URSTADT BIDDLE PROPERTIES INC. The following discussion should be read in conjunction with the consolidated financial statements of the company and the notes thereto included elsewhere in this report.
Forward Looking Statements:
This Quarterly Report on Form 10-Q ofUrstadt Biddle Properties Inc. (the "Company"), including this Item 2, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such statements can generally be identified by such words as "anticipate", "believe", "can", "continue", "could", "estimate", "expect", "intend", "may", "plan", "seek", "should", "will" or variations of such words or other similar expressions and the negatives of such words. All statements included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future, including such matters as future capital expenditures, dividends and acquisitions (including the amount and nature thereof), business strategies, expansion and growth of our operations and other such matters, are forward-looking statements. These statements are based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate. Such statements are inherently subject to risks, uncertainties and other factors, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, performance or achievements, financial and otherwise, may differ materially from the results, performance or achievements expressed or implied by the forward-looking statements. Risks, uncertainties and other factors that might cause such differences, some of which could be material, include, but are not limited to:
• economic and other market conditions, including local real estate and market
conditions, that could impact us, our properties or the financial stability of
our tenants;
• financing risks, such as the inability to obtain debt or equity financing on
favorable terms, as well as the level and volatility of interest rates;
• any difficulties in renewing leases, filling vacancies or negotiating improved
lease terms;
• the inability of the Company's properties to generate revenue increases to
offset expense increases;
• environmental risk and regulatory requirements;
• risks of real estate acquisitions and dispositions (including the failure of
transactions to close);
• risks of operating properties through joint ventures that we do not fully
control;
• risks related to our status as a real estate investment trust, including the
application of complex federal income tax regulations that are subject to change;
• as well as other risks identified in our Annual Report on Form 10-K for the
fiscal year ended
reports filed by the Company with the
"SEC"). Executive Summary Overview We are a fully integrated, self-administered real estate company that has elected to be a REIT for federal income tax purposes, engaged in the acquisition, ownership and management of commercial real estate, primarily neighborhood and community shopping centers, with a concentration in the metropolitanNew York tri-state area outside of theCity of New York . Other real estate assets include office properties, single tenant retail or restaurant properties and office/retail mixed-use properties. Our major tenants include supermarket chains and other retailers who sell basic necessities. AtJanuary 31, 2020 , we owned or had equity interests in 81 properties, which include equity interests we own in five consolidated joint ventures and six unconsolidated joint ventures, containing a total of 5.3 million square feet of Gross Leasable Area ("GLA"). Of the properties owned by wholly-owned subsidiaries or joint venture entities that we consolidate, approximately 92.8% of the GLA was leased (92.9% atOctober 31, 2019 ). Of the properties owned by unconsolidated joint ventures, approximately 93.7% of the GLA was leased (96.1% atOctober 31, 2019 ).
We have paid quarterly dividends to our stockholders continuously since our founding in 1969 and have increased the level of dividend payments to our stockholders for 26 consecutive years.
We derive substantially all of our revenues from rents and operating expense reimbursements received pursuant to operating leases and focus our investment activities on community and neighborhood shopping centers, anchored principally by regional supermarkets, pharmacy chains or wholesale clubs. We believe that because consumers need to purchase food and other types of staple goods and services generally available at supermarket, pharmacy anchored or wholesale club shopping centers, the nature of our investments provides for relatively stable revenue flows even during difficult economic times.
We have a conservative capital structure, which includes permanent equity
sources of Common Stock, Class A Common Stock and two series of perpetual
preferred stock, which are only redeemable at our option. We redeemed our
Series G preferred stock on
We focus on increasing cash flow, and consequently the value of our properties, and seek continued growth through strategic re-leasing, renovations and expansions of our existing properties and selective acquisitions of income-producing properties. Key elements of our growth strategies and operating policies are to:
• acquire quality neighborhood and community shopping centers in the northeastern
part of
metropolitan
unlock further value in these properties with selective enhancements to both
the property and tenant mix, as well as improvements to management and leasing
fundamentals. Our hope is to grow our assets through acquisitions by 5% to 10%
per year on a dollar value basis subject to the availability of acquisitions
that meet our investment parameters;
• selectively dispose of underperforming properties and re-deploy the proceeds
into potentially higher performing properties that meet our acquisition criteria;
• invest in our properties for the long-term through regular maintenance,
periodic renovations and capital improvements, enhancing their attractiveness
to tenants and customers, as well as increasing their value;
• leverage opportunities to increase GLA at existing properties, through
development of pad sites and reconfiguring of existing square footage, to meet
the needs of existing or new tenants;
• proactively manage our leasing strategy by aggressively marketing available
GLA, renewing existing leases with strong tenants, and replacing weak ones when
necessary, with an eye towards securing leases that include regular or fixed
contractual increases to minimum rents, replacing below-market-rent leases with
increased market rents when possible and further improving the quality of our
tenant mix at our shopping centers;
• maintain strong working relationships with our tenants, particularly our anchor
tenants;
• maintain a conservative capital structure with low debt levels; and
• control property operating and administrative costs.
