UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended April 30, 2018January 31, 2019

or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ____________________

For the transition period from __________________ to ____________________

Commission File No.000-25043

 

 

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY
(Exact name of registrant as specified in its charter)

 

New Jersey 22-1697095
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
505 Main Street, Hackensack, New Jersey 07601
(Address of principal executive offices) (Zip Code)

 

201-488-6400

(Registrant's telephone number, including area code)

 

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesxNoo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesxNoo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated FileroAccelerated FilerxNon-Accelerated FileroSmaller Reporting Companyo

Large Accelerated Filer ☐      Accelerated Filerx     Non-Accelerated Filer ☐      Smaller Reporting Company ☐      Emerging growth company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso  Nox

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (240.12b-2 of this chapter).

Emerging growth companyo

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o

As of June 8, 2018,March 11, 2019, the number of shares of beneficial interest outstanding was 6,755,875.

6,758,554.

 

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FIRST REAL ESTATE

INVESTMENT TRUST OF NEW JERSEY

 

 

INDEX

 

Part I:Financial Information 
    Page
     
 Item 1:Unaudited Condensed Consolidated Financial Statements 
     
  a.)Condensed Consolidated Balance Sheets as of April 30, 2018January 31, 2019 and October 31, 2017;2018;3
     
  b.)Condensed Consolidated Statements of Income (Loss) for the Six and  Three Months Ended April 30, 2018January 31, 2019 and 2017;2018;4
     
  c.)Condensed Consolidated Statements of Comprehensive (Loss) Income (Loss) for the Six and Three Months Ended April 30, 2018January 31, 2019 and 2017;2018;5
     
  d.)Condensed Consolidated StatementStatements of Equity for the SixThree Months Ended April 30,January 31, 2019 and 2018;6
     
  e.)Condensed Consolidated Statements of Cash Flows for the SixThree  Months Ended April 30, 2018January 31, 2019 and 2017;2018;7
     
  f.)Notes to Condensed Consolidated Financial Statements.8
     
 Item 2:Management’s Discussion and Analysis of Financial Condition and Results of Operations1716
     
 Item 3:Quantitative and Qualitative Disclosures About Market Risk2927
     
 Item 4:Controls and Procedures2927
     
     
Part II:Other Information 
     
 Item 1:Legal Proceedings2927
     
 Item 1A:Risk Factors2927
     
 Item 6:Exhibits3028
     
 Signatures3028

 

 

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 Page 3

IndexPage 3

 

Part I: Financial Information

 

Item 1: Unaudited Condensed Consolidated Financial Statements

 

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 April 30, October 31,  January 31, October 31, 
 2018 2017  2019 2018 
 (In Thousands of Dollars)  (In Thousands of Dollars) 
ASSETS          
          
Real estate, at cost, net of accumulated depreciation $348,548  $331,965  $336,531  $344,532 
Real estate held for sale, at cost, net of accumulated depreciation (Note 13)  6,212    
Construction in progress  135   129   259   159 
Cash and cash equivalents  18,902   7,899   23,633   21,747 
Tenants' security accounts  2,161   2,007   2,212   2,212 
Receivables arising from straight-lining of rents  3,532   3,359   4,031   3,964 
Accounts receivable, net of allowance for doubtful accounts of $288 and  2,365   1,767 
$175 as of April 30, 2018 and October 31, 2017, respectively        
Accounts receivable, net of allowance for doubtful accounts of $259 and  2,045   2,298 
$276 as of January 31, 2019 and October 31, 2018, respectively        
Secured loans receivable  5,451   5,451   4,000   4,000 
Prepaid expenses and other assets  7,486   9,135   5,672   6,034 
Qualified intermediary deposit - 1031 exchange     6,965 
Deferred charges, net  2,740   2,680   2,653   2,693 
Interest rate cap and swap contracts  3,807   1,600   2,076   4,434 
Total Assets $395,127  $372,957  $389,324  $392,073 
        
                
LIABILITIES AND EQUITY                
                
Liabilities:                
Mortgages payable $352,623  $323,435  $349,417  $350,504 
Less unamortized debt issuance costs  4,067   1,863   3,204   3,498 
Mortgages payable, net  348,556   321,572   346,213   347,006 
                
Due to affiliate  5,284   5,172   5,488   5,417 
Deferred trustee compensation payable  8,457   9,078   8,457   8,457 
Accounts payable and accrued expenses  2,886   3,870   2,216   1,910 
Dividends payable  337      1,014   338 
Tenants' security deposits  3,118   2,960   3,303   3,232 
Deferred revenue  1,068   1,276   1,104   1,369 
Interest rate swap contract     439 
Interest rate swap contracts  160    
Total Liabilities  369,706   344,367   367,955   367,729 
                
Commitments and contingencies                
                
        
Equity:                
Common equity:                
Shares of beneficial interest without par value:                
8,000,000 shares authorized; 6,993,152 shares issued plus 134,404  27,850   27,651 
and 122,092 vested share units granted to trustees at April 30, 2018        
and October 31, 2017, respectively        
Treasury stock, at cost: 237,277 and 253,083 shares at April 30, 2018        
and October 31, 2017, respectively  (4,977)  (5,273)
8,000,000 shares authorized; 6,993,152 shares issued plus 172,599 and  28,556   28,288 
157,395 vested share units granted to Trustees at January 31, 2019        
and October 31, 2018, respectively        
Treasury stock, at cost: 234,598 and 235,536 shares at January 31, 2019  (4,921)  (4,941)
and October 31, 2018, respectively        
Dividends in excess of net income  (4,410)  (4,824)  (4,957)  (4,376)
Accumulated other comprehensive income  2,047   284   819   2,517 
Total Common Equity  20,510   17,838   19,497   21,488 
Noncontrolling interests in subsidiaries  4,911   10,752   1,872   2,856 
Total Equity  25,421   28,590   21,369   24,344 
Total Liabilities and Equity $395,127  $372,957  $389,324  $392,073 

 

See Notes to Condensed Consolidated Financial Statements.  

 

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 Page 4

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

SIX AND THREE MONTHS ENDED APRIL 30,JANUARY 31, 2019 AND 2018 AND 2017

(Unaudited)

 

 Six Months Ended April 30, Three Months Ended April 30,  Three Months Ended January 31, 
 2018 2017 2018 2017  2019 2018 
 (In Thousands of Dollars,Except Per Share Amounts) (In Thousands of Dollars,Except Per Share Amounts)  (In Thousands of Dollars, Except Per Share Amounts) 
Revenue:              
Rental income $25,171  $22,018  $12,781  $11,157  $13,161  $12,390 
Reimbursements  2,987   2,773   1,411   1,407   1,658   1,576 
Sundry income  361   472   133   100   109   228 
Total revenue  28,519   25,263   14,325   12,664   14,928   14,194 
                        
Expenses:                        
Operating expenses  8,350   7,915   4,208   3,947   3,867   4,142 
Lease termination fee     620      620 
Management fees  1,260   1,156   649   593   637   611 
Real estate taxes  3,450   4,808   897   2,746   2,430   2,553 
Depreciation  5,512   5,178   2,801   2,648   2,824   2,711 
Total expenses  18,572   19,677   8,555   10,554   9,758   10,017 
                        
Operating income  9,947   5,586   5,770   2,110   5,170   4,177 
                        
Investment income  112   91   57   45   71   55 
Unrealized gain on interest rate cap contract  19      19    
Unrealized loss on interest rate cap contract  (154)   
Interest expense including amortization                        
of deferred financing costs  (9,571)  (7,722)  (4,419)  (3,856)  (4,652)  (5,152)
Net income (loss)  507   (2,045)  1,427   (1,701)  435   (920)
                        
Net (income) loss attributable to noncontrolling                
Net loss attributable to noncontrolling        
interests in subsidiaries  251   1,409   (312)  1,002   24   563 
                        
Net income (loss) attributable to common equity $758  $(636) $1,115  $(699) $459  $(357)
                        
Earnings (loss) per share - basic and diluted $0.11  $(0.09) $0.16  $(0.10)
Earnings (Loss) per share - basic and diluted $0.07  $(0.05)
                        
Weighted average shares outstanding:                        
Basic and Diluted  6,869   6,823   6,876   6,828   6,915   6,862 

 

See Notes to Condensed Consolidated Financial Statements.      

 

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 Page 5

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (LOSS)

SIX AND THREE MONTHS ENDED APRIL 30,JANUARY 31, 2019 AND 2018 AND 2017

(Unaudited)

 

  Six Months Ended April 30,  Three Months Ended April 30, 
  2018  2017  2018  2017 
  (In Thousands of Dollars)  (In Thousands of Dollars) 
             
Net income (loss) $507  $(2,045) $1,427  $(1,701)
                 
Other comprehensive income (loss):                
   Unrealized gain (loss) on interest rate swap contracts before                
        reclassifications  2,413   2,275   866   (386)
   Amount reclassified from accumulated other comprehensive income                
        to interest expense  125   331   41   146 
   Net unrealized gain (loss) on interest rate swap contracts  2,538   2,606   907   (240)
Comprehensive income (loss)  3,045   561   2,334   (1,941)
Net (income) loss attributable to noncontrolling interests  251   1,409   (312)  1,002 
Other comprehensive income (loss):                
   Unrealized (gain) loss on interest rate swap contracts attributable                
        to noncontrolling interests  (775)  (879)  (242)  113 
Comprehensive income (loss) attributable to noncontrolling interests  (524)  530   (554)  1,115 
Comprehensive income (loss) attributable to common equity $2,521  $1,091  $1,780  $(826)
                 
  Three Months Ended January 31, 
  2019  2018 
  (In Thousands of Dollars) 
       
Net income (loss) $435  $(920)
         
Other comprehensive (loss) income:        
   Unrealized (loss) gain on interest rate swap contracts before        
        reclassifications  (2,276)  1,547 
   Amount reclassified from accumulated other comprehensive income        
        to interest expense  (88)  84 
   Net unrealized (loss) gain on interest rate swap contracts  (2,364)  1,631 
Comprehensive (loss) income  (1,929)  711 
         
Net loss attributable to noncontrolling interests  24   563 
Other comprehensive loss:        
   Unrealized loss (gain) on interest rate swap contracts attributable        
        to noncontrolling interests  666   (533)
Comprehensive loss attributable to noncontrolling interests  690   30 
         
Comprehensive (loss) income attributable to common equity $(1,239) $741 

 

See Notes to Condensed Consolidated Financial Statements.

 

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 Page 6

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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

SIXTHREE MONTHS ENDED APRIL 30, 2018JANUARY 31, 2019

(Unaudited)

 

  Common Equity       
  Shares of
Beneficial
Interest
  Treasury
Shares at
Cost
  Dividends in
Excess of Net
Income
  Accumulated
Other
Comprehensive
Income
  Total
Common
Equity
  Noncontrolling
Interests
  Total Equity 
  (In Thousands of Dollars, Except Share and Per Share Amounts) 
                      
Balance at October 31, 2017 $27,651  $(5,273) $(4,824) $284  $17,838  $10,752  $28,590 
                             
Stock based compensation expense  61               61       61 
                             
Vested share units granted to trustees and consultant  434               434       434 
                             
Vested share units issued to retired trustee *  (296)  296                   
                             
Distributions to noncontrolling interests                     (6,365)  (6,365)
                             
Net income (loss)          758       758   (251)  507 
                             
Dividends declared, including $7 payable in share units ($0.05 per share)          (344)      (344)      (344)
                             
Net unrealized gain on interest rate swaps              1,763   1,763   775   2,538 
                             
Balance at April 30, 2018 $27,850  $(4,977) $(4,410) $2,047  $20,510  $4,911  $25,421 
  Common Equity       
  Shares of
Beneficial
Interest
  Treasury
Shares at
Cost
  Dividends in
Excess of Net
Income
  Accumulated
Other
Comprehensive
Income
  Total
Common
Equity
  Noncontrolling
Interests
  Total Equity 
  (In Thousands of Dollars, Except Share and Per Share Amounts) 
                      
Balance at October 31, 2018 $28,288  $(4,941) $(4,376) $2,517  $21,488  $2,856  $24,344 
                             
Stock based compensation expense  34               34       34 
                             
Vested share units granted to Trustees and consultant  254               254       254 
                             
Vested share units issued to consultant*  (20)  20                   
                             
Distributions to noncontrolling interests                     (294)  (294)
                             
Net income (loss)          459       459   (24)  435 
                             
Dividends declared, including $26 payable in share units ($0.15 per share)          (1,040)      (1,040)      (1,040)
                             
Net unrealized loss on interest rate swaps              (1,698)  (1,698)  (666)  (2,364)
                             
Balance at January 31, 2019 $28,556  $(4,921) $(4,957) $819  $19,497  $1,872  $21,369 

 

  * Represents the issuance of treasury shares to retired trusteeconsultant for share units earned.

 

See Notes to Condensed Consolidated Financial Statements.                          

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

THREE MONTHS ENDED JANUARY 31, 2018

(Unaudited)

  Common Equity       
  Shares of
Beneficial
Interest
  Treasury
Shares at
Cost
  Dividends in
Excess of Net
Income
  Accumulated
Other
Comprehensive
Income
  Total
Common
Equity
  Noncontrolling
Interests
  Total Equity 
  (In Thousands of Dollars, Except Share and Per Share Amounts) 
                      
Balance at October 31, 2017 $27,651  $(5,273) $(4,824) $284  $17,838  $10,752  $28,590 
                             
Stock based compensation expense  31               31       31 
                             
Vested share units granted to Trustees  201               201       201 
                             
Distributions to noncontrolling interests                     (6,084)  (6,084)
                             
Net loss          (357)      (357)  (563)  (920)
                             
Net unrealized gain on interest rate swaps              1,098   1,098   533   1,631 
                             
Balance at January 31, 2018 $27,883  $(5,273) $(5,181) $1,382  $18,811  $4,638  $23,449 

See Notes to Condensed Consolidated Financial Statements.  

 

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 Page 7

FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIXTHREE MONTHS ENDED APRIL 30,JANUARY 31, 2019 AND 2018 AND 2017

(Unaudited)

 

 Six Months Ended  Three Months Ended 
 April 30,  January 31, 
 2018 2017  2019 2018 
 (In Thousands of Dollars)  (In Thousands of Dollars) 
Operating activities:                
Net income (loss) $507  $(2,045) $435  $(920)
Adjustments to reconcile net income (loss) to net cash provided by                
operating activities:                
Depreciation  5,512   5,178   2,824   2,711 
Amortization  766   761   422   295 
Unrealized gain on interest rate cap contract  (19)   
Unrealized loss on interest rate cap contract  154    
Stock based compensation expense  61   61   34   31 
Trustee fees, consultant fee and related interest paid in stock units  427   410   228   201 
Deferred rents - straight line rent  (173)  (311)  (67)  (98)
Bad debt expense  170   93   56   130 
Changes in operating assets and liabilities:                
Tenants' security accounts  4   86 
Tenants' security deposits  71   173 
Accounts receivable, prepaid expenses and other assets  (899)  (429)  725   (1,086)
Accounts payable, accrued expenses and deferred                
trustee compensation  (1,165)  (216)  (24)  150 
Deferred revenue  (208)  (27)  (265)  (44)
Net cash provided by operating activities  4,983   3,561   4,593   1,543 
Investing activities:                
Capital improvements - existing properties  (3,186)  (8,308)  (805)  (1,153)
Acquisition of Station Place, net of proceeds released from escrow related to 1031 exchange  (12,577)   
Acquisition of Station Place     (19,542)
Net cash used in investing activities  (15,763)  (8,308)  (805)  (20,695)
Financing activities:                
Repayment of mortgages and construction loan  (146,561)  (24,026)
Proceeds from mortgage loan refinancings  166,520   23,500 
Repayment of mortgages  (1,087)  (30,172)
Proceeds from mortgage loan refinancing     48,000 
Proceeds from acquisition mortgage loan  12,350         12,350 
Refinancing good faith deposit refund  960         960 
Restricted loan proceeds held in escrow     (250)
Proceeds from construction loan     1,349 
Proceeds from credit line     3,000 
Repayment of credit line  (3,121)   
Advanced funding for construction loan reserve  647   (693)     506 
Interest rate cap contract cost  (89)   
Deferred financing costs  (2,670)  (339)     (811)
Dividends paid     (3,033)  (338)   
Due to affiliate  112   2,806   71   54 
Distributions to noncontrolling interests  (6,365)  (270)  (294)  (6,084)
Net cash provided by financing activities  21,783   2,044 
Net increase (decrease) in cash and cash equivalents  11,003   (2,703)
Cash and cash equivalents, beginning of period  7,899   10,906 
Cash and cash equivalents, end of period $18,902  $8,203 
Net cash (used in) provided by financing activities  (1,648)  24,803 
Net increase in cash, cash equivalents and restricted cash  2,140   5,651 
Cash, cash equivalents and restricted cash, beginning of period  26,394   21,838 
Cash, cash equivalents and restricted cash, end of period $28,534  $27,489 
                
Supplemental disclosure of cash flow data:                
Interest paid, net of amounts capitalized $8,770  $6,979  $4,176  $4,816 
                
Supplemental schedule of non cash activities:                
Investing activities:                
Accrued capital expenditures, construction costs, pre-development costs and interest $285  $274  $172  $292 
                
Financing activities:                
Dividends declared but not paid $337  $  $1,014  $ 
Dividends paid in share units $7  $13  $26  $ 
        
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the balance sheet:The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the balance sheet: 
        
Cash and cash equivalents $23,633  $21,717 
Tenants' security accounts  2,212   2,141 
Mortgage escrows  2,689   3,631 
Total cash, cash equivalents and restricted cash $28,534  $27,489 

 

See Notes to Condensed Consolidated Financial Statements.

