reduce the impact of interest rate fluctuations, FREIT
entered into an interest rate swap. In accordance with SFAS 133,
FREIT recorded a liability for the net present value of the
increase in interest cost over the remaining terms of the debt of
$308,000 at April 30, 2003. Such amount is included in
comprehensive income.
Note 7- Discontinued operations:
On August 9, 2002, FREIT sold the Sheridan Apartments in Camden,
NJ for cash of $1,050,000 and recognized a gain of approximately
$475,000. FREIT had owned and operated the property since 1964.
Summarized operating results included in discontinued operations
in the accompanying consolidated statements of income for the six
and three months ended April 30, 2002 is as follows (in
thousands):
Six Months Ended Three Months Ended
April 30, 2002 April 30, 2002
-------------- --------------
Revenue $ 328 $169
Expenses (352) (151)
----- ----
Net Income (Loss) $ (24) $18
===== ====
Note 8- Subsequent event:
On May 23, 2003, in accordance with FREIT's Equity Incentive
Plan, options to purchase 36,000 of FREIT's shares of beneficial
interest were exercised at the option price of $15.00 per share.
* * *
Management's Discussion and Analysis of
Financial Condition and Results of Operations.
- --------------------------------------------------------------------------------
Cautionary Statement Identifying Important Factors That Could Cause FREIT's
Actual Results to Differ From Those Projected in Forward Looking Statements.
Readers of this discussion are advised that the discussion should be read in
conjunction with the unaudited condensed consolidated financial statements of
FREIT (including related notes thereto) appearing elsewhere in this Form 10-Q,
and the consolidated financial statements included in FREIT's most recently
filed Form 10-K. Certain statements in this discussion may constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements reflect FREIT's
current expectations regarding future results of operations, economic
performance, financial condition and achievements of FREIT, and do not relate
strictly to historical or current facts. FREIT has tried, wherever possible, to
identify these forward-looking statements by using words such as "believe,"
"expect," "anticipate," "intend, " "plan," " estimate," or words of similar
meaning.
Although FREIT believes that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, such statements are subject to
risks and uncertainties, which may cause the actual results to differ materially
from those projected. Such factors include, but are not limited to, the
following: general economic and business conditions, which will, among other
things, affect demand for rental space, the availability of prospective tenants,
lease rents and the availability of financing; adverse changes in FREIT's real
estate markets, including, among other things, competition with other real
estate owners, risks of real estate development and acquisitions; governmental
actions and initiatives; and environmental/safety requirements.
- --------------------------------------------------------------------------------
Overview
FREIT is an equity real estate investment trust ("REIT") that owns a portfolio
of residential apartment and retail properties. Our revenues consist primarily
of fixed rental income from both of our residential and retail properties, 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, LLC ("Westwood Hills") that owns a residential
apartment property, and beginning in fiscal 2003, income from our 40% owned
affiliate Wayne PSC, LLC ("WaynePCS") that owns the Preakness shopping center.
Our policy has been to acquire real property for long-term investment.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
The Securities and Exchange Commission ("SEC") recently issued disclosure
guidance for "Critical Accounting Policies." The SEC defines Critical Accounting
Policies as those that require the application of Management's most difficult,
subjective, or complex judgments, often because of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods.
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, the preparation of which
takes into account estimates based on judgments and assumptions that affect
certain amounts and disclosures. Accordingly, actual results could differ from
these estimates. The accounting policies and estimates used and outlined in Note
1 to our Consolidated Financial Statements included in our annual report on Form
10-K, have been applied consistently as at April 30, 2003 and October 31, 2002,
and for the six and three months ended April 30, 2003 and 2002. We believe that
the following accounting policies or estimates require the application of
Management's most difficult, subjective, or complex judgments:
Revenue Recognition: Base rents, additional rents based on tenants' sales volume
and reimbursement of the tenants' share of certain operating expenses are
generally recognized when due from tenants. The straight-line basis is used to
recognize base rents under leases if they provide for varying rents over the
lease terms. Straight-line rents represent unbilled rents receivable to the
extent straight-line rents exceed current rents billed in accordance with lease
agreements. Before FREIT can recognize revenue, it is required to assess, among
other things, its collectibility. If we incorrectly determine the collectibility
of revenue, our net income and assets could be overstated.
Valuation of Long-Lived Assets: We periodically assess the carrying value of
long-lived assets whenever we determine that events or changes in circumstances
indicate that their carrying amount may not be recoverable. When FREIT
determines that the carrying value of long-lived assets may be impaired, the
measurement of any impairment is based on a projected discounted cash flows
method determined by FREIT's management. While we believe that our discounted
cash flow methods are reasonable, different assumptions regarding such cash
flows may significantly affect the measurement of impairment.