Highlights of Fiscal 2020; Recent Developments
Set forth below are highlights of our recent property acquisitions, potential acquisitions under contract, other investments, property dispositions and financings:
• On
Cumulative Preferred Stock for
Series K Cumulative Preferred Stock in
amount was$75 million .
• In
property located in
price of
objectives. In accordance with ASC Topic 360-10-45, the property met all the
criteria to be classified as held for sale in the fourth quarter of fiscal 2019
and accordingly we recorded a loss on property held for sale of
was included in continuing operations in the consolidated statement of income
for the year ended
carrying amount of the property over the fair value of the asset less estimated
cost to sell. In
was completed and we realized an additional loss on sale of property of
statement of income for the three months ended
been added back to our Funds from Operations ("FFO") as discussed below in this
Item 2.
• In
NY, as that property no longer met our investment objectives. In conjunction
with the sale, we realized a loss on sale of property in the amount of
statement of income for the three months ended
been added back to FFO as discussed below in this Item 2.
• In
noncontrolling member. The total cash price paid for the redemption was
increased to 79.7% from 78.2%.
• In
noncontrolling member. The total cash price paid for the redemption was
Ridge increased to 14.2% from 13.3%.
Known Trends; Outlook
We believe that shopping center REITs face opportunities and challenges that are both common to and unique from other REITs and real estate companies. As a shopping center REIT, we are focused on certain challenges that are unique to the retail industry. In particular, we recognize the challenges presented by e-commerce to brick-and-mortar retail establishments, including our tenants. However, we believe that because consumers generally prefer to purchase food and other staple goods and services available at supermarkets in person, the nature of our properties makes them less vulnerable to the encroachment of e-commerce than other properties whose tenants may more directly compete with the internet. Moreover, we believe the nature of our properties makes them less susceptible to economic downturns than other retail properties whose anchor tenants are not supermarkets or other staple goods providers. We note, however, that many prospective in-line tenants are seeking smaller spaces than in the past, as a result, in part, of internet encroachment on their brick-and-mortar business. When feasible, we actively work to place tenants that are less susceptible to internet encroachment, such as restaurants, fitness centers, healthcare and personal services. We continue to be sensitive to these considerations when we establish the tenant mix at our shopping centers, and believe that our strategy of focusing on supermarket anchors is a strong one. In the metropolitan tri-state area outside ofNew York City , demographics (income, density, etc.) remain strong and opportunities for new development, as well as acquisitions, are competitive, with high barriers to entry. We believe that this will remain the case for the foreseeable future, and have focused our growth strategy accordingly.
As a REIT, we are susceptible to changes in interest rates, the lending environment, the availability of capital markets and the general economy. The impact of such changes are difficult to predict.
19
--------------------------------------------------------------------------------
Index
Leasing
Rollovers
For the three months ended January 31, 2020 , we signed leases for a total of
145,900 square feet of retail space in our consolidated portfolio. New leases
for vacant spaces were signed for 14,300 square feet at an average rental
increase of 5.2% on a cash basis. Renewals for 131,600 square feet of space
previously occupied were signed at an average rental increase of 6.7% on a cash
basis.
Tenant improvements and leasing commissions averaged $16.82 per square foot for
new leases and $0.70 per square foot for renewals for the three months ended
January 31, 2020 . The average term for new leases was 6 years and the average
term for renewal leases was 4 years.
