Cautionary Statement Identifying Important Factors That Could Cause FREITMaryland's Actual Results to Differ From Those Projected in Forward Looking Statements. Readers of this discussion are advised that the discussion should be read in conjunction with the consolidated financial statements of FREIT Maryland (including related notes thereto) appearing elsewhere in this 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 Maryland's current expectations and are based on estimates, projections, beliefs, data, methods and assumptions of management of FREIT Maryland at the time of such statements regarding future results of operations, economic performance, financial condition and achievements of FREIT Maryland, 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 Maryland believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties, which may cause the actual results to differ materially from those projected. Such factors include, but are not limited to the following: general economic and business conditions, including the purchase of retail products over the Internet, which will, among other things, affect demand for rental space, the availability of prospective tenants, lease rents, the financial condition of tenants and the default rate on leases, operating and administrative expenses and the availability of financing; adverse changes in FREIT Maryland's real estate markets, including, among other things, competition with other real estate owners, competition confronted by tenants at FREIT Maryland'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 (see Special Note below). 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. Special Note Regarding the COVID-19 Pandemic: OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of the novel coronavirus, known as COVID-19 ("COVID-19"), a pandemic. The full extent of the effects of the COVID-19 pandemic, including the full extent of its effects on the global,U.S. , and local economies, and on FREIT Maryland and our business, operating results, financial condition, properties, and tenants, cannot yet be known. Any future developments in this regard will be highly uncertain and cannot be predicted with any certainty, including the scope and duration of the pandemic, actions taken by governmental authorities and other third parties in response to the pandemic and the effects thereof, and the other factors discussed above and throughout this report. The uncertain future development of the COVID-19 pandemic could materially and adversely further affect FREIT Maryland and our business, operating results, financial condition, liquidity, and our properties and tenants. OVERVIEW
FREIT Maryland is an equity real estate investment trust ("REIT") that is
self-administered and externally managed. FREIT Maryland owns a portfolio of
residential apartment and commercial properties. FREIT Maryland'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 Maryland's properties are primarily
located in northern
COVID-19 Pandemic: The international spread of COVID-19 was declared a global pandemic by theWorld Health Organization onMarch 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. Beginning inMarch 2020 and throughout most of 2020, many states in theU.S. , includingNew Jersey ,New York andMaryland , where our properties are 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. These orders have continued to evolve resulting in the lifting of these restrictions over the past year. Vaccinations for the COVID-19 virus have been widely distributed among the generalU.S. population which has resulted in loosened restrictions previously mandated on our tenants identified as nonessential. However, the potential emergence of vaccine-resistant variants of COVID-19 could trigger restrictions to be put back in place. Such restrictions may include mandatory business shut-downs, reduced business operations and social distancing requirements. As the impact of the pandemic evolves, it continues to cause uncertainty and volatility in the financial markets. 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 4.6% as ofOctober 2021 , as many businesses continue to reopen and rehire employees following many of the COVID-19 mandated shut down orders being lifted. However, the jobless rate remains above 22
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the pre-pandemic levels of about 3.5%. The COVID-19 pandemic and the actions taken by individuals, businesses and government authorities to reduce its spread have caused substantial lost business revenue, changes in consumer behavior and large reductions in liquidity and fair value of many assets. Despite the COVID-19 pandemic and preventive measures taken to mitigate the spread, our residential properties continued to generate cash flow. The average annual occupancy rate for the residential properties (including the Pierre TIC) has increased from approximately 93.7% for the fiscal year endedOctober 31, 2020 to approximately 96.1% for the fiscal year endedOctober 31, 2021 . The tenants at these properties, for the most part, continue to pay their rent. At our commercial properties, with the exception of grocery stores and other "essential" businesses, many of our retail tenants have been adversely affected by the previously mandated shut downs and the continued lingering impact to consumer sentiment and preferences for safety amid the reemergence of other COVID-19 variants. While the overall average cash realization of monthly billings as compared to monthly cash collections for the commercial properties for the year endedOctober 31, 2021 has resumed to pre-pandemic levels, the average annual occupancy rate has declined from approximately 79.7% for the fiscal year endedOctober 31, 2020 to approximately 76.3% for the fiscal year endedOctober 31, 2021 . During the first quarter of Fiscal 2021,Pet Valu, Inc. , a pet store tenant, vacated several stores located in shopping centers owned by FREIT Maryland affiliates (Wayne PSC, Damascus Centre andGrande Rotunda ) and terminated the related leases early paying an aggregate lease termination fee in the amount of approximately$260,000 (with a consolidated impact to FREITMaryland of approximately$140,000 ). The properties owned byGrande Rotunda and Damascus Centre were sold onDecember 30, 2021 andJanuary 10, 2022 , respectively. See Note 17 to FREIT Maryland's consolidated financial statements for additional details. The Company is closely monitoring changes in the collectability assessment of its tenant receivables as a result of certain tenants suffering adverse financial consequences related to the COVID-19 pandemic. For the fiscal years endedOctober 31, 2021 and 2020, rental revenue deemed uncollectible of approximately$1.3 million and$1.4 million (with a consolidated impact to FREIT Maryland of approximately$0.8 million and$0.9 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 Maryland has applied, net of amounts subsequently paid back by tenants, an aggregate of approximately$397,000 of security deposits from its commercial tenants to outstanding receivables due. On a case by case basis, FREIT has offered some commercial tenants deferrals of rent over a specified time period totaling approximately$132,000 and$206,000 (with a consolidated impact to FREIT Maryland of approximately$81,000 and$192,000 ) and rent abatements totaling approximately$239,000 and$238,000 (with a consolidated impact to FREIT Maryland of approximately$158,000 and$156,000 ) for the fiscal years endedOctober 31, 2021 and 2020, respectively. FREITMaryland currently remains in active discussions and negotiations with these impacted retail tenants.Cobb Theatre , an anchor tenant movie theatre at the Rotunda retail property filed for bankruptcy and rejected its lease at the Rotunda property as ofJune 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 Fiscal 2020 resulting in a net impact to net income of approximately$0.9 million (with a consolidated impact to FREIT Maryland of approximately$0.5 million ) for the year endedOctober 31, 2020 . Tenant improvements related to theCobb Theatre with a net book value of approximately$7.3 million (with a consolidated impact to FREIT Maryland of approximately$4.4 million ) as ofOctober 31, 2020 were deemed to be impaired, written off and charged to operations in the consolidated statement of income for the fiscal year endedOctober 31, 2020 . OnDecember 30, 2021 , the property owned byGrande Rotunda was sold. (See Notes 16 and 17 to FREIT Maryland's consolidated financial statements for additional details.) As a result of the negative impact of the COVID-19 pandemic at our commercial properties, in Fiscal 2020 we were granted debt payment relief from certain of our lenders on such properties in the form of deferral of principal and/or interest payments for a three-month period, resulting in total deferred payments of approximately$1,013,000 , which will become due at the maturity of the loans. As ofOctober 31, 2021 and 2020, approximately$162,000 of this amount has been repaid, there will be no further deferrals of principal and/or interest payments on these loans and the balance due has been included in mortgages payable on the consolidated balance sheets as ofOctober 31, 2021 and 2020. (See Note 5 to FREIT Maryland's consolidated financial statements for additional details). For the fiscal year endedOctober 31, 2021 , we have experienced a positive cash flow from operations with cash provided by operations of approximately$12.2 million . This could change based on the duration of the pandemic, which is uncertain. We believe that our cash balance as ofOctober 31, 2021 of approximately$35.9 million coupled with a$13 million available line of credit (available throughOctober 31, 2023 , see Note 5) and the additional$7.5 million in funds available to draw on the Boulders loan (See Note 17 for additional details) will provide us with sufficient liquidity for at least the next twelve months from the filing of this Form 10-K. 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 "Item 1A. Risk Factors" for additional details.) FREIT Maryland will continue to actively monitor the effects of the pandemic, including governmental directives in the jurisdictions in which we operate and the recommendations of public 23
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health authorities, and will, as needed, take further measures to adapt our business in the best interests of our stockholders and personnel. (See Note 16 to FREIT Maryland's consolidated financial statements for further details.)