In October 2001, the 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.
FREIT has reclassified the net income (loss) from the operation of the property
as Discontinued Operations for all periods presented. 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.
We feel that net income from continuing operations (which excludes the
operations of the Camden property) is the most significant element of net
income. Accordingly, all references and comparisons refer to income from
continuing operations unless otherwise stated. All references to per share
amounts are on a diluted basis (unless otherwise indicated) and refer to
earnings per share from continuing operations.
Results of Operations:
Six months and Quarters Ended April 30, 2003 and 2002
Summary Income Statement & Component Data
Six Months Ended Quarter Ended
April 30, Increase April 30, Increase
--------------------- --------------------
2003 2002 (Decrease) 2003 2002 (Decrease)
---- ---- ---------- ---- ---- ----------
Revenue ($000)
Real estate operations $ 9,578 $ 9,328 $ 250 $ 4,880 $ 4,652 $ 228
Equity in income of affiliates 221 109 112 140 58 82
Net investment income 94 123 (29) 41 55 (14)
------- ------- ------- ------- ------- -------
Total revenue 9,893 9,560 333 5,061 4,765 296
------- ------- ------- ------- ------- -------
Expenses
Real estate operations 4,543 4,205 338 2,265 2,115 150
Financing costs 2,338 2,441 (103) 1,144 1,225 (81)
General & administrative expenses 346 216 130 256 107 149
------- ------- ------- ------- ------- -------
Total expenses 7,227 6,862 365 3,665 3,447 218
------- ------- ------- ------- ------- -------
Income from continuing operations 2,666 2,698 (32) 1,396 1,318 78
Discontinued Operations (24) 24 18 (18)
------- ------- ------- ------- ------- -------
Net Income $ 2,666 $ 2,674 $ (8) $ 1,396 $ 1,336 $ 60
======= ======= ======= ======= ======= =======
Revenue for the quarter ended April 30, 2003 ("Current Quarter") increased 6.2%
to $5,061,000 from $4,765,000 for the prior year's quarter ended April 30, 2002
("Prior Year's Quarter"). Income from continuing operations for the Current
Quarter increased 5.9% to $1,396,000 from $1,318,000 for the Prior Year's
Quarter.
Income from continuing operations for the six months ended April 30, 2003
("Current Six Months") was $2,666,000 on revenue of $9,893,000. This compares to
income from continuing operations for the six months ended April 30, 2002
("Prior Year's Six Months") of $2,698,000 on revenue of $9,560,000.
The consolidated results of operations for the six and three months ended April
30, 2003 are not necessarily indicative of the results to be expected for the
full year.
REAL ESTATE OPERATIONS:
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 5 to the
condensed consolidated financial statements).
RETAIL SEGMENT: FREIT's retail properties consist of six (6) properties totaling
approximately 686,000 sq. ft. Four are multi-tenanted shopping centers and two
are single tenanted stores. Their operations are summarized below:
Retail Segment Six Months Ended Three Months Ended
April 30, April 30,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands of dollars)
Revenues
Minimum & Percentage Rents $ 4,697 $ 4,541 $ 2,370 $2,282
Reimbursements 1,528 1,395 836 628
Other 5 87 (7) 80
--------- -------- -------- ------
Total Revenues 6,230 6,023 3,199 2,990
--------- -------- -------- ------
Operating Expenses 1,957 1,764 985 896
--------- -------- -------- ------
Net operating income $ 4,273 $ 4,259 $ 2,214 $2,094
========= ======== ======== ======
Average Occupancy % 93.0% 97.3% 93.01% 97.3%
========= ======== ======== ======
Minimum and percentage rents at FREIT's retail properties increased 3.4% and
3.9% during the Current Six Months and Current Quarter respectively compared to
the comparable prior periods. The increase in rents resulted from increased base
rents, and rents from tenant's that were not in occupancy for the full quarter
last year. The increase in reimbursements is principally the result of higher
expenses that are passed through to tenants, plus back billings of reimbursable
expenses. These revenue increases have occurred even though overall occupancy
has fallen - see below.
The increases in operating expenses are principally weather related, with higher
snow removal costs and utility costs accounting for 124% and 184% of the
increases for the Current Six Months and Current Quarter respectively.
In February 2003, without any notice, a major tenant in one of our shopping
centers closed their store and ceased paying rent and additional rent, and is in
default of both monetary and non-monetary provisions of their lease. Annual rent
and other charges from this tenant approximate $480,000 per year. As of the date
of this report negotiations with the tenant are proceeding. It is too early to
determine the effect to FREIT of this tenant's default.
