SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended October 31, 2003
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 2-27018
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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, Hackensack, New Jersey 07601
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(Address of principal executive offices) (Zip Code)
201-488-6400
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each Class on which registered
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None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Shares of Beneficial Interest
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(Title of class)
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 shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in this Form 10-K or any amendment to this Form 10-K
(X)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.) Yes No X
The aggregate market value of the registrant's shares of beneficial interest
held by non-affiliates of the registrant as of the last business day of the
registrant's most recently completed second fiscal quarter was approximately $
64.3 million. Excluded from this calculation are shares of the registrant owned
or deemed to be beneficially owned by the trustees and executive officers of the
registrant, including shares with respect to which the trustees and executive
officers disclaim beneficial ownership. 3,155,576 shares of beneficial interest
were issued and outstanding as of January 27, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2004 Annual Meeting of
Shareholders to be held on April 7, 2004 are incorporated by reference in Part
III of this Annual Report.
FORWARD-LOOKING STATEMENTS
Certain information included in this Annual Report contains or may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The registrant
cautions readers that forward-looking statements, including, without limitation,
those relating to the registrant's investment policies and objectives; the
financial performance of the registrant; the ability of the registrant to
service its debt; the competitive conditions which affect the registrant's
business; the ability of the registrant to obtain the necessary governmental
approvals for the development, expansion or renovation of its properties, the
impact of environmental conditions affecting the registrant's properties, and
the registrant's liquidity and capital resources, are subject to certain risks
and uncertainties. Actual results or outcomes may differ materially from those
described in the forward-looking statements and will be affected by a variety of
risks and factors, including, without limitation, the registrant's future
financial performance; the availability of capital; general market conditions;
national and local economic conditions, particularly long-term interest rates;
federal, state and local governmental regulations that affect the registrant;
and the competitive environment in which the registrant operates, including, the
availability of retail space and residential apartment units in the areas where
the registrant's properties are located. In addition, the registrant's continued
qualification as a real estate investment trust involves the application of
highly technical and complex rules of the Internal Revenue Code. The
forward-looking statements are made as of the date of this Annual Report and the
registrant assumes no obligation to update the forward-looking statements or to
update the reasons actual results could differ from those projected in such
forward-looking statements.
PART I
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ITEM 1 BUSINESS
(a) GENERAL BUSINESS
First Real Estate Investment Trust of New Jersey ("FREIT") is an equity real
estate investment trust ("REIT") organized in New Jersey in 1961. FREIT
acquires, develops and holds real estate properties for long-term investment and
not for resale. Its investment portfolio contains multi family residential
properties, retail properties, undeveloped land and a 40% equity interest in
Westwood Hills, LLC ("Westwood Hills"), a New Jersey Limited Liability Company,
which owns a 210 unit apartment complex, and a 40% equity interest in Wayne PSC,
LLC ("WaynePSC"), a New Jersey Limited Liability Company, which owns a 323,000
+/- sq. ft. Community Shopping Center. All but four of FREIT's properties are
located in New Jersey. See the tables in "Item 2 Properties - Portfolio of
Investments."
FREIT's long-range investment policy is to review and evaluate potential real
estate investment opportunities for acquisition that it believes will (i)
complement its existing investment portfolio, (ii) generate increased income and
distributions to shareholders, and (iii) increase the overall value of FREIT's
portfolio. FREIT's investments may take the form of wholly owned fee interests
or, if the circumstances warrant, on a joint venture basis with other parties
provided FREIT would be able to maintain management control over the property.
While FREIT's general investment policy is to hold and maintain its properties
long-term, it may, from time-to-time, sell or trade certain properties in order
to (i) obtain capital used or to be used to purchase, develop or renovate other
properties which we believe will provide a higher rate of return and increase
the value of our investment portfolio, and (ii) divest properties which FREIT
has determined or determines are no longer compatible with our growth strategies
and investment objectives for our real estate portfolio.
Fiscal Year 2003 Developments
(i) Financing
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FREIT
(a) During November 2002, FREIT renegotiated the terms of the first mortgage
note on FREIT's retail property in Patchogue, NY. The mortgage note, which had
an outstanding principal balance of $6.9 million, was due on January 1, 2005,
and carried a fixed interest rate of 7.375%. The principal balance was not
increased, but the due date has been extended three years (3) to January 1, 2008
and the interest rate, subject to an Interest Rate Swap Contract, was reduced to
a fixed rate of interest of 5.95%.
(b) To create additional liquidity and lock in favorable long-term interest
rates, FREIT took 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.
AFFILIATES
(a) On December 18, 2003, Westwood Hills placed a second mortgage in the amount
of $3.4 million on its garden apartment property. The mortgage loan bears
interest at the fixed rate of 6.18%, with payments based on a twenty five (25)
year amortization schedule. The mortgage loan is due on January 1, 2014,
co-terminus with the underlying first mortgage loan. The net proceeds of the
second mortgage were distributed to Westwood Hills members, of which FREIT
received approximately $1.4 million.
(b) On June 30, 2003 WaynePSC re-financed 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 re-finance
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.
(ii) ACQUISITION
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
square feet 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 an entity owned by
employees of Hekemian & Co., Inc. ("Hekemian"), FREIT's managing agent.
FREIT plans to demolish the existing buildings at the Damascus Shopping Center,
with the exception of the freestanding McDonald's restaurant. A new Shopping
Center will be constructed of approximately 145,000 SF, 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 on the property to 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.
(iii) DEVELOPMENT
Rockaway Township, NJ
We own approximately 20 +/- acres of undeveloped land in Rockaway Township, NJ.
Building plan approval and a water allocation has been received from Rockaway
Township for the construction of 129 garden apartment units. Development costs
are estimated at $13.8 million that we will finance, in part, from construction
financing and, in part, from funds available from our institutional money market
investments. Subject to the receipt of final water allocation and sewer approval
from the NJ Department of Environmental Protection, construction is expected to
commence during the summer of 2004 and is expected to last twelve to eighteen
months. Approximately one (1) acre of the Rockaway land has been sub-divided and
leased to a bank. Rent under the land lease commenced in December 2003.
South Brunswick, NJ
FREIT owns approximately 33 acres of land in South Brunswick (see "Item 2
Properties - Portfolio of Investments") that is zoned Industrial. FREIT has
filed for site plan approval for the construction of a 500,000 sq. ft.
industrial warehouse facility.
(b) Financial Information about Segments
FREIT has two reportable segments: Retail Properties and Residential Properties.
These reportable segments have different customers and are managed separately
because each requires different operating strategies and management expertise.
Segment information for the three years ended October 31, 2003 is incorporated
by reference to Note 14, "Segment Information" on pages F- 23 and F- 24 of the
Consolidated Financial Statements
(c) Narrative Description of Business
FREIT was founded and organized for the principal purpose of acquiring,
developing, and owning a portfolio of diverse income producing real estate
properties. FREIT's developed properties include residential apartment
communities and retail properties that consist of multi and single tenanted
properties. Our properties are located in New Jersey, Maryland and on Long
Island. We also currently own approximately 56.5 acres of unimproved land in New
Jersey. See "Item 2 Properties - Portfolio of Investments."
FREIT elected to be taxed as a REIT under the Internal Revenue Code. FREIT
operates in such a manner as to qualify for taxation as a REIT in order to take
advantage of certain favorable tax aspects of the REIT structure. Generally, a
REIT will not be subject to federal income taxes on that portion of its ordinary
income or capital gain that is currently distributed to its equity holders.
As an equity REIT, we generally acquire interests in income producing properties
to be held as long-term investments. FREIT's return on such investments is based
on the income generated by such properties mainly in the form of rents.
From time to time, FREIT has sold, and may sell again in the future, certain of
its properties in order to (i) obtain capital used or to be used to purchase,
develop or renovate other properties which we believe will provide a higher rate
of return and increase the value of our investment portfolio, and (ii) divest
properties which FREIT has determined or determines are no longer compatible
with our growth strategies and investment objectives for our real estate
portfolio.
We do not hold any patents, trademarks or licenses.
Portfolio of Real Estate Investments
At October 31, 2003, FREIT's real estate holdings included (i) seven (7)
apartment buildings or complexes containing 507 rentable units, (ii) seven (7)
retail properties containing approximately 826,000 square feet of leasable
space, including one (1) single tenant store, and (iii) three (3) parcels of
undeveloped land consisting of approximately 56.5 acres. With the exception of
the Olney Town Center which is subject to a land lease, and which is owned by S
And A Commercial Limited Partnership ("S&A"), in which FREIT has a 75% ownership
interest, FREIT and its Affiliates own all such properties in fee simple. See
"Item 2 Properties - Portfolio of Investments" of this Annual Report for a
description of FREIT's separate investment properties and certain other
pertinent information with respect to such properties that is relevant to
FREIT's business. In addition, FREIT holds a 40% membership interest in Westwood
Hills, that owns an apartment complex containing 210 rentable units, and a 40%
membership interest in WaynePSC that owns, effective November 1, 2002, a 323,000
+/- sq. ft. Community Shopping Center. See "Investment in Affiliates."
Investment in Affiliates
Westwood Hills, LLC
FREIT owns a forty percent (40%) membership interest in Westwood Hills that owns
and operates a 210-unit residential apartment complex located in Westwood, New
Jersey. FREIT is the Managing Member of Westwood Hills. In December 1998,
Westwood Hills refinanced its mortgage loan. In connection with the refinancing,
Robert S. Hekemian, Chairman of the Board of FREIT and a member of Westwood
Hills, provided a personal guarantee in certain limited circumstances. FREIT,
and all other members of Westwood Hills, have indemnified Mr. Hekemian, to the
extent of their percentage ownership interest in Westwood Hills, with respect to
this guaranty.
Wayne PSC, LLC
FREIT owns a 40% membership in, and is the Managing Member of WaynePSC, that
owns a 323,000 +/- sq, ft. community shopping center in Wayne, NJ.
Hekemian is the managing agent of the above properties owned by the Affiliates.
See "Management Agreement."
See Fiscal Year 2003 Developments concerning financing of the Affiliate's
properties.
Employees
On October 31, 2003 FREIT and its Affiliates had thirteen (13) full-time
employees and four (4) part-time employees who work solely at the properties
owned by FREIT or its Affiliates. The number of part-time employees varies
seasonally.
Mr. Robert S. Hekemian, Chairman of the Board and Chief Executive Officer, Mr.
Donald W. Barney, President, Treasurer and Chief Financial Officer, and Mr. John
A. Aiello, Esq., Secretary and Executive Secretary, are the executive officers
of FREIT. Mr. Hekemian devotes approximately forty to fifty percent (40% - 50%)
of his business activities to FREIT, Mr. Barney devotes approximately fifteen
percent (15%) of his business activities to FREIT, and Mr. Aiello devotes
approximately five percent (5%) of his business activities to FREIT. See "Item
4A - Executive Officers of FREIT." Hekemian has been retained by FREIT to manage
FREIT's properties and is responsible for recruiting, on behalf of FREIT, the
personnel required to perform all services related to the operation of FREIT's
properties. See "Management Agreement."
Management Agreement
On April 10, 2002, FREIT and Hekemian executed a new Management Agreement
whereby Hekemian would continue as Managing Agent for FREIT. The term of the
Management Agreement runs from November 1, 2001 to October 31, 2003 and shall be
automatically renewed for periods of two (2) years unless either party gives not
less than six (6) months prior notice to the other of non-renewal. No
non-renewal notice has been issued by either party. The April 10, 2002
Management Agreement replaces the Management Agreement dated December 20, 1961
as extended. The salient provisions of the new Management Agreement are as
follows: FREIT continues to retain the Managing Agent as the exclusive
management and leasing agent for properties which FREIT presently owns and for
the Preakness Shopping Center acquired on November 1, 2002 by WaynePSC. However,
FREIT may retain other managing agents to manage certain other properties
hereafter acquired and to perform various other duties such as sales,
acquisitions, and development with respect to any or all properties. The
Managing Agent is no longer the exclusive advisor for FREIT to locate and
recommend to FREIT investments, which the Managing Agent deems suitable for
FREIT, and is no longer required to offer potential acquisition properties
exclusively to FREIT before acquiring those properties for its own account. The
new Management Agreement includes a detailed schedule of fees for those
services, which the Managing Agent may be called upon to perform. The new
Management Agreement provides for a termination fee in the event of a
termination or non-renewal of the Management Agreement under certain
circumstances.
Pursuant to the terms of the new Management Agreement, FREIT pays Hekemian
certain fees and commissions as compensation for its services. From time to
time, FREIT engages Hekemian to provide certain additional services, such as
consulting services related to development and financing activities of FREIT.
Separate fee arrangements are negotiated between Hekemian and FREIT with respect
to such additional services. See "First Real Estate Investment Trust of New
Jersey Notes to Consolidated Financial Statements - Note 9."
Mr. Hekemian, Chairman of the Board, Chief Executive Officer and a Trustee of
FREIT, is the Chairman of the Board and Chief Executive Officer of Hekemian. Mr.
Hekemian owns approximately .2% of all of the issued and outstanding shares of
Hekemian.
Real Estate Financing
FREIT funds acquisition opportunities and the development of its real estate
properties largely through debt financing, including mortgage loans against
certain of its properties. At October 31, 2003, FREIT's aggregate outstanding
mortgage debt was $76.9 million with an average interest cost on a weighted
average basis of 6.577%. FREIT has mortgage loans against certain properties,
which serve as collateral for such loans. See the tables in "Item 2 Properties -
Portfolio of Investments" for the outstanding mortgage balances at October 31,
2003 with respect to each of these properties.
FREIT is currently, and will continue to be for the foreseeable future, more
highly leveraged than it has been in the past. This increased level of
indebtedness also presents an increased risk of default on the obligations of
FREIT and an increase in debt service requirements that could adversely affect
the financial condition and results of operations of FREIT. A number of FREIT's
mortgage loans are being amortized over a period that is greater than the terms
of such loans; thereby requiring balloon payments at the expiration of the terms
of such loans. FREIT has not established a cash reserve sinking fund with
respect to such obligations and at this time does not expect to have sufficient
funds from operations to make such balloon payments when due under the terms of
such loans. See "Liquidity and Capital Resources" section of Item 7.
FREIT is subject to the normal risks associated with debt financing, including
the risk that FREIT's cash flow will be insufficient to meet required payments
of principal and interest; the risk that indebtedness on its properties will not
be able to be renewed, repaid or refinanced when due; or that the terms of any
renewal or refinancing will not be as favorable as the terms of the indebtedness
being replaced. If FREIT were unable to refinance its indebtedness on acceptable
terms, or at all, FREIT might be forced to dispose of one or more of its
properties on disadvantageous terms which might result in losses to FREIT. These
losses could have a material adverse effect on FREIT and its ability to make
distributions to shareholders and to pay amounts due on its debt. If a property
is mortgaged to secure payment of indebtedness and FREIT is unable to meet
mortgage payments, the mortgagee could foreclose upon the property, appoint a
receiver and receive an assignment of rents and leases or pursue other remedies,
all with a consequent loss of revenues and asset value to FREIT. Further,
payment obligations on FREIT's mortgage loans will not be reduced if there is a
decline in the economic performance of any of FREIT's properties. If any such
decline in economic performance occurs, FREIT's revenues, earnings, and funds
available for distribution to shareholders would be adversely affected.
Neither the Declaration of Trust nor any policy statement formally adopted by
FREIT's Board of Trustees limits either the total amount of indebtedness or the
specified percentage of indebtedness (based on the total capitalization of
FREIT), which may be incurred by FREIT. Accordingly, FREIT may incur in the
future additional secured or unsecured indebtedness in furtherance of its
business activities, including, if or when necessary, to refinance its existing
debt. Future debt incurred by FREIT could bear interest at rates, which are
higher than the rates on FREIT's existing debt. Future debt incurred by FREIT
could also bear interest at a variable rate. Increases in interest rates would
increase FREIT's variable interest costs (to the extent that the related
indebtedness was not protected by interest rate protection arrangements), which
could have a material adverse effect on FREIT and its ability to make
distributions to shareholders and to pay amounts due on its debt or cause FREIT
to be in default under its debt. Further, in the future, FREIT may not be able
to, or may determine that it is not able to, obtain financing for property
acquisitions or for capital expenditures to develop or improve its properties on
terms which are acceptable to FREIT. In such event, FREIT might elect to defer
certain projects unless alternative sources of capital were available, such as
through an equity or debt offering by FREIT.
Competitive Conditions
FREIT is subject to normal competition with other investors to acquire real
property and to profitably manage such property. Numerous other REIT(s), banks,
insurance companies and pension funds, as well as corporate and individual
developers and owners of real estate, compete with FREIT in seeking properties
for acquisition and for tenants. Many of these competitors have significantly
greater financial resources than FREIT.
In addition, retailers at FREIT's retail properties face increasing competition
from discount shopping centers, outlet malls, sales through catalogue offerings,
discount shopping clubs, marketing and shopping through cable and computer
sources, particularly over the Internet, and telemarketing. In many markets, the
trade areas of FREIT's retail properties overlap with the trade areas of other
shopping centers. Renovations and expansions at those competing shopping centers
and malls could negatively affect FREIT's retail properties by encouraging
shoppers to make their purchases at such new, expanded or renovated shopping
centers and malls. Increased competition through these various sources could
adversely affect the viability of FREIT's tenants, and any new retail real
estate competition developed in the future could potentially have an adverse
effect on the revenues of and earnings from FREIT's retail properties.
