See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Basis of presentation:
First Real Estate Investment Trust of New Jersey (“FREIT”) was organized on November 1, 1961 as a New Jersey Business Trust. On July 1, 2021, FREIT completed the change of its form of organization from a New Jersey real estate investment trust to a Maryland corporation (the “Reincorporation”) which was approved by its stockholders at the annual meeting of stockholders held on May 6, 2021. The Reincorporation changed the law applicable to FREIT’s affairs from New Jersey law to Maryland law and was accomplished by the merger of FREIT with and into its wholly owned subsidiary, First Real Estate Investment Trust of New Jersey, Inc. (“FREIT Maryland”, “Trust”, “us”, “we”, “our” or the “Company”), a Maryland corporation. As a result of the Reincorporation, the separate existence of FREIT ceased and FREIT Maryland succeeded to all the business, properties, assets and liabilities of FREIT. Holders of shares of beneficial interest in FREIT received one newly issued share of common stock of FREIT Maryland for each share of FREIT that they own, without any action of stockholders required and all treasury stock held by FREIT was retired.
FREIT Maryland is organized and will continue to operate in such a manner as to qualify for taxation as a REIT under the Internal Revenue Code of 1986, as amended, and its stock is traded on the over-the counter market under the trading symbol FREVS.
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 three-month period ended January 31, 2022 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, 2021 of FREIT Maryland.
Reclassification:
Certain prior year cash flow line items have been reclassified to conform to the current year presentation.
Note 2 – Recently issued accounting standard:
In March 2020 and January 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2020-04 “Reference Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, and ASU 2021-01 “Reference Rate Reform (ASC 848): Scope” which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform in contracts and other transactions that reference the London Interbank Offered Rate or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. ASU 2020-04 and ASU 2021-01 are effective for all entities as of March 12, 2020 through December 31, 2022. We currently do not anticipate the need to modify our existing debt agreements as a result of reference rate reform in the current year, however if any modification is executed as a result of reference rate reform, the Company will elect the optional expedient available under ASU 2020-04 and ASU 2021-01, which allows entities to account for the modification as if the modification was not substantial. We will disclose the nature of and reason for electing the optional expedient in each interim and annual financial statement period if and when applicable through December 31, 2022.
Note 3 – Dividends and earnings per share:
The FREIT Maryland Board of Directors (“Board”) declared a dividend of $0.10 per share in the first quarter which was paid on March 15, 2022 to stockholders of record on March 1, 2022. The Board will continue to evaluate the dividend on a quarterly basis.
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 14) 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 Maryland’s stock at the average market price during the period, thereby increasing the number of shares to be added in computing diluted earnings per share. For the three months ended January 31, 2022, the outstanding stock options increased the average dilutive shares outstanding by approximately 63,000 shares with an impact of approximately $0.06 on earnings per share. For the three months ended January 31, 2021, the outstanding stock options were anti-dilutive with no impact on earnings per share. There were approximately 0 and 311,000, anti-dilutive shares for the three months ended January 31, 2022 and 2021, respectively. Anti-dilutive shares consist of out-of-the money stock options under the Equity Incentive Plan (See Note 13).
Note 4 – Interest rate cap and swap contracts:
In accordance with “Accounting Standards Codification Topic 815, Derivatives and Hedging ("ASC 815")”, FREIT Maryland has been accounting for the Damascus Centre, LLC (“Damascus Centre”), FREIT Regency, LLC (“Regency”), Wayne PSC, LLC (“Wayne PSC”) and Station Place on Monmouth (“Station Place”) interest rate swaps and the Grande Rotunda, LLC (“Grande Rotunda”) interest rate cap as 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 and cap in comprehensive income. On December 30, 2021, the Rotunda property owned by Grande Rotunda was sold, a portion of the proceeds from the sale was used to pay off the $116.5 million then outstanding balance of this loan and the corresponding interest rate cap on this loan matured with no settlement due at maturity. On January 10, 2022, the property owned by Damascus Centre was sold and a portion of the proceeds from the sale was used to pay off the $18.2 million then outstanding balance of this loan and the corresponding swap breakage fees of approximately $213,000 related to the early termination of the interest rate swap contracts on this loan which was included as interest expense on the accompanying condensed consolidated statement of income for the three months ended January 31, 2022. (See Note 7 for further details on the sales of these properties.)
For the three months ended January 31, 2022 and 2021, FREIT Maryland recorded an unrealized gain of approximately $1,262,000 and $498,000, respectively, in the condensed consolidated statements of comprehensive income representing the change in the fair value of these cash flow hedges during such periods. As of January 31, 2022, there was an asset of approximately $71,000 for the Wayne PSC swap and a liability of approximately $475,000 for the Regency swap and $642,000 for the Station Place swap. As of October 31, 2021, there was a liability of approximately $278,000 for the Damascus Centre swaps, $348,000 for the Wayne PSC swap, $750,000 for the Regency swap, $932,000 for the Station Place swap and $0 for the Grande Rotunda interest rate cap.
The fair values are based on observable inputs (level 2 in the fair value hierarchy as provided by authoritative guidance).
Note 5 – Investment in tenancy-in-common:
On February 28, 2020, FREIT Maryland reorganized its subsidiary S and A Commercial Associates Limited Partnership (“S&A”) from a partnership into a tenancy-in-common form of ownership (“TIC”). Prior to this reorganization, FREIT Maryland owned a 65% membership interest in S&A, which owned 100% of the Pierre Towers property located in Hackensack, New Jersey through its 100% interest in Pierre Towers, LLC. Pursuant to the TIC agreement, FREIT Maryland ultimately acquired a 65% undivided interest in the Pierre Towers property which was formerly owned by S&A. Based on the guidance of Accounting Standards Codification 810, “Consolidation”, FREIT Maryland’s investment in the TIC is accounted for under the equity method of accounting. While FREIT Maryland’s effective ownership percentage interest in the Pierre Towers property remained unchanged after the reorganization to a TIC, FREIT Maryland no longer had a controlling interest as the TIC is now under joint control.
