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 July 31, 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 __________________
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
---------- ----------
(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 September 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 July 31, 2003
and October 31, 2002;
b.) Condensed Consolidated Statements of Income, Comprehensive
Income and Undistributed Earnings for the Nine and Three
Months Ended July 31, 2003 and 2002;
c.) Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended July 31, 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 About Market Risk.
Item 4: Controls and Procedures.
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 SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, October 31,
2003 2002
---- ----
(Unaudited) (See Note 1)
----------- ------------
(In Thousands of Dollars)
-------------------------
ASSETS
------
Real estate, at cost, net of accumulated
depreciation $ 83,677 $ 74,687
Investment in affiliates -- 3,283
Cash & cash equivalents 7,234 11,930
Tenants' security accounts 823 788
Sundry receivables 3,293 2,555
Prepaid expenses and other assets 2,620 1,306
Deferred charges, net 1,884 1,166
-------- --------
Totals $ 99,531 $ 95,715
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Mortgages payable $ 70,238 $ 68,393
Accounts payable and accrued expenses 1,341 550
Dividends payable 1,104 2,090
Tenants' security deposits 1,204 1,122
Cash distributions in excess of investment in affiliates 452 --
Deferred Trustee's fees 438 228
Deferred revenue 406 332
Interest rate swap contract 152 --
-------- --------
Total liabilities 75,335 72,715
-------- --------
Minority interest 1,166 1,097
-------- --------
Commitments and contingencies
Shareholders' equity:
Shares of beneficial interest without par value:
4,000,000 shares authorized;
3,155,576 and 3,119,576 shares issued and outstanding
respectively 19,854 19,314
Undistributed earnings 3,328 2,589
Accumulated other comprehensive loss (152) --
-------- --------
Total shareholders' equity 23,030 21,903
-------- --------
Totals $ 99,531 $ 95,715
======== ========
See Notes to Consolidated Financial Statements
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
NINE AND THREE MONTHS ENDED JULY 31, 2003 AND 2002
Nine Months Three Months
Ended July 31, Ended July 31,
2003 2002 2003 2002
---- ---- ---- ----
(In Thousands of Dollars,
Except Per Share Amounts)
Revenue:
Rental income $ 12,096 $ 11,801 $ 4,086 $ 3,995
Reimbursements 2,256 2,060 787 665
Equity in income (loss) of affiliates 113 197 (108) 88
Net investment Income 139 183 45 60
Sundry income 229 149 130 23
-------- -------- -------- --------
Totals 14,833 14,390 4,940 4,831
-------- -------- -------- --------
Expenses:
Operating expenses 3,000 2,630 814 960
Management fees 616 594 295 199
Real estate taxes 1,872 1,781 697 598
Financing costs 3,505 3,661 1,167 1,220
Depreciation 1,601 1,609 534 538
Minority interest 184 89 52 (3)
-------- -------- -------- --------
Totals 10,778 10,364 3,559 3,512
-------- -------- -------- --------
Income from continuing operations
before state income taxes 4,055 4,026 1,381 1,319
Provision for state income taxes 15 15 7 5
-------- -------- -------- --------
Income from continuing operations 4,040 4,011 1,374 1,314
Discontinued operations -- (33) -- (10)
-------- -------- -------- --------
Net Income $ 4,040 $ 3,978 $ 1,374 $ 1,304
======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Earnings before discontinued operations $ 1.29 $ 1.29 $ 0.44 $ 0.42
Discontinued operations -- (0.01) -- (0.00)
