FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY, INC. 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 unaudited condensed consolidated financial statements of FREIT Maryland (including related notes thereto) appearing elsewhere in this Form 10-Q, and the consolidated financial statements included in FREIT's most recently filed Form 10-K. Certain statements in this discussion may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect FREITMaryland'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. These and certain other uncertainties, factors and risks, including those risk factors set forth and further described in Part I, Item 1A entitled "Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2020 , and other risks described in our subsequent filings with theSEC , may cause our actual results to differ materially from those projected. Such factors include, but are not limited to, the following: general economic and business conditions, including the purchase of retail products over the Internet, which will, among other things, affect demand for rental space, the availability of prospective tenants, lease rents, the financial condition of tenants and the default rate on leases, operating and administrative expenses and the availability of financing; adverse changes in FREIT Maryland's real estate markets, including, among other things, competition with other real estate owners, competition confronted by tenants at FREITMaryland'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 real estate assets and the real estate markets in which we operate, and the global,U.S. and local economies. The risks with respect to the development of real estate include: increased construction costs, inability to obtain construction financing, or unfavorable terms of financing that may be available, unforeseen construction delays and the failure to complete construction within budget.
OVERVIEW
FREIT 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 rent in the form of expense
reimbursements derived from operating commercial properties. FREIT Maryland's
properties are primarily located in northern New Jersey , Maryland and New York .
COVID-19 Pandemic: The international spread of COVID-19 was declared a global
pandemic by the World Health Organization on March 11, 2020 . The extent to which
this pandemic could continue to affect our financial condition, liquidity, and
results of operations is difficult to predict and depends on evolving factors,
including: duration, scope, government actions, and other social responses.
Beginning in March 2020 , many states in the U.S. , including New Jersey , New York
and Maryland , where our properties are located, implemented stay-at-home and
shutdown 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 a full or partial lifting of these restrictions at various points
over the past year. Vaccinations for the COVID-19 virus have been widely
distributed among the general U.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 has been evolving, it continues to cause
uncertainty and volatility in the financial markets. Many U.S. industries and
businesses have been negatively affected and millions of people have filed for
unemployment resulting in the U.S. unemployment rate rising to 14.7% in April
2020 , which was the highest recorded rate since the Great Depression. Since
April 2020 , the U.S unemployment rate has declined to 5.4% as of July 2021 , as
many businesses continue to reopen and rehire employees following many of the
COVID-19 mandated shutdown orders. However, the jobless rate remains well above
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. These and other
adverse conditions that may unfold in the future are expected to
Page 21
Index
continue until such time as government shutdown orders are fully lifted, and
business operations and commercial activity can fully resume. The lifting of all
government shutdown orders cannot be predicted with any certainty. Further, even
after such orders are fully lifted, the resumption of business operations and
commercial activity will depend on several factors, including prevailing
sentiments among workers and consumers regarding the safety of resuming public
activity, and cannot be predicted with any certainty.
Despite the COVID-19 pandemic and preventive measures taken to mitigate the
spread, our residential properties continued to generate cash flow. The average
annual occupancy rate for the residential properties (including the Pierre TIC)
has increased from approximately 93.5% and 93.3%, respectively, for the nine and
three months ended July 31, 2020 to approximately 95.6% and 95.3%, respectively,
for the nine and three months ended July 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 shutdowns and the continued lingering impact to
consumer sentiment and preferences for safety amid the reemergence of other
variants. While the overall average cash realization of monthly billings as
compared to monthly cash collections for the commercial properties for the nine
months ended July 31, 2021 has resumed to pre-pandemic levels, the average
annual occupancy rate has declined from approximately 80.3% and 79.1%,
respectively, for the nine and three months ended July 31, 2020 to approximately
76.4% and 76%, respectively, for the nine and three months ended July 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 and Grande 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 ). Until the space is re-leased at each of these
properties, FREIT Maryland's operating results will be adversely impacted from
the loss of base rent and additional rent of approximately $0.4 million (with a
consolidated impact to FREIT Maryland of approximately $0.2 million ) on an
annualized basis. 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 nine and three months ended July 31, 2021 , rental revenue
deemed uncollectible of approximately $1.2 million and $0.3 million (with a
consolidated impact to FREIT Maryland of approximately $0.7 million and $0.1
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. As of July 31, 2021 , FREIT Maryland has
applied, net of amounts subsequently paid back by tenants, an aggregate of
approximately $397,000 of security deposits from its commercial tenants to
outstanding receivables due. For the nine and three months ended July 31, 2021 ,
on a case by case basis, FREIT Maryland has offered some commercial tenants rent
abatements over a specified time period totaling approximately $135,000 and
$34,000 (with a consolidated impact to FREIT Maryland of approximately $91,000
and $20,000 ), respectively. FREIT Maryland has not offered any significant new
deferrals of rent over a specified time period during the nine and three months
ended July 31, 2021 . FREIT Maryland currently remains in active discussions and
negotiations with these impacted retail tenants.