FREIT Maryland’s investment in the TIC was approximately $18.9 million and $19.4 million at January 31, 2022 and October 31, 2021, respectively, with a loss on investment in TIC of approximately $124,000 and $27,000, in the accompanying condensed consolidated statements of income for the three months ended January 31, 2022 and 2021, respectively.
Hekemian & Co., Inc. (“Hekemian & Co.”) manages the Pierre Towers property based on a management agreement between the owners of the TIC and Hekemian & Co. dated as of February 28, 2020 and will expire on February 28, 2023. The management agreement is for a term of one year and is automatically renewed for successive periods of one year unless either party gives not less than sixty (60) days prior notice of non-renewal. The management agreement requires the payment of management fees equal to 5% of rents collected. Management fees charged to operations were approximately $98,000 and $93,000 for the three months ended January 31, 2022 and 2021, respectively. The Pierre Towers property also uses the resources of the Hekemian & Co. insurance department to secure various insurance coverages for its property. Hekemian & Co. is paid a commission for these services. Such commissions were charged to operations and amounted to approximately $0 and $10,000 for the three months ended January 31, 2022 and 2021, respectively.
The following table summarizes the balance sheets of the Pierre Towers property as of January 31, 2022 and October 31, 2021, accounted for by the equity method:
|
|
|
January 31, |
|
|
October 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(In Thousands of Dollars) |
|
|
|
|
|
|
|
Real estate, net |
|
$ |
77,508 |
|
$ |
78,023 |
Cash and cash equivalents |
|
|
1,205 |
|
|
1,338 |
Tenants' security accounts |
|
|
475 |
|
|
484 |
Receivables and other assets |
|
|
359 |
|
|
510 |
Total assets |
|
$ |
79,547 |
|
$ |
80,355 |
|
|
|
|
|
|
|
Mortgages payable, net of unamortized debt issuance costs |
|
$ |
49,624 |
|
$ |
49,691 |
Accounts payable and accrued expenses |
|
|
275 |
|
|
261 |
Tenants' security deposits |
|
|
475 |
|
|
484 |
Deferred revenue |
|
|
93 |
|
|
99 |
Equity |
|
|
29,080 |
|
|
29,820 |
Total liabilities & equity |
|
$ |
79,547 |
|
$ |
80,355 |
|
|
|
|
|
|
|
FREIT Maryland's investment in TIC (65% interest) |
|
$ |
18,902 |
|
$ |
19,383 |
The following table summarizes the statements of operations of the Pierre Towers property for the three months ended January 31, 2022 and 2021, accounted for by the equity method:
|
|
Three Months Ended January 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(In Thousands of Dollars) |
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
1,954 |
|
|
$ |
1,891 |
|
Operating expenses |
|
|
1,201 |
|
|
|
991 |
|
Depreciation |
|
|
542 |
|
|
|
540 |
|
Operating income |
|
|
211 |
|
|
|
360 |
|
|
|
|
|
|
|
|
|
|
Interest expense including amortization of deferred financing costs |
|
|
401 |
|
|
|
401 |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(190 |
) |
|
$ |
(41 |
) |
|
|
|
|
|
|
|
|
|
FREIT Maryland's loss on investment in TIC (65% interest) |
|
$ |
(124 |
) |
|
$ |
(27 |
) |
Note 6 – Termination of Purchase and Sale Agreement:
On January 14, 2020, FREIT Maryland and certain of its affiliates (collectively, the “Sellers”), entered into a Purchase and Sale Agreement (as subsequently amended, the “Purchase and Sale Agreement”) with Sinatra Properties LLC (the “Purchaser”), which provides for the sale by the Sellers to the Purchaser of 100% of the Sellers’ ownership interests in six real properties held by the Sellers in exchange for the purchase price described therein, subject to the terms and conditions of the Purchase and Sale Agreement. On April 30, 2020, the Sellers delivered written notice to the Purchaser of the Sellers’ termination of the Purchase and Sale Agreement in accordance with its terms due to the occurrence of a “Purchaser Default” thereunder, based on the Purchaser’s failure to perform its obligations under the Purchase and Sale Agreement and close the transactions contemplated therein.
Upon the execution of the Purchase and Sale Agreement, the Purchaser delivered into escrow a deposit in the amount of $15 million (the “Deposit”), in the form of an unconditional, irrevocable letter of credit in such amount (the “Letter of Credit”). The Purchase and Sale Agreement provides that the Sellers’ exclusive remedy, in the event of a “Purchaser Default” and the termination of the Purchase and Sale Agreement, is the forfeiture of the Deposit to the Sellers as liquidated damages. Accordingly, contemporaneously with the Sellers’ delivery of the termination notice to the Purchaser, the Sellers delivered written notice to the escrow agent requesting that the escrow agent release the Letter of Credit from escrow and deliver same to the Sellers.
On May 6, 2020, the Purchaser filed a complaint (the “Complaint”) against the Sellers in the Superior Court of New Jersey, in which, among other things, the Purchaser alleged breach of contract and breach of the covenant of good faith and fair dealing against the Sellers in connection with the Sellers’ termination of the Purchase and Sale Agreement. The Purchaser sought (a) a judgment of specific performance compelling the Sellers to convey the properties under the Purchase and Sale Agreement to the Purchaser; (b) declaratory judgment from the court that (i) the Purchase and Sale Agreement was not terminated, (ii) the Purchaser was not in default under the Purchase and Sale Agreement, and (iii) the Sellers were in default under the Purchase and Sale Agreement, subject to a right to cure; (c) an order for injunctive relief compelling the Sellers to perform the Purchase and Sale Agreement; (d) in the event that the court did not order specific performance, a judgment directing that the Purchaser’s $15 million deposit under the Purchase and Sale Agreement be returned to the Purchaser, and compensatory, consequential and incidental damages in an amount to be determined at trial; and (e) attorneys’ fees and costs.
