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 the Quarterly period ended April 30, 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 June 21, 2004, there were 6,423,152 shares of beneficial interest issued
and outstanding.
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY
INDEX
Part I: Financial Information
Item 1: Unaudited Condensed Consolidated Financial Statements
a.) Condensed Consolidated Balance Sheets as at April 30, 2004 and
October 31, 2003;
b.) Condensed Consolidated Statements of Income, Comprehensive
Income and Undistributed Earnings for the Six and Three Months
Ended April 30, 2004 and 2003;
c.) Condensed Consolidated Statements of Cash Flows for the Six
Months Ended April 30, 2004 and 2003;
d.) Notes to Condensed Consolidated Financial Statements.
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 3: Quantitative and Qualitative Disclosures About Market Risk.
Item 4: Controls and Procedures.
Part II: Other Information
Item 4: Submission of Matters to a Vote of Security Holders.
Item 6: Exhibits and Reports on Form 8-K.
Item 1: Financial Statements
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30, October 31,
2004 2003
---- ----
(Unaudited) (See Note 1)
----------- ------------
(In Thousands of Dollars)
-------------------------
ASSETS
Real estate, at cost, net of accumulated
depreciation $ 161,049 $ 116,290
Real estate held for sale 14,238 14,426
Cash and cash equivalents 4,754 14,437
Tenants' security accounts 1,319 1,332
Sundry receivables 4,334 4,326
Prepaid expenses and other assets 3,455 2,183
Deferred charges, net 2,963 2,770
--------- ---------
Totals $ 192,112 $ 155,764
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgages payable $ 144,621 $ 115,895
Mortgage applicable to real estate held for sale 10,782 10,872
Notes payable 8,200
Accounts payable and accrued expenses 1,307 1,604
Dividends payable 1,285 2,367
Tenants' security deposits 1,798 1,804
Deferred revenue 78 241
Interest rate swap contract 128 201
--------- ---------
Total liabilities 168,199 132,984
--------- ---------
Minority interest 564 640
--------- ---------
Commitments and contingencies
Shareholders' equity:
Shares of beneficial interest without par value:
8,000,000 shares authorized;
6,423,152 and 6,311,152 shares issued
and outstanding 20,694 19,854
Undistributed earnings 2,783 2,487
Accumulated other comprehensive loss (128) (201)
--------- ---------
Total shareholders' equity 23,349 22,140
--------- ---------
Totals $ 192,112 $ 155,764
========= =========
See Notes to Consolidated Financial Statements
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME AND
UNDISTRIBUTED EARNINGS
SIX AND THREE MONTHS ENDED APRIL 30, 2004 AND 2003
Six Months Ended Three Months Ended
---------------------- ----------------------
April 30, April 30,
---------------------- ----------------------
2004 2003 2004 2003
(In Thousands Of Dollars, Except Per Share Amounts)
INCOME
Revenue:
Rental income $ 11,837 $ 10,316 $ 5,892 S 5,271
Reimbursements 2,067 1,871 1,175 959
Sundry income 65 80 28 42
---------------------- ----------------------
Totals 13,969 12,267 7,095 6,272
---------------------- ----------------------
Expenses:
Operating expenses 3,014 2,723 1,580 1,464
Management fees 553 512 289 260
Real estate taxes 2,028 1,736 1,022 839
Depreciation 1,580 1,243 814 622
Minority interest 222 332 132 211
---------------------- ----------------------
Totals 7,397 6,546 3,837 3,396
---------------------- ----------------------
Operating income 6,572 5,721 3,258 2,876
Investment income 89 101 41 43
Interest expense including amortization
of deferred financing costs (4,132) (3,552) (2,107) (1,771)
---------------------- ----------------------
Income from continuing operations 2,529 2,270 1,192 1,148
Discontinued operations 336 396 171 248
---------------------- ----------------------
Net income $ 2,865 $ 2,666 $ 1,363 $ 1,396
====================== ======================
Basic earnings per share:
Continuing operations $ 0.40 $ 0.37 $ 0.19 $ 0.18
Discontinued operations 0.05 0.06 0.02 0.04
---------------------- ----------------------
Net income $ 0.45 $ 0.43 $ 0.21 $ 0.22
====================== ======================
Diluted earnings per share:
Continuing operations $ 0.38 $ 0.35 $ 0.17 $ 0.17
Discontinued operations 0.05 0.06 0.03 0.04
---------------------- ----------------------
Net income $ 0.43 $ 0.41 $ 0.20 $ 0.21
====================== ======================
Weighted average shares outstanding:
Basic 6,348 6,239 6,367 6,239
Diluted 6,732 6,553 6,943 6,569
COMPREHENSIVE INCOME
Net Income $ 2,865 $ 2,666 $ 1,363 $ 1,396
Other comprehensive income (loss):
Unrealized gain (loss) on interest
rate swap contract 73 (308) 102 (72)
---------------------- ----------------------
Comprehensive income $ 2,938 $ 2,358 $ 1,465 $ 1,324
====================== ======================
UNDISTRIBUTED EARNINGS
Balance, beginning of period $ 2,487 $ 2,589 $ 2,705 $ 2,767
Net income 2,865 2,666 1,363 1,396
Less dividends (2,569) (2,183) (1,285) (1,091)
---------------------- ----------------------
Balance, end of period $ 2,783 $ 3,072 $ 2,783 $ 3,072
====================== ======================
Dividends per share $ 0.40 $ 0.35 $ 0.20 $ 0.18
====================== ======================
See Notes to Consolidated Financial Statements.