(A) General Factors Affecting Investment in Retail and Apartment Complex
Properties; Effect on Economic and Real Estate Conditions
The revenues and value of FREIT's retail and residential apartment properties
may be adversely affected by a number of factors, including, without limitation,
the national economic climate; the regional economic climate (which may be
adversely affected by plant closings, industry slow downs and other local
business factors); local real estate conditions (such as an oversupply of retail
space or apartment units); perceptions by retailers or shoppers of the security,
safety, convenience and attractiveness of a shopping center; perception by
residential tenants of the safety, convenience and attractiveness of an
apartment building or complex; the proximity and the number of competing
shopping centers and apartment complexes; the availability of recreational and
other amenities and the willingness and ability of the owner to provide capable
management and adequate maintenance. In addition, other factors may adversely
affect the fair market value of a retail property or apartment building or
complex without necessarily affecting the revenues, including changes in
government regulations (such as limitations on development or on hours of
operation) changes in tax laws or rates, and potential environmental or other
legal liabilities.
(B) Retail Shopping Center Properties' Dependence on Anchor Stores and
Satellite Tenants
FREIT believes that its revenues and earnings; its ability to meet its debt
obligations; and its funds available for distribution to shareholders would be
adversely affected if space in FREIT's multi-store shopping center properties
could not be leased or if anchor store tenants or satellite tenants failed to
meet their lease obligations.
The success of FREIT's investment in its shopping center properties is largely
dependent upon the success of its tenants. Unfavorable economic, demographic, or
competitive conditions may adversely affect the financial condition of tenants
and consequently the lease revenues from and the value of FREIT's investments in
its shopping center properties. If the sales of stores operating in FREIT's
shopping center properties were to decline due to deteriorating economic
conditions, the tenants may be unable to pay their base rents or meet other
lease charges and fees due to FREIT. In addition, any lease provisions providing
for additional rent based on a percentage of sales could be rendered moot. In
the event of default by a tenant, FREIT could suffer a loss of rent and
experience extraordinary delays while incurring additional costs in enforcing
its rights under the lease, which may or may not be recaptured by FREIT. As at
October 31, 2003 the following table lists the ten largest retail tenants, which
account for approximately 58.3% of FREIT's retail rental space and 50.1% of
fixed retail rents.
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Tenant Center Sq. Ft.
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Burlington Coat Factory Westridge Square 85,992
K Mart Corporation Westwood Plaza 84,254
Pathmark Stores Inc. Patchoque 63,932
Giant Of Maryland Inc. Westridge Square 55,330
Stop & Shop Supermarket Co. Franklin Crossing 48,673
Safeway Stores Inc . Damascus Center 45,189
TJ MAXX Westwood Plaza 28,480
Westwood Cinema (Hoyts) (1) Westridge Square 27,336
Holiday Productions Olney Town Center 23,930
Damascus Rd Community Church Damascus Center 18,954
(1) Tenant's lease expires April 30, 2007. Total rent and expense
reimbursements currently aggregate approximately $488,000 per year. FREIT
and Tenant have agreed on the terms of a lease termination agreement
whereby Tenant will pay FREIT a lump sum payment of approximately $1.8
million to terminate the lease. The transaction documentation is in the
process of being executed by all parties. The mortgage lender has agreed to
the termination agreement with the stipulation that the entire lump sum
payment to be made by the Tenant be deposited in an interest bearing escrow
account held for the benefit of the mortgage lender. Up to $750,000 will be
disbursed to FREIT (a) in monthly installments of $31,595 over
approximately twenty four (24) months, or (b) the balance of the
un-disbursed $750,000 once the mortgage lender is provided with a
Certificate of Occupancy ("C of O") covering all of the space vacated by
the Tenant. The balance of the lease termination payment of approximately
$1 million representing a Tenant Improvement ("TI") Reserve, will be
disbursed to FREIT at the earlier of (a) in $250,000 increments as
comparable amounts of TI's are incurred, or (b) when a C of O is obtained
and the space vacated by the Tenant leased and re-occupied, or (c) when the
mortgage loan has been re-paid.
(C) Renewal of Leases and Reletting of Space
There is no assurance that we will be able to retain tenants at our retail
properties upon expiration of their leases. Upon expiration or termination of
leases for space located in FREIT's retail properties, the premises may not be
relet or the terms of reletting (including the cost of concessions to tenants)
may not be as favorable as lease terms for the terminated lease. If FREIT were
unable to promptly relet all or a substantial portion of this space or if the
rental rates upon such reletting were significantly lower than current or
expected rates, FREIT's revenues and earnings; FREIT's ability to service its
debt; and FREIT's ability to make expected distributions to its shareholders,
could be adversely affected. There are no leases, which FREIT considers material
or significant in terms of any single property which expired during the fiscal
year 2003 or which is scheduled to expire in the fiscal year 2004 with the
exception of the Westridge Cinema (Hoyts) lease- See Above.
D) Illiquidity of Real Estate Investments; Possibility that Value of
FREIT's Interests may be less than its Investment
Equity real estate investments are relatively illiquid. Accordingly, the ability
of FREIT to vary its portfolio in response to changing economic, market or other
conditions is limited. Also, FREIT's interest in its affiliates, Westwood Hills
and WaynePSC, are subject to transfer constraints imposed by the operating
agreements, which govern FREIT's investment in these affiliates. Even without
such restrictions on the transfer of its interests, FREIT believes that there
would be a limited market for its interests in these affiliates.
If FREIT had to liquidate all or substantially all of its real estate holdings,
the value of such assets would likely be diminished if a sale was required to be
completed in a limited time frame. The proceeds to FREIT from any such sale of
the assets in FREIT's real estate portfolio might be less than the fair market
value of those assets.
Impact of Governmental Laws and Regulations on Registrant's Business
FREIT's properties are subject to various Federal, state and local laws,
ordinances and regulations, including those relating to the environment and
local rent control and zoning ordinances.
(A) Environmental Matters
Both Federal and state governments are concerned with the impact of real estate
construction and development programs upon the environment. Environmental
legislation affects the cost of selling real estate, the cost to develop real
estate, and the risks associated with purchasing real estate.
Under various federal, state and local environmental laws, statutes, ordinances,
rules and regulations, an owner of real property may be liable for the costs of
removal or remediation of certain hazardous or toxic substances at, on, in or
under such property, as well as certain other potential costs relating to
hazardous or toxic substances (including government fines and penalties and
damages for injuries to persons and adjacent property). Such laws often impose
such liability without regard to whether the owners knew of, or were responsible
for, the presence or disposal of such substances. Such liability may be imposed
on the owner in connection with the activities of any operator of, or tenant at,
the property. The cost of any required remediation, removal, fines or personal
or property damages and the owner's liability therefore could exceed the value
of the property and/or the aggregate assets of the owner. In addition, the
presence of such substances, or the failure to properly dispose of or remediate
such substances, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral. If FREIT incurred any
such liability, it could reduce FREIT's revenues and ability to make
distributions to its shareholders.
A property can also be negatively impacted by either physical contamination or
by virtue of an adverse effect upon value attributable to the migration of
hazardous or toxic substances, or other contaminants that have or may have
emanated from other properties.
At this time, FREIT is aware of the following environmental matters affecting
its properties:
(i) Vacant Land Located in Rockaway Township, N.J.
The property located in Rockaway Township contains wetlands. Pursuant to a
Letter of Interpretation received from the NJDEP, FREIT has determined that the
wetlands and associated transition areas will have no material impact on the
future development of the property pursuant to the applicable laws and
regulations of New Jersey. Under the current zoning ordinance, the property is
zoned for multifamily residential use, with a small portion zoned for commercial
use. FREIT has received approval from the Township for the construction of 129
garden apartment units.
(ii) Westwood Plaza Shopping Center, Westwood, N.J.
This property is in a HUD Flood Hazard Zone and serves as a local flood
retention basin for part of Westwood, New Jersey. FREIT maintains flood
insurance in the amount of $500,000 for the subject property which is the
maximum available under the HUD Flood Program for the property. Any
reconstruction of that portion of the property situated in the flood hazard zone
is subject to regulations promulgated by the New Jersey Department of
Environmental Protection ("NJDEP"), which could require extraordinary
construction methods.
(iii) Franklin Crossing, Franklin Lakes, N.J.
The redeveloped Franklin Crossing shopping center was completed during the
summer of 1997. Also in 1997, a historical discharge of hazardous materials was
discovered at Franklin Crossing. The discharge was reported to the NJDEP in
accordance with applicable regulations. FREIT completed the remediation required
by the NJDEP.
In November 1999, FREIT received a No Further Action Letter from the NJDEP
concerning the contaminated soil at Franklin Crossing. Monitoring of the
groundwater will continue pursuant to a memorandum of agreement filed with the
NJDEP.
(iv) Preakness Shopping Center, Wayne NJ
a) Prior to its purchase by WaynePSC a Phase I and Phase II Environmental
Assessment of the Preakness shopping center revealed soil ground water
contamination with Percloroethylene (Dry Cleaning Fluid) caused by mishandling
of this chemical by a former Dry Cleaner tenant.
The seller of the center to WaynePSC, LLC is in the process of performing the
remedial work in accordance with the requirements of the NJDEP. Additonally, the
seller has escrowed the estimated cost of the remediation and has purchased a
cap-cost insurance policy to covering any expenses over and above the estimated
cost.
(v) Other
a) The State of New Jersey has adopted an underground fuel storage tank law and
various regulations with respect to underground storage tanks.
FREIT no longer has underground storage tanks on any of its properties.
FREIT has conducted environmental audits for all of its properties except for
its undeveloped land; retail properties in Franklin Lakes (Franklin Crossing)
and Glen Rock, New Jersey; and residential apartment properties located in
Lakewood, Palisades Park and Hasbrouck Heights, New Jersey. Except as noted in
subparagraph (iii) above, the environmental reports secured by FREIT have not
revealed any environmental conditions on its properties, which require
remediation pursuant to any applicable Federal or state law or regulation.
b) FREIT has determined that several of its properties contain lead based paint
("LBP"). FREIT is in compliance with all Federal, state and local requirements
as they pertain to LBP.
FREIT does not believe that the environmental conditions described in
subparagraphs (i) - (iv) above will have a materially adverse effect upon the
capital expenditures, revenues, earnings, financial condition or competitive
position of FREIT.
(B) Rent Control Ordinances
Each of the apartment buildings or complexes owned by FREIT is subject to some
form of rent control ordinance which limits the amount by which FREIT can
increase the rent for renewed leases, and in some cases, limits the amount of
rent which FREIT can charge for vacated units. Westwood Hills is not subject to
any rent control law or regulation.
(C) Zoning Ordinances
Local zoning ordinances may prevent FREIT from developing its unimproved
properties, or renovating, expanding or converting its existing properties, for
their highest and best use as determined by FREIT's Board of Trustees, which
could diminish the values of such properties.
(D) Financial Information about Foreign and Domestic Operations and Export
Sale
FREIT does not engage in operations in foreign countries and it does not
derive any portion of its revenues from customers in foreign countries.
ITEM 2. PROPERTIES
Portfolio of Investments: The following charts set forth certain
information relating to each of FREIT's real estate investments in addition to
the specific mortgages encumbering the properties.
Residential Apartment Properties as of October 31, 2003:
- --------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Depreciated
Average Cost
of Buildings
Annual Mortgage and
Year Occupancy Balance Equipment
Property and Location Acquired No. of Units Rate ($000) ($000)
-----------------------------------------------------------------------------------------------------
Lakewood Apts. 1962 40 94.8% None (1) $ 118
Lakewood, NJ
Palisades Manor 1962 12 98.7% None (1) $ 44
Palisades Park, NJ
Grandview Apts.
Hasbrouck Heights, NJ 1964 20 94.6% None (1) $ 120
Height Manor
Spring Lake Heights, NJ 1971 79 98.4% $3,476 $ 539
Hammel Gardens
Maywood, NJ 1972 80 94.7% $5,080 $ 844
Steuben Arms 1975 100 97.5% $7,046 $ 1,291
River Edge, NJ
Berdan Court
Wayne, NJ 1965 176 95.8% $ 13,941 $ 1,690
Westwood Hills (2) 1994 210 95.8% $17,881 $13,404
Westwood, NJ
------------------------------------------------------------------------------------------------------
(1) Security for draws against FREIT's Credit Line. As of October 31, 2003
there were no draws outstanding.
(2) FREIT owns a 40% equity interest in Westwood Hills. See Investment in
Affiliates.
Retail Properties as of October 31, 2003:
- -----------------------------------------
---------------------------------------------------------------------------------------------------------------------
Average Depreciated Cost
Leaseable Space- Annual Mortgage of Buildings and
Year Approximate Occupancy Balance Equipment
Property and Location Acquired Sq. Ft. Rate ($000) ($000)
---------------------------------------------------------------------------------------------------------------------
Franklin Crossing 1966(2) 87,041 98.8% None (1) $ 9,656
Franklin Lakes, NJ
Westwood Plaza 1988 173,854 90.6% $ 9,910 $ 11,537
Westwood, NJ
Westridge Square 1992 256,620 93.1% $ 17,289 $ 21,431
Frederick, MD
Pathmark Super Store 1997 63,962 100.0% $ 6,744 $ 9,614
Patchogue, NY
Glen Rock, NJ (6) 1962 4,800 0.0% None (1) $ 108
Olney Town Center (3) 2000 98,848 92.7% $ 10,872 $ 14,426
Olney, MD
Preakness Center (4) 2002 322,136 91.5% $ 32,000 $ 32,882
Wayne, NJ
Damascus Center (5) 2003 139,878 87.9% $ 2,532 $ 9,893
Damascus. MD
Rockaway Township, NJ (7) 1964/1963 1+/- Acre Land lease 0.0% None $ 114
------------------------------------------------------------------------------------------------------------------
(1) Security for draws against FREIT's Credit Line. As at October 31, 2003
there were no draws outstanding.
(2) The original 33,000 sq. ft. shopping center was replaced with a new
87,041 sq. ft. center that opened in October 1997.
(3) FREIT owns a 75% equity interest in S & A which owns the center.
(4) FREIT owns a 40% equity interest in WaynePSC which owns the center.
(5) See "Fiscal Year 2003 Developments, Acquisitions".
(6) All of the space has been leased to two tenants. The larger tenant (70
% of the space) began paying rent in November 2003
(7) Tenant began paying rent in December 2003. See "Fiscal Year 2003
Developments, Development."
Vacant Land as of October 31, 2003:
- -----------------------------------
Permitted Use
per Local Acreage Per
Location (1) Acquired Current Use Zoning Laws Parcel
- ----------------------------------------------------------------------------------------------------
Franklin Lakes, NJ 1966 None Residential 4.27
None Multi Family /
Rockaway,Township NJ (2) 1964/1963 Retail 20
So. Brunswick, NJ (3) 1964 Principally leased Industrial 33
as farmland
qualifying for state
farmland assessment
tax treatment
- ----------------------------------------------------------------------------------------------------
(1) All of the above land is unencumbered.
(2) FREIT has received approval for the construction of 129 garden apartment
units on this land.
(3) FREIT has filed for site plan approval for the construction of a 500,000
sq. ft. industrial warehouse facility. See "Fiscal Year 2003 Developments,
Development'"
FREIT believes that it has a diversified portfolio of residential and retail
properties. FREIT's business is not materially dependent upon any single tenant
or any one of its properties. The following Table lists FREIT's properties that
have contributed 15% or more of FREIT's total revenue in one (1) or more of the
last three (3) fiscal years.
Percent Contribution To Revenues
--------------------------------
Fiscal Year
Ended October 31,
--------------------------------
2003 2002 2001
---- ---- ----
Westridge Square 19.8% 20.5% 19.1%
Although FREIT's general investment policy is to hold properties as long-term
investments, FREIT could selectively sell certain properties if it determines
that any such sale is in FREIT's and its shareholders best interests. With
respect to FREIT's future acquisition and development activities, FREIT will
evaluate various real estate opportunities which FREIT believes would increase
FREIT's revenues and earnings as well as compliment and increase the overall
value of FREIT's existing investment portfolio.
Except for the Pathmark supermarket super store located in Patchogue, Long
Island, all of FREIT's and its Affiliate's (WaynePSC) retail properties have
multiple tenants.
FREIT and its Affiliate's retail shopping center properties have fifteen (15)
anchor / major tenants, that account for approximately 57% of the space leased.
The balance of the space is leased to one hundred forty (140) satellite tenants.
The following table lists the anchor / major tenants at each center and the
number of satellite tenants:
------------------------------------------------------------------------------
No. Of
Net Leaseable Satellite
Shopping Center Space Anchor/Major Tenants Tenants
------------------------------------------------------------------------------
Westridge Square. 254,970 Giant Supermarket 23
Frederick, MD Burlington Coat Factory
Westridge Cinema (1)
Franklin Crossing 87,868 Stop & Shop 17
Franklin, Lakes, NJ
Westwood Plaza 173,875 Kmart Corp 19
Westwood, NJ TJMaxx
Olney Town Center (2) 98,848 Holiday Productions (Cinema) 23
Olney, MD Craft Country
Preakness Center (3) 322,136 Stop & Shop 42
Wayne, NJ Macy's
CVS
Annie Sez
Clearview Theaters
Damascus Center (4) 139,878 Safeway Stores 16
Damascus. MD Damascus Rd Comm. Church
------------------------------------------------------------------------------
(1) Lease being terminated. See "Retail Shopping Center Properties'
Dependence on Anchor Stores and Satellite Tenants.
(2) FREIT owns a 75% interest in S&A, which owns this center.
(3) FREIT owns a 40% interest in WaynePSC which owns this center.
(4) See "Fiscal Year 2003 Developments, Acquisitions".
With respect to most of FREIT's retail properties, lease terms range from five
(5) years to twenty-five (25) years with options which if exercised would extend
the terms of such leases. The lease agreements generally contain clauses for
reimbursement of real estate taxes, maintenance, insurance and certain other
operating expenses of the properties. During the last three (3) completed fiscal
years, FREIT's retail properties averaged a 95.6% occupancy rate with respect to
FREIT's available leasable space
Leases for FREIT's apartment buildings and complexes are usually one (1) year in
duration. Even though the residential units are leased on a short-term basis,
FREIT has averaged, during the last three (3) completed fiscal years, a 96.8%
occupancy rate with respect to FREIT's available apartment units.