 

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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 - Basis of presentation:

The accompanying interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and pursuant to the rules of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnotes required by GAAP for complete financial statements have been omitted. It is the opinion of management that all adjustments considered necessary for a fair presentation have been included, and that all such adjustments are of a normal recurring nature.

The consolidated results of operations for the six and three-month periodsperiod ended April 30, 2018January 31, 2019 are not necessarily indicative of the results to be expected for the full year or any other period. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report on Form 10-K for the year ended October 31, 20172018 of First Real Estate Investment Trust of New Jersey (“FREIT” or the “Company”).

 

Note 2 –Recently- Recently issued accounting standards:

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, which is codified as ASC 606 and effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2017. ASC 606 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. Based on

On November 1, 2018, FREIT adopted ASU No. 2014-09 using the nature ofmodified retrospective approach. Since FREIT’s operations and sourcesprimary source of revenue FREIT does not expectis operating leases, which fall under the scope of “Leases, Topic 840” and will be under the scope of “Leases, Topic 842” once adopted in November 2019, the adoption of this new accounting guidance tostandard did not have a significant impact on its consolidated financial statements and footnote disclosures. Additionally, the Company has elected to adopt the practical expedient under ASU 2018-11, to not separate nonlease components from the associated lease component and, instead, to account for those components as a single component if the nonlease components otherwise would be accounted for under the new revenue guidance. The adoption of this standard did not have a significant impact on the consolidated financial statements and FREIT did not record any such cumulative adjustment as of the adoption date of November 1, 2018 in connection with the implementation of ASU No. 2014-09.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which supersedes the existing guidance for lease accounting, “Leases (Topic 840)”. ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Leasing Standard was amended by ASU 2018-11,“Targeted Improvements” (the “Practical Expedient Amendment”)in July of 2018 by allowing lessors to elect to combine lease and associated nonlease components, by classes of underlying asset, in contracts meeting certain criteria. The Company expects to qualify for the practical expedient as allowed by the Practical Expedient Amendment. Given that this standard has minimal impact on real estate operating lessors, FREIT does not expect the adoption of this new accounting guidance to have a significant impact on its consolidated financial statements and footnote disclosures. Based on this new accounting guidance, the Company will no longer be able to capitalize certain leasing costs, such as legal expenses, as it relates to activities before a lease is entered into.

In June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments – Credit Losses (Topic 326)", which amends the current approach to estimate credit losses on certain financial assets, including trade and other receivables, available-for-sale securities, and other financial instruments. Generally, this amendment requires entities to establish a valuation allowance for the expected lifetime losses of these certain financial assets. Subsequent changes in the valuation allowance are recorded in current earnings and reversal of previous losses are permitted. Currently, U.S. GAAP requires entities to write down credit losses only when losses are probable and loss reversals are not permitted. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. FREIT does not expect the adoption of this new accounting guidance to have a significant impact on its consolidated financial statements and footnote disclosures.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”, which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and interim periods within those years and early adoption is permitted including adoption in an interim period. The standard should be applied using a retrospective transition method to each period presented. FREIT does not expect the adoption of this new accounting guidance to have a significant impact on its consolidated financial statements and footnote disclosures.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations: Clarifying the Definition of a Business”, which amends guidance that assists preparers in evaluating whether a transaction will be accounted for as an acquisition of an asset or a business, likely resulting in more acquisitions being accounted for as asset acquisitions. There are certain differences in accounting under these models, including the capitalization of transaction expenses and application of a cost accumulation model in an asset acquisition. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those periods with early adoption permitted for certain transactions. Early application of this new accounting guidance is allowed for transactions for which the acquisition date occurs before the effective date of the amendment, only when the transaction has not been previously been reported in financial statements. FREIT acquired a new property, Station Place, located in Red Bank, New Jersey on December 7, 2017. As such, FREIT early adopted this new accounting guidance in the first quarter of Fiscal 20182019, which changed the presentation of cash and accounted for this transaction as an acquisitioncash equivalents to include restricted cash on the consolidated statement of an asset capitalizing approximately $542,000 of transaction expenses.cash flows.

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In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities to ASC Topic 815, Derivatives and Hedging ("ASC 815")” which amends the hedge accounting recognition and presentation requirements in ASC 815. The update is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting and increase transparency as to the scope and results of hedge programs. ASU 2017-12 requires subsequent changes in fair value of a hedging instrument that has been designated and qualifies as a cash flow hedge to be recognized as a component of "other comprehensive income (loss)." ASU 2017-12 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018, with early adoption permitted. FREIT does not expect the adoption of this new accounting guidance to have a significant impact on its consolidated financial statements and footnote disclosures.

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The SEC's Disclosure Update and Simplification rule (Release 33-10532) amends the interim financial statement requirements to require a reconciliation of changes in stockholders' equity in the notes or as a separate statement. This analysis should reconcile the beginning balance to the ending balance of each caption in stockholders' equity for each period for which an income statement is required to be filed and comply with the remaining content requirements of Rule 3-04 of Regulation S-X. As a result, registrants will have to provide the reconciliation for both the year-to-date and quarterly periods and comparable periods in Form 10-Q but only for the year-to-date periods in registration statements. The rule does not prescribe the format of the presentation as long as the appropriate periods are provided. Per a Compliance and Disclosure Interpretation (Q 105.09, Exchange Act Forms, 10-Q), "The amendments are effective for all filings made on or after November 5, 2018. In light of the timing of effectiveness of the amendments and proximity of effectiveness to the filing date for most filers' quarterly reports, the staff would not object if the filer's first presentation of the changes in shareholders' equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments." This essentially makes the requirements effective for the Company's first quarter 2019 filing. FREIT has adopted this guidance in the first quarter of Fiscal 2019 by presenting a reconciliation of changes in stockholders’ equity for the current and prior period as a separate statement.

Note 3 - Earnings (loss)(Loss) per share:

Basic earnings per share is calculated by dividing net income attributable to common equity (numerator) by the weighted average number of shares and vested share units (See Note 1312 to FREIT’s condensed consolidated financials) outstanding during each period (denominator). The calculation of diluted earnings per share is similar to that of basic earnings per share, except that the denominator is increased to include the number of additional shares that would have been outstanding if all potentially dilutive shares, such as those issuable upon the exercise of stock options, were issued during the period using the Treasury Stock method. Under the Treasury Stock method, the assumption is that the proceeds received upon exercise of the options, including the unrecognized stock option compensation expense attributable to future services, are used to repurchase FREIT’s stock at the average market price during the period, thereby reducing the number of shares to be added in computing diluted earnings per share. For the six and three months ended April 30,January 31, 2019 and 2018, and 2017, the outstanding stock options were anti-dilutive with no impact on earnings (loss) per share.

Note 4 - Interest rate cap and swap contracts: 

On February 7, 2018, Grande Rotunda, LLC, a consolidated subsidiary, refinanced its $115.3 million construction loan held by Wells Fargo with a new loan held by Aareal Capital Corporation in the amount of approximately $118.5 million with additional funding available for retail tenant improvements and leasing costs in the amount of $3,380,000. This loan bears a floating interest rate at 285 basis points over the one-month LIBOR rate and has a maturity date of February 6, 2021. At April 30, 2018,January 31, 2019, the total amount outstanding on this loan was approximately $118.5 million. As part of this transaction, Grande Rotunda, LLC purchased an interest rate cap on LIBOR for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan. At April 30, 2018,January 31, 2019, the derivative financial instrument has a notional amount of $121.9 million and a maturity date of March 5, 2020.

On December 7, 2017, Station Place on Monmouth, LLC (owned 100% by FREIT) closed on a $12,350,000 mortgage loan with Provident Bank. The loan bears a floating interest rate equal to 180 basis points over the one-month BBA LIBOR with a maturity date of December 15, 2027. At April 30, 2018,January 31, 2019, the total amount outstanding on this loan was $12,350,000. In order to minimize interest rate volatility during the term of this loan, Station Place on Monmouth, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 4.35% over the term of the loan. At April 30, 2018,January 31, 2019, the derivative financial instrument has a notional amount of $12,350,000 and a maturity date of December 2027.

On September 29, 2016, Wayne PSC, LLC, a consolidated subsidiary, refinanced its $24.2 million mortgage loan held by Metropolitan Life Insurance Company, with a new mortgage loan from People’s United Bank in the amount of $25.8 million. The new loan bears a floating interest rate equal to 220 basis points over the one-month BBA LIBOR with a maturity date of October 1, 2026. At April 30, 2018,January 31, 2019, the total amount outstanding on this loan was approximately $24.8$24.3 million. In order to minimize interest rate volatility during the term of the loan, Wayne PSC, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 3.625% over the term of the loan. At April 30, 2018,January 31, 2019, the derivative financial instrument has a notional amount of approximately $24.8$24.3 million and a maturity date of October 2026.

On December 26, 2012, Damascus Centre, LLC refinanced its construction loan with long-term financing provided by People’s United Bank and the first tranche of the new loan was taken down in the amount of $20 million. Based on leasing and net operating income at the shopping center, People’s United Bank agreed to a take-down of the second tranche of this loan on April 22, 2016 in the amount of $2,320,000. The total amount outstanding for both tranches of this loan held with People’s United Bank as of April 30, 2018January 31, 2019 was approximately $20.1$19.7 million. The loan has a maturity date of January 3, 2023 and bears a floating interest rate equal to 210 basis points over the one-month BBA LIBOR. In order to minimize interest rate volatility during the term of this loan, Damascus Centre, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate on each tranche of this loan, resulting in a fixed rate of 3.81% over the term of the first tranche of this loan and a fixed rate of 3.53% over the term of the second tranche of this loan. At April 30, 2018,January 31, 2019, the derivative financial instrument has a notional amount of approximately $20.2$19.8 million and a maturity date of January 2023.

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On December 29, 2014, FREIT Regency, LLC closed on a $16.2 million mortgage loan with Provident Bank. The loan bears a floating interest rate equal to 125 basis points over the one-month BBA LIBOR and the loan will mature on December 15, 2024. At April 30, 2018,January 31, 2019, the total amount outstanding on this loan was approximately $16.1$15.8 million. In order to minimize interest rate volatility during the term of the loan, FREIT Regency, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 3.75% over the term of the loan. At April 30, 2018,January 31, 2019, the derivative financial instrument has a notional amount of approximately $16.1$15.8 million and a maturity date of December 2024.

In accordance with ASC 815, “Accounting for Derivative Instruments and Hedging Activities”, FREIT is accounting for the Damascus Centre, LLC, FREIT Regency, LLC, Wayne PSC, LLC and Station Place on Monmouth, LLC interest rate swaps as effective cash flow hedges marking these contracts to market, taking into account present interest rates compared to the contracted fixed rate over the life of the contract and recording the unrealized gain or loss on the swaps in comprehensive income. For the sixthree months ended April 30, 2018,January 31, 2019, FREIT recorded an unrealized gainloss of approximately $2,538,000$2,364,000 in comprehensive income representing the change in the fair value of these cash flow hedges during such period with a corresponding asset of approximately $883,000$502,000 for the Damascus CenterCentre swaps $2,313,000and $1,569,000 for the Wayne PSC swap $238,000and a corresponding liability of approximately $86,000 for the Regency swap and $266,000$74,000 for the Station Place on Monmouth swap as of April 30, 2018.January 31, 2019. For the sixthree months ended April 30, 2017,January 31, 2018, FREIT recorded an unrealized gain of approximately $2,606,000 in comprehensive income representing the change in the fair value of these cash flow hedges during such period. For the three months ended April 30, 2018 and 2017, FREIT recorded an unrealized gain of approximately $907,000 and unrealized loss of approximately $240,000, respectively,$1,631,000 in comprehensive income representing the change in the fair value of these cash flow hedges during such period. For the year ended October 31, 2017,2018, FREIT recorded an unrealized gain of $2,952,000approximately $3,113,000 in comprehensive income representing the change in the fair value of these cash flow hedges during such period with a corresponding asset of approximately $275,000$955,000 for the Damascus CenterCentre swaps, $1,325,000$2,452,000 for the Wayne PSC swap, and a corresponding liability of approximately $439,000$408,000 for the Regency swap and $460,000 for the Station Place on Monmouth swap as of October 31, 2017.

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2018.

The Grande Rotunda, LLC interest rate cap is, for accounting purposes, deemed to be accounted for as an ineffective cash flow hedge with a corresponding gain or loss being recorded in FREIT’s income statement. For the six and three months ended April 30, 2018,January 31, 2019, FREIT recorded an unrealized gainloss in the condensed consolidated statement of income of approximately $19,000$154,000 for the Grande Rotunda, LLC interest rate cap representing the change in the fair value of this ineffective cash flow hedge during such period with a corresponding asset of approximately $107,000$5,000 as of April 30, 2018.January 31, 2019.

The fair values are based on observable inputs (level 2 in the fair value hierarchy as provided by authoritative guidance).

 

Note 5 – Property sale:

On June 12, 2017, FREIT sold its Hammel Gardens property, a residential property located in Maywood, New Jersey, for a sale price of $17 million. The sale of this property, which had a carrying value of approximately $0.7 million, resulted in a capital gain of approximately $15.4 million net of sales fees and commissions. As a result of this sale, FREIT incurred a loan prepayment cost of approximately $1.1 million and paid off the related mortgage on the Hammel Gardens property in the amount of approximately $8 million from the proceeds of the sale. FREIT structured this sale in a manner that qualified it as a like-kind exchange of real estate pursuant to Section 1031 of the Internal Revenue Code. The 1031 Exchange transaction resulted in a deferral for income tax purposes of the $15.4 million capital gain. The net proceeds from this sale, which were approximately $7 million, were held in escrow until a replacement property was purchased. A replacement property to complete this like-kind exchange was acquired on December 7, 2017, and the sale proceeds held in escrow were applied to the purchase price of such property (See Note 6 to FREIT’s condensed consolidated financials for further details).

As the disposal of the Hammel Gardens property did not represent a strategic shift that would have a major impact on FREIT’s operations or financial results, the property’s operations were not reflected as discontinued operations in the accompanying condensed consolidated financial statements.

Note 6 – Property acquisition:

On December 7, 2017, FREIT completed the acquisition of Station Place, a residential apartment complex consisting of one building with 45 units, located in Red Bank, New Jersey through Station Place on Monmouth, LLC (FREIT’s 100% owned consolidated subsidiary). FREIT identified Station Place as the replacement property for the Hammel Gardens property located in Maywood, New Jersey that FREIT sold on June 12, 2017, which completed the like-kind exchange pursuant to Section 1031 of the Internal Revenue Code (See Note 5 to FREIT’s condensed consolidated financial statements).Code. Station Place is part of FREIT’s residential segment. The acquisition cost was $19,542,000$19,550,000 (inclusive of approximately $542,000$550,000 of transaction costs capitalized as part of the asset acquisition), which was funded in part with $7 million in net proceeds from the sale of the Hammel Gardens property, and the remaining balance of $12,350,000 (inclusive of the transaction costs) was funded by Station Place on Monmouth, LLC through long-term financing for this property from Provident Bank.

The acquisition cost of $19.5$19.6 million has been allocated as follows: $10.7$10.8 million to the building and $8.8 million to the land.