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 of July 31, 2021 and October 31, 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 condensed consolidated balance sheets as of July 31, 2021 and
October 31, 2020 . (See Note 9 to FREIT Maryland's condensed consolidated
financial statements for additional details).
For the nine months ended July 31, 2021 , we have experienced a positive cash
flow from operations with cash provided by operations of approximately $10.2
million . This could change based on the duration of the pandemic, which is
uncertain. We believe that our cash balance as of July 31, 2021 of approximately
$36.4 million coupled with a $13 million available line of credit (available
through October 31, 2023 , see Note 9) will provide us with sufficient liquidity
for at least the next twelve months from the filing of this Form 10-Q.
The extent of the effects of COVID-19 on our business, results of operations,
cash flows, value of our real estate assets and growth prospects is highly
uncertain and will ultimately depend on future developments, none of which can
be predicted with any certainty. However, we believe the actions we have taken
and continue to take will help minimize interruptions to our operations and will
put us in the best position to participate in the economic recovery as the
recovery occurs. 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 health authorities, and will, as
needed, take further measures to adapt our business in the best interests of our
shareholders and personnel. (See Note 16 to FREIT Maryland's condensed
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
reopening of the economy.
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Index
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 restrictions
continue to evolve, the impact COVID-19 may have on the operating and financial
performance of our commercial properties over the next year is currently
uncertain and will depend on certain developments, including, among others, the
impact of COVID-19 on our tenants, 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.
Burlington Coat Factory ("Burlington"), which does business as a retail tenant
at the Westridge Square Shopping Center located in Frederick, Maryland , did not
exercise its option to renew its lease which is set to expire on November 30,
2021 . On May 4, 2021 , Burlington amended its lease extending the term of the
lease for a period of one (1) year and ninety (90) days commencing on December
1, 2021 and expiring on February 28, 2023 ("Fourth Extension Period"). The fixed
rent during this Fourth Extension Period shall be 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 receiptof the Termination Notice. 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 FREITMaryland for each share of FREIT that they own, without any action of shareholders 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 condensed 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. 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 quarterly report on Form 10-Q.
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 included in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2020 , have been applied consistently as ofJuly 31, 2021 , and for the nine and three months endedJuly 31, 2021 and 2020. We believe that the following accounting policies or estimates require the application of management's most difficult, subjective, or complex judgments. Revenue Recognition: Base rents, additional rents based on tenants' sales volume and reimbursement of the tenants' share of certain operating expenses are generally recognized when due from tenants. The straight-line basis is used to recognize base rents under leases if they provide for varying rents over the lease terms. Straight-line rents receivable represent unbilled rents 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. Page 23 Index
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 FREIT Maryland believes that our discounted cash flow methods are reasonable, different assumptions regarding such cash flows may significantly affect the measurement of impairment. Real Estate Development Costs: It is FREIT 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 2 to the condensed consolidated financial statements for recently issued accounting standards.