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 2004 AND 2003
2004 2003
---- ----
(In Thousands of Dollars)
Operating activities:
Net income $ 2,865 $ 2,666
Adjustments to reconcile net income to net cash provided by
operating activities (including discontinued operations):
Depreciation 1,768 1,431
Amortization 190 171
Deferred revenue (163) (171)
Minority interest 334 464
Changes in operating assets and liabilities:
Tenants' security accounts 13 (16)
Sundry receivables, prepaid expenses and other assets (1,663) (2,219)
Accounts payable and accrued expenses (297) 70
Tenants' security deposits (6) 93
-------- --------
Net cash provided by operating activities 3,041 2,489
-------- --------
Investing activities:
Capital expenditures (753) (344)
Acquisition of real estate (16,003)(a) (6,782)(b)
-------- --------
Net cash used by investing activities (16,756) (7,126)
-------- --------
Financing activities:
Repayment of mortgages (947) (870)
Proceeds from notes and mortgage financing 8,200 3,400
Proceeds from exercise of stock options 840
Dividends paid (3,651) (3,181)
Contributions by minority interest 5,400
Distribution to minority interest (410) (2,155)
-------- --------
Net cash provided by financing activities 4,032 2,594
-------- --------
Net decrease in cash and cash equivalents (9,683) (2,043)
Cash and cash equivalents, beginning of period 14,437 15,634
-------- --------
Cash and cash equivalents, end of period $ 4,754 $ 13,591
======== ========
Supplemental disclosure of cash flow data:
Interest paid $ 4,209 $ 3,641
======== ========
Income taxes paid $ 15 $ 9
======== ========
Dividends declared but not paid $ 1,285 $ 1,092
======== ========
(a) In April 2004, S And A Commercial Associates LP, a 75% owned subsidiary of
FREIT, completed the acquisition of a 269 unit high rise apartment
building in Hackensack, NJ for approximately $45,586,000, in part with the
proceeds of a $29,583,000 mortgage.
(b) In November 2002, Wayne PSC, LLC, a 40% owned subsidiary of FREIT,
completed the acquisition of a 323,000 sq. ft. shopping center in Wayne,
NJ, for approximately $33,282,000, in part with the proceeds of a
$26,500,000 mortgage.
See Notes to Consolidated Financial Statements.
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of presentation:
The accompanying condensed consolidated financial statements have been
prepared without audit, in accordance with accounting principles generally
accepted in the United States of America for interim financial statements
and pursuant to the rules of the Securities and Exchange Commission.
Accordingly, certain information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements have been omitted. It is the opinion of management
that all adjustments considered necessary for a fair presentation have
been included, and that all such adjustments are of a normal recurring
nature.
The consolidated results of operations for the six and three months ended
April 30, 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.
Effects of recent accounting pronouncements:
In December 2003, the FASB issued revised FIN 46, "Consolidation of
Variable interest Entities, an interpretation of Accounting Research
Bulletin No. 51." ("FIN 46R"). FIN 46R requires the consolidation of an
entity in which an enterprise absorbs a majority of the entity's expected
losses, receives a majority of the entity's expected residual returns, or
both, as a result of ownership, contractual or other financial interests
in the entity (variable interest entities, or "VIEs"). Currently, entities
are generally consolidated by an enterprise when it has a controlling
financial interest through ownership or a majority voting interest in the
entity. FIN 46R is applicable for financial statements of public entities
that have interests in VIEs or potential VIEs referred to as
special-purpose entities for periods ending after December 15, 2003.
Applications by public entities for all other types of entities is
required in financial statements for periods ending after March 15, 2004.