FREIT does not believe that any seasonal factors materially affect FREIT's
business operations and the leasing of its retail and apartment properties.
FREIT does not lease space to any Federal, state or local government entity.
FREIT believes that its properties are covered by adequate fire and property
insurance provided by reputable companies and with commercially reasonable
deductibles and limits.
ITEM 3 LEGAL PROCEEDINGS
There are no material pending legal proceedings to which FREIT is a party or of
which any of its properties is the subject. There is, however, ordinary and
routine litigation involving FREIT's business including various tenancy and
related matters. Notwithstanding the environmental conditions disclosed in "Item
1(c) Description of Business - Impact of Governmental Laws and Regulations on
Registrant's Business; Environmental Matters," there are no legal proceedings
concerning environmental issues with respect to any property owned by FREIT.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Therewere no matters submitted to a vote of security holders during the fourth
quarter of FREIT's 2003 fiscal year.
ITEM 4A EXECUTIVE OFFICERS OF FREIT
The executive officers of FREIT as of January 27, 2004 are listed below. Brief
summaries of their business experience and certain other information with
respect to each of them is set forth in the following table and in the
information, which follows the table.
As a result of Hekemian being responsible for managing the day-to-day operations
of FREIT's properties, the executive officers are not required to devote a
significant part of their business activities to their duties as executive
officers of FREIT. See "Item 1(c) Narrative Description of Business - Management
Agreement." Except for Mr. Aiello, Secretary, and Executive Secretary of FREIT,
each of the executive officers is also a Trustee of FREIT.
The executive officers of FREIT are as follows:
Name Age Position
- ---- --- --------
Robert S. Hekemian 72 Chairman of the Board and Chief
Executive Officer
Donald W. Barney 63 President, Treasurer and Chief
Financial Officer
John A. Aiello, Esq. 54 Secretary and Executive Secretary
Robert S. Hekemian has been active in the real estate industry for more
than fifty (50) years. Mr. Hekemian has served as Chairman of the Board and
Chief Executive Officer of FREIT since 1991, and as a Trustee since 1980. From
1981 to 1991, Mr. Hekemian was President of FREIT. Mr. Hekemian directly devotes
approximately forty to fifty percent (40% - 50%) of his time to execute his
duties as an executive officer of FREIT. Mr. Hekemian is also the Chairman of
the Board and Chief Executive Officer of Hekemian. See "Item 1(c) Narrative
Description of Business - Management Agreement." Mr. Hekemian is a director of
the Pascack National Bank. Mr. Hekemian is also a director, partner and officer
in numerous private real estate corporations and partnerships.
Donald W. Barney has served as President of FREIT since 1993, as a Trustee
since 1981, and was elected Treasurer and Chief Financial Officer in January
2003. Mr. Barney devotes approximately fifteen percent (15%) of his time to
execute his duties as an executive officer of FREIT. Mr. Barney was associated
with Union Camp Corporation, a diversified manufacturer of paper, packaging
products, chemicals, and wood products, from 1969 through December 31, 1998, as
Vice President and Treasurer. Mr. Barney was a director of Ramapo Financial
Corporation until it was acquired, in May 1999 by another financial institution,
and is a partner and director in several other private real estate investment
companies, and a director of the Hilltop Community Bank..
John A. Aiello, Esq., an attorney, was elected to serve as the Executive
Secretary of FREIT in August 2002, and as Secretary in January 2003. Mr. Aiello
devotes approximately five percent (5%) of his time to execute his duties as an
executive officer of FREIT. Beginning in 1974, Mr. Aiello has spent his entire
career with the law firm of Giordano Halleran & Ciesla, P.C. ("GH&C"), with
offices in Middletown and Trenton, NJ. Mr. Aiello is an officer and shareholder
of GH&C. Mr. Aiello is Chairman of GH&C's Corporate and Securities Department,
and his practice focuses on corporate law, corporate finance, securities,
mergers, and acquisitions.
PART II
- -------
ITEM 5 MARKET FOR FREIT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS
Shares of Beneficial Interest
Beneficial interests in FREIT are represented by shares without par value (the
"Shares"). The Shares represent FREIT's only authorized, issued and outstanding
class of equity. As of January 27, 2004, there were approximately 500 holders of
record of the Shares.
The Shares are traded in the over-the-counter market through use of the OTC
Bulletin Board(R) Service (the "OTC Bulletin Board") provided by NASD, Inc.
FREIT does not believe that an active United States public trading market exists
for the Shares since historically only small volumes of the Shares are traded on
a sporadic basis. The following table sets forth, at the end of the periods
indicated, the Bid and Asked quotations for the Shares on the OTC Bulletin
Board.
Bid Asked
--- -----
Fiscal Year Ended October 31, 2003
----------------------------------
First Quarter $ 22 1/2 $ 32
Second Quarter $ 24 1/2 $ 25 3/4
Third Quarter $ 25 1/2 $ 26 1/4
Fourth Quarter $ 28 1/4 $ 36
Bid Asked
--- -----
Fiscal Year Ended October 31, 2002
----------------------------------
First Quarter $ 23 $ 21 1/2
Second Quarter $ 24 $ 21 1/2
Third Quarter $ 21 3/4 $ 21
Fourth Quarter $ 28 $ 24
The bid quotations set forth above for the Shares reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. The source of the bid and asked quotations is
Janney Montgomery Scott, Inc., members of the New York Stock Exchange and other
national securities exchanges.
Dividends
The holders of Shares are entitled to receive distributions as may be declared
by FREIT's Board of Trustees. Dividends may be declared from time to time by the
Board of Trustees and may be paid in cash, property, or Shares. The Board of
Trustees' present policy is to distribute annually at least ninety percent (90%)
of FREIT's REIT taxable income as dividends to the holders of Shares in order to
qualify as a REIT for Federal income tax purposes. Distributions are made on a
quarterly basis. In fiscal 2003 and fiscal 2002, FREIT paid or declared
aggregate total dividends of $1.80 and $1.72 per share, respectively, to the
holders of Shares. See "Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations - Distributions to Shareholders."
Securities Authorized for Issuance Under Equity Compensation Plans
See table included in "Item 12 Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters".
ITEM 6 SELECTED FINANCIAL DATA
The selected consolidated financial data for FREIT for each of the five (5)
fiscal years in the period ended October 31, 2003 are derived from financial
statements that have been audited and reported upon by J.H. Cohn LLP,
independent public accountants for FREIT. This data should be read in
conjunction with "Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations" of this Annual Report and with FREIT's
consolidated financial statements and related notes included in this Annual
Report.
BALANCE SHEET DATA:
As At October 31, 2003 2002 2001 2000 1999
(in thousands)
Total Assets $107,150 $ 96,032 $ 96,495 $ 96,781 $ 84,428
========= ========= ======== ======== ========
Long-Term Obligations $ 76,890 $ 68,393 $ 69,354 $ 70,214 $ 60,071
========= ========= ======== ======== ========
Shareholders' Equity $ 22,140 $ 21,903 $ 21,588 $ 21,144 $ 20,520
========= ========= ======== ======== ========
Weighted average shares outstanding:
Basic 3,134 3,120 3,120 3,120 3,120
========= ========= ======== ======== ========
Diluted 3,261 3,233 3,133 3,120 3,120
========= ========= ======== ======== ========
INCOME STATEMENT DATA:
Year Ended October 31, 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(in thousands, except per share amounts)
REVENUES:
Revenues from real estate operations $ 19,753 $ 18,626 $18,062 $16,610 $14,435
Net investment income 187 250 683 834 742
Equity in earnings (loss) of affiliates 250 269 190 173 (52)
-------- -------- ------- -------- -------
20,190 19,145 18,935 17,617 15,125
-------- -------- ------- -------- -------
EXPENSES:
Real estate operations 6,755 6,056 6,107 5,306 4,800
Financing costs 4,802 4,873 5,356 5,165 4,620
General and administrative expenses 593 643 539 365 401
Depreciation 2,229 2,153 2,138 1,914 1,642
Minority interest 246 137 85 31
-------- -------- ------- -------- -------
14,625 13,862 14,225 12,781 11,463
-------- -------- ------- -------- -------
Income from continuing operations 5,565 5,283 4,710 4,836 3,662
Income (loss) from discontinued operations - 398* (10) (77) 53
-------- -------- ------- -------- -------
Net income $ 5,565 $ 5,681 $ 4,700 $ 4,759 $ 3,715
======== ======== ======= ======== =======
* Includes gain on disposal of $475,000.
Basic earnings (loss) per share:
Continuing operations $ 1.78 $ 1.69 $ 1.51 $ 1.55 $ 1.17
Discontinued operations - 0.13 - (0.02) 0.02
-------- -------- ------- -------- -------
$ 1.78 $ 1.82 $ 1.51 $ 1.53 $ 1.19
======== ======== ======= ======== =======
Diluted earnings (loss) per share:
Continuing operations $ 1.71 $ 1.63 $ 1.50 $ 1.55 $ 1.17
Discontinued operations - 0.12 - (0.02) 0.02
-------- -------- ------- -------- -------
$ 1.71 $ 1.75 $ 1.50 $ 1.53 $ 1.19
======== ======== ======= ======== =======
Cash Dividends Declared Per Common Share $ 1.80 $ 1.72 $ 1.38 $ 1.33 $ 1.13
======== ======== ======== ======== =======
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Identifying Important Factors That Could Cause FREIT's
Actual Results to Differ From Those Projected in Forward Looking Statements.
Readers of this discussion are advised that the discussion should be read
in conjunction with the consolidated financial statements of FREIT
(including related notes thereto) appearing elsewhere in this 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 and additional rent in the form of expense reimbursements
derived from our income producing retail properties. We also receive income from
our 40% owned Affiliate, Westwood Hills, which owns a residential apartment
property and beginning in fiscal 2003, we began receiving income from our 40%
owned affiliate WaynePCS that owns the Preakness shopping center. Our policy has
been to acquire real property for long-term investment.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Pursuant to the Securities and Exchange Commission ("SEC") disclosure guidance
for "Critical Accounting Policies," the SEC defines Critical Accounting Policies
as those that require the application of Management's most difficult,
subjective, or complex judgments, often because of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods.
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, the preparation of which
takes into account estimates based on judgments and assumptions that affect
certain amounts and disclosures. Accordingly, actual results could differ from
these estimates. The accounting policies and estimates used, which are outlined
in Note 1 to our Consolidated Financial Statements which is presented elsewhere
in this Annual Report, have been applied consistently as at October 31, 2003 and
2002, and for the years ended October 31, 2003, 2002 and 2001. 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. The results of this
reclassification can be seen in "ITEM 6 SELECTED FINANCIAL DATA" above and in
the Consolidated Financial Statements of FREIT (including related notes thereto)
appearing elsewhere in this Form 10-K.
Since we consider net income from continuing operations (which excludes the
operations of the Camden property) is the most significant element of net
income, all references and comparisons refer to this item 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:
Fiscal Years Ended October 31, 2003 and 2002
Revenues for the fiscal year ended October 31, 2003 ("Fiscal 2003") increased
$1,045,000 or 5.5% over revenues for the fiscal year ended October 31, 2002
("Fiscal 2002"). The components of the increase are summarized in this chart:
-------------------
October 31, Increase (Decrease)
------------------- --------------------
Revenue Item 2003 2002 $ %
- ------------ ---- ---- - -
(in thousands)
-------------------------------
Real estate operations:
Retail $ 13,186 $ 12,288 $ 898 7.3%
Residential 6,567 6,338 229 3.6%
------------------- -----------------
Total real estate 19,753 18,626 1,127 6.1%
Equity in income
of affiliate 250 269 (19) -7.1%
Investment income 187 250 (63) -25.2%
-------- -------- -------------------
$ 20,190 $ 19,145 $1,045 5.5%
======== ======== ======== =======
The increases in income from real estate operations, as set forth below,
accounted for all of the increased revenue.
Income from continuing operations increased $282,000 (5.3%) to $5,565,000 for
Fiscal 2003 compared to $5,283,000 for Fiscal 2002.
SEGMENT INFORMATION
The following table sets forth comparative operating data for FREIT's real
estate segments:
Retail Residential Combined
------------------------------------- ------------------------------------ -----------------
Year Ended Year Ended Year Ended
---------------- -----------------------
Increase
October 31, Increase (Decrease) October 31, (Decrease) October 31,
---------------- ------------------ ---------------------------- ----------------
2003 2002 $ % 2003 2002 $ % 2003 2002
(in thousands) (in thousands) (in thousands)
-------------------------- ---------------------------- -----------------
Rental income $ 9,779 $9,102 $ 677 7.4% $ 6,499 $ 6,261 $ 238 3.8% $16,278 $15,363
Percentage rent 117 117 - - 117 117
Reimbursements 3,076 2,664 412 15.5% - 3,076 2,664
Other 15 78 (63) -80.8% 68 77 (9) -11.7% 83 155
------------------------------------- ------------------------------------ ------- -------
Total Revenue 12,987 11,961 1,026 8.6% 6,567 6,338 229 3.6% 19,554 18,299
Operating expenses 4,091 3,610 481 13.3% 2,664 2,445 219 9.0% 6,755 6,055
------------------------------------ ------------------------------------ ------- -------
Net operating income $ 8,896 $8,351 $ 545 6.5% $ 3,903 $ 3,893 $ 10 0.3% 12,799 12,244
===================================== ====================================
Average Occupancy % 93.1% 96.2% (3.1%) 96.3% 96.3% -
======== ====== =========== ======= ======= ======
Reconciliation to consolidated net income:
Deferred rents - straight lining 199 326
Net investment income 187 250
Equity in income of affiliates 250 269
General and administrative expenses (593) (643)
Depreciation (2,229) (2,153)
Financing costs (4,802) (4,873)
Minority interest (246) (137)
----------------
Net income from continuing operations 5,565 5,283
Discontinued operations 398
----------------
Net income $ 5,565 $ 5,681
================
The above table details the comparative net operating income ("NOI") for FREIT's
Retail and Residential Segments, and reconciles the combined NOI to consolidated
Net Income. 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. FREIT assesses and measures
segment operating results based on NOI. NOI is not a measure of operating
results or cash flow as measured by generally accepted accounting principles,
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.
RETAIL SEGMENT
During Fiscal 2003, revenues increased by $1,026,000 (8.6%) and NOI increased by
$547,000 (6.6%) in spite of average occupancy declining 3.1% to 93.1% from 96.2%
in Fiscal 2002.
Revenues and NOI from same properties (those properties included for a full year
in fiscal 2003 and 2002) for Fiscal 2003 increased by $761,000 (6.4%) and
$387,000 (4.7%) respectively over Fiscal 2002. The balance of the revenue and
NOI increase came from our Damascus Center that we acquired on July 31, 2003
(see "Fiscal Year 2003 Developments, Acquisitions").
The increases for Fiscal 2003 from same properties reflects higher rents from
existing tenants and rents from new tenants not in occupancy during Fiscal 2002.
The increased rents offset the decline in average occupancy, principally at our
Westridge Square property with the vacancy created by the Westridge Cinema
closing its theater (see below). This vacancy, if the space in not leased, will
have a greater negative impact in the next fiscal year.
Westridge Square:
In February 2003 Westridge Cinema ("Tenant") closed its theater and ceased
paying rent. Tenant's lease expires April 30, 2007. Total rent and expense
reimbursements currently aggregate approximately $488,000 per year. FREIT
and Tenant have agreed on the terms of a lease termination agreement
whereby Tenant will pay FREIT a lump sum payment of approximately $1.8
million to terminate the lease. The transaction documentation is in the
procees of being executed by all parties. The mortgage lender has agreed to
the termination agreement with the stipulation that the entire lump sum
payment to be made by the Tenant be deposited in an interest bearing escrow
account held for the benefit of the mortgage lender. Up to $750,000 will be
disbursed to FREIT (a) in monthly installments of $31,595 over
approximately twenty four (24) months, beginning when all the documentation
is signed, or (b) the balance of the un-disbursed $750,000 will be
discussed once the mortgage lender is provided with a Certificate of
Occupancy ("C of O") covering all of the space vacated by the Tenant. The
balance of the lease termination payment of approximately $1 million
representing a Tenant Improvement ("TI") Reserve, will be disbursed to
FREIT at the earlier of (a) in $250,000 increments as comparable amounts of
TI's are incurred, or (b) when a C of O is obtained and the space vacated
by the Tenant leased and re-occupied, or (c) when the mortgage loan has
been re-paid.
ACQUISITION
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 an entity owned by
employees of Hekemian, FREIT's managing agent.
FREIT plans to demolish the existing buildings, with the exception of the
freestanding McDonald's restaurant. A new shopping Center will be constructed of
approximately 145,000 SF, 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.
Construction costs for the new center are estimated at approximately $13
million. Construction is expected to begin during the summer of 2005.
RESIDENTIAL SEGMENT
Residential revenue increased by $229,000 (3.6%) to $6,567,000 during
Fiscal 2003 from $6,338,000 for Fiscal 2002. Average occupancy for both Fiscal
2003 and Fiscal 2002 remained unchanged at 96.3%. NOI increased marginally to
$3,903,000 for Fiscal 2003 compared to $3,893,000 for Fiscal 2002. The increase
in revenue during Fiscal 2003 was almost equally matched by increased expenses
(snow removal and heating costs) brought on by the severe 2002/2003 winter.
While the demand for apartments was weak at the start of Fiscal 2003, demand at
our properties picked up as evidenced by average annual asking monthly rents
increasing 4% to $1,098 from $1,056 during Fiscal 2002. As at October 31, 2003,
average asking monthly rents were $1,117.
Our residential revenue is principally composed of monthly apartment rental
income. Total apartment rental income is a factor of occupancy and monthly
apartment rents. A 1% decline in annual average occupancy, or a 1% decline in
average rents, results in an annual $65,000 decline in revenues.
