SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended October 31, 2004
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 2-27018
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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY
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(Exact name of registrant as specified in its charter)
New Jersey 22-1697095
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
505 Main Street, Hackensack, New Jersey 07601
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(Address of principal executive offices) (Zip Code)
201-488-6400
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each Class on which registered
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None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Shares of Beneficial Interest
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in this Form 10-K or any amendment to this Form 10-K
|X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.) Yes |_| No |X|
The aggregate market value of the registrant's shares of beneficial interest
held by non-affiliates of the registrant as of the last business day of the
registrant's most recently completed second fiscal quarter was approximately
$131 million. Excluded from this calculation are shares of the registrant owned
or deemed to be beneficially owned by the trustees and executive officers of the
registrant, including shares with respect to which the trustees and executive
officers disclaim beneficial ownership. 6,423,152 shares of beneficial interest
were issued and outstanding as of February 7, 2005.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement for the
Registrant's 2004 Annual Meeting of Shareholders to be held on April 13, 2005
are incorporated by reference in Part III of this Annual Report.
TABLE OF CONTENTS
FORM 10-K
PART 1
Item 1 Business .....................................................
Item 2 Properties ...................................................
Item 3 Legal Proceedings ............................................
Item 4 Submission of Matters to a Vote of Security Holders ..........
Item 4A Executive Officers of FREIT ..................................
PART II
Item 5 Market for FREIT's Common Equity and
Related Stockholder Matters .............................
Item 6 Selected Financial Data ......................................
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk ...
Item 8 Financial Statements and Supplementary Data ..................
Item 9 Changes in and Disagreements with Accountants on Accounting
And Financial Disclosure.................................
Item 9A Controls and Procedures ......................................
PART III
Item 10 Directors and Executive Officers of the Registrant ...........
Item 11 Executive Compensation .......................................
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters ..............
Item 13 Certain Relationships and Related Transactions ...............
Item 14 Principal Accountant Fees and Services........................
PART IV
Item 15 Exhibits, Financial Statements and Schedules..................
FORWARD-LOOKING STATEMENTS
Certain information included in this Annual Report contains or may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The registrant
cautions readers that forward-looking statements, including, without limitation,
those relating to the registrant's investment policies and objectives; the
financial performance of the registrant; the ability of the registrant to
service its debt; the competitive conditions which affect the registrant's
business; the ability of the registrant to obtain the necessary governmental
approvals for the development, expansion or renovation of its properties, the
impact of environmental conditions affecting the registrant's properties, and
the registrant's liquidity and capital resources, are subject to certain risks
and uncertainties. Actual results or outcomes may differ materially from those
described in the forward-looking statements and will be affected by a variety of
risks and factors, including, without limitation, the registrant's future
financial performance; the availability of capital; general market conditions;
national and local economic conditions, particularly long-term interest rates;
federal, state and local governmental regulations that affect the registrant;
and the competitive environment in which the registrant operates, including, the
availability of retail space and residential apartment units in the areas where
the registrant's properties are located. In addition, the registrant's continued
qualification as a real estate investment trust involves the application of
highly technical and complex rules of the Internal Revenue Code. The
forward-looking statements are made as of the date of this Annual Report and the
registrant assumes no obligation to update the forward-looking statements or to
update the reasons actual results could differ from those projected in such
forward-looking statements.
PART I
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ITEM 1 BUSINESS
(a) GENERAL BUSINESS
First Real Estate Investment Trust of New Jersey ("FREIT") is an equity real
estate investment trust ("REIT") organized in New Jersey in 1961. FREIT
acquires, develops and holds real estate properties for long-term investment and
not for resale.
FREIT's long-range investment policy is to review and evaluate potential real
estate investment opportunities for acquisition that it believes will (i)
complement its existing investment portfolio, (ii) generate increased income and
distributions to shareholders, and (iii) increase the overall value of FREIT's
portfolio. FREIT's investments may take the form of wholly owned fee interests
or, if the circumstances warrant, on a joint venture basis, to diversify risk,
with other parties including employees and affiliates of Hekemian & Co., Inc.
(See Mangement Agreement) provided FREIT would be able to maintain management
control over the property. While FREIT's general investment policy is to hold
and maintain its properties long-term, it may, from time-to-time, sell or trade
certain properties in order to (i) obtain capital to be used to purchase,
develop or renovate other properties which we believe will provide a higher rate
of return and increase the value of our investment portfolio, and (ii) divest
properties which FREIT has determined or determines are no longer compatible
with our growth strategies and investment objectives for our real estate
portfolio.
Fiscal Year 2004 Developments
(i) FINANCING
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FREIT's $14 million line of credit expired on January 21, 2005 (extended date)
and has been replaced by an $18 million line of credit. The new line of credit
is for three years but can be cancelled by the bank, at its will, at each
anniversary date. Draws against the credit line can be used for general
corporate purposes, for property acquisitions, construction activities, and
letters-of-credit. Draws against the credit line are secured by mortgages on
FREIT's Franklin Crossing Shopping Center, Franklin Lakes, NJ, retail space in
Glen Rock, NJ, Lakewood Apartments, Lakewood, NJ, and Grandview Apartments,
Hasbrouck Heights, NJ. Interest rates on draws will be set at the time of each
draw for 30, 60, or 90 day periods, based on our choice of the prime rate or at
175 basis points over the 30, 60, or 90 day LIBOR rates at the time of the
draws.
As of October 31, 2004 there were no draws outstanding against this line. As at
January 19, 2005 the credit line has been utilized for the issuance of a $2
million Letter of Credit for the benefit of the Township of Rockaway in
connection with our construction of 129 garden apartment units.
(ii) ACQUISITION AND DISPOSITION
On April 16, 2004, S And A Associates Limited Partnership ("S and A"), a
partnership in which FREIT is the Managing Partner and holds a 75% ownership
position, 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 million was paid in cash. FREIT
provided 75% of the cash required with the balance of approximately $4.2 million
provided by the 25% minority owners of S And A.
On June 22, 2004, S And A closed on its contract for the sale of the Olney Town
Center ("OTC") in Olney, Maryland. The sale price for the property was $28.2
million. The property was acquired in April 2000 for approximately $15.5
million. S And A utilized the net sales proceeds to repay the first mortgage on
the property in the amount of approximately $11.0 million, and to repay FREIT
and the 25% minority owners for their advances made to acquire The Pierre.
FREIT, in accordance with its investment policy, has agreed to allow the
minority owners in S and A to make a cash contribution to S and A of
approximately 1.3 million that will increase their ownership interest to
approximately 35% from 25%. This additional investment, which approximates
market value, will be made in February 2005.
The operations of OTC have been classified as Discontinued Operations. For
financial statement proposes, S And A recognized a gain of approximately $12.7
from the sale.
S And A has structured the sale of OTC and the purchase of The Pierre in a
manner that would qualify as a like kind exchange of real estate pursuant to
Section 1031 of the Internal Revenue Code. This resulted in a deferral for
income tax purposes of the realization of gain on the sale of OTC. Since it is
the intention of FREIT to continue to qualify as a real estate investment trust,
the provision for deferred taxes should be minimal.
(iii) DEVELOPMENT
Rockaway Township, NJ
We own approximately 20 +/- acres of undeveloped land in Rockaway Township, NJ.
Site plan approval and a water allocation has been received from Rockaway
Township for the construction of 129 garden apartment units. Development costs
are estimated at $13.8 million that we will finance, in part, from construction
financing and, in part, from funds available from our institutional money market
investments. We have received final water allocation and sewer approval from the
NJ Department of Environmental Protection. As soon as construction contracts are
negotiated and finalized, construction will begin and is expected to last twelve
to eighteen months.
Approximately one (1) acre of the Rockaway Township land has been sub-divided
and leased to a bank. Rent under the land lease commenced in December 2003.
South Brunswick, NJ
FREIT owns approximately 33 acres of land in South Brunswick (see "Item 2
Properties - Portfolio of Investments") that is zoned Industrial. FREIT has
received site plan approval for the construction of a 560,000 sq. ft. industrial
warehouse facility. It is FREIT's intention to develop the property after it has
been pre-leased to a suitable tenant.
(b) FINANCIAL INFORMATION ABOUT SEGMENTS
FREIT has two reportable segments: Retail Properties and Residential Properties.
These reportable segments have different customers and are managed separately
because each requires different operating strategies and management expertise.
Segment information for the three years ended October 31, 2004 is incorporated
by reference to Note 13, "Segment Information" on pages F- 18 and F-19 of the
Consolidated Financial Statements
(c) NARRATIVE DESCRIPTION OF BUSINESS
FREIT was founded and organized for the principal purpose of acquiring,
developing, and owning a portfolio of diverse income producing real estate
properties. FREIT's developed properties include residential apartment
communities and retail properties that consist of multi and single tenanted
properties. Our properties are located in New Jersey, Maryland and on Long
Island. We also currently own approximately 56.5 acres of unimproved land in New
Jersey. See "Item 2 Properties - Portfolio of Investments."
FREIT elected to be taxed as a REIT under the Internal Revenue Code. FREIT
operates in such a manner as to qualify for taxation as a REIT in order to take
advantage of certain favorable tax aspects of the REIT structure. Generally, a
REIT will not be subject to federal income taxes on that portion of its ordinary
income or capital gain that is currently distributed to its equity holders.
As an equity REIT, we generally acquire interests in income producing properties
to be held as long-term investments. FREIT's return on such investments is based
on the income generated by such properties mainly in the form of rents.
From time to time, FREIT has sold, and may sell again in the future, certain of
its properties in order to (i) obtain capital used or to be used to purchase,
develop or renovate other properties which we believe will provide a higher rate
of return and increase the value of our investment portfolio, and (ii) divest
properties which FREIT has determined or determines are no longer compatible
with our growth strategies and investment objectives for our real estate
portfolio.
We do not hold any patents, trademarks, or licenses.
Portfolio of Real Estate Investments
At October 31, 2004, FREIT's real estate holdings included (i) nine (9)
apartment buildings or complexes containing 986 rentable units, (ii) seven (7)
retail properties containing approximately 1,050,000 square feet of leasable
space, including one (1) single tenant store, and (iii) four (4) parcels of
undeveloped land consisting of approximately 58 acres. FREIT and its Affiliates
own all such properties in fee simple. See "Item 2 Properties - Portfolio of
Investments" of this Annual Report for a description of FREIT's separate
investment properties and certain other pertinent information with respect to
such properties that is relevant to FREIT's business.
Investment in Affiliates
The consolidated financial statements (see Note 1 to the Consolidated Financial
Statements included in Form 10-K) include the accounts the following affiliates
not wholly owned by FREIT:
Westwood Hills, LLC ("Westwood Hills"): FREIT owns a 40% membership interest in
Westwood Hills that owns and operates a 210-unit residential apartment complex
in Westwood, NJ.
Wayne PSC, LLC (WaynePSC"): FREIT owns a 40% membership interest in Wayne PSC,
LLC which owns a 323,000 +/- sq. ft. community shopping center in Wayne, NJ.
S And A Commercial Associates Limited Partnership ("S And A"): FREIT owns a 75%
partnership interest in S And A which owns a 269-unit residential apartment
complex in Hackensack, NJ.
Employees
On October 31, 2004 FREIT and its Affiliates had ten (10) full-time employees
and three (3) part-time employees who work solely at the properties owned by
FREIT or its Affiliates. The number of part-time employees varies seasonally.
Mr. Robert S. Hekemian, Chairman of the Board and Chief Executive Officer, Mr.
Donald W. Barney, President, Treasurer and Chief Financial Officer, and Mr. John
A. Aiello, Esq., Secretary and Executive Secretary, are the executive officers
of FREIT. Mr. Hekemian devotes approximately fifty to sixty percent (50% - 60%)
of his business activities to FREIT, Mr. Barney devotes approximately fifteen
percent (15%) of his business activities to FREIT, and Mr. Aiello devotes
approximately five percent (5%) of his business activities to FREIT. See "Item
4A - Executive Officers of FREIT." Hekemian & Co., Inc. ("Hekemian") has been
retained by FREIT to manage FREIT's properties and is responsible for
recruiting, on behalf of FREIT, the personnel required to perform all services
related to the operation of FREIT's properties. See "Management Agreement."
Management Agreement
On April 10, 2002, FREIT and Hekemian executed a new Management Agreement
whereby Hekemian would continue as Managing Agent for FREIT. The term of the
Management Agreement runs until October 31, 2005 and shall be automatically
renewed for periods of two (2) years unless either party gives not less than six
(6) months prior notice to the other of non-renewal. No non-renewal notice has
been issued by either party. The April 10, 2002 Management Agreement replaces
the Management Agreement dated December 20, 1961 as extended. The salient
provisions of the new Management Agreement are as follows: FREIT continues to
retain the Managing Agent as the exclusive management and leasing agent for
properties which FREIT owned as of April 2002, and for the Preakness Shopping
Center acquired on November 1, 2002 by WaynePSC. However, FREIT may retain other
managing agents to manage certain other properties hereafter acquired and to
perform various other duties such as sales, acquisitions, and development with
respect to any or all properties. The Managing Agent is no longer the exclusive
advisor for FREIT to locate and recommend to FREIT investments, which the
Managing Agent deems suitable for FREIT, and is no longer required to offer
potential acquisition properties exclusively to FREIT before acquiring those
properties for its own account. The new Management Agreement includes a detailed
schedule of fees for those services, which the Managing Agent may be called upon
to perform. The new Management Agreement provides for a termination fee in the
event of a termination or non-renewal of the Management Agreement under certain
circumstances.
Pursuant to the terms of the new Management Agreement, FREIT pays Hekemian
certain fees and commissions as compensation for its services. From time to
time, FREIT engages Hekemian to provide certain additional services, such as
consulting services related to development and financing activities of FREIT.
Separate fee arrangements are negotiated between Hekemian and FREIT with respect
to such additional services. See "First Real Estate Investment Trust of New
Jersey Notes to Consolidated Financial Statements - Note 8."
Mr. Hekemian, Chairman of the Board, Chief Executive Officer and a Trustee of
FREIT, is the Chairman of the Board and Chief Executive Officer of Hekemian. Mr.
Hekemian owns approximately .2% of all of the issued and outstanding shares of
Hekemian.
Real Estate Financing
FREIT funds acquisition opportunities and the development of its real estate
properties largely through debt financing, including mortgage loans against
certain of its properties. At October 31, 2004, FREIT's aggregate outstanding
mortgage debt was $148.2 million with an average interest cost on a weighted
average basis of 6.451%. FREIT has mortgage loans against certain properties,
which serve as collateral for such loans. See the tables in "Item 2 Properties -
Portfolio of Investments" for the outstanding mortgage balances at October 31,
2004 with respect to each of these properties.
FREIT is currently, and will continue to be for the foreseeable future, more
highly leveraged than it has been in the past. This increased level of
indebtedness also presents an increased risk of default on the obligations of
FREIT and an increase in debt service requirements that could adversely affect
the financial condition and results of operations of FREIT. A number of FREIT's
mortgage loans are being amortized over a period that is greater than the terms
of such loans; thereby requiring balloon payments at the expiration of the terms
of such loans. FREIT has not established a cash reserve sinking fund with
respect to such obligations and at this time does not expect to have sufficient
funds from operations to make such balloon payments when due under the terms of
such loans. See "Liquidity and Capital Resources" section of Item 7.
FREIT is subject to the normal risks associated with debt financing, including
the risk that FREIT's cash flow will be insufficient to meet required payments
of principal and interest; the risk that indebtedness on its properties will not
be able to be renewed, repaid or refinanced when due; or that the terms of any
renewal or refinancing will not be as favorable as the terms of the indebtedness
being replaced. If FREIT were unable to refinance its indebtedness on acceptable
terms, or at all, FREIT might be forced to dispose of one or more of its
properties on disadvantageous terms which might result in losses to FREIT. These
losses could have a material adverse effect on FREIT and its ability to make
distributions to shareholders and to pay amounts due on its debt. If a property
is mortgaged to secure payment of indebtedness and FREIT is unable to meet
mortgage payments, the mortgagor could foreclose upon the property, appoint a
receiver and receive an assignment of rents and leases or pursue other remedies,
all with a consequent loss of revenues and asset value to FREIT. Further,
payment obligations on FREIT's mortgage loans will not be reduced if there is a
decline in the economic performance of any of FREIT's properties. If any such
decline in economic performance occurs, FREIT's revenues, earnings, and funds
available for distribution to shareholders would be adversely affected.