In accordance with the definition of related parties as defined in
paragraph 16 of FIN 46R and the guidance in paragraph 4h, it is the belief
of the management of FREIT that FIN 46R is applicable to Westwood Hills,
LLC and Wayne PSC, LLC, both 40% owned by FREIT. Because of this
determination, FREIT has consolidated these two entities in addition to
its 75% owned subsidiary, S And A Commercial Associates Limited
Partnership ("SandA") and its wholly-owned subsidiary, Damascus Centre,
LLC, commencing with the quarter ended April 30, 2004, and has restated
it's Octobet 31, 2003 balance sheet and the prior periods reported in
this Form 10-Q. The consolidation of these two entities did not have any
impact on FREIT's equity, net income, or earnings per share.
Reclassification:
Certain accounts in the 2003 financial statements have been reclassified
to conform to the current presentation.
Note 2 - Earnings per share:
FREIT has presented "basic" and "diluted" earnings per share in the
accompanying statements of income in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, Earnings per Share
("SFAS 128"). Basic earnings per share is calculated by dividing net
income by the weighted average number of shares outstanding during each
period. The calculation of diluted earnings per share is similar to that
of basic earnings per share, except that the denominator is increased to
include the number of additional shares that would have been outstanding
if all potentially dilutive shares, such as those issuable upon the
exercise of stock options and warrants, were issued during the period.
In computing diluted earnings per share for each of the six and three
month periods ended April 30, 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. All shares and per share
amounts have been restated for the two-for-one stock split which became
effective March 31, 2004.
Six Months Ended Three Months Ended
April 30, April 30,
---------------------- ----------------------
2004 2003 2004 2003
---- ---- ---- ----
Basic weighted average
shares outstanding 6,348,485 6,239,152 6,367,152 6,239,152
Shares arising from assumed
exercise of stock options 383,853 314,148 575,779 329,730
Dilutive weighted average shares
--------- --------- --------- ---------
outstanding 6,732,338 6,553,300 6,942,931 6,568,882
========= ========= ========= =========
Basic and diluted earnings per share, based on the weighted average number
of shares outstanding during each period, are comprised of ordinary
income.
Note 3- Equity incentive plan:
All references to the amount of stock options granted, option price, fair
value, or shares exercised have been adjusted to reflect the March 31,
2004 two-for-one stock split. 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 920,000 of FREIT's
shares of beneficial interest may be granted to key personnel in the form
of stock options, restricted share awards and other share-based awards.
Upon ratification of the Plan on April 7,1999, FREIT issued 754,000 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 $7.50 per
share. During May 2003, options to purchase 72,000 shares at $7.50 per
share were exercised, and on February 24, 2004, options to purchase
112,000 shares were exercised at $7.50 per share. The remaining options
for 570,000 shares are all outstanding at April 30, 2004, and are
exercisable through September 2008.
In the opinion of management, if compensation costs 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 4- 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 residential segment contains nine 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 six and three months ended
April 30, 2004 and 2003. Asset information is not reported since FREIT
does not use this measure to assess performance.
Six Months Ended Three Months Ended
April 30, April 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands of dollars)
Real estate revenue:
Retail (a) $ 8,571 $ 7,265 $ 4,260 $ 3,756
Residential 5,243 4,865 2,754 2,447
-------- -------- -------- --------
Totals 13,814 12,130 7,014 6,203
-------- -------- -------- --------
Real estate operating expenses:
Retail 2,931 2,582 1,477 1,334
Residential 2,331 2,043 1,262 973
-------- -------- -------- --------
Totals 5,262 4,625 2,739 2,307
-------- -------- -------- --------
Net operating income:
Retail 5,640 4,683 2,783 2,422
Residential 2,912 2,822 1,492 1,474
-------- -------- -------- --------
Totals $ 8,552 $ 7,505 $ 4,275 $ 3,896
======== ======== ======== ========
Recurring capital improvements:
Residential $ 202 $ 197 $ 92 $ 80
======== ======== ======== ========
Reconciliation to consolidated
net income:
Segment NOI $ 8,552 $ 7,505 $ 4,275 $ 3,896
Deferred rents - straight-lining 155 138 80 68
Net investment income 89 101 41 43
General and administrative expenses (333) (347) (151) (255)
Depreciation (1,580) (1,243) (814) (622)
Discontinued operations 336 396 171 248
Financing costs (4,132) (3,552) (2,107) (1,771)
Minority interest (222) (332) (132) (211)
-------- -------- -------- --------
Net income $ 2,865 $ 2,666 $ 1,363 $ 1,396
======== ======== ======== ========
(a) A Tenant in FREIT's Westridge Square shopping center and FREIT have
entered into a lease termination agreement whereby Tenant paid 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) 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 has been 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 will be disbursed to FREIT 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 in $250,000 increments as comparable
amounts of TI's are incurred, or in full at the earlier of when a C of O
is obtained and the space vacated by the Tenant leased and re-occupied, or
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, was included in revenues for the first quarter
of fiscal 2004.