Residential Properties : While our residential properties continue to generate positive cash flow, the impact COVID-19 may have on these properties over the next year is uncertain and will depend on the duration of the pandemic and the recovery of the economy.Commercial Properties : There continues to be uncertainty in the retail environment that could have an adverse impact on FREIT Maryland's retail tenants, which could have an adverse impact on FREIT Maryland. As the impact of the pandemic evolves, the impact COVID-19 may have on the operating and financial performance of our commercial properties is currently uncertain and will depend on certain developments, including, among others, the impact of COVID-19 on our tenants and the magnitude and duration of the pandemic, including its impact on store closing and social distancing rules which may impact a tenant's ability to generate sales at sufficient levels to cover operating costs, including rent and the continued rollout of the vaccinations to the population. OnMay 4, 2021 ,Burlington Coat Factory Warehouse ("Burlington") amended its lease at theWestridge Square Shopping Center (owned by WestFREIT) extending the term of the lease for a period of one (1) year and ninety (90) days commencing onDecember 1, 2021 and expiring onFebruary 28, 2023 ("Fourth Extension Period"). The fixed rent during this Fourth Extension Period was reduced from$59,120 per month to$35,830 per month. Additionally, Burlington has the right to terminate the lease at any time prior to the last day of the Fourth Extension Period by providing at least twelve (12) months prior written notice of such termination (the "Termination Notice"). In the event that Burlington delivers the Termination Notice, the term of the lease shall automatically end on the last day of the twelfth (12th) full calendar month immediately following receipt of the Termination Notice. OnJanuary 7, 2022 the property owned by WestFREIT was sold. (See Note 17 to FREIT Maryland's consolidated financial statements for additional details.) Reincorporation: OnJuly 1, 2021 ,First Real Estate Investment Trust of New Jersey ("FREIT") completed the change of its form of organization from aNew Jersey real estate investment trust to aMaryland corporation (the "Reincorporation") which was approved by its shareholders at the annual meeting of shareholders held onMay 6, 2021 . The Reincorporation changes the law applicable to FREIT's affairs fromNew Jersey law toMaryland law and was accomplished by the merger of FREIT with and into its wholly owned subsidiary,First Real Estate Investment Trust of New Jersey, Inc. ("FREIT Maryland", "Trust", "us", "we", "our" or the "Company"), aMaryland corporation. As a result of the Reincorporation, the separate existence of FREIT has ceased and FREIT Maryland has succeeded to all the business, properties, assets and liabilities of FREIT. Holders of shares of beneficial interest in FREIT have received one newly issued share of common stock of FREIT Maryland for each share of FREIT that they own, without any action of stockholders required and all treasury stock held by FREIT was retired. FREIT Maryland is organized and will continue to operate in such a manner as to qualify for taxation as a REIT under the Internal Revenue Code of 1986, as amended, and its stock is traded on the over-the counter market under the trading symbol FREVS. (See Note 1 to FREIT Maryland's consolidated financial statements for further details.) Debt Financing Availability: Financing has been available to FREIT Maryland and its affiliates. The lis pendens filed in connection with the legal proceeding between FREIT Maryland and certain of its affiliates andSinatra Properties, LLC may adversely affect FREIT Maryland's ability to refinance certain of its residential properties. In accordance with certain loan agreements, FREITMaryland may be required to meet or maintain certain financial covenants throughout the term of the loan. As a result of 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 in the amount of approximately$22.6 million as ofOctober 31, 2021 . 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. The Company is currently working with the lender to remediate this covenant default. As of the date of the filing of this Form 10K report, the bank has not declared this loan to be in default. Until such time as a definitive agreement is entered into, there can be no assurance the loan covenant will be amended and the bank will not declare this loan to be in default. Operating Cash Flow: FREIT Maryland 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 Form 10K report. 24 Table of Contents
SIGNIFICANT ACCOUNTING POLICIES 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 which is presented elsewhere in this Form 10-K, have been applied consistently as ofOctober 31, 2021 and 2020, and for the years endedOctober 31, 2021 , 2020 and 2019. 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 represent unbilled rents receivable to the extent straight-line rents exceed current rents billed in accordance with lease agreements. Before FREIT Maryland can recognize revenue, it is required to assess, among other things, its collectability. Valuation of Long-Lived Assets: FREIT Maryland 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 Maryland 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 Maryland's management. While we believe that our discounted cash flow methods are reasonable, different assumptions regarding such cash flows may significantly affect the measurement of impairment. Real Estate Development Costs: It is FREIT Maryland'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 Maryland 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 1 to FREIT Maryland's consolidated financial statements for recently issued accounting standards. 25 Table of Contents Results of Operations:
Fiscal Years Ended
Summary revenues and net income for the fiscal years ended
Years Ended October 31, 2021 2020 Change (in thousands, except per share amounts) Real estate revenues: Commercial properties$ 23,317 $ 24,089 $ (772 ) Residential properties 26,974 28,638 (1,664 ) Total real estate revenues 50,291 52,727 (2,436 ) Operating expenses:
Real estate operating expenses 22,294 22,922 (628 ) Third party transaction costs - 4,606 (4,606 ) General and administrative expenses 5,195 3,821 1,374 Depreciation 9,300 10,341 (1,041 ) Tenant improvement write-off due to COVID-19 -
7,277 (7,277 ) Total operating expenses 36,789 48,967 (12,178 ) Operating income 13,502 3,760 9,742 Investment income 116 204 (88 )
Gain on deconsolidation of subsidiary - 27,680 (27,680 ) Loss on investment in tenancy-in-common (295 )
(202 ) (93 ) Financing costs (12,276 ) (14,122 ) 1,846 Net income 1,047 17,320 (16,273 )
Net (income) loss attributable to noncontrolling
interests in subsidiaries (120 ) 3,233 (3,353 ) Net income attributable to common equity $ 927 $
20,553
Earnings per share - basic and diluted:$ 0.13 $
2.94
Weighted average shares outstanding:
Basic 7,019 6,992 Diluted 7,022 6,994
Real estate revenue for Fiscal 2021 decreased 4.6% to$50,291,000 compared to$52,727,000 for Fiscal 2020. The decline in revenue was primarily attributable to the following: (a) a decline in revenue of approximately$2.7 million resulting from the deconsolidation of the operating results of thePierre Towers property from FREIT Maryland's operating results due to the conversion to a tenancy-in-common form of ownership ("TIC") as ofFebruary 28, 2020 ; (b) a decrease in reimbursement revenue of approximately$0.4 million primarily attributed to the settle-ups of Common Area Maintenance with commercial tenants in the fiscal quarter endedOctober 31, 2021 ; (c) a decline in revenue from the commercial segment of approximately$0.4 million , (net of lease termination payments received from PetValu in the amount of approximately$0.3 million and a settlement payment in the amount of approximately$0.2 million received fromCobb Theatre at the Rotunda retail property), primarily driven by a decline in the average occupancy rate to 76.3% in Fiscal 2021 from 79.7% in Fiscal 2020; (d) an insurance reimbursement received at the Icon property in Fiscal 2020 in the amount of approximately$0.2 million ; offset by (e) an increase in revenue from the residential segment of approximately$1.2 million primarily driven by an increase in the average occupancy rate to 96.5% in Fiscal 2021 from 94.0% in Fiscal 2020 and an increase in base rents across most properties. Net income attributable to common equity ("net income-common equity") for Fiscal 2021 was$927,000 ($0.13 per share basic and diluted), compared to$20,533,000 ($2.94 per share basic and diluted) for Fiscal 2020. 26 Table of Contents
The schedule below provides a non-GAAP detailed analysis of the major changes that impacted net income-common equity for Fiscal 2021 and Fiscal 2020:
NON-GAAP NET INCOME COMPONENTS
Years Ended October 31, 2021 2020 Change (In Thousands)
Income from real estate operations:
Commercial properties$ 12,094 $ 12,755 $ (661 ) Residential properties 15,903 17,050 (1,147 ) Total income from real estate operations 27,997 29,805 (1,808 ) Financing costs: Fixed rate mortgages (5,783 ) (7,401 ) 1,618 Floating rate mortgages (5,159 ) (5,303 ) 144 Other - Corporate interest (225 ) (329 ) 104 Mortgage cost amortization (1,109 ) (1,089 ) (20 ) Total financing costs (12,276 ) (14,122 ) 1,846 Investment income 116 204 (88 )
General & administrative expenses:
Accounting fees (426 ) (558
) 132
Legal and professional fees (2,477 ) (1,074
) (1,403 )
Directors and consultant fees (950 ) (1,205
) 255 Stock option expense (42 ) (46 ) 4 Corporate expenses (1,300 ) (938 ) (362 )
Total general & administrative expenses (5,195 ) (3,821
) (1,374 ) Third party transaction costs - (4,606 ) 4,606 Depreciation (9,300 ) (10,341 ) 1,041
Loss on investment in tenancy-in-common (295 ) (202
) (93 )
Adjusted net income (loss) 1,047 (3,083
) 4,130
Tenant improvement write-off due to COVID-19 - (7,277 ) 7,277 Gain on deconsolidation of subsidiary - 27,680
(27,680 )
Net income 1,047 17,320
(16,273 )
Net (income) loss attributable to noncontrolling
interests in subsidiaries (120 ) 3,233 (3,353 ) Net income attributable to common equity$ 927 $ 20,553
$ (19,626 ) Adjusted net income (loss) for Fiscal 2021 was net income of$1,047,000 ($0.15 per share basic and diluted) compared to net loss of$3,083,000 (($0.44 ) per share basic and diluted) for Fiscal 2020. Adjusted net income (loss) 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 deconsolidation of thePierre Towers property in Fiscal 2020; and a tenant improvement write-off due to COVID-19 in Fiscal 2020. The increase in adjusted net income for Fiscal 2021 was primarily driven by the following: (a) third party transaction costs incurred in Fiscal 2020 of approximately$4.6 million ; (b) a decrease in net financing costs of approximately$1.2 million (with a consolidated impact to FREIT Maryland of approximately$0.9 million ), (excluding the impact of the deconsolidation of the operating results of thePierre Towers from FREIT Maryland's operating results of approximately$0.6 million in interest expense), primarily driven by a decline in interest rates on variable mortgage loans; (c) a decline in depreciation expense of approximately$0.6 million (with a consolidated impact to FREIT Maryland of approximately$0.3 million ), (excluding the impact of the deconsolidation of the operating results of thePierre Towers from FREITMaryland's operating results of approximately$0.5 million in depreciation expense), primarily driven by the tenant improvements written off in Fiscal 2020; (d) a decline in expense for the reserve of uncollectible rents for commercial tenants of approximately$0.4 million (with a consolidated impact to FREIT Maryland of approximately$0.3 million ); (e) an increase in revenue, excluding the impact of the conversion of thePierre Towers property to a TIC, in the amount of approximately$0.2 million (with a consolidated impact to FREITMaryland of approximately$0.3 million ) as explained above; (f) a decrease in leasing costs in the amount of approximately$0.2 million (with a consolidated impact to FREIT Maryland of approximately$0.1 million ) resulting from the write-off of unamortized lease commissions in Fiscal 2020 due to theCobb Theatres' rejection of its lease; offset by (g) an increase in general & administrative expenses of approximately$1.4 million primarily driven by an increase in legal costs in Fiscal 2021 attributed to the legal proceeding between FREIT Maryland and certain of its affiliates andSinatra Properties, LLC and reincorporation expenses incurred in Fiscal 2021 to reincorporate in the state ofMaryland ; (h) an increase in snow removal costs due to a harsher winter in Fiscal 2021 of approximately$0.5 million (with a consolidated impact to FREIT Maryland of approximately$0.4 million ); (i) an increase in repairs and maintenance expense of approximately$0.5 million (with a consolidated impact to FREIT Maryland of approximately$0.3 million ), (excluding the impact of the
deconsolidation of the 27 Table of Contents operating results of thePierre Towers from FREIT Maryland's operating results of approximately$0.2 million in repairs and maintenance expense); and (j) a decrease in adjusted net income with an impact of approximately$0.3 million attributed to thePierre Towers deconsolidation from FREIT Maryland's operating results in Fiscal 2020 (with a consolidated impact to FREIT Maryland of approximately$0.2 million ). (Refer to the segment disclosure below for a more detailed discussion of the financial performance of FREIT Maryland's commercial and residential segments.) SEGMENT INFORMATION The following table sets forth comparative net operating income ("NOI") data for FREIT Maryland's real estate segments and reconciles the NOI to consolidated net income-common equity for Fiscal 2021, as compared to Fiscal 2020 (See below for definition of NOI): Commercial Residential Combined Years Ended Years Ended Years Ended October 31, Increase (Decrease) October 31, Increase (Decrease) October 31, 2021 2020 $ % 2021 2020 $ % 2021 2020 (In Thousands) (In Thousands) (In Thousands)
