FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY: Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
From Those Projected in Forward Looking Statements.
Readers of this discussion are advised that the discussion should be read in
conjunction with the unaudited condensed consolidated financial statements of
FREIT (including related notes thereto) appearing elsewhere in this Form 10-Q,
and the consolidated financial statements included in FREIT's most recently
filed Form 10-K. Certain statements in this discussion may constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements reflect FREIT's
current expectations and are based on estimates, projections, beliefs, data,
methods and assumptions of management of FREIT at the time of such statements
regarding future results of operations, economic performance, financial
condition and achievements of FREIT, and do not relate strictly to historical or
current facts. These forward-looking statements are identified through the use
of words such as "believe," "expect," "anticipate," "intend," "plan,"
"estimate," or words of similar meaning. Forward-looking statements involve
risks and uncertainties in predicting future results and conditions.
Although FREIT believes that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, such statements are subject to
risks and uncertainties. These and certain other uncertainties, factors and
risks, including those risk factors set forth and further described in Part I,
Item 1A entitled "Risk Factors" of our Annual Report on Form 10-K for the fiscal
year ended October 31, 2021 , and other risks described in our subsequent filings
with the SEC , may cause our actual results to differ materially from those
projected. Such factors include, but are not limited to, the following: general
economic and business conditions, including the purchase of retail products over
the Internet, which will, among other things, affect demand for rental space,
the availability of prospective tenants, lease rents, the financial condition of
tenants and the default rate on leases, operating and administrative expenses
and the availability of financing; adverse changes in FREIT's real estate
markets, including, among other things, competition with other real estate
owners, competition confronted by tenants at FREIT's commercial properties;
governmental actions and initiatives; environmental/safety requirements; risks
of real estate development and acquisitions; and on-going negative effects of
the COVID-19 pandemic on our properties and tenants, and generally on our real
estate assets and the real estate markets in which we operate, and the global,
U.S. and local economies. The risks with respect to the development of real
estate include: increased construction costs, inability to obtain construction
financing, or unfavorable terms of financing that may be available, unforeseen
construction delays and the failure to complete construction within budget.
OVERVIEW
FREIT is an equity real estate investment trust ("REIT") that is
self-administered and externally managed. FREIT owns a portfolio of residential
apartment and commercial properties. FREIT's revenues consist primarily of
rental income and other related revenues from its residential and commercial
properties and additional rents derived from operating commercial properties.
FREIT's properties are primarily located in northern New Jersey and New York .
Property disposals in Maryland:
OnNovember 22, 2021 , certain affiliates (the "Maryland Sellers") of FREIT entered into a Purchase and Sale Agreement (the "Maryland Purchase and Sale Agreement") withMCB 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 byGrande Rotunda, LLC (the "Rotunda Property"), a shopping center owned byDamascus Centre, LLC (the "Damascus Property"), and a shopping center owned byWestFREIT Corp. (the "Westridge Square Property"). FREIT owns 100% of its subsidiary,WestFREIT Corp. ("WestFREIT"), a 60% interest inGrande Rotunda, LLC ("Grande Rotunda"), the joint venture that owned the Rotunda Property, and a 70% interest inDamascus 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 of$2,723,000 was to account for improvements and repairs to theMaryland 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 theMaryland 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 theMaryland Properties . 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 Index Page 22
and the amounts of funds escrowed to FREIT, in general, depend on the success and timing of future leasing activities at the
The sale of theMaryland Properties having a total net book value of$172.2 million , was consummated by the Maryland Sellers and the Maryland Purchaser for a purchase price of$248,750,269 , after giving effect to the$15,526,731 Maryland Purchaser Escrow Payment. This sale resulted in net proceeds of approximately$53.9 million (inclusive of approximately$1.9 million in funds released from the Maryland Purchaser Escrow Payment during the second quarter of Fiscal 2022), 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 brokerage fees due toHekemian & Co. of approximately$6.2 million . As ofApril 30, 2022 , approximately$1,946,000 of these funds have been released from escrow to the Maryland Sellers. The escrow and related gain on sale were reduced by approximately$1.2 million due to a change in estimate in the second quarter of Fiscal 2022 related to a change in the timing of anticipated rent commencement dates for certain tenants, which will reduce the escrowed funds available to be released to Grande Rotunda. Approximately$6.3 million of remaining funds are held in post-closing escrow for rents anticipated to be released and are included in "Funds held in post-closing escrow" on the accompanying condensed consolidated balance sheet as ofApril 30, 2022 . The sale of theMaryland Properties resulted in a net gain of approximately$68.8 million (as adjusted) (with a consolidated impact to FREIT of approximately$45.6 million ) which includes approximately$8.2 million of proceeds released and anticipated to be released from funds held in escrow, 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 . See Note 7 to FREIT's condensed consolidated financial statements for additional details on the sale of these three properties. COVID-19 Pandemic: The international spread of COVID-19 was declared a global pandemic by theWorld Health Organization onMarch 11, 2020 . Beginning inMarch 2020 and throughout most of 2020, many states in theU.S. , includingNew 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 generalU.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. 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. As the impact of the pandemic evolves, it continues to cause uncertainty and volatility in the financial markets. ManyU.S. industries and businesses were negatively affected and millions of people filed for unemployment resulting in theU.S. unemployment rate rising to 14.7% inApril 2020 , which was the highest recorded rate since the Great Depression. SinceApril 2020 , theU.S unemployment rate has declined to 3.6% as ofApril 2022 . However, the annual inflation rate in theU.S. has accelerated to 8.3% inApril 2022 , the highest since 1982, which is primarily driven by soaring food prices and energy costs, labor shortages and supply disruptions. Despite the COVID-19 pandemic and preventive measures taken to mitigate the spread, our residential properties continued to generate cash flow. At our commercial properties, with the exception of grocery stores and other "essential" businesses, many of our retail tenants were 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 continues to closely monitor changes in the collectability assessment of its tenant receivables. For the six and three months endedApril 30, 2022 , rental revenue deemed uncollectible of approximately$0.4 million and$0.3 million (with a consolidated impact to FREIT of approximately$0.2 million and$0.2 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. For the six and three months endedApril 30, 2021 , rental revenue deemed uncollectible of approximately$0.9 million and$0.3 million (with a consolidated impact to FREIT of approximately$0.6 million and$0.2 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 beginningMarch 2020 throughOctober 31, 2021 , FREIT 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 six and three months endedApril 30, 2022 , there were no security deposits from its commercial tenants applied to outstanding receivables due. On a case by case basis, FREIT has offered rent abatements totaling approximately$9,000 and$0 (with a consolidated impact to FREIT of approximately$9,000 and$0 ) for the six and three months endedApril 30, 2022 , respectively, and$101,000 and$51,000 (with a consolidated impact to FREIT of approximately$71,000 and$40,000 ) for the six and three months endedApril 30, 2021 , respectively. There were no significant deferrals of rent over a specified time period offered to its commercial tenants for the six and three months endedApril 30, 2022 and 2021. FREIT currently remains in active discussions and negotiations with these impacted retail tenants. For the six months endedApril 30, 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 ofApril 30, 2022 of approximately$95.7 million coupled with a$13 million available line of credit (available throughOctober 31, 2023 , see Note 9 to FREIT's condensed consolidated financial statements for further details) and the additional$7.5 million in funds available to be drawn upon on the Boulders loan (See Note 9 to FREIT's condensed consolidated financial statements for further details). This cash and available cash will provide us with sufficient liquidity for at least the next twelve months from the filing of this quarterly report on Form 10-Q including, partial or full repayment of the Wayne PSC loan should we be unable to resolve the Wayne PSC covenant non-compliance and the bank exercises its remedies under the loan agreement, and after giving consideration to the dividends we may need to distribute over this period to maintain our status
as a
REIT.
