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") 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. We caution not to place undue reliance upon any forward-looking statements, which speak only as of the date made. We do not undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based. Important factors that we think could cause our actual results to differ materially from expected results are summarized below. One of the most significant factors, however, is the ongoing impact of the current outbreak of the novel coronavirus ("COVID-19") on theU.S. , regional and global economies, theU.S. retail market and the broader financial markets. The current outbreak of COVID-19 has also impacted, and is likely to continue to impact, directly or indirectly, many of the other important factors listed below. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. In particular, it is difficult to fully assess the impact of COVID-19 at this time due to, among other factors, uncertainty regarding the severity and duration of the outbreak domestically and internationally, uncertainty regarding the effectiveness of federal, state and local governments' efforts to contain the spread of COVID-19 and respond to its direct and indirect impact on theU.S. economy and economic activity, and the uncertainty regarding medical responses to the pandemic. There is, however, reason to believe that the success of vaccination efforts in theU.S. is leading to a decline in COVID-19 cases and having a positive impact on businesses, as federal, state and local restrictions are lifted and individuals begin returning to pre-pandemic activities.
Important factors, among others, that may affect our actual results include:
• negative impacts from the continued spread of COVID-19 or from the emergence of
a new strain of novel corona virus, including on the
on our business, financial position or results of operations;
• economic and other market conditions, including real estate and market
conditions, that could impact us, our properties or the financial stability of
our tenants;
• consumer spending and confidence trends, as well as our ability to anticipate
changes in consumer buying practices and the space needs of tenants;
• our relationships with our tenants and their financial condition and liquidity;
• any difficulties in renewing leases, filling vacancies or negotiating improved
lease terms;
• the inability of our properties to generate increased, or even sufficient,
revenues to offset expenses, including amounts we are required to pay to
municipalities for real estate taxes, payments for common area maintenance
expenses at our properties and salaries for our management team and other employees;
• the market value of our assets and the supply of, and demand for, retail real
estate in which we invest;
• risks of real estate acquisitions and dispositions, including our ability to
identify and acquire retail real estate that meet our investment standards in
our markets, as well as the potential failure of transactions to close;
• risks of operating properties through joint ventures that we do not fully
control;
• financing risks, such as the inability to obtain debt or equity financing on
favorable terms or the inability to comply with various financial covenants
included in our Unsecured Revolving Credit Facility (the "Facility") or other
debt instruments we currently have or may subsequently obtain, as well as the
level and volatility of interest rates, which could impact the market price of
our common stock and the cost of our borrowings;
• environmental risk and regulatory requirements;
• 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;
• legislative and regulatory changes generally that may impact us or our tenants;
and
• other risks identified in our Annual Report on Form 10-K under Item 1A. Risk
Factors for the fiscal year ended
filed by the Company with the
19
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Index
Executive Summary
Overview
We are a fully integrated, self-administered real estate company that has
elected to be a Real Estate Investment Trust ("REIT") for federal income tax
purposes, engaged in the acquisition, ownership and management of commercial
real estate, primarily neighborhood and community shopping centers, anchored by
supermarkets, pharmacy/drug-stores and wholesale clubs, with a concentration in
the metropolitan tri-state area outside of the City of New York . Other real
estate assets include office properties, one self-storage facility, 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.
At April 30, 2021 , we owned or had equity interests in 80 properties, which
include equity interests we own in five consolidated joint ventures and six
unconsolidated joint ventures, containing a total of 5.2 million square feet of
Gross Leasable Area ("GLA"). Of the properties owned by wholly-owned
subsidiaries or joint venture entities that we consolidate, approximately 90.1%
of the GLA was leased (90.4% at October 31, 2020 ). Of the properties owned by
unconsolidated joint ventures, approximately 94.2% of the GLA was leased (91.1%
at October 31, 2020 ). In addition, we own and operate self-storage facilities
at two of our retail properties. Both self-storage facilities are managed for
us by Extra Space Storage, a publicly traded REIT. One of the self-storage
facilities is located in the back of our Yorktown Heights, NY shopping center in
below grade space. As of April 30, 2021 , the self-storage facility had 57,414
of available GLA, which was 98.6% leased. The rent per available square foot
was $24.98 . As discussed later in this Item 2, we have also developed a second
self-storage facility located in Stratford, CT with 131,000 square feet of
available GLA. The facility has been operational for approximately 3 months and
is 25% leased.
In addition to our business of owning and managing real estate, we are also
involved in the beer, wine and spirits retail business, through our ownership of
six subsidiary corporations formed as taxable REIT subsidiaries. Each
subsidiary corporation owns and operates a beer, wine and spirits retail store
at one of our shopping centers. To manage our operations, we have engaged an
experienced third-party, retail beer, wine and spirits manager, which also owns
many stores of its own. Each of these stores occupies space at one of our
shopping centers, fulfilling a strategic need for a beer, wine and spirits
business at such shopping center. These five stores are not currently providing
material earnings in excess of what the Company would have earned from leasing
the space to unrelated tenants at market rents. However, these businesses are
continuing to mature, and net sales and earnings may eventually become material
to our financial position and net income. Nevertheless, our primary business
remains the ownership and management of real estate, and we expect that the
beer, wine and spirts business will remain an ancillary aspect of our business
model. However, if the right opportunity presents itself, we may open
additional beer, wine and spirits stores at other shopping centers if we
determine that any such store would be a strategic fit for our overall business
and the investment return analysis supports such a determination.