The Purchaser filed lis pendens with respect to each of the six properties that were subject to the Purchase and Sale Agreement, providing notice to the public of the Complaint. The lis pendens have been dismissed by the Court pursuant to the Order entered on February 4, 2022 discussed below. Accordingly, subject to the Purchaser’s possible challenge of the Court’s Order, the future sale or financing of these properties is not affected by the lis pendens.
On June 17, 2020, the Sellers filed their answer, separate defenses, and counterclaims (the “Answer”) in response to the Complaint, in which, among other things, the Sellers (a) denied the Purchaser’s claim that the Sellers’ termination of the Purchase and Sale Agreement was wrongful, and asserted that there was no contractual basis in the Purchase and Sale Agreement to relieve the Purchaser from its obligation to perform thereunder, or to defer or postpone the Purchaser’s obligation to perform, (b) asserted certain defenses to the allegations set forth in the Complaint without admitting any liability, and (c) requested relief from the Court in the form of (i) judgment in the Sellers’ favor dismissing all of the Purchaser’s claims against them with prejudice and denying all of the Purchaser’s requests for relief, (ii) reasonable attorneys’ fees and costs, and (iii) such other and further relief as the Court deemed just.
In addition, the Answer asserted counterclaims by the Sellers against the Purchaser for breach of contract due to the Purchaser’s failure to close the Purchase and Sale Agreement in accordance with its terms, and the Sellers sought a declaratory judgment from the Court that the Sellers properly terminated the Purchase and Sale Agreement in accordance with its terms due to the Purchaser’s default and an order from the Court that the Purchaser authorized the escrow agent to release the $15 million deposit under the Purchase and Sale Agreement to the Sellers. On April 28, 2021, the Sellers amended the Answer to include (1) counterclaims against the Purchaser for breach of contract due to the Purchaser’s breach of confidentiality and non-disclosure obligations contained in the Purchase and Sale Agreement, and (2) third-party claims against Purchaser’s affiliate Kushner Realty Acquisition LLC for breach of its confidentiality and non-disclosure obligations contained in the non-disclosure agreement entered into by the parties in connection with the negotiation of the transactions contemplated by the Purchase and Sale Agreement, based on the conduct of the Purchaser and its affiliates after the Sellers terminated the Purchase and Sale Agreement.
In connection with these counterclaims and third-party claims, the Answer sought the following relief from the Court: (a) liquidated damages in the amount of $15 million, as provided in the Purchase and Sale Agreement; (b) in the alternative to the liquidated damages provided for in the Purchase and Sale Agreement, money damages in an amount to be determined at trial; (c) interest, attorneys’ fees and costs associated with the defense of the Purchaser’s claims and the prosecution of the Sellers’ counterclaims against the Purchaser, as provided for in the Purchase and Sale Agreement; (d) judgment declaring that the Sellers properly terminated the Purchase and Sale Agreement due to the Purchaser’s default thereunder; (e) judgment declaring that the Purchaser must authorize the escrow agent to release the $15 million deposit to the Sellers; (f) an order enjoining the Purchaser and its affiliates from engaging in further breaches of the Purchase and Sale Agreement and non-disclosure agreement, and compelling the Purchaser and its affiliates to return the Sellers’ confidential information and materials and to use best efforts to ensure the return of the Sellers’ confidential information and materials from third parties to whom the Purchaser and/or its affiliates provided such materials; and (g) such other relief as the Court deemed just and equitable.
In the Answer filed by the Purchaser on September 15, 2020 and the Answer and Affirmative Defenses filed by the Purchaser and Kushner Realty Acquisition LLC on June 7, 2021, the Purchaser and Kushner Realty Acquisition LLC have generally denied the claims, counterclaims and allegations contained in the Sellers’ original and amended Answer, and asserted affirmative defenses to the Sellers’ claims and counterclaims.
Each of the Sellers and the Purchaser filed motions for summary judgment (“Summary Judgment Motions”) with the Court in which the litigation is pending seeking, among other things, the dismissal of the other parties’ claims.
On February 4, 2022, the Court entered an Order (the “Order”) with respect to the Summary Judgment Motions which provides as follows:
(1) The Court finds that the Plaintiff’s have breached the subject contract and the Court dismisses all claims for relief filed by the Plaintiff in this suit. The Court dismissed the Complaint and dismisses the Lis Pendens.
(2) The Court finds that the liquidated damage provision of the contract is not enforceable and the Court Orders that the $15 million held in escrow be returned to the Plaintiff.
(3) The Court dismisses the Counterclaims and Third Party Complaint. All pleadings are dismissed.
The Sellers are evaluating the Order and their rights and remedies with respect thereto. The Sellers continue to believe that the allegations set forth in the Complaint and Answer filed by the Purchaser and in the Answer and Affirmative Defenses filed by the Purchaser and Kushner Realty Acquisition LLC are without merit.
Through the quarter ended January 31, 2022, the $15 million deposit has not been included in income in the accompanying condensed consolidated statement of income. Legal costs attributed to the legal proceeding between FREIT Maryland and certain of its affiliates and Sinatra Properties, LLC have been incurred in the amount of approximately $613,000 and $481,000 for the three months ended January 31, 2022 and 2021, respectively, and are included in operating expenses on the condensed consolidated statements of income.