 

Note 76 - Management agreement, fees and transactions with related party:

Hekemian & Co., Inc. (“Hekemian”) currently manages all the properties owned by FREIT and its affiliates, except for the office building at The Rotunda located in Baltimore, Maryland, which is managed by an independent third party management company. The management agreement with Hekemian, effective November 1, 2001, requires the payment of management fees equal to 4% to 5% of rents collected. Such fees, charged to operations, were approximately $1,194,000 and $1,074,000 for the six months ended April 30, 2018 and 2017, respectively, and $619,000 and $553,000$575,000 for the three months ended April 30,January 31, 2019 and 2018, and 2017, respectively. In addition, the management agreement provides for the payment to Hekemian of leasing commissions, as well as the reimbursement of operating expenses incurred on behalf of FREIT. Such commissions and reimbursements amounted to approximately $270,000$133,000 and $397,000$141,000 for the six-month periodsthree months ended April 30,January 31, 2019 and 2018, and 2017, respectively, and $130,000 and $198,000 for the three-month periods ended April 30, 2018 and 2017, respectively. The management agreement expires on October 31, 2019, and is automatically renewed for successive periods of two years unless either party gives not less than six (6) months prior notice of non-renewal.

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FREIT also uses the resources of the Hekemian insurance department to secure various insurance coverages for its properties and subsidiaries. Hekemian is paid a commission for these services. Such commissions were charged to operations and amounted to approximately $49,000$29,000 and $55,000 for the six months ended April 30, 2018 and 2017, respectively, and $17,000 and $33,000$31,000 for the three months ended April 30,January 31, 2019 and 2018, and 2017, respectively.

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From time to time, FREIT engages Hekemian to provide certain additional services, such as consulting services related to development, property sales and financing activities of FREIT. Separate fee arrangements are negotiated between Hekemian and FREIT with respect to such additional services. Such fees incurred during the sixthree months ended April 30,January 31, 2019 and 2018 and 2017 were approximately $1,195,000$0 and $0, respectively, and $432,500 and $0 for$762,500, respectively. Fees incurred during the three months ended April 30, 2018 and 2017, respectively. Fees incurred during FiscalJanuary 31, 2018 related to commissions to Hekemian for the following: $522,500 for the purchase of the Station Place property; $400,000 forproperty in the refinancingamount of the Grande Rotunda, LLC loan; $240,000 for$522,500 and commissions related to the refinancing of the Pierre Towers, LLC loan; $32,500 forloan in the renewalamount of FREIT’s line of credit.$240,000.

In Fiscal 2007, FREIT’s Board of Trustees approved and FREIT executed a development fee agreement for the Rotunda redevelopment project for the development services to be provided by Hekemian Development Resources, LLC (“Resources”), a wholly-owned subsidiary of Hekemian. As part of this agreement, the Board approved the payment of a fee to Resources in the amount of $1.4 million in connection with the revision to the scope of the Rotunda redevelopment project. Grande Rotunda, LLC paid $500,000 of this fee to Resources in Fiscal 2013 and the balance of $900,000 became due upon the issuance of a certificate of occupancy for the multi-family portion of this project. A final certificate of occupancy was issued in Fiscal 2016; however Resources agreed to defer the payment of the $900,000 balance of this fee (the $900,000 was included in accounts payable on FREIT’s condensed consolidated balance sheet at October 31, 2017).fee. Grande Rotunda, LLC paid the $900,000 portion of this fee to Resources in February 2018 in connection with the refinancing of the Wells Fargo construction loan for the Rotunda property with a new construction loan from Aareal Capital Corporation. Additionally, Grande Rotunda, LLC paid Resources the amount of approximately $45,000 representing a mutually agreed upon amount of interest on the $900,000 portion of the fee for the period during which Hekemian Resources had agreed to defer payment thereof.

Robert S. Hekemian, the Chairman of the Board and Chief Executive Officer of Hekemian, is the former Chairman and Chief Executive Officer of FREIT. Mr. Hekemian retired as Chairman and Chief Executive Officer of FREIT effective upon the conclusion of FREIT’s 2018 Annual Meeting of Shareholders held on April 5, 2018 (the “2018 Annual Meeting”). Robert S. Hekemian, Jr., the President of Hekemian, is a Trustee of FREIT, and succeeded Robert S. Hekemian as Chief Executive OfficeOfficer of FREIT effective upon the conclusion of the 2018 Annual Meeting. Robert S. Hekemian, Jr. was later appointed as the President of FREIT in February 2019, and as a result he holds the offices of both Chief Executive Officer and President of FREIT. David Hekemian, a Principal of Hekemian, was elected as a Trustee of FREIT at the 2018 Annual Meeting.

Trustee fee expense (including interest) incurred by FREIT for the sixthree months ended April 30,January 31, 2019 and 2018 and 2017 was approximately $255,000$60,000 and $273,000,$136,000, respectively, for Robert S. Hekemian, $41,000$95,000 and $34,000,$14,000, respectively, for Robert S. Hekemian, Jr. and $2,000 and $0, respectively, for David Hekemian and for the three months ended April 30, 2018 and 2017 was approximately $119,000 and $135,000, respectively, for Robert S. Hekemian, $27,000 and $17,000, respectively, for Robert S. Hekemian, Jr. and $2,000$12,000 and $0, respectively, for David Hekemian (See Note 1312 to FREIT’s condensed consolidated financial statements).

Pursuant to the terms of a Consulting Agreement between Robert S. Hekemian and the Trust, Mr. Hekemian will continue to serve the Trust in a consulting capacity effective upon conclusion of FREIT’s 2018 Annual Meeting.April 5, 2018. The Consulting Agreement has a term of four years and obliges Mr. Hekemian to provide advice and consultation with respect to matters pertaining to FREIT and its subsidiaries, affiliates, assets and business for no fewer than 30 hours per month during the term of the agreement. FREIT will pay Mr. Hekemian a consulting fee of $5,000 per month during the term of the Consulting Agreement, which shall be payable in the form of Shares on a quarterly basis (i.e. in quarterly installments of $15,000). The number of Shares to be issued for each quarterly installment of the consulting fee will be determined by dividing the dollar amount of the consulting fee by the closing price of one Share on the OTC Pink Open Market as of the close of trading on the last trading day of the calendar quarter with respect to which such consulting fee is payable. For the six and three months ended April 30,January 31, 2019 and 2018, consulting fee expense for Robert S. Hekemian was approximately $4,200.$15,000 and $0, respectively.

Rotunda 100, LLC owns a 40% minority equity interest in Grande Rotunda, LLC and FREIT owns a 60% equity interest in Grande Rotunda, LLC. Damascus 100, LLC owns a 30% minority equity interest in Damascus Centre, LLC and FREIT owns a 70% equity interest in Damascus Centre, LLC. The equity owners of Rotunda 100, LLC and Damascus 100, LLC are principally employees of Hekemian. To incentivize the employees of Hekemian, FREIT advanced, only to employees of Hekemian, up to 50% of the amount of the equity contributions that the Hekemian employees were required to invest in Rotunda 100, LLC and Damascus 100, LLC. These advances which amounted to $5,451,000 at both April 30, 2018 and October 31, 2017, were in the form of secured loans that bear interest that float at 225 basis points over the ninety (90) day LIBOR, as adjusted each November 1, February 1, May 1 and August 1. These loans are secured by the Hekemian employees’ interests in Rotunda 100 and Damascus 100, and are full recourse loans. The notes originally had maturity dates at the earlier of (a) ten (10) years after issue (Grande Rotunda, LLC – 6/19/2015, Damascus Centre, LLC – 9/30/2016), or, (b) at the election of FREIT, ninety (90) days after the borrower terminates employment with Hekemian, at which time all outstanding unpaid principal and interest is due. On June 4, 2015, the Board approved an extension of the maturity date of the secured loans to occur the earlier of (a) June 19, 2018 or (b) five days after the closing of a permanent mortgage loan secured by the Rotunda property. On December 7, 2017, the Board approved a further extension of the maturity dates of these loans to the date or dates upon which distributions of cash are made by Grande Rotunda, LLC to its members as a result of a refinancing or sale of Grande Rotunda, LLC or the Rotunda property.

In the fourth quarter of Fiscal 2018, the Damascus 100 members repaid their secured notes outstanding in full for a total payment of $1,870,000, which was composed of principal in the amount of $1,451,000 and accrued interest in the amount of approximately $419,000. As of January 31, 2019, and October 31, 2018, only the principal and accrued interest on the secured notes receivable with Rotunda 100 members was outstanding. As such, the aggregate outstanding principal balance of the notes was $4,000,000 at both January 31, 2019 and October 31, 2018. The accrued but unpaid interest related to these notes as of January 31, 2019 and October 31, 2018 amounted to approximately $909,000 and $862,000, respectively, and is included in accounts receivable on the accompanying condensed consolidated balance sheets.

 

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In Fiscal 2017, Grande Rotunda, LLC incurred substantial expenditures at the Rotunda property related to retail tenant improvements, leasing costs and operating expenditures which, in the aggregate, exceeded revenues as the property was still in the rent up phase and the construction loan previously held with Wells Fargo at that time was at its maximum level, resulting inwith no additional funding available to draw. Accordingly, the equity owners in Grande Rotunda, LLC (FREIT with a 60% ownership and Rotunda 100 with a 40% ownership) contributed their respective pro-rata share of any cash needs through loans to Grande Rotunda, LLC. As of April 30, 2018January 31, 2019 and October 31, 2017,2018, Rotunda 100 LLC has funded Grande Rotunda, LLC with approximately $5.3$5.5 million and $5.2$5.4 million (including interest), respectively, which is included in “Due to affiliate” on the accompanying condensed consolidated balance sheets.

 

Note 87 – Mortgage financings:

The loan on the Patchogue, New York property in the amountfinancings and line of approximately $5.2 million became due on March 1, 2018. FREIT is currently working with the lender, Oritani Bank, to extend the loan while the lender completes its underwriting process. Until such time as a definitive agreement providing for an extension of the loan is entered into, there can be no assurance the loan will be extended.

The original Rotunda acquisition loan for $22.5 million, which was subsequently reduced to $19.5 million on February 1, 2010, was acquired by FREIT on May 28, 2013. FREIT subsequently sold this loan to Wells Fargo Bank. On December 9, 2013, Grande Rotunda, LLC, a consolidated subsidiary, closed with Wells Fargo Bank on a construction loan of up to $120 million to be used to redevelop and expand the Rotunda property in Baltimore, Maryland with a term of four (4) years, with one twelve-month extension, at a rate of 225 basis points over the monthly LIBOR. On November 23, 2016, the following terms and conditions of this loan were modified: (i) the total amount that could have been drawn on this loan was decreased from $120 million to $116.1 million, allowing for an additional draw of $2.1 million over the then existing balance of approximately $114 million to be used for retail tenant improvements and leasing commissions; (ii) leasing benchmarks were no longer required to be met including the waiver of the leasing benchmarks FREIT was not in compliance with as of June 30, 2016; (iii) Grande Rotunda, LLC provided an interest reserve to Wells Fargo Bank in the amount of $2 million for the purpose of funding interest payments, and was obliged to replenish the account balance to $1 million if it should fall below $500,000; (iv) the maturity date of the loan was changed from December 31, 2017 to October 31, 2017 with no option to extend; and (v) the interest rate on the amount outstanding on the loan was increased by 25 basis points to 250 basis points over the monthly LIBOR. The following terms and conditions of this loan were modified and effective as of October 31, 2017: (i) the maturity date of the loan was extended 120 days from October 31, 2017 to February 28, 2018; (ii) the interest rate on the amount outstanding on the loan was increased by 35 basis points to 285 basis points over the monthly LIBOR through December 31, 2017; and (iii) the interest rate on the amount outstanding on the loan was increased by 65 basis points to 315 basis points over the monthly LIBOR from January 1, 2018 through February 28, 2018.credit:

On February 7, 2018, Grande Rotunda, LLC refinanced its $115.3 million construction loan held by Wells Fargo with a new loan held by Aareal Capital Corporation in the amount of approximately $118.5 million with additional funding available for retail tenant improvements and leasing costs in the amount of $3,380,000. This refinancing paid off the loan previously held by Wells Fargo, funded loan closing costs and paid the amount due to Hekemian Development Resources for a development fee of $900,000 plus accrued interest of approximately $45,000 (See Note 76 to FREIT’s condensed consolidated financial statements for further details on this fee). This loan is secured by the Rotunda property, bears a floating interest rate at 285 basis points over the one-month LIBOR rate and has a maturity date of February 6, 2021 with two one-year renewal options. As part of this transaction, Grande Rotunda, LLC purchased an interest rate cap on LIBOR for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan. As of April 30, 2018,January 31, 2019, approximately $118.5 million of this loan facility was drawn down and the interest rate was approximately 4.73%5.36%.

On January 8, 2018, Pierre Towers, LLC (“Pierre”Pierre Towers”), (which is owned by S And A Commercial Associates Limited Partnership (“S&A”), which is a consolidated subsidiary of FREIT), refinanced its $29.1 million loan held by State Farm with a new mortgage loan from New York Life Insurance in the amount of $48 million. Pierre Towers paid New York Life Insurance a good faith deposit in the amount of $960,000 (which was included in prepaid expenses and other assets on the accompanying condensed consolidated balance sheet as of October 31, 2017) and was reimbursed by New York Life when the loan was closed in January 2018. The new loan has a term of ten years and bears a fixed interest rate equal to 3.88%. Interest-only payments are required each month for the first five years of the term and thereafter, principal payments plus accrued interest will be required each month through maturity. This refinancing resulted in: (i) a reduction in the annual interest rate from a fixed rate of 5.38% to a fixed rate of 3.88%; and (ii) net refinancing proceeds of approximately $17.2 million (after giving effect to a $1.2 million loan prepayment cost to pay-off the loan held by State Farm) that were distributed to the partners in S&A with FREIT receiving approximately $11.2 million, based on its 65% membership interest in S&A, which can be used for capital expenditures and general corporate purposes.

On December 7, 2017, Station Place on Monmouth, LLC (owned 100% by FREIT) closed on a mortgage loan in the amount of $12,350,000 held by Provident Bank to purchase the Station Place property in Red Bank, New Jersey (see Note 65 to FREIT’s condensed consolidated financial statements). Interest-only payments are required each month for the first two years of the term and thereafter, principal payments plus accrued interest will be required each month through maturity. The loan bears a floating interest rate equal to 180 basis points over the one-month BBA LIBOR with a maturity date of December 15, 2027. In order to minimize interest rate volatility during the term of the loan, Station Place on Monmouth, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 4.35% over the term of the loan.

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On January 21, 2019, Station Place on Monmouth, LLC entered into a modification agreement with Provident Bank. The material terms of the modification were: (i) FREIT guarantees $2,350,000 of the outstanding principal balance of the loan; and (ii) the loan’s Debt Service Coverage Ratio (“DSCR”) covenants are reduced to a single test that will be tested semi-annually (commencing with the six-month period ending April 30, 2019) and require a DSCR of 1.2 / 1.0 based on actual debt service. Prior to this modification, the loan’s DSCR covenants were calculated using the greater of the actual debt service or other hypothetical debt service measures, as provided in the loan agreement, that were to be tested quarterly. As previously disclosed in FREIT’s current report on Form 8-K filed with the SEC on January 24, 2019, Station Place had not been in compliance with the loan covenants as of October 31, 2018, and the modification waives all previous non-compliance. If the DSCR should fall below 1.2 / 1.0, Provident Bank, at its discretion, may require a current appraisal of the Station Place property. If the loan balance exceeds 85% loan-to-value (“L-T-V”) based on the appraised value, Station Place may be required to resize the loan to bring the L-T-V into compliance by paying down the outstanding principal balance of the loan, posting a letter of credit, or providing additional collateral to Provident Bank.

On October 27, 2017, FREIT’s revolving line of credit provided by the Provident Bank was renewed for a three-year term ending on October 27, 2020 at which point no further advances shall be permitted and provided the line of credit is not renewed by the lender, the outstanding principal balance of the line of credit shall convert to a commercial term loan maturing on October 31, 2022. Draws against the credit line can be used for working capital needs and standby letters of credit. Draws against the credit line are secured by mortgages on FREIT’s Franklin Crossing Shopping Center in Franklin Lakes, New Jersey and retail space in Glen Rock, New Jersey. The total line of credit was increased from $12.8 million to $13 million and the interest rate on the amount outstanding will be at a floating rate of 275 basis points over the 30-day LIBOR with a floor of 3.75%. During Fiscal 2017, FREIT utilized $3 million of its credit line to fund tenant improvements for new retail tenants at the Rotunda property. As of January 31, 2019 and October 31, 2017, approximately $3.1 million was outstanding (including closing costs of approximately $0.1 million related to the renewal of the line). In February 2018, FREIT repaid the line of credit in the amount of $3.1 million. As of April 30, 2018, there was no amount outstanding and $13 million was available under the line of credit.

