* Represents the issuance of treasury shares to consultant and retired Trustee for share units earned.
* Represents the issuance of treasury shares to consultant and retired Trustees for share units earned.
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 nine and three-month periods ended July 31, 2020 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, 2019 of First Real Estate Investment Trust of New Jersey (“FREIT”, “us”, “we”, “our” or the “Company”).
Certain prior period statement of operations and cash flow line items have been reclassified to conform to the current year presentation.
Note 2 – Recently issued accounting standards:
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“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; however, certain refinements were made to conform the standard with the recently issued revenue recognition guidance in ASU 2014-09, “Revenue From Contracts With Customers”, specifically related to the allocation and recognition of contract consideration earned from lease and non-lease revenue components. 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, also codified as ASC 842, which created a practical expedient that provides lessors an option not to separate lease and non-lease components when certain criteria are met and instead account for those components as a single lease component. The Company determined that its lease arrangements meet the criteria under the practical expedient to account for lease and non-lease components as a single lease component, which alleviates the requirement upon adoption of ASC 842 that we reallocate or separately present consideration from lease and non-lease components. As such, the Company elected the practical expedient as allowed by the Practical Expedient Amendment and adopted ASU 2016-02 in the first quarter of Fiscal 2020.
Substantially all of FREIT’s revenues are within the scope of ASC 842. FREIT will continue to account for its leases as operating leases. Leases for FREIT’s apartment buildings and complexes are generally short-term in nature (one to two-years in duration), based on fixed payments and contain separate lease components within the contract for each revenue stream (i.e. base rent, garage rent, etc.). Given the nature of these leases, the adoption of ASU No. 2016-02 had no impact on the accounting for the Company’s leases within the residential segment.
With respect to most of FREIT’s commercial properties, lease terms range from five years to twenty-five years with options, which if exercised would extend the terms of such leases. These lease agreements generally provide for reimbursement of real estate taxes, maintenance, insurance and certain other operating expenses of the properties (known as common area maintenance costs (“CAM”)). Some of FREIT’s leases in its commercial segment may contain lease and nonlease components. Generally, the primary lease component in most of FREIT’s commercial leases is base rent charged for the rental of space in an office complex/shopping center. Depending on the lease, the following nonlease components could be present: 1) fixed (or in substance fixed) payments related to real estate taxes and insurance; 2) variable payments that depend on an index or rate initially measured using the index or rate at the commencement date; and 3) fixed CAM reimbursements or CAM expense reimbursements based on the tenant’s proportionate share of the allocable operating expenses and CAM capital expenditures for the property.
FREIT accrues fixed lease income on a straight-line basis over the terms of the leases. FREIT accrues reimbursements from tenants for recoverable portions of real estate taxes, insurance, and CAM as variable lease consideration in the period the applicable expenditures are incurred recognizing differences between estimated recoveries and the final billed amounts in the subsequent year. Some of FREIT’s retail tenants are also required to pay overage rents based on sales over a stated base amount during the lease year. FREIT recognizes this variable lease consideration only when each tenant’s sales exceed the applicable sales threshold. Given that this standard has minimal impact on real estate operating lessors, the adoption of this new accounting guidance did not have a significant impact on FREIT’s consolidated financial statements and footnote disclosures. As a result, there was no cumulative effect adjustment to opening equity. Additionally, 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. (See Note 15 to FREIT’s condensed consolidated financial statements for further details).
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, 2022. In November 2018, the FASB issued ASU 2018-19 “Codification Improvements to Topic 326, Financial Instruments—Credit Losses”, which clarifies that operating lease receivables are outside the scope of the new standard. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, “Leases (Topic 842)”. 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 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 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018. FREIT adopted ASU 2017-12 in the first quarter of Fiscal 2020. This guidance requires that for cash flow and net investment hedges, all changes in the fair value of the hedging instrument (i.e. both the effective and ineffective portions) will be deferred in other comprehensive income and recognized in earnings at the same time that the hedged item affects earnings. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this update. The amended presentation and disclosure guidance is required only prospectively.
The adoption of ASU 2017-12 had no impact on the accounting for FREIT’s interest rate swap contracts, which were previously deemed effective cash flow hedges, on the following entities: Damascus Centre, LLC (“Damascus Centre”), Wayne PSC, LLC (“Wayne PSC”), FREIT Regency, LLC (“Regency”) and Station Place on Monmouth, LLC (“Station Place”). Accordingly, these interest rate swap contracts will continue to be accounted for by 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. The adoption of this accounting guidance has an impact on the accounting for Grande Rotunda, LLC’s (“Grande Rotunda”) interest rate cap, which was previously deemed an ineffective cash flow hedge and for which previous to the adoption of this guidance, the change in the fair value was reported in the statements of operations. Based on this new guidance, FREIT will record the change in the fair value of Grande Rotunda’s interest rate cap in other comprehensive income on a prospective basis. FREIT did not record an adjustment in Fiscal 2020 to the opening balance of retained earnings as the value of Grande Rotunda’s interest rate cap was $0 as of October 31, 2019. (See Note 4 to FREIT’s condensed consolidated financial statements for additional details).