Note 5 - Acquisition and Discontinued Operations:
SAndA has entered into a contract for the sale of the Olney Town Center
("OTC") in Olney, Maryland. The sale price for the property is $28.2
million. The property was acquired in April 2000 for approximately $15.5
million. The purchaser has concluded it's due diligence review and is
expected to close on the purchase contract on June 22, 2004. S and A will
utilize part of the selling price to repay the approximate $11 million
first mortgage on the property. The operations of the Olney Town Center
are being classified as Discontinued Operations. For financial statement
proposes SAndA will recognize a gain of approximately $13 million when the
sale closes.
On April 16, 2004, SAndA closed on the purchase of The Pierre apartments.
The Pierre is a 269-unit luxury high-rise apartment building located in
Hackensack, N.J. The contract purchase price for The Pierre was
approximately $44 million. This amount, together with estimated
transaction costs of approximately $2 million, resulted in total
acquisition costs of approximately $46 million. The acquisition costs were
financed in part by a mortgage loan in the approximate amount of $29.6
million and the balance of approximately $16.4 million in cash. FREIT
provided 75% of the cash required with the balance of approximately $4.2
million provided, in the form of a note, by the 25% minority owners of
SAndA.
The net proceeds from the OTC sale after the repayment of the first
mortgage are expected to repay FREIT and the 25% minority owners for their
advances made to acquire The Pierre.
If the sale of OTC is completed, SAndA intends to structure the sale of
OTC and the purchase of The Pierre in a manor that would qualify as a like
kind exchange of real estate pursuant to Section 1031 of the Internal
Revenue Code, and result in a deferral for income tax purposes of the
realization of gain on the sale of OTC.
The following Unaudited pro forma information shows the results of
operations for six and three months ended April 30, 2004 and 2003 for
FREIT and Subsidiaries as though The Pierre had been acquired at the
beginning of fiscal 2003:
Six Months Ended Three Months Ended
April 30, April 30,
2004 2003 2004 2003
---- ---- ---- ----
(In Thousands of Dollars, Except Per Share Amounts)
Revenues $ 16,268 $ 14,788 $ 8,066 $ 7,535
Net expenses 13,384 12,234 6,637 6,212
-------------------- -------------------
Income (loss) before minority interest 2,884 2,554 1,429 1,323
Minority interest (266) (320) (191) (202)
-------------------- -------------------
Net income from continuing operations $ 2,618 $ 2,234 $ 1,238 $ 1,121
==================== ====================
Earnings Per Share:
Basic $ 0.41 $ 0.36 $ 0.19 $ 0.18
Diluted $ 0.39 $ 0.34 $ 0.18 $ 0.17
The Unaudited pro forma results include adjustments for depreciation based on
the purchase price and increased interest expense based on the mortgage placed
on the property at the acquisition date.
The Unaudited pro forma 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 2003 or of future results of
operations of FREIT's combined properties.
The acquisition price for The Pierre, including closing costs, was approximately
$45,852,000. Based on estimated values in the area, the acquisition costs have
been preliminarily allocated 70% to the building ($32,096,000) and 30% to the
underlying land ($13,756,000).
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
- --------------------------------------------------------------------------------
Cautionary Statement Identifying Important Factors That Could Cause FREIT's
Actual Results to Differ From Those Projected in
Forward Looking Statements.
Readers of this discussion are advised that the discussion should be read in
conjunction with the 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 affiliate, Westwood Hills, LLC ("Westwood Hills") that owns a
residential apartment property. Starting in fiscal 2003, we also receive income
from our 40% owned affiliate Wayne PSC, L.L.C. ("WaynePCS") that owns the
Preakness shopping center. Our policy has been to acquire real property for
long-term investment.
Effects of recent accounting pronouncements:
In December 2003, the FASB issued revised FIN 46, "Consolidation of Variable
interest Entities, an interpretation of Accounting Research Bulletin No. 51."