We have paid quarterly dividends to our stockholders continuously since our founding in 1969.
Impact of COVID-19
The following discussion is intended to provide stockholders with certain information regarding the impacts of the COVID-19 pandemic on our business and management's efforts to respond to those impacts. Unless otherwise specified, the statistical and other information regarding our property portfolio and tenants are estimates based on information available to us as ofMay 20, 2021 . As a result of the rapid development, fluidity and uncertainty surrounding this situation, we expect that such statistical and other information will change going forward, potentially significantly, and may not be indicative of the actual impact of the COVID-19 pandemic on our business, operations, cash flows and financial condition for fiscal 2021 and future periods. The spread of COVID-19 is having a significant impact on the global economy, theU.S. economy, the economies of the local markets throughout the northeast region in which our properties are located, and the broader financial markets. Nearly every industry has been impacted directly or indirectly, and the U.S. market has come under severe pressure due to numerous factors, including preventive measures taken by local, state and federal authorities to alleviate the public health crisis, such as mandatory business closures, quarantines, restrictions on travel and "shelter-in-place" or "stay-at-home" orders. During the early part of the pandemic, these containment measures, as implemented by the tri-state area ofConnecticut ,New York andNew Jersey , generally permitted businesses designated as "essential" to remain open, thereby limiting the operations of different categories of our tenants to varying degrees. Many (but not all) of these restrictions have been gradually lifted as the COVID-19 situation in the tri-state area has significantly improved as a result of various factors, including a large portion of the population getting vaccinated, with most businesses now permitted to open at full or close to full capacity, but under other limitations intended to control the spread of COVID-19. Moreover, not all tenants have been impacted in the same way or to the same degree by the pandemic and the measures adopted to control the spread of COVID-19. For example, grocery stores, pharmacies and wholesale clubs have been permitted to remain fully open throughout the pandemic and have generally performed well given their focus on food and necessities. Many restaurants have also been considered essential, although social distancing and group gathering limitations have until recently, prevented or limited dine-in activity, forcing tenants to evaluate alternate means of operations, such as outdoor dining, delivery and pick-up. The large majority of our restaurant tenants are fast casual, rather than full-service restaurants. For a number of our tenants that operate businesses involving high contact interactions with their customers, such as spas and salons, the negative impact of COVID-19 on their business has been more severe and the recovery more difficult. Gyms and fitness tenants have experienced varying results. Dry cleaners have also suffered as a result of many workers continuing to work from home. There is, however, reason to believe that the success of vaccination efforts in theU.S. is leading to a decline in COVID-19 cases and having a positive impact on businesses, as federal, state and local restrictions are lifted and individuals begin returning to pre-pandemic activities. The following additional information reflects the impact of COVID-19 on our portfolio and tenants:
• As of
restaurants and stand-alone bank branches are open and operating, with
approximately 99.6% of our tenants (based on Annualized Base Rent ("ABR")) open
and fully or partially operating and approximately 0.4% of our tenants currently closed.
• As of
tenants, with approximately 71.1% of our tenants (based on ABR) designated as
"essential businesses" during the early stay-at-home period of the pandemic in
the tri-state area or otherwise permitted to operate through curbside pick-up
and other modified operating procedures in accordance with state guidelines.
These essential businesses are 99.6% open.
• As of
anchored by grocery stores, pharmacies or wholesale clubs, 6% of our GLA is
located in outdoor retail shopping centers adjacent to regional malls and 8% of
our GLA is located in outdoor neighborhood convenience retail, with the
remaining 2% of our GLA consisting of six suburban office buildings located in
one childcare center. All six suburban office buildings are open with some
restrictions based on state mandates and all of the retail bank branches are
open.
• As of
85.7% of lease income, consisting of contractual base rent (leases in place
without consideration of any deferral or abatement agreements), common area
maintenance reimbursement and real estate tax reimbursement billed for April
2020 through
the month ofMay 2021 , respectively, not including the application of any security deposits.
• Similar to other retail landlords across
number of requests for rent relief from tenants, with most requests received
during the early days of the pandemic when stay-at-home orders were in place
and many businesses were required to close. We continued to receive a smaller
number of new requests even after businesses began to re-open, and in some
cases, follow-on requests from tenants to whom we had already provided rent
relief, but these requests are beginning to taper off and no new requests from
tenants who had not previously requested rent relief were received during the
quarter ended
case-by-case basis to determine the best course of action, recognizing that in
many cases some type of concession may be appropriate and beneficial to our
long-term interests. In evaluating these requests, we have been considering
many factors, including the tenant's financial strength, the tenant's operating
history, potential co-tenancy impacts, the tenant's contribution to the
shopping center in which it operates, our assessment of the tenant's long-term
viability, the difficult or ease with which the tenant could be replaced, and
other factors. Although each negotiation has been specific to that tenant,
most of these concessions have been in the form of deferred rent for some
portion of rents due in April through
back over the later part of the lease, preferably within a period of one year
or less. In addition, some of these concessions have been in the form of rent
abatements for some portion of tenant rents due in
2020 or longer.