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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. (See Note 16 to FREIT's condensed consolidated
financial statements for further details.)
Residential Properties : While our residential properties continue to generate
positive cash flow, the impact COVID-19, the significant rise in inflation and
rising interest rates may have on these properties over the next year is
uncertain.
Commercial Properties : There continues to be uncertainty in the retail
environment that could have an adverse impact on FREIT's retail tenants, which
could have an adverse impact on FREIT. The impact COVID-19, the significant rise
in inflation and rising interest rates may have on the operating and financial
performance of our commercial properties is currently uncertain.
Availability of Debt Financing: Financing has been made available to FREIT and its affiliates. (See Note 6 to FREIT’s condensed consolidated financial statements).
OnDecember 30, 2021 , FREIT refinanced its$14.4 million loan (which would have matured onFebruary 1, 2022 ) on its Boulders property located inRockaway, New Jersey with a new loan held byConnectOne 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. This loan is interest-only and has a maturity date ofJanuary 1, 2024 with the option of FREIT 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. In accordance with certain loan agreements, FREIT 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 ofOctober 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 byPeople's United Bank . 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$22.2 million as ofApril 30, 2022 . OnJune 2, 2022 , the lender agreed to waive the covenant default subject to the loan being paid off on or beforeSeptember 1, 2022 . Additionally, Wayne PSC is in the process of refinancing this loan with a new lender in the amount of$25 million , which would be interest only for a term of three years and based on a fixed interest rate of 5%. Until such time as a definitive agreement is entered into, there can be no assurance this loan will be entered into. Operating Cash Flow: FREIT expects that cash provided by operating activities and cash reserves will be adequate to cover mandatory debt service payments (including payments of interest, but excluding balloon payments which are expected to be refinanced and/or extended), real estate taxes, recurring capital improvements at its properties and other needs to maintain its status as a REIT for at least a period of one year from the date of filing of this quarterly
report on Form 10-Q.
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PRINCIPAL ACCOUNTING METHODS AND ESTIMATES
Pursuant to theSEC disclosure guidance for "Critical Accounting Policies," theSEC defines Critical Accounting Policies as those that require the application of management's most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, the preparation of which takes into account estimates based on judgments and assumptions that affect certain amounts and disclosures. Accordingly, actual results could differ from these estimates. The accounting policies and estimates used, which are outlined in Note 1 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2021 , have been applied consistently as ofApril 30, 2022 , and for the six and three months endedApril 30, 2022 and 2021. We believe that the following accounting policies or estimates require the application of management's most difficult, subjective, or complex judgments. Revenue Recognition: Base rents, additional rents based on tenants' sales volume and reimbursement of the tenants' share of certain operating expenses are generally recognized when due from tenants. The straight-line basis is used to recognize base rents under leases if they provide for varying rents over the lease terms. Straight-line rents receivable represent unbilled rents receivable to the extent straight-line rents exceed current rents billed in accordance with lease agreements. Before FREIT can recognize revenue, it is required to assess, among other things, its collectability. Valuation of Long-Lived Assets: FREIT assesses the carrying value of long-lived assets periodically, or whenever events or changes in circumstances indicate that the carrying amounts of certain assets may not be recoverable. When FREIT determines that the carrying value of long-lived assets may be impaired, the measurement of any impairment is based on a projected discounted cash flow method determined by FREIT's management. While FREIT believes that our discounted cash flow methods are reasonable, different assumptions regarding such cash flows may significantly affect the measurement of impairment. Real Estate Development Costs: It is FREIT's policy to capitalize pre-development costs, which generally include legal and professional fees and other directly related third-party costs. Real estate taxes and interest costs incurred during the development and construction phases are also capitalized. FREIT ceases capitalization of these costs when the project or portion thereof becomes operational, or when construction has been postponed. In the event of postponement, capitalization of these costs will recommence once construction on the project resumes. See Note 2 to FREIT's condensed consolidated financial statements for recently issued accounting standards. Index Page 25 RESULTS OF OPERATIONS Real estate revenue for the six months endedApril 30, 2022 ("Current Six Months") decreased 32.5% to$17,264,000 , compared to$25,558,000 for the six months endedApril 30, 2021 ("Prior Year's Six Months"). For the three months endedApril 30, 2022 ("Current Quarter ") real estate revenue decreased 48.3% to$6,615,000 , compared to$12,804,000 for the three months endedApril 30, 2021 ("Prior Year's Quarter"). The