In keeping with our policy of improving our apartments and maintaining their
competitiveness, we invested $484,000 ($954 per apartment) in our capital
program during Fiscal 2003. Since our apartment communities were constructed
more than 25 years ago, we tend to spend more in any given year on maintenance
and capital improvements than may be spent on newer properties.
We own 20 +/- acres of undeveloped land in Rockaway, NJ, and have received
building plan approval and a water allocation from the Township for the
construction of 129 garden apartment units. Development costs are estimated at
$13.8 million that we will finance, in part, from construction financing and, in
part, from funds available from our institutional money market investment.
Pending receipt of final water allocation and sewer approval from the NJ
Department of Environmental Protection, we expect construction to commence by
the summer of 2004. Through October 31, 2003 approximately $260,000 of
pre-construction development costs have been expended and deferred.
Approximately one (1) acre of the Rockaway land has been sub-divided and leased
to a bank. Rent under the land lease commenced in December 2003.
NET INVESTMENT INCOME
Net investment income fell 25.2% to $187,000 during Fiscal 2003 compared to
$250,000 during Fiscal 2002. Net investment income for the past two years was
principally interest earned from our investments in money market funds. Earnings
received from various sources over the past two fiscal are as follows:
-----------------------------------------------------
Year Ended October 31,
----------------------
2003 2002
-------- --------
($000)
Institutional Money Market $ 100 $ 236
Savings Money Market Account 70 8
Mortgage Loan 15
Related Party 4
Other 2 2
-----------------------------------------------------
Total $ 187 $ 250
-----------------------------------------------------
The lower interest rate environment during Fiscal 2003 compared to Fiscal 2002,
coupled with lower average investment balances, due to the acquisition of the
Damascus shopping center, accounted for the reduced investment income. Our
average yield during Fiscal 2003 was approximately 1.6% compared to 1.9% during
Fiscal 2002. (See "Financing Costs" below for offsetting benefits.)
EQUITY IN INCOME OF AFFILIATES
This represents income from Westwood Hills, which owns a 210 unit (family)
garden apartment community in Westwood, NJ, and from WaynePSC, which owns the
Preakness Shopping Center in Wayne, NJ. FREIT has a 40% equity ownership in each
of these entities. Results of operations are as follows:
Year Ended
October 31,
---------------
Net Income of 2003 2002
--------------------------------------
($000)
Westwood Hills, LLC $ 466 $ 672
Wayne PSC, LLC 158
-----------------------------------------------------
Total $ 624 $ 672
=====================================================
FREIT's Share of Net Income $ 250 $ 269
====== ======
Net Income at Westwood Hills decreased 30.8% to $466,000 for Fiscal 2003 from
$672,000 for Fiscal 2002. The reduction for Fiscal 2003 is largely due to two
factors: 1) in spite of revenues increasing 2.9% over Fiscal 2002, the increase
was insufficient to cover the 11.3% increase in expenses directly related to the
severe winter of 2002/2003 and, 2) the financing costs relating to the $3.4
million second mortgage obtained in January 2003. FREIT received, as a
distribution, approximately $1.4 million of the net financing proceeds from
second mortgage loan. This financing will add approximately $170,000 of annual
financing costs to Westwood Hills operations. While FREIT bears 40% of this
additional financing cost, we believe this cost will be offset by the income
FREIT will ultimately earn from investing its $1.4 million distribution.
Income at the Preakness Shopping Center, before financing costs, was $2,319,000.
Net Income for Fiscal 2003, however, was burdened by one-time re-financing costs
of $457,000 related to the financing described below.
On June 30, 2003, Wayne PSC refinanced its original $26.5 million first mortgage
loan with a new $32.5 million mortgage loan. The term of the new loan is
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 re-finance proceeds
as a distribution from WaynePSC.
FINANCING COSTS
Financing costs are summarized as follows:
-----------------------------------------------------
Year Ended October 31,
----------------------
2003 2002
--------------------
($000)
Fixed rate mortgages:
1st Mortgages
Existing $ 4,265 $ 4,447
New (Damascus) 59
2nd Mortgages 76
Floating rate mortgage 345 403
Other 57 23
-----------------------------------------------------
Total $ 4,802 $ 4,873
=====================================================
Financing costs for Fiscal 2003 decreased $71,000 (1.5%) to $4,802,000 from
$4,873,000 for Fiscal 2002. 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 in Fiscal 2003 compared to
Fiscal 2002.
During November 2002, we renegotiated the terms of the first mortgage note on
our retail property in Patchogue, NY. The mortgage note, which had an
outstanding principal balance of $6.9 million, was due on January 1, 2005, and
carried a fixed interest rate of 7.375%. The due date has been extended three
years (3) and the interest rate was reduced to a fixed rate of interest of
5.95%. This interest rate reduction will reduce FREIT's interest costs and debt
service requirements going forward.
To create additional liquidity and lock in favorable long-term interest rates,
FREIT took 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 (Berdan Court, Hammel
Gardens and Steuben Arms). 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 with
respect to the properties. FREIT received net financing proceeds of
approximately $6.9 million from the add-on second mortgages.
As a result of the second mortgage financing, and the first mortgage debt
assumed from the acquisition of the Damascus shopping center, financing costs
for the fiscal year ending October 31, 2004 are expected to increase and
aggregate approximately $5.3 million.
GENERAL AND ADMINISTRATIVE EXPENSES
Our G & A expenses decreased to $593,000 from $643,000 ($482,000 before project
abandonment costs of $161,000) during Fiscal 2002. The increase in Fiscal 2003
results principally from increased Officer's and Trustee's fees.
DEPRECIATION
Depreciation expense in Fiscal 2003 increased slightly to $2.229 million
compared to $2.153 million in Fiscal 2002. Most of this increase is attributable
to the acquisition of the Damascus shopping center and to capital improvements
made to our properties during Fiscal 2003.
Results of Operations:
Fiscal Years Ended October 31, 2002 and 2001
Revenues for the year fiscal ended October 31, 2002 ("Fiscal 2002") increased
$210,000 or 1.1% over revenues for the fiscal year ended October 31, 2001
("Fiscal 2001) revenues. The components of the increase are summarized in this
chart:
Year Ended Increase
October 31, (Decrease)
------------------- ------------------
(in thousands)
--------------------------------
Revenue Item 2002 2001 $ %
--------- -------- ------- -------
Real estate operations $ 18,626 $ 18,062 $ 564 3.1%
Equity in income
of affiliate 269 190 79 41.6%
Investment income 250 683 (433) -63.4%
-------- --------- ------- --------
$ 19,145 $ 18,935 $ 210 1.1%
======== ========= ======== ========
The increases in income from real estate operations, and from our equity in the
earnings of our affiliate, were significantly offset by the reduction in net
investment income.
Income from continuing operations increased $573,000 (12.2%) to $5,283,000 for
Fiscal 2002 compared to $4,710,000 for Fiscal 2001.
RETAIL SEGMENT
The following table sets forth comparative operating data for FREIT's Retail
properties:
Retail Segment
Year Ended
October 31, Increase (Decrease)
------------------ -------------------
2002 2001 $ %
Revenues (in thousands)
----------------------------
Minimum & percentage rents $ 9,219 $ 8,751 $ 468 5.3%
Reimbursements 2,664 2,621 43 1.6%
Other 78 150 (72) -48.0%
-------------------------------------
Total revenue 11,961 11,522 439 3.8%
Operating expenses 3,610 3,617 (7) -0.2%
-------- ------- ----------------
Net operating income $ 8,351 $ 7,905 $ 446 5.6%
======== ======= ================
Average occupancy % 96.2% 95.8% 0.40%
======== ======= =======
Retail rental revenue increased by 3.8% for Fiscal 2002 to $11.9 million from
$11.5 million for Fiscal 2001. Minimum and percentage rents, however, increased
5.3%. This increase results principally from higher average occupancy. The
higher occupancy also added to the increase in expenses reimbursed by tenants.
The higher revenues and lower operating expenses (principally because of the
mild winter) resulted in net operating income increasing 5.6% to $8,351,000 for
Fiscal 2002 compared to $7,905,000 for Fiscal 2001.
Westwood Plaza Shopping Center, Westwood, NJ:
On January 21, 2002 Kmart Corporation, a major tenant in our Westwood Shopping
Center, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Kmart
has since emerged from bankruptcy and has elected to keep and maintain its lease
at the Westwood Plaza Shopping Center.
As 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 whereby, in return for the
termination of this below-market-rent lease at no cost to FREIT, FREIT has
agreed to not lease or allow this space or any other space in the Shopping
Center to be used for a supermarket or for a store using more than 15,000 sq.ft.
for the sale of food or food products for off-premises consumption. This use
restriction shall expire on May 31, 2032, which corresponds with the expiration
of the final option period contained in the Stop & Shop lease. This 28,000
sq.ft. space has been leased and is now occupied by TJMAX.
Olney Expansion
Olney is a 98,900 sq. ft. neighborhood shopping center. We planned an
approximately 50,000 sq. ft. expansion and modernization subject to the plans
being approved by the required governmental agencies, satisfactory pre-leasing
of the new expanded space, and the acceptance of current tenants to be relocated
in the expanded center. FREIT's Board of Trustees, based on the status of
negotiations with certain current tenants, determined that is not likely the
expansion will take place in the short-term, and that it would be more
economical to defer the expansion / modernization to coincide with the
expiration of particular current tenant leases in approximately seven years.
Through July 31, 2002 approximately $270,000 had been expended and deferred for
pre-construction development costs, building plans and building permits. The
Board of Trustees decided to write-off as of July 2002, all costs that were not
capable of being recaptured although some of these costs could be usable when
the expansion is undertaken. These costs, which aggregated $190,000, were
written off in July 2002. The charge was not included in the operations of the
Retail Segment, but was charged to general expense, as it was not considered
part of on-going operations.
Occupancy at Olney remained unchanged at 92%, as the vacant space was kept
vacant pending the expansion. This vacant space, approximately 7,600 sq. ft.,
became available for leasing.
RESIDENTIAL SEGMENT
Residential Segment
Year Ended
October 31, Increase (Decrease)
------------------ -------------------
2002 2001 $ %
(in thousands)
---------------------------
Revenues
Rents $ 6,261 $ 6,058 $ 203 3.4%
Other 77 72 5 6.9%
-------- ------- -------------------
Total revenue 6,338 6,130 208 3.4%
-------- ------- -------------------
Operating expenses 2,445 2,495 (50) -2.0%
-------- ------- ------ ----------
Net operating income $ 3,893 $ 3,635 $ 258 7.1%
======== =============================
Capital Improvements $ 378 $ 429 ($ 51) -11.9%
Average occupancy % 96.8% 97.7% -0.9%
======== ======= =======
Residential revenue increased 3.4% to $6.3 million for Fiscal 2002 from $6.1
million for Fiscal 2001. The combination of increased revenues and reduced
operating expenses helped raise net operating income 7.1% for Fiscal 2002 over
Fiscal 2001. Revenue is principally composed of monthly apartment rental income.
Total apartment rental income is a factor of occupancy and monthly apartment
rents. For Fiscal 2002, annual average occupancy was 96.8% and annual average
monthly apartment rents were $1,056. This compares to Fiscal 2001's annual
average occupancy of 97.7% and annual average monthly rents of $1,008. This 4.7%
increase in average monthly rents more than offset the slight decline in average
occupancy. However, we are now feeling the effect of the slow economy. During
the fourth quarter of Fiscal 2002 we experienced resistance to rent increases
and increased vacancies. While average monthly rents at October 31, 2002
increased to $1,077, average occupancy fell to 95.3%. Furthermore, a 1% decline
in annual average occupancy, or a 1% decline in average rents, results in an
annual $65,400 decline in revenues.
During Fiscal 2002 Residential operating expenses declined 2% compared to Fiscal
2001. The principal causes were lower utility and snow removal costs. As a
percentage of revenue, operating costs were 38.6% during Fiscal 2002 compared to
40.7% during Fiscal 2001.
Capital improvements during Fiscal 2002 decreased by $51,000 over Fiscal 2001.
The decrease resulted from the completion of major apartment renovation programs
at two of our apartment communities to maintain their competitiveness in their
markets. Since our apartment communities were constructed more than 25 years
ago, we tend to spend more in any given year on maintenance and capital
improvements than may be spent on newer properties. Capital improvement programs
are expected to accelerate over the next fiscal year.
We own 20 +/- acres of undeveloped land in Rockaway, NJ, and have received
building plan approval from the Township for the construction of 129 garden
apartment units. Development costs are estimated at $13.8 million that we will
finance, in part, from construction financing and, in part, from funds available
from our institutional money market investment. Pending receipt of final water
allocation and sewer approval from the NJ Department of Environmental
Protection, we expect construction to commence by the summer of 2004.
NET INVESTMENT INCOME
Net investment income fell 63.4% to $250,000 for Fiscal 2002 compared to
$683,000 for Fiscal 2001. Net investment income for Fiscal 2002 was principally
interest earned from our investments in money market funds. This compares to
investments we made during Fiscal 2001 government agency bonds. Earnings
received from various sources over the past two fiscal are as follows:
- -----------------------------------------------------------
Year Ended October 31,
------------------------
2002 2001
-------- -------
($000)
Government Agency Bonds
and Institutional Money Market $ 236 $ 632
Savings Money Market Account 8
Related Party 4 48
Other 2 3
- -----------------------------------------------------------
Total $ 250 $ 683
- -----------------------------------------------------------
Because of the declining lower interest rate environment over Fiscal 2002 and
Fiscal 2001 our government agency bond portfolio was redeemed during Fiscal
2001. As a result the yield on our investments fell to just under 2% during
Fiscal 2002. The decline in yield resulted in the reduction in net investment
income. (See "Financing Costs" below for offsetting benefits.)
EQUITY IN INCOME OF AFFILIATES
Westwood Hills, LLC
FREIT's share of earnings of its 40% owned Affiliate, Westwood Hills, that owns
a 210 unit apartment community in Westwood, NJ, increased 41.6% to $269,000
during Fiscal 2002 from $190,000 for Fiscal 2001. The increase is principally
attributable to increased revenues and lower expenses resulting in net income at
the Affiliate increasing to $672,000 for Fiscal 2002 compared to $476,000 for
Fiscal 2001. During Fiscal 2002 average monthly rents increased 4.9% to $1,284
from $1,224 during Fiscal 2001. These increases more than offset a slight
reduction in average occupancy to 96.8% during Fiscal 2002 compared to 97.4%
during Fiscal 2001.
WaynePSC, L.L.C.
On November 1, 2002, WaynePSC, in which FREIT is the Managing Member, and has a
40% equity interest, acquired the Preakness Shopping Center ("Preakness"), in
Wayne, NJ.
Preakness, situated on 40 acres, is a 323,000 +/- sq. ft. Community Center that
is anchored by Macy's and Stop & Shop. Its 40+ other tenants include well-known
regional and national retail merchants such as Dress Barn, Starbucks, 9 West,
Annie Sez, Radio Shack, Bath & Body Works, Mandee's, and Goodyear Tire. The
center also includes branches of the First Union and Commerce Bank, and a
multiplex Clearview Movie Theater.
The total acquisition costs of $35.5 million were financed in part by a $26.5
million, 6% fixed interest rate, ten year first mortgage loan, and by $9 million
of equity contributions provided pro rata by the Members of WaynePSC including
$3.6 million contributed by FREIT.
During Fiscal 2003 this investment is expected to add to FREIT's net income and
cash flow.
FINANCING COSTS
Financing costs are summarized as follows:
- ---------------------------------------------------------------------
Year Ended October 31,
----------------------------
2002 2001
---- ----
($000)
Fixed rate mortgages $ 4,447 $ 4,514
Floating rate mortgage 403 811
Other 23 31
- ---------------------------------------------------------------------
Total $ 4,873 $ 5,356
- ---------------------------------------------------------------------
Financing costs for Fiscal 2002 decreased $483,000 (9%) to $4,873,000 from
$5,356,000 for Fiscal 2001. 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 during Fiscal 2002 compared
to Fiscal 2001.
During November 2002, we renegotiated the terms of the first mortgage note on
our retail property in Patchogue, NY. The mortgage note, which had an
outstanding principal balance of $6.9 million, was due on January 1, 2005, and
carried a fixed interest rate of 7.375%. The due date was extended three years
(3) and the interest rate was reduced to a fixed rate of interest of 5.95%. This
interest rate reduction reduced FREIT's interest costs and debt service
requirements going forward.
GENERAL AND ADMINISTRATIVE EXPENSES
Our G & A expenses increased to $643,000 for Fiscal 2002 from $539,000 for
Fiscal 2001. Included in this year's expense were increased project abandonment
costs, higher legal and professional fees and higher FREIT overhead charges,
that accounted for much of the G & A increase.
DEPRECIATION
Depreciation expense during Fiscal 2002 increased slightly to $2.2 million
compared to $2.1 million during Fiscal 2001. Most of this increase is primarily
attributable to capital improvements made to our properties during Fiscal 2002.
___________
LIQUIDITY AND CAPITAL RESOURCES
Our financial condition remains strong. Net cash provided by operating
activities was $5.8 million for Fiscal 2003 compared to $7.4 million for Fiscal
2002. 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 October 31, 2003, we had cash and marketable securities totaling $12.9
million compared to $11.9 million at October 31, 2002. These funds are available
for construction, property acquisitions, and general needs.