• As of
approximately 863 tenants in our consolidated portfolio. Subsequently,
approximately 118 of the 401 tenants withdrew their request for rent relief or
paid their rent in full. These requests represent 45.0% of our ABR and 35.0% of
our GLA. Since the on-set of COVID-19 through
completed 274 lease modifications, consisting of base rent deferrals totaling
3.8% of our ABR. Included in the aforementioned amounts were the rent deferrals
and abatements completed in the three months ended
amounted to 8 rent deferrals or abatements, which deferred
rents, or 0.1% of our ABR and abated
ABR. The
30, 2021 included
Each reporting period, we must make estimates as to the collectability of our tenants' accounts receivable related to base rent, straight-line rent, expense reimbursements and other revenues. Management analyzes accounts receivable by considering tenant creditworthiness, current economic trends, including the impact of the COVID-19 pandemic on tenants' businesses, and changes in tenants' payment patterns when evaluating the adequacy of the allowance for doubtful accounts. As a result of this analysis, we have increased our allowance for doubtful accounts by$1.4 million and$725,000 in the six and three months endedApril 30, 2021 , respectively, which on an annualized basis represents approximately 2.9% of ABR. Management has every intention of collecting our billed rents, to the extent feasible, regardless of the requirement under Generally Accepted Accounting Principles ("GAAP") to reserve for uncollectable accounts. In addition, the GAAP accounting standard governing leases requires, among other things, that if a specific tenant's future lease payments as contracted are not probable of collection, revenue recognition for that tenant must be converted to cash-basis accounting and be limited to the lesser of the amount billed or collected from that tenant, and any straight-line rental receivables would need to be reversed in the period that the collectability assessment is changed to not probable. As a result of the continuing analysis of our entire tenant base, we have determined as ofApril 30, 2021 that 89 tenants future lease payments were no longer probable of collection (10.3% of our approximate 863 tenants), which included 9 tenants converted to cash-basis accounting in the three months endedApril 30, 2021 in accordance with ASC Topic 842. As a result of this assessment, in the six and three months endedApril 30, 2021 , we reversed lease income in the amount of$1.9 million and$893,000 , respectively, which represented a reversal of prior billed but unpaid rents related to the tenants converted to cash-basis accounting in the current quarter and billed but unpaid rents related to all 89 tenants converted to cash basis accounting throughApril 30, 2021 . The reduction to lease income was approximately 3.9% of ABR. In addition, as a result of this assessment, we reversed$1.3 million and$814,000 in the six and three months endedApril 30, 2021 , respectively, of accrued straight-line rent receivables related to tenants converted to cash basis accounting in the two respective periods. All of these charges result in a direct reduction of lease income on our consolidated income statement. Each reporting period, management assesses whether there are any indicators that the value of its real estate investments may be impaired and has concluded that none of its investment properties are impaired atApril 30, 2021 . The COVID-19 pandemic has, however, significantly impacted many of the sectors in which our tenants operate, and if the effects of the pandemic are prolonged, it could have a significant adverse impact on their underlying industries. We will continue to monitor the economic, financial, and social conditions resulting from the COVID-19 pandemic and will assess our real estate asset portfolio for any impairment indicators as required under GAAP. If we determine that any of our real estate assets are impaired, we would be required to take impairment charges and such amounts could be material. See Footnote 1 to the Notes to the Company's Consolidated Financial Statements for additional discussion regarding impairment charges. 20 -------------------------------------------------------------------------------- Index
Actions Taken in Response to COVID-19
Moreover, we have taken a number of proactive measures to maintain the strength of our business and manage the impact of COVID-19 on our operations and liquidity, including the following:
• Along with our tenants and the communities we together serve, the health and
safety of our employees is our top priority. We have adapted our operations to
protect employees, including by implementing a work-from-home policy in March
2020, which worked seamlessly, with no disruption in our service to tenants and
other business partners. On
of
with employees encouraged to continue working from home when feasible
consistent with business needs. Thereafter, we have been gradually increasing
our office capacity in accordance with applicable state guidance. We continue
to closely monitor recommendations and mandates of federal, state and local
governments and health authorities to ensure the safety of our own employees as
well as our properties.
• We are in regular communication with our tenants, providing assistance in
identifying local, state and federal resources that may be available to support
their businesses and employees during the pandemic, including stimulus funds
that may be available under the Coronavirus Aid, Relief, and Economic Security
Act of 2020 (the "CARES Act"). We compiled a robust set of tenant materials
explaining these and other programs, which were posted when relevant to the
tenant portal on our website, disseminated by e-mail to all of our tenants and
communicated directly by telephone through our leasing agents. Each of our
tenants was also assigned a leasing agent to whom the tenant could turn with
questions and concerns during these uncertain times.
• In addition, we launched a program designating dedicated parking spots for
curbside pick-up at our shopping centers for use by all tenants and their
customers, assisted restaurant tenants in securing municipal approvals for
outdoor seating, and are assisting tenants in many other ways to improve their
business prospects.
• To enhance our liquidity position and maintain financial flexibility, we
borrowed
• At
equivalents on our consolidated balance sheet, and an additional
available under our Facility (excluding the
• The only unsecured debt we have outstanding are draws on our Facility.
In
million and extended the maturity three years. The new maturity date is March
29, 2024, with an additional one-year company extension option. Additionally,
we do not have any secured debt maturing until
secured debt in fiscal 2022 is generally below a 45% loan-to-value ratio, and
we believe we will be able to refinance that debt.
• We have taken proactive measures to manage costs, including reducing, where
possible, our common area maintenance spending. We have an ongoing construction
project at one of our properties, with approximately
complete the project. Otherwise, only minimal construction is underway.
Further, we expect that the only material capital expenditures at our
properties in the near-term will be tenant improvements and/or other leasing
costs associated with existing and new leases.