In October 2018, the FASB issued ASU 2018-16 “Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes to ASC Topic 815, Derivatives and Hedging”. ASU 2018-16 expands the list of U.S benchmark interest rates permitted in the application of hedge accounting by adding the OIS rate based on SOFR as an eligible benchmark interest rate. ASU 2018-16 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018. FREIT adopted this update in the first quarter of Fiscal 2020 which did not have an impact on the condensed consolidated financial statements or footnote disclosures.
In April 2020, the FASB staff issued a question and answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 global pandemic. Under existing GAAP, the Company would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated within the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification Q&A allows the Company, if certain criteria have been met, to bypass the lease by lease analysis, and instead elect to either apply the lease modification accounting framework or not, with such election applied consistently to leases with similar characteristics and similar circumstances. This election is only available when total cash flows resulting from the modified lease are substantially similar to or less than the cash flows in the original lease. FREIT has made this election and accounts for rent deferrals by increasing its rent receivables as receivables accrue and continuing to recognize income during the deferral period. Lease concessions or amendments other than rent deferrals are evaluated to determine if a substantive change to the consideration in the original lease contract has occurred and should be accounted for as a lease modification. The adoption of this guidance did not have a significant impact on the condensed consolidated financial statements or footnote disclosures.
Note 3 – Earnings (Loss) per share:
Basic earnings (loss) 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 to FREIT’s condensed consolidated financial statements) 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 nine months ended July 31, 2020, the outstanding stock options increased the average dilutive shares outstanding by 3,302 shares with a $0.01 impact on earnings per share. For the three months ended July 31, 2020 and the nine months ended July 31, 2019, the outstanding stock options were anti-dilutive with no impact on (loss) earnings per share. For the three months ended July 31, 2019, the outstanding stock options increased the average dilutive shares outstanding by 1,203 shares with no impact on earnings per share. There were approximately 268,000 anti-dilutive shares for the nine months ended July 31, 2020 and the three months ended July 31, 2019. The number of anti-dilutive shares which have been excluded from the computation of diluted earnings per share was approximately 311,000 for the three months ended July 31, 2020 and the nine months ended July 31, 2019. Anti-dilutive shares consist of out-of-the money stock options under the Equity Incentive Plan.
Note 4 – Interest rate cap and swap contracts:
On February 7, 2018, Grande Rotunda, 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 with two one-year options to extend the maturity of this loan. At July 31, 2020, the total amount outstanding on this loan was approximately $118.5 million. As part of this transaction, Grande Rotunda had 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 which matured on March 5, 2020. On February 28, 2020, Grande Rotunda purchased an interest rate cap on LIBOR, with an effective date of March 5, 2020, for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for one year. At July 31, 2020, the derivative financial instrument had a notional amount of $121.9 million and a maturity date of March 5, 2021.
On December 7, 2017, Station Place (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 July 31, 2020, the total amount outstanding on this loan was approximately $12.2 million. In order to minimize interest rate volatility during the term of this loan, Station Place 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 July 31, 2020, the derivative financial instrument had a notional amount of $12.2 million and a maturity date of December 2027.
On September 29, 2016, Wayne PSC, 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 July 31, 2020, the total amount outstanding on this loan was approximately $23.2 million. In order to minimize interest rate volatility during the term of the loan, Wayne PSC 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 July 31, 2020, the derivative financial instrument had a notional amount of approximately $23.3 million and a maturity date of October 2026.
On December 26, 2012, Damascus Centre 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 July 31, 2020 was approximately $19 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 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 July 31, 2020, the derivative financial instrument had a notional amount of approximately $19 million and a maturity date of January 2023.
On December 29, 2014, Regency 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 July 31, 2020, the total amount outstanding on this loan was approximately $15.3 million. In order to minimize interest rate volatility during the term of the loan, Regency 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 July 31, 2020, the derivative financial instrument had a notional amount of approximately $15.3 million and a maturity date of December 2024.
In accordance with ASU 2017-12, which was adopted by FREIT in the first quarter of Fiscal 2020, FREIT is accounting for the Damascus Centre, Regency, Wayne PSC and Station Place interest rate swaps and the 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 in comprehensive income. For the nine and three months ended July 31, 2020, FREIT recorded an unrealized loss of approximately $3,644,000 and $272,000, respectively, in the condensed consolidated statements of comprehensive income (loss) representing the change in the fair value of these cash flow hedges during such period. As of July 31, 2020, there was a liability of approximately $709,000 for the Damascus Centre swaps, $1,571,000 for the Wayne PSC swap, $1,552,000 for the Regency swap, $1,938,000 for the Station Place swap and $0 for the Grande Rotunda interest rate cap.