As described in the segment analysis above, we are planning the construction of
apartment rental units in Rockaway Township, NJ and the rebuilding of the
Damascus Shopping Center, in Damascus, MD. 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 October 31, 2003, FREIT's aggregate outstanding mortgage debt was $76.9
million. Approximately $66.0 million bears a fixed weighted average interest
rate of 7.187%, and an average life of approximately 7.9 years. Approximately
$10.9 million of mortgage debt bears an interest rate equal to 200 basis points
over LIBOR and resets every 30 days. The fixed rate mortgages are subject to
repayment (amortization) schedules that are longer than the term of the
mortgages. As such, balloon payments for all mortgage debt will be required as
follows:
---------------------------
Year $ Millions
---------------------------
2007 $ 15.7
---------------------------
2008 $ 15.9
---------------------------
2010 $ 12.2
---------------------------
2013 $ 8.0
---------------------------
2014 $ 12.1
---------------------------
The following table shows the estimated fair value and carrying value of our
long-term debt at October 31, 2003 and 2002:
October 31, October 31,
(In Millions) 2003 2002
------------- ------------- -----------
Fair Value $80.8 $73.5
Carrying Value $76.9 $68.4
Fair values are estimated based on market interest rates at the end of each
fiscal year and on discounted cash flow analysis. Changes in assumptions or
estimation methods may significantly affect these fair value estimates.
FREIT expects to re-finance the individual mortgages with new mortgages when
their terms expire. To this extent we have exposure to interest rate risk on our
fixed rate debt obligations. If interest rates, at the time any individual
mortgage note is due, are higher than the current fixed interest rate, higher
debt service may be required, and/or re-financing proceeds may be less than the
amount of mortgage debt being retired. For example, a one percent interest rate
increase would reduce the fair value of our debt by $3.3 million, and a one
percent decrease would increase the fair value by $3.5 million.
Additionally, we have exposure on our floating rate debt. A one percent change
in rates, up or down, will decrease or increase income and cash flow by $109,000
annually.
We believe that the values of our properties will be adequate to command
re-financing proceeds equal to, or higher than the mortgage debt to be
re-financed. We continually review our debt levels to determine if additional
debt can prudentially be utilized for property acquisition additions to our real
estate portfolio that will increase income and cash flow to shareholders.
$14 Million Line of Credit - On June 20, 2002, we finalized the terms of and
- ---------------------------
obtained a two-year $14 million revolving credit line with the Provident Bank.
Draws against the credit line can be used for general corporate purposes, or for
property acquisitions, construction activities, and Letters-of-Credit. Draws are
secured by mortgages on FREIT's Franklin Crossing Shopping Center, Franklin
Lakes NJ, retail space in Glen Rock, NJ, Lakewood Apartments, Lakewood, NJ, and
Grandview Apartments, Hasbrouck Heights, NJ. Interest rates on draws will be at
set at the time of each draw for 30, 60, or 90 day periods, based on our choice
of the prime rate or at 175 basis points over the 30, 60, or 90 day LIBOR rates
at the time of the draws.
No draws have been made against this credit line. We plan to use the credit line
opportunistically, for future acquisitions and/or development opportunities.
FREIT's total capital commitments, including long term debt, are summarized as
follows:
- --------------------------------------------------------------------------------------
CAPITAL COMMITMENTS
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------------
Within 2 - 3 4 - 5 After 5
- --------------------------------------------------------------------------------------
Contractual Obligations Total One Year Years Years Years
- --------------------------------------------------------------------------------------
Long-Term Debt
Annual Amortization $ 13,044 $ 1,689 $ 3,697 $ 3,256 $ 4,401
Balloon Payments 63,846 - - 31,567 32,279
- --------------------------------------------------------------------------------------
Total Long-Term Debt 76,890 1,689 3,698 34,823 36,680
- --------------------------------------------------------------------------------------
Operating Leases
- --------------------------------------------------------------------------------------
Land Rent 5,711 76 152 152 5,331
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Total Capital Commitments $ 82,601 $ 1,765 $ 3,850 $ 34,975 $ 42,011
======================================================================================
Distributions to Shareholders Since its inception in 1961, FREIT has elected to
be treated as a REIT for Federal income tax purposes. In order to qualify as a
REIT, we must satisfy a number of highly technical and complex operational
requirements including that we must distribute to our shareholders at least 90%
of our REIT taxable income. We anticipate making distributions to shareholders
from operating cash flows, which are expected to increase from future growth in
rental revenues. Although cash used to make distributions reduces amounts
available for capital investment, we generally intend to distribute not less
than the minimum of REIT taxable income necessary to satisfy the applicable REIT
requirement as set forth in the Internal Revenue Code. With respect to the Jobs
and Growth Tax Relief Reconciliation Act of 2003, the reduction of the tax rate
on dividends does not apply to FREIT dividends. Since FREIT's policy is to pass
on at least 90 percent of its taxable income to shareholders, FREIT's taxable
income is untaxed at the Trust level. As a result FREIT's dividends will be
taxed as ordinary income.
It has been our policy to pay fixed quarterly dividends for the first three
quarters of each fiscal year, and a final fourth quarter dividend based on the
fiscal year's net income and taxable income. The Board has decided, to fix the
dividend for the first three quarters of fiscal 2004 at $.40 per share. The
following tables list the quarterly dividends paid or declared for the three
most recent fiscal years and the percent the dividends were of taxable income.
Per share amounts have been adjusted to reflect the one-for-one share dividend
paid on October 18, 2001.
--------------------------------------------------
Fiscal
--------------------------------------------------
2003 2002 2001
--------------------------------------------------
First Quarter $ 0.35 $ 0.30 $ 0.30
--------------------------------------------------
Second Quarter $ 0.35 $ 0.30 $ 0.30
--------------------------------------------------
Third Quarter $ 0.35 $ 0.30 $ 0.30
--------------------------------------------------
Fourth Quarter $ 0.75 $ 0.82 * $ 0.48
--------------------------------------------------
Total For Year $ 1.80 $ 1.72 $ 1.38
--------------------------------------------------
* Includes special $.15 dividend representing the gain
on sale of Camden property.
------------------------------------------------------
- -----------------------------------------------------------------
Dividends
($000) as a % of
----------------------------
Fiscal Per Total Taxable Taxable
Year Share Dividends Income Income
- -----------------------------------------------------------------
2003 $1.80 $ 5,667 $ 4,576 123.8%
2002 $1.72 $ 5,366 $ 5,258 102.1%
2001 $1.38 $ 4,305 $ 4,120 104.5%
- -----------------------------------------------------------------
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 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Liquidity and Capital Resources" and "Retail and Residential Segment"
above.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of FREIT and of its
Affiliates, Westwood Hills and WaynePSC, are submitted as a separate section of
this Annual Report. See "Index to Consolidated Financial Statements" on page F-1
of this Annual Report.
ITEM 9 CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A: CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Exchange Act, within the ninety (90) days
prior to the filing date of this report, 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 III
Certain information required by Part III is incorporated by reference to FREIT's
definitive proxy statement (the "Proxy Statement") to be filed with the
Securities and Exchange Commission no later than 120 days after the end of
FREIT's fiscal year covered by this Annual Report. Only those sections of the
Proxy Statement that specifically address the items set forth in this Annual
Report are incorporated by reference from the Proxy Statement into this Annual
Report.
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information concerning FREIT's trustees required by this item is
incorporated herein by reference to the sections titled "Election of Trustees"
and "Compliance with Section 16(a) of the Securities Exchange Act" in FREIT's
Proxy Statement for its Annual Meeting to be held in April 2004.
The information concerning FREIT's executive officers required by this item is
set forth in Item 4A of Part I of this Annual Report under the caption
"Executive Officers of FREIT."
ITEM 11: EXECUTIVE COMPENSATION
The information pertaining to executive compensation required by this item is
incorporated herein by reference to the section titled "Election of Trustees -
Executive Compensation" in FREIT's Proxy Statement for its Annual Meeting to be
held in April 2004.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 403 of Regulation S-K to be included as part of
this item is incorporated herein by reference to the section titled "Security
Ownership of Certain Beneficial Owners and Management" in FREIT's Proxy
Statement for its Annual Meeting to be held in April 2004.
Securities Authorized for Issuance under Equity Compensation Plans
The number of stock options outstanding under our equity compensation
plans, the weighted average exercise price of outstanding options,
and the number of securities remaining available for issuance,
as of October 31, 2003, were as follows:
Number of securities
remaining available for
Number of securities future issuance under
to be issued upon Weighted-average equity compensation
exercise of exercise price of plans (excluding
outstanding options, outstanding options, securities reflected in
warrants and rights warrants and rights column (a))
- -----------------------------------------------------------------------------------------------------------------
Plan category (a) (b) (c)
Equity
Compensation Plans 341,000 $15.00 83,000
approved by
- -----------------------------------------------------------------------------------------------------------------
security holders (1)
Equity
Compensation Plans 0 0 0
not approved by
- -----------------------------------------------------------------------------------------------------------------
security holders
Total 341,000 $15.00 83,000
- -----------------------------------------------------------------------------------------------------------------
(1) FREIT's Equity Incentive plan provides for the issuance of awards to
officers, trustees, employees and consultants in the form of nonqualified
options to acquired shares of beneficial interest restricted shares and
other share based awards.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the
section titled "Certain Relationships and Related Transactions" in FREIT's Proxy
Statement for its Annual Meeting to be held in April 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required in response to this Item is incorporated by reference
to the information contained in FREIT's Proxy Statement for its Annual Meeting
to be held in April 2004 under the captions "Audit Fees," "AUDIT Related Fees,"
" Tax Fees" and "All Other Fees."
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements of Registrant and of Registrant's Affiliates, Westwood
Hills and Wayne PSC:
(i) Reports of Independent Public Accountants for Registrant and
Registrant's Affiliates, J.H. Cohn LLP
(ii) Consolidated Balance Sheets as of October 31, 2003 and 2002
(iii)Consolidated Statements of Income, Comprehensive Income, and
Undistributed Earnings for the years ended October 31, 2003, 2002 and
2001 for Registrant and Statements of Income and Members' Deficiency
for the years ended October 31, 2003, 2002 and 2001 for Westwood
Hills, LLC, and Statement of Income, and Members' Equity for the year
ended October 31, 2003 for WaynePSC, LLC.
(iv) Consolidated Statements of Cash Flows for the years ended October 31,
2003, 2002 and 2001
(v) Notes to Consolidated Financial Statements
Financial Statement Schedules:
(i) Supplementary Income Statement Information.
(ii) Real Estate and Accumulated Depreciation.
Exhibits:
See Index to Exhibits immediately following the Financial Statements.
(b) Reports on Form 8-K:
During the fourth quarter ended October 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 August 13,
2003 the acquisition of the Damascus Shopping Center in Damascus, MD, on
July 31, 2003.
Form 8-K (Item 5. Other Events) date of earliest event reported September
17, 2003. Operating results for the nine (9) and three (3) months ended
July 31, 2003.
(c) Exhibits:
See Index to Exhibits.
(d) Financial Statement Schedules:
See Index to Financial Statements and Financial Statement Schedules.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, FREIT 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
Dated: January 27, 2004 By: /s/ Robert S. Hekemian
-----------------------------
Robert S. Hekemian,
Chairman of the Board and
Chief Executive Officer
By: /s/ Donald W. Barney
-------------------------------------
Donald W. Barney
President, Treasurer and
Chief Financial Officer
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES (ITEMS 8 AND 14(a))
-------------------------------------------------
PAGE
----
(A) FINANCIAL STATEMENTS OF REGISTRANT:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-3
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2003 AND 2002 F-4
CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE
INCOME AND UNDISTRIBUTED EARNINGS
YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001 F-5/6
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001 F-7/8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9/26
(B) FINANCIAL STATEMENTS OF AFFILIATES:
(I) WESTWOOD HILLS, LLC:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-27
BALANCE SHEETS
OCTOBER 31, 2003 AND 2002 F-28
STATEMENTS OF INCOME AND MEMBERS' DEFICIENCY
YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001 F-29
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001 F-30
NOTES TO FINANCIAL STATEMENTS F-31/32
F-1
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES (ITEMS 8 AND 14(a))
-------------------------------------------------
PAGE
----
(B) FINANCIAL STATEMENTS OF AFFILIATES (CONCLUDED):
(II) WAYNE PSC, LLC:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-33
BALANCE SHEET
OCTOBER 31, 2003 F-34
STATEMENT OF INCOME AND MEMBERS' EQUITY
YEAR ENDED OCTOBER 31, 2003 F-35
STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 2003 F-36
NOTES TO FINANCIAL STATEMENTS F-37/39
(C) FINANCIAL STATEMENT SCHEDULES:
X - SUPPLEMENTARY INCOME STATEMENT INFORMATION S-1
XI - REAL ESTATE AND ACCUMULATED DEPRECIATION S-2/3
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in the
consolidated financial statements or notes thereto.
* * *
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Trustees and Shareholders
First Real Estate Investment Trust of New Jersey
We have audited the accompanying consolidated balance sheets of FIRST REAL
ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES as of October 31, 2003
and 2002, and the related consolidated statements of income, comprehensive
income, undistributed earnings and cash flows for each of the three years in the
period ended October 31, 2003. These financial statements are the responsibility
of FREIT's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Real Estate
Investment Trust of New Jersey and Subsidiaries as of October 31, 2003 and 2002,
and their results of operations and cash flows for each of the three years in
the period ended October 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
Our audits referred to above included the information in Schedules X and XI
which present fairly, when read in conjunction with the consolidated financial
statements, the information required to be set forth therein.
/s/ J.H. Cohn LLP
-------------
Roseland, New Jersey
November 18, 2003
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2003 AND 2002
ASSETS 2003 2002
------ ---- ----
(In Thousands
of Dollars)
Real estate and equipment, at cost, net of accumulated
depreciation $ 84,414 $ 74,687
Investment in affiliate 1,255 3,600
Cash and cash equivalents 12,871 11,930
Tenants' security accounts 881 788
Sundry receivables 3,876 2,555
Prepaid expenses and other assets 1,839 1,306
Deferred charges, net 2,014 1,166
--------- ---------
Totals $ 107,150 $ 96,032
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Mortgages payable $ 76,890 $ 68,393
Accounts payable and accrued expenses 1,369 778
Cash distributions in excess of investment in affiliate 1,570 317
Dividends payable 2,367 2,090
Tenants' security deposits 1,256 1,122
Deferred revenue 241 332
Interest rate swap contract 201
--------- ---------
Total liabilities 83,894 73,032
--------- ---------
Minority interest 1,116 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 19,854 19,314
Undistributed earnings 2,487 2,589
Accumulated other comprehensive loss (201)
--------- ---------
Total shareholders' equity 22,140 21,903
--------- ---------
Totals $ 107,150 $ 96,032
========= =========
See Notes to Consolidated Financial Statements.
F-4
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME AND
UNDISTRIBUTED EARNINGS
YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
INCOME 2003 2002 2001
------ ---- ---- ----
(In Thousands of Dollars,
Except per Share Amounts)
VRevenue:
Rental income $ 16,593 $ 15,807 $ 15,224
Reimbursements 2,900 2,536 2,508
Equity in income of affiliates 250 269 190
Net investment income 187 250 683
Sundry income 260 283 330
-------- -------- --------
Totals 20,190 19,145 18,935
-------- -------- --------
Expenses:
Operating expenses 3,973 3,490 3,592
Management fees 825 790 745
Real estate taxes 2,532 2,400 2,293
Interest 4,802 4,873 5,356
Depreciation 2,229 2,153 2,138
Minority interest 246 137 85
-------- -------- --------
Totals 14,607 13,843 14,209
-------- -------- --------
Income from continuing operations before state income taxes 5,583 5,302 4,726
Provision for state income taxes 18 19 16
-------- -------- --------
Income from continuing operations 5,565 5,283 4,710
-------- -------- --------
Discontinued operations:
Loss from discontinued operations (77) (10)
Gain on disposal 475
-------- --------
Income (loss) from discontinued operations 398 (10)
-------- --------
Net income $ 5,565 $ 5,681 $ 4,700
======== ======== ========
Basic earnings per share:
Continuing operations $ 1.78 $ 1.69 $ 1.51
Discontinued operations .13
-------- -------- --------
Net income $ 1.78 $ 1.82 $ 1.51
======== ======== ========
Diluted earnings per share:
Continuing operations $ 1.71 $ 1.63 $ 1.50
Discontinued operations .12
-------- -------- --------
Net income $ 1.71 $ 1.75 $ 1.50
======== ======== ========
Basic weighted average shares outstanding 3,134 3,120 3,120
======== ======== ========
Diluted weighted average shares outstanding 3,261 3,233 3,133
======== ======== ========
F-5
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME AND
UNDISTRIBUTED EARNINGS
YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
COMPREHENSIVE INCOME 2003 2002 2001
-------------------- ---- ---- ----
(In Thousands of Dollars,
Except per Share Amounts)
Net income $ 5,565 $ 5,681 $ 4,700
------- ------- -------
Other comprehensive income (loss):
Unrealized holding gains on marketable securities 49
Unrealized loss on interest rate swap contract (201)
------- -------
Other comprehensive income (loss) (201) 49
------- ------- -------
Comprehensive income $ 5,364 $ 5,681 $ 4,749
======= ======= =======
UNDISTRIBUTED EARNINGS
----------------------
Balance, beginning of year $ 2,589 $ 2,274 $ 1,879
Net income 5,565 5,681 4,700
Less dividends (5,667) (5,366) (4,305)
------- ------- -------
Balance, end of year $ 2,487 $ 2,589 $ 2,274
======= ======= =======
Dividends per share $ 1.80 $ 1.72 $ 1.38
======= ======= =======
See Notes to Consolidated Financial Statements.