Rental income
$ 26,515 $ 27,812 $ (1,297 ) -4.7%$ 44,390 $ 46,581 Reimbursements 5,311 5,690 (379 ) -6.7% 157 150 7 4.7% 5,468 5,840 Other 361 27 334 1237.0% 302 676 (374 ) -55.3% 663 703 Total revenue 23,547 24,486 (939 ) -3.8%
26,974 28,638 (1,664 ) -5.8% 50,521 53,124
Operating expenses 11,223 11,334 (111 ) -1.0% 11,071 11,588 (517 ) -4.5% 22,294
22,922
Net operating income
Average Occupancy % 76.3% 79.7% -3.4%
96.5% * 94.0% * 2.5% Reconciliation to consolidated net income-common equity: Deferred rents - straight lining (230 ) (397 ) Investment income 116 204 Third party transaction costs - (4,606 ) Gain on deconsolidation of subsidiary - 27,680 Loss on investment in tenancy-in-common (295 ) (202 ) General and administrative expenses (5,195 ) (3,821 ) Depreciation (9,300 ) (10,341 ) Tenant improvement write-off due to COVID-19 - (7,277 ) Financing costs (12,276 ) (14,122 ) Net income 1,047 17,320
Net (income) loss attributable to noncontrolling interests in subsidiaries (120 ) 3,233
Net income attributable to common equity$ 927 $ 20,553 *Average occupancy rate excludes thePierre Towers property from all periods presented as the property was deconsolidated and converted to a TIC effectiveFebruary 28, 2020 . NOI is based on operating revenue and expenses directly associated with the operations of the real estate properties, but excludes deferred rents (straight lining), depreciation, financing costs and other items. FREIT Maryland assesses and measures segment operating results based on NOI. Same Property NOI: FREIT Maryland considers same property net operating income ("Same Property NOI") to be a useful supplemental non-GAAP measure of its operating performance. FREIT Maryland defines same property within both the commercial and residential segments to be those properties that FREIT Maryland has owned and operated for both the current and prior periods presented, excluding those properties that FREIT Maryland acquired, sold or redeveloped during those periods. Any newly acquired property that has been in operation for less than a year, any property that is undergoing a major redevelopment but may still be in operation at less than full capacity, and/or any property that has been sold or deconsolidated 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 SEGMENT
The commercial segment contains eight (8) separate properties. Seven of these properties are multi-tenanted retail or office centers, and one is single tenanted on land located inRockaway, New Jersey owned by FREIT Maryland from which it receives monthly rental income from a tenantwho has built and operates a bank branch on the land. As indicated in the table above under the caption Segment Information, total revenue and NOI from FREIT Maryland's commercial segment for Fiscal 2021 decreased by 3.8% and 6.3%, respectively, as compared to Fiscal 2020. The decline in revenue for Fiscal 2021 was primarily attributed to the following: (a) a decrease in reimbursement revenue of approximately$0.4 million primarily attributed to the settle-ups of Common Area Maintenance with commercial tenants in the fiscal quarter endedOctober 31, 2021 ; and (b) a decline in revenue in the amount of approximately$0.6 million (net of lease termination 28
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payments received from PetValu in the amount of approximately$0.3 million and a settlement payment in the amount of approximately$0.2 million received fromCobb Theatre at the Rotunda retail property) primarily attributable to a decline in the average occupancy rate to 76.3% in Fiscal 2021 from 79.7% in Fiscal 2020. The decline in NOI for Fiscal 2021 was primarily attributable to the following: (a) a decline in revenue of approximately$0.9 million as described above; (b) an increase in snow removal costs due to a harsher winter in Fiscal 2021 of approximately$0.3 million ; (c) an increase in repairs and maintenance expense of approximately$0.2 million ; offset by (d) a decline in expense for the reserve of uncollectible rents of approximately$0.4 million ; and (e) a decrease in leasing costs in the amount of approximately$0.2 million resulting from the write-off of unamortized lease commissions in Fiscal 2020 due to theCobb Theatres' rejection of its lease. Same Property Operating Results: FREIT Maryland's commercial segment currently contains eight (8) same properties. (See definition of same property under Segment Information above.) Since all of FREIT Maryland's commercial properties are considered same properties in Fiscal 2021 and Fiscal 2020, refer to the preceding paragraph for discussion of changes in same property results. Leasing: The following tables reflect leasing activity at FREIT Maryland'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 Fiscal 2021. Tenant Weighted Weighted Improvement Lease Average Average Prior Allowance Commissions Number of Lease Area Lease Rate Lease Rate % Increase (per Sq. Ft.) (per Sq. Ft.) RETAIL: Leases (Sq. Ft.) (per Sq.
Ft.) (per Sq. Ft.) (Decrease) (a) (a) Comparable leases (b) 23 148,190 $ 13.83 $ 16.64 -16.9% $ - $ 0.21 Non-comparable leases 7 12,514 $ 32.79 N/A N/A $ 1.27 $ 1.63 Total leasing activity 30 160,704 Tenant Weighted Weighted Improvement Lease Average Average Prior Allowance Commissions Number of Lease Area Lease Rate Lease Rate % Increase (per Sq. Ft.) (per Sq. Ft.) OFFICE: Leases (Sq. Ft.) (per Sq. Ft.) (per Sq. Ft.) (Decrease) (a) (a) Comparable leases (b) 13 30,605 $ 33.01 $ 32.07 2.9% $ - $ 0.34 Non-comparable leases 2 4,053 $ 23.72 N/A N/A $ - $ 1.34 Total leasing activity 15 34,658
(a) These leasing costs are presented as annualized costs per square foot and are allocated uniformly over the lease term.
(b) This includes new tenant leases and/or modifications/extensions/renewals of existing tenant leases. During the first quarter of Fiscal 2021,Pet Valu, Inc. , a pet store tenant, vacated several stores located in shopping centers owned by FREIT Maryland affiliates (Wayne PSC, Damascus Centre andGrande Rotunda ) and terminated the related leases early paying an aggregate lease termination fee in the amount of approximately$260,000 (with a consolidated impact to FREIT Maryland of approximately$140,000 ). OnMay 4, 2021 , Burlington amended its lease at theWestridge Square Shopping Center (owned by WestFREIT) extending the term of the lease for a period of one (1) year and ninety (90) days commencing onDecember 1, 2021 and expiring onFebruary 28, 2023 ("Fourth Extension Period"). The fixed rent during this Fourth Extension Period was reduced from$59,120 per month to$35,830 per month. Additionally, Burlington has the right to terminate the lease at any time prior to the last day of the Fourth Extension Period by providing at least twelve (12) months prior written notice of such termination (the "Termination Notice"). In the event that Burlington delivers the Termination Notice, the term of the lease shall automatically end on the last day of the twelfth (12th) full calendar month immediately following receipt of the Termination Notice. OnJanuary 7, 2022 the property owned by WestFREIT was sold. (See Note 17 to FREIT Maryland's consolidated financial statements for additional details.) OnApril 26, 2020 ,CB Theatre Experience, LLC filed for protection under Chapter 11 of the bankruptcy code as disclosed in the bankruptcy filings.The CB Theatre Experience, LLC (known as "Cobb Theatre ") at the Rotunda retail property inBaltimore, Maryland has been closed sinceApril 2020 due to the mandated shut down related to the COVID-19 pandemic and onJuly 14, 2020 rejected its lease at this property as ofJune 30, 2020 . During the first quarter endedJanuary 31, 2021 , FREIT Maryland received a settlement payment fromCobb Theatre in the amount of approximately$0.2 million (with a consolidated impact to FREITMaryland of approximately$0.1 million ). The properties owned byGrande Rotunda , WestFREIT and Damascus Centre were sold onDecember 30, 2021 ,January 7, 2022 andJanuary 10, 2022 , respectively. See Note 17 to FREIT Maryland's consolidated financial statements for additional details. 29 Table of Contents RESIDENTIAL SEGMENT FREIT Maryland currently operates seven (7) multi-family apartment buildings or complexes totaling 1,171 apartment units. OnFebruary 28, 2020 , FREIT Maryland reorganized its subsidiaryS and A Commercial Associates Limited Partnership ("S&A") from a partnership into a TIC. Prior to this reorganization, FREITMaryland owned a 65% membership interest in S&A, which owned 100% of thePierre Towers property located inHackensack, New Jersey through its 100% interest inPierre Towers, LLC . Accordingly, FREIT Maryland 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 FREITMaryland reflected as "noncontrolling interests in subsidiary" and all significant intercompany accounts and transactions were eliminated in consolidation. Pursuant to the TIC agreement, FREIT Maryland ultimately acquired a 65% undivided interest in the Pierre Towers property which was formerly owned by S&A. Based on the guidance of Accounting Standards Codification 810, "Consolidation", FREIT Maryland's investment in the TIC is accounted for under the equity method of accounting. While FREIT Maryland's effective ownership percentage interest in the Pierre Towers property remains unchanged after the reorganization to a TIC, FREIT Maryland no longer has a controlling interest as the TIC is now under joint control. (See Note 3 to FREIT Maryland's consolidated financial statements for further details.) As indicated in the table above under the caption Segment Information, total revenue and NOI from FREIT Maryland's residential segment for Fiscal 2021 decreased by 5.8% and 6.7%, respectively, as compared to Fiscal 2020. The decline in revenue for Fiscal 2021 was primarily attributable to the following: (a) a deconsolidation of the operating results of the Pierre Towers property from FREIT Maryland's operating results due to the conversion to a TIC as ofFebruary 28, 2020 resulting in a decline in revenue of approximately$2.7 million ; (b) an insurance reimbursement received at the Icon property in Fiscal 2020 in the amount of approximately$0.2 million ; offset by (c) an increase in revenue of approximately$1.2 million driven by an increase in the average occupancy rate by approximately 2.5% over Fiscal 2020 and an increase in base rent across most properties. The decline in NOI for Fiscal 2021 was primarily attributable to the following: (a) a deconsolidation of the operating results of the Pierre Towers property from FREIT Maryland's operating results due to the conversion to a TIC as ofFebruary 28, 2020 resulting in a decline in NOI of approximately$1.3 million ; (b) an increase in repairs and maintenance expense of approximately$0.3 million ; (c) an increase in operating expenses of approximately$0.3 million primarily driven by an increase in snow removal costs due to a harsher winter in Fiscal 2021 and an increase in janitorial costs; (d) an increase in advertising expense of approximately$0.1 million ; and (e) an increase in expense for the reserve of uncollectible rents of approximately$0.1 million ; offset by (f) an increase in revenue of approximately$1 million as explained above (excluding the impact of the Pierre Towers deconsolidation). Same Property Operating Results: FREIT Maryland's residential segment currently contains seven (7) same properties. (See definition of same property under Segment Information above.)The Pierre Towers property was excluded from same property results for both fiscal years because this property was deconsolidated and converted to a TIC as ofFebruary 28, 2020 . Same property revenue and NOI increased by 3.8% and 1.1%, respectively, from Fiscal 2020. The changes resulted from the factors discussed in the immediately preceding paragraph. FREIT Maryland'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 at the end of Fiscal 2021 and Fiscal 2020 were$1,998 and$1,953 , 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$281,000 and$276,000 , respectively. Capital expenditures: Since all of FREIT Maryland's apartment communities, with the exception of the Boulders, Regency, Icon andStation Place properties, were constructed more than 25 years ago, FREIT Maryland tends to spend more in any given year on maintenance and capital improvements than may be spent on newer properties. As a result of the COVID-19 global pandemic, only capital improvements deemed essential are being made at this time. Funds for these capital projects will be available from cash flow from the property's operations and cash reserves. 30 Table of Contents FINANCING COSTS Years Ended October 31, 2021 2020 (In Thousands of Dollars) Fixed rate mortgages (a): 1st Mortgages Existing$ 5,783 $ 7,401 New - - Variable rate mortgages: 1st Mortgages Existing 5,159 5,211 New - 92 Other 225 329 Total financing costs, gross 11,167 13,033 Amortization of mortgage costs 1,109 1,089 Total financing costs, net$ 12,276 $ 14,122
(a) Includes the effect of interest rate swap contracts which effectively convert the floating interest rate to a fixed interest rate over the term of the loan.