Note 7 – Maryland property dispositions:
On November 22, 2021, certain affiliates (the “Maryland Sellers”) of FREIT Maryland entered into a Purchase and Sale Agreement (the “Maryland Purchase and Sale Agreement”) with MCB Acquisition Company, LLC (the “Maryland Purchaser”), a third party, pursuant to which the Maryland Sellers agreed to sell three properties to the Maryland Purchaser. The properties consisted of retail and office space and a residential apartment community owned by Grande Rotunda, LLC (the “Rotunda Property”), a shopping center owned by Damascus Centre, LLC (the “Damascus Property”), and a shopping center owned by WestFREIT Corp. (the “Westridge Square Property”). FREIT Maryland owns 100% of its subsidiary, WestFREIT Corp. (“WestFREIT”), a 60% interest in Grande Rotunda, LLC (“Grande Rotunda”), the joint venture that owned the Rotunda Property, and a 70% interest in Damascus Centre, LLC (“Damascus Centre”), the joint venture that owned the Damascus Property.
The original purchase price for the Rotunda Property, the Damascus Property and the Westridge Square Property (collectively the “Maryland Properties”) under the Maryland Purchase and Sale Agreement was reduced by $2,723,000 from $267,000,000 to $248,750,269, after giving effect to the $15,526,731 escrow deposit described below. This reduction in the sales price was to account for improvements and repairs to the Maryland Properties and miscellaneous items identified by the Maryland Purchaser in the course of its due diligence inspection. Additionally, the Maryland Purchaser was obligated under the Maryland Purchase and Sale Agreement to deposit a total of $15,526,731 in escrow with respect to certain leases at the Maryland Properties, which have not been executed or where the rent commencement date has not occurred or economic obligations of the Maryland Sellers under certain leases remain unpaid. Although there can be no assurance, a portion of the $15,526,731 escrow deposit (the “Maryland Purchaser Escrow Payment”) may be paid to the Maryland Sellers depending upon the outcome of construction and leasing activities at the Maryland Properties.
On December 30, 2021, the sale of the Rotunda Property which had a net book value of approximately $135.7 million, was consummated by Grande Rotunda and the Maryland Purchaser for a purchase price of $191,080,598. Grande Rotunda received net proceeds from the sale of approximately $35.4 million, after payment of related mortgage debt in the amount of $116.5 million, payment of loans (including interest) to each of the partners in Grande Rotunda (FREIT Maryland with a 60% interest and Rotunda 100, LLC (“Rotunda 100”) with a 40% interest) in the amount of approximately $31 million, with FREIT Maryland receiving approximately $27.7 million, and certain transactional expenses and transfer taxes including a brokerage fee due to Hekemian & Co. of approximately $4.8 million (See Note 8). In addition, the Maryland Purchaser deposited a total of $14,026,401 of the Maryland Purchaser Escrow Payment in escrow with respect to certain leases at the Rotunda Property, which have not been executed or where the rent commencement date has not occurred or economic obligations of Grande Rotunda under certain leases remain unpaid. The net proceeds from the sale of approximately $35.4 million were distributed to the partners in Grande Rotunda with FREIT Maryland receiving approximately $21.4 million based on its 60% interest in Grande Rotunda. The sale of the Rotunda Property resulted in a net gain of approximately $51.2 million which includes approximately $8.2 million of proceeds anticipated to be released from the $14,026,401 of funds held in escrow (included in “Funds held in post-closing escrow” on the accompanying condensed consolidated balance sheet as of January 31, 2022), a write-off of the straight-line rent receivable of approximately $1.8 million and a write-off of unamortized lease commissions of approximately $1.1 million. During the first quarter ended January 31, 2022, secured loans including accrued interest held by certain members in Rotunda 100 in the amount of approximately $5.1 million were repaid to FREIT Maryland. The Maryland Purchaser Escrow Payment Agreement provides for among other things, monthly disbursements from escrow to the Maryland Purchaser related to the aforementioned tenant lease agreements until the earlier of (i) the rent commencement date of the respective tenant lease agreements or (ii) 5-years from the date of the agreement. Release and amounts of escrowed funds to FREIT Maryland, generally, is contingent on the success and timing of future leasing activities at the Maryland Properties.
On January 7, 2022, the sale of the Westridge Square Property which had a net book value of approximately $11.5 million, was consummated by WestFREIT and the Maryland Purchaser for a purchase price of $20,984,604. WestFREIT paid net cash outlays from the sale of approximately $0.7 million, after payment of related mortgage debt in the amount of approximately $21.1 million and certain transactional expenses and transfer taxes including a brokerage fee due to Hekemian & Co. of approximately $0.5 million (See Note 8). In addition, the Maryland Purchaser deposited a total of $1,015,396 of the Maryland Purchaser Escrow Payment in escrow with respect to certain leases at the Westridge Square Property, which have not been executed or where the rent commencement date has not occurred or economic obligations of WestFREIT under certain leases remain unpaid. The sale of the Westridge Square Property resulted in a net gain of approximately $8.7 million which includes approximately $0.7 million of proceeds anticipated to be released from the $1,015,396 of funds held in escrow (included in “Funds held in post-closing escrow” on the accompanying condensed consolidated balance sheet as of January 31, 2022), a write-off of the straight-line rent receivable of approximately $0.5 million and a write-off of unamortized lease commissions of approximately $0.3 million.
On January 10, 2022, the sale of the Damascus Property which had a net book value of approximately $24.6 million, was consummated by Damascus Centre and the Maryland Purchaser for a purchase price of $36,685,067. Damascus Centre received net proceeds from the sale of approximately $16.9 million, after payment of related mortgage debt in the amount of approximately $18.2 million and the corresponding swap breakage fees of approximately $213,000 related to the early termination of the interest rate swap contracts on this loan and certain transactional expenses and transfer taxes including a brokerage fee due to Hekemian & Co. of approximately $0.9 million (See Note 8). In addition, the Maryland Purchaser deposited a total of $484,934 of the Maryland Purchaser Escrow Payment in escrow with respect to certain leases at the Damascus Property, which have not been executed or where the rent commencement date has not occurred or economic obligations of Damascus Centre under certain leases remain unpaid. The net proceeds from the sale of approximately $16.9 million were distributed to the partners in Damascus Centre with FREIT Maryland receiving approximately $11.8 million based on its 70% interest in Damascus Centre. The sale of the Damascus Property resulted in a net gain of approximately $10.1 million which includes approximately $0.4 million of proceeds anticipated to be released from the $484,934 of funds held in escrow (included in “Funds held in post-closing escrow” on the accompanying condensed consolidated balance sheet as of January 31, 2022), a write-off of the straight-line rent receivable of approximately $0.6 million and a write-off of unamortized lease commissions of approximately $0.3 million.