-------- -------- -------- ========
$ 1.29 $ 1.28 $ 0.44 $ 0.42
-------- -------- -------- --------
Diluted earnings (loss) per share:
Earnings before discontinued operations $ 1.23 $ 1.26 $ 0.42 $ 0.41
Discontinued operations -- (0.01) -- (0.00)
-------- -------- -------- ========
$ 1.23 $ 1.25 $ 0.42 $ 0.41
- ---------------------------------------------------------------------------------------------------------
Basic weighted average shares outstanding 3,129 3,120 3,138 3,120
Diluted weighted average shares outstanding 3,283 3,181 3,290 3,215
- ---------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND UNDISTRIBUTED EARNINGS
NINE AND THREE MONTHS ENDED JULY 31, 2003 AND 2002
Nine Months Three Months
Ended July 31, Ended July 31,
2003 2002 2003 2002
---- ---- ---- ----
(In Thousands of Dollars)
COMPREHENSIVE INCOME
--------------------
Net income $ 4,040 $ 3,978 $ 1,374 $ 1,304
Other comprehensive income (loss):
Unrealized income(loss)on interest
rate swap contract (152) 156
------- ------- ------- -------
Comprehensive income $ 3,888 $ 3,978 $ 1,530 $ 1,304
======= ======= ======= =======
UNDISTRIBUTED EARNINGS
----------------------
Balance, beginning of period $ 2,589 $ 2,274 $ 3,072 $ 3,076
Net income 4,040 3,978 1,374 1,304
Less dividends (3,301) (2,808) (1,118) (936)
------- ------- ------- -------
Balance, end of period $ 3,328 $ 3,444 $ 3,328 $ 3,444
======= ======= ======= =======
Dividends per share $ 1.05 $ 0.90 $ 0.35 $ 0.30
======= ======= ======= =======
See Notes to Consolidated Financial Statements
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 2003 AND 2002
2003 2002
---- ----
(In thousands of Dollars)
-------------------------
Operating activities:
Net Income $ 4,040 $ 3,978
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,783 1,838
Equity in income of affiliates (113) (197)
Deferred revenue 74 195
Minority interest 184 89
Development costs written-off 190
Changes in operating assets and liabilities:
Tenants' security accounts (35) (32)
Sundry receivables, prepaid expenses and other assets (1,302) (873)
Accounts payable and accrued expenses 1,001 (113)
Deferred charges (900) (289)
Tenants' security deposits 82 29
-------- --------
Net cash provided by operating activities 4,814 4,815
-------- --------
Investing activities:
Capital expenditures (758) (415)
Distributions from affiliate 3,848 80
Investment in mortgage loan (750)
Marketable securities redeemed 500
Acquisition of Damascus Center (7,242)
-------- --------
Net cash provided by(used in) investing activities (4,902) 165
-------- --------
Financing activities:
Repayment of mortgages (746) (722)
Proceeds from shares of beneficial interest issued 540
Dividends paid (4,287) (3,370)
Distribution to minority interest (115) (237)
-------- --------
Net cash used in financing activities (4,608) (4,329)
-------- --------
Net increase (decrease) in cash and cash equivalents (4,696) 651
Cash and cash equivalents, beginning of period 11,930 13,187
-------- --------
Cash and cash equivalents, end of period $ 7,234 $ 13,838
======== ========
Supplemental disclosure of cash flow data:
Interest paid $ 3,412 $ 3,572
======== ========
Income taxes paid $ 15 $ 15
======== ========
Supplemental schedule of non-cash investing and financing activities:
Dividends declared but not paid $ 1,104 $ 936
======== ========
On July 31, 2003, Damascus Centre, LLC, an entity wholly owned by FREIT,
acquired the 139,000 Sq. Ft. Damascus Shopping Center in Damascus, MD. The total
acquisition cost of $9,833,000 was financed in part by the assumption of a
$2,591,000 first mortgage.
See Notes to Consolidated Financial Statements.
