SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarterly period ended January 31, 2004
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________.
Commission File No.: 2-27018
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY
(Exact name of registrant as specified in its charter)
New Jersey 22-1697095
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
505 Main Street, P.O. Box 667, Hackensack, New Jersey 07602
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 201-488-6400
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
|X| Yes |_| No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
|_| Yes |X| No
As of March 12, 2004, there were 3,211,576 shares of beneficial interests issued
and outstanding.
Page 2
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY
INDEX
Part I: Financial Information Page
----
Item 1: Unaudited Condensed Consolidated Financial Statements
a.) Condensed Consolidated Balance Sheets as at January 31, 2004
and October 31, 2003; 3
b.) Condensed Consolidated Statements of Income, Comprehensive
Income and Undistributed Earnings for the Three Months Ended
January 31, 2004 and 2003; 4 - 5
c.) Condensed Consolidated Statements of Cash Flows for the Three
Months Ended January 31, 2004 and 2003; 6
d.) Notes to Condensed Consolidated Financial Statements 7
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3: Quantitative and Qualitative Disclosures about Market Risk 18
Item 4: Controls and Procedures 18
Part II: Other Information 18
Item 6: Exhibits and Reports on Form 8-K
Page 3
Item 1: Financial Statements
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31, October 31,
2004 2003
--------- ---------
(Unaudited) (See Note 1)
----------- ------------
(In Thousands of Dollars)
-------------------------
ASSETS
Real estate, at cost, net of accumulated
depreciation $ 84,078 $ 84,414
Investment in affiliate 1,199 1,255
Cash and cash equivalents 11,575 12,871
Tenants' security accounts 855 881
Sundry receivables 4,370 3,876
Prepaid expenses and other assets 1,462 1,839
Deferred charges, net 1,961 2,014
--------- ---------
Totals $ 105,500 $ 107,150
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgages payable $ 76,502 $ 76,890
Accounts payable and accrued expenses 974 1,369
Cash distributions in excess of investment in affiliate 1,614 1,570
Dividends payable 1,285 2,367
Tenants' security deposits 1,236 1,256
Deferred revenue 221 241
Interest rate swap contract 231 201
--------- ---------
Total liabilities 82,063 83,894
--------- ---------
Minority interest 1,109 1,116
--------- ---------
Commitments and contingencies
Shareholders' equity:
Shares of beneficial interest without par value:
4,000,000 shares authorized;
3,155,576 shares issued and outstanding: 19,854 19,854
Undistributed earnings 2,705 2,487
Accumulated other comprehensive loss (231) (201)
--------- ---------
Total shareholders' equity 22,328 22,140
--------- ---------
Totals $ 105,500 $ 107,150
========= =========
See Notes to Consolidated Financial Statements
Page 4
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME AND UNDISTRIBUTED
EARNINGS THREE MONTHS ENDED JANUARY 31, 2004 AND 2003
2004 2003
------ ------
(In Thousands of Dollars,
Except Per Share Amounts)
INCOME
Revenue:
Rental income $4,687 $3,978
Reimbursements 640 664
Equity in income of affiliates 60 81
Net investment income 45 53
Sundry income 18 56
------ ------
Totals 5,450 4,832
------ ------
Expenses:
Operating expenses 1,041 957
Management fees 206 201
Real estate taxes 703 621
Financing costs 1,324 1,194
Depreciation 609 532
Minority interest 55 49
------ ------
Totals 3,938 3,554
------ ------
Income from operations before state income taxes 1,512 1,278
Provision for state income taxes 9 8
------ ------
Net income $1,503 $1,270
====== ======
- --------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.48 $ 0.41
====== ======
Diluted $ 0.46 $ 0.39
====== ======
Basic weighted average shares outstanding 3,156 3,120
Diluted weighted average shares outstanding 3,259 3,275
- --------------------------------------------------------------------------------
Page 5
January 31, January 31,
2004 2003
------- -------
(Unaudited)
-----------
(In Thousands of Dollars)
-------------------------
COMPREHENSIVE INCOME
Net income $ 1,503 $ 1,270
Other comprehensive income (loss):
Unrealized loss on interest rate swap contract (30) (236)
------- -------
Comprehensive income $ 1,473 $ 1,034
======= =======
UNDISTRIBUTED EARNINGS
Balance, beginning of period $ 2,487 $ 2,589
Net income 1,503 1,270
Less dividends (1,285) (1,092)
------- -------
Balance, end of period $ 2,705 $ 2,767
======= =======
Dividends per share $ 0.40 $ 0.35
======= =======
See Notes to Consolidated Financial Statements
Page 6
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 2004 AND 2003
2004 2003
-------- --------
(In Thousands of Dollars)
-------------------------
Operating activities:
Net income $ 1,503 $ 1,270
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 609 532