In Fiscal 2019, FREIT was accounting for its interest rate swaps and cap contract in accordance with ASC 815. For the nine and three months ended July 31, 2019, FREIT recorded an unrealized loss of approximately $5,210,000 and $2,025,000, respectively, in the condensed consolidated statements of comprehensive income (loss) representing the change in the fair value of these cash flow hedges during such period. For the nine and three months ended July 31, 2019, FREIT recorded an unrealized loss in the condensed consolidated statements of operations of approximately $160,000 and $1,000, respectively, for the Grande Rotunda interest rate cap representing the change in the fair value of this ineffective cash flow hedge during such period. As of October 31, 2019, FREIT recorded a liability of approximately $179,000 for the Damascus Centre swaps, $53,000 for the Wayne PSC swap, $860,000 for the Regency swap, $1,034,000 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 – Property disposition:
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, resulted in a gain of approximately $0.8 million 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. FREIT distributed and paid approximately $676,000 of this gain by way of 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 sale of this property eliminates an operating loss of approximately $0.8 million ($0.12 per share) incurred, annually, since Pathmark vacated the building in December 2015.
As the disposal of this 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 – Termination of Purchase and Sale Agreement:
On January 14, 2020, FREIT 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 as subsequently amended, provided 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 alleges 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 seeks (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 is not terminated, (ii) the Purchaser is not in default under the Purchase and Sale Agreement, and (iii) the Sellers are 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 does 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 has filed lis pendens with respect to each of the six properties that were subject to the Purchase and Sale Agreement. The lis pendens provides notice to the public of the Complaint. The filing of the lis pendens will adversely affect the future sale or financing of those properties.
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) deny the Purchaser’s claim that the Sellers’ termination of the Purchase and Sale Agreement was wrongful, and assert 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) assert certain defenses to the allegations set forth in the Complaint without admitting any liability, and (c) request 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 deems just.
In addition, the Answer asserts 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 seek 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 authorize the escrow agent to release the $15 million deposit under the Purchase and Sale Agreement to the Sellers.
In connection with these counterclaims, the Answer seeks 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; and (f) such other relief as the Court deems just and equitable.
The Sellers believe that the allegations set forth in the Complaint are without merit and intend to vigorously defend the action and enforce the Sellers’ rights and remedies under the Purchase and Sale Agreement in connection with the “Purchaser Default” thereunder, including the Purchaser’s forfeiture of its $15 million deposit to the Sellers as liquidated damages as provided in the Purchase and Sale Agreement. As of the quarter ended July 31, 2020, the $15 million deposit has not been included in income in the accompanying condensed consolidated statements of operations.
During the nine months ended July 31, 2020 and 2019, the Special Committee of the Board incurred on behalf of the Company approximately $4,606,000 and $1,018,000, respectively, of advisory, legal and other expenses related to its activities. During the three months ended July 31, 2020 and 2019, the Special Committee of the Board incurred on behalf of the Company approximately $87,000 and $432,000, respectively, of advisory, legal and other expenses related to its activities. Legal costs attributed to the legal proceedings between FREIT and certain of its affiliates and Sinatra Properties, LLC have been incurred in the amount of approximately $601,000 for the nine and three months ended July 31, 2020.
Note 7 – Termination of Plan of Liquidation:
On January 14, 2020, the Trust’s Board of Trustees adopted a Plan of Voluntary Liquidation with respect to the Trust (the “Plan of Liquidation”), which provided for the voluntary dissolution, termination and liquidation of the Trust by the sale, conveyance, transfer or delivery of all of the Trust’s remaining assets in accordance with the terms and conditions of the Plan of Liquidation and the Internal Revenue Code of 1986, as amended, and the Treasury regulations thereunder. The Plan of Liquidation provided that it would become effective upon (i) approval by a majority of the votes cast by Trust’s shareholders present in person or represented by proxy at a duly called meeting of the Trust’s shareholders at which a quorum is present and (ii) the consummation of the transactions contemplated by the Purchase and Sale Agreement.
While the Plan of Liquidation received shareholder approval, as the Sellers terminated the Purchase and Sale Agreement by written notice delivered to the Purchaser on April 30, 2020, and the transactions contemplated thereby will not be consummated, the Plan of Liquidation will not become effective, and the Trust will not proceed with the sale, conveyance, transfer or delivery of all of the Trust’s remaining assets as contemplated by the Plan of Liquidation that was adopted by the Board on January 14, 2020.
Note 8 – 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 between FREIT and Hekemian dated as of November 1, 2001 (“Management Agreement”) expires on October 31, 2021, 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.