decrease in revenue for the Current Six Months was primarily attributable to the following: (a) a decrease of approximately$8.5 million attributed to theMaryland Properties sold; (b) a decrease from the commercial segment of approximately$0.4 million , excluding theMaryland Properties sold, primarily attributed to approximately$0.2 million in rental revenue being deemed uncollectible and classified as a reduction in rental revenue in the Current Six Months and a$0.2 million decrease resulting from a decline in the average occupancy rate to 67.7% from 69.5% in the Prior Year's Six Months; offset by (c) an increase from the residential segment of approximately$0.6 million , excluding the Icon at the Rotunda Property sold, driven by an increase in base rents across all properties and an increase in the average occupancy rate to 98.7% from 97.1% in the Prior Year's Six Months. The decrease in revenue for theCurrent Quarter was primarily attributable to the following: (a) a decrease of approximately$6.2 million attributed to theMaryland Properties sold; (b) a decrease from the commercial segment of approximately$0.3 million , excluding theMaryland Properties sold, primarily attributed to approximately$0.2 million in rental revenue being deemed uncollectible and classified as a reduction in rental revenue in theCurrent Quarter and a$0.1 million decrease resulting from a decline in the average occupancy rate to 66.6% from 68.8% in the Prior Year's Quarter; offset by (c) an increase from the residential segment of approximately$0.3 million , excluding the Icon at the Rotunda Property sold, primarily driven by an increase in base rents across all properties and an increase in the average occupancy rate to 98.5% from 96.8% in the Prior Year's Quarter. Net income (loss) attributable to common equity ("net income (loss)-common equity") for the Current Six Months andCurrent Quarter was net income of$45,425,000 ($6.46 per share basic and$6.40 per share diluted) and net loss of$352,000 (($0.05 ) per share basic and diluted), compared to$567,000 ($0.08 per share basic and diluted) and$9,000 ($0.00 per share basic and diluted), for the Prior Year's comparable periods, respectively.
The table below provides a detailed analysis of the major changes that impacted net income (loss) on common equity for the six and three months ended
NON-GAAP NET INCOME (LOSS) COMPONENTS Six Months Ended
Three Months Ended
April 30, April 30,
2022 2021 Change 2022 2021 Change
(In Thousands of Dollars) (In Thousands of Dollars)
Income from real estate transactions:
Commercial properties$ 2,286 $ 6,390 $
(4,104)
Residential properties 6,372 7,967 (1,595 ) 2,675 4,022 (1,347 ) Total income from real estate operations 8,658 14,357 (5,699 ) 3,335 6,894 (3,559 ) Financing costs: Fixed rate mortgages (2,431 ) (2,903 ) 472 (1,089 ) (1,442 ) 353 Floating rate mortgages (1,217 ) (2,581 ) 1,364 (265 ) (1,265 ) 1,000 Interest rate swap contracts breakage fee (213 ) - (213 ) - - - Other - Corporate interest (80 ) (140 ) 60 (22 ) (79 ) 57 Mortgage cost amortization (514 ) (568 )
54 (151 ) (274 ) 123 Total financing costs (4,455 ) (6,192 ) 1,737 (1,527 ) (3,060 ) 1,533 Investment income 64 59 5 38 29 9
General and administrative costs:
Accounting fees (251 ) (264 )
13 (113) (110) (3)
Legal and professional fees (1,010 ) (1,177 ) 167 (297 ) (645 ) 348 Directors fees (533 ) (465 ) (68 ) (260 ) (228 ) (32 ) Stock option expense (10 ) (24 ) 14 (5 ) (12 ) 7 Corporate expenses (392 ) (800 )
408 (194 ) (475 ) 281 Total general and administrative expenses (2,196 ) (2,730 ) 534 (869 ) (1,470 ) 601
Depreciation (2,534 ) (4,633 )
2,099 (714 ) (2,338 ) 1,624 Loss on investment in common property (156 ) (145 ) (11 ) (32 ) (118 ) 86
Adjusted net (loss) income (619 ) 716 (1,335 ) 231 (63 ) 294 Net gain (loss) on sale of Maryland properties 68,771 - 68,771 (1,232 ) - (1,232 ) Net income (loss) 68,152 716 67,436 (1,001 ) (63 ) (938 ) Net (income) loss attributable to noncontrolling interests in subsidiaries (22,727 ) (149 ) (22,578 ) 649 72 577 Net income (loss) attributable to common equity$ 45,425 $ 567 $ 44,858 $ (352 ) $ 9 $ (361 )
The condensed consolidated results of operations for the Current Six Months andCurrent Quarter are not necessarily indicative of the results to be expected for the full year or any other period. The table above includes income from real estate operations which is a non- Index Page 26 GAAP financial measure and is not a measure of operating results or cash flow as measured by GAAP, and is not necessarily indicative of cash available to fund cash needs. Adjusted net (loss) income for the Current Six Months andCurrent Quarter was net loss of$619,000 (($0.09 ) per share basic and diluted) and net income of$231,000 ($0.03 per share basic and diluted), compared to net income of$716,000 ($0.10 per share basic and diluted) and net loss of$63,000 (($0.01 ) per share basic and diluted), for the Prior Year's comparable periods. Adjusted net (loss) income is a non-GAAP measure, which management believes is a useful and meaningful gauge to investors of our operating performance, since it excludes the impact of unusual and infrequent items specifically: a gain on sale of Maryland properties in Fiscal 2022. The decrease in adjusted net income for the Current Six Months was primarily driven by the following: (a) a decrease of approximately$2.4 million (with a consolidated impact to FREIT of approximately$1.7 million ) attributed to theMaryland Properties sold; offset by (b) a decrease in general and administrative expenses ("G&A") of approximately$0.5 million primarily driven by reincorporation expenses in the amount of approximately$0.4 million incurred in the Prior Year's Six Months and a decline in legal costs in the amount of approximately$0.2 million attributed to the legal proceeding between