RESULTS OF OPERATIONS
The schedule below provides a detailed analysis of the major changes that
impacted net income (loss)-common equity for the nine and three months ended
NET INCOME (LOSS) COMPONENTS Nine Months Ended
Three Months Ended
July 31, July 31,
2021 2020 Change 2021 2020 Change
(In Thousands of Dollars) (In Thousands of Dollars)Income from real estate operations:
Commercial properties$ 9,728 $ 10,615 $
(887)
Residential properties 11,794 13,008 (1,214) 3,827 3,744 83
Total income from real estate
operations 21,522 23,623 (2,101) 7,165 6,586 579
Financing costs:
Fixed rate mortgages (4,348) (5,773) 1,425 (1,445) (1,718) 273
Floating rate mortgages (3,873) (4,190) 317 (1,292) (1,092) (200)
Other - Corporate interest (183) (270) 87 (43) (60) 17 Mortgage cost amortization (838) (799)
(39) (270) (251) (19)
Total financing costs (9,242) (11,032) 1,790 (3,050) (3,121) 71
Investment income 88 174 (86) 29 38 (9)
General & administrative expenses:
Accounting fees (374) (507) 133 (110) (181) 71 Legal and professional fees (1,929) (676)
(1,253) (752) (641) (111)
Directors and consultant fees (710) (1,032) 322 (245) (318) 73
Stock option expense (35) (35) - (11) (11) -
Corporate expenses (1,095) (811) (284) (295) (82) (213)
Total general & administrative
expenses (4,143) (3,061) (1,082) (1,413) (1,233) (180)
Third party transaction costs - (4,606) 4,606 - (87) 87 Depreciation (6,948) (7,887)
939 (2,315) (2,425) 110 Loss on investment in tenancy-in-common (245) (96) (149) (100) (78) (22)
Adjusted net income (loss) 1,032 (2,885) 3,917 316 (320) 636 Gain on deconsolidation of subsidiary - 27,680 (27,680) - - - Net income (loss) 1,032 24,795
(23,763) 316 (320) 636
Net (income) loss attributable to noncontrolling interests in subsidiaries (256) (18)
(238) (107) 139 (246)
Net income (loss) attributable to common
equity $ 776 $ 24,777 $ (24,001) $ 209 $ (181) $ 390 The condensed consolidated results of operations for the nine months endedJuly 31, 2021 ("Current Nine Months") and for the three months endedJuly 31, 2021 ("Current Quarter ") are not necessarily indicative of the results to be expected for the full year or any other period. The table above includes income from real estate operations which is a non-GAAP financial measure and is not a measure of operating results or cash flow as measured by GAAP, and is not necessarily indicative of cash available to fund cash needs. Real estate revenue for the Current Nine Months decreased 8.0% to$38,100,000 , compared to$41,430,000 for the nine months endedJuly 31, 2020 ("Prior Year's Nine Months"). Real estate revenue for theCurrent Quarter increased 3.2% to$12,542,000 , compared to$12,149,000 for the three months endedJuly 31, 2020 ("Prior Year's Quarter"). The decline in revenue for the Current Nine Months 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 ; Page 24 Index (b) a reversal of rental revenue in the amount of approximately$1.2 million in the Current Year's Nine Months deemed uncollectible and attributable to commercial tenants suffering adverse financial consequences as a result of the COVID-19 pandemic; (c) a decline in revenue from the commercial segment of approximately$0.2 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 76.4% from 80.3% in the Prior Year's Nine Months; offset by (d) an increase in revenue from the residential segment of approximately$0.7 million primarily driven by an increase in the average occupancy rate to 96.0% from 93.8% in the Prior Year's Nine Months and an increase in base rents across most properties. The increase in revenue for theCurrent Quarter was primarily attributable to the following: (a) an increase in revenue of approximately$0.5 million resulting from the write-off in the Prior Year's Quarter of the straight-line rent receivable and uncollectible revenue for theCobb Theatre at the Rotunda retail property due to the lease being rejected in the bankruptcy court proceedings; (b) an increase in revenue from the residential segment of approximately$0.3 million primarily driven by an increase in the average occupancy rate to 95.5% from 93.5% in the Prior Year's Quarter and an increase in base rents across most properties; offset by (c) a reversal of rental revenue in the amount of approximately$0.3 million in the Current Year's Quarter deemed uncollectible and attributable to commercial tenants suffering adverse financial consequences as a result of the COVID-19 pandemic; and (d) a decrease in revenue in the commercial segment of approximately$0.1 million resulting from the decline in the average occupancy rate to 76.0% from 79.1% in the Prior Year's Quarter. Net income (loss) attributable to common equity ("net income (loss)-common equity") for the Current Nine Months andCurrent Quarter was net income of$776,000 ($0.11 per share basic and diluted) and$209,000 ($0.03 per share basic and diluted), compared to$24,777,000 ($3.55 per share basic and$3.54 per share diluted) and net loss of$181,000 (($0.02 ) per share basic and diluted), for the Prior Year's comparable periods, respectively. Adjusted net income (loss) for the Current Nine Months andCurrent Quarter was net income of$1,032,000 ($0.15 per share basic and diluted) and$316,000 ($0.05 per share basic and diluted), compared to net loss of$2,885,000 (($0.41 ) per share basic and diluted) and$320,000 (($0.05 ) per share basic and diluted), for the Prior Year's comparable periods, respectively. 