The rental increases/decreases associated with new and renewal leases generally
include all leases signed in arms-length transactions reflecting market leverage
between landlords and tenants during the period. The comparison between average
rent for expiring leases and new leases is determined by including minimum rent
paid on the expiring lease and minimum rent to be paid on the new lease in the
first year. In some instances, management exercises judgment as to how to most
effectively reflect the comparability of spaces reported in this calculation.
The change in rental income on comparable space leases is impacted by numerous
factors including current market rates, location, individual tenant
creditworthiness, use of space, market conditions when the expiring lease was
signed, the age of the expiring lease, capital investment made in the space and
the specific lease structure. Tenant improvements include the total dollars
committed for the improvement (fit-out) of a space as it relates to a specific
lease but may also include base building costs (i.e. expansion, escalators or
new entrances) that are required to make the space leasable. Incentives (if
applicable) include amounts paid to tenants as an inducement to sign a lease
that do not represent building improvements.
The leases signed in 2020 generally become effective over the following one to
two years. There is risk that some new tenants will not ultimately take
possession of their space and that tenants for both new and renewal leases may
not pay all of their contractual rent due to operating, financing or other
reasons.
In 2020, we believe our leasing volume will be in-line with our historical
averages with overall positive increases in rental income for renewal leases and
a range of positive 5% to negative 5% for new leases, although that is difficult
to predict because it depends on the many factors that can influence the
variance. However, changes in rental income associated with individual signed
leases on comparable spaces may be positive or negative, and we can provide no
assurance that the rents on new leases will continue to increase at the above
described levels, if at all.
Significant Events with Impacts on Leasing
Since the 2015 bankruptcy ofA&P , its former grocery store space at ourPompton Lakes shopping center, totaling 63,000 square feet, has remained vacant. We are continuing to market that space for re-lease and are considering other redevelopment options at that shopping center, including selling a 30,000 square foot portion of this 63,000 square foot space to a grocery store company, who would operate the store at that location. If the sale of the 30,000 square foot portion is successful, it may result in us realizing a loss on the sale of that 30,000 square foot portion. InJuly 2018 , one other 36,000 square foot space formerly occupied byA&P that we had released to a local grocery operator became vacant, as that operator failed to perform under its lease and was evicted.
We
signed a lease with
In
In
In 2017, Toys R' Us andBabies R' Us ("Toys") filed a voluntary petition under chapter 11 of title 11 of the United States Bankruptcy Code. Subsequently, Toys determined that it would be liquidating the company. Toys ground leased 65,700 square feet of space at ourDanbury, CT shopping center. InAugust 2018 , this lease was purchased out of bankruptcy from Toys and assumed by a new owner.
The
base lease rate for the 65,700 square foot space was and remains at$0 for the duration of the lease, and we did not have any other leases with Toys R' Us orBabies R' Us , so our cash flow was not impacted by the bankruptcy of Toys R' Us andBabies R' Us . As of the date of this report, we have not been informed by the new owner of the lease which operator will occupy the space.
Impact of Inflation on Leasing
Our long-term leases contain provisions to mitigate the adverse impact of
inflation on our operating results. Such provisions include clauses entitling us
to receive (a) scheduled base rent increases and (b) percentage rents based upon
tenants' gross sales, which could increase as prices rise. In addition, many of
our non-anchor leases are for terms of less than ten years, which permits us to
seek increases in rents upon renewal at then current market rates if rents
provided in the expiring leases are below then existing market rates. Most of
our leases require tenants to pay a share of operating expenses, including
common area maintenance, real estate taxes, insurance and utilities, thereby
reducing our exposure to increases in costs and operating expenses resulting
from inflation.
Critical Accounting Policies
Critical accounting policies are those that are both important to the
presentation of our financial condition and results of operations and require
management's most difficult, complex or subjective judgments. For a further
discussion about our critical accounting policies, please see Note 1 in our
consolidated financial statements included in Item 1 of this Quarterly Report on
Form 10-Q.