On January 14, 2020, in connection with entering into the Purchase and Sale Agreement, FREIT and Hekemian entered into a First Amendment to Management Agreement (the “First Amendment”), which amends the Management Agreement. The First Amendment would become effective if, and only if, the Plan of Liquidation became effective. Since the Plan of Liquidation will not become effective due to the termination of the Purchase and Sale Agreement, the First Amendment will not become effective. (See Notes 6 and 7 to FREIT’s condensed consolidated financial statements for further details)
The Management Agreement requires the payment of management fees equal to 4% to 5% of rents collected. Management fees, charged to operations, were approximately $1,682,000 and $1,898,000 for the nine months ended July 31, 2020 and 2019, respectively, and $484,000 and $643,000 for the three months ended July 31, 2020 and 2019, 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 $835,000 and $447,000 for the nine months ended July 31, 2020 and 2019, respectively, and $131,000 and $136,000 for the three months ended July 31, 2020 and 2019, respectively. 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 $152,000 and $129,000 for the nine months ended July 31, 2020 and 2019, respectively, and $96,000 and $80,000 for the three months ended July 31, 2020 and 2019, respectively.
From time to time, FREIT engages Hekemian to provide additional services, such as consulting services related to development, property sales and financing activities of FREIT. Separate fee arrangements may be negotiated between Hekemian and FREIT with respect to such additional services. There were no such fees incurred for the nine and three months ended July 31, 2020. Such fees incurred for the nine and three months ended July 31, 2019 were approximately $131,250 and $0, respectively. Fees incurred during Fiscal 2019 related to commissions to Hekemian for the sale of the Patchogue property.
Robert S. Hekemian, Jr., Chief Executive Officer, President and a Trustee of the Trust, is the President and Chief Operating Officer of Hekemian. David B. Hekemian, a Trustee of the Trust, is the Principal/Broker – Salesperson and Director of Commercial Brokerage of Hekemian. Robert S. Hekemian, the former Chairman and Chief Executive Officer of the Trust, served as a consultant to the Trust and Chairman of the Board and Chief Executive Officer of Hekemian prior to his death in December 2019. Allan Tubin, Chief Financial Officer and Treasurer of the Trust, is the Chief Financial Officer of Hekemian.
Trustee fee expense (including interest) incurred by FREIT for the nine months ended July 31, 2020 and 2019 was approximately $21,000 and $164,000, respectively, for Robert S. Hekemian, $322,000 and $286,000, respectively, for Robert S. Hekemian, Jr., $20,000 and $14,000, respectively, for Allan Tubin and $40,000 and $41,000, respectively, for David Hekemian. Trustee fee expense (including interest) incurred by FREIT for the three months ended July 31, 2020 and 2019 was approximately $0 and $51,000, respectively, for Robert S. Hekemian, $86,000 and $93,000, respectively, for Robert S. Hekemian, Jr., $5,000 and $8,000, respectively, for Allan Tubin and $9,000 and $14,000, respectively, for David Hekemian (See Note 14 to FREIT’s condensed consolidated financial statements).
Effective upon the late Robert S. Hekemian’s retirement as Chairman, Chief Executive Officer and as a Trustee on April 5, 2018, FREIT entered into a Consulting Agreement with Mr. Hekemian, pursuant to which Mr. Hekemian provided consulting services to the Trust through December 2019. The Consulting Agreement obliged Mr. Hekemian to provide advice and consultation with respect to matters pertaining to the Trust and its subsidiaries, affiliates, assets and business, for no fewer than 30 hours per month during the term of the agreement. FREIT paid Mr. Hekemian a consulting fee of $5,000 per month during the term of the Consulting Agreement, which was 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 was 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 was payable. For the nine months ended July 31, 2020 and 2019, consulting fee expense for Robert S. Hekemian was approximately $8,000 and $45,000, respectively. For the three months ended July 31, 2020 and 2019, consulting fee expense for Robert S. Hekemian was approximately $0 and $15,000, respectively.
The equity owners of Rotunda 100, LLC, which owns a 40% minority equity interest in Grande Rotunda, 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. 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 employees’ interests in Rotunda 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), 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.
The aggregate outstanding principal balance of the Rotunda 100 notes was $4,000,000 at both July 31, 2020, and October 31, 2019. The accrued but unpaid interest related to these notes as of July 31, 2020 and October 31, 2019 amounted to approximately $1,169,000 and $1,053,000, respectively, and is included in secured loans receivable on the accompanying condensed consolidated balance sheets.
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 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, 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 July 31, 2020 and October 31, 2019, Rotunda 100 has funded Grande Rotunda, LLC with approximately $5.9 million and $5.7 million (including interest), respectively, which is included in due to affiliate on the accompanying condensed consolidated balance sheets.
Note 9 – Mortgage financings and line of credit:
The loan on the Westwood Hills property located in Westwood, New Jersey in the amount of approximately $19.2 million as of July 31, 2020 will mature on November 1, 2020. The Company is working with various lenders to refinance this loan.
On August 26, 2019, Berdan Court, LLC (“Berdan Court”), (owned 100% by FREIT), refinanced its $17 million loan (which matured on September 1, 2019) with the lender in the amount of $28,815,000. This loan, secured by an apartment building located in Wayne, New Jersey, has a term of ten years and bears a fixed interest rate equal to 3.54%. 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 6.09% to a fixed rate of 3.54% and (ii) net refinancing proceeds of approximately $11.6 million which can be used for capital expenditures and general corporate purposes.