Total net financing costs for Fiscal 2021 decreased by approximately$1,846,000 or 13.1%, compared to Fiscal 2020 which is attributable to the following: (a) a decline in interest on the variable mortgage loans for the Rotunda and WestFREIT properties of approximately$1,105,000 resulting from lower interest rates (See Note 17 to FREIT Maryland's consolidated financial statements for further details); and (b) the deconsolidation of the Pierre Towers property from FREITMaryland's operating results due to the conversion to a TIC as ofFebruary 28, 2020 resulting in a decrease in net financing costs of approximately$645,000 . (See Note 3 to FREIT Maryland's consolidated financial statements for further details on the deconsolidation of the Pierre Towers property.)
INVESTMENT INCOME
Investment income for Fiscal 2021 was$116,000 as compared to$204,000 for Fiscal 2020. Investment income is principally derived from interest earned from cash on deposit in institutional money market funds and interest earned from secured loans receivable (loans made toHekemian & Co. employees, includingRobert S. Hekemian , Jr., the Chief Executive Officer, President and a Director of FREIT Maryland,David B. Hekemian , a Director of FREIT Maryland,Allan Tubin , the Chief Financial Officer and Treasurer of FREIT Maryland and certain other members of the immediate family of the lateRobert S. Hekemian , FREIT Maryland's former Chairman, Chief Executive Officer and consultant of FREIT Maryland) for their equity investments (through Rotunda 100, LLC) inGrande Rotunda, LLC , a limited liability company in which FREIT Maryland owns a 60% equity interest. (See Note 8 to FREIT Maryland's consolidated financial statements for additional details.)
GENERAL AND ADMINISTRATIVE EXPENSES ("G&A")
G&A expense for Fiscal 2021 was$5,195,000 as compared to$3,821,000 for Fiscal 2020. The primary components of G&A are accounting/auditing fees, legal and professional fees, directors' and consultant fees and corporate expenses. The increase in G&A costs for Fiscal 2021 was primarily driven by the following: (a) an increase in legal costs of approximately$1,403,000 primarily resulting from the legal proceeding between FREIT Maryland and certain of its affiliates andSinatra Properties, LLC ; (b) an increase in corporate expenses of approximately$362,000 primarily attributed to reincorporation expenses incurred in Fiscal 2021 of approximately$493,000 to reincorporate in the state ofMaryland offset by costs incurred in Fiscal 2020 for the formation and transfer of the Pierre subsidiary to a TIC of approximately$293,000 ; offset by (c) a decline in directors' and consultant fees of approximately$255,000 .
THIRD PARTY TRANSACTION COSTS
The Special Committee of the Board ("Special Committee") incurred on behalf of the Company third party transaction costs for advisory, legal and other expenses primarily related to the Purchase and Sale Agreement and the Plan of Liquidation (See Notes 14 and 15 for additional details) in the amount of approximately$0 for Fiscal 2021 as compared to approximately$4,606,000 for Fiscal 2020. OnApril 30, 2020 , the Sellers delivered written notice to the Purchaser of the Sellers' termination of the Purchase and Sale Agreement (See Note 14 for details) and onMay 7, 2020 , the Board approved the elimination of the Special Committee. No further transaction costs were incurred thereafter.
DEPRECIATION
Depreciation expense from operations for Fiscal 2021 was$9,300,000 as compared to$10,341,000 for Fiscal 2020. The decline in depreciation expense in Fiscal 2021 was primarily attributable to the following: (a) a decline in the amount of approximately$460,000 resulting from the deconsolidation of the operating results of the Pierre Towers property from FREIT Maryland's operating results as ofFebruary 28, 2020 (See Note 3 to FREIT Maryland's consolidated financial statements for further details); and (b) the remainder of the decline is primarily related to tenant improvements written off in Fiscal 2020. 31 Table of Contents Results of Operations:
Fiscal Years Ended
Summary revenues and net income for Fiscal 2020 andOctober 31, 2019 ("Fiscal 2019") are as follows: Years Ended October 31, 2020 2019 Change (in thousands, except per share amounts) Real estate revenues: Commercial properties$ 24,089 $ 27,122 $ (3,033 ) Residential properties 28,638 33,155 (4,517 ) Total real estate revenues 52,727 60,277 (7,550 ) Operating expenses:
Real estate operating expenses 22,922
26,062 (3,140 )
Third party transaction costs 4,606 1,416 3,190 General and administrative expenses 3,821 2,633 1,188 Depreciation 10,341 11,339 (998 ) Tenant improvement write-off due to COVID-19 7,277 - 7,277 Total operating expenses 48,967 41,450 7,517 Operating income 3,760
18,827 (15,067 )
Investment income 204 360 (156 ) Unrealized loss on interest rate cap contract - (160 ) 160 Gain on sale of property - 836 (836 ) Gain on deconsolidation of subsidiary 27,680 - 27,680 Loss on investment in tenancy-in-common (202 )
- (202 ) Financing costs (14,122 ) (18,070 ) 3,948 Net income 17,320 1,793 15,527
Net loss (income) attributable to noncontrolling
interests in subsidiaries 3,233 (6 ) 3,239 Net income attributable to common equity$ 20,553 $
1,787
Earnings per share - basic and diluted:$ 2.94 $
0.26
Weighted average shares outstanding:
Basic 6,992 6,940 Diluted 6,994 6,940
Real estate revenue for Fiscal 2020 decreased 12.5% to$52,727,000 compared to$60,277,000 for Fiscal 2019. The decline in revenue was primarily attributable to the following: (a) a decline in revenue of approximately$5 million resulting from the deconsolidation of the operating results of the Pierre Towers property from FREIT Maryland's operating results due to the conversion to a TIC as ofFebruary 28, 2020 ; (b) a reduction in total revenue in the amount of approximately$1.1 million , which includes the write-off of straight-line rent in the amount of approximately$0.4 million , as compared to Fiscal 2019 due to the rejection of the lease for theCobb Theatre at the Rotunda retail property as ofJune 30, 2020 resulting from theCobb Theatre bankruptcy filing; (c) a reduction in total revenue in the amount of approximately$1.4 million as compared to Fiscal 2019 due to rental revenue being deemed uncollectible and classified as a reduction in rental revenue primarily attributed to commercial tenants suffering adverse financial consequences as a result of the COVID-19 pandemic; (d) a decline in total revenue of approximately$0.4 million driven by a decline in the annual average occupancy rate for the commercial properties from 81.5% in Fiscal 2019 to 79.7% in Fiscal 2020; (e) a decrease in revenue of approximately$0.2 million attributed to commercial rent abatements resulting from the COVID-19 pandemic; offset by (f) an increase in the residential segment of approximately$0.5 million driven by insurance reimbursements received in Fiscal 2020 related to a fire at each of the Pierre Towers and Icon properties and an increase in base rent at most of these properties. Net income attributable to common equity ("net income-common equity") for Fiscal 2020 was$20,553,000 ($2.94 per share basic and diluted), compared to$1,787,000 ($0.26 per share basic and diluted) for Fiscal 2019 primarily as a result of the non-cash gain on the deconsolidation of a subsidiary (See Note 3 to FREITMaryland's consolidated financial statements for additional details). 32 Table of Contents The schedule below provides a non-GAAP detailed analysis of the major changes that impacted revenue and net income-common equity for Fiscal 2020 and Fiscal 2019:
NON-GAAP NET INCOME COMPONENTS
Years Ended October 31, 2020 2019 Change (In Thousands)
Income from real estate operations:
Commercial properties$ 12,755 $ 15,427 $ (2,672 ) Residential properties 17,050 18,788 (1,738 ) Total income from real estate operations 29,805 34,215 (4,410 ) Financing costs: Fixed rate mortgages (7,401 ) (8,953 ) 1,552 Floating rate mortgages (5,303 ) (7,384 ) 2,081 Other - Corporate interest (329 ) (594 ) 265 Mortgage cost amortization (1,089 ) (1,139 ) 50 Total financing costs (14,122 ) (18,070 ) 3,948 Investment income 204 360 (156 )
Unrealized loss on interest rate cap contract - (160
) 160
General & administrative expenses:
Accounting fees (558 ) (654
) 96
Legal and professional fees (1,074 ) (135
) (939 )
Directors and consultant fees (1,205 ) (1,164
) (41 ) Stock option expense (46 ) (124 ) 78 Corporate expenses (938 ) (556 ) (382 )
Total general & administrative expenses (3,821 ) (2,633
) (1,188 ) Third party transaction costs (4,606 ) (1,416 ) (3,190 ) Depreciation (10,341 ) (11,339 ) 998
Loss on investment in tenancy-in-common (202 ) -
(202 )
Adjusted net (loss) income (3,083 ) 957
(4,040 )
Tenant improvement write-off due to COVID-19 (7,277 ) - (7,277 ) Gain on sale of property - 836 (836 ) Gain on deconsolidation of subsidiary 27,680 -
27,680
Net income 17,320 1,793
15,527
Net loss (income) attributable to noncontrolling
interests in subsidiaries 3,233 (6 ) 3,239 Net income attributable to common equity$ 20,553 $ 1,787
$ 18,766 Adjusted net loss for Fiscal 2020 was$3,083,000 (($0.44 ) per share basic and diluted) compared to net income of$957,000 ($0.14 per share basic and diluted) for Fiscal 2019. 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 deconsolidation of the Pierre Towers property in Fiscal 2020; a tenant improvement write-off due to COVID-19 in Fiscal 2020; and a gain related to the sale of the property inPatchogue, New York in Fiscal 2019. The adjusted net loss for Fiscal 2020 was primarily driven by the following: (a) an increase in third party transaction costs incurred in Fiscal 2020 of approximately$3.2 million ; (b) a reduction in total revenue, excluding the impact of the conversion of the Pierre property to a TIC, in the amount of approximately$2.8 million (with a consolidated impact to FREIT Maryland of approximately$1.5 million ) as explained above; (c) an increase in G&A expenses of approximately$1.2 million primarily driven by an increase in legal costs of approximately$1 million attributed to the legal proceeding between FREITMaryland and certain of its affiliates andSinatra Properties, LLC and an increase of approximately$0.3 million in lender and legal fees related to the conversion of the Pierre Towers partnership to a TIC in Fiscal 2020; (d) an increase in expense for the reserve of uncollectible rents of approximately$0.4 million (with a consolidated impact to FREIT Maryland of approximately$0.3 million ) primarily resulting from the COVID-19 pandemic impact on certain commercial non-essential tenants due to mandated shut downs and imposed restrictions; (e) an increase in leasing costs due to theCobb Theatres' rejection of its lease in the amount of approximately$0.2 million ; offset by (f) a decrease in financing costs of approximately$2.7 million (with a consolidated impact to FREIT Maryland of approximately$1.8 million ), (excluding the impact of the deconsolidation of the operating results of the Pierre Towers from FREIT Maryland's operating results of approximately$1.3 million in interest expense), primarily attributed to the decline in interest rates on variable mortgage loans; and (g) a decline in repairs and maintenance expense of approximately$1.1 million (with a consolidated impact to FREIT Maryland of approximately$0.8 million ) due to the deferral of non-essential 33
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maintenance projects across all properties in Fiscal 2020 in an effort to keep such costs lower while the Company has experienced a loss of revenues at the commercial properties and to adjust to the difficulty in hiring contractors due to imposed COVID-19 restrictions and mandates. See Note 3 to FREIT Maryland's consolidated financial statements for further details on the deconsolidation of the Pierre Towers property to a TIC. (Refer to the segment disclosure below for a more detailed discussion of the financial performance of FREIT Maryland's commercial and residential segments.)