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
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 nine and three months
ended July 31, 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 July 31, 2003 and October 31,
2002, and income statement information for the nine and three months
ended July 31, 2003 and 2002 of the above affiliates that are
accounted for using the equity method are as follows:
July 31, October 31,
2003 2002
---- ----
(In thousands of dollars)
Balance sheet data:
Assets:
Real estate and equipment, net $ 46,426 $ 13,673
Other 3,038 9,779
-------- --------
Total assets $ 49,464 $ 23,452
======== ========
Liabilities and members' equity:
Liabilities:
Mortgage payable $ 49,946 $ 14,794
Other 651 455
-------- --------
Total liabilities 50,597 15,249
-------- --------
Members' equity (deficiency):
Westwood Hills - deficiency (4,096) (797)
Wayne PSC-equity 2,963 9,000
-------- --------
Total members' equity (deficiency) (1,133) 8,203
-------- --------
Total liabilities and members' equity $ 49,464 $ 23,452
======== ========
FREIT - Investment in affiliates equity $ (452) $ 3,283
======== ========
Nine Months Ended Three Months Ended
July 31, July 31,
--------------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----
(In thousands of dollars)
Income Statement Data:
Rental revenue $ 5,912 $ 2,377 $ 1,931 $ 807
Real estate operating expenses (2,495) (845) (827) (240)
------- ------- ------- -------
Net operating Income 3,417 1,532 1,104 567
Financing costs, net (2,589)a (760) (1,193)a (253)
Depreciation (546) (280) (182) (95)
------- ------- ------- -------
Net income(loss) $ 282 $ 492 $ (271) $ 219
======= ======= ======= =======
FREIT-Equity in income(loss) $ 113 $ 197 $ (108) $ 88
======= ======= ======= =======
a-2003 includes a one time charge of $457,000 for costs related to the
re-finance of the Wayne PSC mortgage.
On November 1, 2002, our newly formed 40% owned affiliate, Wayne PSC,
LLC ("WPSC"), 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 WPSC, with FREIT's contribution being $3.6
million.
On June 30, 2003, WPSC re-financed its first mortgage with a new $32.5
million, 13-year mortgage loan bearing a fixed interest rate of 6.04%.
FREIT received $2.4 million of the net re-finance proceeds as a
distribution from WPSC.
During January 2003, Westwood Hills 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 - Property acquisition:
On July 31, 2003, Damascus Centre, LLC, an entity wholly owned by
FREIT, acquired the Damascus Shopping Center ("Damascus") in Damascus,
MD. The total acquisition cost of the shopping center of $9.8 million
was financed in part by the assumption of an existing $2.6 million
first mortgage loan and the balance of $7.2 million with cash.
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 ("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 were issued during the
period.
In computing diluted earnings per share for each of the nine and three
month periods ended July 31, 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:
Nine Months Ended Three Months Ended
July 31, July 31,
------------------------ ------------------------
2003 2002 2003 2002
---- ---- ---- ----
Basic weighted average shares
outstanding 3,128,576 3,119,576 3,137,576 3,119,576
Shares arising from assumed
exercise of stock options 153,929 61,403 152,429 95,106
Dilutive weighted average shares
outstanding --------- --------- --------- ---------
3,282,505 3,180,979 3,290,005 3,214,682
========= ========= ========= =========
Basic and diluted earnings per share, based on the weighted average
number of shares outstanding during each period, are comprised of
ordinary income.
Page 10
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 FREIT's shareholders
on April 7, 1999, whereby up to 460,000 of 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.
On May 23, 2003 options to purchase 36,000 shares of beneficial
interest were exercised at a price of $15 per share. As of July 31,
2003 options for 341,000 shares of beneficial interest are outstanding
and 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 - 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 nine 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 FREIT'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 nine and three
months ended July 31, 2003 and 2002. Asset information is not reported
since the Trust does not use this measure to assess performance.
Nine Months Ended Three Months Ended
July 31, July 31,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands of dollars)
Real estate revenue:
Retail $ 9,527 $ 9,020 $ 3,297 $ 2,997
Residential 4,922 4,727 1,669 1,609
-------- -------- -------- --------
Totals 14,449 13,747 4,966 4,606
-------- -------- -------- --------
Real estate operating expenses:
Retail 2,992 2,854 1,035 1,090
Residential 2,067 1,820 680 542
-------- -------- -------- --------
Totals 5,059 4,674 1,715 1,632
-------- -------- -------- --------
Net operating income: `
Retail 6,535 6,166 2,262 1,907
Residential 2,855 2,907 989 1,067
-------- -------- -------- --------
Totals $ 9,390 $ 9,073 $ 3,251 $ 2,974
======== ======== ======== ========
Recurring capital improvements:
Residential $ 265 $ 209 $ 98 $ 84
======== ======== ======== ========
Reconciliation to consolidated
net income:
Segment NOI $ 9,390 $ 9,073 $ 3,251 $ 2,974
Deferred rents - straight-lining 132 266 37 80
Net investment income 139 183 45 60
Equity in income(loss) of affiliates 113 197 (108) 88
General and administrative expenses (444) (349) (98) (133)
Depreciation (1,601) (1,609) (534) (538)
Discontinued operations -- (33) -- (10)
Financing costs (3,505) (3,661) (1,167) (1,220)
Minority interest (184) (89) (52) 3
-------- -------- -------- --------
Net Income $ 4,040 $ 3,978 $ 1,374 $ 1,304
======== ======== ======== ========
Note 7 - Interest Rate Swap Contract:
During November 2002, FREIT negotiated to lower the fixed interest
rate on a first mortgage secured by its Patchogue, 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 $152,000 at July 31, 2003. Such amount
is included in comprehensive income.