Neither FREIT's Declaration of Trust nor any policy statement formally adopted
by FREIT's Board of Trustees limits either the total amount of indebtedness or
the specified percentage of indebtedness (based on the total capitalization of
FREIT), which may be incurred by FREIT. Accordingly, FREIT may incur in the
future additional secured or unsecured indebtedness in furtherance of its
business activities, including, if or when necessary, to refinance its existing
debt. Future debt incurred by FREIT could bear interest at rates, which are
higher than the rates on FREIT's existing debt. Future debt incurred by FREIT
could also bear interest at a variable rate. Increases in interest rates would
increase FREIT's variable interest costs (to the extent that the related
indebtedness was not protected by interest rate protection arrangements), which
could have a material adverse effect on FREIT and its ability to make
distributions to shareholders and to pay amounts due on its debt or cause FREIT
to be in default under its debt. Further, in the future, FREIT may not be able
to, or may determine that it is not able to, obtain financing for property
acquisitions or for capital expenditures to develop or improve its properties on
terms which are acceptable to FREIT. In such event, FREIT might elect to defer
certain projects unless alternative sources of capital were available, such as
through an equity or debt offering by FREIT.
Competitive Conditions
FREIT is subject to normal competition with other investors to acquire real
property and to profitably manage such property. Numerous other REIT(s), banks,
insurance companies and pension funds, as well as corporate and individual
developers and owners of real estate, compete with FREIT in seeking properties
for acquisition and for tenants. Many of these competitors have significantly
greater financial resources than FREIT.
In addition, retailers at FREIT's retail properties face increasing competition
from discount shopping centers, outlet malls, sales through catalogue offerings,
discount shopping clubs, marketing and shopping through cable and computer
sources, particularly over the Internet, and telemarketing. In many markets, the
trade areas of FREIT's retail properties overlap with the trade areas of other
shopping centers. Renovations and expansions at those competing shopping centers
and malls could negatively affect FREIT's retail
properties by encouraging shoppers to make their purchases at such new, expanded
or renovated shopping centers and malls. Increased competition through these
various sources could adversely affect the viability of FREIT's tenants, and any
new retail real estate competition developed in the future could potentially
have an adverse effect on the revenues of and earnings from FREIT's retail
properties.
(A) General Factors Affecting Investment in Retail and Apartment
Properties; Effect on Economic and Real Estate Conditions
The revenues and value of FREIT's retail and residential apartment properties
may be adversely affected by a number of factors, including, without limitation,
the national economic climate; the regional economic climate (which may be
adversely affected by plant closings, industry slow downs and other local
business factors); local real estate conditions (such as an oversupply of retail
space or apartment units); perceptions by retailers or shoppers of the security,
safety, convenience and attractiveness of a shopping center; perception by
residential tenants of the safety, convenience and attractiveness of an
apartment building or complex; the proximity and the number of competing
shopping centers and apartment complexes; the availability of recreational and
other amenities and the willingness and ability of the owner to provide capable
management and adequate maintenance. In addition, other factors may adversely
affect the fair market value of a retail property or apartment building or
complex without necessarily affecting the revenues, including changes in
government regulations (such as limitations on development or on hours of
operation) changes in tax laws or rates, and potential environmental or other
legal liabilities.
(B) Retail Shopping Center Properties' Dependence on Anchor Stores and
Satellite Tenants
FREIT believes that its revenues and earnings; its ability to meet its debt
obligations; and its funds available for distribution to shareholders would be
adversely affected if space in FREIT's multi-store shopping center properties
could not be leased or if anchor store tenants or satellite tenants failed to
meet their lease obligations.
The success of FREIT's investment in its shopping center properties is largely
dependent upon the success of its tenants. Unfavorable economic, demographic, or
competitive conditions may adversely affect the financial condition of tenants
and consequently the lease revenues from and the value of FREIT's investments in
its shopping center properties. If the sales of stores operating in FREIT's
shopping center properties were to decline due to deteriorating economic
conditions, the tenants may be unable to pay their base rents or meet other
lease charges and fees due to FREIT. In addition, any lease provisions providing
for additional rent based on a percentage of sales could be rendered moot. In
the event of default by a tenant, FREIT could suffer a loss of rent and
experience extraordinary delays while incurring additional costs in enforcing
its rights under the lease, which may or may not be recaptured by FREIT. As of
October 31, 2004, the following table lists the ten largest retail tenants,
which account for approximately 55.8% of FREIT's retail rental space and 43.7%
of fixed retail rents.
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Tenant Center Sq. Ft.
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Burlington Coat Factory Westridge Square 85,992
K Mart Corporation Westwood Plaza 84,254
Macy's Federated Department Stores, Inc. Preakness 81,160
Pathmark Stores Inc. Patchoque 63,932
Stop & Shop Supermarket Co. Preakness 61,020
Giant Of Maryland Inc. Westridge Square 55,330
Stop & Shop Supermarket Co. Franklin Crossing 48,673
Safeway Stores Inc . Damascus Center 45,189
TJ MAXX Westwood Plaza 28,480
T-Bowl Inc. Preakness 27,195
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(C) Renewal of Leases and Reletting of Space
There is no assurance that we will be able to retain tenants at our retail
properties upon expiration of their leases. Upon expiration or termination of
leases for space located in FREIT's retail properties, the premises may not be
relet or the terms of reletting (including the cost of concessions to tenants)
may not be as favorable as lease terms for the terminated lease. If FREIT were
unable to promptly relet all or a substantial portion of this space or if the
rental rates upon such reletting were significantly lower than current or
expected rates, FREIT's revenues and earnings; FREIT's ability to service its
debt; and FREIT's ability to make expected
distributions to its shareholders, could be adversely affected. There are no
leases, which FREIT considers material or significant in terms of any single
property which expired during the fiscal year 2004 or which are scheduled to
expire in the fiscal year 2005.
D) Illiquidity of Real Estate Investments; Possibility that Value of
FREIT's Interests may be less than its Investment
Equity real estate investments are relatively illiquid. Accordingly, the ability
of FREIT to vary its portfolio in response to changing economic, market or other
conditions is limited. Also, FREIT's interest in its affiliates, Westwood Hills,
S And A, and WaynePSC, are subject to transfer constraints imposed by the
operating agreements, which govern FREIT's investment in these affiliates. Even
without such restrictions on the transfer of its interests, FREIT believes that
there would be a limited market for its interests in these affiliates.
If FREIT had to liquidate all or substantially all of its real estate holdings,
the value of such assets would likely be diminished if a sale was required to be
completed in a limited time frame. The proceeds to FREIT from any such sale of
the assets in FREIT's real estate portfolio might be less than the fair market
value of those assets.
Impact of Governmental Laws and Regulations on Registrant's Business
FREIT's properties are subject to various Federal, state and local laws,
ordinances and regulations, including those relating to the environment and
local rent control and zoning ordinances.
(A) Environmental Matters
Both Federal and state governments are concerned with the impact of real estate
construction and development programs upon the environment. Environmental
legislation affects the cost of selling real estate, the cost to develop real
estate, and the risks associated with purchasing real estate.
Under various federal, state and local environmental laws, statutes, ordinances,
rules and regulations, an owner of real property may be liable for the costs of
removal or remediation of certain hazardous or toxic substances at, on, in or
under such property, as well as certain other potential costs relating to
hazardous or toxic substances (including government fines and penalties and
damages for injuries to persons and adjacent property). Such laws often impose
such liability without regard to whether the owners knew of, or were responsible
for, the presence or disposal of such substances. Such liability may be imposed
on the owner in connection with the activities of any operator of, or tenant at,
the property. The cost of any required remediation, removal, fines or personal
or property damages and the owner's liability therefore could exceed the value
of the property and/or the aggregate assets of the owner. In addition, the
presence of such substances, or the failure to properly dispose of or remediate
such substances, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral. If FREIT incurred any
such liability, it could reduce FREIT's revenues and ability to make
distributions to its shareholders.
A property can also be negatively impacted by either physical contamination or
by virtue of an adverse effect upon value attributable to the migration of
hazardous or toxic substances, or other contaminants that have or may have
emanated from other properties.
At this time, FREIT is aware of the following environmental matters affecting
its properties:
(i) Vacant Land Located in Rockaway Township, N.J.
The property located in Rockaway Township contains wetlands. Pursuant to a
Letter of Interpretation received from the NJDEP, FREIT has determined that the
wetlands and associated transition areas will have no material impact on the
future development of the property pursuant to the applicable laws and
regulations of New Jersey. Under the current zoning ordinance, the property is
zoned for multifamily residential use, with a small portion zoned for commercial
use. FREIT has received approval from the Township for the construction of 129
garden apartment units.
(ii) Westwood Plaza Shopping Center, Westwood, N.J.
This property is in a HUD Flood Hazard Zone and serves as a local flood
retention basin for part of Westwood, New Jersey. FREIT maintains flood
insurance in the amount of $500,000 for the subject property, which is the
maximum available under the HUD Flood Program for the property. Any
reconstruction of that portion of the property situated in the flood hazard zone
is subject to regulations promulgated by the New Jersey Department of
Environmental Protection ("NJDEP"), which could require extraordinary
construction methods.
(iii) Franklin Crossing, Franklin Lakes, N.J.
The redeveloped Franklin Crossing shopping center was completed during the
summer of 1997. Also in 1997, a historical discharge of hazardous materials was
discovered at Franklin Crossing. The discharge was reported to the NJDEP in
accordance with applicable regulations. FREIT completed the remediation required
by the NJDEP.
In November 1999, FREIT received a No Further Action Letter from the NJDEP
concerning the contaminated soil at Franklin Crossing. Monitoring of the
groundwater will continue pursuant to a memorandum of agreement filed with the
NJDEP.
(iv) Preakness Shopping Center, Wayne, NJ
Prior to its purchase by WaynePSC, a Phase I and Phase II Environmental
Assessment of the Preakness shopping center revealed soil and ground water
contamination with Percloroethylene (Dry Cleaning Fluid) caused by the
mishandling of this chemical by a former Dry Cleaner tenant.
The seller of the center to WaynePSC is in the process of performing the
remedial work in accordance with the requirements of the NJDEP. Additionally,
the seller has escrowed the estimated cost of the remediation and has purchased
a cap-cost insurance policy covering any expenses over and above the estimated
cost.
(v) Other
a) The State of New Jersey has adopted an underground fuel storage tank law and
various regulations with respect to underground storage tanks.
FREIT no longer has underground storage tanks on any of its properties.
FREIT has conducted environmental audits for all of its properties except for
its undeveloped land; retail properties in Franklin Lakes (Franklin Crossing)
and Glen Rock, New Jersey; and residential apartment properties located in
Lakewood, Palisades Park and Hasbrouck Heights, New Jersey. Except as noted in
subparagraph (iii) above, the environmental reports secured by FREIT have not
revealed any environmental conditions on its properties, which require
remediation pursuant to any applicable Federal or state law or regulation.
b) FREIT has determined that several of its properties contain lead based paint
("LBP"). FREIT complies with all Federal, state and local requirements as they
pertain to LBP.
FREIT does not believe that the environmental conditions described in
subparagraphs (i) - (iv) above will have a materially adverse effect upon the
capital expenditures, revenues, earnings, financial condition or competitive
position of FREIT.
(B) Rent Control Ordinances
Each of the apartment buildings or complexes owned by FREIT is subject to some
form of rent control ordinance which limits the amount by which FREIT can
increase the rent for renewed leases, and in some cases, limits the amount of
rent which FREIT can charge for vacated units. Westwood Hills is not subject to
any rent control law or regulation.
(C) Zoning Ordinances
Local zoning ordinances may prevent FREIT from renovating, expanding or
converting its existing properties, for their highest and best use as determined
by FREIT's Board of Trustees. The Board of Trustees is not aware of any such
zoning impediments to the development of the Rockaway Township and South
Brunswick Properties described herein (See Item I (a) iii).
(D) Financial Information about Foreign and Domestic Operations and
Export Sale
FREIT does not engage in operations in foreign countries and it does not derive
any portion of its revenues from customers in foreign countries.
ITEM 2. PROPERTIES
Portfolio of Investments: The following charts set forth certain
information relating to each of FREIT's real estate investments in addition to
the specific mortgages encumbering the properties.
Residential Apartment Properties as of October 31, 2004:
- --------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Average Depreciated Cost
Annual Mortgage of Buildings and
Year Occupancy Balance Equipment
Property and Location Acquired No. of Units Rate ($000) ($000)
- ------------------------------------------------------------------------------------------------------------
Lakewood Apts. 1962 40 93.5% None(1) $ 107
Lakewood, NJ
Palisades Manor 1962 12 95.5% None(1) $ 39
Palisades Park, NJ
Grandview Apts. 1964 20 96.9% None(1) $ 118
Hasbrouck Heights, NJ
Height Manor 1971 79 96.9% $ 3,422 $ 575
Spring Lake Heights, NJ
Hammel Gardens 1972 80 94.7% $ 4,996 $ 809
Maywood, NJ
Steuben Arms 1975 100 90.8% $ 6,930 $ 1,335
River Edge, NJ
Berdan Court 1965 176 96.0% $ 13,704 $ 1,555
Wayne, NJ
Pierre Towers (3) 2004 269 92.6% $ 34,125 $ 45,213
Hackensack, NJ
Westwood Hills (2) 1994 210 95.1% $ 17,592 $ 13,097
Westwood, NJ
- ------------------------------------------------------------------------------------------------------------
(1) Security for draws against FREIT's Credit Line. As of October 31, 2004
there were no draws outstanding.
(2) FREIT owns a 40% equity interest in Westwood Hills. See Investment in
Affiliates.
(3) Pierre Towers is 100% owned by S & A Commercial Associates LP, which is
75% owned by FREIT.
Retail Properties as of October 31, 2004:
- -----------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Average Depreciated Cost
Leaseable Space- Annual Mortgage of Buildings and
Year Approximate Occupancy Balance Equipment
Property and Location Acquired Sq. Ft. Rate ($000) ($000)
- ----------------------------------------------------------------------------------------------------------------
Franklin Crossing 1966(2) 87,041 99.5% None(1) $ 9,448
Franklin Lakes, NJ
Westwood Plaza 1988 173,854 99.9% $ 9,758 $ 11,309
Westwood, NJ
Westridge Square 1992 256,620 88.6% $ 16,885 $ 20,868
Frederick, MD
Pathmark Super Store 1997 63,962 100.0% $ 6,553 $ 9,390
Patchogue, NY
Glen Rock, NJ 1962 4,800 76.9% None(1) $ 187
Preakness Center (3) 2002 322,136 92.1% $ 32,000 $ 32,777
Wayne, NJ
Damascus Center 2003 139,878 80.9% $ 2,279 $ 9,786
Damascus, MD
Rockaway Township, NJ 1964/1963 1+/- Acre Landlease 100.0% None $ 139
- ----------------------------------------------------------------------------------------------------------------
(1) Security for draws against FREIT's Credit Line. As at October 31, 2004
there were no draws outstanding.
(2) The original 33,000 sq. ft. shopping center was replaced with a new 87,041
sq. ft. center that opened in October 1997.
(3) FREIT owns a 40% equity interest in WaynePSC that owns the center.
Vacant Land as of October 31, 2004:
- -----------------------------------
Permitted Use
per Local Acreage Per
Location(1) Acquired Current Use Zoning Laws Parcel
- -------------------------------------------------------------------------------------------------------
Franklin Lakes, NJ 1966 None Residential 4.27
Rockaway Township, NJ(2) 1964/1963 None Multi Family / Retail 18.26
Wayne, NJ 2002 None Commercial 2.1
So. Brunswick, NJ(3) 1964 Principally leased Industrial 33
as farmland
qualifying for state
farmland assessment
tax treatment
- -------------------------------------------------------------------------------------------------------
(1) All of the above land is unencumbered.
(2) FREIT has received approval for the construction of 129 garden apartment
units on this land.
(3) Site plan approval has been received for the construction of a 563,000
square foot industrial building.
FREIT believes that it has a diversified portfolio of residential and retail
properties. FREIT's business is not materially dependent upon any single tenant
or any one of its properties. The following Table lists FREIT's properties that
have contributed 15% or more of FREIT's total revenue in one (1) or more of the
last three (3) fiscal years.
Fiscal Year Ended
October 31,
----------------------------
2004 2003 2002
---- ---- ----
Preakness Center (1) 17.2% 15.9% 0.0%
(1) Center acquired November 2002.
Although FREIT's general investment policy is to hold properties as long-term
investments, FREIT could selectively sell certain properties if it determines
that any such sale is in FREIT's and its shareholders best interests. With
respect to FREIT's future acquisition and development activities, FREIT will
evaluate various real estate opportunities which FREIT believes would increase
FREIT's revenues and earnings as well as compliment and increase the overall
value of FREIT's existing investment portfolio.
Except for the Pathmark supermarket super store located in Patchogue, Long
Island, all of FREIT's and its Affiliate's (WaynePSC) retail properties have
multiple tenants.