As was previously reported, Stop & Shop closed its 28,000 sq. ft. supermarket in
Westwood Plaza Shopping Center and 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. Since this date no rent has been
received for this space. FREIT has entered into a ten-year lease with TJMaxx for
all of this space. The terms of the lease are for market rents that will be far
in excess of the rent pursuant to the terminated Stop & Shop lease. The income
from this lease will increase income, cash flow, and value. TJMaxx opened their
store for business late May 2003 and commenced paying rent.
RESIDENTIAL SEGMENT: FREIT operates seven (7) multi-family apartment communities
totaling 507 apartment units. The NOI of our residential properties is
summarized below.
Residential Segment Six Months Ended Three Months Ended
April 30, April 30,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands of dollars)
Revenues
Rents $3,218 $3,079 $1,622 $1,554
Other 35 39 19 22
------ ------ ------ ------
Total Revenues 3,253 3,118 1,641 1,576
------ ------ ------ ------
Operating Expenses 1,387 1,278 669 646
------ ------ ------ ------
Net operating income $1,866 $1,840 $ 972 $ 930
====== ====== ====== ======
Average Occupancy % 96.2% 96.4% 96.7% 96.4%
====== ====== ====== ======
Recurring capital
improvements $ 167 $ 125 $ 63 $ 46
====== ====== ====== ======
Residential revenue has increased 4.3% and 4.1% for the Current Six Months and
Current Quarter respectively compared to the comparable prior periods. Higher
monthly rents, in spite of scattered concessions were the principal reason for
the increase. 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 rental rates and occupancy levels at April 30,
2003, a 1% increase or decrease in average occupancy will cause an annual
$66,700 increase or reduction in revenues, while a 1% increase or decrease in
rental rates will cause an annual $64,600 increase or decrease in annual
revenues.
Average occupancy for the Current Six Months was down slightly from the Prior
Year's Six Month period, while average occupancy for the Current Quarter was
slightly higher than for the Prior Year's Quarter.
During the Current Six Months and Current Quarter operating expenses increased
8.5% and 3.5% respectively over prior year's comparable periods. As a percentage
of revenue, operating expenses for the Current Six Months were 42.6% of revenue
compared to 41% for the Prior Year's Six Months period. Increases in snow
removal and utility costs, because of the recent severe winter, which we
experienced, were the principal reasons for the expense increase.
EQUITY IN INCOME OF AFFILIATES
Prior to October 31, 2002 FREIT shared in the earnings of its 40% owned
affiliate, Westwood Hills which owns a 210 unit apartment community in Westwood,
NJ. Effective November 1, 2002, FREIT also shares in the earnings of its 40%
owned affiliate, Wayne PSC, which purchased the 323,000 sq. ft. Preakness
Shopping Center in Wayne, NJ, on November 1, 2002. The following table
summarizes the operations at these affiliates:
Six Months Ended Three Months Ended
April 30, April 30,
------------------ ------------------
Income Statement Data: 2003 2002 2003 2002
---- ---- ---- ----
(In thousands of dollars)
Rental revenue
Westwood Hills $1,612 $1,570 $ 806 $ 786
Wayne PSC 2,362 1,295
------ ------ ------ ------
Total revenue 3,974 1,570 2,101 786
------ ------ ------ ------
Real estate operating expenses
Westwood Hills 846 790 399 387
Wayne PSC 1,186 641
------ ------ ------ ------
Total real estate expenses 2,032 790 1,040 387
------ ------ ------ ------
Income before financing costs
Westwood Hills 766 780 407 399
Wayne PSC 1,176 -- 654 --
------ ------ ------ ------
Total income before
financing costs 1,942 780 1,061 399
Financing costs
Westwood Hills 580 507 303 253
Wayne PSC 809 407
------ ------ ------ ------
Total financing costs 1,389 507 710 253
------ ------ ------ ------
Net income
Westwood Hills 186 273 104 146
Wayne PSC 367 -- 247 --
------ ------ ------ ------
Net income $ 553 $ 273 $ 351 $ 146
====== ====== ====== ======
FREIT's share of net income $ 221 $ 109 $ 140 $ 58
====== ====== ====== ======
Occupancy:
Westwood Hills 96.2% 96.4% 96.7% 96.4%
------ ------ ------ ------
Wayne PSC 87.1% 96.3%
------ ------
Net income at Westwood Hills fell 31.8% to $186,000 for the Current Six Months
from $273,000 for the Prior Year's Six Months. The reduction results from two
factors: 1) while revenues increased 2.7% over last year, the increase was
insufficient to cover the 7.1% increase in expenses directly related to the
severity of the recent winter and, 2) the additional financing costs during the
Current Six Months resulting from the new $3.4 million second mortgage added in
January 2003. The effect of this financing will be to add approximately $212,000
of financing costs to Westwood Hills operations in fiscal 2003. While FREIT
bears 40% of this additional financing cost, this cost will be offset by the
income FREIT earns on its share of the net financing proceeds of approximately
$1.4 million that was distributed.