• On
Act. The CARES Act, among other things, includes provisions relating to
refundable payroll tax credits, deferment of employer-side social security
payments, net operating loss carryback periods, alternative minimum tax credit
refunds, modifications to the net interest deduction limitations, increased
limitations on qualified charitable contributions, and technical corrections to
tax depreciation methods for qualified improvement property. The Company has
availed itself of some of the above benefits afforded by The CARES Act. We
believe that many of our tenants have also availed themselves of one or more of
the benefits afforded by The Cares Act.
• Subsequently, additional COVID-19 federal stimulus packages, including the
Consolidated Appropriations Act, 2021 and the America Rescue Plan of 2021 have
been enacted. Among other things, these stimulus packages have enhanced,
extended or supplemented benefits and programs provided under The CARES Act,
for which some of our tenants qualify. As with the Cares Act, the Company has
disseminated information about these programs to our tenants through our website and general ledger system.
• On
of
on
that the increased level is appropriate, after taking into account the improved
liquidity position of the Company, the significant progress made in vaccinating
the
of business improvement as operating restrictions are relaxed and individuals
begin returning to pre-pandemic activities. Also, as a REIT, we are required to
distribute at least 90% of our taxable income to our stockholders. Based on
our estimates, this level of Common Stock dividend, when combined with our
preferred stock dividends, will satisfy that requirement (excluding gains on
sales of property). The Board declared the full contractual dividend on both
our Series H and Series K Cumulative Preferred Stock, which will be paid on
of Directors will continue to evaluate our dividend policy.
• For most of the pandemic, we redirected our acquisitions department to assist
with lease negotiations as there were few commercial real estate property
transactions taking place. As the COVID-19 pandemic eases and the economy
improves, some commercial properties are starting to trade in the marketplace.
We always seek opportunities to acquire high-quality neighborhood and community
shopping centers, and as a result of our strong liquidity position and access
to various forms of capital, we have the ability to execute on potential acquisitions should the right opportunity arise.
Strategy, Challenges & Outlook
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. In addition, we have mortgage debt secured by some of our properties. As mentioned earlier, we do not have any secured debt maturing until January of 2022.
Key elements of our growth strategy and operating policies are to:
• maintain our focus on community and neighborhood shopping centers, anchored
principally by regional supermarkets, pharmacy chains or wholesale clubs, which
we believe can provide a more stable revenue flow even during difficult
economic times because of the focus on food and other types of staple goods;
• acquire quality neighborhood and community shopping centers in the northeastern
part of
metropolitan tri-state area outside of the
value in these properties with selective enhancements to both the property and
tenant mix, as well as improvements to management and leasing fundamentals,
with hopes to grow our assets through acquisitions 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 (e.g. curbside pick-up), 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, anticipating tenant weakness
when necessary by pre-leasing their spaces and replacing below-market-rent
leases with increased market rents, with an eye towards securing leases that
include regular or fixed contractual increases to minimum rents;
• improve and refine 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.
We believe our strategy of focusing on community and neighborhood shopping centers, anchored principally by regional supermarkets, pharmacy chains or wholesale clubs, is being validated during the COVID-19 pandemic. We believe the nature of our properties makes them less susceptible to economic downturns than other retail properties whose anchor tenants do not supply basic necessities. During normal conditions, we believe that consumers generally prefer to purchase food and other staple goods and services in person, and even during the COVID-19 pandemic our supermarkets, pharmacies and wholesale clubs have been posting strong in-person sales. Moreover, most of our grocery stores have also implemented or expanded curbside pick-up or partnered with delivery services to cater to the needs of their customers during the COVID-19 pandemic. We recognize, however, that the pandemic may have accelerated a movement towards e-commerce that may be challenging for weaker tenants that lack an omni-channel sales or micro-fulfillment strategy. We launched a program designating dedicated parking spots for curbside pick-up and are assisting tenants in many other ways to help them quickly adapt to these changing circumstances. Many tenants have adapted to the new business environment through use of our curbside pick-up program and early industry data seems to indicate that micro-fulfillment from retailers with physical locations may be a new competitive alternative to e-commerce. It is too early to know which tenants will or will not be successful in making any changes that may be necessary. It is also too early to determine whether these changes in consumer behavior are temporary or reflect long-term changes. Moreover, due to the current disruptions in the economy and our marketplace as a result of the COVID-19 pandemic and resulting changes to the short-term and possibly even long-term landscape for brick-and-mortar retail, we anticipate that it will be more difficult to actively pursue and achieve certain elements of our growth strategy. For example, it could be more difficult for us to acquire or sell properties in fiscal 2021 (or possibly beyond), as it may be difficult to correctly value a property given changing circumstances. Additionally, parties may be unwilling to enter into transactions during such uncertainty. However, as the COVID-19 pandemic eases and the economy improves, some commercial properties are starting to trade in the marketplace. We may also be less willing to enter into developments or capital improvements that require large amounts of upfront capital if the expected return is perceived as delayed or uncertain. While we believe we still maintain a conservative capital structure and low debt levels, particularly relative to our peers, our profile may evolve based on changing needs. While it appears that the COVID-19 pandemic has begun to ease in theU.S. and businesses are in the early stages of recovery, we expect that our rent collections will continue to be below our tenants' contractual rent obligations during the early stages of such recovery and potentially beyond. We will continue to accrue rental revenue during the deferral period, except for tenants for which revenue recognition was converted to cash basis accounting in accordance with ASC Topic 842. However, we anticipate that some tenants eventually will be unable to pay amounts due, and we will incur losses against our rent receivables. The extent and timing of the recognition of such losses will depend on future developments occurring afterApril 2021 , which are highly uncertain and cannot be predicted. Rental income collections and rent relief requests to date may not be indicative of collections or requests in any future period. We continue to have active discussions with existing and potential new tenants for new and renewed leases. With significant progress made in vaccinating theU.S. public, the resulting decline in COVID-19 cases, and the early signs of business improvement as operating restrictions are relaxed and individuals begin returning to pre-pandemic activities, we have observed a marked increase in leasing activity, including interest from potential new tenants and tenants interested in renewing their leases. However, our tenants and other businesses are in the early stages of a potential recovery and many of them may still face an uncertain future. As a result, we may continue to experience higher than typical vacancy rates, take longer to fill vacancies and suffer potentially lower rental rates until the recovery becomes more robust. As a REIT, we are susceptible to changes in interest rates, the lending environment, the availability of capital markets and the general economy. The impacts of any changes are difficult to predict, particularly during the course of the current COVID-19 pandemic.