FREIT and its Affiliate's retail shopping center properties have twelve (12)
anchor / major tenants, that account for approximately 53% of the space leased.
The balance of the space is leased to one hundred twenty (120) satellite
tenants. The following table lists the anchor / major tenants at each center and
the number of satellite tenants:
---------------------------------------------------------------------------------------------------
No. Of
Net Leaseable Satellite
Shopping Center Space Anchor/Major Tenants Tenants
---------------------------------------------------------------------------------------------------
Westridge Square 254,970 Giant Supermarket 26
Frederick, MD Burlington Coat Factory
Franklin Crossing 87,868 Stop & Shop 18
Franklin, Lakes, NJ
Westwood Plaza 173,875 Kmart Corp 20
Westwood, NJ TJMaxx
Preakness Center (1) 322,136 Stop & Shop 40
Wayne, NJ Macy's
CVS
Annie Sez
Clearview Theaters
Damascus Center 139,878 Safeway Stores 16
Damascus, MD Damascus Rd Comm. Church
---------------------------------------------------------------------------------------------------
(1) FREIT has a 40% interest in this center.
With respect to most of FREIT's retail properties, lease terms range from five
(5) years to twenty-five (25) years with options which if exercised would extend
the terms of such leases. The lease agreements generally contain clauses for
reimbursement of real estate taxes, maintenance, insurance and certain other
operating expenses of the properties. During the last three (3) completed fiscal
years, FREIT's retail properties averaged a 93.9% occupancy rate with respect to
FREIT's available leasable space
Leases for FREIT's apartment buildings and complexes are usually one (1) year in
duration. Even though the residential units are leased on a short-term basis,
FREIT has averaged, during the last three (3) completed fiscal years, a 95.7%
occupancy rate with respect to FREIT's available apartment units.
FREIT does not believe that any seasonal factors materially affect FREIT's
business operations and the leasing of its retail and apartment properties.
FREIT believes that its properties are covered by adequate fire and property
insurance provided by reputable companies and with commercially reasonable
deductibles and limits.
ITEM 3 LEGAL PROCEEDINGS
There are no material pending legal proceedings to which FREIT is a party or of
which any of its properties is the subject. There is, however, ordinary and
routine litigation involving FREIT's business including various tenancy and
related matters. Notwithstanding the environmental conditions disclosed in "Item
1(c) Description of Business - Impact of Governmental Laws and Regulations on
Registrant's Business; Environmental Matters," there are no legal proceedings
concerning environmental issues with respect to any property owned by FREIT.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of FREIT's 2004 fiscal year.
ITEM 4A EXECUTIVE OFFICERS OF FREIT
The executive officers of FREIT as of February 7, 2005 are listed below. Brief
summaries of their business experience and certain other information with
respect to each of them is set forth in the following table and in the
information, which follows the table.
As a result of Hekemian being responsible for managing the day-to-day operations
of FREIT's properties, the executive officers, with the exception of Mr. Robert
S. Hekemian, are not required to devote a significant part of their business
activities to their duties as executive officers of FREIT. See "Item 1(c)
Narrative Description of Business - Management Agreement." Except for Mr.
Aiello, Secretary, and Executive Secretary of FREIT, each of the executive
officers is also a Trustee of FREIT.
The executive officers of FREIT are as follows:
Name Age Position
---- --- --------
Robert S. Hekemian 73 Chairman of the Board and Chief
Executive Officer
Donald W. Barney 64 President, Treasurer and Chief Financial
Officer
John A. Aiello, Esq. 55 Secretary and Executive Secretary
Robert S. Hekemian has been active in the real estate industry for more than
fifty (50) years. Mr. Hekemian has served as Chairman of the Board and Chief
Executive Officer of FREIT since 1991, and as a Trustee since 1980. From 1981 to
1991, Mr. Hekemian was President of FREIT. Mr. Hekemian directly devotes
approximately fifty to sixty percent (50% - 60%) of his time to execute his
duties as an executive officer of FREIT. Mr. Hekemian is also the Chairman of
the Board and Chief Executive Officer of Hekemian. See "Item 1(c) Narrative
Description of Business - Management Agreement." Mr. Hekemian is a director of
the Pascack Community Bank. Mr. Hekemian is also a director, partner and officer
in numerous private real estate corporations and partnerships.
Donald W. Barney has served as President of FREIT since 1993, as a Trustee
since 1981, and was elected Treasurer and Chief Financial Officer in January
2003. Mr. Barney devotes approximately fifteen percent (15%) of his time to
execute his duties as an executive officer of FREIT. Mr. Barney was associated
with Union Camp Corporation, a diversified manufacturer of paper, packaging
products, chemicals, and wood products, from 1969 through December 31, 1998, as
Vice President and Treasurer. Mr. Barney was a director of Ramapo Financial
Corporation until it was acquired, in May 1999 by another financial institution,
and is a partner and director in several other private real estate investment
companies, and a director of the Hilltop Community Bank.
John A. Aiello, Esq., an attorney, was elected to serve as the Executive
Secretary of FREIT in August 2002, and as Secretary in January 2003. Mr. Aiello
devotes approximately five percent (5%) of his time to execute his duties as an
executive officer of FREIT. Beginning in 1974, Mr. Aiello has spent his entire
career with the law firm of Giordano Halleran & Ciesla, P.C. ("GH&C"), with
offices in Middletown and Trenton, NJ. Mr. Aiello is an officer and shareholder
of GH&C. Mr. Aiello is Chairman of GH&C's Corporate and Securities Department,
and his practice focuses on corporate law, corporate finance, securities,
mergers, and acquisitions.
PART II
- -------
ITEM 5 MARKET FOR FREIT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS
Shares of Beneficial Interest
Beneficial interests in FREIT are represented by shares without par value (the
"Shares"). The Shares represent FREIT's only authorized, issued and outstanding
class of equity. As of February 7, 2005, there were approximately 500 holders of
record of the Shares.
The Shares are traded in the over-the-counter market through use of the OTC
Bulletin Board(R) Service (the "OTC Bulletin Board") provided by NASD, Inc.
FREIT does not believe that an active United States public trading market exists
for the Shares since historically only small volumes of the Shares are traded on
a sporadic basis. The following table sets forth, at the end of the periods
indicated, the Bid and Asked quotations for the Shares on the OTC Bulletin Board
and have been adjusted for prior periods, to reflect the one-for-one share
dividend paid in March 2004.
Bid Asked
--- -----
Fiscal Year Ended October 31, 2004
----------------------------------
First Quarter $ 19.50 $ 25.00
Second Quarter $ 22.75 $ 23.00
Third Quarter $ 22.60 $ 23.90
Fourth Quarter $ 22.50 $ 23.00
Bid Asked
--- -----
Fiscal Year Ended October 31, 2003
----------------------------------
First Quarter $ 11.25 $ 16.00
Second Quarter $ 12.25 $ 12.87
Third Quarter $ 12.75 $ 13.12
Fourth Quarter $ 14.12 $ 18.00
The bid quotations set forth above for the Shares reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. The source of the bid and asked quotations is
Janney Montgomery Scott, Inc., members of the New York Stock Exchange and other
national securities exchanges.
Dividends
The holders of Shares are entitled to receive distributions as may be
declared by FREIT's Board of Trustees. Dividends may be declared from time to
time by the Board of Trustees and may be paid in cash, property, or Shares. The
Board of Trustees' present policy is to distribute annually at least ninety
percent (90%) of FREIT's REIT taxable income as dividends to the holders of
Shares in order to qualify as a REIT for Federal income tax purposes.
Distributions are made on a quarterly basis. In fiscal 2004 and fiscal 2003,
FREIT paid or declared aggregate total dividends of $1.10 and $0.90 per share,
respectively, to the holders of Shares. See "Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations - Distributions to
Shareholders."
Securities Authorized for Issuance Under Equity Compensation Plans
See table included in "Item 12 Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters".
ITEM 6 SELECTED FINANCIAL DATA
The selected consolidated financial data for FREIT for each of the five (5)
fiscal years in the period ended October 31, 2004 are derived from financial
statements that have been audited and reported upon by J.H. Cohn LLP,
Independent Registered Public Accounting Firm for FREIT and have been restated
to include the accounts of Westwood Hills and WaynePSC. This data should be read
in conjunction with "Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations" of this Annual Report and with FREIT's
consolidated financial statements and related notes included in this Annual
Report.
BALANCE SHEET DATA:
As At October 31, 2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(in thousands of dollars)
Total Assets $ 190,575 $ 155,764 $ 110,485 $ 110,958 $ 111,438
Long-Term Obligations $ 148,244 $ 126,767 $ 83,188 $ 84,350 $ 85,399
Shareholders' Equity $ 31,167 $ 22,140 $ 21,903 $ 21,588 $ 21,144
Weighted average shares outstanding:
Basic 6,378 6,268 6,240 6,240 6,240
Diluted 6,658 6,522 6,466 6,266 6,240
INCOME STATEMENT DATA:
Year Ended October 31, 2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(in thousands of dollars, except per share amounts)
Revenue:
Revenue from real estate operations $ 30,356 $ 25,399 $ 19,571 $ 18,832 $ 18,182
Expenses:
Real estate operations 11,459 9,133 6,460 6,566 5,967
General and administrative expenses 689 592 449 539 365
Depreciation 3,677 2,839 2,155 2,122 2,045
Minority interest 416 374 404 286 260
--------- --------- --------- --------- ---------
Totals 16,241 12,938 9,468 9,513 8,637
--------- --------- --------- --------- ---------
Operating income 14,115 12,461 10,103 9,319 9,545
Investment income 183 201 249 680 834
Interest expense including amortization
of deferred financing costs (9,046) (7,838) (5,480) (5,543) (5,634)
--------- --------- --------- --------- ---------
Income from continuing operations 5,252 4,824 4,872 4,456 4,745
Discontinued operations:
Income from discontinued operations,
net of minority interests * 9,958 741 809 244 14
--------- --------- --------- --------- ---------
Net income $ 15,210 $ 5,565 $ 5,681 $ 4,700 $ 4,759
========= ========= ========= ========= =========
* Includes gain on disposal of $12,681 and $475
in fiscal years 2004 and 2002, respectively.
Basic earnings per share:
Continuing operations $ 0.82 $ 0.77 $ 0.78 $ 0.71 $ 0.76
Discontinued operations $ 1.56 $ 0.12 $ 0.13 $ 0.04 $ 0.00
--------- --------- --------- --------- ---------
Net income $ 2.38 $ 0.89 $ 0.91 $ 0.75 $ 0.76
========= ========= ========= ========= =========
Diluted earnings per share:
Continuing operations $ 0.79 $ 0.74 $ 0.75 $ 0.71 $ 0.76
Discontinued operations $ 1.50 $ 0.11 $ 0.13 $ 0.04 $ 0.00
--------- --------- --------- --------- ---------
Net income $ 2.29 $ 0.85 $ 0.88 $ 0.75 $ 0.76
========= ========= ========= ========= =========
Cash Dividends Declared Per Common Share $ 1.10 $ 0.90 $ 0.86 $ 0.69 $ 0.67
========= ========= ========= ========= =========
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
---------------------------------------------------------------------------
Cautionary Statement Identifying Important Factors That Could Cause
FREIT's Actual Results to Differ From Those Projected in Forward
Looking Statements.
Readers of this discussion are advised that the discussion should be read
in conjunction with the consolidated financial statements of FREIT
(including related notes thereto) appearing elsewhere in this Form 10-K.
Certain statements in this discussion may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Forward-looking statements reflect FREIT's current
expectations regarding future results of operations, economic performance,
financial condition and achievements of FREIT, and do not relate strictly
to historical or current facts. FREIT has tried, wherever possible, to
identify these forward-looking statements by using words such as
"believe," "expect," "anticipate," "intend, " "plan," " estimate," or
words of similar meaning.
Although FREIT believes that the expectations reflected in such
forward-looking statements are based on reasonable assumptions, such
statements are subject to risks and uncertainties, which may cause the
actual results to differ materially from those projected. Such factors
include, but are not limited to, the following: general economic and
business conditions, which will, among other things, affect demand for
rental space, the availability of prospective tenants, lease rents and the
availability of financing; adverse changes in FREIT's real estate markets,
including, among other things, competition with other real estate owners,
risks of real estate development and acquisitions; governmental actions
and initiatives; and environmental/safety requirements.
---------------------------------------------------------------------------
Overview
FREIT is an equity real estate investment trust ("REIT") that owns a portfolio
of residential apartment and retail properties. Our revenues consist primarily
of fixed rental income from our residential and retail properties and additional
rent in the form of expense reimbursements derived from our income producing
retail properties. We also receive income from our 40% owned Affiliate, Westwood
Hills, which owns a residential apartment property and beginning in fiscal 2003,
we began receiving income from our 40% owned affiliate WaynePSC 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 are
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 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-K. The consolidation of these two
entities did not have any impact on FREIT's equity, net income, or earnings per
share.
In December 2004, the FASB issued SFAS No. 123 (R) "Accounting for Stock-Based
Compensation." SFAS 123 (R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SFAS 123 (R) requires that the fair value of such equity instruments be
recognized as an expense in the historical financial statements as services are
performed. Prior to SFAS 123 (R), only certain pro forma disclosures of fair
value were required. SFAS 123 (R) shall be effective for FREIT as of the
beginning of the first interim or annual reporting period that begins after
December 15, 2005. The adoption of this new accounting pronouncement is not
expected to have a material impact on FREIT's consolidated financial statements.
In December 2002, the Financial Accounting Standards Board (the "FASB") issued
SFAS 148, which amends SFAS 123. SFAS 148 provides alternate methods of
transition for a voluntary change from the intrinsic value method to the fair
value method of accounting for stock-based employee compensation. However, we do
not expect to make such a change. In addition, SFAS 148 amends SFAS 123 to
require more prominent annual and quarterly disclosures in the financial
statements about the effects of using the intrinsic value method rather than the
fair value method for stock-based compensation. The adoption of this provision
of SFAS 148 did not have a material impact on FREIT's consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The adoption of the provisions of
SFAS 149 did not have a material impact on FREIT's consolidated financial
statements.
In May 2003 the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
This statement requires that an issuer classify financial instruments that are
within its scope as a liability. Many of those instruments were classified as
equity under previous guidance. Most of the guidance in SFAS 150 was effective
for all financial instruments entered into or modified after May 31, 2003, and
otherwise was effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of the provisions of SFAS 150 did not have any
impact on FREIT's consolidated financial statements.
In November 2002, the EITF reached a consensus on EITF 00-21, "Revenue
Arrangements with Multiple Deliverables," related to the separation and
allocation of consideration for arrangements that include multiple deliverables.
The EITF requires that when the deliverables included in this type of
arrangement meet certain criteria they should be accounted for separately as
separate units of accounting. This may result in a difference in the timing of
revenue recognition but will not result in a change in the total amount of
revenues recognized in a bundled sales arrangement. The allocation of revenues
to the separate deliverables is based on the relative fair value of each item.
If the fair value is not available for the delivered items then the residual
method must be used. This method requires that the amount allocated to the
undelivered items in the arrangement is their full fair value. This would result
in the discount, if any, being allocated to the delivered items. This consensus
was effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption of the provisions of EITF 00-21 did
not have a material impact on FREIT's consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation of FASB
Statements Nos. 5, 57 and 107 and a rescission of FASB Interpretation No. 34."
This Interpretation, among other things, clarifies that a guarantor is required
to recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The adoption of the initial recognition and measurement
provisions of the Interpretation was required for guarantees issued or modified
after December 31, 2002. Such adoption did not have a material impact on FREIT's
consolidated financial statements.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Pursuant to the Securities and Exchange Commission ("SEC") disclosure guidance
for "Critical Accounting Policies," the SEC defines Critical Accounting Policies
as those that require the application of Management's most difficult,
subjective, or complex judgments, often because of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods.
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, the preparation of which
takes into account estimates based on judgments and assumptions that affect
certain amounts and disclosures. Accordingly, actual results could differ from
these estimates. The accounting policies and estimates used, which are outlined
in Note 1 to our Consolidated Financial Statements which is presented elsewhere
in this Annual Report, have been applied consistently as at October 31, 2004 and
2003, and for the years ended October 31, 2004, 2003 and 2002. We believe that
the following accounting policies or estimates require the application of
Management's most difficult, subjective, or complex judgments:
Revenue Recognition: Base rents, additional rents based on tenants' sales volume
and reimbursement of the tenants' share of certain operating expenses are
generally recognized when due from tenants. The straight-line basis is used to
recognize base rents under leases if they provide for varying rents over the
lease terms. Straight-line rents represent unbilled rents receivable to the
extent straight-line rents exceed current rents billed in accordance with lease
agreements. Before FREIT can recognize revenue, it is required to assess, among
other things, its collectibility. If we incorrectly determine the collectibility
of revenue, our net income and assets could be overstated.
