FREVS First Real Estate Investment Trust of New Jersey Inc (PK)

Note 1 - Basis of presentation:

First Real Estate Investment Trust of New Jersey was organized on November 1, 1961 as a New Jersey Business Trust. On July 1, 2021, First Real Estate Investment Trust of New Jersey completed the change of its form of organization from a New Jersey real estate investment trust to a Maryland corporation (the “Reincorporation”) which was approved by its stockholders at the annual meeting of stockholders held on May 6, 2021. The Reincorporation changed the law applicable to First Real Estate Investment Trust of New Jersey’s affairs from New Jersey law to Maryland law and was accomplished by the merger of First Real Estate Investment Trust of New Jersey with and into its wholly owned subsidiary, First Real Estate Investment Trust of New Jersey, Inc. (“FREIT”, “Trust”, “us”, “we”, “our” or the “Company”), a Maryland corporation. As a result of the Reincorporation, the separate existence of First Real Estate Investment Trust of New Jersey has ceased and FREIT has succeeded to all the business, properties, assets and liabilities of First Real Estate Investment Trust of New Jersey. Holders of shares of beneficial interest in First Real Estate Investment Trust of New Jersey have received one newly issued share of common stock of FREIT for each share of First Real Estate Investment Trust of New Jersey that they own, without any action of stockholders required and all treasury stock held by First Real Estate Investment Trust of New Jersey was retired.

FREIT is organized and will continue to operate in such a manner as to qualify for taxation as a REIT under the Internal Revenue Code of 1986, as amended, and its stock is traded on the over-the-counter market under the trading symbol FREVS.

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

The consolidated results of operations for the nine and three-month periods ended July 31, 2023 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 FREIT’s Annual Report on Form 10-K for the year ended October 31, 2022.

Note 2 – Recently issued accounting standard:

In March 2020 and January 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2020-04 “Reference Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, and ASU 2021-01 “Reference Rate Reform (ASC 848): Scope” which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform in contracts and other transactions that reference the London Interbank Offered Rate or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. ASU 2020-04 and ASU 2021-01 are effective for all entities as of March 12, 2020 through the recently deferred date of December 31, 2024. We currently do not anticipate the need to modify our existing debt agreements as a result of reference rate reform in the current year, however if any modification is executed as a result of reference rate reform, the Company will elect the optional expedient available under ASU 2020-04 and ASU 2021-01, which allows entities to account for the modification as if the modification was not substantial. We will disclose the nature of and reason for electing the optional expedient in each interim and annual financial statement period if and when applicable through December 31, 2024.

Note 3 – Dividends and earnings (loss) per share:

The FREIT Board of Directors (“Board”) declared a total dividend of approximately $2,235,000 ($0.30 per share) in the third quarter of Fiscal 2023, which was composed of an ordinary dividend of $0.05 per share and a special dividend of $0.25 per share to distribute funds released in Fiscal 2023 from a post-closing rent escrow established in connection with the sale of FREIT’s Maryland properties. The total dividend of $0.30 per share will be paid on September 15, 2023 to holders of record of said shares at the close of business on September 1, 2023. The Board will continue to evaluate the dividend on a quarterly basis.

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) 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 increasing the number of shares to be added in computing diluted earnings per share. For the nine and three months ended July 31, 2023, the outstanding stock options increased the average dilutive shares outstanding by approximately 6,000 and 0 shares, respectively, with no impact on earnings (loss) per share. For the nine and three months ended July 31, 2022, the outstanding stock options increased the average dilutive shares outstanding by approximately 72,000 and 74,000 shares, respectively, with an impact of approximately $0.05 and $0.00, respectively, on earnings per share. There were no anti-dilutive shares for the nine and three months ended July 31, 2023. There were approximately 268,000 anti-dilutive shares for both the nine and three months ended July 31, 2022. Anti-dilutive shares consist of out-of-the money stock options under the Equity Incentive Plan (See Note 13).

Note 4 - Interest rate cap and swap contracts: 

In accordance with “Accounting Standards Codification Topic 815, Derivatives and Hedging ("ASC 815")”, FREIT has been accounting for the Damascus Centre, LLC (“Damascus Centre”), FREIT Regency, LLC (“Regency”), Wayne PSC, LLC (“Wayne PSC”) and Station Place on Monmouth (“Station Place”) interest rate swaps and the Grande Rotunda, LLC (“Grande Rotunda”) interest rate cap as cash flow hedges marking these contracts to market, taking into account present interest rates compared to the contracted fixed rate over the life of the contract and recording the unrealized gain or loss on the swaps and cap in comprehensive income (loss). On December 30, 2021, the 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. 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 nine months ended July 31, 2022. (See Note 7 for further details on the sales of these properties.) On June 17, 2022, Wayne PSC terminated its interest rate swap contract on its underlying loan held with People’s United Bank, which had a maturity date of October 2026, for a settlement amount of approximately $1.4 million. People’s United Bank held the proceeds from this settlement in escrow until the underlying loan was paid off in July 2022 and has been included as a realized gain on interest rate swap termination on the accompanying condensed consolidated statements of income for the nine and three months ended July 31, 2022. (See Note 9 for further details.)