Note 8- 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 nine and
three months ended July 31, 2002 is as follows (in thousands):
| Nine Months Ended Three Months Ended
| July 31, 2002 July 31, 2002
| ------------- -------------
Revenue | $ 511 $ 183
Expenses | (544) (193)
| ----- -----
Net Income (Loss) | $ (33) ($ 10)
| ===== -----
Note 9- Subsequent event:
On August 20, 2003 FREIT placed add-on second mortgages on three of
its residential properties. The mortgages aggregated approximately $7
million bearing an average fixed interest rate of 5.2%. The mortgages
are due co-terminus with the underlying first mortgage loans. FREIT
received net financing proceeds of approximately $6.9 million.
* * *
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 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 ("WaynePSC") 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 July 31, 2003 and October 31, 2002,
and for the nine and three months ended July 31, 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 believe 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:
Nine months and Quarters Ended July 31, 2003 and 2002
Summary Income Statement & Component Data
Nine Months Ended Quarter Ended
July 31, Increase July 31, Increase
---------------------- ---------------------
2003 2002 (Decrease) 2003 2002 (Decrease)
---- ---- ---------- ---- ---- ----------
Revenue ($000)
Real estate operations $ 14,581 $ 14,010 $ 571 $ 5,003 $ 4,683 $ 320
Equity in income (loss) of affiliates 113 197 (84) (108) 88 (196)
Net investment income 139 183 (44) 45 60 (15)
-------- -------- -------- -------- -------- --------
Total revenue 14,833 14,390 443 4,940 4,831 109
-------- -------- -------- -------- -------- --------
Expenses
Real estate operations 6,842 6,369 473 2,301 2,170 131
Financing costs 3,505 3,661 (156) 1,167 1,220 (53)
Gen'l & administrative expenses 446 349 97 98 127 (29)
-------- -------- -------- -------- -------- --------
Total expenses 10,793 10,379 414 3,566 3,517 49
-------- -------- -------- -------- -------- --------
Income from continuing operations 4,040 4,011 29 1,374 1,314 60
Discontinued Operations (33) 33 (10) 10
-------- -------- -------- -------- -------- --------
Net Income $ 4,040 $ 3,978 $ 62 $ 1,374 $ 1,304 $ 70
======== ======== ======== ======== ======== ========
Revenue for the quarter ended July 31, 2003 ("Current Quarter") increased 2.3%
to $4,940,000 from $4,831,000 for the prior year's quarter ended July 31, 2002
("Prior Year's Quarter"). Income from continuing operations for the Current
Quarter increased 4.6% to $1,374,000 from $1,314,000 for the Prior Year's
Quarter.
Income from continuing operations for the nine months ended July 31, 2003
("Current Nine Months") was $4,040,000 on revenue of $14,833,000. This compares
to income from continuing operations for the nine months ended July 31, 2002
("Prior Year's Nine Months") of $4,011,000 on revenue of $14,390,000.