Valuation of Long-Lived Assets: We periodically assess the carrying value of
long-lived assets whenever we determine that events or changes in circumstances
indicate that their carrying amount may not be recoverable. When FREIT
determines that the carrying value of long-lived assets may be impaired, the
measurement of any impairment is based on a projected discounted cash flow
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.
Results of Operations:
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. During 2002 and 2004, FREIT sold its Camden, NJ and its
Olney, MD properties, respectively. FREIT has reclassified the net income (loss)
from the operation,of these properties 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 these properties within the
consolidated statements of income. The results of this reclassification can be
seen in "ITEM 6 SELECTED FINANCIAL DATA" above and in the Consolidated Financial
Statements of FREIT (including related notes thereto) appearing elsewhere in
this Form 10-K.
Since we consider net income from continuing operations (which excludes the
operations of the Camden and Olney properties) to be the most significant
element of net income, all references and comparisons refer to this item unless
otherwise stated. All references to per share amounts are on a diluted basis
(unless otherwise indicated), and refer to earnings per share from continuing
operations and have been adjusted to reflect the one-for-one share dividends
paid in October 2001 and March 2004.
Results of Operations:
Fiscal Year Ended October 31, 2004 and 2003
Revenues for the fiscal year ended October 31, 2004 ("Fiscal 2004") increased
$4,939,000 or 19.3% over revenues for the fiscal year ended October 31, 2003
("Fiscal 2003"). The components of the increase are summarized in this chart:
Year Ended
October 31,
------------------ Increase
2004 2003 (Decrease)
---- ---- ----------
Retail revenues:
Same properties(1) $16,105 $15,304 $ 801
New Properties 1,253 265 988
------- ------- -------
17,358 15,569 1,789
------- ------- -------
Residential revenues:
Same properties(1) 9,978 9,830 148
New Properties 3,020 3,020
------- ------- -------
12,998 9,830 3,168
------- ------- -------
Total real estate revenues 30,356 25,399 4,957
Investment income
and other 183 201 (18)
------- ------- -------
Total Revenues $30,539 $25,600 $ 4,939
======= ======= =======
(1) Properties operated since the beginning of fiscal 2003.
New Properties, specifically The Pierre, generated the major increase in
revenues. The Pierre is a 269-apartment high-rise residential property in
Hackensack, NJ, that was purchased in July 2004.
Income from continuing operations increased $428,000 (8.9%) to $5,252,000 for
Fiscal 2004 from Fiscal 2003.
SEGMENT INFORMATION
The following table sets forth comparative operating data for FREIT's real
estate segments.
Retail Residential Combined
------------------------------------------ ----------------------------------------- -------------------
Year Ended Year Ended
------------------- ------------------ Year Ended
October 31, Increase (Decrease) October 31, Increase (Decrease) October 31,
------------------- -------------------- ------------------ ------------------- -------------------
2004 2003 $ % 2004 2003 $ % 2004 2003
(in thousands) (in thousands) (in thousands)
------------------------------ ----------------------------- -------------------
Rental income $12,699 $11,195 $ 1,504 13.4% $12,843 $ 9,737 $3,106 31.9% $25,542 $20,932
Percentage rent 57 129 (72) -- 57 129
Reimbursements 4,229 3,943 286 7.3% -- 4,229 3,943
Other 36 26 10 38.5% 155 93 62 66.7% 191 119
---------------------------------------- -------------------------------------- -------------------
Total Revenue 17,021 15,293 1,728 11.3% 12,998 9,830 3,168 32.2% 30,019 25,123
Operating expenses 5,663 5,237 426 8.1% 5,794 3,896 1,898 48.7% 11,457 9,133
---------------------------------------- -------------------------------------- -------------------
Net operating income $11,358 $10,056 $ 1,302 12.9% $ 7,204 $ 5,934 $1,270 21.4% 18,562 15,990
========================================= ======================================
Average
Occupancy % 92.1% 91.5% 0.6% 94.4% 96.2% -1.8%
==== ==== === ==== ==== ===
Reconciliation to consolidated net income:
Deferred rents - straight lining 335 276
Net investment income 183 201
General and administrative expenses (689) (592)
Depreciation (3,677) (2,839)
Financing costs (9,046) (7,838)
Minority interest (416) (374)
-------------------
Net income from continuing operations 5,252 4,824
Discontinued operations 9,958 741
-------------------
Net income $15,210 $5,565
===================
The above table details the comparative net operating income ("NOI") for FREIT's
Retail and Residential Segments, and reconciles the combined NOI to consolidated
Net Income. NOI is based on operating revenue and expenses directly associated
with the operations of the real estate properties, but excludes deferred rents
(straight lining), depreciation and financing costs. FREIT assesses and measures
segment operating results based on NOI. NOI is not a measure of operating
results or cash flow as measured by generally accepted accounting principles,
and is not necessarily indicative of cash available to fund cash needs and
should not be considered an alternative to cash flows as a measure of liquidity.
RETAIL SEGMENT
During Fiscal 2004 revenues increased $1,728,000 (11.3%) to $17,021,000 and NOI
increased $1,302,000 (12.9%) to $11,358,000. $850,000 of the NOI increase is
attributable to the new properties of the Damascus Shopping Center, acquired
July 2003, and rent from our land lease in Rockaway Township, NJ, that commenced
December 2003. Revenues from same properties increased 5.2% to $16,105,000 and
NOI from same properties increased $612,000 (6.2%) to $10,508,000. The reasons
for the favorable increases are attributable to higher occupancy for full Fiscal
2004 and higher rents.
RESIDENTIAL SEGMENT
Residential revenue increased $3,168,000 (32.2%) to $12,998,000 during Fiscal
2004 from $9,830,000 for Fiscal 2003. As indicated above, the principal amount
of the increase was attributable to the operations of The Pierre, which has been
included in operations for the period from April 15, 2004 through October 31,
2004. The Pierre, a 269-apartment unit high rise in Hackensack, NJ, was acquired
by S And A, FREIT's 75% owned subsidiary.
While revenues at the same properties (properties operated since the start of
Fiscal 2003) increased slightly to $9,978,000 during Fiscal 2004 from $9,830,000
for Fiscal 2003, average occupancy for the same properties decreased to 94.8%
during Fiscal 2004 compared to 96.2% for Fiscal 2003. The decreased in occupancy
was the result of weakened demand for rental housing in our markets. This
reduced occupancy, coupled with rent concessions, higher advertising, painting
and decorating expenses, resulted in the NOI of our same properties falling
$210,000 (3.5%) to $5,723,000 for Fiscal 2003 from $5,933,000 for Fiscal 2003.
We feel the rental housing demand has firmed, as occupancies are increasing and
concessions eliminated. We expect fiscal 2005 to show improved operating
results in the residential segment.
While demand During Fiscal 2004 was sluggish, average monthly asking rents at
our same properties increased 2.1% to $1,192, from $1,167 during Fiscal 2003.
Average asking monthly rents for all properties, including The Pierre, were
$1,529.
Our residential revenue is principally composed of monthly apartment rental
income. Total rental income is a factor of occupancy and monthly apartment
rents. A 1% decline in annual average occupancy, or a 1% decline in average
rents, results in an annual decline of $158,000 and $149,000 respectively.
During Fiscal 2004 we expended $416,000 ($580 per apartment unit), excluding The
Pierre, to improve and maintain the competitiveness of our apartments. Since our
apartment communities were constructed more than 25 years ago, we tend to spend
more in any given year on maintenance and capital improvements than may be spent
on newer properties. At The Pierre a major renovation program has been started.
We intend to modernize, where required, all apartments and modernize some of the
buildings mechanical services. This renovation is expected to take, at least,
several years to complete and will be financed from operating cash flow in cash
reserves.
Rockaway Township, NJ
We own approximately 20 +/- acres of undeveloped land in Rockaway Township, NJ.
Building plan approval has been received from Rockaway Township for the
construction of 129 garden apartment units. Development costs are estimated at
$13.8 million that we will finance, in part, from construction financing and, in
part, from funds available from our institutional money market investments. We
have received final water allocation and sewer approval from the NJ Department
of Environmental Protection. As soon as construction agreements are negotiated
and finalized, construction will begin and is expected to last twelve to
eighteen months.
NET INVESTMENT INCOME
Net investment income decreased approximately 9% to $183,000 for Fiscal 2004
compared to $201,000 for Fiscal 2003. Net investment income is principally
derived from interest earned from our cash on deposit in institutional money
market funds. The amount of earnings is dependent on prevailing interest rates
in effect from time-to-time.
FINANCING COSTS
Financing costs are summarized as follows:
Year Ended
October 31,
--------------
2004 2003
---- ----
($000)
Fixed rate Mortgages
1st Mortgages
Existing $7,040 $7,323
New (1) 1,162 59
2nd Mortgages
New (1) 564 243
Credit Line 23
Other 61 36
------ ------
8,850 7,661
Amortization of
Mortgage Costs 196 177
------ ------
Financing Costs $9,046 $7,838
====== ======
(1) Mortgages not in place at beginning of Fiscal 2003.
Financing costs for Fiscal 2004 increased by $1,208,000 (15.4%) compared to
Fiscal 2003. The principal reasons for the increase were the new first mortgage
loans on FREIT's acquisitions of the Damascus S/C in 2003 and The Pierre during
Fiscal 2004; and the result of a full years interest expense on the 2nd
mortgages placed on several of our residential properties during Fiscal 2003.
Additionally, FREIT incurred interest costs for draws against its credit
line to purchase The Pierre.
GENERAL AND ADMINISTRATIVE EXPENSES
Our General and Administrative expenses increased 16.4% to $689,000 for Fiscal
2004 from $592,000 for Fiscal 2003. The principal reasons for the increase were
higher Officer and Trustee's fees for Fiscal 2003, higher NJ income taxes, and
increases in legal fees.
DEPRECIATION
Depreciation expense in fiscal 2004 increased $838,000 (29.5%) to $3,677,000
from $2,839,000 for Fiscal 2003. The principal reasons for the increase was the
acquisition of The Pierre during Fiscal 2004, and a full year's depreciation
take on the Damascus S/C which was purchased during Fiscal 2003.
Results of Operations:
Fiscal Years Ended October 31, 2003 and 2002
Revenues for the fiscal year ended October 31, 2003 ("Fiscal 2003") increased
$5,780,000 or 29% over revenues for the fiscal year ended October 31, 2002
("Fiscal 2002"). The components of the increase are summarized in this chart:
Year Ended
October 31,
----------------- Increase
2003 2002 (decrease)
---- ---- ----------
Retail revenues:
Same properties (1) $10,445 $10,063 $ 382
New Properties 5,124 -- 5,124
------- ------- -------
15,569 10,063 5,506
------- ------- -------
Residential revenues:
Same properties (1) 9,830 9,508 322
------- ------- -------
9,830 9,508 322
------- ------- -------
Total real estate revenues 25,399 19,571 5,828
Investment income
and other 201 249 (48)
------- ------- -------
Total Revenues $25,600 $19,820 $ 5,780
======= ======= =======
(1) Properties operated since the beginning of fiscal 2002.
Income from continuing operations decreased marginally to $4,824,000 for Fiscal
2003 from $4,872,000 for Fiscal 2002.
SEGMENT INFORMATION
The following table sets forth comparative operating data for FREIT's real
estate segments:
Retail Residential Combined
--------------------------------------- ----------------------------------------- ------------------
Year Ended Year Ended
----------------- ------------------ Year Ended
October 31, Increase (Decrease) October 31, Increase (Decrease) October 31,
----------------- ------------------- ------------------ ------------------- ------------------
2003 2002 $ % 2003 2002 $ % 2003 2002
(in thousands) (in thousands) (in thousands)
---------------------------- ----------------------------- ------------------
Rental income $11,195 $7,334 $ 3,861 52.6% $ 9,737 $ 9,407 $ 330 3.5% $20,932 $16,741
Percentage rent 129 108 21 -- 129 108
Reimbursements 3,943 2,283 1,660 72.7% -- 3,943 2,283
Other 26 75 (49) -65.3% 93 101 (8) -7.9% 119 176
-------------------------------------- -------------------------------------- -----------------
Total Revenue 15,293 9,800 5,493 56.1% 9,830 9,508 322 3.4% 25,123 19,308
Operating expenses 5,237 2,906 2,331 80.2% 3,896 3,554 342 9.6% 9,133 6,460
-------------------------------------- -------------------------------------- -----------------
Net operating income $10,056 $6,894 $ 3,162 45.9% $ 5,934 $ 5,954 $ (20) -0.3% 15,990 12,848
====================================== ======================================
Average
Occupancy % 91.5% 96.9% -5.4% 96.2% 96.4% -0.2%
===== ===== ===== ===== ===== =====
Reconciliation to consolidated net income:
Deferred rents - straight lining 276 263
Net investment income 201 249
General and administrative expenses (592) (449)
Depreciation (2,839) (2,155)
Financing costs (7,838) (5,480)
Minority interest (374) (404)
------------------
Net income from continuing operations 4,824 4,872
Discontinued operations 741 809
------------------
Net income $ 5,565 $5,681
==================
The above table details the comparative net operating income ("NOI") for FREIT's
Retail and Residential Segments, and reconciles the combined NOI to consolidated
Net Income. NOI is based on operating revenue and expenses directly associated
with the operations of the real estate properties, but excludes deferred rents
(straight lining), depreciation and financing costs. FREIT assesses and measures
segment operating results based on NOI. NOI is not a measure of operating
results or cash flow as measured by generally accepted accounting principles,
and is not necessarily indicative of cash available to fund cash needs and
should not be considered an alternative to cash flows as a measure of liquidity.
RETAIL SEGMENT
During Fiscal 2003, revenues increased by $5,493,000 (56.1%) and NOI increased
by $ 3,162,000 (45.9%) in spite of average occupancy declining 5.4% to 91.5%
from 96.9% for Fiscal 2002.
Revenues and NOI from same properties (those properties included for a full year
in fiscal 2003 and 2002) for Fiscal 2003 increased by $508,000 (5.2%) and
$195,000 (2.8%) respectively over Fiscal 2002. The balance of the revenue and
NOI increase came from our Damascus Center that we acquired on July 31, 2003,
and the Preakness Center that was acquired on November 1, 2002.
The increases for Fiscal 2003 from same properties reflects higher rents from
existing tenants and rents from new tenants not in occupancy during Fiscal 2002.
The increased rents offset the decline in average occupancy, principally at our
Westridge Square property with the vacancy created by the Westridge Cinema
closing its theater (see below). This vacancy, if the space in not leased, will
have a greater negative impact in the next fiscal year.
Westridge Square:
In February 2003 Westridge Cinema ("Tenant") closed its theater and ceased
paying rent. Tenant's lease expires April 30, 2007. Total rent and expense
reimbursements currently aggregate approximately $488,000 per year. FREIT and
Tenant have agreed on the terms of a lease termination agreement whereby Tenant
paid FREIT a lump sum payment of approximately $1.8 million to terminate the
lease. The mortgage lender has agreed to the termination agreement with the
stipulation that the entire lump sum payment made by the Tenant be deposited in
an interest bearing escrow account held for the benefit of the mortgage lender.
Up to $750,000 will be disbursed to FREIT (a) in monthly installments of $31,595
over approximately twenty four (24) months, or (b) the balance of the
undisbursed $750,000 will be disbursed 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
is leased and re-occupied, or (c) when the mortgage loan has been re-paid.
ACQUISITION
On July 31, 2003, Damascus Centre, LLC, an entity wholly owned by FREIT,
acquired the Damascus Shopping Center in Damascus, MD.
The shopping center is situated on 13 acres, and contains approximately 139,000
SF of retail and office space. A Safeway supermarket is the anchor tenant.
The total acquisition costs of $10.3 Million were financed in part by the
assumption of an existing $2.6 Million first mortgage loan and the balance of
$7.7 Million with equity capital. Included in the acquisition costs is an amount
paid to an existing tenant to terminate its lease as of December 31, 2003. FREIT
is considering offering an interest in this investment to an entity owned by
employees of Hekemian, FREIT's managing agent.
FREIT plans to demolish the existing buildings, with the exception of the
freestanding McDonald's restaurant. A new Shopping Center will be constructed of
approximately 145,000 SF, of which 58,000 SF is expected to be occupied by a
new, prototype supermarket. A smaller building will be constructed on an out
parcel which will accommodate the office tenants as well as some smaller, retail
space. This plan to construct a new center is subject to obtaining all approvals
and building permits from the various governing authorities. Construction costs
for the new center are estimated at approximately $13 million. Construction is
expected to begin during the latter part of 2005.