("FIN 46R"). FIN 46R requires the consolidation of an entity in which an
enterprise absorbs a majority of the entity's expected losses, receives a
majority of the entity's expected residual returns, or both, as a result of
ownership, contractual or other financial interests in the entity (variable
interest entities, or "VIEs"). Currently, entities are generally consolidated by
an enterprise when it has a controlling financial interest through ownership or
a majority voting interest in the entity. FIN 46R is applicable for financial
statements of public entities that have interests in VIEs or potential VIEs
referred to as special-purpose entities for periods ending after December 31,
2003. Applications by public entities for all other types of entities is
required in financial statements for periods ending after March 15, 2004.
In accordance with the definition of related parties as defined in paragraph 16
of FIN 46R and the guidance in paragraph 4h, it is the belief of the management
of FREIT that FIN 46R is applicable to Westwood Hills, LLC and Wayne PSC, LLC,
both 40% owned by FREIT. Because of this determination, FREIT has consolidated
these two entities in addition to its 75% owned subsidiary, S And A Commercial
Associates Limited Partnership ("SAndA") and its wholly-owned subsidiary,
Damascus Centre, LLC, commencing with the quarter ended April 30, 2004, and has
restated its October 31, 2003 balance sheet and the prior periods reported in
this Form 10-Q. The consolidation of these two entities did not have any impact
on FREIT's equity, net income, or earnings per share.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
The Securities and Exchange Commission ("SEC") recently issued disclosure
guidance for "Critical Accounting Policies." The SEC defines Critical Accounting
Policies as those that require the application of management's most difficult,
subjective, or complex judgments, often because of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods.
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, the preparation of which
takes into account estimates based on judgments and assumptions that affect
certain amounts and disclosures. Accordingly, actual results could differ from
these estimates. The accounting policies and estimates used and outlined in Note
1 to our Consolidated Financial Statements included in our annual report on Form
10-K, for the year ended October 31, 2003, have been applied consistently as at
April 30, 2004 and October 31, 2003, and for the six and three months ended
April 30, 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.
Real Estate: Real estate is carried at cost, net of accumulated depreciation. As
at April 30, 2004 FREIT's carrying amount of its real estate, net of
depreciation is $175.2 million. Maintenance and repairs are charged to
operations as incurred. Depreciation requires an estimate by management of the
useful life of each property and improvement as well as an allocation of the
costs associated with a property to its various components. If FREIT does not
allocate these costs appropriately or incorrectly estimates the useful lives of
its real estate depreciation expense may be misstated.
When we acquire real estate assets, we assess the fair value of the acquired
assets (in accordance with Statements of Financial Accounting Standards ("SFAS")
No. 141 and 142) and allocate the purchase price to the asset's components -
land, building, leases, etc. - based on these assessments. FREIT assesses fair
value based on estimated cash flow projections that utilize appropriate discount
and capitalization rates and available market information. Initial valuation
assessments are subject to change until such information is finalized no later
than six months from the acquisition date.
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 June 22, 2004 FREIT is expected to close on the sale of
its Olney Town Center ("OTC") property in Olney, Maryland. Accordingly, FREIT
has reclassified the net income from the operations of the property as
Discontinued Operations for all periods presented. The adoption of SFAS No. 144
did not have an impact on net income; but only impacted the presentation of this
property within the consolidated statements of income.
We feel that income form continuing operations (which excludes the operations of
OTC) is the most significant element of net income. Accordingly, all references
and comparisons refer to income from continuing operations unless otherwise
stated.
All references to per share amounts are on a diluted basis unless otherwise
indicated and have been restated for the March 31, 2004 two-for-one stock split.
Results of Operations:
Six and Three Months Ended April 30, 2004 and 2003
Revenue for the six months ended April 30, 2004 ("Current Six Months") increased
13.9% to $13,969,000 compared to $12,267,000 for the six months ended April 30,
2003 ("Prior Year's Six Months"). Revenue for the quarter ended April 30, 2004
("Current Quarter") increased 13.1% to $7,095,000 compared to $6,272,000 for the
quarter ended April 30, 2003 ("Prior Year's Quarter").
Income from continuing operations increased 11.4% to $2,529,000 during the
Current Six Months compared to $2,270,000 for the Prior Year's Six Months.
Income from continuing operations for the Current Quarter increased to
$1,192,000 compared to $ 1,148,000 for the Prior Year's Quarter. The Current Six
Months revenue and net income include a one-time item of $308,000 representing a
gain from a lease termination payment made by a former tenant of FREIT (see
discussion below).