On November 1, 2002, Wayne PSC closed on the acquisition of the Preakness
Shopping Center. For the Current Six Months the Net Income from the Center's
operations was $367,000. FREIT's share of this income was $147,000 (40%). During
the Current Quarter the Center's income grew as Stop and Shop, one of the major
anchors, opened its super market on February 13, 2003. This is the reason
average occupancy for the current Quarter was 96.3% compared to the Current Six
Months average occupancy of 87.1%
During the Current Quarter Wayne PSC, LLC reached an agreement with a financial
institution to refinance its $26.5 million for $32.0 million. The term of the
new loan will be for thirteen (13) years, with interest fixed at 6.04%, and the
loan will require interest only payments for the first three years and
thereafter be amortized over a 25-year life. While we feel this credit will be
formalized shortly, it is subject to the lender's satisfaction of appraisals,
title searches, and environmental reports. If finalized, FREIT will receive 40%
of the net financing proceeds.
FINANCING COSTS
Financing Costs for the Current Six Months and Current Quarter decreased 4.2%
and 6.6% respectively from the comparable prior period levels. 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.
Six Months Ended Three Months Ended
April 30, April 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
(thousands of dollars)
Fixed rate mortgages $ 2,142 $ 2,233 $ 1,049 $ 1,115
Floating rate mortgage 183 203 87 107
Other 13 5 8 3
------- -------- ------- --------
$ 2,338 $ 2,441 $ 1,144 $ 1,225
======= ======== ======= ========
Interest Rate Swap Contract
To reduce interest rate volatility, FREIT uses "pay fixed, receive floating"
interest rate swaps to convert floating interest rates to fixed interest rates
over the terms of certain loans. We enter INTO these swap contracts with a
counterparty that is usually a high-quality commercial bank.
In essence, we agree to pay our Counterparty a fixed rate of interest on a
dollar amount of notional principal (which corresponds to our mortgage debt)
over a term equal to the terms of the mortgage note. Our counterparty, in
return, agrees to pay us a short-term rate of interest - generally LIBOR - on
that same notional amount over the same term as our mortgage note.
FAS 133 requires us to mark-to-market fixed pay interest rate swaps. As the
floating interest rate varies from time-to-time over the term of the contract,
the value of the contract will change upward or downward. If the floating rate
is higher than the fixed rate the value of the contract goes up and there is a
gain and an asset. If the floating rate is less than the fixed rate, there is a
loss and a liability. These gains or losses will not affect our income
statement. Changes in the fair value of these swap contracts will be reported in
earnings of other comprehensive income and appear in the equity section of our
balance sheet.
This gain or loss represents the economic consequence of liquidating our fixed
rate swap contracts and replacing them with like-duration funding at current
market rates, something we'd likely never do.
GENERAL AND ADMINISTRATIVE EXPENSES
Our G & A expenses for the Current Six Months and Current Quarter increased by
$130,000 and $149,000 respectively over the prior year's comparable periods. The
increase was due to increases in FREIT's officers and Trustee's fees approved
during the second quarter of fiscal 2003 and applied retroactively to November
1, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Our financial condition remains strong. Below are the cash flows provided by
(used in) operating, investing, and financing activities:
----------------------------------
(Amounts in thousands) For The Six Months Ended April 30,
----------------------------------
2003 2002
---- ----
Operating activities $ 3,346 $ 3,576
======== ========
Investing activities $ 939 $ 270
======== ========
Financing activities* $(3,764) $ (3,098)
======== ========
* Including dividends paid of $3,181,000 and $2,433,000 respectively.
-------------------------------------------------------------------------
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 April 30, 2003, we had cash and cash equivalents totaling $12.5 million
compared to $11.9 million at October 31, 2002. During January 2003 FREIT
received approximately $1.4 million as a distribution from Westwood Hills as its
share of Westwood Hills second mortgage financing proceeds. These funds are
available for construction, property acquisitions, and general needs.
As previously reported, we are planning the construction of 129 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 April 30, 2003 FREIT's aggregate outstanding mortgage debt was $67.9 million.