RESIDENTIAL SEGMENT
Residential revenue increased by $322,000 (3.4%) to $9,830,000 during Fiscal
2003 from $9,508,000 during Fiscal 2002. Average occupancy for both Fiscal 2003
and Fiscal 2002 remained substantially unchanged at 96.25 and 96.45
respectively. NOI decreased marginally to $5,934,000 for Fiscal 2003 compared to
$5,954,000 for Fiscal 2002. The increase in revenue during Fiscal 2003 was more
than offset by increased expenses (snow removal and heating costs) brought on by
the severe 2002/2003 winter.
While the demand for apartments was weak at the start of Fiscal 2003, demand at
our properties picked up as evidenced by average annual asking monthly rents
increasing 3.6% to $1,167 from $1,126 during Fiscal 2002. As at October 31,
2003, average asking monthly rents were $1,167
Our residential revenue is principally composed of monthly apartment rental
income. Total apartment rental income is a factor of occupancy and monthly
apartment rents. A 1% decline in annual average occupancy, or a 1% decline in
average rents, results in an annual decline in revenues of approximately
$100,000.
In keeping with our policy of improving our apartments and maintaining their
competitiveness, we invested $596,000 ($831 per apartment) in our capital
program during Fiscal 2003. Since our apartment communities were constructed
more than 25 years ago, we tend to spend more in any given year on maintenance
and capital improvements than may be spent on newer properties.
We own 20 +/- acres of undeveloped land in Rockaway, NJ, and have received
building plan approval and a water allocation from the Township for the
construction of 129 garden apartment units. Development costs are estimated at
$13.8 million that we will finance, in part, from construction financing and, in
part, from funds available from our institutional money market investment. We
expect construction to commence by the summer of 2005. Through October 31, 2003
approximately $260,000 of pre-construction development costs have been expended
and deferred.
Approximately one (1) acre of the Rockaway Township land has been sub-divided
and leased to a bank. Rent under the land lease commenced in December 2003.
NET INVESTMENT INCOME
Net investment income decreased 19.3% to $201,000 in Fiscal 2003 compared to
$249,000 for Fiscal 2002. Net investment income for the past two years was
principally interest earned from our investments in money market funds. The
lower interest rate environment during Fiscal 2003 compared to Fiscal 2002,
coupled with lower average investment balances, due to the acquisition of the
Damascus shopping center, accounted for the reduced investment income. Our
average yield during Fiscal 2003 was approximately 1.6% compared to 1.9% during
Fiscal 2002.
FINANCING COSTS
Financing costs are summarized as follows:
Year Ended
October 31,
-----------------
2003 2002
---- ----
($000)
Fixed rate Mortgages
1st Mortgages
Existing $5,162 $5,353
New (1) 2,220 --
2nd Mortgages
New (1) 243 --
Other 36 14
------ ------
7,661 5,367
Amortization of
Mortgage Costs 177 113
------ ------
Financing Costs $7,838 $5,480
====== ======
(1) Mortgages not in place at beginning of fiscal 2002.
Financing costs for Fiscal 2003 increased $2,358,000 (43%) to $7,838,000 from
$5,480,000 for Fiscal 2002. The increase is principally attributable to the
mortgages on FREIT's acquisitions of the Preakness Center in Wayne,NJ, and the
Damascus Center in Damascus, MD. The decrease in financing costs from existing
mortgages is principally attributable to reduced interest costs resulting from
lower mortgage balances from normal loan amortization.
During November 2002, we renegotiated the terms of the first mortgage note on
our retail property in Patchogue, NY. The mortgage note, which had an
outstanding principal balance of $6.9 million, was due on January 1, 2005, and
carried a fixed interest rate of 7.375%. The due date has been extended three
years (3) and the interest rate was reduced to a fixed interest rate of 5.95%.
This interest rate reduction will reduce FREIT's interest costs and debt service
requirements going forward.
To create additional liquidity and lock in favorable long-term interest rates,
FREIT took advantage of the Freddie Mac second mortgage program. This program
allows add-ons to existing Freddie Mac first mortgages to the extent justified
by increased values and cash flows. On August 20, 2003, FREIT placed add-on
second mortgages on three of its residential properties (Berdan Court, Hammel
Gardens and Steuben Arms). The second mortgage loans aggregated approximately $7
million bearing an average fixed rate of 5.2%. The due dates of the second
mortgage loans are co-terminus with the underlying first mortgage loans with
respect to the properties. FREIT received net financing proceeds of
approximately $6.9 million from the add-on second mortgages.
As a result of the second mortgage financing, and the first mortgage debt
assumed from the acquisition of the Damascus shopping center, financing costs
for the fiscal year ending October 31, 2004 are expected to increase.
On June 30, 2003, Wayne PSC refinanced its original $26.5 million first mortgage
loan with a new $32.5 million mortgage loan. The term of the new loan is
thirteen (13) years, with interest fixed at 6.04%, and the loan will require
interest only payments for the first three years and thereafter be amortized
over a 25-year life. FREIT received $2.4 million of the net re-finance proceeds
as a distribution from WaynePSC.
GENERAL AND ADMINISTRATIVE EXPENSES
Our General and Administrative expenses increased to $592,000 in Fiscal 2003
from $449,000 in Fiscal 2002. The increase in Fiscal 2003 results principally
from increased Officer and Trustee's fees.
DEPRECIATION
Depreciation expense in Fiscal 2003 increased $2.839 million compared to $2.155
million for Fiscal 2002. Most of this increase is attributable to the
acquisition of the Damascus and Preakness shopping centers and to capital
improvements made to our properties during Fiscal 2003.
-----------------------------
LIQUIDITY AND CAPITAL RESOURCES
Our financial condition remains strong. Net cash provided by operating
activities was $11.3 million for Fiscal 2004 compared to $6.2 million for Fiscal
2003. We expect that cash provided by operating activities will be adequate to
cover mandatory debt service payments, recurring capital improvements and
dividends necessary to retain qualification as a REIT (90% of taxable income).
As at October 31, 2004, we had cash and marketable securities totaling $18.8
million compared to $14.4 million at October 31, 2003. These funds are available
for construction, property acquisitions and general needs.
As described in the segment analysis above, we are planning the construction of
apartment rental units in Rockaway Township, NJ and the rebuilding of the
Damascus Shopping Center, in Damascus, MD. The total capital required for these
projects is estimated at $13.8 million and $13 million, respectively. We expect
to finance these costs, in part, from construction and mortgage financing and,
in part, from funds available in our institutional money market investment.
At October 31, 2004, FREIT's aggregate outstanding mortgage debt was $148.2
million. This debt bears a fixed weighted average interest rate of 6.451%, and
an average life of approximately 8 years. The fixed rate mortgages are subject
to repayment (amortization) schedules that are longer than the term of the
mortgages. As such, balloon payments for all mortgage debt will be required as
follows:
--------------------------
Year $ Millions
--------------------------
2007 $ 15.7
--------------------------
2008 $ 5.9
--------------------------
2010 $ 12.3
--------------------------
2013 $ 8.0
--------------------------
2014 $ 26.1
--------------------------
2016 $ 24.7
--------------------------
2019 $ 28.3
--------------------------
The following table shows the estimated fair value and carrying value of our
long-term debt at October 31, 2003 and 2002:
October 31, October 31,
(In Millions) 2004 2003
------------- ---- ----
Fair Value $158.1 $131.7
Carrying Value $148.2 $126.8
Fair values are estimated based on market interest rates at the end of each
fiscal year and on discounted cash flow analysis. Changes in assumptions or
estimation methods may significantly affect these fair value estimates.
FREIT expects to re-finance the individual mortgages with new mortgages when
their terms expire. To this extent we have exposure to interest rate risk on our
fixed rate debt obligations. If interest rates, at the time any individual
mortgage note is due, are higher than the current fixed interest rate, higher
debt service may be required, and/or re-financing proceeds may be less than the
amount of mortgage debt being retired. For example, a one percent interest rate
increase would reduce the fair value of our debt by $7.7 million, and a one
percent decrease would increase the fair value by $7.3 million.
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.
Credit Line:
FREIT's $14 million line of credit expired on January 21, 2005 (extended date)
and has been replaced by an $18 million line of credit. The line of credit well
to for three years but can be cancelled by the bank, at its will, at each
anniversary date. Draws against the credit line can be used for general
corporate purposes, for property acquisitions, construction activities, and
letters-of-credit. Draws against the credit line are secured by mortgages on
FREIT's Franklin Crossing Shopping Center, Franklin Lakes, NJ, retail space in
Glen Rock, NJ, Lakewood Apartments, Lakewood, NJ, and Grandview Apartments,
Hasbrouck Heights, NJ. Interest rates on draws will be set at the time of each
draw for 30, 60, or 90 day periods, based on out choice of the prime rate or at
175 basis points over the 30, 60, or 90 day LIBOR rates at the time of the
draws.
During Fiscal 2004 FREIT borrowed $3.9 million against its credit line to use
for the purchase of The Pierre. This borrowing was repaid in June 2004. As of
October 31, 2004 there were no draws outstanding against this line. As at
January 19, 2005 the credit line has been utilized for the issuance of a $2
million Letter of Credit for the benefit of the Township of Rockaway in
connection with our construction of 129 garden apartment units.
On January 21, 2005 FREIT, taking advantage of an expired yield maintenance pre
payment penalty, pre-paid the 9.25% fixed interest mortgage note secured by the
Damascus Shopping Center, in the amount of approximately $2.3 million. FREIT
used funds from its institutional money market account to make the pre-payment.
FREIT's total capital commitments, including long term debt, are summarized as
follows:
=======================================================================================
CAPITAL COMMITMENTS
(IN THOUSANDS OF DOLLARS)
---------------------------------------------------------------------------------------
Within 2 - 3 4 - 5 After 5
---------------------------------------------------------------------------------------
Contractual Obligations Total One Year Years Years Years
---------------------------------------------------------------------------------------
Long-Term Debt (a)
Annual Amortization $ 27,492 $ 1,922 $ 4,845 $ 4,783 $ 15,942
Balloon Payments 120,752 15,671 5,893 99,188
---------------------------------------------------------------------------------------
Total Long-Term Debt 148,244 1,922 20,516 10,676 115,130
---------------------------------------------------------
---------------------------------------------------------------------------------------
Total Capital Commitments $148,244 $ 1,922 $20,516 $10,676 $115,130
=======================================================================================
(a) Excludes the impact of prepaying the $2.3 million Damascus Shopping Center
mortgage.
Distributions to Shareholders
Since its inception in 1961, FREIT has elected to be treated as a REIT for
Federal income tax purposes. In order to qualify as a REIT, we must satisfy a
number of highly technical and complex operational requirements including that
we must distribute to our
shareholders at least 90% of our REIT taxable income. We anticipate making
distributions to shareholders from operating cash flows, which are expected to
increase from future growth in rental revenues. Although cash used to make
distributions reduces amounts available for capital investment, we generally
intend to distribute not less than the minimum of REIT taxable income necessary
to satisfy the applicable REIT requirement as set forth in the Internal Revenue
Code. With respect to the Jobs and Growth Tax Relief Reconciliation Act of 2003,
the reduction of the tax rate on dividends does not apply to FREIT dividends.
Since it is FREIT's policy to pass on at least 90 percent of its taxable income
to shareholders, FREIT's taxable income is untaxed at the Trust level. As a
result, FREIT's dividends will be taxed as ordinary income.
It has been our policy to pay fixed quarterly dividends for the first three
quarters of each fiscal year, and a final fourth quarter dividend based on the
fiscal year's net income and taxable income. The Board has decided to fix the
dividend for the first three quarters of fiscal 2005 at $.25 per share. The
following tables list the quarterly dividends paid or declared for the three
most recent fiscal years and the percent the dividends were of taxable income.
Per share amounts have been adjusted to reflect the one-for-one share dividends
paid in October 2001 and March 2004.
----------------------------------------------------------
Fiscal Year ended October 31,(1)
----------------------------------------------------------
2004 2003 2002
----------------------------------------------------------
First Quarter $ 0.20 $ 0.175 $ 0.15
Second Quarter $ 0.20 $ 0.175 $ 0.15
Third Quarter $ 0.20 $ 0.175 $ 0.15
Fourth Quarter $ 0.50 $ 0.375 $ 0.41 (2)
----------------------------------------------------------
Total For Year $ 1.10 $ 0.90 $ 0.86
----------------------------------------------------------
(1) All prior periods adjusted for one-for-one stock split on March 31,
2004.
(2) Includes special $0.075 dividend representing the gain on the sale
of Camden property.
($000)
---------------------- Dividends
Fiscal Per Total Taxable as a % of
Year Share Dividends Income Taxable Income
--------------------------------------------------------------------
2004 $ 1.10 $ 7,064 $ 5,700 123.9%
2003 $ 0.90 $ 5,667 $ 4,576 123.8%
2002 $ 0.86 $ 5,366 $ 5,258 102.1%
--------------------------------------------------------------------
INFLATION
Inflation can impact the financial performance of FREIT in various ways. Our
retail tenant leases normally provide that the tenants bear all or a portion of
most operating expenses, which can reduce the impact of inflationary increases
on FREIT. Apartment leases are normally for a one-year term, which may allow us
to seek increased rents as leases renew or when new tenants are obtained.
Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Liquidity and Capital Resources" and "Retail and Residential Segment"
above.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of FREIT are
submitted as a separate section of this Annual Report. See "Index to
Consolidated Financial Statements" on page F-1 of this Annual Report.
ITEM 9 CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
TEM 9A: CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an evaluation
of the effectiveness of the design and operation of FREIT's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
participation of FREIT's management, including FREIT's Chairman and Chief
Executive Officer and Chief Financial Officer, who concluded that FREIT's
disclosure controls and procedures are effective. There have been no significant
changes in FREIT's internal controls or in other factors which could
significantly affect internal controls subsequent to the date we carried out our
evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in FREIT's reports
filed or submitted under the Exchange Act is recorded, processed, summarized,
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
FREIT's reports filed under the Exchange Act is accumulated and communicated to
management, including FREIT's Chief Executive Officer and Chief Financial
Officer as appropriate, to allow timely decisions regarding required disclosure.
PART III
Certain information required by Part III is incorporated by reference to FREIT's
definitive proxy statement (the "Proxy Statement") to be filed with the
Securities and Exchange Commission no later than 120 days after the end of
FREIT's fiscal year covered by this Annual Report. Only those sections of the
Proxy Statement that specifically address the items set forth in this Annual
Report are incorporated by reference from the Proxy Statement into this Annual
Report.
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information concerning FREIT's trustees required by this item is
incorporated herein by reference to the sections titled "Election of Trustees"
and "Compliance with Section 16(a) of the Securities Exchange Act" in FREIT's
Proxy Statement for its Annual Meeting to be held in April 2005.
The information concerning FREIT's executive officers required by this item is
set forth in Item 4A of Part I of this Annual Report under the caption
"Executive Officers of FREIT."
ITEM 11: EXECUTIVE COMPENSATION
The information pertaining to executive compensation required by this item is
incorporated herein by reference to the section titled "Election of Trustees -
Executive Compensation" in FREIT's Proxy Statement for its Annual Meeting to be
held in April 2005.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 403 of Regulation S-K to be included as part of
this item is incorporated herein by reference to the section titled "Security
Ownership of Certain Beneficial Owners and Management" in FREIT's Proxy
Statement for its Annual Meeting to be held in April 2005.
Securities Authorized for Issuance under Equity Compensation Plans
The number of stock options outstanding under our equity compensation plans, the
weighted average exercise price of outstanding options, and the number of
securities remaining available for issuance, as of October 31, 2004 follows:
Number of securities
remaining available for
Number of securities future issuance under
to be issued upon Weighted-average equity compensation
exercise of exercise price of plans (excluding
outstanding options, outstanding options, securities reflected in
warrants and rights warrants and rights column (a))
----------------------------------------------------------------------------------------------------------------
Plan category (a) (b) (c)
Equity
Compensation Plans 570,000 $7.50 166,000
approved by
security holders (1)
----------------------------------------------------------------------------------------------------------------
Equity
Compensation Plans 0 0 0
not approved by
security holders
----------------------------------------------------------------------------------------------------------------
Total 570,000 $7.50 166,000
================================================================================================================
(1) FREIT's equity incentive plan provides for the issuance of awards to
officers, trustees, employees and consultants in the form of nonqualified
options to acquire shares of beneficial interest, restricted shares and other
share based awards.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the
section titled "Certain Relationships and Related Transactions" in FREIT's Proxy
Statement for its Annual Meeting to be held in April 2005.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required in response to this Item is incorporated by reference
to the information contained in FREIT's Proxy Statement for its Annual Meeting
to be held in April 2005 under the captions "Audit Fees," "Related Fees,"
" Tax Fees" and "All Other Fees."