SEGMENT INFORMATION
The following table sets forth comparative net operating income ("NOI") data for FREIT Maryland's real estate segments and reconciles the NOI to consolidated net income-common equity for Fiscal 2020, as compared to Fiscal 2019 (See below for definition of NOI): Commercial Residential Combined Years Ended Years Ended Years Ended October 31, Increase (Decrease) October 31, Increase (Decrease) October 31, 2020 2019 $ % 2020 2019 $ % 2020 2019 (In Thousands) (In Thousands) (In
Thousands) Rental income$ 18,769 $ 20,324 $ (1,555 ) -7.7%$ 27,812 $ 32,592 $ (4,780 ) -14.7%$ 46,581 $ 52,916 Reimbursements 5,690 6,295 (605 ) -9.6% 150 134 16 11.9% 5,840 6,429 Other 27 73 (46 ) -63.0% 676 449 227 50.6% 703 522 Total revenue 24,486 26,692 (2,206 ) -8.3% 28,638 33,175 (4,537 ) -13.7% 53,124 59,867 Operating expenses 11,334 11,694 (360 ) -3.1% 11,588 14,368 (2,780 ) -19.3% 22,922 26,062
Net operating income
- 836 Average Occupancy % 79.7% 81.5% * -1.8% 94.0% ** 95.6% ** -1.6% Reconciliation to consolidated net income-common equity: Deferred rents - straight lining (397 ) 410 Investment income 204 360 Unrealized loss on interest rate cap contract - (160 ) Third party transaction costs (4,606 ) (1,416 ) Gain on deconsolidation of subsidiary 27,680 - Loss on investment in tenancy-in-common (202 ) - General and administrative expenses (3,821 ) (2,633 ) Depreciation (10,341 ) (11,339 ) Tenant improvement write-off due to COVID-19 (7,277 ) - Financing costs (14,122 ) (18,070 ) Net income 17,320 1,793
Net loss (income) attributable to noncontrolling interests in subsidiaries 3,233
(6 ) Net income attributable to common equity$ 20,553 $ 1,787
*Average occupancy rate excludes the
**Average occupancy rate excludes the Pierre Towers property from all periods presented as the property was deconsolidated and converted to a TIC effectiveFebruary 28, 2020 .
NOI is based on operating revenue and expenses directly associated with the operations of the real estate properties, but excludes deferred rents (straight lining), depreciation, financing costs and other items. FREIT Maryland assesses and measures segment operating results based on NOI. Same Property NOI: FREIT Maryland considers same property net operating income ("Same Property NOI") to be a useful supplemental non-GAAP measure of its operating performance. FREIT Maryland defines same property within both the commercial and residential segments to be those properties that FREIT Maryland has owned and operated for both the current and prior periods presented, excluding those properties that FREIT Maryland acquired or redeveloped during those periods. Any newly acquired property that has been in operation for less than a year, any property that is undergoing a major redevelopment but may still be in operation at less than full capacity, and/or any property that has been sold or deconsolidated 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 SEGMENT
The commercial segment contains eight (8) separate properties. Seven of these properties are multi-tenanted retail or office centers, and one is single tenanted on land located inRockaway, New Jersey owned by FREIT Maryland from which it receives monthly rental income from a tenantwho has built and operates a bank branch on the land. OnFebruary 8, 2019 , FREIT Maryland sold a commercial building, formerly occupied as a Pathmark supermarket inPatchogue, 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 34
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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 . The sale of this property eliminated an operating loss of approximately$0.8 million ($0.12 per share) incurred, annually, since Pathmark vacated the building inDecember 2015 (see Note 2 to FREIT Maryland's consolidated financial statements for further details). As indicated in the table above under the caption Segment Information, total revenue and NOI from FREIT Maryland's commercial segment for Fiscal 2020 decreased by 8.3% and 12.3%, respectively, as compared to Fiscal 2019. The decline in revenue for Fiscal 2020 was primarily attributable to the following: (a) a reduction in revenue as compared to Fiscal 2019 resulting fromCobb Theatre's rejection of its lease due to theCobb Theatre bankruptcy filing as ofJune 30, 2020 at the Rotunda retail property in the amount of approximately$0.7 million (excluding the straight-line rent receivable write-off of approximately$0.4 million ); (b) a reduction in total revenue in the amount of approximately$1.2 million (excluding the straight-line rent receivable write-off of approximately$0.2 million ) as compared to Fiscal 2019 due to rental revenue being deemed uncollectible and classified as a reduction in rental revenue primarily attributed to commercial tenants suffering adverse financial consequences as a result of the COVID-19 pandemic; (c) a decrease in revenue of approximately$0.2 million attributed to commercial rent abatements resulting from the COVID-19 pandemic; and (d) the remainder of the decline of approximately$0.1 million attributed to the 1.8% decrease in the average annual occupancy rate in Fiscal 2020 as compared to Fiscal 2019. The decline in NOI for Fiscal 2020 was primarily attributable to the following: (a) a decrease in revenue of approximately$2.2 million as explained above; (b) an increase in expense for the reserve of uncollectible rents of approximately$0.3 million primarily resulting from the COVID-19 pandemic impact; (c) a write-off of unamortized leasing costs related toCobb Theatres' rejection of its lease in the amount of approximately$0.2 million ; offset by (d) a decline in repairs and maintenance expense of approximately$0.7 million due to the deferral of non-essential maintenance projects across all properties in Fiscal 2020 in an effort to keep such costs lower while the Company has experienced a loss of revenues at the commercial properties and to adjust to the difficulty in hiring contractors due to imposed COVID-19 restrictions and mandates. Same Property Operating Results: FREIT Maryland's commercial segment currently contains eight (8) same properties. (See definition of same property under Segment Information above.) ThePatchogue property was excluded from same property results for Fiscal 2020 and 2019 because this property was sold inFebruary 2019 . Same property revenue and NOI for Fiscal 2020 decreased by 8.3% and 12.9%, respectively, as compared to Fiscal 2019. The changes resulted from the factors discussed in the immediately preceding paragraph. Leasing: The following tables reflect leasing activity at FREIT Maryland'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 Fiscal 2020. Tenant Weighted Weighted Improvement Lease Average Average Prior Allowance Commissions Number of Lease Area Lease Rate Lease Rate % Increase (per Sq. Ft.) (per Sq. Ft.) RETAIL: Leases (Sq. Ft.) (per Sq. Ft.) (per Sq. Ft.) (Decrease) (a) (a)
Comparable leases (b) 10 20,619 $ 27.75 $ 32.07 -13.5% $ - $ 0.36 Non-comparable leases 1 1,730 $ 14.63 N/A N/A $ - $ 0.80 Total leasing activity 11 22,349 Tenant Weighted Weighted Improvement Lease Average Average Prior Allowance Commissions Number of Lease Area Lease Rate Lease Rate % Increase (per Sq. Ft.) (per Sq. Ft.) OFFICE: Leases (Sq. Ft.) (per Sq. Ft.) (per Sq. Ft.) (Decrease) (a) (a)
Comparable leases (b) 1 444 $ 35.87 $ 32.08 11.8% $ - $ 0.68 Non-comparable leases - - $ - N/A N/A $ - $ - Total leasing activity 1 444
(a) These leasing costs are presented as annualized costs per square foot and are allocated uniformly over the lease term.
(b) This includes new tenant leases and/or modifications/extensions/renewals of existing tenant leases. RESIDENTIAL SEGMENT FREIT Maryland currently operates seven (7) multi-family apartment buildings or complexes totaling 1,171 apartment units. OnFebruary 28, 2020 , FREIT Maryland reorganized its subsidiaryS and A Commercial Associates Limited Partnership ("S&A") from a partnership into a TIC. Prior to this reorganization, FREITMaryland owned a 65% partnership interest in S&A, which owned 100% of the Pierre Towers property located inHackensack, New Jersey through its 100% interest inPierre Towers, LLC . Accordingly, FREIT Maryland 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
Maryland reflected as 35 Table of Contents
"noncontrolling interests in subsidiary" and all significant intercompany accounts and transactions were eliminated in consolidation.