F-6
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
(In Thousands of Dollars)
Operating activities:
Net income $ 5,565 $ 5,681 $ 4,700
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,229 2,153 2,138
Amortization 256 310 307
Equity in income of affiliates (250) (269) (190)
Deferred revenue (91) 10 19
Minority interest 246 137 85
Write-off of development costs and abandoned property 190 114
Gain on disposal of discontinued operations (475)
Changes in operating assets and liabilities:
Tenants' security accounts (93) 85 (107)
Sundry receivables, prepaid expenses and other assets (1,854) (87) (774)
Deferred leasing and other charges (946) (167)
Accounts payable and accrued expenses 591 (41) (35)
Tenants' security deposits 134 (97) 146
-------- -------- --------
Net cash provided by operating activities 5,787 7,430 6,403
-------- -------- --------
Investing activities:
Capital expenditures (2,023) (635) (1,132)
Distributions from affiliates 3,848 200 224
Proceeds from disposal of discontinued operations 983
Proceeds from sale of marketable securities 500 9,000
Investment in affiliate (3,600)
Good faith deposits (15)
Acquisition of Damascus (7,323)
-------- -------- --------
Net cash provided by (used in) investing activities (5,498) (2,552) 8,077
-------- -------- --------
Financing activities:
Dividends paid (5,390) (4,773) (4,602)
Received from sale of 25% minority interest in Olney 1,066
Proceeds from issuance of shares of beneficial interest 540
Capital contributions by minority interest 178
Distribution to minority interest (227) (350)
Repayment of mortgages (1,132) (961) (860)
Proceeds from second mortgages 7,019
Deferred mortgage costs (158) (51)
-------- -------- --------
Net cash provided by (used in) financing activities 652 (6,135) (4,218)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 941 (1,257) 10,262
Cash and cash equivalents, beginning of year 11,930 13,187 2,925
-------- -------- --------
Cash and cash equivalents, end of year $ 12,871 $ 11,930 $ 13,187
======== ======== ========
F-7
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
(In Thousands of Dollars)
Supplemental disclosure of cash flow data:
Interest paid $4,677 $4,759 $5,230
====== ====== ======
Income taxes paid $ 18 $ 19 $ 16
====== ====== ======
Supplemental schedule of noncash investing and financing activities:
Dividends declared but not paid $2,367 $2,090 $1,497
====== ====== ======
Damascus mortgage assumed $2,610
======
See Notes to Consolidated Financial Statements.
F-8
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and significant accounting policies:
Organization:
First Real Estate Investment Trust of New Jersey ("FREIT") was
organized November 1, 1961 as a New Jersey Business Trust. FREIT
is engaged in owning residential and commercial income producing
properties located primarily in New Jersey, Maryland and New
York.
FREIT has elected to be taxed as a Real Estate Investment Trust
under the provisions of Sections 856-860 of the Internal Revenue
Code, as amended. Accordingly, FREIT does not pay Federal income
tax on income whenever income distributed to shareholders is
equal to at least 90% of real estate investment trust taxable
income. Further, FREIT pays no Federal income tax on capital
gains distributed to shareholders.
FREIT is subject to Federal income tax on undistributed taxable
income and capital gains. FREIT may make an annual election under
Section 858 of the Internal Revenue Code to apply part of the
regular dividends paid in each respective subsequent year as a
distribution for the immediately preceding year. For fiscal 2003,
2002 and 2001, FREIT made such an election.
Principles of consolidation:
The consolidated financial statements include the accounts of
FREIT, its 75%-owned subsidiary, S and A Commercial Associates
Limited Partnership ("S and A") and, subsequent to July 31, 2003,
its wholly-owned subsidiary, Damascus Centre, LLC ("Damascus" -
see Note 3). The consolidated financial statements include 100%
of S and A's assets, liabilities, operations and cash flows with
the 25% interest not owned by FREIT reflected as "minority
interest", a group consisting principally of employees of
Hekemian & Co., Inc. ("Hekemian"), and 100% of Damascus' assets,
liabilities, operations and cash flows. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Use of estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Investment in affiliates:
FREIT's 40% investments in Westwood Hills, LLC ("WHLLC") and
Wayne PSC, LLC ("WPSCLLC") are accounted for using the equity
method.
F-9
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and significant accounting policies (continued):
Cash and cash equivalents:
Financial instruments which potentially subject FREIT to
concentrations of credit risk consist primarily of cash and cash
equivalents. FREIT considers all highly liquid investments
purchased with a maturity of three months or less to be cash
equivalents. FREIT maintains its cash and cash equivalents in
bank and other accounts, the balances of which, at times, may
exceed Federally insured limits. At October 31, 2003, such cash
and cash equivalent balances exceeded Federally insured limits by
approximately $12,035,000. Exposure to credit risk is reduced by
placing such deposits with high credit quality financial
institutions.
Depreciation:
Real estate and equipment are depreciated on the straight-line
method by annual charges to operations calculated to absorb costs
of assets over their estimated useful lives.
Impairment of long-lived assets:
FREIT has adopted the provisions of Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment of
Long-Lived Assets" ("SFAS 144"). Under SFAS 144, impairment
losses on long-lived assets, such as real estate and equipment,
are recognized when events or changes in circumstances indicate
that the undiscounted cash flows estimated to be generated by
such assets are less than their carrying value and, accordingly,
all or a portion of such carrying value may not be recoverable.
Impairment losses are then measured by comparing the fair value
of assets to their carrying amounts.
Deferred charges:
Deferred charges consist of mortgage costs and leasing
commissions. Deferred mortgage costs are amortized on the
straight-line method by annual charges to operations over the
terms of the mortgages. Amortization of such costs is included in
interest expense and approximated $125,000, $114,000 and $126,000
in 2003, 2002 and 2001, respectively. Deferred leasing
commissions are amortized on the straight-line method over the
terms of the applicable leases.
Revenue recognition:
Income from leases is recognized on a straight-line basis
regardless of when payment is due. Lease agreements between FREIT
and commercial tenants generally provide for additional rentals
based on such factors as percentage of tenants' sales in excess
of specified volumes, increases in real estate taxes, Consumer
Price Indices and common area maintenance charges. These
additional rentals are generally included in income when reported
to FREIT, when billed to tenants or ratably over the appropriate
period.
F-10
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and significant accounting policies (continued):
Interest rate swap contract:
FREIT utilizes derivative financial instruments to reduce
interest rate risk. FREIT does not hold or issue derivative
financial instruments for trading purposes. Effective November 1,
2002, FREIT adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), which establishes accounting and
reporting standards for derivative instruments and hedging
activities. As required by SFAS 133, FREIT recognizes all
derivatives as either assets or liabilities in the consolidated
balance sheet and measures those instruments at fair value.
Changes in fair value of those instruments are reported in
earnings or other comprehensive income depending on the use of
the derivative and whether it qualifies for hedge accounting. The
accounting for gains and losses associated with changes in the
fair value of the derivative and the effect on the consolidated
financial statements depends on its hedge designation and whether
the hedge is highly effective in achieving offsetting changes in
the fair value of cash flows on the assets or liability hedged.
Advertising:
FREIT expenses the cost of advertising and promotions as
incurred. Advertising costs charged to operations amounted to
approximately $85,000, $115,000 and $47,000 in 2003, 2002 and
2001, respectively.
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").
Stock-based compensation:
In accordance with the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," FREIT
will recognize compensation cost as a result of the issuance of
stock options to employees, including directors, based on the
excess, if any, of the fair value of the underlying shares at the
date of grant or award (or at an appropriate subsequent
measurement date) over the amount the employees must pay to
acquire the shares (the "intrinsic value method"). However, FREIT
will not be required to recognize compensation expense as a
result of any grants to employees at an exercise price that is
equal to or greater than fair value. FREIT will also make
proforma disclosures, as required by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), and Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation
-Transition and Disclosures" ("SFAS 148"), of net income or loss
as if a fair value based method of accounting for stock options
had been applied if such amounts differ materially from the
historical amounts.
F-11
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and significant accounting policies (concluded):
Stock-based compensation (concluded):
In accordance with the provisions of SFAS 123, all other
issuances of shares of beneficial interest, options or other
equity instruments to employees and nonemployees as the
consideration for goods or services received by FREIT are
accounted for based on the fair value of the equity instruments
issued (unless the fair value of the consideration received can
be more reliably measured). The fair value of any options or
similar equity instruments issued will be estimated based on the
Black-Scholes option-pricing model, which meets the criteria set
forth in SFAS 123, and the assumption that all of the options or
other equity instruments will ultimately vest. Such fair value is
measured as of an appropriate date pursuant to EITF Issue No.
96-18 (generally, the earlier of the date the other party becomes
committed to provide goods or services or the date performance by
the other party is complete) and capitalized or expensed as if
FREIT had paid cash for the goods or services.
Recent accounting pronouncements:
In December 2002, the Financial Accounting Standards Board (the
"FASB") issued SFAS 148 which amends SFAS 123. SFAS 148 provides
alternate methods of transition for a voluntary change from the
intrinsic value method to the fair value method of accounting for
stock-based employee compensation. However, management of FREIT
does not expect to make such a change. In addition, SFAS 148
amends SFAS 123 to require more prominent annual and quarterly
disclosures in the financial statements about the effects of
using the intrinsic value method rather than the fair value
method for stock-based compensation. The adoption of the
provisions of SFAS 148 did not have a material impact on FREIT's
consolidated financial statements.
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" ("SFAS 149"). The adoption of
the provisions of SFAS 149 did not have a material impact on
FREIT's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equity" ("SFAS 150"). SFAS 150 requires that an issuer
classify financial instruments that are within its scope as a
liability. Many of those instruments were classified as equity
under previous guidance. Most of the guidance in SFAS 150 was
effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise was effective at the beginning
of the first interim period beginning after June 15, 2003. The
adoption of the provisions of SFAS 150 did not have any impact on
FREIT's consolidated financial statements.
Reclassifications:
Certain accounts in the 2002 and 2001 consolidated financial
statements have been reclassified to conform with the current
presentation.
F-12
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Investment in affiliates:
WHLLC:
FREIT is a 40% member of WHLLC, a limited liability company that
is managed by Hekemian, a company which manages all of FREIT's
properties and in which one of the trustees of FREIT is the
chairman of the board. Certain other members of WHLLC are either
trustees of FREIT or their families or officers of Hekemian.
WHLLC owns a residential apartment complex located in Westwood,
New Jersey.
Summarized financial information of WHLLC as of October 31, 2003
and 2002 and for each of the three years in the period ended
October 31, 2003 is as follows:
2003 2002
---- ----
(In Thousands
of Dollars)
Balance sheet data:
Assets:
Real estate and equipment, net $13,405 $13,673
Other 1,020 779
------- -------
Total assets $14,425 $14,452
======= =======
Liabilities and members' deficiency:
Liabilities:
Mortgage payable (A) $17,881 $14,794
Other 473 455
------- -------
Total liabilities 18,354 15,249
------- -------
Members' deficiency:
FREIT (1,570) (317)
Others (2,359) (480)
------- -------
Total members' deficiency (3,929) (797)
------- -------
Total liabilities and members' deficiency $14,425 $14,452
======= =======
(A) The chairman of FREIT, who is also a member of WHLLC, has
personally guaranteed the mortgage in certain limited
circumstances. FREIT and the other members of WHLLC have
indemnified the chairman to the extent of their ownership
percentage in WHLLC with respect to this guarantee.
2003 2002 2001
---- ---- ----
(In Thousands of Dollars)
Income statement data:
Rental revenue $3,263 $3,169 $3,035
Rental expenses 2,797 2,497 2,559
----- ----- -----
Net income $ 466 $ 672 $ 476
====== ====== ======
F-13
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Investment in affiliates (concluded):
WPSCLLC:
During 2002, FREIT invested $3,600,000 for a 40% membership
interest in WPSCLLC which was formed to acquire a shopping center
in Wayne, New Jersey. Prior to November 1, 2002, WPSCLLC had no
significant operations. On November 1, 2002, WPSCLLC acquired a
323,000 square foot shopping center in Wayne, New Jersey. The
total acquisition cost of $35,500,000 was financed, in part, by a
$26,500,000 ten-year first mortgage loan and by $9,000,000 of
equity contributions provided by the members in accordance with
their equity ownership percentages.
WPSCLLC is a limited liability company that is managed by
Hekemian. Certain other members of WPSCLLC are either trustees of
FREIT or their families or officers of Hekemian.
Summarized financial information of WPSCLLC as of and for the
year ended October 31, 2003 is as follows (in thousands of
dollars):
Balance sheet data:
Assets:
Real estate and equipment, net $32,896
Other 2,548
-------
Total assets $35,444
=======
Liabilities and members' equity:
Liabilities:
Mortgage payable $32,000
Other 306
-------
Total liabilities 32,306
-------
Members' equity:
FREIT 1,255
Others 1,883
-------
Total members' equity 3,138
-------
Total liabilities and members' equity $35,444
=======
Income statement data:
Rental revenue $ 4,875
Rental expenses 4,717
-------
Net income $ 158
=======
F-14
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Acquisition:
On July 31, 2003, Damascus, a newly-formed limited liability
company which is wholly-owned by FREIT, acquired a 139,000 square
foot shopping center in Damascus, Maryland. The total acquisition
cost of approximately $9,933,000 was financed in part by the
assumption of a $2,610,000 first mortgage. The accompanying
consolidated financial statements include the operations of
Damascus since the date of acquisition.
The following unaudited proforma information show the results of
operations for the years ended October 31, 2003, 2002 and 2001 as
though the acquisition of Damascus was consummated at the
beginning of fiscal 2001:
2003 2002 2001
---- ---- ----
(In Thousands of Dollars,
Except Per Share Amounts)
Revenue $ 21,063 $ 20,309 $ 20,099
Expenses 15,325 14,795 15,158
-------- -------- --------
Income from continuing operations 5,738 5,514 4,941
Income (loss) from discontinued operations 398 (10)
-------- -------- --------
Net income $ 5,738 $ 5,912 $ 4,931
======== ======== ========
Basic earnings per share:
Continuing operations $ 1.83 $ 1.77 $ 1.58
Discontinued operations .13
-------- -------- --------
Totals $ 1.83 $ 1.90 $ 1.58
======== ======== ========
Basic weighted average shares outstanding 3,134 3,120 3,120
======== ======== ========
The unaudited proforma results include adjustments for
depreciation based on the purchase price, increased interest
expense and reduced net investment income related to assets
utilized to make the acquisition, and obligations incurred to
complete the transaction.
The unaudited proforma results of operations set forth above are
not necessarily indicative of the results that would have
occurred had the acquisition been made at the beginning of fiscal
2001 or of future results of operations of FREIT's combined
properties.
F-15
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Real estate and equipment:
Real estate and equipment consists of the following:
Range of
Estimated
Useful Lives 2003 2002
------------ ---- ----
(In Thousands
of Dollars)
Land $ 26,663 $ 23,713
Unimproved land 3,098 2,809
Apartment buildings 7-40 years 10,843 10,415
Commercial buildings/shopping centers 15-50 years 65,754 57,563
Equipment 3-15 years 707 651
--------- ---------
107,065 95,151
Less accumulated depreciation 22,651 20,464
--------- ---------
Totals $ 84,414 $ 74,687
========= =========
Note 5 - Mortgages payable:
Mortgages payable consist of the following:
2003 2002
---- ----
(In Thousands
of Dollars)
Northern Life Insurance Cos. - Frederick, MD (A) $17,289 $ 17,661
National Realty Funding L.C. - Westwood, NJ (B) 9,910 10,052
Larson Financial Resources, Inc. - Spring Lake, NJ (C) 3,476 3,528
Fleet Bank - Patchogue, NY (D) 6,744 6,914
Larson Financial Resources, Inc. - Wayne, NJ (E):
First mortgage 10,353 10,505
Second mortgage 3,588
Larson Financial Resources, Inc. - River Edge, NJ (F):
First mortgage 5,052 5,127
Second mortgage 1,994
Larson Financial Resources, Inc. - Maywood, NJ (G):
First mortgage 3,666 3,720
Second mortgage 1,414
Fleet Bank - Olney, MD (H) 10,872 10,886
Keybank Real Estate Capital - Damascus, MD (I) 2,532
--------- ---------
Totals $ 76,890 $ 68,393
========= =========
F-16
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Mortgages payable (continued):
(A) Payable in monthly installments of $152,153 including interest at
8.31% through June 2007 at which time the outstanding balance is
due. The mortgage is secured by a retail building in Frederick,
Maryland having a net book value of approximately $21,476,000.
(B) Payable in monthly installments of $73,248 including interest at
7.38% through February 2013 at which time the outstanding balance
is due. The mortgage is secured by a retail building in Westwood,
New Jersey having a net book value of approximately $11,538,000.
(C) Payable in monthly installments of $23,875 including interest at
6.70% through December 2013 at which time the outstanding balance
is due. The mortgage is secured by an apartment building in
Spring Lake, New Jersey having a net book value of approximately
$505,000.
(D) Payable in monthly installments of $17,500 plus interest at the
thirty day LIBOR rate plus 200 basis points through January 2008
at which time the outstanding balance is due. The mortgage is
secured by a retail building in Patchogue, New York having a net
book value of approximately $9,613,000.
(E) The first mortgage is payable in monthly installments of $76,023
including interest at 7.29% through July 2010 at which time the
outstanding balance is due. The second mortgage is payable in
monthly installments of $20,878 including interest at 4.92%
through July 2010 at which time the outstanding balance is due.
The mortgages are secured by an apartment building in Wayne, New
Jersey having a net book value of approximately $1,602,000.
(F) The first mortgage is payable in monthly installments of $34,862
including interest at 6.75% through December 2013 at which time
the outstanding balance is due. The second mortgage is payable in
monthly installments of $12,318 including interest at 5.53%
through December 2013 at which time the outstanding balance is
due. The mortgages are secured by an apartment building in River
Edge, New Jersey having a net book value of approximately
$1,248,000.
(G) The first mortgage is payable in monthly installments of $25,295
including interest at 6.75% through December 2013 at which time
the outstanding balance is due. The second mortgage is payable in
monthly installments of $8,739 including interest at 5.53%
through December 2013 at which time the outstanding balance is
due. The mortgages are secured by an apartment building in
Maywood, New Jersey having a net book value of approximately
$823,000.