Amortization 67 76
Equity in income of affiliates (60) (81)
Deferred revenue (20) (50)
Minority interest 55 49
Changes in operating assets and liabilities:
Tenants' security accounts 26 (33)
Sundry receivables, prepaid expenses and other assets (131) (67)
Accounts payable and accrued expenses (395) 76
Tenants' security deposits (20) 33
-------- --------
Net cash provided by operating activities 1,634 1,805
-------- --------
Investing activities:
Capital expenditures (273) (132)
Distributions from affiliates 160 1,360
-------- --------
Net cash (used in) provided by investing activities (113) 1,228
-------- --------
Financing activities:
Repayment of mortgages (388) (217)
Dividends paid (2,367) (2,090)
Distribution to minority interest (62) (50)
-------- --------
Net cash used in financing activities (2,817) (2,357)
-------- --------
Net increase (decrease) in cash and cash equivalents (1,296) 676
Cash and cash equivalents, beginning of period 12,871 11,930
-------- --------
Cash and cash equivalents, end of period $ 11,575 $ 12,606
======== ========
Supplemental disclosure of cash flow data:
Interest paid $ 1,287 $ 1,118
======== ========
Income taxes paid $ 9 $ 8
======== ========
Dividends declared but not paid $ 1,285 $ 1,092
======== ========
See Notes to Consolidated Financial Statements.
Page 7
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of presentation:
The accompanying condensed consolidated financial statements have been
prepared without audit, in accordance with accounting principles generally
accepted in the United States of America for interim financial statements
and pursuant to the rules of the Securities and Exchange Commission.
Accordingly, certain information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements have been omitted. It is the opinion of management
that all adjustments considered necessary for a fair presentation have
been included, and that all such adjustments are of a normal recurring
nature.
The consolidated results of operations for the three months ended January
31, 2004 are not necessarily indicative of the results to be expected for
the full year. The unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements
and related notes included in FREIT's Annual Report on Form 10-K for the
year ended October 31, 2003.
Certain accounts in the 2003 financial statements have been reclassified
to conform to the current presentation.
Note 2 - Investment in Affiliates:
Certain investments, where FREIT's ownership interest is 50% or less, but
can exercise significant influence, are accounted for by the equity
method. Under the equity method, the investment, originally recorded at
cost, is adjusted to recognize FREIT's share of the net earnings or losses
of the affiliates as they occur. These investments include:
Ownership
Interest
--------
Westwood Hills, LLC 40%
(owns a 210 unit apartment community in Westwood, NJ)
Wayne PSC, LLC 40%
(owns a 323,000 sq. ft. Shopping Center in Wayne, NJ)
Summarized combined balance sheets as at January 31, 2004 and October 31,
2003, and income statement information for the three months ended January
31, 2004 and 2003 of the above affiliates that are accounted for using the
equity method are as follows:
Page 8
January October
31, 31,
2004 2003
-------- --------
Balance Sheet Data
Assets:
Real Estate $ 46,266 $ 46,301
Other Assets 3,175 3,568
-------- --------
Total assets $ 49,441 $ 49,869
======== ========
Liabilities and members' equity (deficiency):
Liabilities:
Mortgages payable $ 49,810 49,881
Other liabilities 672 779
-------- --------
Totals 50,482 50,660
-------- --------
Members' Equity (Deficiency):
Westwood Hills (4,038) (3,929)
Wayne PSC 2,997 3,138
-------- --------
Totals (1,041) (791)
-------- --------
Total Liabilities and Equity $ 49,441 $ 49,869
======== ========
FREIT balance sheet classification:
Assets
Investment in affiliate $ 1,199 $ 1,255
======== ========
Liabilities
Cash distributions in excess
of investment in affiliate $ (1,614) $ (1,570)
======== ========
Three Months Ended
January 31,
-------------------------
2004 2003
-------- --------
Income Statement Data
Revenues $ 2,097 1,873
Expenses 1,947 1,670
-------- --------
Net income $ 150 $ 203
======== ========
FREIT - Equity in income $ 60 $ 81
======== ========
Note 3 - Earnings per share:
FREIT has presented "basic" and "diluted" earnings per share in the
accompanying statements of income in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, Earnings per Share
("SFAS 128"). Basic earnings per share is calculated by dividing net
income by the weighted average number of shares outstanding during each
period. The calculation of diluted earnings per share is similar to that
of basic earnings per share, except that the denominator is increased to
include the number of additional shares that would have been outstanding
if all potentially dilutive shares, such as those issuable upon the
exercise of stock options and warrants, were issued during the period.