In summary, the sale of the Maryland Properties having a total net book value of $171.8 million resulted in net proceeds from the sale of approximately $51.6 million, after payment of related mortgage debt in the amount of $155.8 million and the corresponding swap breakage fees of approximately $213,000 related to the early termination of the interest rate swap contracts on the Damascus Property loan, payment of loans (including interest) to each of the partners in Grande Rotunda in the amount of approximately $31 million and certain transactional expenses and transfer taxes including a brokerage fee due to Hekemian & Co. of approximately $6.2 million. The sale of the Maryland Properties resulted in a net gain of approximately $70 million (with a consolidated impact to FREIT Maryland of approximately $46.3 million) which includes approximately $9.3 million of proceeds anticipated to be released from the $15,526,731 of funds held in escrow (included in “Funds held in post-closing escrow” on the accompanying condensed consolidated balance sheet as of January 31, 2022), a write-off of the straight-line rent receivable of approximately $2.9 million and a write-off of unamortized lease commissions of approximately $1.7 million.
As the disposal of the Maryland Properties did not represent a strategic shift that would have a major impact on FREIT Maryland’s operations or financial results, the properties’ operations were not reflected as discontinued operations in the accompanying condensed consolidated financial statements.
Note 8 – Management agreement, fees and transactions with related party:
Hekemian & Co. currently manages all the properties owned by FREIT Maryland and its affiliates, except for the office building at the Rotunda Property which was sold December 30, 2021 and was formerly managed by an independent third party management company. The management agreement between FREIT Maryland and Hekemian & Co. dated as of November 1, 2001 (“Management Agreement”) expires on October 31, 2023 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.
The Management Agreement requires the payment of management fees equal to 4% to 5% of rents collected. Such fees charged to operations were approximately $484,000 and $513,000 for the three months ended January 31, 2022 and 2021, respectively. In addition, the Management Agreement provides for the payment to Hekemian & Co. of leasing commissions, as well as the reimbursement of certain operating expenses, such as payroll and insurance costs, incurred on behalf of FREIT Maryland. Such commissions and reimbursements amounted to approximately $184,000 and $129,000 for the three months ended January 31, 2022 and 2021, respectively. FREIT Maryland also uses the resources of the Hekemian & Co. insurance department to secure various insurance coverages for its properties and subsidiaries. Hekemian & Co. is paid a commission for these services. Such commissions were charged to operations and amounted to approximately $52,000 and $69,000 for the three months ended January 31, 2022 and 2021, respectively.
From time to time, FREIT Maryland engages Hekemian & Co., or certain affiliates of Hekemian & Co., to provide additional services, such as consulting services related to development, property sales and financing activities of FREIT Maryland. Separate fee arrangements are negotiated between Hekemian & Co. and FREIT Maryland with respect to such additional services. Such fees incurred for the three months ended January 31, 2022 and 2021 were approximately $6,294,000 and $0, respectively. Fees incurred during Fiscal 2022 related to commissions to Hekemian & Co. for the following: $4,777,000 for the sale of the Rotunda Property; $917,000 for the sale of the Damascus Property; $525,000 for the sale of the Westridge Square Property; $75,000 for the refinancing of the loan on the Boulders property. The commissions related to the sale of the Rotunda Property, the Damascus Property and the Westridge Square Property were charged against the gain on sale of the Maryland Properties (See Note 7) in the accompanying condensed consolidated income statement for the three months ended January 31, 2022. The commission for the refinancing of the loan on the Boulders property was a deferred mortgage cost included in the unamortized debt issuance costs in the accompanying condensed consolidated balance sheet as of January 31, 2022.
Robert S. Hekemian, Jr., Chief Executive Officer, President and a Director of FREIT Maryland, is the Chief Executive Officer of Hekemian & Co. David B. Hekemian, a Director of FREIT Maryland, is the President of Hekemian & Co. Allan Tubin, Chief Financial Officer and Treasurer of FREIT Maryland, is the Chief Financial Officer of Hekemian & Co.
Director fee expense and/or executive compensation (including interest and dividends) incurred by FREIT Maryland for the three months ended January 31, 2022 and 2021 was approximately $135,000 and $116,000, respectively, for Robert S. Hekemian, Jr., $10,000 and $8,000, respectively, for Allan Tubin and $15,000 and $14,000, respectively, for David Hekemian (See Note 14). Such costs are included within operating expenses on the accompanying condensed consolidated statements of income.
The equity owners of Rotunda 100, which owns a 40% minority equity interest in Grande Rotunda, are principally employees of Hekemian & Co. To incentivize the employees of Hekemian & Co., FREIT Maryland advanced, only to employees of Hekemian & Co., up to 50% of the amount of the equity contributions that the Hekemian & Co. employees were required to invest in Rotunda 100. These advances were in the form of secured loans that bear interest at rates 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 & Co. employees’ interests in Rotunda 100 and are full recourse loans. On December 7, 2017, the Board approved a further extension of the previously amended maturity dates of these loans to the date or dates upon which distributions of cash are made by Grande Rotunda to its members as a result of a refinancing or sale of Grande Rotunda or the Rotunda Property. On December 30, 2021, the Rotunda Property was sold and the net sales proceeds were distributed to the partners in Grande Rotunda. (See Note 7 for further details.) As of January 31, 2022, approximately $5.1 million of the secured loans receivable (including accrued interest) were repaid to FREIT Maryland. The aggregate outstanding principal balance of the Rotunda 100 notes was approximately $167,000 and $4,000,000 at January 31, 2022 and October 31, 2021, respectively. The accrued but unpaid interest related to these notes as of January 31, 2022 and October 31, 2021 amounted to approximately $54,000 and $1,292,000, respectively, and is included in secured loans receivable on the accompanying condensed consolidated balance sheets.