The consolidated results of operations for the nine and three months ended July
31, 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 during the current reporting periods
consisted of six (6) properties (excluding the Damascus shopping center acquired
on July 31,2003). 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 Nine Months Ended Three Months Ended
July 31, July 31,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands of dollars)
Revenues
Minimum & Percentage Rents $7,099 $6,871 $2,402 $2,330
Reimbursements 2,422 2,060 894 665
Other 6 89 1 2
------ ------ ------ ------
Total Revenues 9,527 9,020 3,297 2,997
------ ------ ------ ------
Operating Expenses 2,992 2,854 1,035 1,090
------ ------ ------ ------
Net operating income $6,535 $6,166 $2,262 $1,907
====== ====== ====== ======
Average Occupancy % 93.0% 97.1% 92.9% 96.7%
====== ====== ====== ======
Minimum and percentage rents at FREIT's retail properties increased 3.3% and
3.1% during the Current Nine 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.
After adjusting 2002 costs for $190,000 of costs related to the expansion
project abandoned at our Olney property, operating expenses increased 12% and
15% for the Current Nine Months and Current Quarter respectively. These
increases are principally winter related resulting in higher snow removal and
utility costs during our first two fiscal quarters, and higher landscaping and
clean-up costs during the third quarter.
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. A
lease termination agreement has been reached with the tenant whereby the tenant
will pay FREIT $1.7 million to terminate the lease. As of the date of this
report we await approval of this termination agreement by the mortgage lender on
the property.
During May 2003, at our Westwood Plaza Shopping Center/ Westwood, N.J., TJMaxx
took occupancy of the space vacated by Stop and Shop and began paying rent.
Acquisition of Damascus Shopping Center.
On July 31, 2003, Damascus Centre, LLC, an entity wholly owned by FREIT,
acquired the Damascus Shopping Center in Damascus, MD.
The Shopping Center is situated on 13 acres, and contains approximately 139,000
SF of retail and office space. A Safeway supermarket is the anchor tenant.
The total acquisition costs of $10.3 million were financed in part by the
assumption of an existing $2.6 million first mortgage loan and the balance of
$7.7 Million with equity capital. Included in the acquisition costs is an amount
paid to an existing tenant to terminate its lease as of December 31, 2003. FREIT
is considering offering an interest in this investment to a joint venture
partner owned by employees of Hekemian & Co., Inc., FREIT's managing agent.
FREIT plans to demolish the existing buildings, with the exception of the
freestanding McDonald's restaurant. The construction of a Shopping Center of
approximately 145,000 SF is planned, of which 58,000 SF is expected to be
occupied by a new, prototype Safeway Supermarket. A smaller building will be
constructed on an out parcel, which will accommodate the office tenants as well
as some smaller, retail space. This plan to construct a new center is subject to
obtaining all approvals and building permits from the various governing
authorities. If all approvals are obtained, total development costs are
estimated at approximately $13 million. Construction is not expected to begin
before January 2005. During the holding period until construction begins, the
center is not expected to make a significant contribution to FREIT's earnings or
cash flow.
Since the center was acquired on July 31, 2003, no operations of the center are
included in our results of operations for the nine months ended July 31, 2003.
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 Nine Months Ended Three Months Ended
July 31, July 31,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands of dollars)
Revenues
Rents $4,865 $4,667 $1,647 $1,588
Other 57 60 22 21
------ ------ ------ ------
Total Revenues 4,922 4,727 1,669 1,609
------ ------ ------ ------
Operating Expenses 2,067 1,820 680 542
------ ------ ------ ------
Net operating income $2,855 $2,907 $ 989 $1,067
====== ====== ====== ======
Average Occupancy % 96.7% 96.4% 97.5% 96.8%
====== ====== ====== ======
Recurring capital
improvements $ 265 $ 209 $ 98 $ 84
====== ====== ====== ======
Residential revenue has increased 4.1% and 3.7% for the Current Nine 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 July 31,
2003, a 1% increase or decrease in average occupancy will cause an annual
$67,000 increase or reduction in revenues, while a 1% increase or decrease in
rental rates will cause an annual $66,100 increase or decrease in annual
revenues.
Average occupancy of 97.5% during the Current Quarter was an increase over the
Prior Year's Quarter. The Current Quarter's average occupancy was also higher
than FREIT's prior quarter ended April 30, 2003, raising the Current Nine Months
occupancy levels to 96.7%, higher than the Prior Year's Nine Month occupancy
level.