20
--------------------------------------------------------------------------------
IndexLiquidity and Capital Resources
Overview
AtJanuary 31, 2020 , we had cash and cash equivalents of$14.3 million , compared to$94.1 million atOctober 31, 2019 (see below). Our sources of liquidity and capital resources include operating cash flows from real estate operations, proceeds from bank borrowings and long-term mortgage debt, capital financings and sales of real estate investments. Substantially all of our revenues are derived from rents paid under existing leases, which means that our operating cash flow depends on the ability of our tenants to make rental payments. For the three months endedJanuary 31, 2020 and 2019, net cash flows from operating activities amounted to$15.8 million and$13.7 million , respectively. OnNovember 1, 2019 , we redeemed all 3,000,000 outstanding shares of our 6.75% Series G Cumulative Preferred Stock for$25 per share, which included all accrued and unpaid dividends. The total amount of the redemption amounted to$75 million . The redemption was funded with proceeds from our recently completed sale of 4,400,000 shares of 5.875% Series K Cumulative preferred stock. We issued the Series K shares onOctober 1, 2019 and raised proceeds of$106.5 million . Our short-term liquidity requirements consist primarily of normal recurring operating expenses and capital expenditures, debt service, management and professional fees, cash distributions to certain limited partners and non-managing members of our consolidated joint ventures, and regular dividends paid to our Common and Class A Common stockholders, which we expect to continue. Cash dividends paid on Common and Class A Common stock for the three months endedJanuary 31, 2020 and 2019 totaled$10.9 million and$10.7 million , respectively. Historically, we have met short-term liquidity requirements, which is defined as a rolling twelve month period, primarily by generating net cash from the operation of our properties. We believe that our net cash provided by operations will continue to be sufficient to fund our short-term liquidity requirements, including payment of dividends necessary to maintain our federal income tax REIT status. Our long-term liquidity requirements consist primarily of obligations under our long-term debt, dividends paid to our preferred stockholders, capital expenditures and capital required for acquisitions. In addition, the limited partners and non-managing members of our five consolidated joint venture entities,McLean Plaza Associates, LLC ,UB Orangeburg, LLC ,UB High Ridge, LLC ,UB Dumont I, LLC andUB New City I, LLC , have the right to require us to repurchase all or a portion of their limited partner or non-managing member interests at prices and on terms as set forth in the governing agreements. See Note 3 to the financial statements included in Item 1 of this Report on Form 10-Q. Historically, we have financed the foregoing requirements through operating cash flow, borrowings under our unsecured revolving credit facility ("Facility"), debt refinancings, new debt, equity offerings and other capital market transactions, and/or the disposition of under-performing assets, with a focus on keeping our debt level low. We expect to continue doing so in the future. We cannot assure you, however, that these sources will always be available to us when needed, or on the terms we desire.
Capital Expenditures
We invest in our existing properties and regularly make capital expenditures in the ordinary course of business to maintain our properties. We believe that such expenditures enhance the competitiveness of our properties. For the three months endedJanuary 31, 2020 , we paid approximately$5.9 million for property improvements, tenant improvements and leasing commission costs ($2.7 million representing property improvements and approximately$3.2 million related to new tenant space improvements, leasing costs and capital improvements as a result of new tenant spaces). The amount of these expenditures can vary significantly depending on tenant negotiations, market conditions and rental rates. We expect to incur approximately$9.3 million for anticipated capital improvements, tenant improvements/allowances and leasing costs related to new tenant leases and property improvements during the remainder of fiscal 2020; this amount is inclusive of commitments for the development discussed directly below. These expenditures are expected to be funded from operating cash flows, bank borrowings or other financing sources. We are currently in the process of developing 3.4 acres of recently-acquired land adjacent to a shopping center we own inStratford, CT . We are building two pad site buildings totaling approximately 5,260 square feet, which are pre-leased to national chains, and a self-storage facility of approximately 131,000 square feet, which will be managed for us by a national self-storage company. We anticipate the total development cost will be approximately$15 million over the next two years, which we plan on funding with available cash, by borrowing on our Facility or by using other sources of equity as more fully described earlier in this Item 2. As ofJanuary 31, 2020 , we have invested approximately$7.3 million in this development. We expect to complete the construction of one of the retail pads and the self-storage building in the fall of 2020.