In Fiscal 2017, Grande Rotunda 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 held with Wells Fargo at that time was at its maximum level, with no additional funding available to draw. Accordingly, during Fiscal 2017 the equity owners in Grande Rotunda contributed their respective pro-rata share of any cash needs through loans to Grande Rotunda. In Fiscal 2021, Grande Rotunda repaid $7 million to the equity owners in Grande Rotunda based on their respective pro-rata share resulting in a loan repayment to Rotunda 100 of approximately $2.8 million. As of October 31, 2021, Rotunda 100 had funded Grande Rotunda with approximately $3.3 million (including interest) which was included in “Due to affiliate” on the accompanying condensed consolidated balance sheet. On December 30, 2021, the Rotunda Property was sold and Grande Rotunda repaid approximately $31 million to the equity owners in Grande Rotunda resulting in a loan repayment to Rotunda 100 of approximately $3.3 million. As of January 31, 2022, all loans were repaid in full to each of the partners.
Note 9 – Mortgage financings and line of credit:
On December 30, 2021, FREIT Maryland refinanced its $14.4 million loan (which would have matured on February 1, 2022) on its Boulders property located in Rockaway, New Jersey with a new loan held by ConnectOne Bank in the amount of $7,500,000, with additional funding available to be drawn upon in the amount of $7,500,000 for corporate needs inclusive of $250,000 for legal fees potentially incurred by the lender related to the lis pendens on this property resulting from the legal proceeding between FREIT Maryland and certain of its affiliates and Sinatra Properties, LLC (See Note 6). This loan is interest-only and has a maturity date of January 1, 2024 with the option of FREIT Maryland to extend for one year from the maturity date, subject to certain provisions of the loan agreement. This refinancing will provide annual debt service savings of approximately $1,173,000 as a result of the reduction in the principal amount, a reduction in the annual interest rate from a fixed rate of 5.37% to a fixed rate of 2.85% and interest-only payments being required under this new loan.
FREIT Maryland’s revolving line of credit provided by the Provident Bank was renewed for a three-year term ending on October 31, 2023. 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 Maryland’s Franklin Crossing Shopping Center in Franklin Lakes, New Jersey and retail space in Glen Rock, New Jersey. The total line of credit is $13 million and the interest rate on the amount outstanding is based on a floating interest rate of prime minus 25 basis points with a floor of 3.75%. As of January 31, 2022 and October 31, 2021, there was no amount outstanding and $13 million was available under the line of credit.
In accordance with certain loan agreements, FREIT Maryland may be required to meet or maintain certain financial covenants throughout the term of the loan. As a result of the COVID-19 pandemic, rent losses and the planning for a potential redevelopment of its shopping center, as of October 31, 2021, Wayne PSC was not, and currently is not, in compliance with a look back debt service coverage ratio loan covenant contained in the mortgage loan agreement held by People’s United Bank. As of January 31, 2022, this loan has a balance of approximately $22.4 million. Although the Company continues to make its required debt service payments in accordance with the loan agreement, it is unable to comply with this covenant. As such, the bank could exercise its remedies under the loan agreement including, among other things, requiring a partial or full repayment of the loan with a balance of approximately $22.4 million as of January 31, 2022. The Company is currently working with the lender to remediate this covenant default. As of the date of the filing of this quarterly report on Form 10-Q, the bank has not declared this loan to be in default. Until such time as a definitive agreement is entered into, there can be no assurance the loan covenant will be amended and the bank will not declare this loan to be in default.
Note 10 – Fair value of long-term debt:
The following table shows the estimated fair value and net carrying value of FREIT Maryland’s long-term debt at January 31, 2022 and October 31, 2021:
($ in Millions) |
|
January 31, 2022 |
|
October 31, 2021 |
|
|
|
|
|
Fair Value |
|
$136.5 |
|
$301.6 |
|
|
|
|
|
Carrying Value, Net |
|
$136.5 |
|
$299.9 |
Fair values are estimated based on market interest rates at January 31, 2022 and October 31, 2021 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 11 – Segment information:
FREIT Maryland 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 five (5) properties, excluding the Rotunda Property, the Westridge Square Property and the Damascus Property which were sold on December 30, 2021, January 7, 2022 and January 10, 2022, respectively. The residential segment is comprised of six (6) properties, excluding the Icon at the Rotunda Property which was sold on December 30, 2021. (See Note 7 for further details.)
The accounting policies of the segments are the same as those described in Note 1 in FREIT Maryland’s Annual Report on Form 10-K for the fiscal year ended October 31, 2021. The chief operating and decision-making group responsible for oversight and strategic decisions of FREIT Maryland's commercial segment, residential segment and corporate/other is comprised of FREIT Maryland’s Board.
FREIT Maryland, through its chief operating and decision making group, 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.