Transaction Highlights of Fiscal 2021; Recent Developments
Set forth below are highlights of our recent property acquisitions, potential acquisitions under contract, other investments, property dispositions and financings:
• In
noncontrolling member. The total cash price paid for the redemption was
increased to 17.0% from 16.3%.
• In
property was sold for
the six month and three month periods ended
$435,000 .
• In
property located in
of
anticipate the sale will close sometime later in fiscal 2021. When and if the
sale closes, we anticipate that we will record a gain on sale of the property
in the approximate amount of
• In
extension at our option. Please see note 2 in our financial statements included in Item 1 for more information.
• In
noncontrolling member. The total cash price paid for the redemption was
million. As a result of the redemption, our ownership percentage of High Ridge
increased to 23.7% from 17.0%.
21
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IndexLeasing
For the six months endedApril 30, 2021 , we signed leases for a total of 424,000 square feet of retail space in our consolidated portfolio. New leases for vacant spaces were signed for 51,000 square feet at an average rental decrease of 13.5% on a cash basis. Renewals for 373,000 square feet of space previously occupied were signed at an average rental decrease of 2.2% on a cash basis. Tenant improvements and leasing commissions averaged$26.08 per square foot for new leases for the six months endedApril 30, 2021 . We did not pay any tenant improvements and leasing commissions on renewal leases for the six months endedApril 30, 2021 . The average term for new leases was 6 years and the average term for renewal leases was 3 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 2021 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 the past, we had seen overall positive increases in rental income for renewal leases, but since the outbreak of the COVID-19 pandemic and the resulting regulatory restrictions on business operations, we have experienced average rental income decreases that exceed historic norms. Moreover, notwithstanding the significant progress made in vaccinating theU.S. public, the resulting decline in COVID-19 cases, and the early signs of business improvement as operating restrictions are relaxed and individuals begin returning to pre-pandemic activities, the long-term prospects of some of our tenants and the overall economic recovery is still uncertain. Therefore, our average rental rates on renewal and new leases may continue to suffer.
Significant Leasing Events
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, and subsequently liquidated 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, so our cash flow was not impacted by the bankruptcy of Toys. As of the date of this report, the ground lease has been subsequently sold to a national retailer,Ocean State Job Lot , who is operating a store in approximately 45,000 square feet of the 65,700 square feet covered by the lease.
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.
22
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IndexCritical Accounting Estimates
Critical accounting estimates are those estimates made in accordance with GAAP that involve a significant level of estimation and uncertainty and are reasonably likely to have a material impact on the financial condition or results of operations of the Company and require management's most difficult, complex or subjective judgments. Our most significant accounting estimates are as follows:
• Valuation of investment properties
• Revenue recognition
• Determining the amount of our allowance for doubtful accounts
Valuation of investment properties At each reporting period management must assess whether the value of any of its investment properties are impaired. The judgement of impairment is subjective and requires management to make assumptions about future cash flows of an investment property and to consider other factors. The estimation of these factors has a direct effect on valuation of investment properties and consequently net income. As ofApril 30, 2021 , management does not believe that any of our investment properties are impaired based on information available to us atApril 30, 2021 . In the future, almost any level of impairment would be material to our net income. Revenue Recognition Our main source of revenue is lease income from our tenants to whom we lease space at our 80 shopping centers. The COVID-19 pandemic has caused distress for many of our tenants as some of those tenant businesses were forced to close early in the pandemic, and although most have been allowed to re-open and operate, many tenants like restaurants and fitness/gyms are operating at reduced capacity or operational efficiency. As a result we have many tenants who have had difficulty paying all of their contractually obligated rents and we have reached agreements with many of them to defer or abate portions of the contractual rents due under their leases with the Company. In accordance with ASC Topic 842, where appropriate, we will continue to accrue rental revenue during the deferral period, except for tenants for which revenue recognition was converted to cash basis accounting in accordance with ASC Topic 842. However, we anticipate that some tenants eventually will be unable to pay amounts due, and we will incur losses against our rent receivables, which would reduce lease income. The extent and timing of the recognition of such losses will depend on future developments, which are highly uncertain and cannot be predicted and these future losses could be material. Allowance for doubtful accounts GAAP requires us to bill our tenants based on the terms in their leases and to record lease income on a straight-line basis. When a tenant does not pay a billed amount due under their lease, it becomes a tenant account receivable, or an asset of the Company. GAAP requires that receivables, like most assets, be recorded at their realizable value. Each reporting period we analyze our tenant accounts receivable, and based on the information available to management at the time, and record an allowance for doubtful account for any unpaid tenant receivable that we believe is uncollectable. This analysis is subjective and the conclusions reached have a direct impact on net income. As ofApril 30, 2021 , the portion of our billed but unpaid tenant receivables, excluding straight-line rent receivables that we believe are collectable, amounts to$2.2 million . For a further discussion of our accounting estimates and critical accounting policies, please see Note 1 in our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q and Note 1 in our consolidated financial statements included in Item 8 of ourOctober 31, 2020 Annual Report on From 10-K. 23 -------------------------------------------------------------------------------- Index
Liquidity and Capital Resources
Overview