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. The increase in adjusted net income for the Current Nine Months was primarily driven by the following: (a) a decrease in third party transaction costs incurred in the Prior Year's Nine Months of approximately$4.6 million ; (b) a decrease in net financing costs of approximately$1.1 million (with a consolidated impact to FREIT Maryland of approximately$0.8 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 expense for the reserve of uncollectible rents for commercial tenants of approximately$0.7 million (with a consolidated impact to FREIT Maryland of approximately$0.5 million ); (d) a decline in depreciation expense of approximately$0.5 million (with a consolidated impact to FREITMaryland of approximately$0.2 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; offset by (e) an increase in general & administrative ("G&A") expenses of approximately$1.1 million primarily driven by an increase in legal costs attributed to the legal proceedings between FREIT Maryland and certain of its affiliates andSinatra Properties, LLC ; (f) 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 ); (g) a reduction in revenue, excluding the impact of the conversion of thePierre Towers property to a TIC, in the amount of approximately$0.7 million (with a consolidated impact to FREIT Maryland of approximately$0.2 million ) as explained above; (h) a decrease in adjusted net income with an impact of approximately$0.4 million attributed to thePierre Towers deconsolidation from FREIT Maryland's operating results in the Prior Year's Nine Months (with a consolidated impact to FREIT Maryland of approximately$0.3 million ); and (i) an increase in repairs and maintenance expense of approximately$0.4 million (with a consolidated impact to FREIT Maryland of approximately$0.2 million ), (excluding the impact of the deconsolidation of the operating results of thePierre Towers from FREIT Maryland's operating results of approximately$0.2 million in repairs and maintenance expense). The increase in adjusted net income for theCurrent Quarter was primarily driven by the following: (a) an increase in revenue in the amount of approximately$0.4 million (with a consolidated impact to FREIT Maryland of approximately$0.3 million ) as explained above; (b) a decrease in third party transaction costs incurred in the Prior Year's Quarter of approximately$0.1 million ; (c) a decrease in depreciation expense of approximately$0.1 million (with a consolidated impact to FREIT Maryland of approximately$0.1 million ) primarily attributed to tenant improvements written off in Fiscal 2020; (d) a decline in expense for the reserve of uncollectible rents of approximately$0.3 million (with a consolidated impact to FREIT Maryland of approximately$0.2 million ); offset by (e) an increase in G&A expenses of approximately$0.2 million primarily driven by an increase in corporate expenses; and (f) an increase in repairs and maintenance expense of approximately$0.2 million (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.) Page 25 Index SEGMENT INFORMATION The following tables set forth comparative net operating income ("NOI") data for FREIT Maryland's real estate segments and reconciles the NOI to condensed consolidated net income (loss)-common equity for the Current Nine Months andCurrent Quarter as compared to the Prior Year's comparable periods (see below for definition of NOI): Commercial Residential Combined Nine Months Ended Nine Months Ended
Nine Months Ended
July 31, Increase (Decrease) July 31, Increase (Decrease) July 31,
2021 2020 $ % 2021 2020 $ % 2021 2020
(In Thousands) (In Thousands) (In Thousands)
Rental income $ 13,410 $ 14,919 $ (1,509 ) -10.1%
4,544 4,695 (151 ) -3.2% 123 109 14 12.8% 4,667 4,804
Other 345 24 321 1337.5% 217 444 (227 ) -51.1% 562 468
Total revenue 18,299 19,638 (1,339 ) -6.8% 20,026 22,005 (1,979 ) -9.0% 38,325 41,643
Operating expenses 8,346 8,810 (464 ) -5.3% 8,232 8,997 (765 ) -8.5% 16,578 17,807
Net operating income $ 9,953 $ 10,828 $ (875 ) -8.1% $ 11,794 $ 13,008 $ (1,214 ) -9.3% 21,747 23,836
Average Occupancy % 76.4% 80.3% -3.9% 96.0% * 93.8% * 2.2%
Reconciliation tocondensed consolidated net income-common equity:
Deferred rents - straight lining (225 ) (213 )
Investment income 88 174
General and administrative expenses (4,143 ) (3,061 )
Third party transaction costs - (4,606 )
Gain on
deconsolidation of subsidiary - 27,680
Loss on investment in tenancy-in-common (245 ) (96 )
Depreciation (6,948 ) (7,887 )
Financing costs (9,242 ) (11,032 )
Net income 1,032 24,795
Net incomeattributable to noncontrolling interests in subsidiaries
(256 ) (18 )
Net income attributable to common equity $776$ 24,777 Commercial Residential Combined Three Months Ended Three Months Ended Three Months EndedJuly 31 , Increase (Decrease)July 31 , Increase (Decrease)July 31, 2021 2020 $ % 2021 2020 $ % 2021 2020 (In Thousands) (In Thousands) (In Thousands) Rental income$ 4,423 $ 4,732 $ (309) -6.5%$ 6,545 $ 6,303 $ 242 3.8%$ 10,968 $ 11,035 Reimbursements 1,425 1,349 76 5.6% 45 33 12 36.4% 1,470 1,382 Other 37 9 28 311.1% 79 57 22 38.6% 116 66 Total revenue 5,885 6,090 (205) -3.4% 6,669 6,393 276 4.3% 12,554 12,483 Operating expenses 2,535 2,914 (379) -13.0% 2,842 2,649 193 7.3% 5,377 5,563 Net operating income$ 3,350 $ 3,176 $ 174 5.5%$ 3,827 $ 3,744 $ 83 2.2% 7,177 6,920 Average Occupancy % 76.0% 79.1% -3.1% 95.5% * 93.5% * 2.0%
Reconciliation to condensed consolidated net income (loss)-common equity:
Deferred rents - straight lining
(12 ) (334 )
Investment income 29 38
General and administrative expenses
(1,413 ) (1,233 )
Third party transaction costs - (87 )
Losson investment in tenancy-in-common
(100 ) (78 )
Depreciation (2,315 ) (2,425 )
Financing costs (3,050 ) (3,121 )
Net income (loss) 316 (320 )
Net
(income) loss attributable to noncontrolling interests in subsidiaries (107 ) 139
Net income (loss) attributable to common equity $ 209 $ (181 )
* Average occupancy rate excludes the Pierre
Towers property from all periods presented as the property was deconsolidated and converted to a TIC effective
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 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.