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 attributable to common equity for the three month periods ended January 31, 2022 and 2021. Asset information is not reported since FREIT Maryland does not use this measure to assess performance.
|
|
Three Months Ended |
|
|
January 31, |
|
|
2022 |
|
2021 |
|
|
(In Thousands of Dollars) |
Real estate rental revenue: |
|
|
|
|
|
|
|
|
Commercial |
|
$ |
4,321 |
|
|
$ |
6,351 |
|
Residential |
|
|
6,338 |
|
|
|
6,609 |
|
Total real estate rental revenue |
|
|
10,659 |
|
|
|
12,960 |
|
|
|
|
|
|
|
|
|
|
Real estate operating expenses: |
|
|
|
|
|
|
|
|
Commercial |
|
|
2,685 |
|
|
|
2,627 |
|
Residential |
|
|
2,641 |
|
|
|
2,664 |
|
Total real estate operating expenses |
|
|
5,326 |
|
|
|
5,291 |
|
|
|
|
|
|
|
|
|
|
Net operating income: |
|
|
|
|
|
|
|
|
Commercial |
|
|
1,636 |
|
|
|
3,724 |
|
Residential |
|
|
3,697 |
|
|
|
3,945 |
|
Total net operating income |
|
$ |
5,333 |
|
|
$ |
7,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring capital improvements - residential |
|
$ |
(48 |
) |
|
$ |
(82 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to condensed consolidated net income attributable to common equity: |
|
|
|
|
|
|
|
|
Segment NOI |
|
$ |
5,333 |
|
|
$ |
7,669 |
|
Deferred rents - straight lining |
|
|
(10 |
) |
|
|
(206 |
) |
Investment income |
|
|
26 |
|
|
|
30 |
|
General and administrative expenses |
|
|
(1,327 |
) |
|
|
(1,260 |
) |
Loss on investment in tenancy-in-common |
|
|
(124 |
) |
|
|
(27 |
) |
Depreciation |
|
|
(1,820 |
) |
|
|
(2,295 |
) |
Net gain on sale of Maryland properties |
|
|
70,003 |
|
|
|
- |
|
Financing costs |
|
|
(2,928 |
) |
|
|
(3,132 |
) |
Net income |
|
|
69,153 |
|
|
|
779 |
|
Net income attributable to noncontrolling interests in subsidiaries |
|
|
(23,376 |
) |
|
|
(221 |
) |
Net income attributable to common equity |
|
$ |
45,777 |
|
|
$ |
558 |
|
Note 12 – Income taxes:
FREIT Maryland has elected to be treated as a REIT for federal income tax purposes and as such intends to distribute at least 90% of its ordinary taxable income (to maintain its status as a REIT) and 100% of its capital gains to its stockholders as dividends for the fiscal year ending October 31, 2022. FREIT Maryland distributed 99% of its ordinary taxable income to its stockholders as dividends for the fiscal year ended October 31, 2021. Accordingly, no provision for federal or state income taxes related to such ordinary taxable income and such gains were recorded in FREIT Maryland’s condensed consolidated financial statements for the three months ended January 31, 2022 and 2021.
As of January 31, 2022, FREIT Maryland had no material uncertain income tax positions. The tax years subsequent to and including the fiscal year ended October 31, 2018 remain open to examination by the major taxing jurisdictions.
Note 13 – Equity incentive plan:
As of January 31, 2022, 442,060 shares are available for issuance under the Plan.
The following table summarizes stock option activity for the three month periods ended January 31, 2022 and 2021:
|
|
Three Months Ended
January 31,
2022 |
|
|
Three Months Ended
January 31,
2021 |
|
|
|
No. of Options |
|
Exercise |
|
|
No. of Options |
|
Exercise |
|
|
|
Outstanding |
|
Price |
|
|
Outstanding |
|
Price |
|
Options outstanding at beginning of period |
|
|
310,740 |
|
$ |
18.35 |
|
|
|
310,740 |
|
$ |
18.35 |
|
Options granted during period |
|
|
- |
|
|
- |
|
|
|
- |
|
|
- |
|
Options forfeited/cancelled during period |
|
|
- |
|
|
- |
|
|
|
- |
|
|
- |
|
Options outstanding at end of period |
|
|
310,740 |
|
$ |
18.35 |
|
|
|
310,740 |
|
$ |
18.35 |
|
Options vested and expected to vest |
|
|
309,450 |
|
|
|
|
|
|
308,310 |
|
|
|
|
Options exercisable at end of period |
|
|
292,540 |
|
|
|
|
|
|
276,340 |
|
|
|
|
For the three month periods ended January 31, 2022 and 2021, compensation expense related to stock options vested amounted to approximately $5,000 and $12,000, respectively. At January 31, 2022, there was approximately $25,000 of unrecognized compensation cost relating to outstanding non-vested stock options to be recognized over the remaining weighted average vesting period of approximately 1.4 years. The aggregate intrinsic value of options vested and expected to vest and options exercisable at January 31, 2022 was approximately $1,706,000 and $1,563,000, respectively.
Note 14 – Deferred fee plan:
On September 4, 2014, the Board approved amendments, effective November 1, 2014, to the FREIT Maryland Deferred Fee Plan for its executive officers and directors, one of which provides for the issuance of share units payable in FREIT Maryland shares in respect of (i) deferred amounts of all director fees on a prospective basis; (ii) interest on director 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 Maryland shares on the date as set forth in the Deferred Fee Plan.
On November 4, 2021 (the “Adoption Date”), the Board approved the termination of the Deferred Fee Plan resulting in the termination of the deferral of fees on December 31, 2021 with any subsequent fees earned by a participant being paid in cash. Consistent with the termination of the Deferred Fee Plan, payment related to each participant’s cash account (in the form of a cash lump sum payment) and share unit account (in the form of the issuance of common stock) must be made to each participant no earlier than twelve (12) months and one day after, and no later than twenty-four (24) months, after the Adoption Date. Any interest earned on the participant’s cash account along with dividends (if any) earned on share units, will continue to accrue in share units on each participant’s account until final payment is made.