The consolidated results of operations for the six and three months ended April
30, 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 from continuing operations:
Six Months Ended Three Months Ended
April 30, April 30,
--------------------------------- --------------------------------
Increase Increase
2004 2003 (Decrease) 2004 2003 (Decrease)
---- ---- ---------- ---- ---- ----------
(in thousands of dollars)
-------------------------
Retail Properties:
Rental income:
Same properties $ 8,067 $ 7,265 $ 802 $ 4,011 $ 3,756 $ 255
New properties 504 504 249 249
-------------------------------- -------------------------------
Total revenues 8,571 7,265 1,306 4,260 3,756 504
-------------------------------- -------------------------------
Operating expenses:
Same properties 2,736 2,582 154 1,346 1,334 12
New properties 195 195 131 131
-------------------------------- -------------------------------
Total expenses 2,931 2,582 349 1,477 1,334 143
-------------------------------- -------------------------------
Net operating income:
Same properties 5,331 4,683 648 2,665 2,422 243
New properties 309 -- 309 118 -- 118
-------------------------------- -------------------------------
Total Retail NOI $ 5,640 $ 4,683 $ 957 $ 2,783 $ 2,422 $ 361
================================ ===============================
Residential properties:
Rental income:
Same properties $ 4,963 4,865 98 2,474 2,447 27
New properties 280 280 280 280
-------------------------------- -------------------------------
Total revenues 5,243 4,865 378 2,754 2,447 307
-------------------------------- -------------------------------
Operating expenses:
Same properties 2,212 2,043 169 1,143 973 170
New properties 119 119 119 119
-------------------------------- -------------------------------
Total expenses 2,331 2,043 288 1,262 973 289
-------------------------------- -------------------------------
Net operating income:
Same properties 2,751 2,822 (71) 1,331 1,474 (143)
New properties 161 -- 161 161 -- 161
-------------------------------- -------------------------------
Total Residential NOI $ 2,912 $ 2,822 $ 90 $ 1,492 $ 1,474 $ 18
================================ ===============================
Combined real estate NOI $ 8,552 $ 7,505 $ 4,275 $ 3,896
Reconciliation to
consolidated net income:
Deferred rents 155 138 80 68
Net investment income 89 101 41 43
Administrative expenses (333) (347) (151) (255)
Depreciation (1,580) (1,243) (814) (622)
Discontinued operations 336 396 171 248
Financing costs (4,132) (3,552) (2,107) (1,771)
Minority interests (222) (332) (132) (211)
------------------- -------------------
Net income $ 2,865 $ 2,666 $ 1,363 $ 1,396
=================== ===================
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 for continuing operations consist of seven (7)
properties totaling approximately 1,050,000 sq. ft. Six are multi-tenanted
retail centers and one is a single tenanted store.
As indicated in the above table, revenues from our retail segment for the
Current Six Months are up by $1,306,000 (18%) and NOI is up $957,000 (20.4%) to
$5,640,000. Revenue and net operating income includes a one-time item of
$308,000 representing the gain from a lease termination payment made by a former
tenant located at FREIT's Westridge Square shopping center. FREIT and the tenant
entered into a lease termination agreement whereby Tenant paid 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). The 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 has been deposited in an interest bearing escrow account held for the
benefit of the
mortgage lender. Up to $750,000 will be disbursed to FREIT in monthly
installments of $31,595 over approximately twenty four (24) months, or the
balance of the un-disbursed $750,000 will be disbursed to FREIT 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 in $250,000 increments as comparable amounts
of TI's are incurred, or in full at the earlier of when a C of O is obtained and
the space vacated by the Tenant leased and re-occupied, 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
Six Months and the Prior Year's Six Months), excluding the one-time lease
termination income, were up 6.8% and 7.3% respectively for the Current Six
Months over the Prior Year's Six Months. Operating expenses for the same
properties increased 6% during the Current Six Months compared to the Prior
Year's Six Months.
ASSET SALE:
SAndA has entered into a contract for the sale of the Olney Town Center ("OTC")
in Olney, Maryland. The sale price for the property is $28.2 million. The
property was acquired in April 2000 for approximately $15.5 million. The
purchaser has concluded its due diligence review and is expected to close on the
purchase contract on June 22, 2004. SAndA will recognize a gain of approximately
$13 million from the sale. SAndA will utilize part of the selling price to repay
the approximate $11 million first mortgage on the property. The operations of
OTC are being classified as Discontinued Operations.
The net proceeds from the OTC sale after the repayment of the first mortgage are
expected to repay FREIT and the 25% minority owners for their advances made to
acquire The Pierre. (See below).
RESIDENTIAL SEGMENT
FREIT operates nine (9) multi-family apartment communities totaling 986
apartment units. The NOI of our residential properties is summarized in the
above table.
On April 16, 2004, SAndA closed on the purchase of The Pierre apartments. The
Pierre is a 269-unit high-rise apartment building located in Hackensack, N.J.