Page 9
In computing diluted earnings per share for each of the three month
periods ended January 31, 2004 and 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:
2004 2003
--------- ---------
Basic weighted average shares
outstanding 3,155,576 3,119,576
Shares arising from assumed
exercise of stock options 103,916 155,429
--------- ---------
Dilutive weighted average shares
outstanding 3,259,492 3,275,005
========= =========
Basic and diluted earnings per share, based on the weighted average number
of shares outstanding during each period, are comprised of ordinary
income.
Note 4- Equity incentive plan:
On September 10, 1998, the Board of Trustees approved FREIT's Equity
Incentive Plan (the "Plan") which was ratified by FREIT's shareholders on
April 7, 1999, whereby up to 460,000 of 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.
sUpon 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. During May 2003, options to purchase 36,000 shares at $15 per share
were exercised. As at January 31, 2004, options for 341,000 shares of
beneficial interest are outstanding and are exercisable through September
2008. (See Note 6 - Subsequent Events)
In the opinion of management, if compensation cost for the stock options
granted in 1999 had been determined based on the fair value of the options
at the grant date under the provisions of SFAS 123 using the Black-Scholes
option pricing model, FREIT's pro forma net income and pro forma basic net
income per share arising from such computation would not have differed
materially from the corresponding historical amounts.
Note 5- Segment information:
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", established standards for reporting financial information
about operating segments in interim and annual financial reports and
provides for a "management approach" in identifying the reportable
segments.
FREIT has determined that it has two reportable segments: retail
properties and residential properties. These reportable segments offer
different products, have different types of customers, and are managed
separately because each requires different operating strategies and
management expertise. The retail segment contains six separate properties
and the
Page 10
residential segment contains eight properties. The accounting policies of
the segments are the same as those described in Note 1 in FREIT's Annual
Report on Form 10-K.
The chief operating decision-making group of FREIT's retail segment,
residential segment and corporate/other is comprised of the Board of
Trustees.
FREIT assesses and measures segment operating results based on net
operating income ("NOI"). NOI is based on operating revenue and expenses
directly associated with the operations of the real estate properties, but
excludes deferred rents (straight lining), depreciation and financing
costs. NOI is not a measure of operating results or cash flows from
operating activities as measured by accounting principles generally
accepted in the United States of America, and is not necessarily
indicative of cash available to fund cash needs and should not be
considered an alternative to cash flows as a measure of liquidity.
Real estate rental revenue, operating expenses, NOI and recurring capital
improvements for the reportable segments are summarized below and
reconciled to consolidated net income for the three months ended January
31, 2004 and 2003. Asset information is not reported since FREIT does not
use this measure to assess performance.