Approximately $57.0 million bears a fixed weighted average interest rate of
6.749%, and an average life of approximately 7.2 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. This
mortgage note, due at the end of March 2003, has been extended for three months
pending the completion of negotiations for a permanent extension. Our lender has
proposed an extension of the due date to June 2006, with interest to reset
monthly at 200 basis points over the one-month LIBOR. Monthly amoritization
payments to be fixed at $15,000. At our option we can, at any time, enter into
an interest rate swap and fix the interest rate.
Our 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 (including the variable rate mortgage at the proposed
terms):
Fiscal Year $ Millions
----------- ----------
2006 $ 10.0
2007 $ 15.7
2008 $ 5.9
2010 $ 9.2
2013 $ 8.0
2014 $ 9.4
The first mortgages secured by our affiliates, properties are also subject to
amoritization schedules that are longer than the terms of the mortgages. As
such, ballon payments on our affiliates mortgage will be required as follows:
$ Millions
-----------
2012 $20.3
2014 $13.8
The following table shows the estimated fair value and carrying value of our
long-term debt at April 30, 2003 and October 31, 2002:
April 30, October 31,
(In Millions) 2003 2002
------------- ---- ----
Fair Value $72.7 $73.5
Carrying Value $67.9 $68.4
Fair values are estimated based on market interest rates at April 30, 2003 and
October 31, 2002 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 $3.3 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.
To create additional liquidity and lock in favorable long-term interest rates we
continue to take advantage of the Freddie Mac second mortgage program. This
program allows add-ons to existing Freddie Mac first mortgages to the extent
justified by increased values and cash flows. Accordingly, we have reached
agreement with Freddie Mac to place second mortgage on several of our
residential properties. The new second mortgages, which are expected to fund
within the next sixty days, will aggregate about $7 million at an average
interest rate of 5.59% and will be due to co-terminus with the existing first
mortgages.
FREIT also has the ability to draw, if needed, against it $14 million, two-year
revolving line of credit. To date, no draws have been made against this credit
line.
See "EQUITY IN INCOME OF AFFILIATES" above for additional potential liquidity
from a Wayne PSC, LLC refinancing.
On May 23, 2003, in accordance with FREIT's Equity Incentive Plan, options to
purchase 36,000 of FREIT's shares of beneficial interest were exercised at the
option price of $15.00 per share. Accordingly, FREIT issued the shares and
received payment of $540,000.
INFLATION
Inflation can impact the financial performance of FREIT in various ways. Our
retail tenant leases normally provide that the tenants bear all or a portion of
most operating expenses, which can reduce the impact of inflationary increases
on FREIT. Apartment leases are normally for a one-year term, which may allow us
to seek increased rents as leases renew or when new tenants are obtained.
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Liquidity and Capital Resources" above.
Item 4: Controls and Procedures
Within the ninety (90) days prior to the filing date of this quarterly report on
Form 10-Q, we carried out an evaluation of the effectiveness of the design and
operation of FREIT's disclosure controls and procedures. This evaluation was
carried out under the supervision and with participation of FREIT's management,
including FREIT's Chairman and Chief Executive Officer and Chief Financial
Officer, who concluded that FREIT's disclosure controls and procedures are
effective. There have been no significant changes in FREIT's internal controls
or in other factors, which could significantly affect internal controls
subsequent to the date we carried out our evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in FREIT's reports
filed or submitted under the Exchange Act is recorded, processed, summarized,
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
FREIT's reports filed under the Exchange Act is accumulated and communicated to
management, including FREIT's Chief Executive Officer and Chief Financial
Officer as appropriate, to allow timely decisions regarding required disclosure.
Part II Other Information
Item 4: Submission of Matters to a Vote of Security Holders.
The following matter was submitted to a vote of security holders at FREIT's
Annual Meeting of Shareholders held on April 15, 2003.
The shareholders re-elected Mr. Herbert C. Klein to serve as Trustee for an
additional three (3) year term. The balloting for election was as follows:
NOMINEE VOTES FOR % OF VOTES ABSTAINED
OUTSTANDING WITHHELD
---------------- --------- ----------- -------- ----------
Herbert C. Klein 2,526,378 81% 21,466 571,732
---------------- --------- ----------- -------- ----------
Item 6. Exhibits and Reports on Form 8-K
NONE
Exhibit Index
Exhibit 99.1 Certification of Chief Executive Officer
-----------------------------------------------------
Exhibit 99.2 Certification of Chief Financial Officer
-----------------------------------------------------
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: June 16, 2003
/s/ Robert S. Hekemian
----------------------
(Signature)
Robert S. Hekemian.
Chairman of the Board and Chief Executive Officer
/s/ Donald W. Barney
--------------------
(Signature)
Donald W. Barney
President, Treasurer and Chief Financial Officer
(Principal Financial/Accounting Officer)