On April 3, 2019, WestFREIT, Corp. (owned 100% by FREIT) exercised its option to extend its loan held by M&T Bank, with a then outstanding balance of approximately $22.5 million, for twelve months. Effective beginning on June 1, 2019, the extension of this loan secured by the Westridge Square Shopping Center, required monthly principal payments of $47,250 plus interest based on a floating interest rate equal to 240 basis points over the one-month LIBOR and had a maturity date of May 1, 2020. This loan was extended for another six months with a new maturity date of November 1, 2020 under the same terms and conditions of the existing agreement while the lender is in discussions with the Company regarding a further modification and extension.
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 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 options to extend the maturity of this loan. As part of this transaction, Grande Rotunda had 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 which matured on March 5, 2020. On February 28, 2020, Grande Rotunda purchased an interest rate cap on LIBOR, with an effective date of March 5, 2020, for the full amount that can be drawn on this loan of $121.9 million, capping the one-month LIBOR rate at 3% for one year. As of July 31, 2020, approximately $118.5 million of this loan facility was drawn down and the interest rate was approximately 3.01%.
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 is $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%. As of July 31, 2020 and October 31, 2019, there was no amount outstanding and $13 million was available under the line of credit.
The lis pendens filed in connection with the legal proceeding between FREIT and certain of its affiliates and Sinatra Properties, LLC may adversely affect FREIT’s ability to refinance certain of its residential properties.
As a result of the negative impact of the COVID-19 pandemic at our commercial properties, we were granted debt payment relief from certain of our lenders on the retail properties in the form of deferral of principal and/or interest payments for a three-month period which ended June 30, 2020, resulting in total deferred payments of approximately $722,000 being due at maturity of the loans.
Note 10 – Fair value of long-term debt:
The following table shows the estimated fair value and net carrying value of FREIT’s long-term debt at July 31, 2020 and October 31, 2019:
($ in Millions)
|
|
July 31, 2020
|
|
October 31, 2019
|
|
|
|
|
|
Fair Value
|
|
$309.2
|
|
$352.9
|
|
|
|
|
|
Carrying Value, Net
|
|
$300.7
|
|
$349.9
|
Fair values are estimated based on market interest rates at July 31, 2020 and October 31, 2019 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 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 eight (8) properties and the residential segment is comprised of seven (7) properties, excluding the Pierre Towers property which was converted into a tenancy-in-common and deconsolidated from FREIT’s operating results as of February 28, 2020 (See Note 16 to FREIT’s condensed consolidated financial statements for further details).
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, 2019. 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.
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.
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 nine and three month periods ended July 31, 2020 and 2019. Asset information is not reported since FREIT does not use this measure to assess performance.
|
|
Nine Months Ended
|
|
Three Months Ended
|
|
|
July 31,
|
|
July 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(In Thousands of Dollars)
|
|
(In Thousands of Dollars)
|
Real estate rental revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
19,638
|
|
|
$
|
19,865
|
|
|
$
|
6,090
|
|
|
$
|
6,786
|
|
Residential
|
|
|
22,005
|
|
|
|
24,791
|
|
|
|
6,393
|
|
|
|
8,343
|
|
Total real estate rental revenue
|
|
|
41,643
|
|
|
|
44,656
|
|
|
|
12,483
|
|
|
|
15,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
8,810
|
|
|
|
8,664
|
|
|
|
2,914
|
|
|
|
3,013
|
|
Residential
|
|
|
8,997
|
|
|
|
10,512
|
|
|
|
2,649
|
|
|
|
3,616
|
|
Total real estate operating expenses
|
|
|
17,807
|
|
|
|
19,176
|
|
|
|
5,563
|
|
|
|
6,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
10,828
|
|
|
|
11,201
|
|
|
|
3,176
|
|
|
|
3,773
|
|
Residential
|
|
|
13,008
|
|
|
|
14,279
|
|
|
|
3,744
|
|
|
|
4,727
|
|
Total net operating income
|
|
$
|
23,836
|
|
|
$
|
25,480
|
|
|
$
|
6,920
|
|
|
$
|
8,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring capital improvements - residential
|
|
$
|
(353
|
)
|
|
$
|
(489
|
)
|
|
$
|
(127
|
)
|
|
$
|
(204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to condensed consolidated net income (loss) attributable to common equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment NOI
|
|
$
|
23,836
|
|
|
$
|
25,480
|
|
|
$
|
6,920
|
|
|
$
|
8,500
|
|
Deferred rents - straight lining
|
|
|
(213
|
)
|
|
|
313
|
|
|
|
(334
|
)
|
|
|
126
|
|
Investment income
|
|
|
174
|
|
|
|
276
|
|