The contract purchase price for The Pierre was approximately $44 million. This
amount, together with estimated transaction costs of approximately $2 million,
resulted in total acquisition costs of approximately $46.0 million. The
acquisition costs were financed in part by a mortgage loan in the approximate
amount of $29.6 million and the balance of approximately $16.4 million in cash.
FREIT provided 75% of the cash required with the balance, of approximately $4.2
million provided in the form of a note, provided by the 25% minority owners of
SandA. The Pierre has been included in operations for fifteen days of April 2004
and had no material impact on FREIT's operations.
Residential revenue for Same Properties for the Current Six Months and Current
Quarter increased modestly by 2 % and 1.1% respectively over the prior year's
comparable periods. These increases were insufficient to cover the increases in
expenses during the same periods. While apartment rental increases are holding,
average occupancy during the Current Quarter fell to 93.7% compared to an
average occupancy of 96.7% during the Prior Year's Quarter.
FINANCING COSTS
Financing costs are summarized as follows:
Six Months Ended Three Months Ended
April 30, April 30,
------------------- -------------------
2004 2003 2004 2003
(In thousands of Dollars)
Fixed rate mortgages:
1st Mortgages:
Existing $ 3,543 $ 3,375 $ 1,781 $ 1,666
New
Damascus 115 57
Pierre 71 71
2nd Mortgages 284 76 138 52
Other 25 13 13 8
------------------- -------------------
Total interest expense 4,038 3,464 2,060 1,726
Amortization of deferred
mortgage costs 94 88 47 45
------------------- -------------------
Total financing costs from
continuing operations $ 4,132 $ 3,552 $ 2,107 $ 1,771
=================== ===================
Financing Costs for the Current Six Months and Current Quarter increased by
$580,000 and $336,000 respectively over the prior year's comparable periods. The
increases are principally attributable to the mortgages from the newly acquired
Damascus and Pierre properties, the approximate $5.5 million increase in the
first mortgage on the Preakness property, and from the interest costs relating
to the second mortgages placed on several of FREIT's residential properties.
LIQUIDITY AND CAPITAL RESOURCES
Our financial condition remains strong. Net Cash Provided By Operating
Activities was $3.0 million for the Current Six Months compared to $2.5 million
for the Prior Year's Six Months. We expect that cash provided by operating
activities will be adequate to cover mandatory debt service payments, recurring
capital improvements and dividends necessary to retain qualification as a REIT
(90% of taxable income).
As at April 30, 2004, we had cash and cash equivalents totaling $4.8 million.
During April 2004 FREIT utilized approximately $8 million of its cash and cash
equivalents and drew down approximately $4 million from its line of credit to
fund its portion of the purchase Price of the Pierre. It is expected that these
funds will be recouped from the sale of the Olney Town Center.
As previously reported, we are planning the construction of 129 apartment rental
units in Rockaway, NJ. The total capital required for this project is estimated
at $13.8 million. We expect to finance these costs, in part, from construction
and mortgage financing and, in part, from funds available in our institutional
money market investment.
At April 30, 2004 FREIT's aggregate outstanding mortgage debt was $155.4
million. Approximately $144.6 million bears a fixed weighted average interest
rate of 6.4%, and an average life of approximately 8.3 years. Approximately
$10.8 million of mortgage debt secured by the Olney Town Center (real estate
being held for sale) 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 2008. 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 $ 23.2
2016 $ 24.5
2019 $ 24.4
The following table shows the estimated fair value and carrying value of our
long-term debt at April 30, 2004 and October 31, 2003:
April 30, October 31,
(In Millions) 2004 2003
------------- ---- ----
Fair Value $158 $132
Carrying Value $155 $127
Fair values are estimated based on market interest rates at April 30, 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, at April 30, 2004 a one
percent interest rate increase would reduce the Fair Value of our debt by $9.2
million, and a one percent decrease would increase the Fair Value by $10.1
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.
Interest rate swap contract: To reduce interest rate volatility, FREIT uses "pay
fixed, receive floating" interest rate swaps to convert floating interest rates
to fixed interest rates over the terms of certain loans. We enter into these
swap contracts with a Counterparty that is usually a high-quality commercial
bank.
In essence, we agree to pay our Counterparty a fixed rate of interest on a
dollar amount of notional principal (which corresponds to our mortgage debt)
over a term equal to the terms of the mortgage note. Our Counterparty, in
return, agrees to pay us a short-term rate of interest - generally LIBOR - on
that same notional amount over the same term as our mortgage note.