Financing Strategy, Unsecured Revolving Credit Facility and other Financing Transactions
Our strategy is to maintain a conservative capital structure with low leverage levels by commercial real estate standards. Mortgage notes payable and other loans of$304.9 million consist of$1.7 million in variable rate debt with an interest rate of 5.09% as ofJanuary 31, 2020 and$303.2 million in fixed-rate mortgage loans with a weighted average interest rate of 4.1% atJanuary 31, 2020 . The mortgages are secured by 24 properties with a net book value of$555 million and have fixed rates of interest ranging from 3.5% to 4.8%. The$1.7 million in variable rate debt is unsecured. We may refinance our mortgage loans, at or prior to scheduled maturity, through replacement mortgage loans. The ability to do so, however, is dependent upon various factors, including the income level of the properties, interest rates and credit conditions within the commercial real estate market. Accordingly, there can be no assurance that such re-financings can be achieved. Included in the mortgage notes discussed above, we have 8 promissory notes secured by properties we consolidate and 3 promissory notes secured by properties in joint ventures that we do not consolidate. The interest rate on these 11 notes is based on some variation of the London Interbank Offered Rate ("LIBOR") plus some amount of credit spread. In addition, on the day these notes were executed by us, we entered into derivative interest rate swap contracts, the counterparty of which was either the lender on the aforementioned promissory notes or an affiliate of that lender. These swap contracts are in accordance with theInternational Swaps and Derivatives Association, Inc ("ISDA"). These swap contracts convert the variable interest rate in the notes, which are based on LIBOR, to a fixed rate of interest for the life of each note. All indications are that the LIBOR reference rate will no longer be published beginning on or around the year 2021. All contracts, including our 11 promissory notes and 11 swap contracts that use LIBOR, will no longer have the reference rate available and the reference rate will need to be replaced. We have good working relationships with all of our lenders to our notes, who are also the counterparties to our swap contracts. All indications we have received from our lenders and counterparties is that their goal is to have the replacement reference rate under the notes match the replacement rates in the swaps. If this were to happen, we believe there would be no effect on our financial position or results of operations. However, because this will be the first time any of our promissory notes or swap contracts reference rates will stop being published, we cannot be sure how the replacement rate event will conclude. Until we have more clarity from our lenders and counterparties on how they plan on dealing with this replacement rate event, we cannot be certain of the impact on the Company. See "Item 3. Quantitative and Qualitative Disclosures about Market Risk" included in this Report on Form 10-Q for additional information on our interest rate risk. We currently maintain a ratio of total debt to total assets below 30.7% and a fixed charge coverage ratio of over 3.5 to 1 (excluding preferred stock dividends), which we believe will allow us to obtain additional secured mortgage loans or other types of borrowings, if necessary. We own 51 properties in our consolidated portfolio that are not encumbered by secured mortgage debt. AtJanuary 31, 2020 , we had borrowing capacity of$99.3 million on our Facility. Our Facility includes financial covenants that limit, among other things, our ability to incur unsecured and secured indebtedness. See Note 2 in our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for additional information on these and other restrictions. We have a$100 million unsecured revolving credit facility with a syndicate of three banks, BNY Mellon, Bank of Montreal andWells Fargo N.A. with the ability under certain conditions to additionally increase the capacity to$150 million , subject to lender approval. The maturity date of the Facility isAugust 23, 2020 with a one-year extension at our option. Borrowings under the Facility can be used for general corporate purposes and the issuance of up to$10 million of letters of credit. Borrowings will bear interest at our option of Eurodollar rate plus 1.35% to 1.95% orThe Bank of New York Mellon's prime lending rate plus 0.35% to 0.95%, based on consolidated indebtedness, as defined. We pay a quarterly commitment fee on the unused commitment amount of 0.15% to 0.25% per annum, based on outstanding borrowings during the year. As ofJanuary 31, 2020 ,$99.3 million was available to be drawn on the Facility. Our ability to borrow under the Facility is subject to its compliance with the covenants and other restrictions on an ongoing basis. The principal financial covenants limit our level of secured and unsecured indebtedness and additionally require us to maintain certain debt coverage ratios. We were in compliance with such covenants atJanuary 31, 2020 .
During the three months ended
Net Cash Flows from: Operating Activities Net cash flows provided by operating activities amounted to$15.8 million for the three months endedJanuary 31, 2020 compared to$13.7 million in the comparable period of fiscal 2019. The increase in operating cash flows when compared with the corresponding prior period was primarily related to a positive variance in other accounts payable and other assets and liabilities.