Pursuant to the TIC agreement, FREIT Maryland ultimately acquired a 65% undivided interest in the Pierre Towers property which was formerly owned by S&A. Based on the guidance of Accounting Standards Codification 810, "Consolidation", FREIT Maryland's investment in the TIC is accounted for under the equity method of accounting. While FREIT Maryland's effective ownership percentage interest in the Pierre Towers property remains unchanged after the reorganization to a TIC, FREIT Maryland no longer has a controlling interest as the TIC is now under joint control. Since FREIT Maryland retained a noncontrolling financial interest in the TIC, and the deconsolidation (as ofFebruary 28, 2020 ) of the subsidiary is not the result of a nonreciprocal transfer to owners, a gain on deconsolidation in the amount of approximately$27.7 million was recognized in the accompanying consolidated statement of income for the year endedOctober 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. (See Note 3 to FREIT Maryland's consolidated financial statements for further details.) As indicated in the table above under the caption Segment Information, total revenue and NOI from FREIT Maryland's residential segment for Fiscal 2020 decreased by 13.7% and 9.3%, respectively, as compared to Fiscal 2019. The decline in revenue for Fiscal 2020 was primarily attributable to the following: (a) a decline in revenue of approximately$5 million resulting from the deconsolidation of the operating results of the Pierre Towers property from FREIT Maryland's operating results due to the conversion to a TIC as ofFebruary 28, 2020 ; offset by (b) insurance reimbursements received in Fiscal 2020 of approximately$0.3 million ; and (c) a slight increase in base rents at most properties of approximately$0.2 million as compared to Fiscal 2019. The decline in NOI for Fiscal 2020 is primarily attributed the deconsolidation of the operating results of the Pierre Towers property from FREIT Maryland's operating results resulting in a decrease of approximately$2.2 million in NOI as compared to Fiscal 2019 offset by a decline in repairs and maintenance expense of approximately$0.4 million due to the deferral of non-essential maintenance projects across all properties in Fiscal 2020 in an effort to keep such costs lower while the Company has experienced a loss of revenues at the commercial properties and to adjust to the difficulty in hiring contractors due to imposed COVID-19 restrictions and mandates. Average occupancy for all residential properties for Fiscal 2020 decreased by approximately 1.6% over Fiscal 2019. The decline in the average occupancy rate is primarily driven by the decline in the average occupancy rate at the Icon to an average occupancy rate of 91.5% for Fiscal 2020 as compared to 95.1% for Fiscal 2019. This decline in occupancy rate is primarily attributed to tenants attending theJohns Hopkins University , which is in close proximity to the Icon and represents approximately 30% of our tenants at this property. In response to the COVID-19 pandemic,Johns Hopkins University only offered online classes for the fall semester which resulted in a loss of these tenants at our property. Same Property Operating Results: FREIT Maryland's residential segment currently contains seven (7) same properties. (See definition of same property under Segment Information above.)The Pierre Towers property was excluded from same property results for both fiscal years since this property was deconsolidated and converted to a TIC as ofFebruary 28, 2020 . Same property revenue and NOI increased by 0.9% and 1.7%, respectively, from Fiscal 2019. The changes resulted from the factors discussed in the immediately preceding paragraph. FREIT Maryland'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 at the end of Fiscal 2020 and Fiscal 2019 were$1,953 and$1,914 , respectively. For comparability purposes, the average residential rent for Fiscal 2019 has been restated to include the impact ofStation Place and exclude the impact of the Pierre Towers due to the deconsolidation and conversion to a TIC in Fiscal 2020. 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$274,000 and$258,000 , respectively. Capital expenditures: Since all of FREIT Maryland's apartment communities, with the exception of the Boulders, Regency, Icon andStation Place properties, were constructed more than 25 years ago, FREIT Maryland 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 will be available from cash flow from the property's operations and cash reserves. 36 Table of Contents FINANCING COSTS Years Ended October 31, 2020 2019 (In Thousands of Dollars) Fixed rate mortgages (a): 1st Mortgages Existing $ 7,401 $ 8,763 New - 190 Variable rate mortgages: 1st Mortgages Existing 5,211 7,384 New 92 - Other 329 594 Total financing costs, gross 13,033 16,931 Amortization of mortgage costs 1,089 1,139 Total financing costs, net $ 14,122$ 18,070
(a) Includes the effect of interest rate swap contracts which effectively convert the floating interest rate to a fixed interest rate over the term of the loan.
Total net financing costs for Fiscal 2020 decreased by approximately$3,948,000 or 21.8%, compared to Fiscal 2019 which is attributable to the following: (a) a decline in interest on variable mortgage loans of approximately$2,081,000 resulting from lower interest rates; (b) the deconsolidation of the Pierre Towers property from FREIT Maryland's operating results due to the conversion to a TIC as ofFebruary 28, 2020 resulting in a decrease in net financing costs of approximately$1,289,000 ; (c) a decline in other interest expense of approximately$265,000 primarily resulting from the$5 million payment of deferred Trustee fees to two retired Trustees earlier in Fiscal 2020 and a decline in the ten (10)-year Treasury Bond interest rate as compared to Fiscal 2019; and (d) the remainder of the decrease of approximately$313,000 resulted from the decline in interest on fixed interest rate mortgages due to another year of loan amortization. (See Note 3 to FREIT Maryland's consolidated financial statements for further details on the deconsolidation of the Pierre Towers property.) INVESTMENT INCOME
Investment income for Fiscal 2020 was$204,000 as compared to$360,000 for Fiscal 2019. Investment income is principally derived from interest earned from cash on deposit in institutional money market funds and interest earned from secured loans receivable (loans made toHekemian & Co. employees, includingRobert S. Hekemian , Jr., the Chief Executive Officer, President and a Director of FREIT Maryland,David B. Hekemian , a Director of FREIT Maryland,Allan Tubin , the Chief Financial Officer and Treasurer of FREIT Maryland and certain other members of the immediate family of the lateRobert S. Hekemian , FREIT Maryland's former Chairman, Chief Executive Officer and consultant of FREIT Maryland) for their equity investments (through Rotunda 100, LLC) inGrande Rotunda, LLC , a limited liability company in which FREIT Maryland owns a 60% equity interest. (See Note 8 to FREIT Maryland's consolidated financial statements for additional details.)
GENERAL AND ADMINISTRATIVE EXPENSES
G&A expense for Fiscal 2020 was$3,821,000 as compared to$2,633,000 for Fiscal 2019. The primary components of G&A are accounting/auditing fees, legal and professional fees, Trustees' and consultant fees and corporate expenses. The increase in G&A costs for Fiscal 2020 was primarily driven by an increase in legal costs of approximately$960,000 resulting from the legal proceeding between FREIT Maryland and certain of its affiliates andSinatra Properties, LLC and an increase of approximately$300,000 in lender and legal fees related to the conversion of the Pierre Towers partnership to a TIC in Fiscal 2020. (See Note 3 to FREIT Maryland's consolidated financial statements for additional details.)
THIRD PARTY TRANSACTION COSTS
The Special Committee incurred on behalf of the Company third party transaction costs for advisory, legal and other expenses primarily related to the Purchase and Sale Agreement and the Plan of Liquidation (See Notes 14 and 15 for additional details) in the amount of approximately$4,606,000 for Fiscal 2020 as compared to approximately$1,416,000 for Fiscal 2020. OnApril 30, 2020 , the Sellers delivered written notice to the Purchaser of the Sellers' termination of the Purchase and Sale Agreement (See Note 14 for details) and onMay 7, 2020 , the Board approved the elimination of the Special Committee. No further transaction costs were incurred thereafter.
DEPRECIATION
Depreciation expense from operations for Fiscal 2020 was$10,341,000 as compared to$11,339,000 for Fiscal 2019. The decline in depreciation expense for Fiscal 2020 was primarily attributable to the deconsolidation of the operating results of the Pierre 37 Table of Contents
Towers property from FREIT Maryland's operating results as ofFebruary 28, 2020 . (See Note 3 to FREIT Maryland's consolidated financial statements for further details.)