FREIT and certain of its affiliates andSinatra Properties, LLC ; (c) a decrease in interest expense of approximately$0.2 million attributed to the refinancing of the loan on the Boulders property in the Current Six Months resulting in a reduction in the interest rate and principal balance of the loan; (d) a decrease in the reserve for uncollectible rents of approximately$0.3 million (with a consolidated impact to FREIT of approximately$0.2 million ), excluding theMaryland Properties sold, primarily due to rental revenue being deemed uncollectible and classified as a reduction in rental revenue in the Current Six Months; and (e) an increase in revenue of approximately$0.2 million (with a consolidated impact to FREIT of approximately$0.3 million ), excluding theMaryland Properties sold. The increase in adjusted net income for theCurrent Quarter was primarily driven by the following: (a) a decrease in G&A of approximately$0.6 million primarily driven by reincorporation expenses in the amount of approximately$0.3 million incurred in the Prior Year's Quarter and a decline in legal costs in the amount of approximately$0.3 million attributed to the legal proceeding between FREIT and certain of its affiliates andSinatra Properties, LLC ; (b) a decrease in the reserve for uncollectible rents of approximately$0.3 million (with a consolidated impact to FREIT of approximately$0.2 million ), excluding theMaryland Properties sold, primarily due to rental revenue being deemed uncollectible and classified as a reduction in rental revenue in theCurrent Quarter ; (c) a decline in snow removal costs of approximately$0.3 million (with a consolidated impact to FREIT of approximately$0.2 million ), excluding theMaryland Properties sold; (d) a decrease in interest expense of approximately$0.1 million attributed to the refinancing of the loan on the Boulders property resulting in a reduction in the interest rate and principal balance of the loan; and (e) a decrease in loss on investment in tenancy-in-common of approximately$0.1 million ; offset by (f) a decrease of approximately$1 million (with a consolidated impact to FREIT of approximately$0.8 million ) attributed to theMaryland Properties sold. (Refer to the segment disclosure below for a more detailed discussion of the financial performance of FREIT's commercial and
residential segments.)
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SEGMENT INFORMATION
The following tables set forth comparative net operating income ("NOI") data for
FREIT's real estate segments and reconciles the NOI to condensed consolidated
net income (loss)-common equity for the Current Six Months and Current Quarter
as compared to the Prior Year's comparable periods (see below for definition of
NOI):
Commercial Residential Combined
Six Months Ended Six Months Ended Six Months Ended
April 30, Increase (Decrease) April 30, Increase (Decrease) April 30,
2022 2021 $ % 2022 2021 $ % 2022 2021
(In Thousands) (In Thousands) (In Thousands)
Rental income $ 5,006 $ 8,987 $ (3,981 ) -44.3% $ 10,833 $ 13,141 $ (2,308 ) -17.6% $ 15,839 $ 22,128
Reimbursements 1,232 3,119 (1,887 ) -60.5% 23 78 (55 ) -70.5% 1,255 3,197
Other 28 308 (280 ) -90.9% 203 138 65 47.1% 231 446
Total revenue 6,266 12,414 (6,148 ) -49.5% 11,059 13,357 (2,298 ) -17.2% 17,325 25,771
Operating expenses 3,919 5,811 (1,892 ) -32.6% 4,687 5,390 (703 ) -13.0%
8,606 11,201 Net operating income
Average Occupancy % * 67.7% 69.5% -1.8% 98.7% 97.1% 1.6%
Reconciliation to
condensed consolidated net income-equity:
Deferred rents - straight lining (61 ) (213 )
Investment income 64 59
General and administrative expenses (2,196 ) (2,730 )
Loss on investment in tenancy-in-common (156 ) (145 )
Depreciation (2,534 ) (4,633 )
Net gain on sale of Maryland properties 68,771 -
Financing costs (4,455 ) (6,192 )
Net income 68,152 716
Net income attributable to noncontrolling interests in subsidiaries
(22,727) (149)
Net income attributable to common equity $ 45,425 $ 567
Commercial Residential Combined
Three Months Ended Three Months Ended Three Months Ended
April 30, Increase (Decrease) April 30, Increase (Decrease) April 30,
2022 2021 $ % 2022 2021 $ % 2022 2021
(In Thousands) (In Thousands) (In Thousands)
Rental income $ 1,430 $ 4,436 $ (3,006 ) -67.8% $ 4,636 $ 6,636 $ (2,000 ) -30.1% $ 6,066 $ 11,072
Reimbursements 505 1,615 (1,110 ) -68.7% (7 ) 38 (45 ) -118.4% 498 1,653
Other 10 12 (2 ) -16.7% 92 74 18 24.3% 102 86
Total revenue 1,945 6,063 (4,118 ) -67.9% 4,721 6,748 (2,027 ) -30.0% 6,666 12,811
Operating expenses 1,234 3,184 (1,950 )
-61.2% 2,046 2,726 (680 ) -24.9% 3,280 5,910 Net operating income$ 711 $ 2,879 $ (2,168 ) -75.3%$ 2,675 $ 4,022 $ (1,347 ) -33.5% 3,386 6,901
Average Occupancy % * 66.6% 68.8% -2.2% 98.5% 96.8% 1.7%
Reconciliation to
Condensed consolidated net income-ordinary equity:
Deferred rents - straight lining (51 ) (7 )
Investment income 38 29
General and administrative expenses (869 ) (1,470 )
Loss on investment in tenancy-in-common (32 ) (118 )
Depreciation (714 ) (2,338 )
Net loss on sale of Maryland properties (1,232 ) -
Financing costs (1,527 ) (3,060 )
Net loss (1,001 ) (63 )
Net loss attributable
to noncontrolling interests in subsidiaries 649 72
Net (loss) income attributable to common equity
$ (352 ) $ 9 * Average occupancy rate excludes the Rotunda Property, the Damascus
property and the Westridge Square property of all periods presented as
the properties were sold in the Current Six Months. See Note 7 to FREIT
Maryland's condensed consolidated financial statements for further
details.
The RNE is based on the operating income and expenses directly associated with the operation of the properties, but excludes deferred (linear) rents, depreciation, financing costs and other elements. FREIT evaluates and measures the operating results of the segment based on the RNE.