On April 28, 2017, WestFREIT Corp., a consolidated subsidiary, refinanced its $22 million mortgage loan held by Wells Fargo Bank, with a new mortgage loan from Manufacturer’s and Traders Trust Company in the amount of $23.5 million. The new loan bears a floating interest rate equal to 275 basis points over the one-month LIBOR and has a maturity date of April 28, 2019 with the option to extend for 12 months. This refinancing resulted in: (i) a reduction in the annual interest rate from a fixed rate of 5.55% to a variable rate and (ii) net refinancing proceeds of approximately $1.1 million which have been used for general corporate purposes.

 

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Note 98 – Fair value of long-term debt:

The following table shows the estimated fair value and carrying value of FREIT’s long-term debt at April 30, 2018January 31, 2019 and October 31, 2017:2018:

($ in Millions) April 30, 2018 October 31, 2017 January 31, 2019 October 31, 2018 
         
Fair Value $341.7 $317.8 $342.2  $338.3 
            
Carrying Value $348.6 $321.6 $346.2  $347.0 

Fair values are estimated based on market interest rates at April 30, 2018January 31, 2019 and October 31, 20172018 and on a discounted cash flow analysis. Changes in assumptions or estimation methods may significantly affect these fair value estimates. The fair value is based on observable inputs (level 2 in the fair value hierarchy as provided by authoritative guidance).

Note 109 - Segment information:

FREIT has determined that it has two reportable segments: commercial properties and residential properties. These reportable segments offer different types of space, have different types of tenants, and are managed separately because each requires different operating strategies and management expertise. The commercial segment is comprised of nine (9)eight (8) properties, excluding the land and thebuilding formerly occupied as a Pathmark supermarket in Patchogue, New York, which was sold on February 8, 2019 (see Note 13 to FREIT’s condensed consolidated financial statements). The residential segment is comprised of eight (8) properties inclusive of the property acquired in Fiscal 2018 (Station Place).properties.

The accounting policies of the segments are the same as those described in Note 1 in FREIT’s Annual Report on Form 10-K for the fiscal year ended October 31, 2017.2018. The chief operating and decision-making group of FREIT's commercial segment, residential segment and corporate/other is comprised of FREIT’s Board of Trustees (“Board”).

FREIT assesses and measures segment operating results based on net operating income ("NOI"). NOI, a standard used by real estate professionals, is based on operating revenue and expenses directly associated with the operations of the real estate properties, but excludes: deferred rents (straight lining), depreciation, financing costs and other items. NOI is not a measure of operating results or cash flows from operating activities as measured by GAAP, 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.

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Real estate rental revenue, operating expenses, NOI and recurring capital improvements for the reportable segments are summarized below and reconciled to condensed consolidated net income (loss) attributable to common equity for the six and three-monththree month periods ended April 30, 2018January 31, 2019 and 2017.2018. Asset information is not reported since FREIT does not use this measure to assess performance.

 

 Six Months Ended Three Months Ended  Three Months Ended 
 April 30, April 30,  January 31, 
 2018 2017 2018 2017  2019 2018 
 (In Thousands of Dollars) (In Thousands of Dollars)  (In Thousands of Dollars) 
Real estate rental revenue:                        
Commercial $12,566  $12,070  $6,263  $5,996  $6,627  $6,303 
Residential  15,780   12,882   7,987   6,495   8,234   7,793 
Total real estate rental revenue  28,346   24,952   14,250   12,491   14,861   14,096 
                        
Real estate operating expenses:                        
Commercial  6,001   5,835   2,964   2,950   2,831   3,037 
Residential  5,867   6,887   2,151   3,703   3,495   3,716 
Total real estate operating expenses  11,868   12,722   5,115   6,653   6,326   6,753 
                        
Net operating income:                        
Commercial  6,565   6,235   3,299   3,046   3,796   3,266 
Residential  9,913   5,995   5,836   2,792   4,739   4,077 
Total net operating income $16,478  $12,230  $9,135  $5,838  $8,535  $7,343 
                        
                        
Recurring capital improvements - residential $(238) $(379) $(127) $(179) $(124) $(111)
                        
                        
Reconciliation to condensed consolidated net income (loss) attributable to common equity:                Reconciliation to condensed consolidated net income (loss) attributable to common equity:
Segment NOI $16,478  $12,230  $9,135  $5,838  $8,535  $7,343 
Deferred rents - straight lining  173   311   75   173   67   98 
Lease termination fee     (620)     (620)
Investment income  112   91   57   45   71   55 
Unrealized gain on interest rate cap contract  19      19    
Unrealized loss on interest rate cap contract  (154)   
General and administrative expenses  (1,192)  (1,157)  (639)  (633)  (608)  (553)
Depreciation  (5,512)  (5,178)  (2,801)  (2,648)  (2,824)  (2,711)
Financing costs  (9,571)  (7,722)  (4,419)  (3,856)  (4,652)  (5,152)
Net income (loss)  507   (2,045)  1,427   (1,701)  435   (920)
Net (income) loss attributable to noncontrolling interests in subsidiaries  251   1,409   (312)  1,002 
Net loss attributable to noncontrolling interests in subsidiaries  24   563 
Net income (loss) attributable to common equity $758  $(636) $1,115  $(699) $459  $(357)

 

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Note 1110 – Income taxes:

FREIT intends to distribute 100% of its ordinary taxable income to its shareholders as dividends for the fiscal year ending October 31, 2018.2019. Accordingly, no provision for federal or state income taxes related to such ordinary taxable income was recorded in FREIT’s condensed consolidated financial statements.

There was no ordinary taxable income for the fiscal year ended October 31, 20172018 for FREIT to distribute to its shareholders. As described in NotesNote 5 and 6 to FREIT’s condensed consolidated financial statements, FREIT completed a like-kind exchange with respect to the sale of the Hammel Gardens property in Maywood, New Jersey property, which was sold on June 12, 2017 resulting in a capital gain of approximately $15.4 million. The tax basis of Station Place in Red Bank, New Jersey, which was the replacement property in the like-kind exchange, iswas approximately $18.8$18.9 million lower than the acquisition cost of approximately $19.5$19.6 million recorded for financial reporting purposes. Accordingly, no provision for federal or state income taxes related to such gain was recorded in FREIT’s condensed consolidated financial statements.statements for the fiscal year ended October 31, 2018.

As of April 30, 2018,January 31, 2019, FREIT had no material uncertain income tax positions. The tax years subsequent to and including the fiscal year ended October 31, 20152016 remain open to examination by the major taxing jurisdictions to which FREIT is subject.

 

Note 1211 – Stock option plan:

On September 4, 2014, the Board approved the grant of a totalan aggregate of 246,000 non-qualified share options under FREIT’s Equity Incentive Plan (“the Plan”) to certain FREIT Executive Officers,executive officers, the members of the Board and certain employees of Hekemian & Co., Inc., FREIT’s managing agent. The options have an exercise price of $18.45 per share, will vest in equal annual installments over a 5-year period and will expire 10 years from the date of grant, which will be September 3, 2024.

On November 10, 2016, the Board approved the grant of a totalan aggregate of 38,000 non-qualified share options under the Equity Incentive Plan to two members of the Board who were appointed to the Board during Fiscal 2016. The options have an exercise price of $21.00 per share, will vest in equal annual installments over a 5-year period and will expire 10 years from the date of grant, which will be November 9, 2026.

On May 3, 2018, the Board approved the grant of an aggregate of 38,000 non-qualified share options under the Plan to two members of the Board who were appointed to the Board during Fiscal 2018. The options have an exercise price of $15.50 per share, will vest in equal annual installments over a 5-year period and will expire 10 years from the date of grant, which will be May 2, 2028.

On April 5, 2018, FREIT shareholders approved an amendment to FREIT’s Equity Incentivethe Plan reserving an additional 300,000 shares for issuance under the Plan. As of April 30, 2018, 485,020January 31, 2019, 447,060 shares are available for issuance under the Plan after giving effect to the amendment.

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Plan.

The following table summarizes stock option activity for the six-monththree-month period ended April 30, 2018:January 31, 2019:

 

  No. of Options  Weighted Average 
  Outstanding  Exercise Price 
Options outstanding beginning of period  267,780  $18.81 
Options granted during period      
Options forfeited/cancelled during period      
Options outstanding end of period  267,780  $18.81 
Options vested and expected to vest  262,280     
Options exercisable at end of period  147,940     

  No. of Options  Weighted Average 
  Outstanding  Exercise Price 
Options outstanding beginning of period  305,780  $18.40 
Options granted during period      
Options forfeited/cancelled during period  (40)  18.45 
Options outstanding end of period  305,740  $18.40 
Options vested and expected to vest  299,140     
Options exercisable at end of period  200,260     

 

The estimated fair value of options granted during Fiscal 2017 was $3.54 per option. Such value was estimated on the grant date using a binomial lattice option pricing model using the following assumptions:

·Expected volatility – 30.30%
·Risk-free interest rate – 2.23%
·Imputed option life – 6.3 years
·Expected dividend yield – 4.66%

The expected volatility over the options’ expected life was based on the historical volatility of the weekly closing price of the Company’s stock over a five (5) year period. The risk-free interest rate was based on the annual yield on the grant date of a zero-coupon U.S. Treasury Bond the maturity of which equals the option’s expected life. The imputed option life was based on the simplified expected term calculation permitted by the SEC, which defines the expected life as the average of the contractual term of the options and the weighted-average vesting period for all option tranches. The expected dividend yield was based on the Company’s historical dividend yield, exclusive of capital gain dividends.

For the six-monththree-month periods ended April 30,January 31, 2019 and 2018, and 2017, compensation expense related to stock options granted amounted to approximately $61,000$34,000 and $61,000, respectively. For the three-month periods ended April 30, 2018 and 2017, compensation expense related to stock options granted amounted to approximately $30,000 and $30,000,$31,000, respectively. At April 30, 2018,January 31, 2019, there was approximately $218,000$194,000 of unrecognized compensation cost relating to outstanding non-vested stock options to be recognized over the remaining weighted average vesting period of approximately 1.92.4 years.

There was noThe aggregate intrinsic value of options vested and expected to vest andat January 31, 2019 was approximately $11,000. There was no aggregate intrinsic value of options exercisable at April 30, 2018January 31, 2019 as the exercise price of the vested options was greater than the market or average share price.

Note 1312 – Deferred fee plan:

On September 4, 2014, the Board approved amendments, effective November 1, 2014, to the FREIT Deferred Fee Plan for its Executive Officers and Trustees, one of which provides for the issuance of share units payable in FREIT shares in respect of (i) deferred amounts of all Trustee fees on a prospective basis; (ii) interest on Trustee fees deferred prior to November 1, 2014 (payable at a floating rate, adjusted quarterly, based on the average 10-year Treasury Bond interest rate plus 150 basis points); and (iii) dividends payable in respect of share units allocated to participants in the Deferred Fee Plan as a result of deferrals described above. The number of share units credited to a participant’s account will be determined by the closing price of FREIT shares on the date as set forth in the Deferred Fee Plan. All fees payable to Trustees for the six and three-month periods ended April 30,January 31, 2019 and 2018 were deferred under the Deferred Fee Plan except for fees payable to three Trustees, who elected to receive such fees in cash. All fees payable to Trustees for the six and three-month periods ended April 30, 2017 were deferred under the Deferred Fee Plan except for fees payable to one Trustee, who elected to receive such fees in cash. As a result of the amendment to the Deferred Fee Plan described above, for the six-monththree-month periods ended April 30,January 31, 2019 and 2018, and 2017, the aggregate amounts of deferred Trustee fees together with related interest and dividends were approximately $430,000$238,200 and $423,200,$201,000, respectively, which have been paid through the issuance of 28,11815,204 and 21,03713,289 vested FREIT share units, respectively, based on the closing price of FREIT shares on the dates as set forth in the Deferred Fee Plan.

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For the six-monththree-month periods ended April 30,January 31, 2019 and 2018, and 2017, FREIT has charged as expense approximately $423,300$212,600 and $410,200,$201,000, respectively, representing deferred Trustee fees and interest, and the balance of approximately $6,700$25,600 and $13,000,$0, respectively, representing dividends payable in respect of share units allocated to Plan participants, has been charged to equity.

Note 13 – Subsequent events:

Note 14 – Anchor tenant terminationOn February 8, 2019, FREIT sold a commercial building, formerly occupied as a Pathmark supermarket in Patchogue, New York for a sales price of $7.5 million. The sale of this property, which had a carrying value of approximately $6.2 million (and is presented as held for sale on the condensed consolidated balance sheet as of January 31, 2019), resulted in a capital gain of approximately $0.8 million (on a GAAP basis) net of sales fees and modificationcommissions. Net cash proceeds of lease:approximately $2 million were realized after paying off the related mortgage on this property in the amount of approximately $5.2 million. The sale of this property eliminates an operating loss of approximately $0.8 million ($0.12 per share) incurred, annually, since Pathmark vacated in December 2015.

FREIT ownsOn February 7, 2019, Donald W. Barney retired and operates an 87,661 square foot shopping center located in Franklin Lakes,resigned as President, Chief Financial Officer, Treasurer and a Trustee of First Real Estate Investment Trust of New Jersey the anchor tenant(the “Trust”). The Board of which is The Stop & Shop Supermarket Company, LLC (“Stop & Shop”). On July 26, 2017, Stop & Shop entered into a lease modification with FREIT whereby the tenant exercised its option to renew the lease for a ten year period with a rightTrustees appointed Allan Tubin as Chief Financial Officer and Treasurer of the tenant to terminateTrust and Robert S. Hekemian, Jr. as President of the lease at any time during the fifth year if the store does not meet certain sales volume levels set forth in the modification. This lease modification, which provided for a $250,000 reduction in annual rent, has adversely affected and will adversely affect FREIT’s future operating results.

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Trust.

On JanuaryMarch 4, 2017, Macy’s, Inc. announced its intention to close several of its department stores across the United States, including the approximately 81,160 square foot Macy’s anchor store located at the Preakness Shopping Center in Wayne, New Jersey. Wayne PSC, LLC (“Wayne PSC”), a 40% owned consolidated affiliate of FREIT, owns and operates this shopping center in which Macy’s operated its store under a long-term lease and was paying annual rent of approximately $234,000 ($2.88 per square foot) with no future rent escalations for the remaining term and option periods of the lease. On April 25, 2017, Wayne PSC announced it had agreed to a termination of Macy’s lease effective as of April 15, 2017. To terminate the lease and take possession of the space, Wayne PSC paid Macy’s a termination fee of $620,000, which was fully expensed in the second quarter of Fiscal 2017. Wayne PSC expects to re-position this space and re-lease it to a new tenant (or multiple tenants) at market rents, which are currently higher than the rent provided for under the terminated Macy’s lease. FREIT will lose total consolidated rental income, including reimbursements, of approximately $0.2 million until such time as the space is fully re-leased. FREIT anticipates increased revenue from the space when it is fully re-leased.

Note 15 – Subsequent event:

On May 3, 2018,2019, the Board approved the grant of a totalan aggregate of 38,0005,000 non-qualified share options under the Equity Incentive Plan to two membersthe Chairman of the Board who were appointed to the Board during Fiscal 2018.Board. The options have an exercise price of $15.50$15.00 per share, will vest in equal annual installments over a 5-year period and will expire 10 years from the date of grant, which will be May 2, 2028.March 3, 2029.

 

 

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Cautionary Statement Identifying Important Factors That Could Cause First Real Estate Investment Trust of New Jersey’s (“FREIT”) Actual Results to Differ From Those Projected in Forward Looking Statements.

 

Readers of this discussion are advised that the discussion should be read in conjunction with the unaudited condensed consolidated financial statements of FREIT (including related notes thereto) appearing elsewhere in this Form 10-Q, and the consolidated financial statements included in FREIT’s most recently filed Form 10-K. Certain statements in this discussion may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect FREIT’s current expectations regarding future results of operations, economic performance, financial condition and achievements of FREIT, and do not relate strictly to historical or current facts. FREIT has tried, wherever possible, to identify these forward-looking statements by using words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” or words of similar meaning.

Although FREIT believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties, which may cause the actual results to differ materially from those projected. Such factors include, but are not limited to the following: general economic and business conditions, including the purchase of retail products over the Internet, which will, among other things, affect demand for rental space, the availability of prospective tenants, lease rents, the financial condition of tenants and the default rate on leases, operating and administrative expenses and the availability of financing; adverse changes in FREIT’s real estate markets, including, among other things, competition with other real estate owners, competition confronted by tenants at FREIT’s commercial properties; governmental actions and initiatives; environmental/safety requirements; and risks of real estate development and acquisitions. The risks with respect to the development of real estate include: increased construction costs, inability to obtain construction financing, or unfavorable terms of financing that may be available, unforeseen construction delays and the failure to complete construction within budget.