Page 26
Index
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 in Rockaway, New Jersey owned by FREIT Maryland from
which it receives monthly rental income from a tenant who has built and operates
a bank branch on the land.
As indicated in the tables above under the caption Segment Information, total
revenue from FREIT Maryland's commercial segment for the Current Nine Months and
Current Quarter decreased by 6.8% and 3.4%, respectively, and NOI decreased by
8.1% and increased by 5.5%, respectively, as compared to the Prior Year's
comparable periods. Average occupancy for all commercial properties for the
Current Nine Months and Current Quarter decreased by 3.9% and 3.1%,
respectively, as compared to the Prior Year's comparable periods.
The decline in revenue for the Current Nine Months was primarily attributable to
the following: (a) a reversal of rental revenue in the amount of approximately
$1 million (excluding the straight-line rent receivable write-off of
approximately $0.2 million ) deemed uncollectible and attributable to commercial
tenants suffering adverse financial consequences as a result of the COVID-19
pandemic; (b) a decline in revenue of approximately $0.3 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 from Cobb Theatre at the Rotunda retail property), primarily driven by
a decline in the average occupancy rate; and (c) a decrease in revenue of
approximately $0.1 million attributed to commercial rent abatements resulting
from the COVID-19 pandemic. The decline in NOI for the Current Nine Months was
primarily attributable to the following: (a) a decline in revenue of
approximately $1.3 million as described above; (b) an increase in snow removal
costs due to a harsher winter in Fiscal 2021 of approximately $0.4 million ;
offset by (c) a decline in expense for the reserve of uncollectible rents of
approximately $0.7 million .
The decline in revenue for the Current Quarter was primarily attributable to the
following: (a) a reversal of rental revenue in the amount of approximately $0.3
million deemed uncollectible and attributable to commercial tenants suffering
adverse financial consequences as a result of the COVID-19 pandemic; offset by
(b) an increase in revenue of approximately $0.1 million (excluding the
straight-line rent receivable write-off of approximately $0.4 million ) resulting
from the write-off in the Prior Year's Quarter of uncollectible revenue for the
Cobb Theatre at the Rotunda retail property due to the lease being rejected in
the bankruptcy court proceedings. The increase in NOI for the Current Quarter
was primarily attributable to the following: (a) a decline in expense for the
reserve of uncollectible rents of approximately $0.3 million ; offset by (b) a
decline in revenue of approximately $0.2 million as described above.
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 the Current Nine Months and Current Quarter ,
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 the Current Nine Months:
Weighted Weighted Tenant
Average Lease Average Prior Improvement Lease
Number of Lease Area Rate Lease Rate % Increase Allowance Commissions
RETAIL: Leases (Sq. Ft.) (per Sq. Ft.) (per Sq. Ft.) (Decrease) (per Sq. Ft.) (a) (per Sq. Ft.) (a)
Comparable leases (b) 16 132,909 $ 12.60 $ 15.81 -20.3% $ - $ 0.16
Non-comparable leases 4 6,631 $ 38.63 N/A N/A $ 2.40 $ 1.92
Total leasing activity 20 139,540
Weighted Weighted Tenant
Average Lease Average Prior Improvement Lease
Number of Lease Area Rate Lease Rate % Increase Allowance Commissions
OFFICE: Leases (Sq. Ft.) (per Sq. Ft.) (per Sq. Ft.) (Decrease) (per Sq. Ft.) (a) (per Sq. Ft.) (a)
Comparable leases (b) 12 29,800 $ 33.15 $ 32.13 3.2% $ - $ 0.32
Non-comparable leases 2 4,053 $ 23.72 N/A N/A $ - $ 1.34
Total leasing activity 14 33,853
(a) These leasing costs are presented as annualized costs per square foot and are allocated uniformly over the initial lease term.