AtApril 30, 2021 , we had cash and cash equivalents of$38.4 million , compared to$40.8 million atOctober 31, 2020 . 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. As a result of state mandates forcing many non-essential businesses to close or restricting store operations to help prevent the spread of COVID-19, many of our tenants are suffering. Please see the "Impact of COVID-19" section earlier in this Item 2 for more information. For the six months endedApril 30, 2021 and 2020, net cash flows from operating activities amounted to$34.6 million and$30.7 million , respectively. 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. Cash dividends paid on Common and Class A Common stock for the six months endedApril 30, 2021 and 2020 totaled$11.0 million and$21.8 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. As a result of the COVID-19 pandemic, we have made a number of concessions in the form of deferred rents and rent abatements, as more extensively discussed under the "Impact of COVID-19" section earlier in this Item 2. To the extent rent deferral arrangements remain collectible, it will reduce operating cash flow in the near term but most likely increase operating cash flow in future periods. This process is ongoing. During the first two quarters of fiscal 2021, the Board of Directors declared and the Company paid quarterly dividends that were reduced from pre-pandemic levels, as more extensively discussed under the "Impact of COVID-19" section earlier in this Item 2. Subsequent to the end of the second quarter the Board of Directors has increased our Common and Class A Common stock dividends when compared to the reduced dividends that have been paid during the pandemic. Future determinations regarding quarterly dividends will impact the Company's short-term liquidity requirements.
We are also in contract to sell our last non-core shopping center located in
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 consolidated 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 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 six months endedApril 30, 2021 , we paid approximately$11.6 million for property improvements, tenant improvements and leasing commission costs ($4.6 million representing property improvements,$4.8 million in property improvements related to ourStratford project (see paragraph below) and approximately$2.2 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$2.7 million for anticipated capital improvements, tenant improvements/allowances and leasing costs related to new tenant leases and property improvements during the remainder of fiscal 2021 and fiscal 2022. This amount is inclusive of commitments for theStratford, CT development discussed directly below. These expenditures are expected to be funded from operating cash flows, bank borrowings or other financing sources. The above amounts do not include a potential new self-storage development at ourPompton Lakes, NJ property. The cost for this development is still in the planning stages but the anticipated cost is estimated to be$7 million , which will be funded with available cash or borrowings on our Facility. 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 5,200 square feet, which are pre-leased to national retail 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$18.6 million (excluding land cost), of which we have already funded$18.3 million as ofApril 30, 2021 and plan on funding the balance with available cash, borrowings on our Facility or other sources, as more fully described earlier in this Item 2. We have completed the construction of one of the retail pads and the self-storage building as ofApril 30, 2021 . The storage building is approximately 25.8% leased as ofApril 30, 2021 .
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$295.8 million consist of$1.7 million in variable rate debt with an interest rate of 5.09% as ofApril 30, 2021 and$294.1 million in fixed-rate mortgage loans with a weighted average interest rate of 4.1% atApril 30, 2021 . The mortgages are secured by 24 properties with a net book value of$514 million and have fixed rates of interest ranging from 3.5% to 4.9%. 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. AtApril 30, 2021 , we had 50 properties in our consolidated portfolio that were unencumbered by mortgages. Included in the mortgage notes discussed above, we have eight promissory notes secured by properties we consolidate and three 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. InJuly 2017 , theUnited Kingdom regulator that regulates LIBOR announced its intention to phase out LIBOR rates by the end of 2021. However, theICE Benchmark Administration , in its capacity as administrator of USD LIBOR, has announced that it intends to extend publication of USD LIBOR (other than one-week and two-month tenors) by 18 months toJune 2023 . Notwithstanding this possible extension, a joint statement by key regulatory authorities calls on banks to cease entering into new contracts that use USD LIBOR as a reference rate by no later thanDecember 31, 2021 . At some point, 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 material effect on our financial position or results of operations. However, because this will be the first time any of the reference rates for our promissory notes or swap contracts 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 33.0% and a fixed charge coverage ratio of over 2.9 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 50 properties in our consolidated portfolio that are not encumbered by secured mortgage debt. AtApril 30, 2021 , we had borrowing capacity of$89.3 million on our Facility (exclusive of the accordion feature discussed in the following paragraph). 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. Until it was terminated onMarch 30, 2021 , we had a$100 million unsecured revolving credit facility with a syndicate of three banks led byThe Bank of New York Mellon , as administrative agent. The syndicate also included Wells FargoBank N.A . and Bank of Montreal (co-syndication agents). The Facility gave us the option, under certain conditions, to increase the Facility's borrowing capacity up$150 million (subject to lender approval). The maturity date of the Facility wasAugust 23, 2021 . OnMarch 30, 2021 , we refinanced our existing Facility with the same syndicate of three banks led byThe Bank of New York Mellon , as administrative agent, increasing the capacity to$125 million from$100 million , with the ability under certain conditions to additionally increase the capacity to$175 million (subject to lender approval). The maturity date of the new Facility isMarch 29, 2024 with a one-year extension at our option. Borrowings under the Facility can be used for general corporate purposes and the issuance of letters of credit (up to$10 million ). Borrowings will bear interest at our option of Eurodollar rate plus 1.45% to 2.20% orThe Bank of New York's Prime Lending Rate plus 0.45% to 1.20% based on consolidated total indebtedness, as defined. We pay a quarterly commitment fee on the unused commitment amount of 0.15% to 0.25% based on outstanding borrowings during the year. Our ability to borrow under the Facility is subject to our compliance with the covenants and other restrictions on an ongoing basis. The principal financial covenants limit the level of secured and unsecured indebtedness we can incur, including preferred stock and additionally requires us to maintain certain debt coverage ratios. The Facility includes market standard provisions for determining the benchmark replacement rate for LIBOR. The Company was in compliance with such covenants atApril 30, 2021 .