 

OVERVIEW

FREIT is an equity real estate investment trust (“REIT”) that is self-administered and externally managed. FREIT owns a portfolio of residential apartment and commercial properties. FREIT’s revenues consist primarily of rental income and other related revenues from its residential and commercial properties and additional rent in the form of expense reimbursements derived from operating commercial properties. FREIT’s properties are primarily located in northern New Jersey, Maryland and New York. FREIT acquires existing properties for investment and properties that FREIT believes have redevelopment potential through changes and capital improvements to these properties. FREIT develops and constructs properties on its vacant land. FREIT’s policy is to acquire and develop real property for long-term investment.

The economic and financial environment: Even though theThe U.S. economy grew throughout 2018 at an average annualized rate of 2.3% in3.4%, which is the firststrongest average annualized growth rate since the third quarter of 2018, it remained at the lowest growth rate in a year.2014. Employment remains healthy with an unemployment rate at 3.9%4% in April 2018, the lowest rate since December 2000,January 2019 and real income continues to grow at a solid pace. If the U.S. economy continues to improve, the Federal Reserve may continue to increase lending rates which may affect the refinancing of mortgages coming due in the short-term.short-term and borrowings for other purposes.

Residential Properties: FREIT has aggressively increased rental rates on its stabilized properties. As a result, FREIT’s rental rates continue to show year-over-year increases. FREIT expects increases in rental rates to taper; however, the increased rental rates that are in place should positively impact future revenues.

Commercial Properties: There continues to be uncertainty in the retail environment that could have an adverse impact on FREIT’s retail tenants, which could have an adverse impact on FREIT.

Development Projects and Capital Expenditures: FREIT continues to make only those capital expenditures that are absolutely necessary. The construction at the Rotunda development project began in September 2013 and, with the exception of retail tenant improvements, the redevelopment was substantially completed in the third quarter of Fiscal 2016. AsBy the end of April 30,the third quarter of Fiscal 2018, the residential section reached a stabilized level of occupancy of approximately 94%. The retail space continues to lease-up and is approximately 96%84.9% leased and the retail space is approximately 79.7% leased.79.3% occupied as of January 31, 2019. FREIT expects Rotunda’s operations to stabilize in late 2018 to early 2019.

Debt Financing Availability: Financing for development projects has been available to FREIT and its affiliates. On February 7, 2018, Grande Rotunda, LLC refinanced its $115.3 million construction loan held by Wells Fargo with a new loan held by Aareal Capital Corporation in the amount of approximately $118.5 million with additional funding available for retail tenant improvements and leasing costs in the amount of $3,380,000. This refinancing paid off the loan previously held by Wells Fargo, funded loan closing costs and paid the amount due to Hekemian Development Resources for a development fee of $900,000 plus accrued interest of approximately $45,000 (See Note 76 to FREIT’s condensed consolidated financial statements for further details on this fee). This loan is secured by the Rotunda property, bears a floating interest rate at 285 basis points over the one-month LIBOR rate and has a maturity date of February 6, 2021 with two one-year renewal options. As part of this transaction, Grande Rotunda, LLC purchased an interest rate cap on LIBOR for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan. As of April 30, 2018,January 31, 2019, approximately $118.5 million of this loan facility was drawn down and the interest rate was approximately 4.73%5.36%.

 

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On January 8, 2018, Pierre Towers, LLC (“Pierre”), owned by S And A Commercial Associates Limited Partnership (“S&A”), which is a consolidated subsidiary, refinanced its $29.1 million loan held by State Farm with a new mortgage loan from New York Life Insurance in the amount of $48 million. Pierre paid New York Life Insurance a good faith deposit in the amount of $960,000, (which was included in prepaid expenses and other assets on the accompanying condensed consolidated balance sheet as of October 31, 2017) andwhich was reimbursed by New York Life when the loan was closed in January 2018. The new loan has a term of ten years and bears a fixed interest rate equal to 3.88%. Interest-only payments are required each month for the first five years of the term and thereafter, principal payments plus accrued interest will be required each month through maturity. This refinancing resulted in: (i) a reduction in the annual interest rate from a fixed rate of 5.38% to a fixed rate of 3.88%; and (ii) net refinancing proceeds of approximately $17.2 million (after giving effect to a $1.2 million loan prepayment cost to pay-off the loan held by State Farm) that were distributed to the partners in S&A with FREIT receiving approximately $11.2 million, based on its 65% membership interest in S&A which can be used for capital expenditures and general corporate purposes.

On December 7, 2017, Station Place on Monmouth, LLC (owned 100% by FREIT) closed on a mortgage loan in the amount of $12,350,000 held by Provident Bank to purchase the Station Place property in Red Bank, New Jersey. Interest-only payments are required each month for the first two years of the term and thereafter, principal payments plus accrued interest will be required each month through maturity. The loan bears a floating interest rate equal to 180 basis points over the one-month BBA LIBOR with a maturity date of December 15, 2027. In order to minimize interest rate volatility during the term of the loan, Station Place on Monmouth, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 4.35% over the term of the loan.

On January 21, 2019, Station Place on Monmouth, LLC entered into a modification agreement with Provident Bank. The material terms of the modification were: (i) FREIT guarantees $2,350,000 of the outstanding principal balance of the loan; and (ii) the loan’s Debt Service Coverage Ratio (“DSCR”) covenants are reduced to a single test that will be tested semi-annually (commencing with the six-month period ending April 30, 2019) and require a DSCR of 1.2 / 1.0 based on actual debt service. Prior to this modification, the loan’s DSCR covenants were calculated using the greater of the actual debt service or other hypothetical debt service measures, as provided in the loan agreement, that were to be tested quarterly. As previously disclosed in FREIT’s current report on Form 8-K filed with the SEC on January 24, 2019, Station Place had not been in compliance with the loan covenants as of October 31, 2018, and the modification waives all previous non-compliance. If the DSCR should fall below 1.2 / 1.0, Provident Bank, at its discretion, may require a current appraisal of the Station Place property. If the loan balance exceeds 85% loan-to-value (“L-T-V”) based on the appraised value, Station Place may be required to resize the loan to bring the L-T-V into compliance by paying down the outstanding principal balance of the loan, posting a letter of credit, or providing additional collateral to Provident Bank.

On October 27, 2017, FREIT’s revolving line of credit provided by the Provident Bank was renewed for a three-year term ending on October 27, 2020 at which point no further advances shall be permitted and provided the line of credit is not renewed by the lender, the outstanding principal balance of the line of credit shall convert to a commercial term loan maturing on October 31, 2022. Draws against the credit line can be used for working capital needs and standby letters of credit. Draws against the credit line are secured by mortgages on FREIT’s Franklin Crossing Shopping Center in Franklin Lakes, New Jersey and retail space in Glen Rock, New Jersey. The total line of credit was increased from $12.8 million to $13 million and the interest rate on the amount outstanding will be at a floating rate of 275 basis points over the 30-day LIBOR with a floor of 3.75%. During Fiscal 2017, FREIT utilized $3 million of its credit line to fund tenant improvements for new retail tenants at the Rotunda property. As of January 31, 2019 and October 31, 2017, approximately $3.1 million was outstanding (including closing costs of approximately $0.1 million related to the renewal of the line). In February 2018, FREIT repaid the line of credit in the amount of $3.1 million. As of April 30, 2018, there was no amount outstanding and $13 million was available under the line of credit.

On April 28, 2017, WestFREIT Corp., a consolidated subsidiary, refinanced its $22 million mortgage loan held by Wells Fargo Bank, with a new mortgage loan from Manufacturer’s and Traders Trust Company in the amount of $23.5 million. The new loan bears a floating interest rate equal to 275 basis points over the one-month LIBOR and has a maturity date of April 28, 2019 with the option to extend for 12 months. This refinancing resulted in: (i) a reduction in the annual interest rate from a fixed rate of 5.55% to a variable rate and (ii) net refinancing proceeds of approximately $1.1 million which have been used for general corporate purposes.

In accordance with the loan agreement for each of the loans described above, FREIT may be required to meet or maintain certain financial covenants throughout the term of the loan.

Operating Cash Flow: FREIT expects that cash provided by operating activities and cash reserves will be adequate to cover mandatory debt service payments (including payments of interest, but excluding balloon payments), real estate taxes, recurring capital improvements at properties and other needs to maintain its status as a REIT for at least a period of one year from the date of filing of this quarterly report on Form 10-Q.

 

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SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

Pursuant to the 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 included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2017,2018, have been applied consistently as at April 30, 2018,of January 31, 2019, and for the six and three months ended April 30, 2018January 31, 2019 and 2017.2018. We believe that the following accounting policies or estimates require the application of management's most difficult, subjective, or complex judgments:

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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 collectability.

Valuation of Long-Lived Assets: We assess the carrying value of long-lived assets periodically, or whenever events or changes in circumstances indicate that the carrying amounts of certain assets 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.

Real Estate Development Costs: It is FREIT’s policy to capitalize pre-development costs, which generally include legal and professional fees and other directly related third-party costs. Real estate taxes and interest costs incurred during the development and construction phases are also capitalized. FREIT ceases capitalization of these costs when the project or portion thereof becomes operational, or when construction has been postponed. In the event of postponement, capitalization of these costs will recommence once construction on the project resumes.

See Note 2 to the condensed consolidated financial statements for recently issued accounting standards.

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RESULTS OF OPERATIONS

Real estate revenue for the six months ended April 30, 2018 (“Current Six Months”) increased 12.9% to $28,519,000, compared to $25,263,000 for the six months ended April 30, 2017 (“Prior Year’s Six Months”). For the three months ended April 30, 2018January 31, 2019 (“Current Quarter”), real estate revenue increased 13.1%5.2% to $14,325,000,$14,928,000, compared to $12,664,000$14,194,000 for the three months ended April 30, 2017January 31, 2018 (“Prior Year’s Quarter”). The increase in revenue was primarily attributable to an increase in the average occupancy rate at the Rotunda property resulting from the lease-up of the new residential units and retail space at the property.

Net income (loss) attributable to common equity (“net income (loss)-common equity”) for the Current Six Months and Current Quarter was net income of $758,000$459,000 or $0.11 per share basic and diluted and $1,115,000 or $0.16$0.07 per share basic and diluted, compared to neta loss of $636,000$357,000 or ($0.09) per share basic and diluted and $699,000 or ($0.10)0.05) per share basic and diluted for the Prior Year’s comparable periods, respectively.

IncludedQuarter. The Current Quarter’s increase in net income forwas due to the Current Six and Three Months wasPrior Year’s Quarter being burdened by a $1.5$1.2 million real estate tax credit at the Rotunda Icon property for tax year 2017 and 2018 received in March 2018 withloan prepayment cost (with a consolidated impact to FREIT of approximately $0.9 million based on FREIT’s 60% ownership. Also included in net income for the Current Six Months was a $1.2 million loan prepayment cost$0.8 million) related to the Pierre Towers, LLC loan refinancing (which is included in Interest expenserefinancing. (Refer to the segment disclosure below for a more detailed discussion on the accompanying condensed consolidated statementfinancial performance of income for the six months ended April 30, 2018) with a consolidated impact to FREIT of approximately $0.8 million based on FREIT’s 65% ownership. Included in net loss for the Prior Year’s Sixcommercial and Three Months was a $620,000 termination fee payment made by Wayne PSC, LLC (“Wayne PSC”residential segments.) to terminate the lease and take possession of the Macy’s space at the Preakness Shopping Center in Wayne, New Jersey with a consolidated impact to FREIT of approximately $250,000 based on FREIT’s 40% ownership.

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The schedule below provides a detailed analysis of the major changes that impacted net income (loss)-common equity for the six and three months ended April 30, 2018January 31, 2019 and 2017:2018:

  Six Months Ended Three Months Ended
  April 30, April 30,
  2018 2017 Change 2018 2017 Change
  (In Thousands of Dollars) (In Thousands of Dollars)
Income from real estate operations:                        
    Commercial properties $6,778  $6,572  $206  $3,394  $3,225  $169 
    Residential properties  9,873   5,969   3,904   5,816   2,786   3,030 
Total income from real estate operations  16,651   12,541   4,110   9,210   6,011   3,199 
                         
Financing costs:                        
Fixed rate mortgages  (5,608)  (5,116)  (492)  (2,294)  (2,527)  233 
Floating rate mortgages  (1,812)  (8)  (1,804)  (1,565)  (8)  (1,557)
Floating rate - Rotunda construction loan  (1,321)  (1,856)  535   (90)  (954)  864 
Credit line  (28)  (10)  (18)  (3)  (10)  7 
Other - Corporate interest  (336)  (194)  (142)  (151)  (103)  (48)
Mortgage cost amortization  (466)  (538)  72   (316)  (254)  (62)
Total financing costs  (9,571)  (7,722)  (1,849)  (4,419)  (3,856)  (563)
                         
Investment income  112   91   21   57   45   12 
Unrealized gain on interest rate cap contract  19      19   19      19 
                         
General & administrative expenses:                        
    Accounting fees  (277)  (275)  (2)  (136)  (125)  (11)
    Legal & professional fees  (88)  (47)  (41)  (62)  (38)  (24)
    Trustees and consultant fees  (495)  (485)  (10)  (261)  (250)  (11)
    Stock option expense  (61)  (61)     (30)  (30)   
    Corporate expenses  (271)  (289)  18   (150)  (190)  40 
Total general & administrative expenses  (1,192)  (1,157)  (35)  (639)  (633)  (6)
                         
Depreciation  (5,512)  (5,178)  (334)  (2,801)  (2,648)  (153)
    Adjusted net income (loss)  507   (1,425)  1,932   1,427   (1,081)  2,508 
                         
Lease termination fee     (620)  620      (620)  620 
    Net income (loss)  507   (2,045)  2,552   1,427   (1,701)  3,128 
                         
Net (income) loss attributable to noncontrolling interests in subsidiaries  251   1,409   (1,158)  (312)  1,002   (1,314)
                         
    Net income (loss) attributable to common equity $758  $(636) $1,394  $1,115  $(699) $1,814 

  Three Months Ended
  January 31,
  2019 2018 Change
  (In Thousands of Dollars)
Income from real estate operations:            
    Commercial properties $3,868  $3,384  $484 
    Residential properties  4,734   4,057   677 
Total income from real estate operations  8,602   7,441   1,161 
             
Financing costs:            
Fixed rate mortgages  (2,306)  (3,314)  1,008 
Floating rate mortgages  (1,890)  (247)  (1,643)
Floating rate - Rotunda construction loan     (1,231)  1,231 
Credit line     (25)  25 
Other - Corporate interest  (162)  (185)  23 
Mortgage cost amortization  (294)  (150)  (144)
Total financing costs  (4,652)  (5,152)  500 
             
Investment income  71   55   16 
Unrealized loss on interest rate cap contract  (154)     (154)
             
General & administrative expenses:            
    Accounting fees  (147)  (141)  (6)
    Legal and professional fees  (18)  (26)  8 
    Trustees and consultant fees  (264)  (234)  (30)
    Stock option expense  (34)  (31)  (3)
    Corporate expenses  (145)  (121)  (24)
Total general & administrative expenses  (608)  (553)  (55)
             
Depreciation  (2,824)  (2,711)  (113)
    Net income (loss)  435   (920)  1,355 
             
Net loss attributable to noncontrolling interests in subsidiaries  24   563   (539)
             
    Net income (loss) attributable to common equity $459  $(357) $816 

The condensed consolidated results of operations for the Current Six Months and Current Quarter are not necessarily indicative of the results to be expected for the full year or any other period.