Three Months ended
January 31,
2004 2003
------- -------
(in thousands of dollars)
Real estate revenue:
Retail (a) $ 3,631 $ 3,038
Residential 1,647 1,612
------- -------
Total 5,278 4,650
------- -------
Real estate operating expenses:
Retail 1,064 978
Residential 713 717
------- -------
Total 1,777 1,695
------- -------
Net operating income:
Retail 2,567 2,060
Residential 934 895
------- -------
Total $ 3,501 $ 2,955
======= =======
Recurring capital improvements:
Residential $ 103 $ 104
======= =======
Reconciliation to consolidated
net income:
Segment NOI - per above $ 3,501 $ 2,955
Deferred rents - straight lining 67 48
Net investment income 45 53
Equity in income of affiliates 60 81
General and administrative expenses (182) (92)
Depreciation (609) (532)
Financing costs (1,324) (1,194)
Minority interest (55) (49)
------- -------
Net income $ 1,503 $ 1,270
======= =======
Page 11
(a) A Tenant ("Tenant") in FREIT's Westridge Square shopping center and FREIT
have entered into a lease termination agreement whereby Tenant will pay
FREIT a lump sum payment of approximately $1.8 million ($750,000 as a rent
termination payment for past and future rent payments and $1,035,000 for
repairing and refurbishing space vacated by Tenant in February 2003 to
terminate the lease. The mortgage lender has agreed to the termination
agreement and has entered into an escrow agreement with FREIT whereby the
entire lump sum payment made by the Tenant shall be deposited in an
interest bearing escrow account held for the benefit of the mortgage
lender (Tenant made payment in February 2004). 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. Approximately $300,000, representing
the difference between the $750,000 rent termination payment and rents
already accrued, is included in revenues for the first quarter of fiscal
2004.
Note 6 - Subsequent Events:
a) FREIT, through a subsidiary, has entered into a contract to
purchase an apartment community in Northern New Jersey.
FREIT is currently conducting inspections as part of its due diligence
review. If the findings of the due diligence review are satisfactory to
FREIT, the acquisition is expected to close on or about March 31, 2004.
The acquisition price will be approximately $45 million that will be
financed in part by a mortgage and in part by cash.
b) On February 24, 2004, in accordance with FREIT's Equity Incentive Plan,
options to purchase 56,000 of FREIT's shares of beneficial interests were
exercised at the option price of $15 per share.
c) On March 4, 2004, FREIT's Board of Trustees declared a share split in
the form of a share dividend. Each shareholder will be issued one
additional share for each share held. The additional shares will be issued
on March 31, 2004 to shareholders of record on March 17, 2004.
The pro forma impact on FREIT's basic and diluted earnings per share for the
three months ended January 31, 2004 and 2003, had the share dividend been
effective January 31, 2004 is as follows:
Three Months Ended
January 31
2004 2003
---- ----
Earnings per share:
Basic $.24 $.20
--- ---
Diluted $.23 $.19
--- ---
Weighted average shares outstanding:
Basic 6,312,000 6,240,000
Diluted 6,518,000 6,550,000
* *
Page 12
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
--------------------------------------------------------------------------
Cautionary Statement Identifying Important Factors That Could Cause
FREIT's Actual Results to Differ From Those Projected in Forward
Looking Statements.
Readers of this discussion are advised that the discussion should be read
in conjunction with the unaudited condensed consolidated financial
statements of FREIT (including related notes thereto) appearing elsewhere
in this Form 10-Q, and the consolidated financial statements included in
FREIT's most recently filed Form 10-K. Certain statements in this
discussion may constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements reflect FREIT's current expectations regarding future results
of operations, economic performance, financial condition and achievements
of FREIT, and do not relate strictly to historical or current facts. FREIT
has tried, wherever possible, to identify these forward-looking statements
by using words such as "believe," "expect," "anticipate," "intend, "
"plan," " estimate," or words of similar meaning.
Although FREIT believes that the expectations reflected in such
forward-looking statements are based on reasonable assumptions, such
statements are subject to risks and uncertainties, which may cause the
actual results to differ materially from those projected. Such factors
include, but are not limited to, the following: general economic and
business conditions, which will, among other things, affect demand for
rental space, the availability of prospective tenants, lease rents and the
availability of financing; adverse changes in FREIT's real estate markets,
including, among other things, competition with other real estate owners,
risks of real estate development and acquisitions; governmental actions
and initiatives; and environmental/safety requirements.