During the Current Nine Months and Current Quarter operating expenses increased
13.6% and 25.5% respectively over prior year's comparable periods. As a
percentage of revenue, operating expenses for the Current Nine Months were 42.0%
of revenue compared to 38.5% for the Prior Year's Nine Months period. Increases
in snow removal and utility costs, because of the recent severe winter, which we
experienced, in addition to increased landscaping costs and apartment fix-up
costs were the principal reasons for the expense increase.
Because revenue increases were not sufficient to cover the increased costs, NOI
from our residential properties fell 1.8% from year earlier levels. We feel that
the firming occupancy, coupled with elimination of concessions, will, in future
periods, result in operating results that exceed prior periods.
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:
Nine Months Ended Three Months Ended
July 31, July 31,
-------------------------- -------------------------
Income Statement Data: 2003 2002 2003 2002
---- ---- ---- ----
(In thousands of dollars)
Rental revenue
Westwood Hills $ 2,431 $ 2,377 $ 819 $ 807
Wayne PSC 3,481 -- 1,112 --
------- ------- ------- -------
Total revenue 5,912 2,377 1,931 807
Real estate operating expenses
Westwood Hills 1,251 1,125 405 335
Wayne PSC 1,790 -- 604 --
------- ------- ------- -------
Total real estate expenses 3,041 1,125 1,009 335
------- ------- ------- -------
Income before financing costs
Westwood Hills 1,180 1,252 414 472
Wayne PSC 1,691 -- 508 --
------- ------- ------- -------
Total income before financing costs 2,871 1,252 922 472
Financing costs
Westwood Hills 881 760 303 253
Wayne PSC 1,708(a) -- 890(a) --
------- ------- ------- -------
Total financing costs 2,589 760 1,193 253
------- ------- ------- -------
Net income (loss)
Westwood Hills 299 492 111 219
Wayne PSC (17) -- (382) --
------- ------- ------- -------
Net income(loss) $ 282 $ 492 $ (271) $ 219
======= ======= ======= =======
FREIT's share of net income(loss) $ 113 $ 197 $ (108) $ 88
======= ======= ======= =======
Occupancy:
Westwood Hills 96.0% 97.2% 96.0% 97.8%
------- ------- ------- -------
Wayne PSC 91.1% 97.0%
------- -------
a- 2003 includes a one-time charge of $457,000 in costs related to the
re-finance of the Wayne PSC mortgage.
Net income at Westwood Hills fell 39.2% to $299,000 for the Current Nine Months
from $492,000 for the Prior Year's Nine Months. The reduction results from two
factors: 1) while revenues increased 2.3% over last year, the increase was
insufficient to cover the 11.2% increase in expenses directly related to the
severity of the recent
winter and, 2) the financing costs related to the $3.4 million second mortgage
added in January 2003. FREIT received, as a distribution, approximately $1.4
million of the net financing proceeds. The cost 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,we feel this cost
will be offset by the income FREIT will ultimately earn from investing its $1.4
million distribution.
On November 1, 2002, Wayne PSC closed on the acquisition of the Preakness
Shopping Center. Income before financing costs was $1,691,000 and $508,000 for
the Current Nine Months and Current Quarter respectively. Earnings, however,
were burdened by one-time re-financing costs (see below) of $457,000 that
resulted in a net loss of $17,000 for the Current Nine Months and a loss of
$382,000 for the Current Quarter. FREIT shares in 40% of these losses.
On June 30, 2003 Wayne PSC refinanced its original $26.5 million first mortgage
with a new $32.5 million mortgage loan. 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. FREIT received $2.4 million of the net refinance proceeds
as a distribution from Wayne PSC. Because there is no amortization of the new
loan over the first 36 months, debt service will be less than under the original
loan during this period. We feel that the benefits of locking in attractive
long-term interest rates, coupled with the income potential from investing the
cash received in the future real estate acquisitions, outweighs the financing
costs incurred.
FINANCING COSTS
Financing Costs for the Current Nine Months and Current Quarter decreased 4.3%
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.