|
|
38
|
|
|
|
92
|
|
Unrealized loss on interest rate cap contract
|
|
|
-
|
|
|
|
(160
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
General and administrative expenses
|
|
|
(3,061
|
)
|
|
|
(2,109
|
)
|
|
|
(1,233
|
)
|
|
|
(718
|
)
|
Special committee advisory, legal and other expenses
|
|
|
(4,606
|
)
|
|
|
(1,018
|
)
|
|
|
(87
|
)
|
|
|
(432
|
)
|
Gain on sale of property
|
|
|
-
|
|
|
|
836
|
|
|
|
-
|
|
|
|
-
|
|
Gain on deconsolidation of subsidiary
|
|
|
27,680
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss on investment in tenancy-in-common
|
|
|
(96
|
)
|
|
|
-
|
|
|
|
(78
|
)
|
|
|
-
|
|
Depreciation
|
|
|
(7,887
|
)
|
|
|
(8,413
|
)
|
|
|
(2,425
|
)
|
|
|
(2,806
|
)
|
Financing costs
|
|
|
(11,032
|
)
|
|
|
(13,675
|
)
|
|
|
(3,121
|
)
|
|
|
(4,496
|
)
|
Net income (loss)
|
|
|
24,795
|
|
|
|
1,530
|
|
|
|
(320
|
)
|
|
|
265
|
|
Net (income) loss attributable to noncontrolling interests in subsidiaries
|
|
|
(18
|
)
|
|
|
(86
|
)
|
|
|
139
|
|
|
|
(66
|
)
|
Net income (loss) attributable to common equity
|
|
$
|
24,777
|
|
|
$
|
1,444
|
|
|
$
|
(181
|
)
|
|
$
|
199
|
|
Note 12 – Income taxes:
FREIT has elected to be treated as a REIT for federal income tax purposes and as such intends to distribute 100% of its ordinary taxable income to its shareholders as dividends for the fiscal year ending October 31, 2020. Accordingly, no provision for federal or state income taxes related to such ordinary taxable income was recorded in FREIT’s condensed consolidated financial statements.
FREIT distributed 100% of its ordinary taxable income and 100% of its capital gain from the sale of the Patchogue, New York property to its shareholders as dividends for the fiscal year ended October 31, 2019. Accordingly, no provision for federal or state income taxes related to such ordinary taxable income and such gain was recorded in FREIT’s condensed consolidated financial statements for the fiscal year ended October 31, 2019.
As of July 31, 2020, FREIT 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:
On September 4, 2014, the Board approved the grant of an aggregate of 246,000 non-qualified share options under FREIT’s Equity Incentive Plan (“the Plan”) to certain FREIT 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, fully vested on September 3, 2019 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 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 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 March 4, 2019, the Board approved the grant of an aggregate of 5,000 non-qualified share options under the Plan to the Chairman of the Board. The options have an exercise price of $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 March 3, 2029.
As of July 31, 2020, 442,060 shares are available for issuance under the Plan.
The following table summarizes stock option activity for the nine-month period ended July 31, 2020:
|
|
No. of Options
|
|
Weighted Average
|
|
|
|
Outstanding
|
|
Exercise Price
|
|
Options outstanding beginning of period
|
|
|
310,740
|
|
|
$
|
18.35
|
|
Options granted during period
|
|
|
-
|
|
|
|
-
|
|
Options forfeited/cancelled during period
|
|
|
-
|
|
|
|
-
|
|
Options outstanding end of period
|
|
|
310,740
|
|
|
$
|
18.35
|
|
Options vested and expected to vest
|
|
|
308,310
|
|
|
|
|
|
Options exercisable at end of period
|
|
|
268,740
|
|
|
|
|
|
For the nine-month periods ended July 31, 2020 and 2019, compensation expense related to stock options granted amounted to approximately $35,000 and $104,000, respectively. For the three-month periods ended July 31, 2020 and 2019, compensation expense related to stock options granted amounted to approximately $11,000 and $35,000, respectively. At July 31, 2020, there was approximately $83,000 of unrecognized compensation cost relating to outstanding non-vested stock options to be recognized over the remaining weighted average vesting period of approximately 2.3 years.
There was no aggregate intrinsic value of options vested and expected to vest and options exercisable at July 31, 2020 as the exercise price of the options was greater than the market price.
Note 14 – 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 nine and three-month periods ended July 31, 2020 and 2019 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 nine-month periods ended July 31, 2020 and 2019, the aggregate amounts of deferred Trustee fees together with related interest and dividends were approximately $444,400 and $745,500, respectively, which have been paid through the issuance of 23,302 and 46,070 vested FREIT share units, respectively, based on the closing price of FREIT shares on the dates as set forth in the Deferred Fee Plan.
For the nine-month periods ended July 31, 2020 and 2019, FREIT has charged as expense approximately $444,400 and $677,300, respectively, representing deferred Trustee fees and interest, and the balance of approximately $0 and $68,200, respectively, representing dividends payable in respect of share units allocated to Plan participants, has been charged to equity.