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was$12.2 million for Fiscal 2021 as compared to net cash provided by operating activities of$3.9 million for Fiscal 2020. FREIT Maryland expects that cash provided by operating activities, including cash received from property sales subsequent toOctober 31, 2021 (see Note 17 to FREIT Maryland's consolidated financial statements) 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 Form 10-K. As atOctober 31, 2021 , FREIT Maryland had cash, cash equivalents and restricted cash totaling$39 million , compared to$39.5 million atOctober 31, 2020 . The decrease in cash in Fiscal 2021 is primarily attributable to$10.9 million in net cash used in financing activities,$1.8 million in net cash used in investing activities including capital expenditures offset by$12.2 million in net cash provided by operating activities. OnFebruary 8, 2019 , FREIT Maryland sold a commercial building, formerly occupied as a Pathmark supermarket inPatchogue, 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 . In connection with and in anticipation of the closing of the sale of thePatchogue property, FREIT Maryland declared a one-time special dividend of$0.10 per share in the first quarter of Fiscal 2019. The sale of this property eliminated an operating loss of approximately$0.8 million ($0.12 per share) incurred, annually, since Pathmark vacated the building inDecember 2015 . (See Note 2 to FREIT Maryland's consolidated financial statements.) In Fiscal 2017,Grande Rotunda, LLC ("Grande Rotunda") incurred substantial expenditures at the Rotunda property related to retail tenant improvements, leasing costs and operating expenditures which, in the aggregate, exceeded revenues as the property was still in the rent up phase and the construction loan previously held with Wells Fargo was at its maximum level resulting in no additional funding available to draw. Accordingly, during Fiscal 2017 the equity owners in Grande Rotunda (FREIT Maryland with a 60% ownership and Rotunda 100, LLC (Rotunda 100) with a 40% ownership) contributed their respective pro-rata share of any cash needs through loans to Grande Rotunda. In Fiscal 2021, Grande Rotunda repaid$7 million to the equity owners in Grande Rotunda based on their respective pro-rata share resulting in a loan repayment to Rotunda 100 of approximately$2.8 million . As ofOctober 31, 2021 and 2020, Rotunda 100 has funded Grande Rotunda with approximately$3.3 million and$5.9 million (including accrued interest), respectively, which is included in "Due to affiliate" on the accompanying consolidated balance sheets. Credit Line: FREIT Maryland'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 on FREITMaryland'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 rate of prime minus 25 basis points with a floor of 3.75%. As ofOctober 31, 2021 and 2020, there was no amount outstanding and$13 million was available under the line of credit. (See Note 5 to FREIT Maryland's consolidated financial statements for additional details.) Dividend: After careful consideration of FREIT Maryland's Fiscal 2021 results and projected operating results and cash needs, the FREIT Maryland Board of Directors ("Board") declared a fourth quarter dividend of$0.10 per share which was paid onDecember 15, 2021 to stockholders of record onDecember 1, 2021 . The Board will continue to evaluate the dividend on a quarterly basis. 38 Table of Contents As ofOctober 31, 2021 , FREIT Maryland's aggregate outstanding mortgage debt was$301.3 million , which bears a weighted average interest rate of 3.56% and an average life of approximately 2.44 years. FREIT Maryland's fixed rate mortgages are subject to amortization schedules that are longer than the terms of the mortgages. As such, balloon payments (unpaid principal amounts at mortgage due date) for all mortgage debt will be required as follows: Fiscal Year 2022 2023 2024 2025 2026 2027 2028 2029 ($ in millions) Mortgage "Balloon" Payments$199.5 (A)$34.8 (B)$9.0 $13.9 $0.0 $0.0 $10.5 $26.0 (A) Includes the following: (1) A loan on the Rotunda property
located in
in the amount of approximately$116.5 million which would have matured onFebruary 6, 2022 . OnDecember 30, 2021 , the property owned by Grande Rotunda was sold and a portion of the proceeds was used to pay off the$116.5 million then outstanding balance of this loan. (See Note 17 to FREIT Maryland's consolidated financial statements for additional details.) (2) A loan on theWestridge Square Shopping Center located inFrederick, Maryland in the amount of approximately$21.1 million which has a maturity date ofJanuary 31, 2021 . OnJanuary 7, 2022 , the property owned by WestFREIT was sold and a portion of the proceeds was used to pay off the then outstanding balance of this loan. (See Note 17 to FREIT Maryland's consolidated financial statements for additional details.) (3) A loan on the Boulders property, which is a residential property located inRockaway, New Jersey in the amount of approximately$14.5 million which had a maturity date ofFebruary 1, 2022 . The loan was refinanced on
of$7.5 million with additional funding available of up to another$7.5 million and has a maturity date ofJanuary 1, 2024 . (See Note 5 to FREIT Maryland's consolidated financial statements for additional details.) (4) A loan on thePreakness Shopping Center located inWayne, New Jersey in the amount of approximately$22.6 million . Although the Company continues to make its required debt service payments in accordance with the loan agreement, it is unable to comply with this covenant. As such, the bank could exercise its remedies under the loan agreement including, among other things, requiring a partial or full repayment of the loan. (See Note 5 to FREITMaryland's consolidated financial statements for additional details.) (B) Includes a loan on theDamascus property located inDamascus, Maryland in the amount of approximately$18.2 million . OnJanuary 10, 2022 , the property owned byDamascus was sold and a portion of the proceeds was used to pay off the then outstanding balance of this loan. (See Note 17 to FREIT
statements for additional details.)
The following table shows the estimated fair value and carrying value of FREIT
Maryland's long-term debt, net at
($ in Millions) October 31, 2021 October 31, 2020 Fair Value$301.6 $311.4 Carrying Value, Net$299.9 $305.4 Fair values are estimated based on market interest rates at the end of each fiscal year 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 Maryland expects to refinance the individual mortgages with new mortgages or exercise extension options when their terms expire. To this extent FREITMaryland 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, atOctober 31, 2021 , a 1% interest rate increase would reduce the fair value of FREITMaryland's debt by$4.4 million , and a 1% decrease would increase the fair value by$4.6 million . FREIT Maryland 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. OnFebruary 7, 2018 , Grande Rotunda refinanced its construction loan with a new loan held byAareal Capital Corporation in the amount of approximately$118.5 million with additional funding which was available throughFebruary 6, 2021 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 had a maturity date ofFebruary 6, 2021 with two one-year options
of Grande Rotunda to 39 Table of Contents extend the maturity of this loan, subject to certain requirements as provided for in the loan agreement. Grande Rotunda had purchased an interest rate cap 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 onMarch 5, 2020 . OnFebruary 28, 2020 , Grande Rotunda had purchased an interest rate cap on LIBOR, with an effective date ofMarch 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 onMarch 5, 2021 . EffectiveFebruary 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 ofFebruary 6, 2022 . Principal payments in the amount of$500,000 were required upon exercise of the first loan extension option and per calendar quarter thereafter. Additionally, Grande Rotunda purchased an interest rate cap on LIBOR, with an effective date ofMarch 5, 2021 , for the loan amount of approximately$118.5 million , capping the one-month LIBOR rate at 3% for one year expiring onFebruary 6, 2022 . AtOctober 31, 2021 , the total amount outstanding on this loan was approximately$116.5 million and the interest rate was approximately 2.93%. (See Notes 5 and 6 to FREIT Maryland's consolidated financial statements for further details). OnDecember 30, 2021 , the property owned by Grande Rotunda was sold and a portion of the proceeds was used to pay off the$116.5 million then outstanding balance of this loan. (See Note 17 to FREIT Maryland's consolidated financial statements for additional details.) OnSeptember 30, 2020 ,Westwood Hills, LLC ("Westwood Hills"), a consolidated subsidiary, refinanced its$19.2 million loan (which would have matured onNovember 1, 2020 ) with a new loan held byConnectOne Bank in the amount of$25,000,000 , with additional funding available in the amount of$250,000 for legal fees potentially incurred by the lender related to the lis pendens on this property. (See Note 14 to FREIT Maryland's consolidated financial statements for additional details in regards to the lis pendens.) This loan, secured by an apartment building inWestwood, New Jersey , is interest-only based on a floating rate at 400 basis points over the one-month LIBOR rate with a floor of 4.15% and has a maturity date ofOctober 1, 2022 with the option ofWestwood Hills to extend for two (2) additional six (6)-month periods from the maturity date, subject to certain provisions of the loan agreement. This refinancing resulted in: (i) a change in the annual interest rate from a fixed rate of 4.62% to a variable rate with a floor of 4.15% and (ii) net refinancing proceeds of approximately$5.6 million that were distributed to the partners inWestwood Hills with FREIT Maryland receiving approximately$2.2 million based on its 40% membership interest inWestwood Hills . As ofOctober 31, 2021 ,$25,000,000 of this loan was drawn and outstanding and the interest rate was based on the floor of 4.15%. (See Note 5 to FREIT Maryland's consolidated financial statements for additional details.) OnAugust 26, 2019 ,Berdan Court, LLC ("Berdan Court"), (owned 100% by FREITMaryland ), refinanced its$17 million loan (which matured onSeptember 1, 2019 ) with the lender in the amount of$28,815,000 . This loan, secured by an apartment building located inWayne, 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. (See Note 5 to FREIT Maryland's consolidated financial statements for additional details.) OnApril 3, 2019 , WestFREIT, Corp. exercised its option to extend its loan secured by theWestridge Square shopping center inFrederick, Maryland , held by M&T Bank, with a then outstanding balance of approximately$22.5 million , for twelve months. Effective beginning onJune 1, 2019 , the extension of this loan 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 ofMay 1, 2020 . This loan was extended toNovember 1, 2020 and further extended toJanuary 31, 2021 under the same terms and conditions of the existing agreement. WestFREIT, Corp. entered into a loan extension and modification agreement with M&T Bank, effective beginning onFebruary 1, 2021 , which requires monthly principal payments of$49,250 plus interest based on a floating interest rate equal to 255 basis points over the one-month LIBOR and has a maturity date ofJanuary 31, 2022 , with the option of WestFREIT, Corp. to extend for an additional one-year period throughJanuary 31, 2023 , subject to certain requirements as provided for in the loan agreement including the lease-up of certain space. As ofOctober 31, 2021 , approximately$21.2 million of this loan was outstanding and the interest rate was approximately 2.68%. (See Note 5 to FREIT Maryland's consolidated financial statements for additional details.) OnJanuary 7, 2022 , the property owned by WestFREIT was sold and a portion of the proceeds was used to pay off the then outstanding balance of this loan. (See Note 17 to FREIT Maryland's consolidated financial statements for additional details.) Interest rate swap contracts: To reduce interest rate volatility, FREIT Maryland 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. FREITMaryland enters into these swap contracts with a counterparty that is usually a high-quality commercial bank. In essence, FREIT Maryland agrees to pay its counterparties a fixed rate of interest on a dollar amount of notional principal (which generally corresponds to FREIT Maryland's mortgage debt) over a term equal to the term of the mortgage notes. FREIT Maryland's counterparties, in return, agree to pay FREIT Maryland a short-term rate of interest - generally LIBOR - on that same notional amount over the same term as the mortgage notes. FREIT Maryland has variable interest rate loans secured by itsDamascus Centre, LLC ("Damascus Centre"),Wayne PSC, LLC ("Wayne PSC"),FREIT Regency, LLC ("Regency") andStation Place onMonmouth, LLC ("Station Place ") properties. To reduce interest rate fluctuations, FREIT Maryland entered into interest rate swap contracts for each of these loans. These interest 40