--------------------------------------------------------------------------
Overview
FREIT is an equity real estate investment trust ("REIT") that owns a portfolio
of residential apartment and retail properties. Our revenues consist primarily
of fixed rental income and additional rent in the form of expense reimbursements
derived from our income producing retail properties. We also receive income from
our 40% owned affiliates, Westwood Hills, LLC ("Westwood Hills") that owns a
residential apartment property and Wayne PSC, L.L.C. ("WaynePCS") that owns the
Preakness shopping center. Our policy has been to acquire real property for
long-term investment.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
The Securities and Exchange Commission ("SEC") issued disclosure guidance for
"Critical Accounting Policies." The SEC defines Critical Accounting Policies as
those that require the application of Management's most difficult, subjective,
or complex judgments, often because of the need to make estimates about the
effect of matters that are inherently uncertain and may change in subsequent
periods.
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, the preparation of which
takes into account estimates based on judgments and assumptions that affect
certain amounts and disclosures. Accordingly, actual results could differ from
these estimates. The accounting policies and estimates used and outlined in Note
1 to our Consolidated Financial Statements included in our annual report on Form
10-K, have been applied consistently as at January 31, 2004, and for the three
Page 13
months ended January 31, 2004 and 2003. 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.
All references to per share amounts are on a diluted basis unless otherwise
indicated.
Results of Operations:
Quarters Ended January 31, 2004 and 2003
Revenue for the quarter ended January 31, 2004 ("Current Quarter") increased
$618,000 (12.8%) to $5,450,000 from $4,832,000 for the quarter ended January 31,
2003 ("Prior Year's Quarter"). Net income increased $233,000 (18.3%) to
$1,503,000 for the Current Quarter compared to $1,270,000 for the Prior Year's
Quarter. The Current Quarter's revenue and net income increase is principally
from real estate operations, which includes a one-time item of $308,000
representing the gain from a lease termination payment made by a former tenant
of FREIT (see discussion below).
The consolidated results of operations for the three months ended January 31,
2004 are not necessarily indicative of the results to be expected for the full
year.
SEGMENT INFORMATION
The following table sets forth comparative operating data for FREIT's real
estate segments:
Page 14
Retail Residential Combined
--------------------------------------- ------------------------------------------ -------------------
Three Months Ended Three Months Ended Three Months Ended
January 31, Increase (Decrease) January 31, Increase (Decrease) January 31,
--------------------------------------- ------------------------------------------ -------------------
2004 2003 $ % 2004 2003 $ % 2004 2003
(in thousands) (in thousands) (in thousands)
------------------------------- ------------------------------- -------------------
Rental income $2,957 $2,308 $649 28.1% $1,638 $1,596 $ 42 2.6% $ 4,595 $ 3,904
Percentage rents 25 27 (2) -7.4% 25 27
Reimbursements 640 691 (51) -7.4% 640 691
Other 9 12 (3) -25.0% 9 16 (7) -43.8% 18 28
--------------------------------------- ------------------------------------------ -------------------
Total revenue 3,631 3,038 593 19.5% 1,647 1,612 35 2.2% 5,278 4,650
Operating
expenses 1,064 978 86 8.8% 713 717 (4) -0.6% 1,777 1,695
--------------------------------------- ------------------------------------------ -------------------
Net operating
income $2,567 $2,060 $507 24.6% $ 934 $ 895 $ 39 4.4% 3,501 2,955
======================================= ==========================================
Average
Occupancy % 92.4% 93.0% 0.6% 94.5% 96.0% 1.6%
====== ====== ===== ====== ====== =====
Reconciliation to consolidated net income:
Deferred rents - straight lining 67 48
Net investment income 45 53
Equity in income of affiliates 60 81
General and administrative expenses (182) (92)
Depreciation (609) (532)
Financing costs (1,324) (1,194)
Minority interest (55) (49)
-------------------
Net Income $ 1,503 $ 1,270
===================
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
FREIT's retail properties consist of seven (7) properties totaling approximately
826,000 sq. ft (including the Damascus shopping center, Damascus. MD, acquired
July 31, 2003). Six are multi-tenanted retail centers and one is a single
tenanted store.