Investing Activities
Net cash flows used in investing activities amounted to$1.9 million for the three months endedJanuary 31, 2020 compared to$10.2 million in the comparable period of fiscal 2019. The decrease in net cash flows used in investing activities in the three months endedJanuary 31, 2020 when compared to the corresponding prior period was the result of acquiring one property in the first three months of fiscal 2019 for$13.8 million . We did not purchase any investment properties in the first three months of fiscal 2020. In addition, we sold two properties in the first three months of fiscal 2020 and realized proceeds on the sales of$3.7 million , we did not sell any properties in the first three months of fiscal 2019. This positive variance in net cash used by investing activities was offset by our selling our marketable security portfolio in the first quarter of fiscal 2019 and realizing proceeds on that sale of$6 million . In addition, we expended$3.0 million more on improvements to our properties in the first three months of fiscal 2020 when compared with the corresponding prior period.
We regularly make capital investments in our properties for property improvements, tenant improvements costs and leasing commissions.
Financing Activities
The$93.7 million increase in net cash flows used by financing activities for the three months endedJanuary 31, 2020 when compared to the corresponding prior period was predominantly the result of our redemption of our Series G preferred stock for$75 million in the first three months of fiscal 2020. In addition, the increase in cash flows used by financing activities was the result of our borrowing a net$16 million on our Facility in the first three months of fiscal 2019 versus having no borrowing or repayment activity on the Facility in the first three months of fiscal 2020. 21 -------------------------------------------------------------------------------- Index
Results of Operations
The following information summarizes our results of operations for the three
months ended
Three Months Ended
January 31, Change Attributable to
Properties
Held In
Both
Increase Property Periods
Revenues 2020 2019 (Decrease) % Change Acquisitions/Sales (Note 1)
Base rents $ 24,950 $ 24,809 $ 141 0.6 % $ 57 $ 84
Recoveries from tenants 7,995 8,452 (457 ) (5.4 )% 39 (496 )
Other income 1,194 989 205 20.7 % 1 204
Operating Expenses
Property operating 5,929 5,930 (1 ) - 37 (38 )
Property taxes 5,810 5,913 (103 ) (1.7 )% 34 (137 )
Depreciation and
amortization 7,135 6,940 195 2.8 % 5 190
General and
administrative 2,777 2,654 123 4.6 % n/a n/a
Non-Operating
Income/Expense
Interest expense 3,339 3,578 (239 ) (6.7 )% 120 (359 )
Interest, dividends, and
other investment income 94 129 (35 ) (27.1 )% n/a n/a
Note 1 - Properties held in both periods includes only properties owned for the
entire periods of 2020 and 2019 and for interest expense the amount also
includes parent company interest expense. All other properties are included in
the property acquisition/sales column. There are no properties excluded from
the analysis.
Base rents increased by 0.6% to $25.0 million for the three month period ended
January 31, 2020 as compared with $24.8 million in the comparable period of
2019. The change in base rent and the changes in other income statement line
items analyzed in the table above were attributable to:
Property Acquisitions and Properties Sold:
In the first three months of fiscal 2019, we purchased one property totaling 177,000 square feet, and in fiscal 2019 we sold one property totaling 10,100 square feet. In the first three months of fiscal 2020, we sold two properties totaling 18,100 square feet. These properties accounted for all of the revenue and expense changes attributable to property acquisitions and sales in the three months endedJanuary 31, 2020 when compared with fiscal 2019.
Properties Held in Both Periods:
Revenues
Base Rent The small net increase in base rents for the three month period endedJanuary 31, 2020 , when compared to the corresponding prior period, was predominantly caused by an increase in base rents at most properties related to normal base rent increases provided for in our leases and new leasing at some properties offset by a decrease in base rent at six properties related to tenant vacancies. The most significant of these vacancies were the vacating of TJ Maxx at ourNew Milford, CT property and a tenant at ourStamford, CT property after the first quarter of fiscal 2019. In the first three months of fiscal 2019, we leased or renewed approximately 145,900 square feet (or approximately 3.2% of total consolidated property leasable area). AtJanuary 31, 2020 , the Company's consolidated properties were 92.8% leased (92.9% leased atOctober 31, 2019 ). Tenant Recoveries In the three month period endedJanuary 31, 2020 , recoveries from tenants (which represent reimbursements from tenants for operating expenses and property taxes) decreased by a net$496,000 , when compared with the corresponding prior period. This decrease was predominantly the result of a large real estate tax reduction at one of our properties caused by a reduced assessment as part of a successful tax reduction proceeding, which reduces the amount to be billed back to tenants at that property. In addition, this decrease was caused by a negative variance of$400,000 relating to reconciliation of the accruals for real estate tax recoveries billed to tenants in the first quarter of fiscal 2019 and 2020. This net decrease was offset by an increase in property tax expense caused by an increase in property tax assessments at some of our properties.