 

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SEGMENT INFORMATION

The following table sets forth comparative net operating income ("NOI") data for FREIT’s real estate segments and reconciles the NOI to condensed consolidated net income (loss)-common equity for the Current Six Months and Current Quarter as compared to the Prior Year’s comparable periods (SeeQuarter (see below for definition of NOI):

 

 Commercial Residential Combined Commercial Residential Combined
 Six Months Ended     Six Months Ended     Six Months Ended Three Months Ended     Three Months Ended     Three Months Ended
 April 30, Increase (Decrease) April 30, Increase (Decrease) April 30, January 31, Increase (Decrease) January 31, Increase (Decrease) January 31,
 2018 2017 $ % 2018 2017 $ % 2018 2017 2019 2018 $ % 2019 2018 $ % 2019 2018
 (In Thousands)   (In Thousands)   (In Thousands) (In Thousands)   (In Thousands)   (In Thousands)
Rental income $9,572  $9,019  $553   6.1% $15,426  $12,688  $2,738   21.6% $24,998  $21,707  $5,000  $4,712  $288   6.1%  $8,094  $7,580  $514   6.8%  $13,094  $12,292 
Reimbursements  2,950   2,754   196   7.1%  37   19   18   94.7%  2,987   2,773   1,623   1,557   66   4.2%   35   19   16   84.2%   1,658   1,576 
Other  44   297   (253)  -85.2%  317   175   142   81.1%  361   472   4   34   (30)  -88.2%   105   194   (89)  -45.9%   109   228 
Total revenue  12,566   12,070   496   4.1%  15,780   12,882   2,898   22.5%  28,346   24,952   6,627   6,303   324   5.1%   8,234   7,793   441   5.7%   14,861   14,096 
Operating expenses  6,001   5,835   166   2.8%  5,867   6,887   (1,020)  -14.8%  11,868   12,722   2,831   3,037   (206)  -6.8%   3,495   3,716   (221)  -5.9%   6,326   6,753 
Net operating income $6,565  $6,235  $330   5.3% $9,913  $5,995  $3,918   65.4%  16,478   12,230  $3,796  $3,266  $530   16.2%  $4,739  $4,077  $662   16.2%   8,535   7,343 
                                                                                
Average Occupancy %  75.9%  76.8%      -0.9%  93.7%  78.6%*    15.1%          77.5%   75.6%       1.9%   95.2%   93.1%       2.1%         

 

 Reconciliation to consolidated net income (loss)-common equity:
 Deferred rents - straight lining  173   311 
 Lease termination fee     (620)
 Investment income  112   91 
 Unrealized gain on interest rate cap contract  19    
 General and administrative expenses  (1,192)  (1,157)
 Depreciation  (5,512)  (5,178)
 Financing costs  (9,571)  (7,722)
            Net income (loss)  507   (2,045)
 Net loss attributable to noncontrolling interests in subsidiaries  251   1,409 
            Net income (loss) attributable to common equity $758  $(636)
 Reconciliation to condensed consolidated net income (loss)-common equity:
 Deferred rents - straight lining  67   98 
 Investment income  71   55 
 Unrealized loss on interest rate cap contract  (154)   
 General and administrative expenses  (608)  (553)
 Depreciation  (2,824)  (2,711)
 Financing costs  (4,652)  (5,152)
            Net income (loss)  435   (920)
 Net loss attributable to noncontrolling interests in subsidiaries  24   563 
            Net income (loss) attributable to common equity $459  $(357)

 

  Commercial Residential Combined
  Three Months Ended     Three Months Ended     Three Months Ended
  April 30, Increase (Decrease) April 30, Increase (Decrease) April 30,
  2018 2017 $ % 2018 2017 $ % 2018 2017
  (In Thousands)   (In Thousands)   (In Thousands)
Rental income $4,860  $4,593  $267   5.8% $7,846  $6,391  $1,455   22.8% $12,706  $10,984 
Reimbursements  1,393   1,397   (4)  -0.3%  18   10   8   80.0%  1,411   1,407 
Other  10   6   4   66.7%  123   94   29   30.9%  133   100 
Total revenue  6,263   5,996   267   4.5%  7,987   6,495   1,492   23.0%  14,250   12,491 
Operating expenses  2,964   2,950   14   0.5%  2,151   3,703   (1,552)  -41.9%  5,115   6,653 
Net operating income $3,299  $3,046  $253   8.3% $5,836  $2,792  $3,044   109.0%  9,135   5,838 
                                         
Average Occupancy %  76.6%  77.6%      -1.0%  94.2%  79.2%*    15.0%        

 Reconciliation to condensed consolidated net income (loss)-common equity:
 Deferred rents - straight lining  75   173 
 Lease termination fee     (620)
 Investment income  57   45 
 Unrealized gain on interest rate cap contract  19    
 General and administrative expenses  (639)  (633)
 Depreciation  (2,801)  (2,648)
 Financing costs  (4,419)  (3,856)
            Net income (loss)  1,427   (1,701)
 Net (income) loss attributable to noncontrolling interests in subsidiaries  (312)  1,002 
            Net income (loss) attributable to common equity $1,115  $(699)

 

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* Average occupancy rate excludes the Maywood, New Jersey ("Hammel Gardens") property as the property was sold in June 2017.

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, financing costs and other items. FREIT assesses and measures segment operating results based on NOI.

Same Property NOI: FREIT considers same property net operating income (“Same Property NOI”) to be a useful supplemental non-GAAP measure of its operating performance. FREIT defines same property within both the commercial and residential segments to be those properties that FREIT has owned and operated for both the current and prior periods presented, excluding those properties that FREIT acquired or redeveloped during those periods. Any newly acquired property that has been in operation for less than a year, any property that is undergoing a major redevelopment but may still be in operation at less than full capacity, and/or any property that has been sold is not considered same property.

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NOI and Same Property NOI are non-GAAP financial measures and are not measures of operating results or cash flow as measured by GAAP, and are 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.

 

COMMERCIAL SEGMENT

The commercial segment contains nine (9) separate properties.eight (8) properties, excluding the land and building formerly occupied as a Pathmark supermarket in Patchogue, New York sold on February 8, 2019 (see Note 13 to FREIT’s condensed consolidated financial statements). Seven of these properties are multi-tenanted retail or office centers, and two areone is single tenanted – a building formerly occupied as a supermarket andon land located in Rockaway, New Jersey owned by FREIT from which it receives monthly rental income from a tenant who has built and operates a bank branch on the land.

As indicated in the table above under the caption Segment Information, total revenue from FREIT’s commercial segment for the Current Six Months and Current Quarter increased by 4.1% and 4.5%, respectively,5.1% and NOI increased by 5.3% and 8.3%, respectively,16.2% as compared to the Prior Year’s comparable periods.Quarter. Average occupancy for all commercial properties increased by 1.9% as compared to the Prior Year’s Quarter. The increase in revenue and NOI was primarily attributable to an increase in occupancy at the Rotunda property resulting from the lease-up of the new retail space offset partially by the loss of revenue from Macy’s vacating the Preakness Shopping Centeran average annual occupancy 69.4% in Wayne, New Jersey in April 2017. For the Current Six Months and Current Quarter, average occupancy showed a slight decrease of 0.9% and 1%, respectively, as compared to the Prior Year’s comparable periods primarily driven by Macy’s vacatingQuarter to 79.3% in the space at the Preakness Shopping Center offset by an increase at the Rotunda property as tenants occupy leased spaces.Current Quarter.

Same Property Operating Results: FREIT’s commercial segment currently contains nine (9)eight (8) same properties. (See definition of same property under Segment Information above.) Since all of FREIT’s commercial properties are considered same properties in the current fiscal year,Current Quarter, refer to the preceding paragraph for discussion of changes in same property results.

Leasing: The following tables reflect leasing activity at FREIT’s commercial properties for comparable leases (leases executed for spaces in which there was a tenant at some point during the previous twelve-month period) and non-comparable leases for the Current Six Months:Quarter:

 

RETAIL: Number of
Leases
  Lease Area
(Sq. Ft.)
  Weighted
Average Lease
Rate (per Sq.
Ft.)
  Weighted
Average Prior
Lease Rate (per
Sq. Ft.)
  % Increase
(Decrease)
  Tenant
Improvement
Allowance (per
Sq. Ft.)  (a)
  Lease
Commissions
(per Sq. Ft.)  (a)
 
                      
Comparable leases (b)  6   14,741  $28.96  $29.22   -0.9%  $1.12  $0.75 
                             
Non-comparable leases  1   1,130  $27.83    N/A     N/A   $  $1.39 
                             
Total leasing activity  7   15,871                     
                             

 

RETAIL: Number of
Leases
  Lease Area
(Sq. Ft.)
  Weighted
Average Lease
Rate (per Sq.
Ft.)
  Weighted
Average Prior
Lease Rate (per
Sq. Ft.)
  % Increase
(Decrease)
  Tenant
Improvement
Allowance (per
Sq. Ft.)  (a)
  Lease
Commissions
(per Sq. Ft.)  (a)
 
                      
Comparable leases (b)  10   55,031  $22.49  $22.69   -0.9% $0.28  $0.45 
                             
Non-comparable leases  3   6,688  $42.37    N/A     N/A   $4.69  $1.49 
                             
Total leasing activity  13   61,719                     
                             

OFFICE: Number of
Leases
  Lease Area
(Sq. Ft.)
  Weighted
Average Lease
Rate (per Sq.
Ft.)
  Weighted
Average Prior
Lease Rate (per
Sq. Ft.)
  % Increase
(Decrease)
  Tenant
Improvement
Allowance (per
Sq. Ft.)  (a)
  Lease
Commissions
(per Sq. Ft.)  (a)
  Number of
Leases
  Lease Area
(Sq. Ft.)
  Weighted
Average Lease
Rate (per Sq.
Ft.)
  Weighted
Average Prior
Lease Rate (per
Sq. Ft.)
  % Increase
(Decrease)
  Tenant
Improvement
Allowance (per
Sq. Ft.)  (a)
  Lease
Commissions
(per Sq. Ft.)  (a)
 
                              
Comparable leases (b)  2   3,683  $25.63  $23.35   9.8% $0.58  $0.31   5   5,550  $25.99  $22.75   14.2%  $2.08  $0.81 
                                                        
Non-comparable leases       $    N/A     N/A   $  $   2   4,350  $25.56    N/A     N/A   $4.84  $1.15 
                                                        
Total leasing activity  2   3,683                       7   9,900                     
                            

 

(a) These leasing costs are presented as annualized costs per square foot and are allocated uniformly over the initial lease term.

(b) This includes new tenant leases and/or modifications/extensions/renewals of existing tenant leases.        

 

In October 2018, Sears and certain of its subsidiaries, including Kmart Corporation, filed for protection under Chapter 11 of the bankruptcy code as disclosed in the bankruptcy filings. While Sears has elected to close numerous stores, as of the date of this report, Sears continues to pay rent and the Kmart store at the Westwood Plaza Shopping Center in Westwood, New Jersey remains open for business. In the event that the Kmart lease is rejected in the course of Sears’ bankruptcy proceedings, FREIT’s operating results would be adversely impacted.

ROTUNDA

TheIn March 2018, iHeartMedia Inc. along with its affiliates, including iHeartMedia+Entertainment (formerly known as Clear Channel Broadcasting Inc.), filed jointly for protection under Chapter 11 of the bankruptcy code as disclosed in the bankruptcy filings. As of the date of this report, the lease for iHeartMedia+Entertainment at the Rotunda property in Baltimore, Maryland (owned by FREIT’s 60% owned consolidated affiliate Grande Rotunda, LLC) is an 11.5 acre site containing a building with approximately 135,000 sq. ft. of office space and approximately 84,000 sq. ft. of retail space on the lower level of the building. In September 2013, FREIT began construction to redevelop and expand this property and, with the exception of retail tenant improvements, the redevelopment was substantially completed in the third quarter of Fiscal 2016. The redevelopment and expansion plans included a modernization of the office building and smaller adjacent buildings, construction of 379 residential apartment rental units, an additional 75,000 square feet of new retail space, and 864 above level parking spaces. As of April 30, 2018, the residential section is approximately 96% leased and 92.6% occupied and the retail space is approximately 79.7% leased and 74.5% occupied. FREIT expects the Rotunda’s operations to stabilize in late 2018 to early 2019.

On February 7, 2018, Grande Rotunda, LLC refinanced its $115.3 million construction loan held by Wells Fargo with a new loan held by Aareal Capital Corporation in the amount of approximately $118.5 million with additional funding available for retail tenant improvements and leasing costs in the amount of $3,380,000. This refinancing paid off the loan previously held by Wells Fargo, funded loan closing costs and paid the amount due to Hekemian Development Resources for a development fee of $900,000 plus accrued interest of approximately $45,000 (See Note 7 to FREIT’s condensed consolidated financial statements for further details on this fee). This loan, securedassumed by the Rotunda property, bears a floating interest rate at 285 basis points over the one-month LIBOR ratebankrupt entity, which continues to pay rent and has a maturity date of February 6, 2021 with two one-year renewal options. As part of this transaction, Grande Rotunda, LLC purchased an interest rate cap on LIBORremains open for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan. As of April 30, 2018, approximately $118.5 million of this loan was drawn down and the interest rate was approximately 4.73%.business.

 

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In Fiscal 2017, Grande Rotunda, LLC incurred substantial expenditures at the Rotunda property related to retail tenant improvements, leasing costs and operating expenditures which, in the aggregate, exceeded revenues as the property was still in the rent up phase and the construction loan previously held with Wells Fargo was at its maximum level resulting in no additional funding available to draw. Accordingly, the equity owners in Grande Rotunda, LLC (FREIT with a 60% ownership and Rotunda 100, LLC with a 40% ownership) contributed their respective pro-rata share of any cash needs through loans to Grande Rotunda, LLC. As of April 30, 2018 and October 31, 2017, Rotunda 100, LLC has funded Grande Rotunda, LLC with approximately $5.3 million and $5.2 million, respectively, which is included in “Due to affiliate” on the accompanying condensed consolidated balance sheets.

RESIDENTIAL SEGMENT

FREIT currently operates eight (8) multi-family apartment buildings or complexes totaling 1,437 apartment units, which is inclusiveunits. On December 7, 2017, FREIT completed the acquisition of the Station Place, propertya residential apartment complex consisting of one building with 45 units, located in Red Bank, New Jersey which was acquired in December 2017. On June 12, 2017,through Station Place on Monmouth, LLC (FREIT’s 100% owned consolidated subsidiary). FREIT sold itsidentified Station Place as the replacement property for the Hammel Gardens property, a residential property located in Maywood, New Jersey for a sale price of $17 million. The sale of this property,that FREIT sold on June 12, 2017, which had a carrying value of approximately $0.7 million, resulted in a capital gain of approximately $15.4 million net of sales fees and commissions. As a result of this sale, FREIT incurred a loan prepayment cost of approximately $1.1 million and paid offcompleted the related mortgage on the Hammel Gardens property in the amount of approximately $8 million from the proceeds of the sale. FREIT structured this sale in a manner that qualified it as a like-kind exchange of real estate pursuant to Section 1031 of the Internal Revenue Code. The 1031 Exchange transaction resulted in a deferral for income tax purposes of the $15.4 million capital gain. The net proceeds from this sale, which were approximately $7 million, were held in escrow until a replacement property was purchased. A replacement property to complete this like-kind exchange (Station Place) was acquired on December 7, 2017, and the sale proceeds held in escrow were applied to the purchase price of such propertyCode (See NotesNote 5 and 6 to FREIT’s condensed consolidated financials for further details).

As indicated in the table above under the caption Segment Information, total revenue from FREIT’s residential segment for the Current Six Months and Current Quarter increased by 22.5% and 23%, respectively,5.7% and NOI for the Current Six Months and Current Quarter increased by 65.4% and 109%16.2%, respectively, as compared to the Prior Year’s comparable periods.Quarter. Average occupancy for all residential properties for the Current Quarter increased approximately 2.1% over the Prior Year’s Quarter. The increase in revenue and NOI for the Current Six Months and Current Quarter was primarily driven by an increase in the average annual occupancy at the Icon (the residential portion of the Rotunda property in Baltimore, Maryland) to 88.5% in the Current Six Months compared to 34.5% in the Prior Year’s Six Months and 90.9%95.3% in the Current Quarter as compared to 37.8%86.1% in the Prior Year’s Quarter. Also contributing to the increase in NOI for the Current Six Months and Current Quarter was the $1.5 milliontiming of real estate tax credits earned in the Current Quarter as compared to the prior year (tax refund and credit at the Rotunda Icon property for tax year 2017 and 2018was not received in March 2018 with a consolidated impact to FREITthe prior year until the second quarter of approximately $0.9 million based on FREIT’s 60% ownership. Average occupancy for all residential properties for the Current Six Months and Current Quarter increased 15.1% and 15%, respectively, over the Prior Year’s comparable periods primarily driven by the Rotunda Icon property.fiscal 2018).

Same Property Operating Results: FREIT’s residential segment currently contains seven (7) same properties. (See definition of same property under Segment Information above.) The Station Place property is not included as same property, since it is a newly acquired property that hashad been in operation for less than a year. The Hammel Gardens property was excluded from same property results for all periods presented because this property was soldyear in the prior fiscal year.2018. For the Current Six Months and Current Quarter, same property revenue increased by 24.4% and 23.7%, respectively, and same property NOI increased by 68.9%4.5% and 114.4%16.3%, respectively, as compared to the Prior Year’s comparable periods.Quarter. Average occupancy for same properties increased approximately 2.4% over the Prior Year’s Quarter. The changes resulted from the factors discussed in the immediately preceding paragraph.