F-17
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Mortgages payable (concluded):
(H) Payable in monthly installments of $15,000 plus interest at
FREIT's option of either (i) the thirty day LIBOR rate plus 200
basis points or (ii) the prime rate plus 50 basis points through
January 1, 2008, at which time the unpaid balance is due. The
mortgage is secured by a retail building in Olney, Maryland
having a net book value of $14,427,000.
(I) Payable in monthly installments of $39,719 including interest at
9.25% through March 2011 at which time the outstanding balance is
due. The mortgage is secured by a retail building in Damascus,
Maryland having a net book value of approximately $9,893,000.
Principal amounts (in thousands of dollars) due under the above
obligations in each of the five years subsequent to October 31,
2003 are as follows:
Year Ending
October 31, Amount
----------- --------
2004 $ 1,689
2005 1,793
2006 1,905
2007 17,520
2008 17,303
The fair value of FREIT's long-term debt, which approximates
$80,770,000 and $73,500,000 at October 31, 2003 and 2002,
respectively, is estimated based on the current rates offered to
FREIT for debt of the similar remaining maturities.
Note 6 - Line of credit:
On June 20, 2002, FREIT obtained a two-year $14,000,000 revolving
line of credit from The Provident Bank. Draws against the line of
credit can be used for general corporate purposes, or for
property acquisitions, construction activities, letters-of-credit
and other related business purposes. Draws are secured by
mortgages on FREIT's Franklin Crossing Shopping Center, Franklin
Lakes, NJ, single-tenanted retail space in Glen Rock, NJ,
Lakewood Apartments, Lakewood, NJ and Grandview Apartments,
Hasbrouck Heights, NJ. Interest rates on draws will be set at the
time of each draw, based on FREIT's choice of the prime rate or
at 175 basis points over the 30, 60 or 90 day LIBOR rates. There
were no draws under the line of credit during the years ended
October 31, 2003 and 2002.
Note 7 - Interest rate swap contract:
During November 2002, FREIT entered into an interest rate swap
contract to reduce the impact of interest rate fluctuations on
its variable rate mortgage secured by its Patchogue, NY property.
At October 31, 2003, the derivative financial instrument has a
notional amount of approximately $6,769,000 and a current
maturity date of January 1, 2008. The contract effectively
converted the variable rate to a fixed rate of 5.95%. In
accordance with SFAS 133, FREIT recorded a liability for the net
present value of the increase in interest cost over the remaining
term of the debt of $201,000 at October 31, 2003. Such amount is
included in comprehensive income.
F-18
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and contingencies:
Leases:
Retail tenants:
FREIT leases retail space having a net book value of
approximately $76,674,000 at October 31, 2003 to tenants for
periods of up to twenty-five years. Most of the leases
contain clauses for reimbursement of real estate taxes,
maintenance, insurance and certain other operating expenses
of the properties. Minimum rental income (in thousands of
dollars) to be received from noncancelable operating leases
in years subsequent to October 31, 2003 are as follows:
Year Ending
October 31, Amount
----------- ------
2004 $ 9,085
2005 8,466
2006 7,752
2007 6,592
2008 5,829
Thereafter 36,216
--------
Total $ 73,940
========
The above amounts assume that all leases which expire are
not renewed and, accordingly, neither minimal rentals nor
rentals from replacement tenants are included.
Minimum future rentals do not include contingent rentals
which may be received under certain leases on the basis of
percentage of reported tenants' sales volume or increases in
Consumer Price Indices. Rental income that is contingent on
future events is not included in income until the
contingency is resolved. Contingent rentals included in
income for each of the three years in the period ended
October 31, 2003 were not material.
Residential tenants:
Lease terms for residential tenants are usually one year or
less.
Ground lease:
FREIT's shopping center in Olney, Maryland contains
approximately 98,800 square feet of gross leaseable area
situated on approximately 13 acres of land. Approximately 11
acres of the land are subject to a ground lease expiring in
2078, and approximately 2 acres are owned in Fee simple. The
lease requires the payment of a minimum annual rental plus
real estate taxes, assessments and other operating expenses.
Rent expense charged to operations totaled approximately
$121,000, $121,000 and $118,000 in 2003, 2002 and 2001,
respectively. Future minimum annual lease payments (in
thousands of dollars) in each of the five years subsequent
to October 31, 2003 and thereafter are as follows:
F-19
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and contingencies (concluded):
Ground lease (concluded):
Year Ending
October 31, Amount
----------- ------
2004 $ 76
2005 76
2006 76
2007 76
2008 76
Thereafter 5,330
-------
Total $ 5,710
=======
Minimum future rentals do not include contingent rentals
which may be due under the lease on the basis of percentage
of S and A's adjusted gross income, as defined. Contingent
rentals included in rent expense for each of the three years
in the period ended October 31, 2003 were not material.
Environmental concerns:
In accordance with applicable regulations, FREIT reported to
the New Jersey Department of Environmental Protection
("NJDEP") that a historical discharge of hazardous material
was discovered in 1997 at the renovated Franklin Lakes
shopping center (the "Center").
In November 1999, FREIT received a no further action letter
from the NJDEP concerning the historical discharge at the
Center. However, FREIT is required to continue monitoring
such discharge, the cost of which will not be material.
Note 9 - Management agreement and related party transactions:
The properties owned by FREIT are currently managed by Hekemian. The
management agreement, effective November 1, 2001, requires fees equal
to a percentage of rents collected. Such fees were approximately
$825,000, $817,000 and $771,000 in 2003, 2002 and 2001, respectively,
inclusive of $27,000 and $26,000 in 2002 and 2001, respectively,
included in discontinued operations in the accompanying consolidated
statements of income. The agreement expires on October 31, 2005. In
addition, Hekemian charged FREIT fees and commissions in connection
with the acquisition of Damascus in 2003 and various mortgage
refinancing and lease acquisition fees. Such fees and commissions
amounted to approximately $793,000, $280,000 and $472,000 in 2003,
2002 and 2001, respectively.
FREIT earned approximately $48,000 in 2001 on the advance it made in
2000 on behalf of the minority interest in Olney which was repaid in
2001.
F-20
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10- Dividends and earnings per share:
FREIT declared dividends (in thousands of dollars) of $5,667, $5,366
and $4,305 to shareholders of record during 2003, 2002 and 2001,
respectively. FREIT has determined the shareholders' treatment for
Federal income tax purposes to be as follows:
2003 2002 2001
---- ---- ----
Ordinary income $5,667 $4,891 $4,305
Capital income 475
------ ------ ------
Totals $5,667 $5,366 $4,305
====== ====== ======
Basic and diluted earnings per share, based on the weighted average
number of shares outstanding during each period, are comprised of
ordinary and capital gain income.
FREIT has adopted the provisions of SFAS 128, which require the
presentation of "basic" earnings per share and, if appropriate,
"diluted" earnings per share. Basic earnings per share is calculated
by dividing net income by the weighted average number of shares
outstanding during each period. The calculation of diluted earnings
per share is similar to that of basic earnings per share, except that
the denominator is increased to include the number of additional
shares that would have been outstanding if all potentially dilutive
shares, such as those issuable upon the exercise of stock options and
warrants, were issued during the period.
In computing diluted earnings per share for each of the three years in
the period ended October 31, 2003, 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:
2003 2002 2001
Basic weighted average shares
outstanding 3,133,976 3,119,576 3,119,576
Shares arising from assumed
exercise of stock options 127,401 113,201 13,759
--------- --------- ---------
Dilutive weighted average shares
outstanding 3,261,377 3,232,777 3,133,335
========= ========= =========
F-21
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11- 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.
In connection therewith, the Board of Trustees approved an increase of
460,000 shares in FREIT's number of authorized shares of beneficial
interest. Key personnel eligible for these awards include trustees,
executive officers and other persons or entities including, without
limitation, employees, consultants and employees of consultants, who
are in a position to make significant contributions to the success of
FREIT. Under the Plan, the exercise price of all options will be the
fair market value of the shares on the date of grant. The
consideration to be paid for restricted share and other share-based
awards shall be determined by the Board of Trustees, with the amount
not to exceed the fair market value of the shares on the date of
grant. The maximum term of any award granted may not exceed ten years.
The actual terms of each award will be determined by the Board of
Trustees.
Upon ratification of the Plan on April 7, 1999, 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, 36,000 options were exercised for
proceeds totaling $540,000. The balance of the options 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 or SFAS
148 using the Black-Scholes option pricing model and assuming a
risk-free interest rate of 4.27%, expected option lives of ten years,
expected volatility of 1.65% and expected dividends of 8.59%, FREIT's
proforma net income and proforma basic net income per share arising
from such computation would not have differed materially from the
corresponding historical amounts.
The impact on FREIT's consolidated shareholders' equity for the 36,000
options that were exercised on May 23, 2003 for $540,000 was to
increase the number of shares and values of beneficial interest
outstanding to 3,155,576 and $19,854,000 at October 31, 2003,
respectively, from 3,119,576 and $19,314,000 at October 31, 2002,
respectively.
Note 12- Share split:
On September 26, 2001, the Board of Trustees approved a two-for-one
share split in the form of a share dividend. In connection with the
share dividend, the Board of Trustees also approved an increase in the
authorized number of shares of beneficial interest from 1,790,000 to
4,000,000. Financial information contained herein, including the
number of options, has been adjusted to retroactively reflect the
impact of the split.
F-22
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13- Deferred fee plan:
During fiscal 2001, the Board of Trustees adopted a deferred fee plan
(the "Plan") for its officers and trustees. Pursuant to the Plan, any
officer or trustee may elect to defer receipt of any fees that would
be due them. FREIT has agreed to pay any participant (the
"Participant") in the Plan interest on any deferred fee at 9% per
annum, compounded quarterly. Any such deferred fee is to be paid to
the Participants at the later of: (i) the retirement age specified in
the deferral election; (ii) actual retirement; or (iii) upon cessation
of a Participant's duties as an officer or trustee. The Plan provides
that any such deferral fee will be paid in a lump sum or in annual
installments over a period not to exceed 10 years, at the election of
the Participant. As of October 31, 2003 and 2002, approximately
$476,000 and $210,000, respectively, of fees have been deferred
together with accrued interest of approximately $32,000 and $18,000,
respectively.
Note 14- 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 seven separate
properties and the continuing residential segment contains seven
properties (see Note 16). The accounting policies of the segments are
the same as those described in Note 1.
The chief operating decision-making group of FREIT's retail segment,
residential segment and corporate/other is comprised of FREIT's
Executive Committee of the Board of Trustees.
FREIT assesses and measures segment operating results based on net
operating income ("NOI"). NOI is based on operating revenue and
expenses directly associated with the operations of the real estate
properties, but excludes deferred rents (straight lining),
depreciation and financing costs. NOI is not a measure of operating
results or cash flows from operating activities as measured by
accounting principles generally accepted in the United States of
America, and is not necessarily indicative of cash available to fund
cash needs and should not be considered an alternative to cash flows
as a measure of liquidity.
F-23
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14- Segment information (concluded):
Continuing real estate rental revenue, operating expenses, NOI and
recurring capital improvements for the reportable segments are
summarized below and reconciled to consolidated net income for each of
the three years in the period ended October 31, 2003. Asset
information is not reported since FREIT does not use this measure to
assess performance.
2003 2002 2001
---- ---- ----
(In Thousands of Dollars)
Real estate rental revenue:
Retail $ 12,987 $ 11,961 $ 11,522
Residential 6,567 6,338 6,130
-------- -------- --------
Totals $ 19,554 $ 18,299 $ 17,652
======== ======== ========
Real estate operating expenses:
Retail $ 4,091 $ 3,610 $ 3,617
Residential 2,664 2,445 2,495
-------- -------- --------
Totals $ 6,755 $ 6,055 $ 6,112
======== ======== ========
Net operating income:
Retail $ 8,896 $ 8,351 $ 7,905
Residential 3,903 3,893 3,635
-------- -------- --------
Totals $ 12,799 $ 12,244 $ 11,540
======== ======== ========
Recurring capital improvements -
residential $ 484 $ 378 $ 429
======== ======== ========
Reconciliation to consolidated net
income:
Segment NOI $ 12,799 $ 12,244 $ 11,540
Deferred rents - straight lining 199 326 415
Net investment income 187 250 683
Equity in income of affiliates 250 269 190
General and administrative expenses (593) (643) (539)
Depreciation (2,229) (2,153) (2,138)
Financing costs (4,802) (4,873) (5,356)
Minority interest (246) (137) (85)
Discontinued operations (Note 16) 398 (10)
-------- -------- --------
Net income $ 5,565 $ 5,681 $ 4,700
======== ======== ========
F-24
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15- Quarterly data (unaudited):
The following summary represents the results of operations for each
quarter for the years ended October 31, 2003 and 2002 (in thousands,
except per share data):
Quarter Ended
----------------------------------------------------
January 31, April 30, July 31, October 31,
----------- --------- -------- -----------
2003:
Revenue $ 4,832 $ 5,061 $ 4,940 $ 5,357
Expenses 3,562 3,665 3,566 3,832
------- ------- ------- -------
Net income $ 1,270 $ 1,396 $ 1,374 $ 1,525
======= ======= ======= =======
Earnings per share:
Basic $ .41 $ .45 $ .44 $ .48
======= ======= ======= =======
Diluted $ .39 $ .43 $ .43 $ .46
======= ======= ======= =======
Dividends per share $ .35 $ .35 $ .35 $ .75
======= ======= ======= =======
2002:
Revenue $ 4,789 $ 4,771 $ 4,830 $ 4,755
Expenses 3,409 3,454 3,516 3,483
------- ------- ------- -------
Income from continuing
operations 1,380 1,317 1,314 1,272
Income (loss) from dis-
continued operations (42) 19 (10) 431
------- ------- ------- -------
Net income $ 1,338 $ 1,336 $ 1,304 $ 1,703
======= ======= ======= =======
Earnings per share:
Basic $ .43 $ .43 $ .42 $ .54
======= ======= ======= =======
Diluted $ .42 $ .42 $ .41 $ .50
======= ======= ======= =======
Dividends per share $ .30 $ .30 $ .30 $ .82
======= ======= ======= =======
Note 16- 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 has owned and operated the property since 1964.
The Board of Trustees declared a special capital gain dividend of $.15
per share, which was distributed on September 6, 2002 to shareholders
of record on August 23, 2002. The remaining sales proceeds have been
retained by FREIT to increase its liquidity.
F-25
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16- Discontinued operations (concluded):
Summarized operating results included in discontinued operations in
the accompanying consolidated statements of income for each of the
years ended October 31, 2002 and 2001 are as follows:
2002 2001
---- ----
Revenue $ 536 $ 596
Expenses 613 606
----- -----
Net loss $ (77) $ (10)
===== =====
* * *
F-26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Members
Westwood Hills, LLC
We have audited the accompanying balance sheets of WESTWOOD HILLS, LLC as of
October 31, 2003 and 2002, and the related statements of income and members'
deficiency and cash flows for each of the three years in the period ended
October 31, 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Westwood Hills, LLC as of
October 31, 2003 and 2002, and its results of operations and cash flows for each
of the three years in the period ended October 31, 2003 in conformity with
accounting principles generally accepted in the United States of America.
/s/ J.H. Cohn LLP
-------------
Roseland, New Jersey
November 18, 2003
WESTWOOD HILLS, LLC
(A New Jersey Limited Liability Company)
BALANCE SHEETS
OCTOBER 31, 2003 AND 2002
ASSETS 2003 2002
------ ---- ----
(In Thousands
of Dollars)
Real estate, at cost, net of accumulated depreciation of $3,028,000
and $2,683,000 $13,237 $13,519
Equipment, at cost, net of accumulated depreciation of $177,000 and
$142,000 168 154
Cash 224 104
Tenants' security accounts 451 386
Prepaid expenses and other assets 144 59
Deferred charges, net 201 230
------- -------
Totals $14,425 $14,452
======= =======
LIABILITIES AND MEMBERS' DEFICIENCY
-----------------------------------
Liabilities:
Mortgages payable $17,881 $14,794
Accounts payable and accrued expenses 16 64
Tenants' security deposits 457 391
------- -------
Total liabilities 18,354 15,249
Members' deficiency (3,929) (797)
------- -------
Totals $14,425 $14,452
======= =======
See Notes to Financial Statements.
F-28
WESTWOOD HILLS, LLC
(A New Jersey Limited Liability Company)
STATEMENTS OF INCOME AND MEMBERS' DEFICIENCY
YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
INCOME 2003 2002 2001
------ ---- ---- ----
(In Thousands of Dollars)
Revenue:
Rental income $ 3,238 $3,145 $3,014
Sundry income 25 24 21
------- ------ ------
Totals 3,263 3,169 3,035
------- ------ ------
Expenses:
Operating expenses 694 586 676
Management fees 159 162 151
Real estate taxes 381 361 348
Interest 1,182 1,011 1,024
Depreciation 381 377 360
------- ------ ------
Totals 2,797 2,497 2,559
------- ------ ------
Net income 466 672 476
MEMBERS' DEFICIENCY
-------------------
Balance, beginning of year (797) (969) (885)
Less distributions (3,598) (500) (560)
------- ------ ------
Balance, end of year $(3,929) $ (797) $ (969)
======= ====== ======
See Notes to Financial Statements.
F-29
WESTWOOD HILLS, LLC
(A New Jersey Limited Liability Company)
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
(In Thousands of Dollars)
Operating activities:
Net income $ 466 $ 672 $ 476
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 381 377 360
Amortization 19 14 13
Changes in operating assets and liabilities:
Tenants' security accounts (65) (19) (46)
Prepaid expenses and other assets (85) 69 (9)
Accounts payable and accrued expenses (38) (23) 20
Tenants' security deposits 66 23 37
------- ------- -------
Net cash provided by operating activities 744 1,113 851
------- ------- -------
Investing activities - capital expenditures (113) (244) (224)
------- ------- -------
Financing activities:
Distributions paid (3,598) (500) (560)
Repayment of mortgage (263) (202) (189)
Proceeds from second mortgage 3,350
Good faith deposits (83)
------- ------- -------
Net cash used in financing activities (511) (785) (749)
Net increase (decrease) in cash 120 84 (122)
Cash, beginning of year 104 20 142
------- ------- -------
Cash, end of year $ 224 $ 104 $ 20
======= ======= =======
Supplemental disclosure of cash flow data:
Interest paid $ 1,163 $ 997 $ 1,009
======= ======= =======
See Notes to Financial Statements.