For the nine and three months ended July 31, 2023, FREIT recorded an unrealized loss of approximately $168,000 and unrealized gain of $389,000, respectively, in the condensed consolidated statements of comprehensive (loss) income representing the change in the fair value of these cash flow hedges during such periods. For the nine and three months ended July 31, 2022, FREIT recorded an unrealized gain of approximately $2,408,000 and unrealized loss of $1,393,000, respectively, in the condensed consolidated statements of comprehensive (loss) income representing the change in the fair value of these cash flow hedges during such periods. As of July 31, 2023, there was an asset of approximately $526,000 for the Regency swap and $715,000 for the Station Place swap. As of October 31, 2022, there was an asset of approximately $611,000 for the Regency swap and $798,000 for the Station Place swap.

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

Note 5 – Investment in tenancy-in-common:

On February 28, 2020, FREIT 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% partnership interest in S&A, which owned 100% of the Pierre Towers property located in Hackensack, New Jersey through its 100% interest in Pierre Towers, LLC. Pursuant to the TIC agreement, FREIT ultimately acquired a 65% undivided interest in the Pierre Towers property, which was formerly owned by S&A. Based on the guidance of Accounting Standards Codification 810, “Consolidation”, FREIT’s investment in the TIC is accounted for under the equity method of accounting. While FREIT’s effective ownership percentage interest in the Pierre Towers property remained unchanged after the reorganization to a TIC, FREIT no longer had a controlling interest as the TIC is now under joint control.

FREIT’s investment in the TIC was approximately $18.2 million and $18.8 million at July 31, 2023 and October 31, 2022, respectively. For the nine and three months ended July 31, 2023, FREIT recognized a loss on investment in TIC of approximately $231,000 and $43,000, respectively, in the accompanying condensed consolidated statements of operations. For the nine and three months ended July 31, 2022, FREIT recognized a loss on investment in TIC of approximately $99,000 and a gain on investment in TIC of approximately $57,000, in the accompanying condensed consolidated statements of income.

Hekemian & Co., Inc. (“Hekemian & Co.”) manages the Pierre Towers property pursuant to a management agreement between the owners of the TIC and Hekemian & Co. dated as of February 28, 2020, which was for an initial term of one (1) year and which renews for successive one (1) year terms unless either party gives written notice of termination to the other party at least sixty (60) days prior to the end of the then-current term. The management agreement renewed for a successive one (1) year term on February 28, 2023 and will expire on February 28, 2024.

The management agreement requires the payment of management fees equal to 5% of rents collected. Management fees, charged to operations, were approximately $313,000 and $105,000 for the nine and three months ended July 31, 2023, respectively, and $298,000 and $101,000 for the nine and three months ended July 31, 2022, respectively. The Pierre Towers property also uses the resources of the Hekemian & Co. insurance department to secure various insurance coverages for its property. Hekemian & Co. is paid a commission for these services. Such commissions were charged to operations and amounted to approximately $51,000 for both the nine and three months ended July 31, 2023 and $40,000 for both the nine and three months ended July 31, 2022.

Note 6 – Termination of Purchase and Sale Agreement:

On July 19, 2023, First Real Estate Investment Trust of New Jersey, Inc. and certain of its affiliates (collectively, “FREIT”) filed a complaint (the “Complaint”) in the Superior Court of New Jersey, Monmouth County, Chancery Division (the “Court”), against Kushner Companies LLC (“Kushner”) seeking to collect on a $3.42 million judgment entered by the Court in favor of FREIT against Sinatra Properties, LLC (“Sinatra”), a wholly owned subsidiary of defendant, Kushner. Sinatra defaulted on an agreement with FREIT (the “Purchase Agreement”) by refusing to close the purchase of certain properties at the agreed upon time and then sued FREIT for specific performance to enforce the sale. The Court rejected Sinatra’s bid for specific performance, found that Sinatra breached the Purchase Agreement and entered a judgment in favor of FREIT for $3.42 million for recovery of attorneys’ fees and expenses (the “Judgment”). As previously reported, the Court denied FREIT’s claim for liquidated damages resulting from Sinatra’s breach in the amount of $15,000,000. Both FREIT and Sinatra appealed the Court’s rulings adverse to it.

The Complaint alleges that Kushner used Sinatra as a shell to evade its debts and obligations, and asks the Court to pierce the corporate veil and hold Kushner liable for Sinatra’s debts and obligations under the Purchase Agreement, including the attorneys’ fees awarded to FREIT, all costs incurred by FREIT to enforce the Judgment and any additional fees awarded to FREIT in connection with the pending appeal.