For the three month periods ended January 31, 2022 and 2021, the aggregate amounts of deferred director fees together with related interest and dividends were approximately $61,600 and $118,100, respectively, which have been paid through the issuance of 2,496 and 6,919 vested FREIT Maryland share units, respectively, based on the closing price of FREIT Maryland shares on the dates as set forth in the Deferred Fee Plan.
For the three month periods ended January 31, 2022 and 2021, FREIT Maryland has charged as expense approximately $43,800 and $110,200, respectively, representing deferred director fees and interest, and the balance of approximately $17,000 and $7,900, respectively, representing dividends payable in respect of share units allocated to Plan participants, has been charged to equity.
The Deferred Fee Plan, as amended, provided that cumulative fees together with accrued interest deferred as of November 1, 2014 was paid in a lump sum or in annual installments over a period not to exceed 10 years, at the election of the participant. As of January 31, 2022 and October 31, 2021, approximately $1,454,000 of fees has been deferred together with accrued interest of approximately $1,021,000.
Note 15 – Rental Income:
Commercial tenants:
Fixed lease income under our commercial operating leases generally includes fixed minimum lease consideration which is accrued on a straight-line basis over the terms of the leases. Variable lease income includes consideration based on sales, as well as reimbursements for real estate taxes, maintenance, insurance and certain other operating expenses of the properties.
Minimum fixed lease consideration (in thousands of dollars) under non-cancelable tenant operating leases for each of the next five years and thereafter, excluding variable lease consideration and rents from tenants for which collectability is deemed to be constrained, for the years ending October 31, as of January 31, 2022, is as follows:
Year Ending October 31, |
|
Amount |
|
2022* |
|
$ |
5,782 |
|
2023 |
|
|
5,191 |
|
2024 |
|
|
4,110 |
|
2025 |
|
|
3,413 |
|
2026 |
|
|
2,666 |
|
Thereafter |
|
|
3,362 |
|
Total |
|
$ |
24,524 |
|
|
*Amount represents full fiscal year and excludes rents from the Rotunda Property, the Westridge Square Property and the Damascus Property sold on December 30, 2021, January 7, 2022 and January 10, 2022, respectively. |
The above amounts assume that all leases which expire are not renewed and, accordingly, neither month-to-month nor rentals from replacement tenants are included.
Minimum future rentals do not include contingent rentals, which may be received under certain leases on the basis of percentage of reported tenants' sales volume. Rental income that is contingent on future events is not included in income until the contingency is resolved. Contingent rentals included in income for the three month periods ended January 31, 2022 and 2021 were not material.
Residential tenants:
Lease terms for residential tenants are usually one to two years.
Note 16 – COVID-19 Pandemic:
The international spread of COVID-19 was declared a global pandemic by the World Health Organization on March 11, 2020. Beginning in March 2020 and throughout most of 2020, many states in the U.S., including New Jersey, New York and Maryland, where our properties were located, implemented stay-at-home and shut down orders for all "non-essential" business and activity in an aggressive effort to mitigate the spread of COVID-19. Over the past year, vaccinations for the COVID-19 virus were widely distributed among the general U.S. population which resulted in loosened restrictions previously mandated on our tenants identified as nonessential. However, the potential emergence of vaccine-resistant variants of COVID-19 could trigger restrictions to be put back in place. Such restrictions may include mandatory business shut-downs, reduced business operations and social distancing requirements. As the impact of the pandemic evolves, it continues to cause uncertainty and volatility in the financial markets. The COVID-19 pandemic and the actions taken by individuals, businesses and government authorities to reduce its spread have caused substantial lost business revenue, changes in consumer behavior and large reductions in liquidity and fair value of many assets.
Despite the COVID-19 pandemic and preventive measures taken to mitigate the spread, our residential properties have continued to generate cash flow. At our commercial properties, with the exception of grocery stores and other "essential" businesses, many of our retail tenants have been adversely affected by the previously mandated shut downs and the continued lingering impact to consumer sentiment and preferences for safety amid the reemergence of other COVID-19 variants. The Company is closely monitoring changes in the collectability assessment of its tenant receivables as a result of certain tenants suffering adverse financial consequences related to the COVID-19 pandemic. For the three months ended January 31, 2022 and 2021, rental revenue deemed uncollectible of approximately $0.1 million and $0.6 million (with a consolidated impact to FREIT Maryland of approximately $0.1 million and $0.4 million), respectively, was classified as a reduction in rental revenue based on our assessment of the probability of collecting substantially all of the remaining rents for certain tenants. During the period beginning March 2020 through October 31, 2021, FREIT Maryland has applied, net of amounts subsequently paid back by tenants, an aggregate of approximately $397,000 of security deposits from its commercial tenants to outstanding receivables due. For the three months ended January 31, 2022, there were no security deposits from its commercial tenants applied to outstanding receivables due. On a case by case basis, FREIT Maryland has offered rent abatements totaling approximately $9,000 and $50,000 (with a consolidated impact to FREIT Maryland of approximately $9,000 and $31,000) for the three months ended January 31, 2022 and 2021, respectively. There were no significant deferrals of rent over a specified time period offered to its commercial tenants for the three months ended January 31, 2022 and 2021. FREIT Maryland currently remains in active discussions and negotiations with these impacted retail tenants.
For the three months ended January 31, 2022, we have experienced a positive cash flow from operations with cash provided by operations of approximately $2.9 million. This could change based on the duration of the pandemic, which is uncertain. We believe that our cash balance as of January 31, 2022 of approximately $95.4 million coupled with a $13 million available line of credit (available through October 31, 2023, see Note 9) and the additional $7.5 million in funds available to be drawn upon on the Boulders loan (See Note 9 for additional details) will provide us with sufficient liquidity for at least the next twelve months from the filing of this quarterly report on Form 10-Q.
The extent of the effects of COVID-19 on our business, results of operations, cash flows, value of our real estate assets and growth prospects is highly uncertain and will ultimately depend on future developments, none of which can be predicted with any certainty.