At
Net Cash Flows from: Operating Activities Net cash flows provided by operating activities amounted to$34.6 million for the six months endedApril 30, 2021 compared to$30.7 million in the comparable period of fiscal 2020. The net increase in operating cash flows when compared with the corresponding prior period was primarily related to an increase of lease income related to the collection of rents that were deferred in fiscal 2020. Investing Activities Net cash flows used in investing activities amounted to$9.1 million for the six months endedApril 30, 2021 compared to$15.3 million in the comparable period of fiscal 2020. The decrease in net cash flows used in investing activities in the six months endedApril 30, 2021 when compared to the corresponding prior period was the result of our purchase of$7.0 million of marketable securities in the first six months of fiscal 2020. The total decrease was offset by investing in a note receivable in the amount of$2.2 million in the first six months of fiscal 2021.
We regularly make capital investments in our properties for improvements, and pursuant to our obligations for tenant improvements and leasing commissions.
Financing Activities
The$47.8 million decrease in net cash flows used by financing activities for the six months endedApril 30, 2021 when compared to the corresponding prior period was predominantly the result of the redemption of our Series G preferred stock for$75 million in the first six months of fiscal 2020. In addition, for the first six months of fiscal 2021 when compared to corresponding prior period, we paid$10.9 million less in dividends on our Common and Class A Common stock in response to a loss of cash flow caused by the effects of the COVID-19 pandemic. This decrease was offset by our borrowing$35 million on our Facility in the first six months of fiscal 2020. We did not have any borrowing activity on our Facility in the first six months of fiscal 2021. 24 -------------------------------------------------------------------------------- Index
Results of Operations
The following information summarizes our results of operations for the six months and three months endedApril 30, 2021 and 2020 (amounts in thousands): Six months ended Change Attributable to Properties Held April 30, Increase Property In Both Periods Revenues 2021 2020 (Decrease) % Change Acquisitions/Sales (Note 1) Base rents$ 48,757 $ 50,883 $ (2,126 ) (4.2 )% $ 112$ (2,238 ) Recoveries from tenants 18,792 14,110 4,682 33.2 % 33 4,649 Uncollectable amounts in lease income (1,379 ) (1,845 ) 466 (25.3 )% - 466 ASC Topic 842 cash basis lease income reversal (1,892 ) - (1,892 ) 100.0 % - (1,892 ) Lease termination 705 348 357 102.6 % - 357 Other income 2,220 2,132 88 4.1 % (16 ) 104 Operating Expenses Property operating 12,449 10,730 1,719 16.0 % 25 1,694 Property taxes 11,776 11,718 58 0.5 % 22 36 Depreciation and amortization 14,710 14,283 427 3.0 % 182 245 General and administrative 4,737 6,384 (1,647 ) (25.8 )% n/a n/a Non-Operating Income/Expense Interest expense 6,733 6,648 85 1.3 % - 85 Interest, dividends, and other investment income 96 332 (236 ) (71.1 )% n/a n/a Three Months Ended Change Attributable to Properties Held April 30, Increase Property In (Decrease) Acquisitions/Sales Both Periods Revenues 2021 2020 % Change (Note 1) Base rents$ 24,598 $ 25,591 $ (993 ) $ (3.9 )% $ 46 $ (1,039 ) Recoveries from tenants 8,814 6,115 2,699 44.1 % 33 2,666 Uncollectible amounts in lease income (724 ) (1,503 ) 779 (51.8 )% - 779 ASC Topic 842 cash basis lease income reversal (893 ) - (893 ) 100.0 % - (893 ) Lease termination income - 139 (139 ) (100.0 )% - (139 ) Other income 1,131 938 193 20.6 % 8 185 Operating Expenses Property operating 6,135 4,801 1,334 27.8 % 32 1,302 Property taxes 5,915 5,908 7 0.1 % 23 (16 ) Depreciation and amortization 7,192 7,148 44 0.6 % 106 (62 ) General and administrative 2,093 3,607 (1,514 ) (42.0 )% n/a n/a Non-Operating Income/Expense Interest expense 3,341 3,309 32 1.0 % - 32 Interest, dividends, and other investment income 53 238 (185 ) (77.7 )% n/a n/a Note 1 - Properties held in both periods includes only properties owned for the entire periods of 2021 and 2020 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 decreased by 4.2% to$48.8 million for the six month period endedApril 30, 2021 as compared with$50.9 million in the comparable period of 2020. Base rents decreased by 3.9% to$24.6 million for the three months endedApril 30, 2021 as compared with$25.6 million in the comparable period of 2020. 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 six months of fiscal 2020, we sold two properties totaling 18,100 square feet. In the second quarter of fiscal 2021 we sold one property totaling 2,500 square feet. These properties accounted for all of the revenue and expense changes attributable to property acquisitions and sales in the six months endedApril 30, 2021 when compared with fiscal 2020.