Same Property NOI: FREIT considers same property net operating income ("Same
Property NOI") to be a useful supplemental non-GAAP measure of its operating
performance. FREIT defines same property within both the commercial and
residential segments to be those properties that FREIT has owned and operated
for both the current and prior periods presented, excluding those properties
that FREIT acquired, sold or redeveloped during those periods. Any newly
acquired property that has been in operation for less than
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a year, any property that is undergoing a major redevelopment but may still be in operation at less than full capacity, and/or any property that has been sold is not considered same property. NOI and Same Property NOI are non-GAAP financial measures and are not measures of operating results or cash flow as measured by GAAP, and are not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity.
COMMERCIAL SECTOR
The commercial segment contains five (5) separate properties, excluding the Rotunda Property, the Westridge Square Property and the Damascus Property which were sold onDecember 30, 2021 ,January 7, 2022 andJanuary 10, 2022 , respectively. Three of these properties are multi-tenanted retail centers, one is a single tenanted retail center located inGlen Rock, New Jersey and one is single tenanted on land located inRockaway, New Jersey owned by FREIT from which it receives monthly rental income from a tenantwho has built and operates a bank branch on the land. (See Note 7 to FREIT's condensed consolidated financial statements for additional details on the sale of these three properties.) As indicated in the table above under the caption Segment Information, total revenue from FREIT's commercial segment for the Current Six Months andCurrent Quarter decreased by 49.5% and 67.9%, respectively, and NOI decreased by 64.5% and 75.3%, respectively, as compared to the Prior Year's comparable periods. Average occupancy for all commercial properties for the Current Six Months andCurrent Quarter decreased by 1.8% and 2.2%, respectively, as compared to the Prior Year's comparable periods. The decline in revenue for the Current Six Months was primarily attributable to the following: (a) a decrease of approximately$5.7 million (excluding an increase in the straight-line rent receivable of approximately$0.1 million ) attributed to theMaryland Properties sold; and (b) a decrease of approximately$0.4 million , excluding theMaryland Properties sold, primarily attributed to rental revenue being deemed uncollectible and classified as a reduction in rental revenue in the Current Six Months and a decline in the average occupancy rate to 67.7% from 69.5% in the Prior Year's Six Months. The decrease in NOI for the Current Six Months was primarily attributable to the following: (a) a decrease of approximately$4.1 million attributed to theMaryland Properties sold; (b) a decline in revenue of approximately$0.4 million , excluding theMaryland Properties sold, as explained above; offset by (c) a decrease in the reserve for uncollectible rents of approximately$0.2 million , excluding theMaryland Properties sold, primarily due to rental revenue being deemed uncollectible and classified as a reduction in rental revenue in the Current Six Months. The decline in revenue for theCurrent Quarter was primarily attributable to the following: (a) a decrease of approximately$3.9 million attributed to theMaryland Properties sold; and (b) a decrease of approximately$0.3 million , excluding theMaryland Properties sold, primarily attributed to rental revenue being deemed uncollectible and classified as a reduction in rental revenue in theCurrent Quarter and a decline in the average occupancy rate to 66.6% from 68.8% in the Prior Year's Quarter. The decrease in NOI for theCurrent Quarter was primarily attributable to the following: (a) a decrease of approximately$2.3 million attributed to theMaryland Properties sold; (b) a decline in revenue of approximately$0.3 million , excluding theMaryland Properties sold, as explained above; offset by (c) a decrease in the reserve for uncollectible rents of approximately$0.2 million , excluding theMaryland Properties sold, primarily due to rental revenue being deemed uncollectible and classified as a reduction in rental revenue in theCurrent Quarter ; and (d) a decline in snow removal costs of approximately$0.2 million , excluding theMaryland Properties sold. Same Property Operating Results: FREIT's commercial segment currently contains five (5) same properties. (See definition of same property under Segment Information above.) The Rotunda property, the Westridge Square Property and the Damascus Property were excluded from same property results for all periods presented because these properties were sold in the Current Six Months. Same property revenue for the Current Six Months andCurrent Quarter decreased by 9% and 11.4%, respectively, and same property NOI decreased by 6.5% and increased by 19.1%, respectively, as compared to the Prior Year's comparable periods. The changes resulted from the factors discussed in the immediately preceding paragraph. Leasing: The following table reflects leasing activity at FREIT's commercial properties for comparable leases (leases executed for spaces in which there was a tenant at some point during the previous twelve-month period) and non-comparable leases for the Current Six Months (excluding any leases executed for the Rotunda Property, the Westridge Square Property and the Damascus Property which were sold in the Current Six Months): Weighted Weighted Tenant Average Lease Average Prior Improvement Lease Number of Lease Area Rate (per Sq. Lease Rate (per % Increase Allowance (per Commissions RETAIL: Leases (Sq. Ft.) Ft.) Sq. Ft.) (Decrease) Sq. Ft.) (a) (per Sq. Ft.) (a) Comparable leases (b) 5 90,493$ 5.51 $ 6.67 -17.4% $ - $ 0.02 Non-comparable leases 5 11,875$ 26.37 N/A N/A $ 1.07 $ 1.32 Total leasing activity 10 102,368 (a) These leasing costs are presented as annualized costs per square foot and are allocated uniformly over the initial lease term. (b) This includes new tenant leases and/or modifications/extensions/renewals of existing tenant leases. Index Page 29 RESIDENTIAL SEGMENT FREIT currently operates six (6) multi-family apartment buildings or complexes totaling 792 apartment units, excluding the Icon at the Rotunda Property which was sold onDecember 30, 2021 (see Note 7 to FREIT's condensed consolidated financial statements) and thePierre Towers property which was converted to a TIC (see Note 5 to FREIT's condensed consolidated financial statements). As indicated in the table above under the caption Segment Information, total revenue from FREIT's residential segment for the Current Six Months andCurrent Quarter decreased by 17.2% and 30%, respectively, and NOI decreased by 20% and 33.5%, respectively, as compared to the Prior Year's comparable periods. Average occupancy for all residential properties for the Current