(b) This includes new tenant leases and/or
modifications/extensions/renewals of existing tenant leases.
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 and Grande 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 ). Until the space is re-leased at each of these
properties, FREIT Maryland's operating results will be adversely impacted from
the loss of base rent and additional rent of approximately $0.4 million (with a
consolidated impact to FREIT Maryland of approximately $0.2 million ) on an
annualized basis.
Page 27
Index
Burlington, which does business as a retail tenant at theWestridge Square Shopping Center located inFrederick, Maryland , did not exercise its option to renew its lease which is set to expire onNovember 30, 2021 . OnMay 4, 2021 , Burlington amended its lease 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 shall be 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. 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 shutdown related to the COVID-19 pandemic and onJuly 14, 2020 rejected its lease at this property as ofJune 30, 2020 . Until this space is re-leased, FREITMaryland's operating results will be adversely impacted from loss of base rent and additional rent of approximately$1.1 million (with a consolidated impact to FREIT Maryland of approximately$0.7 million ) on an annualized basis. 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 FREIT Maryland of approximately$0.1 million ). The Company is currently exploring all possible options for the re-leasing of this space. 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 5 to FREIT Maryland's condensed consolidated financial statements for further details.) As indicated in the tables above under the caption Segment Information, total revenue from FREIT Maryland's residential segment for the Current Nine Months andCurrent Quarter decreased by 9% and increased by 4.3%, respectively, and NOI decreased by 9.3% and increased by 2.2%, respectively, as compared to the Prior Year's comparable periods. Average occupancy for all residential properties for the Current Nine Months andCurrent Quarter increased by 2.2% and 2%, respectively, as compared to the Prior Year's comparable periods. The decline in revenue for the Current Nine Months 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 ; offset by (b) an increase in revenue of approximately$0.7 million driven by an increase in the average occupancy rate by approximately 2.2% over the Prior Year's Nine Months and an increase in base rent across most properties. The decline in NOI for the Current Nine Months 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 ; and (c) an increase in operating expenses of approximately$0.2 million partially driven by an increase in snow removal costs due to a harsher winter in Fiscal 2021; offset by (d) an increase in revenue of approximately$0.7 million as explained above. The increase in revenue for theCurrent Quarter was primarily attributable to an increase in the average occupancy rate by approximately 2% over the Prior Year's Quarter and an increase in base rents across most properties. The increase in NOI for theCurrent Quarter was primarily attributable to the following: (a) an increase in revenue of approximately$0.3 million as explained above; offset by (b) an increase in repairs and maintenance expense of approximately$0.2 million . Same Property Operating Results: FREIT Maryland's residential segment currently contains seven (7) same properties. (See definition of same property under Segment Information above.)The Pierre Towers property was excluded from same property results for all periods presented because this property was deconsolidated and converted to a TIC as ofFebruary 28, 2020 . Same property revenue for the Current Nine Months andCurrent Quarter increased by 3.5% and 4.3%, respectively, and same property NOI increased by 0.9% and 2.2%, respectively, as compared to the Prior Year's comparable periods. The changes resulted from the factors discussed in the immediately preceding paragraph.
Page 28
Index
FREIT Maryland's residential revenue is principally composed of monthly
apartment rental income. Total rental income is a factor of occupancy and
monthly apartment rents. Monthly average residential rents at the end of the
Capital expenditures: Since all of FREIT Maryland's apartment communities, with the exception of the Boulders, Regency, Icon andStation Place properties, were constructed more than 25 years ago, FREIT Maryland tends to spend more in any given year on maintenance and capital improvements than may be spent on newer properties. As a result of the COVID-19 global pandemic, only capital improvements deemed essential are being made at this time. Funds for these capital projects will be available from cash flow from the property's operations and cash reserves. FINANCING COSTS Nine Months Ended July 31, Three Months Ended July 31, 2021 2020 2021 2020 (In Thousands of Dollars) (In Thousands of Dollars) Fixed rate mortgages (a): 1st Mortgages Existing$ 4,348 $ 5,773 $ 1,445 $ 1,718 New - - - - Variable rate mortgages: 1st Mortgages Existing 3,873 4,190 1,292 1,092 New - - - - Other 183 270 43 60
Total financing costs, gross 8,404 10,233 2,780 2,870 Amortization of mortgage costs 838 799 270 251 Total financing costs, net$ 9,242 $ 11,032
$ 3,050 $ 3,121
(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 financing costs for the Current Nine Months decreased by approximately$1,790,000 or 16.2%, compared to the Prior Year's Nine Months which is primarily attributable to the following: (a) a decline in interest on the variable mortgage loans for the Rotunda and WestFREIT properties of approximately$1,104,000 resulting from lower interest rates; and (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$645,000 . Total financing costs for theCurrent Quarter decreased by approximately$71,000 or 2.3%, compared to the Prior Year's Quarter which is primarily attributable to a decline in interest on the variable mortgage loans for the Rotunda and WestFREIT properties resulting from lower interest rates. (See Note 5 to FREIT Maryland's condensed consolidated financial statements for further details on the deconsolidation of the Pierre Towers property.)