Note 7 – Maryland property dispositions:

On November 22, 2021, certain affiliates (the “Maryland Sellers”) of FREIT entered into a Purchase and Sale Agreement (the “Maryland Purchase and Sale Agreement”) with MCB Acquisition Company, LLC (the “Maryland Purchaser”), a third party, pursuant to which the Maryland Sellers agreed to sell three properties to the Maryland Purchaser. The properties consisted of retail and office space and a residential apartment community owned by Grande Rotunda, LLC (the “Rotunda Property”), a shopping center owned by Damascus Centre, LLC (the “Damascus Property”), and a shopping center owned by WestFREIT Corp. (the “Westridge Square Property”). FREIT owns 100% of its subsidiary, WestFREIT Corp. (“WestFREIT”), a 60% interest in Grande Rotunda, LLC (“Grande Rotunda”), the joint venture that owned the Rotunda Property, and a 70% interest in Damascus Centre, LLC (“Damascus Centre”), the joint venture that owned the Damascus Property.

The sale of the Maryland Properties having a total net book value of $172.3 million (as adjusted) 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 escrow deposit (the “Maryland Purchaser Escrow Payment”). This sale resulted in net proceeds of approximately $58.2 million (inclusive of approximately $4.6 million in funds released during the nine months ended July 31, 2023 and $1.9 million in funds released in Fiscal 2022 from the Maryland Purchaser Escrow Payment), 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 equity owners in Grande Rotunda in the amount of approximately $31 million and certain transactional expenses and transfer taxes including brokerage fees due to Hekemian & Co. of approximately $6.4 million (see Note 8 for additional details). As of July 31, 2023, approximately $6,547,000 of the Maryland Purchaser Escrow Payment has been released from escrow to the Maryland Sellers. The escrow and related gain on sale were reduced by approximately $1 million and $0.6 million for the nine and three months ended July 31, 2023, respectively, and $1.2 million and $0 for the nine and three months ended July 31, 2022, respectively, due to a change in estimate 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 $0.9 million and $6.3 million of remaining funds are held in a post-closing escrow for rents and are included in “Funds held in post-closing escrow” on the accompanying condensed consolidated balance sheets as of July 31, 2023 and October 31, 2022, respectively. These funds held in post-closing escrow are anticipated to be released in Fiscal 2024. The sale of the Maryland Properties resulted in a net gain of approximately $67.8 million (as adjusted) (with a consolidated impact to FREIT of approximately $45 million) which includes approximately $7.4 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.

On August 4, 2022, FREIT’s Board declared a special, extraordinary, non-recurring cash distribution of approximately $51.5 million, or $7.50 per share, which was paid on August 30, 2022, to stockholders of record on August 16, 2022 (with an ex-dividend date of August 31, 2022). This distribution represented most of the net proceeds of FREIT’s sale of its portfolio of Maryland Properties.

On July 12, 2023, FREIT’s Board declared an ordinary dividend of $0.05 per share and a special dividend of $0.25 per share to distribute funds released in Fiscal 2023 from a post-closing rent escrow established in connection with the sale its portfolio of Maryland Properties. The total dividend of $0.30 per share will be paid on September 15, 2023 to holders of record of said shares at the close of business on September 1, 2023.

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

Note 8 - Management agreement, fees and transactions with related party:

Hekemian & Co. currently manages all of the properties owned by FREIT and its affiliates, except for the office building at the Rotunda Property, which was sold on December 30, 2021 and was formerly managed by an independent third party management company. The management agreement between FREIT and Hekemian & Co. dated as of November 1, 2001 (“Management Agreement”) has been renewed and will expire on October 31, 2025. The Management Agreement is automatically renewed for successive periods of two years unless either party gives not less than six (6) months prior notice of non-renewal.

Note 9 – Mortgage financings and line of credit:

On August 19, 2022, Westwood Hills, LLC (“Westwood Hills”) exercised its right, pursuant to the loan agreement, to extend the term of its $25 million loan on its property located in Westwood, New Jersey, for an additional six (6) months from an initial maturity date of October 1, 2022 to a new maturity date of April 1, 2023. On March 1, 2023, Westwood Hills exercised its right, pursuant to the loan agreement, to extend the term of its loan, for an additional six (6) months to a new maturity date of October 1, 2023 on the same terms and conditions as stated in the loan agreement. As of July 31, 2023, $25,000,000 of this loan was drawn and outstanding and the interest rate was 9.21%. On August 3, 2023, this loan was refinanced with a new loan in the amount of $25,500,000. (See Note 18 for additional details.)

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, 2023 and October 31, 2022:

Fair values are estimated based on market interest rates at July 31, 2023 and October 31, 2022 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:

ASC 280-10, "Disclosures about Segments of an Enterprise and Related Information", establishes standards for reporting financial information about operating segments in interim and annual financial reports and provides for a "management approach" in identifying the reportable segments. FREIT has determined that it has two reportable segments: commercial properties and residential properties. These reportable segments offer different types of space, have different types of tenants, and are managed separately because each requires different operating strategies and management expertise. The commercial segment is comprised of five (5) properties, excluding the Rotunda Property, the Westridge Square Property and the Damascus Property, which were sold on December 30, 2021, January 7, 2022 and January 10, 2022, respectively. The residential segment is comprised of six (6) properties, excluding the Icon at the Rotunda Property, which was sold as part of the Maryland Properties on December 30, 2021. (See Note 7 for further details.)