Six Months andCurrent Quarter increased by 1.6% and 1.7%, respectively, as compared to the Prior Year's comparable periods. The decrease in revenue for the Current Six Months was primarily attributable to the following: (a) a decrease of approximately$2.9 million attributed to the Icon at the Rotunda Property sold; offset by (b) an increase of approximately$0.6 million , excluding the Icon at the Rotunda Property sold, primarily driven by an increase in base rents and an increase in the average occupancy rate to 98.7% from 97.1% in the Prior Year's Quarter. The decrease in NOI for the Current Six Months was primarily attributable to the following: (a) a decrease of approximately$2.1 million attributed to the Icon at the Rotunda Property sold; offset by (b) an increase in revenue of approximately$0.6 million , excluding the Icon at the Rotunda Property; and (c) a decrease in the reserve for uncollectible rents of approximately$0.1 million , excluding theMaryland Properties sold. The decrease in revenue for theCurrent Quarter was primarily attributable to the following: (a) a decrease of approximately$2.3 million attributed to the Icon at the Rotunda Property sold; offset by (b) an increase of approximately$0.3 million , excluding the Icon at the Rotunda Property sold, primarily driven by an increase in base rents and an increase in the average occupancy rate to 98.5% from 96.8% in the Prior Year's Quarter. The decrease in NOI for theCurrent Quarter was primarily attributable to the following: (a) a decrease of approximately$1.7 million attributed to the Icon at the Rotunda Property sold; offset by (b) an increase of approximately$0.3 million in revenue, excluding the Icon at the Rotunda Property sold; (c) a decrease in the reserve for uncollectible rents of approximately$0.1 million , excluding theMaryland Properties sold; and (d) a decline in snow removal costs of approximately$0.1 million , excluding theMaryland Properties sold. Same Property Operating Results: FREIT's residential segment currently contains six (6) same properties. (See definition of same property under Segment Information above.) The Icon at the Rotunda property was excluded from same property results for all periods presented because this property was sold in the Current Six Months. Same property revenue for the Current Six Months andCurrent Quarter increased by 7.2% and 6.9%, respectively, and same property NOI increased by 10.4% and 13.7%, respectively, as compared to the Prior Year's comparable periods. The changes resulted from the factors discussed in the immediately preceding paragraph. FREIT's residential revenue is principally composed of monthly apartment rental income. Total rental income is a factor of occupancy and monthly apartment rents. Monthly average residential rents, (excluding from both periods presented for comparability purposes the Icon at the Rotunda property which was sold in the Current Six Months), at the end of theCurrent Quarter and the Prior Year's Quarter were$1,984 and$1,892 , respectively. A 1% decline in annual average occupancy, or a 1% decline in average rents from current levels, results in an annual revenue decline of approximately$189,000 and$186,000 , respectively. Capital expenditures: Since all of FREIT's apartment communities, with the exception of the Boulders, Regency andStation Place properties, were constructed more than 25 years ago, FREIT tends to spend more in any given year on maintenance and capital improvements than may be spent on newer properties. As a result of the COVID-19 global pandemic, only capital improvements deemed essential are being made at this time. Funds for these capital projects are available from cash flow from the property's operations and cash reserves. FINANCING COSTS Six Months Ended April 30, Three Months Ended April 30, 2022 2021 2022 2021 (In Thousands of Dollars) (In Thousands of Dollars) Fixed rate mortgages (a): 1st Mortgages Existing$ 2,359 $ 2,903 $ 1,037 $ 1,442 New 72 - 52 -
Variable Rate Mortgages:
1st Mortgages Existing 1,217 2,581 265 1,265 New - - - -
Interest rate swap contracts breakage fee 213
- - Other 80 140 22 79 Total financing costs, gross 3,941 5,624 1,376 2,786
Amortization of mortgage costs 514
568 151 274 Total financing costs, net$ 4,455 $ 6,192 $ 1,527 $ 3,060
(a) Includes the effect of interest rate swaps which effectively convert the variable interest rate to a fixed interest rate over the term of the loan.
Index
Page 30
Total financing costs for the Current Six Months decreased by approximately
$1,737,000 , or 28.1%, compared to the Prior Year's Six Months which was
primarily attributable to the following: (a) a decline of approximately
$1,758,000 primarily attributed to the pay-down of the loans outstanding on the
Maryland Properties sold in the Current Six Months; (b) a decrease of
approximately $165,000 attributed to the refinancing of the loan on the Boulders
property in the Current Six Months resulting in a reduction in the interest rate
from 5.37% to 2.85% and in the principal balance from approximately $14.4
million to $7.5 million ; offset by (c) an increase of approximately $213,000
attributed to a breakage fee on the early termination of the interest rate swap
contracts relating to the loan outstanding on the Damascus property, which was
repaid from the net proceeds of the sale of the Damascus property in the Current
Six Months.
Total financing costs for the Current Quarter decreased by approximately
$1,533,000 , or 50.1%, compared to the Prior Year's Quarter which was primarily
attributable to the following: (a) a decline of approximately $1,399,000
primarily attributed to the pay-down of the loans outstanding on the Maryland
Properties sold; and (b) a decrease of approximately $117,000 attributed to the
refinancing of the loan on the Boulders property.
(See Note 7 to Freit’s condensed consolidated financial statements for more details on the sale of these three properties.)
GENERAL AND ADMINISTRATIVE EXPENSES
G&A for the Current Six Months andCurrent Quarter was approximately$2,196,000 and$869,000 , respectively, compared to$2,730,000 and$1,470,000 , respectively, for the Prior Year's comparable periods. The primary components of G&A are legal and professional fees, directors' fees, corporate expenses and accounting/auditing fees. The decrease in G&A for the Current Six Months was primarily driven by reincorporation expenses in the amount of approximately$0.4 million incurred in the Prior Year's Six Months and a decline in legal costs in the amount of approximately$0.2 million attributed to the legal proceeding between FREIT and certain of its affiliates andSinatra Properties, LLC . The decrease in G&A for theCurrent Quarter was primarily driven by reincorporation expenses in the amount of approximately$0.3 million incurred in the Prior Year's Quarter and a decline in legal costs in the amount of approximately$0.3 million attributed to the legal proceeding between FREIT and certain of its affiliates andSinatra Properties, LLC .