GENERAL AND ADMINISTRATIVE EXPENSES
G&A expense for the Current Nine Months andCurrent Quarter was approximately$4,143,000 and$1,413,000 , respectively, compared to$3,061,000 and$1,233,000 , respectively, for the Prior Year's comparable periods. 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 the Current Nine Months was primarily driven by the following: (a) an increase in legal costs of approximately$1,253,000 resulting from the legal proceedings between FREIT Maryland and certain of its affiliates andSinatra Properties, LLC ; (b) an increase in corporate expenses of approximately$284,000 primarily attributed to reincorporation expenses incurred in the Current Nine Months of approximately$475,000 to reincorporate in the state ofMaryland offset by costs incurred in the Prior Year's Nine Months 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$322,000 . The increase in G&A costs for theCurrent Quarter was primarily driven by an increase in corporate expenses attributed to the reincorporation of FREIT in the state ofMaryland .
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 6 and 7 for additional details) in the amount of approximately $0 and
$0 , respectively, for the Current Nine Months and Current Quarter , compared to
approximately $4,606,000 and $87,000 , respectively, for the Prior Year's
comparable periods. On April 30, 2020 , the Sellers delivered written notice to
the Purchaser of the Sellers' termination of the Purchase and Sale Agreement
(See
Page 29
Index
Note 6 for details) and on
DEPRECIATION
Depreciation expense for the Current Nine Months andCurrent Quarter was approximately$6,948,000 and$2,315,000 , respectively, compared to$7,887,000 and$2,425,000 , respectively, for the Prior Year's comparable periods. The decline in depreciation expense for the Current Nine Months 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 ; and (b) the remainder of the decline is primarily related to tenant improvements written off in Fiscal 2020. The decline in depreciation expense for theCurrent Quarter was primarily attributable to tenant improvements written off in Fiscal 2020. (See Note 5 to FREIT Maryland's condensed consolidated financial statements for further details on the deconsolidation of the Pierre Towers property.)
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately$10.2 million for the Current Nine Months compared to net cash provided by operating activities of approximately$0 for the Prior Year's Nine Months. 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 quarterly report on Form 10-Q. As ofJuly 31, 2021 , FREIT Maryland had cash, cash equivalents and restricted cash totaling$39.2 million , compared to$39.5 million atOctober 31, 2020 . The decrease in cash in the Current Nine Months is primarily attributable to approximately$10.2 million in net cash provided by operating activities offset by approximately$9.5 million in net cash used in financing activities and approximately$1.0 million in net cash used in investing activities including capital expenditures. In Fiscal 2017,Grande Rotunda incurred substantial expenditures at the Rotunda property related to retail tenant improvements, leasing costs and operating expenditures which, in the aggregate, exceeded revenues as the property was still in the rent up phase and the construction loan held with Wells Fargo at that time was at its maximum level, with no additional funding available to draw. Accordingly, during Fiscal 2017 the equity owners inGrande Rotunda (FREITMaryland with a 60% ownership and Rotunda 100 with a 40% ownership) contributed their respective pro-rata share of any cash needs through loans toGrande Rotunda, LLC . 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 ofJuly 31, 2021 andOctober 31, 2020 , Rotunda 100 has funded Grande Rotunda with approximately$3.2 million and$5.9 million (including interest), respectively, which is included in "Due to affiliate" on the accompanying condensed consolidated balance sheets. Credit Line: FREIT Maryland's revolving line of credit provided by theProvident 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 ofJuly 31, 2021 andOctober 31, 2020 , there was no amount outstanding and$13 million was available under the line of credit. As atJuly 31, 2021 , FREIT Maryland's aggregate outstanding mortgage debt was$302.8 million , which bears a weighted average interest rate of 3.56% and an average life of approximately 2.7 years. FREIT Maryland's fixed rate mortgages are subject to amortization schedules that are longer than the terms of the mortgages. As such, balloon payments (unpaid principal amounts at the mortgage due date) for all mortgage debt will be required as follows: Fiscal Year 2021 2022 2023 2024 2025 2026 2027 2028 2029 ($ in millions)
Mortgage "Balloon"
Payments $0.0 $176.5 (A) $34.8 $9.0 $13.9 $18.6 $0.0 (A) Includes the loan on the Rotunda property located inBaltimore, Maryland with a balloon payment in the amount of approximately$116 million due onFebruary 6, 2022 , which may be extended further for an additional one-year term at Grande Rotunda's option.