As indicated in the above table, revenues from our retail segment are up by
$593,000 (19.5%) and Net Operating Income ("NOI") is up $507,000 (24.6%) to
$2,567,000. Revenue and NOI for the Current Quarter include the following items
not included during the Prior Year's Quarter:
Page 15
a) Revenues and NOI from the Damascus Shopping Center (acquired July
31, 2003) of $263,000 and $199,000, respectively, and
b) Revenues and NOI includes a one-time item of $308,000 representing
the gain on a lease termination payment made by a former tenant at
FREIT's Westridge Square shopping center (see below)
FREIT and a former tenant ("Tenant") entered into a lease termination
agreement whereby Tenant will pay FREIT a lump sum payment of
approximately $1.8 million ($750,000 as a rent termination payment for
past and future rent payments and $1,035,000 for repairing and
refurbishing space vacated by Tenant during February 2003) to terminate
the lease. (Tenant made the payment in February 2004.) The mortgage lender
has agreed to the termination agreement and has entered into an escrow
agreement with FREIT whereby the entire lump sum payment made by the
Tenant shall 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. The
former tenant's total rent and expense reimbursements aggregated
approximately $488,000 per year.
Revenues and NOI from same properties (those properties included in the Current
Quarter and the Prior Year's Quarter) are slightly ahead for the Current
Quarter over the Prior Year's Quarter. Operating expenses for the same
properties increased 2.2% during the Current Quarter compared to the Prior
Year's Quarter.
RESIDENTIAL SEGMENT
FREIT operates seven (7) multi-family apartment communities totaling 507
apartment units. The NOI of our residential properties is summarized in the
above table.
Residential revenue for the Current Quarter increased 2.2% to $1,647,000 from
$1,612,000 for the Prior Year's Quarter. NOI for the Current Quarter increased
4.4% to $934,000 form $895,000 for the Prior Year's Quarter.
Higher monthly rents were the principal reason for the increase. Revenue is
principally composed of monthly apartment rental income. Total apartment rental
income is a factor of occupancy and monthly apartment rents. For instance, at
rental rates and occupancy levels at January 31, 2004, a 1% increase or decrease
in average occupancy will cause an annual $67,000 increase or reduction in
revenues, while a 1% increase or decrease in rental rates will cause an annual
$63,400 increase or decrease in annual revenues.
Average occupancy for the Current Quarter was 94.5% compared to 96% for the
Prior Year's Quarter.
EQUITY IN INCOME OF AFFILIATES
FREIT's share of net income of its affiliates fell to $60,000 for the Current
Quarter from $81,000 for the Prior Year's Quarter. While the NOI of both
affiliates increased for the Current Quarter over the Prior Year's Quarter,
higher interest costs due to last fiscal year's financings and higher
depreciation costs reduced net income.
Page 16
FINANCING COSTS
Financing costs are summarized as follows:
========================================================
Quarter Ended
--------------------
January 31,
2004 2003
------ ------
($000)
Fixed rate mortgages:
1st Mortgages
Existing $1,061 $1,087
New (Damascus) 58
2nd Mortgages 96
Floating rate mortgage 90 96
Other 19 11
--------------------------------------------------------
Total $1,324 $1,194
========================================================
Financing Costs for the Current Quarter increased by $130,000 over the Prior
Year's Quarter. The increase is principally attributable to the Damascus
mortgage and the 2nd mortgages placed on FREIT properties during the later part
of the 2003 fiscal year. The increased costs from the above mortgages was
partially offset by reduced interest costs resulting from lower mortgage
balances from existing mortgage loans resulting from normal loan amortization.
GENERAL AND ADMINISTRATIVE EXPENSES
Our G & A expenses increased to $182,000 for the Current Quarter from $92,000
for the Prior Year's Quarter. Higher office expenses and higher executive
officer retainers accounted for the bulk of the increases.
LIQUIDITY AND CAPITAL RESOURCES
Our financial condition remains strong. Net Cash Provided By Operating
Activities was $1.6 million for the Current Quarter compared to $1.8 for the
Prior Year's Quarter. 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 January 31, 2004, we had cash and cash equivalents totaling $11.6 million
compared to $12.9 million at October 31, 2003.
As previously reported, we are planning the construction of 129 apartment rental
units in Rockaway, NJ. The total capital required for this project is estimated
at $13.8 million. We expect to finance these costs, in part, from construction
and mortgage financing and, in part, from funds available in our institutional
money market investment.