FREIT’s residential revenue is principally composed of monthly apartment rental income. Total rental income is a factor of occupancy and monthly apartment rents. Monthly average residential rents, (excluding from both periods presented the Hammel Gardens property which was sold in June 2017 andfor comparability purposes, the Station Place property which was a newly acquired property that hashad been in operation for less than a year in fiscal 2018 and the Icon which reached a stabilized occupancy rate in the third quarter of the prior year), at the end of the Current Quarter and the Prior Year’s Quarter were $1,879$1,921 and $1,846,$1,876, respectively. A 1% decline in annual average occupancy, or a 1% decline in average rents from current levels, results in an annual revenue decline of approximately $228,000$234,000 and $217,000,$224,000, respectively.

Capital expenditures: Since all of FREIT’s apartment communities, with the exception of the Boulders, Regency, Icon and Station Place properties, were constructed more than 25 years ago, FREIT tends to spend more in any given year on maintenance and capital improvements than may be spent on newer properties. Funds for these capital projects will be available from cash flow from the property's operations and cash reserves. In April 2018, Pierre Towers, LLC (“Pierre”), a consolidated subsidiary, entered into an agreement with Public Service Electric & Gas Company (“PSE&G”), whereby PSE&G would fundfunded a project to make certain upgrades at the Pierre property located in Hackensack, New Jersey, which includeincluded boiler replacement, lighting replacement of interior and exterior fixtures and minor lighting controls in apartment lighting. PSE&G will initially fundfunded 100% of this project at an estimateda total cost of $924,000. Upon completion of$927,000 and the project which is targetedwas completed in late December 2018,2018. Per the reimbursement agreement, Pierre Towers, LLC will be required to reimburse PSE&G for approximately $391,000$316,000 of this cost to be paidon a monthly basis over a five yearfive-year term with no interest.

 

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FINANCING COSTS

 

 Six Months Ended April 30, Three Months Ended April 30,  Three Months Ended January 31, 
 2018 2017 2018 2017  2019 2018 
 (In Thousands of Dollars) (In Thousands of Dollars)  (In Thousands of Dollars) 
Fixed rate mortgages (a):                        
1st Mortgages                        
Existing $4,918  $5,116  $1,696  $2,527  $2,306  $3,222 
New  690      598   8      92 
Variable rate mortgages:                        
1st Mortgages                        
Existing  503      256      1,890   247 
New  1,309   8   1,309    
Construction loan-Rotunda  1,321   1,856   90   954      1,231 
Credit line  28   10   3   10      25 
Other  336   194   151   103   162   185 
Total financing costs, gross  9,105   7,184   4,103   3,602   4,358   5,002 
Amortization of mortgage costs  466   538   316   254   294   150 
Total financing costs, net $9,571  $7,722  $4,419  $3,856 
Total financing costs $4,652  $5,152 
        
(a) Includes the effect of interest rate swap contracts which effectively convert the floating interest rate to a fixed interest rate over the term of the loan.(a) Includes the effect of interest rate swap contracts which effectively convert the floating interest rate to a fixed interest rate over the term of the loan.

 

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(a) Includes the effect of interest rate swap contracts which effectively convert the floating interest rate to a fixed interest rate over the term of the loan.    

Total net financing costs for the Current Six Months increasedQuarter decreased by approximately $1,849,000$500,000 or 23.9%9.7% as compared to the Prior Year’s comparable periodQuarter, which was primarily attributable todriven by a decrease of approximately $1 million in interest expense on the Pierre Towers, LLC loan resulting from a $1.2 million loan prepayment cost paid in the prior year related to the refinancing of the loan on the Pierre Towers,property offset by an increase of approximately $0.4 million in interest expense on the Grande Rotunda, LLC loan refinancing with a consolidated impact to FREIT of approximately $0.8 million andresulting from the refinancing of Grande Rotunda LLC’sthe loan on the Rotunda property. Total net financing costs for the Current Quarter increased approximately $563,000 or 14.6% as compared to the Prior Year’s comparable period primarily driven by the increaseproperty in interest associated with the refinancing of Grande Rotunda LLC’s loan on the Rotunda property.February 2018. (See Note 87 to FREIT’s condensed consolidated financial statements for further details.)

GENERAL AND ADMINISTRATIVE EXPENSES (“G & A”)

G&A expense for the Current Six Months and Current Quarter was $1,192,000 and $639,000, respectively,$608,000 compared to $1,157,000 and $633,000, respectively,$553,000 for the Prior Year’s comparable periods.Quarter. The primary components of G&A are accountingaccounting/auditing fees, legal &and professional fees, Trustees’ and Trustee and consultingconsultant fees.

 

DEPRECIATION

Depreciation expense from operations for the Current Six Months and Current Quarter was $5,512,000 and $2,801,000, respectively, as$2,824,000 compared to $5,178,000 and $2,648,000, respectively,$2,711,000 for the Prior Year’s comparable periods.Quarter. The increase in depreciation was primarily attributable to additional retail tenant improvements at the Rotunda property being placed into service as the property continues to lease-up.

 

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $5$4.6 million for the Current Six MonthsQuarter compared to $3.6$1.5 million for the Prior Year’s Six Months.Quarter. FREIT expects that cash provided by operating activities and cash reserves will be adequate to cover mandatory debt service payments (including payments of interest, but excluding balloon payments), real estate taxes, recurring capital improvements at properties and other needs to maintain its status as a REIT for at least a period of one year from the date of filing of this quarterly report on Form 10-Q.

As at April 30, 2018,of January 31, 2019, FREIT had cash, and cash equivalents and restricted cash totaling $18.9$28.5 million, compared to $7.9$26.4 million at October 31, 2017.2018. The increase in cash for the Current Six MonthsQuarter is primarily attributable to $21.8 million in net cash provided by financing activities and $5$4.6 million in net cash provided by operating activities offset by $15.8$1.7 million in net cash used in financing activities and $0.8 million in net cash used in investing activities including capital expenditures.

On February 8, 2019, FREIT sold a commercial building, formerly occupied as a Pathmark supermarket in Patchogue, New York for a sales price of $7.5 million. The sale of this property, which had a carrying value of approximately $6.2 million (and is presented as held for sale on the condensed consolidated balance sheet as of January 31, 2019), resulted in a capital gain of approximately $0.8 million (on a GAAP basis) net of sales fees and commissions. Net cash proceeds of approximately $2 million were realized after paying off the related mortgage on this property in the amount of approximately $5.2 million. The sale of this property eliminates an operating loss of approximately $0.8 million ($0.12 per share) incurred, annually, since Pathmark vacated in December 2015.

On April 25, 2017, Wayne PSC announced it had agreed to a termination of Macy’s lease for the 81,160 square foot Macy’s store at the Preakness Shopping Center, effective as of April 15, 2017. To terminate the lease and take possession of the space, Wayne PSC paid Macy’s a termination fee of $620,000. Wayne PSC expects to re-position this space and re-lease to a new tenant (or multiple tenants) at market rents, which are currently higher than the rent provided for under the terminated Macy’s lease. FREIT will lose total consolidated annual rental income, including reimbursements, of approximately $0.2 million until such time as the space is fully re-leased. FREIT anticipates increased revenue from the space when it is fully re-leased.

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On June 12, 2017, FREIT sold its Hammel Gardens property, a residential property located in Maywood, New Jersey, for a sale price of $17 million. The sale of this property, which had a carrying value of approximately $0.7 million, resulted in a capital gain of approximately $15.4 million net of sales fees and commissions. As a result of this sale, FREIT incurred a loan prepayment cost of approximately $1.1 million and paid off the related mortgage on the Hammel Gardens property in the amount of approximately $8 million from the proceeds of the sale. FREIT structured this sale in a manner that qualified it as a like-kind exchange of real estate pursuant to Section 1031 of the Internal Revenue Code. The 1031 Exchange transaction resulted in a deferral for income tax purposes of the $15.4 million capital gain. The net proceeds from this sale, which were approximately $7 million, were held in escrow until a replacement property was purchased.

On December 7, 2017, FREIT completed the acquisition of Station Place, a residential apartment complex consisting of one building with 45 units, located in Red Bank, New Jersey through Station Place on Monmouth, LLC (FREIT’s 100% owned consolidated subsidiary). FREIT identified Station Place as a replacement property for the Hammel Gardens property that FREIT sold on June 12, 2017.2017 to complete the like-kind exchange transaction under Section 1031 of the Internal Revenue Code. Station Place is part of FREIT’s residential segment. The acquisition cost was $19,542,000$19,550,000 (inclusive of approximately $542,000$550,000 of transaction costs capitalized as part of the asset acquisition), which was funded in part with $7 million in net proceeds from the sale of the Hammel Gardens property, and the remaining balance of $12,350,000 (inclusive of the transaction costs) was funded by Station Place on Monmouth, LLC through long-term financing for this property from Provident Bank. (See Note 5 to FREIT’s condensed consolidated financial statements.)

FREIT owns and operates an 87,661 square foot shopping center located in Franklin Lakes, New Jersey, the anchor tenant of which is Stop & Shop. On July 26, 2017, Stop & Shop entered into a lease modification with FREIT whereby the tenant exercised its option to renew the lease for a ten yearten-year period with a right of the tenant to terminate the lease at any time during the fifth year if the store does not meet certain sales volume levels set forth in the modification. This lease modification, which provided for a $250,000 reduction in annual rent, has adversely affected and will adversely affect FREIT’s future operating results.

In Fiscal 2017, Grande Rotunda, LLC incurred substantial expenditures at the Rotunda property related to retail tenant improvements, leasing costs and operating expenditures which, in the aggregate, exceeded revenues as the property was still in the rent up phase and the construction loan previously held with Wells Fargo was at its maximum level resulting in no additional funding available to draw. Accordingly, the equity owners in Grande Rotunda, LLC (FREIT with a 60% ownership and Rotunda 100, LLC with a 40% ownership) contributed their respective pro-rata share of any cash needs through loans to Grande Rotunda, LLC. As of April 30, 2018January 31, 2019 and October 31, 2017,2018, Rotunda 100, LLC has funded Grande Rotunda, LLC with approximately $5.3$5.5 million and $5.2$5.4 million (including interest), respectively, which is included in “Due to affiliate” on the accompanying condensed consolidated balance sheets.

After careful consideration of FREIT’s projected operating results and cash needs, the Board of Trustees declared

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On April 22, 2016, Damascus Centre, LLC was able to take-down a second quarter dividendtranche of $0.05 per shareits loan held with People’s United Bank in the amount of $2,320,000, of which will be paid on June 15,approximately $470,000 was readily available and the remaining $1,850,000 was held in escrow. In July 2018, these funds totaling $1,850,000 were released from escrow by the bank and became readily available to shareholders of record on June 1, 2018. The Board will continue to evaluate the dividend on a quarterly basis.Damascus, Centre LLC.

Credit Line: On October 27, 2017, FREIT’s revolving line of credit provided by the Provident Bank was renewed for a three-year term ending on October 27, 2020 at which point no further advances shall be permitted and provided the line of credit is not renewed by the lender, the outstanding principal balance of the line of credit shall convert to a commercial term loan maturing on October 31, 2022. Draws against the credit line can be used for working capital needs and standby letters of credit. Draws against the credit line are secured by mortgages on FREIT’s Franklin Crossing Shopping Center in Franklin Lakes, New Jersey and retail space in Glen Rock, New Jersey. The total line of credit was increased from $12.8 million to $13 million and the interest rate on the amount outstanding will be at a floating rate of 275 basis points over the 30-day LIBOR with a floor of 3.75%. During Fiscal 2017, FREIT utilized $3 million of its credit line to fund tenant improvements for new retail tenants at the Rotunda property. As of January 31, 2019 and October 31, 2017, approximately $3.1 million was outstanding (including closing costs of approximately $0.1 million related to the renewal of the line). In February 2018, FREIT repaid the line of credit in the amount of $3.1 million. As of April 30, 2018, there was no amount outstanding and $13 million was available under the line of credit.

As at April 30, 2018,January 31, 2019, FREIT’s aggregate outstanding mortgage debt was $352.6$349.4 million, which bears a weighted average interest rate of 3.9%4.49% and an average life of approximately 4.74 years. FREIT’s fixed rate mortgages are subject to amortization schedules that are longer than the terms of the mortgages. As such, balloon payments (unpaid principal amounts at mortgage due date) for all mortgage debt will be required as follows:

Fiscal Year201820192021202220232024202520262028
($ in millions)          
Mortgage "Balloon" Payments   $5.2$39.5137.6*$14.4$34.4$9.0$13.9$18.2$53.9
          
   *Includes Rotunda loan in the amount of $118.5 million refinanced with Aareal Capital Corporation on February 7, 2018.

Fiscal Year20192021202220232024202520262028
($ in millions)         
Mortgage "Balloon" Payments   $39.5 (A)$137.6 (B)$14.4$34.4$9.0$13.9$18.2$53.9
         
(A) Excludes Patchogue balloon payment of $5.2 million as the property was sold on February 8, 2019 and the related mortgage was paid off with the proceeds from the sale. (See Note 13 to FREIT's condensed consolidated financial statements.) The remaining balance represents two loans aggregating approximately $39.5 million which are extendable for a period of one (1) year. 
(B) Includes Rotunda loan in the amount of approximately $118.5 million refinanced with Aareal Capital Corporation on February 7, 2018.

 

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The following table shows the estimated fair value and carrying value of FREIT’s long-term debt at April 30, 2018January 31, 2019 and October 31, 2017:2018:

 

($ in Millions) April 30, 2018 October 31, 2017 January 31, 2019 October 31, 2018 
         
Fair Value $341.7 $317.8 $342.2  $338.3 
            
Carrying Value $348.6 $321.6 $346.2  $347.0 

 

Fair values are estimated based on market interest rates at April 30, 2018January 31, 2019 and October 31, 20172018 and on a discounted cash flow analysis. Changes in assumptions or estimation methods may significantly affect these fair value estimates. The fair value is based on observable inputs (level 2 in the fair value hierarchy as provided by authoritative guidance).

FREIT expects to refinance the individual mortgages with new mortgages when their terms expire. To this extent FREIT has exposure to interest rate risk. 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 refinancing proceeds may be less than the amount of mortgage debt being retired. For example, at April 30, 2018,January 31, 2019, a 1% interest rate increase would reduce the fair value of FREIT’s debt by $9.4$8.5 million, and a 1% decrease would increase the fair value by $10$9 million.

FREIT believes that the values of its properties will be adequate to command refinancing proceeds equal to or higher than the mortgage debt to be refinanced. FREIT continually reviews its debt levels to determine if additional debt can prudently be utilized for property acquisitions for its real estate portfolio that will increase income and cash flow to shareholders.

The loan on the Patchogue, New York property in the amount of approximately $5.2 million became due on March 1, 2018. FREIT is currently working with the lender, Oritani Bank, to extend the loan while the lender completes its underwriting process. Until such time as a definitive agreement providing for an extension of the loan is entered into, there can be no assurance the loan will be extended.

On February 7, 2018, Grande Rotunda, LLC refinanced its $115.3 million construction loan held by Wells Fargo with a new loan held by Aareal Capital Corporation in the amount of approximately $118.5 million with additional funding available for retail tenant improvements and leasing costs in the amount of $3,380,000. This refinancing paid off the loan previously held by Wells Fargo, funded loan closing costs and paid the amount due to Hekemian Development Resources for a development fee of $900,000 plus accrued interest of approximately $45,000 (See Note 76 to FREIT’s condensed consolidated financial statements for further details on this fee). This loan is secured by the Rotunda property, bears a floating interest rate at 285 basis points over the one-month LIBOR rate and has a maturity date of February 6, 2021 with two one-year renewal options. As part of this transaction, Grande Rotunda, LLC purchased an interest rate cap on LIBOR for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan. As of April 30, 2018,January 31, 2019, approximately $118.5 million of this loan facility was drawn down and the interest rate was approximately 4.73%5.36%.