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rate swap contracts effectively converted variable interest rate payments to fixed interest rate payments. The contracts were based on a notional amount of approximately$22,320,000 ($18,320,000 atOctober 31, 2021 ) for theDamascus Centre swaps, a notional amount of approximately$16,200,000 ($14,921,000 atOctober 31, 2021 ) for the Regency swap, a notional amount of approximately$25,800,000 ($22,333,000 atOctober 31, 2021 ) for the Wayne PSC swap and a notional amount of approximately$12,350,000 ($11,971,000 atOctober 31, 2021 ) for theStation Place swap. Interest rate cap contract: To limit exposure on interest rate volatility, FREITMaryland uses an interest rate cap contract to cap a floating interest rate at a set pre-determined rate. FREIT Maryland 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 Maryland agrees to pay its counterparties a variable rate of interest on a dollar amount of notional principal (which generally corresponds to FREIT Maryland's mortgage debt). Once the floating interest rate rises above the cap rate, FREITMaryland's counterparties, in return, agree to pay FREIT Maryland a short-term rate of interest above the cap on that same notional amount. FREIT Maryland has 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 fromAareal Capital Corporation , Grande Rotunda had purchased an interest rate cap 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 onMarch 5, 2020 . OnFebruary 28, 2020 , Grande Rotunda had purchased an interest rate cap on LIBOR, with an effective date ofMarch 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 onMarch 5, 2021 . EffectiveFebruary 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 ofFebruary 6, 2022 . Additionally, Grande Rotunda purchased an interest rate cap on LIBOR, with an effective date ofMarch 5, 2021 , for the loan amount of approximately$118.5 million , capping the one-month LIBOR rate at 3% for one year expiring onFebruary 6, 2022 . The cap contract was based on a notional amount of approximately$118,520,000 ($118,520,000 atOctober 31, 2021 ). OnDecember 30, 2021 , the property owned by Grande Rotunda was sold and a portion of the proceeds was used to pay off the$116.5 million then outstanding balance of this loan. (See Note 17 to FREIT Maryland's consolidated financial statements for additional 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")"which was adopted by FREIT Maryland in the first quarter of Fiscal 2020 (see Note 1 to FREIT Maryland's consolidated financial statements for further details), FREIT Maryland 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 Maryland's consolidated statement of income; 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 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. In Fiscal 2019, prior to the adoption of ASU 2017-12, the Grande Rotunda interest rate cap which matured onMarch 5, 2020 was, for accounting purposes, deemed to be an ineffective cash flow hedge with a corresponding gain or loss being recorded in FREIT Maryland's consolidated statement of income. FREIT Maryland has the following derivative-related risks with its swap and cap contracts ("contract"): 1) early termination risk, and 2) counterparty credit risk. Early Termination Risk: If FREIT Maryland 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 Maryland's fixed interest rate payments, this could be costly. Conversely, if interest rates rise above FREIT Maryland's fixed interest payments and FREIT Maryland elected early termination, FREIT Maryland would realize a gain on termination. AtOctober 31, 2021 , the swap contracts for Damascus Centre, Regency,Station Place and Wayne PSC were in the counterparties' favor. If FREIT Maryland had terminated these contracts at that date it would have realized losses of approximately$0 for the Grande Rotunda cap,$278,000 for the Damascus Centre swaps,$750,000 for the Regency swap,$932,000 for theStation Place swap and$348,000 for the Wayne PSC swap, all of which have been included as a liability in FREIT Maryland's consolidated balance sheet as atOctober 31, 2021 . The change in the fair value for the contract (gain or loss) during such period has been included in comprehensive income and for the year endedOctober 31, 2021 , FREIT Maryland recorded an unrealized gain of approximately$2,616,000 in the consolidated statement of comprehensive income. For the year endedOctober 31 2020 , FREIT Maryland recorded an unrealized loss of$2,798,000 in the consolidated statement of comprehensive income representing the change in fair value of the swaps during such period. Counterparty Credit Risk: Each party to a contract bears the risk that its counterparty will default on its obligation to make a periodic payment. FREITMaryland reduces this risk by entering into a contract only with major financial institutions that are experienced market makers in the derivatives market. 41
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FREIT Maryland's total contractual obligations under its line of credit and
mortgage loans in place as of
CONTRACTUAL OBLIGATIONS-PRINCIPAL (in thousands of dollars) Within 2 - 3 4 - 5 After 5 Total One Year Years Years Years Long-Term Debt Annual Amortization$ 7,550 $ 2,133 $ 1,753 $ 1,659 $ 2,005 Balloon Payments 293,726 199,547 (A) 43,824 (B) 13,892 36,463 Total Long-Term Debt *$ 301,276 $ 201,680 $ 45,577 $ 15,551 $ 38,468
* Includes deferred interest in the amount of approximately
5 to FREIT Maryland's consolidated financials for additional details.
Includes the (A) following: (1) A loan on the Rotunda property located inBaltimore, Maryland in the
amount of approximately
6, 2022. On
and a portion of the proceeds was used to pay off the$116.5 million then outstanding balance of this loan. (See Note 17 to FREIT Maryland's consolidated financial statements for additional details.)
(2) A loan on the
date of
WestFREIT was sold and a portion of the proceeds was used to pay off the
then outstanding balance of this loan. (See Note 17 to FREIT Maryland's
consolidated financial statements for additional details.)
(3) A loan on the
the amount of approximately
make its required debt service payments in accordance with the loan
agreement, it is unable to comply with this covenant. As such, the bank
could exercise its remedies under the loan agreement including, among other
things, requiring a partial or full repayment of the loan. (See Note 5 to
FREIT Maryland's consolidated financial statements for additional details.)
(4)A loan on the Boulders property, which is a residential property located
in
had a maturity date of
30, 2021 in the amount of
up to another
Note 5 to FREIT Maryland's consolidated financial statements for additional
details.)
(B) Includes a loan on the
the amount of approximately
owned by
the then outstanding balance of this loan. (See Note 17 to FREIT Maryland's
consolidated financial statements for additional details.) FREIT Maryland's annual estimated cash requirements related to interest on its line of credit and mortgage loans in place as ofOctober 31, 2021 are as follows: INTEREST OBLIGATIONS (in thousands of dollars) Within 2 - 3 4 - 5 After 5 Total One Year Years Years Years
Interest on Fixed Rate Debt*
- - Total Interest Obligations$ 19,865 $ 5,819 $ 6,481 $ 4,164 $ 3,401 * Includes interest on the loan forPreakness Shopping Center located in
the maturity date ofOctober 1, 2026 which has been included in the column "within one year" on the Contractual Obligations - Principal table above. Interest based on rates as of **October 31, 2021
(A) Includes interest on the loan on the
sale of
the then outstanding loan balance. (See Note 17 to FREIT Maryland's
consolidated financial statements for additional details.)
(B) Includes interest on the loan on the Rotunda and WestFREIT property through
the date of sale of
proceeds from each of these sales were used to pay off the then outstanding
loan balance. (See Note 17 to FREIT Maryland's consolidated financial
statements for additional details.) 42 Table of Contents
ADJUSTED FUNDS FROM OPERATIONS
Funds From Operations ("FFO") is a non-GAAP measure defined by theNational Association of Real Estate Investment Trusts ("NAREIT"). FREIT Maryland does not include sources or distributions from equity/debt sources in its computation of FFO. Although many consider FFO as the standard measurement of a REIT's performance, FREIT Maryland 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 FREITMaryland's residential apartments. The modified FFO computation is referred to as Adjusted Funds From Operations ("AFFO"). FREIT Maryland believes that AFFO is a superior measure of its operating performance. FREIT Maryland computes FFO and AFFO as follows: Years Ended October 31, 2021 2020 2019 (In Thousands, Except Per Share) Funds From Operations ("FFO") (a) Net income$ 1,047 $ 17,320 $ 1,793 Depreciation of consolidated properties 9,300 10,341 11,339 Tenant improvement write-off due to COVID-19 - 7,277 - Amortization of deferred leasing costs 544 730 611 Distributions to non-controlling interests (1,350 ) (583 )(b) (686 ) Adjustment to loss in investment in tenancy-in-common for depreciation 1,408 933 - Gain on sale of property - - (836 ) Gain on deconsolidation of subsidiary -
(27,680 ) - FFO$ 10,949 $ 8,338 $ 12,221 Per Share - Basic and Diluted $ 1.56$ 1.19 $ 1.76 (a) As prescribed by NAREIT. (b) FFO excludes the distribution of proceeds to non-controlling interests in the amount of approximately$3.3 million related to the refinancing of the loan for theWestwood Hills property. See Note 5 to the consolidated financial statements for further details. Adjusted Funds From Operations ("AFFO") FFO$ 10,949 $ 8,338 $ 12,221 Deferred rents (Straight lining) 230 397 (410 ) Capital Improvements - Apartments (625 )
(347 ) (685 ) AFFO$ 10,554 $ 8,388 $ 11,126 Per Share - Basic and Diluted $ 1.50$ 1.20 $ 1.60 Weighted Average Shares Outstanding: Basic 7,019 6,992 6,940 Diluted 7,022 6,994 6,940 FFO and AFFO do not represent cash generated from operating activities in accordance with GAAP, and therefore should not be considered a substitute for net income as a measure of results of operations or for cash flow from operations as a measure of liquidity. Additionally, the application and calculation of FFO and AFFO by certain other REITs may vary materially from that of FREIT Maryland, and therefore FREIT Maryland's FFO and AFFO may not be directly comparable to those of other REITs. 43 Table of Contents DISTRIBUTIONS TO STOCKHOLDERS
Since its inception in 1961, FREIT Maryland has elected to be treated as a REIT for federal income tax purposes. In order to qualify as a REIT, FREIT Maryland must satisfy a number of highly technical and complex operational requirements of the Internal Revenue Code, including a requirement that FREIT Maryland must distribute to its stockholders at least 90% of its REIT taxable income. Although cash used to make distributions reduces amounts available for capital investment, FREIT Maryland generally intends to distribute not less than the minimum of REIT taxable income necessary to satisfy the applicable REIT requirement as set forth in the Internal Revenue Code. With respect to the Jobs and Growth Tax Relief Reconciliation Act of 2003, the reduction of the tax rate on dividends does not apply to FREIT Maryland dividends other than capital gains dividends, which are subject to capital gains rates. FREIT Maryland's policy is to pass on at least 90% of its ordinary taxable income to stockholders. FREITMaryland's taxable income is untaxed at FREIT Maryland level to the extent distributed to stockholders. FREIT Maryland's dividends of ordinary taxable income will be taxed as ordinary income to its stockholders and FREIT Maryland's capital gains dividends will be taxed as capital gains to its stockholders. FREIT Maryland's Board evaluates the dividend to be declared/paid (if any) on a quarterly basis. The following tables list the quarterly dividends declared for the three most recent fiscal years and the dividends as a percentage of taxable income for those periods. Fiscal Years Ended October 31, 2021 2020 2019 First Quarter$ 0.05 $ -$ 0.150 Second Quarter$ 0.05 $ -$ 0.125 Third Quarter$ 0.05 $ -$ 0.125 Fourth Quarter$ 0.10 $ -$ 0.200 Total For Year$ 0.25 $ -$ 0.600 (in thousands of dollars) Dividends Fiscal Per Total Ordinary Capital Gain Taxable as a % of Year Share Dividends Income-Tax Basis Income-Tax Basis Income Taxable Income 2021$ 0.25 $ 1,755 $ 1,774 * $ -$ 1,774 * 98.9% 2020 $ - $ - $ - $ - $ - 0.0% 2019$ 0.60 $ 4,173 $ 4,073 $ 100$ 3,877 107.6% *Estimated INFLATION
Inflation can impact the financial performance of FREIT Maryland in various ways. FREIT Maryland's commercial tenant leases normally provide that the tenants bear all or a portion of most operating expenses, which can reduce the impact of inflationary increases on FREIT Maryland. Apartment leases are generally for a one-year term, which may allow FREIT Maryland to seek increased rents as leases renew or when new tenants are obtained, subject to prevailing market conditions.
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