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES.
(a) Financial Statements
(i) Reports of Independent Registered Public Accounting Firm, J.H. Cohn
LLP
(ii) Consolidated Balance Sheets as of October 31, 2004 and 2003
(iii) Consolidated Statements of Income, Comprehensive Income, and
Undistributed Earnings for the years ended October 31, 2004, 2003
and 2002
(iv) Consolidated Statements of Cash Flows for the years ended October
31, 2004, 2003 and 2002
(v) Notes to Consolidated Financial Statements
Financial Statement Schedules:
(i) Real Estate and Accumulated Depreciation.
Exhibits:
See Index to Exhibits immediately following the Financial Statements.
(b) Exhibits:
See Index to Exhibits.
(c) Financial Statement Schedules:
See Index to Financial Statements and Financial Statement Schedules.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, FREIT has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
First Real Estate Investment Trust
of New Jersey
Dated: February 9, 2005 By:/s/ Robert S. Hekemian
-----------------------------
Robert S. Hekemian, Chairman of the
Board and Chief Executive Officer
By: /s/ Donald W. Barney
------------------------------------
Donald W. Barney
President, Treasurer and Chief
Financial Officer
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES (ITEMS 8 AND 14(a))
-------------------------------------------------
PAGE
----
(A) Financial Statements:
Report of Independent Registerd Public Accounting Firm F-2
Consolidated Balance Sheets
October 31, 2004 and 2003 F-3
Consolidated Statements of Income, Comprehensive Income and
Undistributed Earnings
Years ended October 31, 2004, 2003 and 2002 F-4
Consolidated Statements of Cash Flows
Years Ended October 31, 2004, 2003 and 2002 F-5
Notes To Consolidated Financial Statements F-6
(B) Financial Statement Schedules:
XI - Real Estate and Accumulated Depreciation F-22/F-23
Other schedules are omitted because of the absence of
conditions under which they are required or because the
required information is given in the consolidated financial
statement or notes thereto.
* * *
F - 1
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
To the Trustees and Shareholders
First Real Estate Investment Trust of New Jersey
We have audited the accompanying consolidated balance sheets of First Real
Estate Investment Trust of New Jersey and Subsidiaries ("FREIT") as of October
31, 2004 and 2003, and the related consolidated statements of income,
comprehensive income and undistributed earnings and cash flows for each of the
three years in the period ended October 31, 2004. These financial statements are
the responsibility of FREIT's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Real Estate
Investment Trust of New Jersey and Subsidiaries as of October 31,2004 and 2003,
and their results of operations and cash flows for each of the three years in
the period ended October 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1, in 2004 FREIT adopted the provisions of Financial
Accounting Standards Board Interpretation No. 46R, "Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research Bulletin No.51."
Accordingly, FREIT consolidated certain affiliates which had previously been
accounted for on the equity method and restated all prior periods presented.
Our audits referred to above included the information in Schedule XI, which
presents fairly, when read in conjunction with the consolidated financial
statements, the information required to be set forth therein.
/s/ J.H. Cohn LLP
Roseland, New Jersey
January 10, 2005
F - 2
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2004 AND 2003
2004 2003
---- ----
(In Thousands of Dollars)
-------------------------
ASSETS
------
Real estate, at cost, net of accumulated depreciation $ 160,357 $ 116,290
Real estate held for sale -- 14,426
Cash and cash equivalents 18,843 14,437
Tenants' security accounts 1,777 1,332
Sundry receivables 3,102 4,326
Prepaid expenses and other assets 3,580 2,183
Deferred charges, net 2,916 2,770
--------- ---------
Totals $ 190,575 $ 155,764
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Mortgages payable $ 148,244 $ 115,895
Mortgage applicable to real estate held for sale -- 10,872
Accounts payable and accrued expenses 3,068 1,604
Dividends payable 3,212 2,367
Tenants' security deposits 2,210 1,804
Deferred revenue 247 241
Interest rate swap contract 160 201
--------- ---------
Total liabilities 157,141 132,984
--------- ---------
Minority interest 2,267 640
--------- ---------
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 10,633 2,487
Accumulated other comprehensive loss (160) (201)
--------- ---------
Total shareholders' equity 31,167 22,140
--------- ---------
Totals $ 190,575 $ 155,764
========= =========
See Notes to Consolidated Financial Statements.
F - 3
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME AND
UNDISTRIBUTED EARNINGS
YEARS ENDED OCTOBER 31, 2004, 2003 AND 2002
INCOME 2004 2003 2002
------ ---------- ---------- ----------
(In Thousands Of Dollars,
Except Per Share Amounts)
Revenue:
Rental income $ 25,937 $ 21,336 $ 17,112
Reimbursements 4,229 3,945 2,283
Sundry income 190 118 176
---------- ---------- ----------
Totals 30,356 25,399 19,571
---------- ---------- ----------
Expenses:
Operating expenses 6,441 4,982 3,518
Management fees 1,299 1,065 844
Real estate taxes 4,408 3,678 2,547
Depreciation 3,677 2,839 2,155
Minority interest 416 374 404
---------- ---------- ----------
Totals 16,241 12,938 9,468
---------- ---------- ----------
Operating income 14,115 12,461 10,103
Investment income 183 201 249
Interest expense including amortization
of deferred financing costs (9,046) (7,838) (5,480)
---------- ---------- ----------
Income from continuing operations 5,252 4,824 4,872
---------- ---------- ----------
Discontinued operations:
Income from discontinued operations 597 988 470
Gain on disposal 12,681 -- 475
Minority interest in discontinued operations (3,320) (247) (136)
---------- ---------- ----------
Income from discontinued operations 9,958 741 809
---------- ---------- ----------
Net income $ 15,210 $ 5,565 $ 5,681
========== ========== ==========
Basic earnings per share:
Continuing operations $ 0.82 $ 0.77 $ 0.78
Discontinued operations 1.56 0.12 0.13
---------- ---------- ----------
Net income $ 2.38 $ 0.89 $ 0.91
========== ========== ==========
Diluted earnings per share:
Continuing operations $ 0.79 $ 0.74 $ 0.75
Discontinued operations 1.50 0.11 0.13
---------- ---------- ----------
Net income $ 2.29 $ 0.85 $ 0.88
========== ========== ==========
Weighted average shares outstanding:
Basic 6,378 6,268 6,239
Diluted 6,658 6,523 6,466
COMPREHENSIVE INCOME
--------------------
Net Income $ 15,210 $ 5,565 $ 5,681
Other comprehensive income (loss):
Unrealized gain (loss) on interest
rate swap contract 41 (201) --
---------- ---------- ----------
Comprehensive income $ 15,251 $ 5,364 $ 5,681
========== ========== ==========
UNDISTRIBUTED EARNINGS
----------------------
Balance, beginning of year $ 2,487 $ 2,589 $ 2,274
Net income 15,210 5,565 5,681
Less dividends (7,064) (5,667) (5,366)
---------- ---------- ----------
Balance, end of year $ 10,633 $ 2,487 $ 2,589
========== ========== ==========
Dividends per share $ 1.10 $ 0.90 $ 0.86
========== ========== ==========
See Notes to Consolidated Financial Statements.
F - 4
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2004, 2003 AND 2002
2004 2003 2002
---- ---- ----
(In Thousands of Dollars)
Operating activities:
Net income $ 15,210 $ 5,565 $ 5,681
Adjustments to reconcile net income to net cash provided by
operating activities (including discontinued operations):
Depreciation 3,928 3,215 2,582
Amortization 405 350 274
Deferred revenue 6 (91) 10
Minority interest 3,735 621 540
Gain on disposal of discontinued operations (12,681) (475)
Changes in operating assets and liabilities:
Tenants' security accounts (445) (158) 66
Sundry receivables, prepaid expenses and other assets (724) (4,313) (341)
Accounts payable and accrued expenses 1,464 767 (49)
Tenants' security deposits 406 291 (74)
---------- ---------- ----------
Net cash provided by operating activities 11,304 6,247 8,214
---------- ---------- ----------
Investing activities:
Capital expenditures (2,409) (2,455) (689)
Proceeds from disposal of discontinued operations 16,235 983
Investment in affiliate 3,600 (3,600)
Acquisition of real estate (16,003)(a) (14,007)(b)
---------- ---------- ----------
Net cash used in investing activities (2,177) (12,862) (3,306)
---------- ---------- ----------
Financing activities:
Repayment of mortgages (1,776) (1,661) (1,162)
Proceeds from notes and mortgage financing 4,542 16,132
Proceeds from exercise of stock options 840 540
Dividends paid (6,219) (5,390) (4,773)
Distribution to minority interest (2,108) (603) (646)
---------- ---------- ----------
Net cash (used in) provided by financing activities (4,721) 9,018 (6,581)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 4,406 2,403 (1,673)
Cash and cash equivalents, beginning of year 14,437 12,034 13,707
---------- ---------- ----------
Cash and cash equivalents, end of year $ 18,843 $ 14,437 $ 12,034
========== ========== ==========
Supplemental disclosure of cash flow data:
Interest paid $ 9,070 $ 8,000 $ 4,759
========== ========== ==========
Income taxes paid $ 59 $ 18 $ 19
========== ========== ==========
Supplemetal schedule of non cash
investing and financing activities:
Dividends declared but not paid $ 3,212 $ 2,367 $ 2,090
========== ========== ==========
(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) (i) 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.
(ii) In July 2003, Damascus Centre LLC, a 100% owned subsidiary of FREIT,
completed the acquisition of a 139,000 sq ft. shopping center in Damascus, MD
for approximately $9,833,000, in part by assuming a mortgage in the amount of
$2,608,000.
See Notes to Consolidated Financial Statements.
F - 5
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and significant accounting policies:
Organization:
First Real Estate Investment Trust of New Jersey ("FREIT") was
organized November 1, 1961 as a New Jersey Business Trust.
FREIT is engaged in owning residential and commercial income
producing properties located primarily in New Jersey, Maryland
and New York.
FREIT has elected to be taxed as a Real Estate Investment
Trust under the provisions of Sections 856-860 of the Internal
Revenue Code, as amended. Accordingly, FREIT does not pay
Federal income tax on income whenever income distributed to
shareholders is equal to at least 90% of real estate
investment trust taxable income. Further, FREIT pays no
Federal income tax on capital gains distributed to
shareholders.
FREIT is subject to Federal income tax on undistributed
taxable income and capital gains. FREIT may make an annual
election under Section 858 of the Internal Revenue Code to
apply part of the regular dividends paid in each respective
subsequent year as a distribution for the immediately
preceding year. For fiscal 2004, 2003 and 2002, FREIT made
such an election.
Principles of consolidation:
In December 2003, the FASB issued FIN 46 R, "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 are 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 its consolidated
financial statements for the fiscal year ended October 31,
2004, and has restated all prior periods included in this
annual report on Form 10-K. The consolidation of these two
entities did not have any impact on FREIT's equity, net income
or earnings per share.
Accordingly, the consolidated financial statements include the
accounts of FREIT,and its subsidiaries as follows:
F - 6
Owning % Year
Subsidiary Entity Ownership Acquired
--------------------------------- ------ --------- --------
S And A Commercial Associates
Limited Partnership ("S and A") FREIT 75% 2000
Westwood Hills, LLC FREIT 40% 1994
Damascus Centre, LLC('Damascus") FREIT 100% 2003
Wayne Preakness, LLC FREIT 40% 2002
Pierre Towers, LLC S and A 100% 2004
The consolidated financial statements include 100% of each
subsidiary's assets, liabilities, operations and cash flows
with the interests not owned by FREIT reflected as "minority
interest". All significant inter-company accounts and
transactions have been eliminated in consolidation.
Use of estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from
those estimates.
Cash and cash equivalents:
Financial instruments that potentially subject FREIT to
concentrations of credit risk consist primarily of cash and
cash equivalents. FREIT considers all highly liquid
investments purchased with a maturity of three months or less
to be cash equivalents. FREIT maintains its cash and cash
equivalents in bank and other accounts, the balances of which,
at times, may exceed Federally insured limits. At October 31,
2004, such cash and cash equivalent balances exceeded
Federally insured limits by approximately $17,861,000.
Exposure to credit risk is reduced by placing such deposits
with high credit quality financial institutions.
Depreciation:
Real estate and equipment are depreciated on the straight-line
method by annual charges to operations calculated to absorb
costs of assets over their estimated useful lives.
Impairment of long-lived assets:
FREIT has adopted the provisions of Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment
of Long-Lived Assets" ("SFAS 144"). Under SFAS 144, impairment
losses on long-lived assets, such as real estate and
equipment, are recognized when events or changes in
circumstances indicate that the undiscounted cash flows
estimated to be generated by such assets are less than their
carrying value and, accordingly, all or a portion of such
carrying value may not be recoverable. Impairment losses are
then measured by comparing the fair value of assets to their
carrying amounts.
F - 7
Deferred charges:
Deferred charges consist of mortgage costs and leasing
commissions. Deferred mortgage costs are amortized on the
straight-line method by annual charges to operations over the
terms of the mortgages. Amortization of such costs is included
in interest expense and approximated $196,000, $177,000 and
$113,000 in 2004, 2003 and 2002, respectively. Deferred
leasing commissions are amortized on the straight-line method
over the terms of the applicable leases.
Revenue recognition:
Income from leases is recognized on a straight-line basis
regardless of when payment is due. Lease agreements between
FREIT and commercial tenants generally provide for additional
rentals based on such factors as percentage of tenants' sales
in excess of specified volumes, increases in real estate
taxes, Consumer Price Indices and common area maintenance
charges. These additional rentals are generally included in
income when reported to FREIT, when billed to tenants or
ratably over the appropriate period.
Interest rate swap contract:
FREIT utilizes derivative financial instruments to reduce
interest rate risk. FREIT does not hold or issue derivative
financial instruments for trading purposes. Effective November
1, 2002, FREIT adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments and hedging
activities and amended by statement of Financial Accounting
Standards No. 149, "Amendment on Statement 133 on Derivative
Instruments and Hedging activities". As required by SFAS 133,
FREIT recognizes all derivatives as either assets or
liabilities in the consolidated balance sheet and measures
those instruments at fair value. Changes in fair value of
those instruments are reported in earnings or other
comprehensive income depending on the use of the derivative
and whether it qualifies for hedge accounting. The accounting
for gains and losses associated with changes in the fair value
of the derivative and the effect on the consolidated financial
statements depends on its hedge designation and whether the
hedge is highly effective in achieving offsetting changes in
the fair value of cash flows on the assets or liability
hedged.
Advertising:
FREIT expenses the cost of advertising and promotions as
incurred. Advertising costs charged to operations amounted to
approximately $188,000, $116,000 and $99,000 in 2004, 2003 and
2002, respectively.
Earnings per share:
FREIT has presented "basic" and "diluted" earnings per share
in the accompanying consolidated statements of income in
accordance with the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS
128").
Stock-based compensation:
In accordance with the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to
Employees," FREIT will recognize compensation cost as a result
of the issuance of stock options to employees, including
directors, based on the excess, if any, of the fair value of
the underlying shares at the date of grant or award (or at an
appropriate subsequent measurement date) over the amount the
employees must pay to acquire the shares (the "intrinsic value
method"). However, FREIT will not be required to recognize
compensation expense as a result of any grants to employees at
an exercise price that is equal to or greater than fair value.
FREIT will also make proforma disclosures, as required by
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), and
Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation -Transition and
Disclosures" ("SFAS 148"), of net income or loss as if a fair
value based method of accounting for stock options had been
applied if such amounts differ materially from the historical
amounts.
In accordance with the provisions of SFAS 123, all other
issuances of shares of beneficial interest, options or other
equity instruments to employees and nonemployees as the
consideration for goods
F - 8
or services received by FREIT are accounted for based on the
fair value of the equity instruments issued (unless the fair
value of the consideration received can be more reliably
measured). The fair value of any options or similar equity
instruments issued will be estimated based on the
Black-Scholes option-pricing model, which meets the criteria
set forth in SFAS 123, and the assumption that all of the
options or other equity instruments will ultimately vest. Such
fair value is measured as of an appropriate date pursuant to
EITF Issue No. 96-18 (generally, the earlier of the date the
other party becomes committed to provide goods or services or
the date performance by the other party is complete) and
capitalized or expensed as if FREIT had paid cash for the
goods or services.
Reclassifications:
Certain accounts in the 2003 and 2002 consolidated financial
statements have been reclassified to conform with the current
presentation.