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On January 8, 2018, Pierre Towers, LLC (“Pierre”), owned by S&A, And A Commercial Associates Limited Partnership (“S&A”), which is a consolidated subsidiary, refinanced its $29.1 million loan held by State Farm with a new mortgage loan from New York Life Insurance in the amount of $48 million. Pierre paid New York Life Insurance a good faith deposit in the amount of $960,000, (which was included in prepaid expenses and other assets on the accompanying condensed consolidated balance sheet as of October 31, 2017) andwhich was reimbursed by New York Life when the loan was closed in January 2018. The new loan has a term of ten years and bears a fixed interest rate equal to 3.88%. Interest-only payments are required each month for the first five years of the term and thereafter, principal payments plus accrued interest will be required each month through maturity. This refinancing resulted in: (i) a reduction in the annual interest rate from a fixed rate of 5.38% to a fixed rate of 3.88%; and (ii) net refinancing proceeds of approximately $17.2 million (after giving effect to a $1.2 million loan prepayment cost to pay-off the loan held by State Farm) that were distributed to the partners in S&A with FREIT receiving approximately $11.2 million, based on its 65% membership interest in S&A which can be used for capital expenditures and general corporate purposes.

On December 7, 2017, Station Place on Monmouth, LLC (owned 100% by FREIT) closed on a mortgage loan in the amount of $12,350,000 held by Provident Bank to purchase the Station Place property in Red Bank, New Jersey. Interest-only payments are required each month for the first two years of the term and thereafter, principal payments plus accrued interest will be required each month through maturity. The loan bears a floating interest rate equal to 180 basis points over the one-month BBA LIBOR with a maturity date of December 15, 2027. In order to minimize interest rate volatility during the term of the loan, Station Place on Monmouth, LLC entered into an interest rate swap agreement that, in effect, converted the floating interest rate to a fixed interest rate of 4.35% over the term of the loan.

On April 28, 2017, WestFREIT Corp.,January 21, 2019, Station Place on Monmouth, LLC entered into a modification agreement with Provident Bank to modify the loan’s DSCR covenants. See Note 7 to the condensed consolidated subsidiary, refinanced its $22 million mortgage loan held by Wells Fargo Bank, with a new mortgage loan from Manufacturer’sfinancial statements and Traders Trust Company in the amountItem 2, “Management’s Discussion and Analysis of $23.5 million. The new loan bears a floating interest rate equal to 275 basis points over the one-month LIBORFinancial Condition and has a maturity dateResults of April 28, 2019 with the option to extend for 12 months. This refinancing resulted in: (i) a reduction in the annual interest rate from a fixed rate of 5.55% to a variable rate and (ii) net refinancing proceeds of approximately $1.1 million which have been used for general corporate purposes.

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Operation – Overview” above.

Interest rate swap contracts: To reduce interest rate volatility, FREIT uses a “pay fixed, receive floating” interest rate swap to convert floating interest rates to fixed interest rates over the term of a certain loan. FREIT enters into these swap contracts with a counterparty that is usually a high-quality commercial bank. In essence, FREIT agrees to pay its counterparties a fixed rate of interest on a dollar amount of notional principal (which corresponds to FREIT’s mortgage debt) over a term equal to the term of the mortgage notes. FREIT’s counterparties, in return, agree to pay FREIT a short-term rate of interest - generally LIBOR - on that same notional amount over the same term as the mortgage notes.

FREIT has variable interest rate mortgages securing its Damascus Center,Centre, Regency, Wayne PSCPreakness Shopping Center and Station Place properties. To reduce interest rate fluctuations, FREIT entered into interest rate swap contracts for each of these loans. These interest rate swap contracts effectively converted variable interest rate payments to fixed interest rate payments. The contracts were based on a notional amount of approximately $22,320,000 ($20,152,00019,782,000 at April 30, 2018)January 31, 2019) for the Damascus CenterCentre swaps, a notional amount of approximately $16,200,000 ($16,089,00015,839,000 at April 30, 2018)January 31, 2019) for the Regency swap, a notional amount of approximately $25,800,000 ($24,823,00024,318,000 at April 30, 2018)January 31, 2019) for the Wayne PSCPreakness Shopping Center swap and a notional amount of approximately $12,350,000 ($12,350,000 at April 30, 2018)January 31, 2019) for the Station Place swap.

Interest rate cap contract: To limit exposure on interest rate volatility, FREIT uses an interest rate cap contract to cap a floating interest rate at a set pre-determined rate. FREIT enters into cap contracts with a counterparty that is usually a high-quality commercial bank. In essence, so long as the floating interest rate is below the cap rate, FREIT agrees to pay its counterparties a variable rate of interest on a dollar amount of notional principal (which corresponds to FREIT’s mortgage debt). Once the floating interest rate rises above the cap rate, FREIT’s counterparties, in return, agree to pay FREIT a short-term rate of interest above the cap on that same notional amount.

FREIT has a variable interest rate loan securing its Rotunda property. As part of the refinancing of Grande Rotunda, LLC’s construction loan previously held by Wells Fargo with a new loan from Aareal Capital Corporation, Grande Rotunda, LLC purchased an interest rate cap on LIBOR for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for the first two years of this loan. The cap contract was based on a notional amount of approximately $121,900,000 ($121,900,000 at April 30, 2018)January 31, 2019) and a term of two years with the loan being hedged against having a balance of approximately $118,520,000 and a term of three years.

Current GAAP requires FREIT to mark-to-market its interest rate swap and cap contracts. As the floating interest rate varies from time-to-time over the term of the contract, the value of the contract will change upward or downward. If the floating rate is higher than the fixed rate, the value of the contract goes up and there is a gain and an asset. If the floating rate is less than the fixed rate, there is a loss and a liability. The interest rate swaps are accounted for as effective cash flow hedges with the corresponding gains or losses on these contracts not affecting FREIT’s income statement; changes in the fair value of these cash flow hedges will be reported in other comprehensive income and appear in the equity section of the balance sheet. The interest rate cap is, for accounting purposes, deemed to be accounted for as an ineffective cash flow hedge with a corresponding gain or loss being recorded in FREIT’s income statement. This gain or loss represents the economic consequence of liquidating fixed rate swaps or the cap contract and replacing them with like-duration funding at current market rates, something we would likely never do. Periodic cash settlements of these contracts will be accounted for as an adjustment to interest expense.

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FREIT has the following derivative-related risks with its swap and cap contracts (“contract”): 1) early termination risk, and 2) counterparty credit risk.

Early Termination Risk: If FREIT wants to terminate its contract before maturity, it would be bought out or terminated at market value; i.e., the difference in the present value of the anticipated net cash flows from each of the contract’s parties. If current variable interest rates are significantly below FREIT’s fixed interest rate payments, this could be costly. Conversely, if interest rates rise above FREIT’s fixed interest payments and FREIT elected early termination, FREIT would realize a gain on termination. At April 30, 2018,January 31, 2019, the interest rate cap contract for the Rotunda property and the swap contracts for the Damascus Centre Regency, Wayne PSC and Station PlacePreakness Shopping Center properties were in FREIT’s favor. If FREIT had terminated these contracts at that date it would have realized gains of approximately $2,313,000$1,569,000 for the Wayne PSCPreakness Shopping Center swap, $883,000$502,000 for the Damascus Centre swaps $238,000and $5,000 for the Regency swap, $266,000 for the Station Place swap and $107,000 for the Grande Rotunda LLC cap, all of which have been included as an asset in FREIT’s condensed consolidated balance sheet as at April 30, 2018. January 31, 2019. At January 31, 2019, the swap contracts for the Regency and Station Place were in the counterparties’ favor. If FREIT had terminated these contracts at that date it would have realized losses of approximately $86,000 for the Regency swap and $74,000 for the Station Place swap, all of which have been included as a liability in FREIT’s condensed consolidated balance sheet as at January 31, 2019.

The change in the fair value for the interest rate swap contracts (gain or loss) during such period has been included in comprehensive income and for the six and three months ended April 30, 2018,January 31, 2019, FREIT recorded an unrealized gainloss of $2,538,000 and $907,000, respectively,$2,364,000 in comprehensive income. The change in the fair value of the Grande Rotunda LLC interest rate cap contract (gain or loss) during such period has been included in the condensed consolidated statement of income and for the six and three months ended April 30,January 31, 2019, FREIT recorded an unrealized loss of approximately $154,000. For the three months ended January 31, 2018, FREIT recorded an unrealized gain of approximately $19,000. For the six and three months ended April 30, 2017, FREIT recorded an unrealized gain of $2,606,000 and unrealized loss of $240,000, respectively,$1,631,000 in comprehensive income representing the change in fair value of the swaps during such period. For the year ended October 31, 2017,2018, FREIT recorded an unrealized gain of $2,952,000$3,113,000 in comprehensive income representing the change in fair value of the swaps during such period with a corresponding asset of approximately $1,325,000$2,452,000 for the Wayne PSCPreakness Shopping Center swap and $275,000$955,000 for the Damascus CentreCenter swaps, and a corresponding liability of $439,000$408,000 for the Regency swap and $460,000 for the Station Place swap as atof October 31, 2017.

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2018. For the year ended October 31, 2018, FREIT recorded an unrealized gain of $72,000 in the condensed consolidated statement of income representing the change in the fair value of the Rotunda interest rate cap contract during such period with a corresponding asset of approximately $159,000 as of October 31, 2018.

Counterparty Credit Risk: Each party to a cap or swap contract bears the risk that its counterparty will default on its obligation to make a periodic payment. FREIT reduces this risk by entering into swap or cap contracts only with major financial institutions that are experienced market makers in the derivatives market.

Dividend: After careful consideration of FREIT’s projected operating results and cash needs, the Board of Trustees declared a first quarter dividend of $0.05 per share. Additionally, the Board of Trustees declared a one-time special dividend in connection with and in anticipation of the closing of the sale of the Patchogue property of $0.10 per share. The total dividend of $0.15 per share will be paid on March 15, 2019 to shareholders of record on March 1, 2019. The Board will continue to evaluate the dividend on a quarterly basis.

 

STOCK OPTION PLAN

On April 5, 2018, FREIT shareholders approved an amendment to FREIT’s Equity Incentive Plan reserving an additional 300,000 shares for issuance under the Plan. As of April 30,October 31, 2018, 485,020447,060 shares are available for issuance under the Plan after giving effect to the amendment.

On May 3, 2018, the Board approved the grant of a total of 38,000 non-qualified share options under the Equity Incentive Plan to two members of the Board who were appointed to the Board during Fiscal 2018. The options have an exercise price of $15.50 per share, will vest in equal annual installments over a 5-year period, and will expire 10 years from the date of grant, which will be May 2, 2028.

 

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ADJUSTED FUNDS FROM OPERATIONS

Funds From Operations (“FFO”) is a non-GAAP measure defined by the National Association of Real Estate Investment Trusts (“NAREIT”). FREIT does not include sources or distributions from equity/debt sources in its computation of FFO. Although many consider FFO as the standard measurement of a REIT’s performance, FREIT modified the NAREIT computation of FFO to include other adjustments to GAAP net income that are not considered by management to be the primary drivers of its decision making process. These adjustments to GAAP net income are straight-line rents and recurring capital improvements on FREIT’s residential apartments and lease termination fees paid to buyout a lease.apartments. The modified FFO computation is referred to as Adjusted Funds From Operations (“AFFO”). FREIT believes that AFFO is a superior measure of its operating performance. FREIT computes FFO and AFFO as follows:

 

  For the Six Months Ended April 30,  For the Three Months Ended April 30, 
  2018  2017  2018  2017 
  (In Thousands, Except Per Share)  (In Thousands, Except Per Share) 
Funds From Operations ("FFO") (a)                
Net income (loss) $507  $(2,045) $1,427  $(1,701)
Depreciation of consolidated properties  5,512   5,178   2,801   2,648 
Amortization of deferred leasing costs  300   223   155   120 
Distributions to minority interests  (340)(b)  (270)  (280)  (120)
FFO $5,979  $3,086  $4,103  $947 
                 
                Per Share - Basic and Diluted $0.87  $0.45  $0.60  $0.14 

  For the Three Months Ended January 31, 
  2019  2018 
  (In Thousands, Except Per Share) 
Funds From Operations ("FFO") (a)        
Net income (loss) $435  $(920)
Depreciation of consolidated properties  2,824   2,711 
Amortization of deferred leasing costs  127   145 
Distributions to minority interests  (294)  (60)(b)
FFO $3,092  $1,876 
         
   Per Share - Basic and Diluted $0.45  $0.27 
         
(a) As prescribed by NAREIT.    
(b) FFO excludes the distribution of proceeds to minority interest in the amount of approximately $6 million related to the refinancing of the loan for Pierre Towers, LLC, owned by S And A Commercial Associates Limited Partnership which is a consolidated subsidiary. See Note 7 to the condensed consolidated financial statements for further details.
         
Adjusted Funds From Operations ("AFFO")        
FFO $3,092  $1,876 
Deferred rents (Straight lining)  (67)  (98)
Capital Improvements - Apartments  (124)  (111)
AFFO $2,901  $1,667 
         
  Per Share - Basic and Diluted $0.42  $0.24 
         
Weighted Average Shares Outstanding:        
 Basic and Diluted  6,915   6,862 

 

(a) As prescribed by NAREIT.

(b) FFO excludes the distribution of proceeds to minority interest in the amount of approximately $6 million related to the refinancing of the loan for Pierre Towers, LLC, owned by S And A Commercial Associates Limited Partnership which is a consolidated subsidiary. See Note 8 to the condensed consolidated financial statements for further details.

Adjusted Funds From Operations ("AFFO")                
FFO $5,979  $3,086  $4,103  $947 
Deferred rents (Straight lining)  (173)  (311)  (75)  (173)
Capital Improvements - Apartments  (238)  (379)  (127)  (179)
Lease termination fee     620      620 
AFFO $5,568  $3,016  $3,901  $1,215 
                 
                Per Share - Basic and Diluted $0.81  $0.44  $0.57  $0.18 
                 
                Weighted Average Shares Outstanding:                
 Basic and Diluted  6,869   6,823   6,876   6,828 

 

FFO and AFFO do not represent cash generated from operating activities in accordance with GAAP, and therefore should not be considered a substitute for net income as a measure of results of operations or for cash flow from operations as a measure of liquidity. Additionally, the application and calculation of FFO and AFFO by certain other REITs may vary materially from that of FREIT, and therefore FREIT’s FFO and AFFO may not be directly comparable to those of other REITs.

 

INFLATION

Inflation can impact the financial performance of FREIT in various ways. FREIT’s commercial 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 FREIT to seek increased rents as leases renew or when new tenants are obtained, subject to prevailing market conditions.

 

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Item 3: Quantitative and Qualitative Disclosures About Market Risk

See “Commercial Segment”, “Residential Segment” and “Liquidity and Capital Resources” under Item 2 above for a detailed discussion of FREIT’s quantitative and qualitative market risk disclosures.

 

Item 4: Controls and Procedures

At 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 Chief Executive Officer and Chief Financial Officer, who concluded that FREIT’s disclosure controls and procedures are effective as of April 30, 2018.January 31, 2019. There has been no change in FREIT’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, FREIT’s internal control over financial reporting.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in FREIT’s reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in FREIT’s reports filed under the Exchange Act is accumulated and communicated to management, including FREIT’s Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.

 

Part II: Other Information

 

Item 1: Legal Proceedings

None.

 

Item 1A: Risk Factors

There were no material changes in any risk factors previously disclosed in FREIT’s Annual Report on Form 10-K for the year ended October 31, 2017,2018, that was filed with the Securities and Exchange Commission on January 12, 2018.11, 2019.

 

 

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Item 6: Exhibits

Exhibit Index

 

Exhibit 31.1 - Section 302 Certification of Chief Executive Officer

Exhibit 31.2 - Section 302 Certification of Chief Financial Officer

Exhibit 32.1 - Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350

Exhibit 32.2 - Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350

 

Exhibit 101 - The following materials from FREIT’s quarterly report on Form 10-Q for the period ended April 30, 2018,January 31, 2019, are formatted in Extensible Business Reporting Language (“XBRL”): (i) condensed consolidated balance sheets; (ii) condensed consolidated statements of income; (iii) condensed consolidated statements of comprehensive income; (iv) condensed consolidated statementstatements of equity; (v) condensed consolidated statements of cash flows; and (vi) notes to condensed consolidated financial statements.

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 FIRST REAL ESTATE INVESTMENT
 TRUST OF NEW JERSEY
 (Registrant)
  
Date: June 8, 2018March 11, 2019 
 /s/ Robert S. Hekemian, Jr.
 (Signature)
 Robert S. Hekemian, Jr.
 President and Chief Executive Officer
 (Principal Executive Officer)
  
  
 /s/ Donald W. BarneyAllan Tubin
 (Signature)
 Donald W. BarneyAllan Tubin
 President, Treasurer and Chief Financial Officer and Treasurer
 (Principal Financial/Accounting Officer)