F-30
WESTWOOD HILLS, LLC
(A New Jersey Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organization and significant accounting policies:
Organization:
Westwood Hills, LLC (the "Company") was formed in May 1994 as a
New Jersey limited liability company for the purpose of acquiring
a residential apartment complex in Westwood, New Jersey. The
Company is 40%-owned by First Real Estate Investment Trust of New
Jersey (the "Trust") and managed by Hekemian & Co., Inc.
("Hekemian"), a company which manages all of the Trust's
properties and in which one of the trustees of the Trust is the
chairman of the board. Certain other members of the Company are
either trustees of the Trust or their families or officers of
Hekemian.
The Company will be dissolved on the earlier of April 2024 or
upon the sale of substantially all of it assets.
Use of estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Cash:
The Company maintains its cash in bank deposit accounts which, at
times, may exceed Federally insured limits. At October 31, 2003,
such cash exceeded Federally insured limits by approximately
$116,000. The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to
be cash equivalents. At October 31, 2003 and 2002, the Company
had no cash equivalents.
Depreciation:
Real estate and equipment are depreciated on the straight-line
method by annual charges to operations calculated to absorb costs
of assets over their estimated useful lives ranging from 7 to 40
years.
Deferred charges:
Deferred charges consist of mortgage costs which are amortized on
the straight-line method by annual charges to operations over the
term of the mortgage. Amortization of such costs is included in
interest expense and approximated $19,000, $14,000 and $13,000 in
2003, 2002 and 2001, respectively.
Advertising:
The Company expenses the cost of advertising and promotions as
incurred. Advertising costs charged to operations were not
material.
Income taxes:
The Company, with the consent of its members, elected to be
treated as a limited liability company under the applicable
sections of the Internal Revenue Code. Under these sections,
income or loss, in general, is allocated to the members for
inclusion in their individual income tax returns. Accordingly,
there is no provision for income taxes in the accompanying
financial statements.
F-31
WESTWOOD HILLS, LLC
(A New Jersey Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
Note 2 - Real estate:
Real estate consists of the following:
2003 2002
---- ----
(In Thousands
of Dollars)
Land $ 3,849 $ 3,849
Apartment buildings 12,416 12,353
------ ------
16,265 16,202
------ ------
Less accumulated depreciation 3,028 2,683
------ ------
Totals $13,237 $13,519
======= =======
Note 3 - Mortgages payable:
Mortgages payable consist of a first and second mortgage on the
real estate of the Company. The first mortgage is payable in
monthly installments of $99,946 including interest at 6.693%
through January 2014 at which time the outstanding balance is
due. The second mortgage is payable in monthly installments of
$21,954 including interest at 6.18% through January 2014 at which
time the outstanding balance is due. The mortgages are secured by
an apartment building located in Westwood, New Jersey having a
net book value of approximately $13,237,000. Principal amounts
(in thousands of dollars) due under the above obligations in each
of the years subsequent to October 31, 2003 are as follows:
Year Ending
October 31, Amount
----------- ------
2004 $231
2005 247
2006 264
2007 282
2008 301
Based on borrowing rates currently available to the Company, the
fair value of the mortgages approximates $18,811,000 and
$16,078,000 at October 31, 2003 and 2002, respectively.
Note 4 - Management agreement:
The apartment complex is currently managed by Hekemian. The
management agreement requires fees equal to a percentage of rents
collected. Such fees were approximately $159,000, $162,000 and
$151,000 in 2003, 2002 and 2001, respectively.
* * *
F-32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members
Wayne PSC, LLC
We have audited the accompanying balance sheet of WAYNE PSC, LLC as of October
31, 2003, and the related statements of income and members' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wayne PSC, LLC as of October
31, 2003, and its results of operations and cash flows for the year then ended,
in conformity with accounting principles generally accepted in the United States
of America.
/s/ J.H. Cohn LLP
-------------
Roseland, New Jersey
November 18, 2003
F-33
WAYNE PSC, LLC
(A New Jersey Limited Liability Company)
BALANCE SHEET
OCTOBER 31, 2003
(In Thousands of Dollars)
ASSETS
------
Real estate, at cost, net of accumulated depreciation of $599,000 $32,880
Equipment, at cost, net of accumulated depreciation of $6,000 16
Cash 1,342
Sundry receivables 466
Prepaid expenses and other assets 184
Deferred charges, net 556
-------
Total $35,444
=======
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
Liabilities:
Mortgage payable $32,000
Accounts payable and accrued expenses 215
Tenants' security deposits 91
-------
Total liabilities 32,306
Members' equity 3,138
-------
Total $35,444
=======
See Notes to Financial Statements.
F-34
WAYNE PSC, LLC
(A New Jersey Limited Liability Company)
STATEMENT OF INCOME AND MEMBERS' EQUITY
YEAR ENDED OCTOBER 31, 2003
(In Thousands of Dollars)
INCOME
------
Revenue:
Rental income $4,848
Sundry income 27
------
Total 4,875
------
Expenses:
Operating expenses 775
Management fees 186
Real estate taxes 990
Interest 2,161
Depreciation 605
------
Total 4,717
------
Net income 158
MEMBERS' EQUITY
---------------
Capital contribution 9,000
Less distributions (6,020)
------
Balance, end of year $3,138
======
See Notes to Financial Statements.
F-35
WAYNE PSC, LLC
(A New Jersey Limited Liability Company)
STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 2003
(In Thousands of Dollars)
Operating activities:
Net income $ 158
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 605
Amortization 74
Changes in operating assets and liabilities:
Sundry receivables (466)
Prepaid expenses and other assets (184)
Deferred leasing and other charges (183)
Accounts payable and accrued expenses 215
Tenants' security deposits 91
--------
Net cash provided by operating activities 310
--------
Investing activities - capital expenditures (33,501)
--------
Financing activities:
Distributions paid (6,020)
Capital contribution 9,000
Proceeds from mortgage 32,000
Deferred mortgage costs (447)
--------
Net cash provided by financing activities 34,533
--------
Net increase in cash and cash balance, end of year $ 1,342
========
Supplemental disclosure of cash flow data:
Interest paid $ 2,161
========
See Notes to Financial Statements.
F-36
WAYNE PSC, LLC
(A New Jersey Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organization and significant accounting policies:
Organization:
Wayne PSC, LLC (the "Company") was formed in March 2002 as a New
Jersey limited liability company for the purpose of acquiring a
shopping center complex in Wayne, New Jersey. The Company is
40%-owned by First Real Estate Investment Trust of New Jersey
(the "Trust") and managed by Hekemian & Co., Inc. ("Hekemian"), a
company which manages all of the Trust's properties and in which
one of the trustees of the Trust is the chairman of the board.
Certain other members of the Company are either trustees of the
Trust or their families or officers of Hekemian.
The Company will be dissolved on the earlier of the sale of
substantially all of its assets, agreement of all members, or
bankruptcy of any member.
Use of estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Cash:
The Company maintains its cash in bank deposit accounts which, at
times, may exceed Federally insured limits. At October 31, 2003,
such cash exceeded Federally insured limits by approximately
$1,136,000. The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to
be cash equivalents. At October 31, 2003, the Company had no cash
equivalents.
Depreciation:
Real estate and equipment are depreciated on the straight-line
method by annual charges to operations calculated to absorb costs
of assets over their estimated useful lives ranging from 7 to 40
years.
Deferred charges:
Deferred charges consist of mortgage costs and leasing
commissions. Deferred mortgage costs are amortized on the
straight-line method by annual charges to operations over the
term of the mortgage. Amortization of such costs is included in
interest expense and approximated $38,000 in 2003. Deferred
leasing commissions are amortized on the straight-line method
over the terms of the applicable leases.
Revenue recognition:
Income from leases is recognized on a straight-line basis
regardless of when payment is due. Lease agreements between the
Company and commercial tenants generally provide for additional
rentals based on such factors as percentage of tenants' sales in
excess of specified volumes, increases in real estate taxes,
Consumer Price Indices and common area maintenance charges. These
additional rentals are generally included in income when reported
to the Company, when billed to tenants or ratably over the
appropriate period.
F-37
WAYNE PSC, LLC
(A New Jersey Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organization and significant accounting policies (concluded):
Advertising:
The Company expenses the cost of advertising and promotions as
incurred. Advertising costs charged to operations were not
material.
Income taxes:
The Company, with the consent of its members, elected to be
treated as a limited liability company under the applicable
sections of the Internal Revenue Code. Under these sections,
income or loss, in general, is allocated to the members for
inclusion in their individual income tax returns. Accordingly,
there is no provision for income taxes in the accompanying
financial statements.
Note 2 - Real estate:
Real estate consists of the following (in thousands of dollars):
Land $ 9,567
Commercial building 23,912
--------
33,479
Less accumulated depreciation 599
--------
Total $32,880
=======
Note 3 - Mortgage payable:
The mortgage is payable in interest only installments of $161,067
through June 2006 and thereafter in monthly installments of
$206,960 including interest at 6.04% through January 2016 at
which time the outstanding balance is due. Principal amounts (in
thousands of dollars) due under the above obligation in each of
the five years subsequent to October 31, 2003 are as follows:
Year Ending
October 31, Amount
----------- ------
2004 $ -
2005 -
2006 232
2007 581
2008 617
Based on borrowing rates currently available to the Company, the
fair value of the mortgage approximates $32,105,000 at October
31, 2003.
F-38
WAYNE PSC, LLC
(A New Jersey Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
Note 4 - Management agreement:
The shopping center is currently managed by Hekemian. The
management agreement requires fees equal to a percentage of rents
collected. Such fees were approximately $186,000 in 2003. In
addition, Hekemian charged the Company $160,000 in connection
with the mortgage financing.
Note 5 - Leases:
The Company leases retail space to tenants for periods of up to
twenty-five years. Most of the leases contain clauses for
reimbursement of real estate taxes, maintenance, insurance and
certain other operating expenses of the properties. Minimum
rental income (in thousands of dollars) to be received from
noncancelable operating leases in years subsequent to October 31,
2003 are as follows:
Year Ending
October 31, Amount
----------- ------
2004 $ 3,274
2005 3,076
2006 2,843
2007 2,611
2008 2,277
Thereafter 19,393
-------
Total $33,474
=======
The above amounts assume that all leases which expire are not
renewed and, accordingly, neither minimal rentals nor rentals
from replacement tenants are included.
Minimum future rentals do not include contingent rentals which
may be received under certain leases on the basis of percentage
of reported tenants' sales volume or increases in Consumer Price
Indices. Rental income that is contingent on future events is not
included in income until the contingency is resolved. Contingent
rentals included in income for the year ended October 31, 2003
were not material.
* * *
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
(In Thousands of Dollars)
Column A Column B
-------- --------
Charged to Costs
Item (A) and Expenses
-------- ------------
2003 2002 2001
---- ---- ----
Maintenance and repairs $ 602 $ 692 $ 657
====== ====== ======
Real estate taxes $2,532 $2,400 $2,293
====== ====== ======
(A) Amounts for other items were less than 1% of revenue in all years.
S-1
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION
OCTOBER 31, 2003
(In Thousands of Dollars)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Costs
Capitalized
Initial Cost Subsequent Gross Amount at Which
to Company to Acquisition Carried at Close of Period
---------------------------- -------------- --------------------------
Buildings Buildings
Date Encum- and Improve- Carrying and
Description brances Land Improvement Land ments Costs Land improvements Total(1)
----------- ------- ---- ----------- ---- ----- ------ ---- ------------
Garden apartments:
Grandview Apts., Hasbrouck
Heights, NJ $ 22 $ 180 $ 227 $ 22 $ 407 $ 429
Lakewood Apts., Lakewood, NJ 11 396 213 11 609 620
Hammel Gardens, Maywood, NJ $ 5,080 313 728 702 313 1,430 1,743
Palisades Manor, Palisades
Park, NJ 12 81 78 12 159 171
Steuben Arms, River Edge, NJ 7,046 364 1,773 618 364 2,391 2,755
Heights Manor, Spring Lake
Heights, NJ 3,476 109 974 425 109 1,399 1,508
Berdan Court, Wayne, NJ 13,941 250 2,206 2,238 250 4,444 4,694
Retail properties:
Damascus Shopping Center,
Damascus, MD 2,532 2,950 6,987 2,950 6,987 9,937
Franklin Lakes Shopping Center,
Franklin Lakes, NJ 29 $3,382 7,421 3,411 7,421 10,832
Glen Rock, NJ 12 36 40 12 76 88
Olney Shopping Center, Olney,
MD 10,872 1,058 14,590 123 1,058 14,713 15,771
Patchogue Shopping Center,
Patchogue, NY 6,744 2,128 8,818 (21) 2,128 8,797 10,925
Westridge Shopping Center,
Frederick, MD 17,289 9,135 19,159 394 9,135 19,553 28,688
Westwood Shopping Center,
Westwood, NJ 9,910 6,889 6,416 1,794 6,889 8,210 15,099
Vacant land:
Franklin Lakes, NJ 224 (156) 68 68
Rockaway, NJ 1,683 382 $633 2,698 2,698
South Brunswick, NJ 80 150 101 331 331
------- -------- ------- ------ ------- ---- ------- ------- --------
Totals $76,890 $25,269 $62,344 $3,758 $14,252 $734 $29,761 $76,596 $106,357
======= ======= ======= ====== ======= ==== ======= ======= ========
(1) Aggregate cost is the same for Federal income tax purposes.
Column F Column G Column H Column I
-------- -------- -------- --------
Life on
Which De-
Accumulated Date of Date precaution
Depreciation Construction Acquired is Computed
------------ ------------ -------- -----------
Garden apartments:
Grandview Apts., Hasbrouck
Heights, NJ $ 313 1925 1964 7-40 years
Lakewood Apts., Lakewood, NJ 516 1960 1962 7-40 years
Hammel Gardens, Maywood, NJ 920 1949 1972 7-40 years
Palisades Manor, Palisades
Park, NJ 128 1935/70 1962 7-40 years
Steuben Arms, River Edge, NJ 1,507 1966 1975 7-40 years
Heights Manor, Spring Lake
Heights, NJ 1,003 1967 1971 7-40 years
Berdan Court, Wayne, NJ 3,095 1964 1965 7-40 years
Retail properties:
Damascus Shopping Center,
Damascus, MD 44 2003 15-39 years
Franklin Lakes Shopping Center,
Franklin Lakes, NJ 1,143 1963/75/97 1966 10-50 years
Glen Rock, NJ 50 1940 1962 10-31.5 years
Olney Shopping Center, Olney,
MD 1,344 2000 15-39.5 years
Patchogue Shopping Center,
Patchogue, NY 1,312 1997 1997 39 years
Westridge Shopping Center,
Frederick, MD 7,212 1986 1992 15-31.5 years
Westwood Shopping Center,
Westwood, NJ 3,561 1981 1988 15-31.5 years
Vacant land:
Franklin Lakes, NJ 1966/93
Rockaway, NJ 1964/92/93
South Brunswick, NJ 1964
--------
Totals $22,148
=======
(1) Aggregate cost is the same for Federal income tax purposes.
S-2
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION
(In Thousands of Dollars)
Reconciliation of real estate and accumulated depreciation:
2003 2002 2001
---- ---- ----
Real estate:
Balance, beginning of year $ 94,500 $ 95,637 $ 94,565
Additions:
Building and improvements 11,857 365 1,036
Carrying costs 36
Deletions - building and improvements (1,502)
--------- --------- ---------
Balance, end of year $ 106,357 $ 94,500 $ 95,637
========= ========= =========
Accumulated depreciation:
Balance, beginning of year $ 20,026 $ 18,892 $ 16,726
Additions - charged to operating expenses 2,122 2,148 2,166
Deletions (1,014)
--------- --------- ---------
Balance, end of year $ 22,148 $ 20,026 $ 18,892
========= ========= =========
S-3
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY ("FREIT")
EXHIBIT INDEX
Exhibit No.
3 Amended and Restated Declaration of Trust of FREIT, dated
November 7,1993, as amended on May 31, 1994 and on September
10, 1998. (a)
4 Form of Specimen Share Certificate, Beneficial Interest in
FREIT. (b)
10.1 Management Agreement dated April 10, 2002, by and between
FREIT and Hekemian & Co., Inc. (c)
10.2 Wayne PSC, L.L.C. Operating Agreement dated March 25, 2002
between FREIT and H-TPKE, LLC ( c)
10.3 Line of Credit Note in the principal amount of $14 million
executed by FREIT as Borrower, and delivered to The Provident
Bank, as Lender, in connection with the Credit Facility
provided by The Provident Bank to FREIT. (d)
21 Subsidiaries of FREIT
23 Consent of J.H. Cohn LLP
24 Power of Attorney (filed with signature pages).
31.1 Rule 13a-14(a)-Certification of Chief Executive Officer.
31.2 Rule 13a-14(a)-Certification of Chief Financial Officer
99.1 Section 1350 Certification of Cheif Executive Officer.
99.2 Section 1350 Certification of Cheir Financial officer.
The following filings with the Security and Exchange
------------------------------------------------------------
Commission are incorporated by reference:
-----------------------------------------
Footnote
(a) Exhibit No. 1 to FREIT's Registration Statement on Form 8-A filed on
November 6, 1998.
(b) FREIT's Annual Report on Form 10-K for the fiscal year ended October
31, 1998.
(c) FREIT's Form 8-K filed on April 29, 2002.
(d) Exhibit 10 to FREIT's Form 10-Q filed on September 13, 2002.