Expenses
Property Operating In the three month period endedJanuary 31, 2020 , property operating expenses were relatively unchanged when compared with the corresponding prior period. Property Taxes In the three month period endedJanuary 31, 2020 , property taxes decreased by$137,000 when compared with the corresponding prior period predominantly as a result of a large real estate tax reduction at one of our properties caused by a reduced assessment as part of a successful tax reduction proceeding offset by an increase in property tax assessments for a number of our properties owned in both periods.
Interest
In the three month period endedJanuary 31, 2020 , interest expense decreased by$359,000 when compared with the corresponding prior periods as a result of a reduction in interest expense related to our revolving credit facility. InOctober 2019 , we used a portion of the proceeds from a new series of preferred stock to repay all amounts outstanding on our revolving credit facility. Depreciation and Amortization In the three month period endedJanuary 31, 2020 , depreciation and amortization increased by$190,000 when compared with the prior period primarily as a result of a write off of tenant improvements related to a tenant that vacated ourDanbury, CT property in the first quarter of fiscal 2020. General and Administrative Expenses General and administrative expense had a net increase in the three month period endedJanuary 31, 2020 when compared with the corresponding prior periods as a result of an increase of$454,000 in compensation and benefits expense predominantly related to an increase in cash bonuses paid in the first quarter of fiscal 2020 when compared with the corresponding prior period and an increase in medical insurance costs in the first quarter of fiscal 2020 when compared with the corresponding prior period. 22 -------------------------------------------------------------------------------- Index
Funds from Operations
We consider Funds from Operations ("FFO") to be an additional measure of our
operating performance. We report FFO in addition to net income applicable to
common stockholders and net cash provided by operating activities. Management
has adopted the definition suggested by The National Association of Real Estate
Investment Trusts ("NAREIT") and defines FFO to mean net income (computed in
accordance with GAAP) excluding gains or losses from sales of property, plus
real estate-related depreciation and amortization and after adjustments for
unconsolidated joint ventures.
Management considers FFO a meaningful, additional measure of operating
performance because it primarily excludes the assumption that the value of our
real estate assets diminishes predictably over time and industry analysts have
accepted it as a performance measure. FFO is presented to assist investors in
analyzing our performance. It is helpful as it excludes various items included
in net income that are not indicative of our operating performance, such as
gains (or losses) from sales of property and depreciation and amortization.