The following table shows the estimated fair value and net carrying value of
FREIT Maryland's long-term debt at
($ in Millions) July 31, 2021 October 31, 2020 Fair Value$304.2 $311.4 Carrying Value, Net$301.2 $305.4 Page 30 Index Fair values are estimated based on market interest rates atJuly 31, 2021 andOctober 31, 2020 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, atJuly 31, 2021 , a 1% interest rate increase would reduce the fair value of FREITMaryland's debt by$4.8 million , and a 1% decrease would increase the fair value by$5 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 shareholders. 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 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 , which may be extended further for an additional one-year term at Grande Rotunda's option. Principal payments in the amount of$500,000 were required upon exercise of the first loan extension option and per calendar quarter thereafter. If the second loan extension option is exercised, principal payments in the amount of$750,000 will be required upon exercise of the second 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 . AtJuly 31, 2021 , the total amount outstanding on this loan was approximately$117 million and the interest rate was approximately 2.95%. OnSeptember 30, 2020 ,Westwood Hills 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 6 to FREIT Maryland's condensed 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 ofJuly 31, 2021 ,$25,000,000 of this loan was drawn and outstanding and the interest rate was based on the floor of 4.15%. 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 ofWestFREIT 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 ofJuly 31, 2021 , approximately$21.3 million of this loan was outstanding and the interest rate was approximately 2.68%. 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. Page 31 Index FREIT Maryland has variable interest rate loans secured by its Damascus Centre, Regency, Wayne PSC andStation Place properties. To reduce interest rate fluctuations, FREIT Maryland entered into interest rate swap contracts for each of these loans. These interest rate swap contracts effectively converted variable interest rate payments to fixed interest rate payments. The contracts were based on a notional amount of approximately$22,320,000 ($18,457,000 atJuly 31, 2021 ) for the Damascus Centre swaps, a notional amount of approximately$16,200,000 ($15,004,000 atJuly 31, 2021 ) for the Regency swap, a notional amount of approximately$25,800,000 ($22,520,000 atJuly 31, 2021 ) for the Wayne PSC swap and a notional amount of approximately$12,350,000 ($12,024,000 atJuly 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 atJuly 31, 2021 ). In accordance with ASU 2017-12, "Accounting Standards Codification Topic 815, Derivatives and Hedging ("ASC 815")", 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 condensed 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 condensed consolidated balance sheet. This gain or loss represents the economic consequence of liquidating fixed rate swaps or the cap contract and replacing them with like-duration funding at current market rates, something we would likely never do. Periodic cash settlements of these contracts will be accounted for as an adjustment to interest expense. FREIT 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. AtJuly 31, 2021 , the swap contracts forDamascus 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,$391,000 for the Damascus Centre swaps,$1,030,000 for the Regency swap,$1,260,000 for theStation Place swap and$802,000 for the Wayne PSC swap, all of which have been included as a liability in FREIT Maryland's condensed consolidated balance sheet as atJuly 31, 2021 . The change in the fair value for the contract (gain or loss) during such period has been included in comprehensive income (loss) and for the nine and three months endedJuly 31, 2021 , FREIT Maryland recorded an unrealized gain of approximately$1,441,000 and unrealized loss of$234,000 , respectively, in the condensed consolidated statements of comprehensive income (loss). For the nine and three months endedJuly 31, 2020 , FREIT Maryland recorded an unrealized loss of approximately$3,644,000 and$272,000 , respectively, in the condensed consolidated statements of comprehensive income (loss). 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. Dividend: After careful consideration of FREIT Maryland's projected operating results and cash needs, the Board of Directors ("Board") declared a third quarter dividend of$0.05 per share which will be paid onSeptember 15, 2021 to shareholders of record onSeptember 1, 2021 . The Board will continue to evaluate the dividend on a quarterly basis. Page 32 Index
ADJUSTED FUNDS FROM OPERATIONS
Funds From Operations ("FFO") is a non-GAAP measure defined by the National
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 FREIT
Maryland'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:
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