Note 2 - Acquisition and Discontinued Operations:
On June 22, 2004, S And A closed on its contract for the sale
of the Olney Town Center ("OTC") in Olney, Maryland. The sale
price for the property was $28.2 million. The property was
acquired in April 2000 for approximately $15.5 million. S And
A utilized 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. For
financial statement proposes, S And A recognized a gain of
approximately $12.7 million from the sale.
On April 16, 2004, S And A 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 $30.0 million and the balance of approximately $16 million
in cash. FREIT provided 75% of the cash required with the
balance of approximately $4.0 million provided by the 25%
minority owners of S And A.
F - 9
The net proceeds from the OTC sale after the repayment of the first
mortgage repaid FREIT and the 25% minority owners for their advances
made to acquire The Pierre.
S And A has structured 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 resulted in
a deferral for income tax purposes of the realization of gain on the
sale of OTC. Since it is the intention of FREIT to continue to qualify
as a real estate investment trust, deferred tax would be minimal.
In November 2003 Wayne PSC, LLC, a 40% owned affiliate of FREIT
acquired the Preakness Shopping Center in Wayne, NJ. The acquisition
price of approximately $33 million was financed in part by a $26.5
million first mortgage.
On July 31, 2003 Damascus, a newly-formed-limited-liability-company-
which is wholly owned by FREIT, acquired a 139,000 square foot shopping
center in Damascus, Maryland. The total acquisition cost of
approximately $9,933,000 was financed in part by the assumption of a
$2,610,000 first mortgage.
The following unaudited pro forma information shows the results of
operations fiscal years ended October 31, 2004, 2003 and 2002 for FREIT
and Subsidiaries as though The Pierre, Preakness and Damascus had been
acquired at the beginning of fiscal 2002:
Year Ended October 31,
------------------------------------------
2004 2003 2002
---- ---- ----
(In thousands of Dollars,
Except for Per Share Amounts)
Revenues $ 33,080 $ 31,520 $ 30,404
Net expenses 27,592 26,473 24,802
Minority Interest 433 293 571
---------- ---------- ----------
Income before discontinued operations 5,055 4,754 5,031
Discontinued Operations 9,958 741 809
---------- ---------- ----------
Net Income $ 15,013 $ 5,495 $ 5,840
========== ========== ==========
Basic Earnings Per Share:
Continuing operations $ 0.79 $ 0.76 $ 0.81
Discontinued operations 1.56 0.12 0.13
---------- ---------- ----------
Net Income $ 2.35 $ 0.88 $ 0.94
========== ========== ==========
Diluted earnings per share:
Continuing operations $ 0.76 $ 0.73 $ 0.78
Discontinued operations 1.50 0.11 0.12
---------- ---------- ----------
Net Income $ 2.26 $ 0.84 $ 0.90
========== ========== ==========
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 acquisition date and reduced net investment income related to
assets utilized to make the acquisitions, and obligations incurred to complete
the transactions.
The unaudited pro forma results of operations set forth above are not
necessarily indicative of the results that would have occurred had the
acquisitions been made at the beginning of fiscal 2002 or of future results of
operations of FREIT's combined properties.
The acquisition price for The Pierre, including closing costs, was approximately
$45.6 million. Based on a detailed appraisal of the property, the purchase price
was allocated as follows: approximately $37.5 million (82.2%) was allocated to
the building and other improvements and approximately $8.1 million (17.8%) was
allocated towards land. Value attributable to leases was considered immaterial
due to their short-term nature.
The Preakness Shopping Center was acquired for approximately $33 million. Based
on a cost allocation study prepared by a third party consultant, approximately
$23.7 million was allocated to buildings and improvements and approximately $9.3
million allocated to land. The center, at the time of purchase, was
approximately 78% occupied. Management reviewed the existing leases and
determined that in the aggregate, the leases approximated market.
The acquisition price for the Damascus shopping center was allocated to land and
buildings based on relative fair value of each to the purchase price. It is
management's intention to demolish the center and construct a new center,
therefore, no value was allocated to the leases as they are relatively
short-term and will be renegotiated for space in the new center.
F - 10
Note 3 - Real estate and equipment:
Real estate and equipment consists of the following:
Range of
Estimated
Useful Lives 2004 2003
------------ ---- ----
(In Thousands
of Dollars)
Land $ 47,301 $ 38,734
Unimproved land 3,359 3,389
Apartment buildings 7-40 years 61,189 23,257
Commercial buildings/shopping centers 15-50 years 75,885 74,992
Equipment 3-15 years 1,174 1,073
Pre-construction development costs 281 4
---------- ----------
189,189 141,449
Less accumulated depreciation 28,832 25,159
---------- ----------
Totals $ 160,357 $ 116,290
========== ==========
Real estate held for sale, net of depreciation $ -- $ 14,426
========== ==========
Note 4 - Mortgages payable:
Mortgages payable consist of the following:
2004 2003
---------- ----------
(In Thousands
of Dollars)
Northern Life Insurance Cos. - Frederick, MD (A) $ 16,885 $ 17,289
National Realty Funding Inc. - Westwood, NJ (B) 9,758 9,910
PW Funding, Inc. - Spring Lake, NJ (C) 3,422 3,476
Bank Of America - Patchogue, NY (D) 6,553 6,744
PW Funding, Inc. - Wayne, NJ (E):
First mortgage 10,191 10,353
Second mortgage 3,513 3,588
PW Funding, Inc. - River Edge, NJ (F):
First mortgage 4,974 5,052
Second mortgage 1,956 1,994
PW Funding, Inc. - Maywood, NJ (G):
First mortgage 3,608 3,666
Second mortgage 1,388 1,414
MetLife - Damascus, MD (H) 2,279 2,532
PW Funding, Inc. - Westwood, NJ (I):
First mortgage 14,349 14,577
Second mortgage 3,243 3,300
MetLife - Wayne, NJ (J) 32,000 32,000
State Farm Life Insurance Co. - Hackensack, NJ (K) 34,125 --
---------- ----------
$ 148,244 $ 115,895
========== ==========
Mortgage applicable to real estate held for sale:
Bank Of America - Olney, MD Re-paid $ -- $ 10,872
========== ==========
F - 11
(A) Payable in monthly installments of $152,153 including interest
at 8.31% through June 2007 at which time the outstanding
balance is due. The mortgage is secured by a retail building
in Frederick, Maryland having a net book value of
approximately $20,868,000.
(B) Payable in monthly installments of $73,248 including interest
at 7.38% through February 2013 at which time the outstanding
balance is due. The mortgage is secured by a retail building
in Westwood, New Jersey having a net book value of
approximately $11,309,000.
(C) Payable in monthly installments of $23,875 including interest
at 6.70% through December 2013 at which time the outstanding
balance is due. The mortgage is secured by an apartment
building in Spring Lake, New Jersey having a net book value of
approximately $575,000.
(D) Payable in monthly installments of $17,500 plus interest at
the thirty day LIBOR rate plus 200 basis points through
January 2008 at which time the outstanding balance is due. The
mortgage is secured by a retail building in Patchogue, New
York having a net book value of approximately $9,390,000.
(E) The first mortgage is payable in monthly installments of
$76,023 including interest at 7.29% through July 2010 at which
time the outstanding balance is due. The second mortgage is
payable in monthly installments of $20,878 including interest
at 4.92% through July 2010 at which time the outstanding
balance is due. The mortgages are secured by an apartment
building in Wayne, New Jersey having a net book value of
approximately $1,555,000.
(F) The first mortgage is payable in monthly installments of
$34,862 including interest at 6.75% through December 2013 at
which time the outstanding balance is due. The second mortgage
is payable in monthly installments of $12,318 including
interest at 5.53% through December 2013 at which time the
outstanding balance is due. The mortgages are secured by an
apartment building in River Edge, New Jersey having a net book
value of approximately $1,335,000.
(G) The first mortgage is payable in monthly installments of
$25,295 including interest at 6.75% through December 2013 at
which time the outstanding balance is due. The second mortgage
is payable in monthly installments of $8,739 including
interest at 5.53% through December 2013 at which time the
outstanding balance is due. The mortgages are secured by an
apartment building in Maywood, New Jersey having a net book
value of approximately $809,000.
(H) Payable in monthly installments of $39,719 including interest
at 9.25% through March 2011 at which time the outstanding
balance is due. The mortgage is secured by a retail building
in Damascus, Maryland having a net book value of approximately
$9,786,000.
F - 12
(I) The first mortgage is payable in monthly installments of
$99,946 including interest at 6.693% through December 2013 at
which time the outstanding balance is due. The second mortgage
is payable in monthly installments of $21,954 including
interest at 6.18% through December 2013 at which time the
outstanding balance is due. The mortgages are secured by an
apartment building in Westwood, New Jersey having a net book
value of approximately $13,097,000.
(J) Payable in monthly installments of interest only of $161,067
at the rate of 6.04% through June 2006, thereafter payable in
monthly installments of $206,960 including interest until June
2016 at which time the unpaid balance is due. The mortgage is
secured by a shopping center in Wayne, NJ having a net book
value of approximately $32,777,000.
(K) Payable in monthly installments of interest only of $152,994
at the rate of 5.38% through May 2009, thereafter payable in
monthly installments of $191,197 including interest until May
2019 at which time the unpaid balance is due. The mortgage is
secured by an apartment building in Hackensack, NJ having a
net book value of approximately $45,460,000.
Principal amounts (in thousands of dollars) due under the above
obligations in each of the five years subsequent to October 31, 2004
are as follows:
Year Ending
October 31, Amount
----------- ------
2005 $ 1,922
2006 2,247
2007 18,271
2008 8,127
2009 2,549
The fair value of FREIT's long-term debt, which approximates $158
million and $132 million at October 31, 2004 and 2003, respectively,
is estimated based on the current rates offered to FREIT for debt of
the similar remaining maturities.
Note 5 - Line of credit:
On June 20, 2002, FREIT obtained a two-year $14,000,000 revolving
line of credit from The Provident Bank. Draws against the line of
credit can be used for general corporate purposes, or for property
acquisitions, construction activities, letters-of-credit and other
related business purposes. Draws are secured by mortgages on FREIT's
Franklin Crossing Shopping Center, Franklin Lakes, NJ,
single-tenanted retail space in Glen Rock, NJ, Lakewood Apartments,
Lakewood, NJ and Grandview Apartments, Hasbrouck Heights, NJ.
Interest rates on draws will be set at the time of each draw, based
on FREIT's choice of the prime rate or at 175 basis points over the
30, 60 or 90 day LIBOR rates. There are no draws outstanding as at
October 31, 2004. The line of credit has been extended and expires
January 21, 2005. FREIT is currently negotiating a new $18 million
line of credit with The Provident Bank.
F - 13
Note 6 - Interest rate swap contract:
During November 2002, FREIT entered into an interest rate swap contract to
reduce the impact of interest rate fluctuations on its variable rate mortgage
secured by its Patchogue, NY property. At October 31, 2004, the derivative
financial instrument has a notional amount of approximately $6,553,000 and a
current maturity date of January 1, 2008. The contract effectively converted the
variable rate to a fixed rate of 5.95%. In accordance with SFAS 133, FREIT
recorded a liability for the net present value of the increase in interest cost
over the remaining term of the debt of $160,000 and $201,000 at October 31, 2004
and 2003, respectively. FREIT included a gain of $41,000 and a loss of $201,000
in comprehensive income for fiscal 2004 and 2003, respectively.
Note 7 - Commitments and contingencies:
Leases:
Retail tenants:
FREIT leases retail space having a net book value of
approximately $93,904,000 at October 31, 2004 to tenants
for periods of up to twenty-five years. Most of the
leases contain clauses for reimbursement of real estate
taxes, maintenance, insurance and certain other
operating expenses of the properties. Minimum rental
income (in thousands of dollars) to be received from
non-cancelable operating leases in years subsequent to
October 31, 2004 are as follows:
Year Ending
October 31, Amount
------------ ----------
2005 $ 10,388
2006 9,743
2007 8,474
2008 7,412
2009 6,534
Thereafter 48,870
----------
Total $ 91,421
==========
The above amounts assume that all leases which expire
are not renewed and, accordingly, neither minimal
rentals nor rentals from replacement tenants are
included.
Minimum future rentals do not include contingent
rentals, which may be received under certain leases on
the basis of percentage of reported tenants' sales
volume or increases in Consumer Price Indices. Rental
income that is contingent on future events is not
included in income until the contingency is resolved.
Contingent rentals included in income for each of the
three years in the period ended October 31, 2004 were
not material.
Residential tenants:
Lease terms for residential tenants are usually one year
or less.
F - 14
Environmental concerns:
In accordance with applicable regulations, FREIT reported to
the New Jersey Department of Environmental Protection
("NJDEP") that a historical discharge of hazardous material
was discovered in 1997 at the renovated Franklin Lakes
shopping center (the "Center").
In November 1999, FREIT received a no further action letter
from the NJDEP concerning the historical discharge at the
Center. However, FREIT is required to continue monitoring such
discharge, the cost of which will not be material.
Note 8 - Management agreement and fees to related parties:
The properties owned by FREIT are currently managed by
Hekemian & Co., Inc. The management agreement, effective
November 1, 2001, requires fees equal to a percentage of rents
collected. Such fees were approximately $1,372,000, $1,170,000
and $978,000 in 2004, 2003 and 2002, respectively, inclusive
of $73,000, $105,000 and $143,000 in 2004, 2003 and 2002,
respectively, included in discontinued operations in the
accompanying consolidated statements of income. The agreement
expires on October 31, 2005. In addition, Hekemian charged
FREIT fees and commissions in connection with the acquisition
of the Pierre and sale of the Olney Center during fiscal 2004,
the acquisition of the Preakness center during fiscal 2003,
and various mortgage refinancing and lease acquisition fees.
Such fees and commissions amounted to approximately
$2,110,000, $1,451,000 and $234,000 in 2004, 2003 and 2002,
respectively.
Note 9 - Dividends and earnings per share:
FREIT declared dividends of $7,064,000, $5,667,000 and $5,366,000 to
shareholders of record during 2004, 2003 and 2002, respectively.
FREIT has determined the shareholders' treatment for Federal income
tax purposes to be as follows:
2004 2003 2002
---- ---- ----
(In thousands of Dollars)
Ordinary income $ 7,064 $ 5,667 $ 4,891
Capital income -- -- 475
-------- -------- --------
Totals $ 7,064 $ 5,667 $ 5,366
======== ======== ========
Basic and diluted earnings per share, based on the weighted average
number of shares outstanding during each period, are comprised of
ordinary and capital gain income.
F - 15
FREIT has adopted the provisions of SFAS 128, which require the
presentation of "basic" earnings per share and, if appropriate,
"diluted" earnings per share. Basic earnings per share is calculated
by dividing net income by the weighted average number of shares
outstanding during each period. The calculation of diluted earnings
per share is similar to that of basic earnings per share, except
that the denominator is increased to include the number of
additional shares that would have been outstanding if all
potentially dilutive shares, such as those issuable upon the
exercise of stock options and warrants, were issued during the
period.
In computing diluted earnings per share for each of the three years
in the period ended October 31, 2004, 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 2002
---- ---- ----
Basic weighted average
shares outstanding 6,378,352 6,267,952 6,239,152
Shares arising from assumed 279,392 254,802 226,402
exercise of stock options
Dilutive weighted average
--------- --------- ---------
shares outstanding 6,657,744 6,522,754 6,465,554
========= ========= =========
Note 10- 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 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. In connection therewith, the Board of Trustees approved an
increase of 920,000 shares in FREIT's number of authorized shares of
beneficial interest. Key personnel eligible for these awards include
trustees, executive officers and other persons or entities
including, without limitation, employees, consultants and employees
of consultants, who are in a position to make significant
contributions to the success of FREIT. Under the Plan, the exercise
price of all options will be the fair market value of the shares on
the date of grant. The consideration to be paid for restricted share
and other share-based awards shall be determined by the Board of
Trustees, with the amount not to exceed the fair market value of the
shares on the date of grant. The maximum term of any award granted
may not exceed ten years. The actual terms of each award will be
determined by the Board of Trustees.
Upon ratification of the Plan on April 7, 1999, FREIT issued 754,000
stock options (adjusted for stock splits), 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.
In the opinion of management, if compensation cost for the stock
options granted in 1999 had been determined based on the fair value
of the options at the grant date under the provisions of SFAS 123 or
SFAS 148 using the Black-Scholes option pricing model and assuming a
risk-
F - 16
free interest rate of 4.27%, expected option lives of ten years,
expected volatility of 1.65% and expected dividends of 8.59%,
FREIT's 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.