FAS 133 requires us to mark-to-market fixed pay interest rate swaps. As the
floating interest rate varies from time-to-time over the term of the contract,
the value of the contract will change upward or downward. If the floating rate
is higher than the fixed rate, the value of the contract goes up and there is a
gain and an asset. If the floating rate is less than the fixed rate, there is a
loss and a liability. These gains or losses will not affect our income
statement. Changes in the fair value of these swap contracts will be reported in
earnings of other comprehensive income and appear in the equity section of our
balance sheet.
This gain or loss represents the economic consequence of liquidating our fixed
rate swap contracts and replacing them with like-duration funding at current
market rates, something we would likely never do.
FREIT had a variable interest rate mortgage securing its Patchogue, NY property.
To reduce interest rate fluctuations, during 2002, FREIT entered into an
interest rate swap contract. This rate swap contract effectively converted
variable interest rate payments to fixed interest rate payments. The contract
was initially based on a notional amount of approximately $6,769,000 ($6,657,000
at April 30, 2004). FREIT has the following derivative-related risks with its
swap contract: 1) early termination risk, and 2) Counterparty credit risk.
Early Termination Risk: If FREIT wants to terminate its swap contract before
maturity, it has to be bought out or terminated at market value; i.e., the
difference in the present value of the anticipated net cash flows from each of
the swap's parties. If current variable interest rates are below FREIT's fixed
interest rate payments, this could be costly. At April 30, 2004, FREIT's
liability for early termination would be $128,000. This amount has been included
in comprehensive income. Conversely, if interest rates rise above FREIT's fixed
interest payments and FREIT wished early termination, FREIT would realize a gain
on termination.
Counterparty Credit Risk: Each party to a swap contract bears the risk that its
Counterparty will default on its obligation to make a periodic payment. FREIT
reduces this risk by entering swap contracts only with major financial
institutions that are experienced market makers in the derivatives market.
FREIT also has the ability to draw, if needed, against its $14 million, two-year
revolving line of credit. To date FREIT has drawn approximately $4 million
against this line, which was used for the acquisition of The Pierre.
INFLATION
Inflation can impact the financial performance of FREIT in various ways. Our
retail tenant leases normally provide that the tenants bear all or a portion of
most operating expenses, which can reduce the impact of inflationary increases
on FREIT. Apartment leases are normally for a one-year term, which may allow us
to seek increased rents as leases renew or when new tenants are obtained.
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Liquidity and Capital Resources" above.
Item 4: Controls and Procedures
As 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 affect, FREIT's internal control over financial
reporting.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in FREIT's reports
filed or submitted under the Exchange Act is recorded, processed, summarized,
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
FREIT's reports filed under the Exchange Act is accumulated and communicated to
management, including FREIT's Chief Executive Officer and Chief Financial
Officer as appropriate, to allow timely decisions regarding required disclosure.
Part II Other Information
Item 4: Submission of Matters to a Vote of Security Holders.
The following matter was submitted to a vote of security holders at FREIT's 2004
Annual Meeting of Shareholders held on April 7, 2004:
The shareholders re-elected Mr. Donald W. Barney to serve as a Trustee for a two
(2) year term, and Messrs. Ronald J. Artinian and Alan L. Aufzien were
re-elected to serve a Trustees for three (3) year terms. The balloting for
election was as follows:
% Of
OUTSTANDING ON VOTES
NOMINEE VOTES FOR RECORD DATE WITHHELD
------- --------- ----------- --------
Donald W. Barney 2,860,773 90.7% 5,016
Ronald J. Artinian 2,865,789 90.8% --
Alan L. Aufzien 2,865,789 90.8% --
Item 6. Exhibits and Reports on Form 8-K
During the second quarter ended April 30, 2004, the following reports on
Form 8-K were filed with the SEC:
(a) On February 6, 2004, FREIT filed a report on Form 8-K
announcing it had entered into a contract to purchase an
apartment property in Northern New Jersey.
(b) On March 9, 2004, FREIT filed a report on Form 8-K announcing
the declaration of a two-for-one share split.
(c) On March 12, 2004, FREIT filed a report on Form 8-K announcing
its operating results for the quarter ended January 31, 2004.
A copy of the press release was attached.
(d) On April 12, 2004, FREIT filed a report on Form 8-K announcing
its subsidiary, SAndA Commercial Associates limited
Partnership ("SAndA"), had entered into a contract for the
sale of the Olney Town Center, Olney, MD; and that SAndA
had entered into a contract to purchase The Pierre apartment
community in Hackensack, NJ.
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
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST REAL ESTATE INVESTMENT
TRUST OF NEW JERSEY
(Registrant)
Date: June 21, 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)