Nine Months Ended Three Months Ended
July 31, July 31,
---------------------- ----------------------
2003 2002 2003 2002
---- ---- ---- ----
(thousands of dollars)
Fixed rate mortgages $3,198 $3,342 $1,056 $1,109
Floating rate mortgage 266 310 83 107
Other 41 9 28 4
------ ------ ------ ------
$3,505 $3,661 $1,167 $1,220
====== ====== ====== ======
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 ADMINISTRATIVE EXPENSES
Our G & A expenses for the Current Nine Months increased by $97,000 over the
prior year's comparable period. The increase was due to increases in FREIT's
officers and Trustee's fees.
LIQUIDITY AND CAPITAL RESOURCES
Our financial condition remains strong. Below are the cash flows provided by
(used in) operating, investing, and financing activities:
------------------------------------
For The Nine Months Ended July 31,
------------------------------------
2003 2002
---- ----
(Amounts in thousands)
Operating activities $ 4,814 $ 4,815
============= ===============
Investing activities $ (4,902) $ 165
============= ===============
Financing activities* $ (4,608) $ (4,329)
============= ===============
* Including dividends paid of $4,287,000 and $3,370,000 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 July 31, 2003, we had cash and cash equivalents totaling $7.2 million
compared to $11.9 million at October 31, 2002. This reduction principally
results from utilizing $7.7 million to purchase the Damascus Shopping Center
property, off-set by FREIT receiving distributions from its affiliates of $3.8
million, generated from mortgage financings.
As previously reported, we are planning the construction of 129 apartment rental
units in Rockaway, NJ., and the reconstruction of our Damascus Shopping Center.
The total capital required for these projects is estimated at $13.8 million and
$13 million respectively. 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, 2003 FREIT's aggregate outstanding mortgage debt was $70.2 million.
Approximately $59.4 million bears a fixed weighted average interest rate of
7.422%, and an average life of approximately 7.9 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. This
mortgage note, which was due at the end of March 2003, has been extended for
two, three month periods to allow for the time necessary to complete the
documentation of a permanent mortgage extension. The due date of the loan will
be extended to June 2006, with interest to reset
Page 21
monthly at 200 basis points over the one-month LIBOR. Monthly amortization
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
amortization schedules that are longer than the terms of the mortgages. As such,
balloon payments on our affiliates mortgages will be required as follows:
$ Millions
----------
2012 $ 24.5
2014 $ 13.8
The following table shows the estimated fair value and carrying value of our
long-term debt at July 31, 2003 and October 31, 2002:
July 31, October 31,
(In Millions) 2003 2002
------------- ---- ----
Fair Value $75.6 $73.5
Carrying Value $70.2 $68.4
Fair values are estimated based on market interest rates at July 31, 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. On August 20, 2003 FREIT placed
add-on second mortgages on three of its residential properties. The second
mortgage loans aggregated approximately $7 million bearing an average fixed rate
of 5.2%. The due dates of the second mortgage loans are co-terminus with the
underlying first mortgage loans. FREIT received net financing proceeds of
approximately $6.9 million.
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.
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
As of the end of the period covered by 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. During
FREIT's last fiscal quater, there have been no change in FREIT's internal
control over financial reporting that has materialy affected, or is reasonably
likely to materialy affect, FREIT's internal control over financial reporting.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in FREIT's reports
filed or submitted under the Exchange Act is recorded, processed, summarized,
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
FREIT's reports filed under the Exchange Act is accumulated and communicated to
management, including FREIT's Chief Executive Officer and Chief Financial
Officer as appropriate, to allow timely decisions regarding required disclosure.
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
During the third quarter ended July 31, 2003, the following reports on Form 8-K
were filed with the SEC:
Form 8-K (Item 5. Other Events), date of earliest event reported June 17,
2003 FREIT reported to its shareholders its operating results for the six
months and three months ended April 30, 2003.
Exhibit Index
Exhibit 31.1 Section 302 Certification of Chief Executive Officer
Exhibit 31.2 Section 302 Certification of Chief Financial Officer
Exhibit 31.1 Certification of Chief Executive Officer to 18 U.S.C. 1350
Exhibit 31.2 Certification of Chief Financial Officer to 18 U.S.C. 1350
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 15, 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)