DEPRECIATION
Depreciation expense for the Current Six Months andCurrent Quarter was approximately$2,534,000 and$714,000 , respectively, compared to$4,633,000 and$2,338,000 , respectively, for the Prior Year's comparable periods. The decline in depreciation expense for the Current Six Months andCurrent Quarter was primarily attributable the sale of theMaryland Properties . (See Note 7 to FREIT's condensed consolidated financial statements for additional details on the sale of these three properties.)
CASH AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately$2.9 million for the Current Six Months compared to net cash provided by operating activities of approximately$8.8 million for the Prior Year's Six Months. FREIT expects that cash provided by operating activities and cash reserves will be adequate to cover mandatory debt service payments (including payments of interest, but excluding balloon payments which are expected to be refinanced and/or extended), real estate taxes, dividends, recurring capital improvements at its properties and other needs to maintain its status as a REIT for at least a period of one year from the date of filing of this quarterly report on Form 10-Q. As ofApril 30, 2022 , FREIT had cash, cash equivalents and restricted cash totaling$104 million , compared to$39 million atOctober 31, 2021 . The increase in cash in the Current Six Months was primarily attributable to approximately$250.8 million in net cash provided by investing activities including capital expenditures and$2.9 million in net cash provided by operating activities offset by approximately$188.8 million in net cash used in financing activities. The increase in cash of approximately$64.9 million was primarily attributed to the following: (a) a distribution of net proceeds received from the sale of the Rotunda Property of approximately$54.2 million (inclusive of a loan repayment from Grande Rotunda of approximately$27.7 million and repayment of secured loans receivable including accrued interest by certain members in Rotunda 100 of approximately$5.1 million ); (b) a distribution of net proceeds received from the sale of the Damascus Property of approximately$11.8 million ; (c) net proceeds received from the sale of the Westridge Square Property of approximately$0.1 million ; (d) anticipated funds to be released of approximately$6.3 million and funds released of approximately$1.9 million from the funds held in post-closing escrow for rents related to the sale of theMaryland Properties ; offset by (e) a loan pay-down including closing costs of approximately$7.6 million attributed to the refinancing of the loan on the Boulders property; and (f) dividends paid in the Current Six Months the amount of approximately$1.4 million . (See Note 7 to FREIT's condensed consolidated financial statements for additional details on the sale of these three properties.) Credit Line: FREIT's revolving line of credit provided byProvident Bank was renewed for a three-year term ending onOctober 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 onFREIT's Franklin Crossing Shopping Center inFranklin Lakes, New Jersey and retail space inGlen 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 Index Page 31
prime rate minus 25 basis points with a floor of 3.75%. From
and
Dividend: After careful consideration of FREIT's projected operating results and cash needs, the Board declared a dividend of$0.10 per share in the second quarter of Fiscal 2022 which will be paid onJune 15, 2022 to stockholders of record onJune 1, 2022 . The Board will continue to evaluate the dividend on a quarterly basis. As ofApril 30, 2022 , FREIT's aggregate outstanding mortgage debt was$137.2 million , which bears a weighted average interest rate of 3.96% and an average life of approximately 1.9 years. FREIT's mortgages are subject to amortization schedules that are longer than the terms of the mortgages. As such, balloon payments (unpaid principal amounts at the mortgage due date) for all mortgage debt will be required as follows: Fiscal Year 2022 2023 2024 2025 2026 2027 2028 2029 ($ in millions) Mortgage "Balloon"$47.4 Payments (A)$17.1 $16.5 $13.9 $0.0 $0.0 $10.5 $26.0 (A) Includes the following: (1) A loan on the Preakness Shopping Center located in Wayne, New Jersey in the amount of approximately$22.2 million . Although the Company continues to make its required debt service payments in accordance with the loan agreement, it was unable to comply with a look back debt service coverage ratio loan covenant contained in the mortgage loan agreement held by People's United Bank. On June 2, 2022, the lender agreed to waive the covenant default subject to the loan being paid off on or before September 1, 2022. (See Note 9 to FREIT's condensed consolidated financial statements for additional details.) (2) A loan on the Westwood Hills property located in Westwood, New Jersey in the amount of$25 million which matures on October 1, 2022 and has an option to extend for two (2) additional six (6)-month periods from the maturity date, subject to provisions of the loan agreement.
The following table shows the estimated fair value and net book value of FREIT’s long-term debt as at
($ in Millions) April 30, 2022 October 31, 2021 Fair Value$131.8 $301.6 Carrying Value, Net$136.1 $299.9
Fair values are estimated based on market interest rates atApril 30, 2022 andOctober 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). FREIT expects to refinance the individual mortgages with new mortgages or exercise extension options when their terms expire. To this extent FREIT has exposure to interest rate risk. If interest rates, at the time any individual mortgage note is due, are higher than the current fixed interest rate, higher debt service may be required, and/or refinancing proceeds may be less than the amount of mortgage debt being retired. For example, atApril 30, 2022 , a 1% interest rate increase would reduce the fair value of FREIT's debt by$3.6 million , and a 1% decrease would increase the fair value by$3.8 million . FREIT continually reviews its debt levels to determine if additional debt can prudently be utilized for property acquisitions for its real estate portfolio that will increase income and cash flow to stockholders. OnDecember 30, 2021 , FREIT refinanced its$14.4 million loan (which would have matured onFebruary 1, 2022 ) on its Boulders property located inRockaway, New Jersey with a new loan held byConnectOne 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. This loan is interest-only and has a maturity date ofJanuary 1, 2024 with the option of FREIT 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. Interest rate swap contracts: To reduce interest rate volatility, FREIT uses a "pay fixed, receive floating" interest rate swap to convert floating interest rates to fixed interest rates over the term of a certain loan. FREIT enters into these swap contracts with a counterparty that is usually a high-quality commercial bank. In essence, FREIT agrees to pay its counterparties a fixed rate of interest on a dollar amount of notional principal (which generally corresponds to FREIT's mortgage debt) over a term equal to the term of the
mortgage
Index
Page 32
notes. FREIT's counterparties, in return, agree to pay FREIT a short-term rate
of interest - generally LIBOR - on that same notional amount over the same term
as the mortgage notes.