FREIT, through an affiliate, has entered into a contract to purchase an
apartment community in Northern New Jersey. FREIT is currently conducting
inspections as part of its due diligence review. If the findings of the due
diligence review are satisfactory to FREIT, the acquisition is expected to close
on or about March 31, 2004. The acquisition price will be approximately $45
million that will be financed in part by a mortgage and in part by cash.
Page 17
At January 31, 2004 FREIT's aggregate outstanding mortgage debt was $76.5
million. Approximately $57.3 million bears a fixed weighted average interest
rate of 7.512%, and an average life of approximately 9 years. Approximately
$10.9 million of mortgage debt bears an interest rate equal to 175 basis points
over LIBOR and resets at our option every 30, 60 or 90 days. This mortgage note
is due at the end of March 2006. The fixed rate mortgages are subject to
amortization schedules that are longer than the term of the mortgages. As such,
balloon payments for all mortgage debt will be required as follows:
Fiscal Year $ Millions
----------- ----------
2007 $15.7
2008 $16.8
2010 $ 9.2
2013 $ 8.0
2014 $ 9.4
The following table shows the estimated fair value and carrying value of our
long-term debt at January 31, 2004 and October 31, 2003:
January 31, October 31,
(In Millions) 2004 2003
---- ----
Fair Value $81.4 $80.8
Carrying Value $76.5 $76.9
Fair values are estimated based on market interest rates at January 31, 2004 and
October 31, 2003 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 $3.2 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
approximately $109,000.
We believe that the values of our properties will be adequate to command
re-financing proceeds equal to, or higher than the mortgage debt to be
re-financed. We continually review our debt levels to determine if additional
debt can prudentially be utilized for property acquisition additions to our real
estate portfolio that will increase income and cash flow to shareholders.
FREIT also has the ability to draw, if needed, against its $14 million, two-year
revolving line of credit. To date, no draws have been made against this credit
line.
INFLATION
Inflation can impact the financial performance of FREIT in various ways. Our
retail tenant leases normally provide that the tenants bear all or a portion of
most operating expenses, which can reduce the impact of inflationary increases
on FREIT. Apartment leases are normally for a one-year term, which may allow us
to seek increased rents as leases renew or when new tenants are obtained.
Page 18
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Liquidity and Capital Resources" above.
Item 4: Controls and Procedures
As at the end of the period covered by this quarterly report on Form 10-Q, we
carried out an evaluation of the effectiveness of the design and operation of
FREIT's disclosure controls and procedures. This evaluation was carried out
under the supervision and with participation of FREIT's management, including
FREIT's Chairman and Chief Executive Officer and Chief Financial Officer, who
concluded that FREIT's disclosure controls and procedures are effective. There
has been no change in FREIT's internal control over financial reporting that
occurred during FREIT's last fiscal quarter that has materially affected, or is
reasonably likely to material effect, FREIT's internal control over financial
reporting.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in FREIT's reports
filed or submitted under the Exchange Act is recorded, processed, summarized,
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
FREIT's reports filed under the Exchange Act is accumulated and communicated to
management, including FREIT's Chief Executive Officer and Chief Financial
Officer as appropriate, to allow timely decisions regarding required disclosure.
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
During the first quarter ended January 31, 2004, the following reports on
Form 8-K were filed with the SEC:
On December 9, 2003, FREIT filed a report on Form 8-K announcing its
operating results for the year and three months quarter ended October 31,
2003. A copy of the press release was attached.
Exhibit Index
Exhibit 31.1 Section 302 Certification of Chief Executive Officer
Exhibit 31.2 Section 302 Certification of Chief Financial Officer
Exhibit 32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350
Exhibit 32.1 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350
Page 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST REAL ESTATE INVESTMENT
TRUST OF NEW JERSEY
----------------------------
(Registrant)
Date: March __, 2004
/s/ Robert S. Hekemian
--------------------------
(Signature)
Robert S. Hekemian.
Chairman of the Board and Chief Executive
Officer
/s/ Donald W. Barney
--------------------------
(Signature)
Donald W. Barney
President, Treasurer and Chief Financial
Officer (Principal Financial/Accounting
Officer)