The following table summarizes stock option activities (adjusted for
the stock split):
Years Ended October 31,
----------------------------------------------------------------------------------
2004 2003 2002
----------------------------------------------------------------------------------
No. of Average No. of Average No. of Average
Options Exercise Options Exercise Options Exercise
Outstanding Price Outstanding Price Outstanding Price
----------- ----- ----------- ----- ----------- -----
Balance beginning of year 682,000 $ 7.50 754,000 $ 7.50 754,000 $ 7.50
Grants during period -- -- --
Options exercised (112,000) $ 7.50 (72,000) $ 7.50 --
Options cancelled -- -- --
-------- -------- ------- -------- ------- --------
Balance at end of year 570,000 $ 7.50 682,000 $ 7.50 754,000 $ 7.50
======== ======== ======= ======== ======= ========
The impact on FREIT's consolidated shareholders' equity for the
options that were exercised during fiscal 2004 and 2003 was to
increase the number of shares outstanding by the amount of options
exercised and values of beneficial interest outstanding by $840,000
in fiscal 2004 and $540,000 in fiscal 2003. The options outstanding
are exercisable through September 2008.
Note 11- Share split:
On March 4, 2004, the Board of Trustees approved a two-for-one share
split in the form of a share dividend. In connection with the share
dividend, the Board of Trustees also approved an increase in the
authorized number of shares of beneficial interest from 4,000,000 to
8,000,000. Financial information contained herein, including the
number of options, has been adjusted to retroactively reflect the
impact of the split.
Note 12- Deferred fee plan:
During fiscal 2001, the Board of Trustees adopted a deferred fee
plan (the "Plan") for its officers and trustees. Pursuant to the
Plan, any officer or trustee may elect to defer receipt of any fees
that would be due them. FREIT has agreed to pay any participant (the
"Participant") in the Plan interest on any deferred fee at 9% per
annum, compounded quarterly. Any such deferred fee is to be paid to
the Participants at the later of: (i) the retirement age specified
in the deferral election; (ii) actual retirement; or (iii) upon
cessation of a Participant's duties as an officer or trustee. The
Plan provides that any such deferral fee will be paid in a lump sum
or in annual installments over a period not to exceed 10 years, at
the election of the Participant. As of October 31, 2004, 2003 and
2002, approximately $738,000, $476,000 and $210,000,
F - 17
respectively, of fees have been deferred together with accrued
interest of approximately $109,000, $32,000 and $18,000,
respectively.
Note 13- Segment information:
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," established standards for reporting financial
information about operating segments in interim and annual financial
reports and provides for a "management approach" in identifying the
reportable segments.
FREIT has determined that it has two reportable segments: retail
properties and residential properties. These reportable segments
offer different products, have different types of customers and are
managed separately because each requires different operating
strategies and management expertise. The retail segment contains
nine separate properties and the continuing residential segment
contains nine properties. The accounting policies of the segments
are the same as those described in Note 1.
The chief operating decision-making group of FREIT's retail segment,
residential segment and corporate/other is comprised of FREIT's
Executive Committee of the Board of Trustees.
FREIT assesses and measures segment operating results based on net
operating income ("NOI"). NOI is based on operating revenue and
expenses directly associated with the operations of the real estate
properties, but excludes deferred rents (straight lining),
depreciation and financing costs. NOI is not a measure of operating
results or cash flows from operating activities as measured by
accounting principles generally accepted in the United States of
America, and is not necessarily indicative of cash available to fund
cash needs and should not be considered an alternative to cash flows
as a measure of liquidity.
Continuing real estate rental revenue, operating expenses, NOI and
recurring capital improvements for the reportable segments are
summarized below and reconciled to consolidated net income for each
of the three years in the period ended October 31, 2004. Asset
information is not reported since FREIT does not use this measure to
assess performance.
F - 18
2004 2003 2002
---- ---- ----
(In Thousands of Dollars)
Real estate rental revenue:
Retail $ 17,021 $ 15,293 $ 9,800
Residential 12,998 9,830 9,508
-------- -------- --------
Totals 30,019 25,123 19,308
-------- -------- --------
Real estate operating expenses:
Retail 5,663 5,237 2,906
Residential 5,794 3,896 3,554
-------- -------- --------
Totals 11,457 9,133 6,460
-------- -------- --------
Net operating income:
Retail 11,358 10,056 6,894
Residential 7,204 5,934 5,954
-------- -------- --------
Totals $ 18,562 $ 15,990 $ 12,848
-------- -------- --------
Recurring capital improvements-
residential $ 417 $ 596 $ 622
======== ======== ========
Reconciliation to consolidated net
income:
Segment NOI $ 18,562 $ 15,990 $ 12,848
Deferred rents - straight lining 335 276 263
Net investment income 183 201 249
Minority interest in earnings of
subsidiaries (416) (374) (404)
General and administrative expenses (689) (592) (449)
Depreciation (3,677) (2,839) (2,155)
Financing costs (9,046) (7,838) (5,480)
-------- -------- --------
Income from continuing operations 5,252 4,824 4,872
Discontinued operations 9,958 741 809
-------- -------- --------
Net income $ 15,210 $ 5,565 $ 5,681
======== ======== ========
Note 14- Quarterly data (unaudited):
The following summary represents the results of operations for each
quarter for the years ended October 31, 2004 and 2003 (in thousands,
except per share data):
F - 19
Quarter Ended
----------------------------------------------------------
January 31, April 30, July 31, October 31,
----------- --------- -------- -----------
2004:
Revenue $ 6,922 $ 7,136 $ 8,007 $ 8,474
Expenses 5,585 5,944 6,791 6,967
---------- ---------- ---------- ----------
Income from continuing
operations 1,337 1,192 1,216 1,507
Income (loss) from dis-
continued operations 165 171 9,685 (63)
---------- ---------- ---------- ----------
Net income $ 1,502 $ 1,363 $ 10,901 $ 1,444
========== ========== ========== ==========
Basic earnings (loss) per share:
Continuing operations $ 0.21 $ 0.19 $ 0.19 $ 0.23
Discontinued operations 0.03 0.02 1.51 (0.01)
---------- ---------- ---------- ----------
Net income $ 0.24 $ 0.21 $ 1.70 $ 0.22
========== ========== ========== ==========
Diluted earnings (loss) per share:
Continuing operations $ 0.21 $ 0.17 $ 0.18 $ 0.22
Discontinued operations 0.03 0.03 1.44 (0.01)
---------- ---------- ---------- ----------
Net income $ 0.24 $ 0.20 $ 1.62 $ 0.21
========== ========== ========== ==========
Dividends per share $ 0.20 $ 0.20 $ 0.20 $ 0.50
========== ========== ========== ==========
2003:
Revenue $ 6,053 $ 6,315 $ 6,400 $ 6,832
Expenses 4,931 5,167 5,184 5,494
---------- ---------- ---------- ----------
Income from continuing
operations 1,122 1,148 1,216 1,338
Income from dis-
continued operations 148 248 158 187
---------- ---------- ---------- ----------
Net income $ 1,270 $ 1,396 $ 1,374 $ 1,525
========== ========== ========== ==========
Basic earnings per share:
Continuing operations $ 0.18 $ 0.18 $ 0.19 $ 0.21
Discontinued operations 0.02 0.04 0.03 0.03
---------- ---------- ---------- ----------
Net income $ 0.20 $ 0.22 $ 0.22 $ 0.24
========== ========== ========== ==========
Diluted earnings per share:
Continuing operations $ 0.17 $ 0.17 $ 0.18 $ 0.20
Discontinued operations 0.02 0.02 0.02 0.03
---------- ---------- ---------- ----------
Net income $ 0.19 $ 0.19 $ 0.20 $ 0.23
========== ========== ========== ==========
Dividends per share $ 0.18 $ 0.18 $ 0.18 $ 0.36
========== ========== ========== ==========
Note: Due to rounding, quarterly per share amounts may not total amounts
reported for the full fiscal year.
F - 20
Note 15- Discontinued operations:
On August 9, 2002, FREIT sold the Sheridan Apartments in Camden, NJ
for cash of $1,050,000 and recognized a gain of approximately
$475,000. FREIT has owned and operated the property since 1964.
On July 15, 2004 FREIT sold the Olney Town Center in Olney MD for
$28,150,000, and recognized a gain of approximately $12,681,000
($9,361,000 after the minority interest's share.)
Summarized operating results included in discontinued operations in
the accompanying consolidated statements of income for each of the
years ended October 31, 2004, 2003 and 2002 are as follows:
2004 2003 2002
---- ---- ----
Revenues $1,510 $2,475 $2,759
Expenses 913 1,487 2,289
------ ------ ------
Net income $ 597 $ 988 $ 470
====== ====== ======
* * *
F - 21
FIRST REAL ESTATE INVESTENT TRUST OF NEW JERSEY AND SUBSIDIARIES
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION
October 31, 2004
(In Thousands of Dollars)
Column A Column B Column C Column D
- -------- -------- -------- --------
Initial Cost Costs Capitalized
to Company Subsequent to Acquisition
-------------------- ---------------------------
Buildings
Encum- and Improve- Carrying
Descripton brances Land Improvements Land ments Costs
- ---------- ------- ---- ------------ ---- ----- -----
Residential Properties:
Grandview Apts., Hasbrouck
Heights, NJ $ 22 $ 180 $ -- $ 263
Lakewood Apts., Lakewood, NJ 11 396 -- 267
Hammel Gardens, Maywood, NJ $ 4,996 313 728 -- 806
Palisades Manor, Palisades
Park, NJ 12 81 -- 87
Steuben Arms, River Edge, NJ 6,930 364 1,773 -- 906
Heights Manor, Spring Lake
Heights, NJ 3,422 109 974 -- 641
Berdan Court, Wayne, NJ 13,704 250 2,206 -- 2,565
Westwood Hills, Westwood, NJ 17,592 3,849 11,546 -- 1,295
Pierre Towers, Hackensack, NJ 34,125 8,390 37,486 -- 135
Retail Properties:
Damascus Shopping Center,
Damascus, MD 2,279 2,950 6,987 -- 68
Franklin Crossing, Franklin Lakes, NJ 29 3,382 7,441
Glen Rock, NJ 12 36 -- 204
Pathmark Super Center,
Patchogue, NY 6,553 2,128 8,818 -- (21)
Westridge Square S/C, Frederick, MD 16,885 9,135 19,159 37 418
Westwod Plaza, Westwood, NJ 9,758 6,889 6,416 -- 1,924
Preakness S/C, Wayne, NJ 32,000 9,280 24,217 -- 527
Land Leased:
Rockaway, NJ 114 25 --
Vacant Land:
Franklin Lakes, NJ 224 (156) --
Wayne, NJ 286 --
Rockaway, NJ 1,683 934 --
South Brunswick, NJ 80 308 --
--------------------------------- ---------------------------
$ 148,244 $ 46,130 $ 121,003 $ 4,530 $17,526 $ --
================================= ===========================
Column A Column E Column F Column G Column H Column I
- -------- -------- -------- -------- -------- --------
Gross Amount at Which
Carried at Close of Perod
-------------------------------
Life on
Buildings Which De-
and Accumulated Date of Date preciation
Descripton Land Improvements Total (1) Depreciation Construction Acquired is Computed
- ---------- ---- ------------ --------- ------------ ------------ -------- -----------
Residential Properties:
Grandview Apts., Hasbrouck
Heights, NJ $ 22 $ 443 $ 465 $ 347 1925 1964 7-40 years
Lakewood Apts., Lakewood, NJ 11 663 674 567 1960 1962 7-40 years
Hammel Gardens, Maywood, NJ 313 1,534 1,847 1,037 1949 1972 7-40 years
Palisades Manor, Palisades
Park, NJ 12 168 180 141 1935/70 1962 7-40 years
Steuben Arms, River Edge, NJ 364 2,679 3,043 1,708 1966 1975 7-40 years
Heights Manor, Spring Lake
Heights, NJ 109 1,615 1,724 1,149 1967 1971 7-40 years
Berdan Court, Wayne, NJ 250 4,771 5,021 3,466 1964 1965 7-40 years
Westwood Hills, Westwood, NJ 3,849 12,841 16,690 3,593 1965-70 1994 7-40 years
Pierre Towers, Hackensack, NJ 8,390 37,621 46,011 552 1970 2004 7-40 years
Retail Properties:
Damascus Shopping Center,
Damascus, MD 2,950 7,055 10,005 219 1960's 2003 15-39 years
Franklin Crossing, Franklin Lakes, NJ 3,411 7,441 10,852 1,404 1963/75/97 1966 10-50 years
Glen Rock, NJ 12 240 252 65 1940 1962 10-31.5 years
Pathmark Super Center,
Patchogue, NY 2,128 8,797 10,925 1,536 1997 1997 39 years
Westridge Square S/C, Frederick, MD 9,172 19,577 28,749 7,881 1986 1992 15-31.5 years
Westwod Plaza, Westwood, NJ 6,889 8,340 15,229 3,920 1981 1988 15-31.5 years
Preakness S/C, Wayne, NJ 9,280 24,744 34,024 1,247 1955/89/00 2002 15-31.5 years
Land Leased:
Rockaway, NJ 139 139 --
Vacant Land:
Franklin Lakes, NJ 68 68 1966/93
Wayne, NJ 286 286 2004
Rockaway, NJ 2,617 2,617 1964/92/93
South Brunswick, NJ 388 388 1964
---------------------------------------------
$50,660 $ 138,529 $ 189,189 $ 28,832
=============================================
(1) Total cost for each property is the same for Federal income tax purposes,
with the exception of Pierre Towers, whose cost for Federal income tax
purposes is approximately $32,500,000.
F - 22
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION
(In Thousands of Dollars)
Reconciliation of Real Estate and accumulated depreciation:
2004 2003 2002
---- ---- ----
Real estate:
Balance, Beginning of year $ 157,219 $ 111,654 $ 112,532
Additions:
Buildings and improvements 47,670 45,565 181
Carrying costs 84
Deletions - building and improvements (15,784) (1,059)
--------- --------- ---------
Balance, end of year $ 189,189 $ 157,219 $ 111,654
========= ========= =========
Accumulated depreciation:
Balance, beginning of year $ 26,503 $ 23,293 $ 21,770
Additions - Charged to operating expenses 3,924 3,210 2,205
Deletions (1,595) (682)
--------- --------- ---------
Balance, end of year $ 28,832 $ 26,503 $ 23,293
========= ========= =========
F - 23
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Robert S. Hekemian his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully as he might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent or his substitutes or substitute, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the Registrant, in the capacities, and on the
dates indicated have signed this report below:
Signature Title Date
--------- ----- ----
/s/ Robert S. Hekemian Chairman of the Board and February 9, 2005
- ------------------------ Chief Executive Officer and
Robert S. Hekemian Trustee (Principal Executive
Officer)
/s/ Donald W. Barney President, Treasurer, Chief February 9, 2005
- ------------------------ Financial Officer and Trustee
Donald W. Barney (Principal Financial /
Accounting Officer)
/s/ Herbert C. Klein Trustee February 9, 2005
- ------------------------
Herbert C. Klein
/s/ Ronald J. Artinian Trustee February 9, 2005
- ------------------------
Ronald J. Artinian
/s/ Alan L. Aufzien Trustee February 9, 2005
- ------------------------
Alan L. Aufzien
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY ("FREIT")
EXHIBIT INDEX
Exhibit No.
3 Amended and Restated Declaration of Trust of FREIT, dated
November 7, 1993, as amended on May 31, 1994 and on
September 10, 1998. (a)
4 Form of Specimen Share Certificate, Beneficial Interest in
FREIT. (b)
10.1 Management Agreement dated April 10, 2002, by and between
FREIT and Hekemian & Co., Inc. (c)
10.2 Wayne PSC, L.L.C. Operating Agreement dated March 25, 2002
between FREIT and H-TPKE, LLC ( c)
10.3 Line of Credit Note in the principal amount of $14 million
executed by FREIT as Borrower, and delivered to The
Provident Bank, as Lender, in connection with the Credit
Facility provided by The Provident Bank to FREIT. (d)
21 Subsidiaries of FREIT
23 Consent of J.H. Cohn LLP
24 Power of Attorney (filed with signature pages).
31.1 Rule 13a-14(a) - Certification of Chief Executive Officer.
31.2 Rule 13a-14(a) - Certification of Chief Financial Officer
99.1 Section 1350 Certification of Chief Executive Officer
99.2 Section 1350 Certification of Chief Financial officer.
The following filings with the Security and Exchange
----------------------------------------------------
Commission are incorporated by reference:
-----------------------------------------
Footnote
(a) Exhibit No. 1 to FREIT's Registration Statement on Form 8-A
filed on November 6, 1998.
(b) FREIT's Annual Report on Form 10-K for the fiscal year ended
October 31, 1998.
(c) FREIT's Form 8-K filed on April 29, 2002.
(d) Exhibit 10 to FREIT's Form 10-Q filed on September 13, 2002.