However, FFO:
• does not represent cash flows from operating activities in accordance with GAAP
(which, unlike FFO, generally reflects all cash effects of transactions and
other events in the determination of net income); and
• should not be considered an alternative to net income as an indication of our
performance. FFO as defined by us may not be comparable to similarly titled items reported by other real estate investment trusts due to possible differences in the application of the NAREIT definition used by such REITs. The table below provides a reconciliation of net income applicable to Common and Class A Common stockholders in accordance with GAAP to FFO for the three months endedJanuary 31, 2020 and 2019 (amounts in thousands):
Reconciliation of Net Income Available to Common and Class A Common Stockholders To Funds From Operations:
Three Months Ended
January 31,
2020 2019
Net Income Applicable to Common and Class A Common
Stockholders $ 5,071 $ 5,854
Real property depreciation 5,671 5,664
Amortization of tenant improvements and allowances 1,036 883
Amortization of deferred leasing costs 407
393
Depreciation and amortization on unconsolidated joint ventures
373 380
Loss on sale of property 339
-
Loss on sale of property in unconsolidated joint venture -
363
Funds from Operations Applicable to Common and Class A Common Stockholders$ 12,897 $ 13,537 FFO amounted to$12.9 million in the three months endedJanuary 31, 2020 compared to$13.5 million in the comparable period of fiscal 2019. The net decrease in FFO is attributable, among other things, to: (a) our sale of a small marketable security portfolio in the first quarter of fiscal 2019 with a realized gain on sale of$403,000 ; (b) an$80,000 over-accrual adjustment in recoveries from tenants for real estate taxes in the first quarter of fiscal 2020 versus a$342,000 under-accrual adjustment in recoveries from tenants for real estate taxes in the first quarter of fiscal 2019, which combined, resulted in a$422,000 negative variance in the first quarter of fiscal 2020 when compared to the first quarter of fiscal 2019; and (c) a net increase in preferred stock dividends of$349,000 as a result of issuing a new series of preferred stock in fiscal 2019 and redeeming an existing series. The new series has a principal value$35 million higher than the redeemed series, which increased preferred dividends by$513,000 . The new series has a lower coupon rate of 5.875% versus 6.75% on the redeemed series, which reduced preferred stock dividends by$164,000 ; (d) a net increase in general and administrative expenses of$123,000 predominantly related to compensation and benefits, which increased in the first quarter of fiscal 2020 compared with the corresponding prior period. The increase was related to increased staff bonuses and an increase in medical insurance costs. These decreases were partially offset by (e) generating an additional$266,000 in leasing commissions on properties we do not own in the first quarter of fiscal 2020 when compared to the first quarter of fiscal 2019; (f) generating$192,000 more in lease termination income in the first quarter of fiscal 2020 when compared to the corresponding prior period of fiscal 2019; (g) a reduction in interest expense of$239,000 in the first quarter of fiscal 2020 compared to the corresponding period of fiscal 2019 as a result of fully repaying our Facility in the fourth quarter of fiscal 2019 with proceeds from our new series of preferred stock. 23 -------------------------------------------------------------------------------- Index
Off-Balance Sheet Arrangements
We have six off-balance sheet investments in real property through unconsolidated joint ventures:
• a 66.67% equity interest in the
• an 11.792% equity interest in
• a 50% equity interest in the
• a 50% equity interest in the
Applebee's Plaza, and
• a 20% interest in a suburban office building with ground level retail.
These unconsolidated joint ventures are accounted for under the equity method of accounting, as we have the ability to exercise significant influence over, but not control of, the operating and financial decisions of these investments.
Our
off-balance sheet arrangements are more fully discussed in Note 4, "Investments in and Advances toUnconsolidated Joint Ventures " in our financial statements in Item 1 of this Quarterly Report on Form 10-Q. Although we have not guaranteed the debt of these joint ventures, we have agreed to customary environmental indemnifications and nonrecourse carve-outs (e.g. guarantees against fraud, misrepresentation and bankruptcy) on certain loans of the joint ventures. The below table details information about the outstanding non-recourse mortgage financings on our unconsolidated joint ventures (amounts in thousands): Principal Balance Joint Venture AtJanuary 31 ,
Fixed Interest Rate
Description Location Original Balance 2020 Per Annum Maturity Date
Midway Shopping
Center Scarsdale, NY $ 32,000 $ 26,400 4.80 % Dec-2027Putnam Plaza Shopping
Center Carmel, NY $ 18,900 $ 18,600 4.81 % Oct-2028
Gateway Plaza Riverhead, NY $ 14,000 $ 11,900 4.18 % Feb-2024
Applebee's Plaza Riverhead, NY $ 2,300 $ 1,900 3.38 % Aug-2026
Environmental Matters
Based upon management's ongoing review of its properties, management is not
aware of any environmental condition with respect to any of our properties that
would be reasonably likely to have a material adverse effect on us. There can be
no assurance, however, that (a) the discovery of environmental conditions that
were previously unknown, (b) changes in law, (c) the conduct of tenants or (d)
activities relating to properties in the vicinity of our properties, will not
expose us to material liability in the future. Changes in laws increasing the
potential liability for environmental conditions existing on properties or
increasing the restrictions on discharges or other conditions may result in
significant unanticipated expenditures or may otherwise adversely affect the
operations of our tenants, which could adversely affect our financial condition
and results of operations.
24
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