The Deferred Fee Plan, as amended, provides that cumulative fees together with accrued interest deferred as of November 1, 2014 will be paid in a lump sum or in annual installments over a period not to exceed 10 years, at the election of the Participant. In connection with the termination of Robert S. Hekemian’s service to the Trust under the Consulting Agreement between Mr. Hekemian and the Trust in December 2019, Mr. Hekemian’s accrued plan benefits under the Deferred Fee Plan became payable to him and were paid in a single lump sum in the amount of approximately $4.8 million. As of July 31, 2020 and October 31, 2019, approximately $1,542,000 and $4,422,000, respectively, of fees has been deferred together with accrued interest of approximately $1,091,000 and $3,188,000, respectively.
Note 15 – Rental Income:
Commercial tenants:
As discussed in Note 2, fixed lease income under our operating leases generally includes fixed minimum lease consideration and fixed CAM reimbursements which are 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, for the years ending October 31, as of July 31, 2020, is as follows:
Year Ending October 31,
|
|
Amount
|
|
2020*
|
|
$
|
19,443
|
|
2021
|
|
|
18,137
|
|
2022
|
|
|
14,993
|
|
2023
|
|
|
12,384
|
|
2024
|
|
|
10,179
|
|
Thereafter
|
|
|
34,883
|
|
Total
|
|
$
|
110,019
|
|
*Amount represents full fiscal year
|
|
|
|
|
The above amounts assume that all leases which expire are not renewed and, accordingly, neither minimal rentals nor rentals from replacement tenants are included.
Minimum future rentals do not include contingent rentals, which may be received under certain leases on the basis of percentage of reported tenants' sales volume. 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 nine and three-month periods ended July 31, 2020 and 2019 were not material.
Residential tenants:
Lease terms for residential tenants are usually one to two years.
Note 16 – Investment in tenancy-in-common:
On February 28, 2020, FREIT 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 owned a 65% membership interest in S&A, which owned 100% of the Pierre Towers property located in Hackensack, NJ through its 100% interest in Pierre Towers, LLC. Accordingly, FREIT consolidated the financial statements of S&A and its subsidiary to include 100% of the subsidiary’s assets, liabilities, operations and cash flows with the interest not owned by FREIT reflected as “noncontrolling interests in subsidiary” and all significant intercompany accounts and transactions were eliminated in consolidation.
Pursuant to the TIC agreement, FREIT ultimately acquired a 65% undivided interest in the Pierre Towers property which was formerly owned by S&A. Based on the guidance of ASC 810, “Consolidation”, FREIT’s investment in the TIC was accounted for under the equity method of accounting. While FREIT’s effective ownership percentage interest in the Pierre Towers property remains unchanged after the reorganization to a TIC, FREIT no longer has a controlling interest as the TIC is now under joint control. Since FREIT retained a noncontrolling financial interest in the TIC and the deconsolidation of the subsidiary is not the result of a nonreciprocal transfer to owners, the subsidiary was deconsolidated from FREIT as of February 28, 2020. A gain in the amount of approximately $27.7 million was recognized in the accompanying condensed consolidated statements of operations for the nine months ended July 31, 2020. This gain was measured at the date of deconsolidation as the difference between the fair value of the investment in the TIC at the date the entity was deconsolidated and the carrying amount of the former subsidiary’s assets and liabilities.
As of July 31, 2020, FREIT’s investment in TIC was approximately $20.7 million with a loss on investment of approximately $96,000 and $78,000, respectively, recognized in the accompanying condensed consolidated statements of operations for the nine and three months ended July 31, 2020.
Hekemian currently manages the Pierre Towers property based on a management agreement between the owners of the TIC and Hekemian dated as of February 28, 2020, which expires on February 28, 2021, 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 $150,000 for the period from February 28, 2020 through July 31, 2020 and $88,000 for the three months ended July 31, 2020. The Pierre Towers property also uses the resources of the Hekemian insurance department to secure various insurance coverages for its property. Hekemian is paid a commission for these services. Such commissions were charged to operations and amounted to approximately $22,000 for the period from February 28, 2020 through July 31, 2020 and for the three months ended July 31, 2020.