FREIT has variable interest rate loans secured by its Damascus Centre, Regency,
Wayne PSC and Station Place properties. To reduce interest rate fluctuations,
FREIT entered into interest rate swap contracts for each of these loans. These
interest rate swap contracts effectively converted variable interest rate
payments to fixed interest rate payments. The contracts were based on a notional
amount of approximately $16,200,000 ($14,754,000 at April 30, 2022 ) for the
Regency swap, a notional amount of approximately $25,800,000 ($21,949,000 at
April 30, 2022 ) for the Wayne PSC swap and a notional amount of approximately
$12,350,000 ($11,862,000 at April 30, 2022 ) for the Station Place swap. 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 the underlying 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 six months ended
April 30, 2022 . (See Note 7 to FREIT's condensed consolidated financial
statements for further details.)
Interest rate cap contract: To limit exposure on interest rate volatility, FREIT
uses an interest rate cap contract to cap a floating interest rate at a set
pre-determined rate. FREIT enters into cap contracts with a counterparty that is
usually a high-quality commercial bank. In essence, so long as the floating
interest rate is below the cap rate, FREIT agrees to pay its counterparties a
variable rate of interest on a dollar amount of notional principal (which
generally corresponds to FREIT's mortgage debt). Once the floating interest rate
rises above the cap rate, FREIT's counterparties, in return, agree to pay FREIT
a short-term rate of interest above the cap on that same notional amount.
FREIT had a variable interest rate loan secured by its Rotunda Property. As part
of the refinancing of Grande Rotunda's construction loan with a new loan from
Aareal Capital Corporation , Grande Rotunda had purchased an interest rate cap
contract on LIBOR for the full amount that could have been 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 had purchased an interest rate cap on LIBOR, with an effective date of
March 5, 2020 , for the full amount that could have been drawn on this loan of
$121.9 million , capping the one-month LIBOR rate at 3% for one year, maturing on
March 5, 2021 . Effective February 6, 2021 , Grande Rotunda exercised the first
extension option on this loan with a balance in the amount of approximately
$118.5 million , extending the loan one year with a new maturity date of February
6, 2022 . Additionally, Grande Rotunda purchased an interest rate cap contract on
LIBOR, with an effective date of March 5, 2021 , for the loan amount of
approximately $118.5 million , capping the one-month LIBOR rate at 3% for one
year expiring on February 6, 2022 . 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 the underlying
loan and the corresponding interest rate cap on this loan matured with no
settlement due at maturity. (See Note 7 to FREIT's condensed consolidated
financial statements for further details.)
In accordance with ASU 2017-12, "Targeted Improvements to Accounting for Hedging
Activities to Accounting Standards Codification Topic 815, Derivatives and
Hedging ("ASC 815")", FREIT marks-to-market its interest rate swap and cap
contracts. As the floating interest rate varies from time-to-time over the term
of the contract, the value of the contract will change upward or downward. If
the floating rate is higher than the fixed rate, the value of the contract goes
up and there is a gain and an asset. If the floating rate is less than the fixed
rate, there is a loss and a liability. The interest rate swaps and cap are
accounted for as cash flow hedges with the corresponding gains or losses on
these contracts not affecting FREIT's condensed consolidated statement of
operations; changes in the fair value of these cash flow hedges will be reported
in other comprehensive income and appear in the equity section of the condensed
consolidated balance sheet. This gain or loss represents the economic
consequence of liquidating fixed rate swaps or the cap contract and replacing
them with like-duration funding at current market rates, something we would
likely never do. Periodic cash settlements of these contracts will be accounted
for as an adjustment to interest expense.
FREIT has the following risks associated with derivatives with its interest rate swaps and cap agreements (“agreement”): 1) early termination risk, and 2) counterparty credit risk.
Early Termination Risk: If FREIT wants to terminate its contract before maturity, it would be bought out or terminated at market value; i.e., the difference in the present value of the anticipated net cash flows from each of the contract's parties. If current variable interest rates are significantly below FREIT's fixed interest rate payments, this could be costly. Conversely, if interest rates rise above FREIT's fixed interest payments and FREIT elected early termination, FREIT would realize a gain on termination. AtApril 30, 2022 , the contracts for Regency,Station Place and Wayne PSC were in FREIT's favor. If FREIT had terminated these contracts at that date it would have realized gains of approximately$131,000 for the Regency swap,$158,000 for theStation Place swap and$1,204,000 for the Wayne PSC swap all of which have been included as an asset in FREIT's condensed consolidated balance sheet as atApril 30, 2022 . The change in the fair value for the contract (gain or loss) during such period has been included in comprehensive income (loss) and for the six and three months endedApril 30, 2022 , FREIT recorded an unrealized gain of approximately$3,801,000 and$2,539,000 , respectively, in the condensed consolidated statements of comprehensive income. For the six and three months endedApril 30, 2021 , FREIT recorded an unrealized gain of approximately$1,675,000 and$1,177,000 , respectively, in the condensed consolidated statements of comprehensive income. Index Page 33
Counterparty credit risk: Each party to a contract bears the risk that its counterparty will default on its obligation to make a periodic payment. FREIT reduces this risk by contracting only with large financial institutions that are experienced market makers in the derivatives market.
ADJUSTED FUNDS OF OPERATING
Funds From Operations ("FFO") is a non-GAAP measure defined by the National
Association of Real Estate Investment Trusts ("NAREIT"). FREIT does not include
distributions from equity/debt/capital gain sources in its computation of FFO.
Although many consider FFO as the standard measurement of a REIT's performance,
FREIT modified the NAREIT computation of FFO to include other adjustments to
GAAP net income that are not considered by management to be the primary drivers
of its decision making process. These adjustments to GAAP net income are
straight-line rents and recurring capital improvements on FREIT's residential
apartments. The modified FFO computation is referred to as Adjusted Funds From
Operations ("AFFO"). FREIT believes that AFFO is a superior measure of its
operating performance. FREIT computes FFO and AFFO as follows:
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