The following table summarizes the balance sheet of the Pierre Towers property as of July 31, 2020 accounted for by the equity method:
|
|
|
July 31,
|
|
|
|
|
2020
|
|
|
|
|
(In Thousands of Dollars)
|
|
|
|
|
|
|
Real estate, net
|
|
$
|
80,558
|
|
Cash and cash equivalents
|
|
|
1,557
|
|
Tenants' security accounts
|
|
|
569
|
|
Receivables and other assets
|
|
|
483
|
|
Total assets
|
|
$
|
83,167
|
|
|
|
|
|
|
Mortgages payable, net of unamortized debt issuance costs
|
|
$
|
50,022
|
|
Accounts payable and accrued expenses
|
|
|
725
|
|
Tenants' security deposits
|
|
|
562
|
|
Deferred revenue
|
|
|
71
|
|
Equity
|
|
|
31,787
|
|
Total liabilities & equity
|
|
$
|
83,167
|
|
|
|
|
|
|
FREIT's investment in TIC (65% interest)
|
|
$
|
20,662
|
|
The following table summarizes the statements of operations of the Pierre Towers property for the period from February 28, 2020 through July 31, 2020 and for the three months ended July 31, 2020, accounted for by the equity method:
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For the period from
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|
|
|
|
|
February 28, 2020
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|
Three months ended
|
|
|
through July 31, 2020
|
|
July 31, 2020
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|
|
(In Thousands of Dollars)
|
|
(In Thousands of Dollars)
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|
|
|
|
|
Revenues
|
|
$
|
3,106
|
|
|
$
|
1,864
|
|
Operating expenses
|
|
|
1,689
|
|
|
|
1,046
|
|
Net operating income
|
|
|
1,417
|
|
|
|
818
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
895
|
|
|
|
537
|
|
Interest expense including amortization of deferred financing costs
|
|
|
669
|
|
|
|
401
|
|
Net loss
|
|
$
|
(147
|
)
|
|
$
|
(120
|
)
|
|
|
|
|
|
|
|
|
|
FREIT's loss on investment in TIC (65% interest)
|
|
$
|
(96
|
)
|
|
$
|
(78
|
)
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Note 17 – COVID-19 Pandemic:
The international spread of COVID-19 was declared a global pandemic by the World Health Organization on March 11, 2020. The extent to which this pandemic could continue to affect our financial condition, liquidity, and results of operations is difficult to predict and depends on evolving factors, including: duration, scope, government actions, and other social responses. Many states in the U.S., including New Jersey, New York and Maryland, where our properties are located, implemented stay-at-home orders for all "non-essential" business and activity in an aggressive effort to mitigate the spread of COVID-19. While some of these orders have been fully or partially lifted, many of our commercial tenants have not been able to open or resume operations at full capacity due to continued restrictions imposed upon them. As the impact of the pandemic has been evolving, 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. These and other adverse conditions that may unfold in the future are expected to continue until such time as shutdown orders are fully lifted, and all business operations and commercial activity can fully resume. The lifting of shutdown orders cannot be predicted with any certainty. Further, even after such orders are fully lifted, the resumption of business operations and commercial activity will depend on several factors, including prevailing sentiments among workers and consumers regarding the safety of resuming public activity, and cannot be predicted with any certainty.
Despite the COVID-19 pandemic and preventive measures taken to mitigate the spread, our residential properties continue 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 and continue to be adversely affected by the mandated shutdowns or imposed restrictions. The overall average cash realization for the commercial properties, based on monthly billings as compared to monthly cash collections from April through July 2020, was approximately 68%. As such, FREIT incurred an increase in expense for the reserve of uncollectible rents of approximately $0.6 million (with a consolidated impact of approximately $0.4 million) and approximately $0.1 million (with a consolidated impact of approximately $0.1 million), respectively, for the nine and three months ended July 31, 2020. Additionally, as of July 31, 2020, FREIT has applied approximately $462,000 of security deposits from its commercial tenants to outstanding receivables due. FREIT has offered some commercial tenants deferrals of rent over a specified time period as well as rent abatements for a certain period of time, both of which were immaterial to FREIT for the nine and three months ended July 31, 2020. FREIT does not expect these deferrals or rent abatements to have a material impact on future operating results. FREIT currently remains in active discussions and negotiations with these impacted retail tenants. Additionally, Cobb Theatre, an anchor tenant movie theatre at the Rotunda retail property filed for bankruptcy and rejected its lease at the Rotunda property as of June 30, 2020. As a result of the rejection of this lease, uncollected rents in the amount of approximately $0.3 million and a straight-line rent receivable of approximately $0.4 million were reversed against revenue, and unamortized leasing commissions in the amount of approximately $0.2 million were written off and fully expensed in the third quarter of Fiscal 2020 resulting in a net impact of approximately $0.9 million (with a consolidated impact of approximately $0.5 million) to net income (loss) for the nine and three months ended July 31, 2020. The Company is currently exploring all possible options for the re-leasing of this space, which includes renting to another movie theatre.
As a result of the negative impact of the COVID-19 pandemic at our commercial properties, we were granted debt payment relief from certain of our lenders on the retail properties in the form of deferral of principal and/or interest payments for a three-month period which ended June 30, 2020, resulting in total deferred payments of approximately $722,000 being due at maturity of the loans.
Through the end of the fiscal quarter ended July 31, 2020, we have experienced a positive cash flow from operations, excluding corporate expenses such as Special Committee advisory, legal and other expenses paid of approximately $5.1 million and deferred compensation in the amount of $5 million paid to two retired trustees. This could change based on the duration of the pandemic, which is uncertain. We believe that our cash balance as of July 31, 2020 of approximately $31 million coupled with a $13 million available line of credit (available through October 27, 2020, see Note 9) will provide us with sufficient liquidity for at least the next twelve months from the filing of this Form 10-Q. Additionally, in an effort to further preserve cash flow, effective May 1, 2020, our Board of Trustees reduced all fees, salaries and retainers payable to our executive officers and members of the Board of Trustees by up to 30% through the end of Fiscal 2020.
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.