Properties Held in Both Periods:
Revenues
Base Rent The net decrease in base rents for the six month and three month periods endedApril 30, 2021 , when compared to the corresponding prior period, was predominantly caused by a reduction of$1.3 million and$814,000 in the six months and three months endedApril 30, 2021 , respectively, for a reversal of straight-line rents for tenants whose revenue recognition was switched to cash-basis accounting in accordance with ASC Topic 842. There was no such reversal in the six months or three months endedApril 30, 2020 . In addition, the reduction of base rents was caused by a decrease in occupancy rates in the six months and three months endedApril 30, 2021 when compared with the corresponding prior periods, predominantly related to the vacancies at 8 properties. In the first six months of fiscal 2021, we leased or renewed approximately 424,000 square feet (or approximately 9.4% of total GLA). AtApril 30, 2021 , the Company's consolidated properties were 90.1% leased (90.4% leased atOctober 31, 2020 ). Tenant Recoveries In the six month and three month periods endedApril 30, 2021 , recoveries from tenants (which represent reimbursements from tenants for operating expenses and property taxes) increased by a net$4.6 million and$2.7 million , respectively when compared with the corresponding prior period. The increase in tenant recoveries was the result of having higher common area maintenance expenses in the six months and three months of fiscal 2021 when compared with the corresponding prior periods related to snow removal and parking lot repairs. In addition, we completed the 2020 annual reconciliations for both common area maintenance and real estate taxes in the first half of fiscal 2021 and those reconciliations resulted in us billing our tenants more than we had anticipated and accrued for in the prior period, which increased tenant reimbursement income in the first half of fiscal 2021. Uncollectable Amounts in Lease Income In the six month and three month periods endedApril 30, 2021 , uncollectable amounts in lease income decreased by$466,000 and$779,000 , respectively. In the second quarter of fiscal 2020, we significantly increased our uncollectable amounts in lease income based on our assessment of the collectability of existing non-credit small shop tenants' receivables given the on-set of the COVID-19 pandemic inMarch 2020 . A number of non-credit small shop tenants' businesses were deemed non-essential by the states where they operate and were forced to close for a portion of the second and third quarters of fiscal 2020. This placed stress on our small shop tenants and made it difficult for many of them to pay their rents when due. Our assessment was that any billed but unpaid rents would likely be uncollectable. During the first six months endedApril 30, 2021 , many of our tenants saw early signs of business improvement as regulatory restrictions were relaxed and individuals began returning to pre-pandemic activities following significant progress made in vaccinating theU.S. public and the resulting decline in COVID-19 cases. As a result, the uncollectable amounts in lease income has been declining. ASC Topic 842 Cash Basis Lease Income ReversalsThe Company adopted ASC Topic 842 "Leases" at the beginning of fiscal 2020.
ASC
Topic 842 requires amongst other things, that if the collectability of a specific tenant's future lease payments as contracted are not probable of collection, revenue recognition for that tenant must be converted to cash-basis accounting and be limited to the lesser of the amount billed or collected from that tenant, and in addition, any straight-line rental receivables would need to be reversed in the period that the collectability assessment changed to not probable. As a result of continuing to analyze our entire tenant base, we have determined that as a result of the COVID-19 pandemic, 89 tenants' future lease payments are no longer probable of collection (10.3% of our approximate 863 tenants), including 9 tenants who were converted to cash-basis accounting in this second quarter of fiscal 2021. As a result of this assessment in the six month and three month periods endedApril 30, 2021 , we reversed$1.3 million and$814,000 , respectively, of lease income, consisting of billed but uncollected lease income for all 89 tenants, and prior billed but uncollected accounts receivable related to the 9 tenants converted to cash-basis accounting in the second quarter of fiscal 2021. This reduction is a direct reduction of lease income in the consolidated statement of income for the six months and three months endedApril 30, 2021 . We did not have any reversal of lease income for tenants converted to cash basis accounting in the six months and three months endedApril 30, 2020 . Expenses Property Operating In the six month and three month periods endedApril 30, 2021 , property operating expenses increased by$1.7 million and$1.3 million , respectively, as a result of having higher common area maintenance expenses in the six months and three months of fiscal 2021 when compared with the corresponding prior periods related to snow removal and parking lot repairs.
Property Taxes
In the six month and three month periods ended
Interest
In the six month and three month periods ended
Depreciation and Amortization In the six month period endedApril 30, 2021 , depreciation and amortization increased by$245,000 when compared with the prior period, primarily as a result of a write-off of tenant improvements related to a tenant that vacated six locations in our portfolio in fiscal 2021 and increased depreciation for tenant improvements for two large grocery store re-tenanting projects at ourEastchester, NY andWayne, NJ properties after the first quarter of fiscal 2020. Depreciation and amortization was relatively unchanged for the three months endedApril 30, 2021 when compared with the corresponding prior period. General and Administrative Expenses In the six month and three month periods endedApril 30, 2021 , general and administrative expenses decreased by$1.6 million and$1.5 million , respectively, when compared with the corresponding prior period, predominantly related to a decrease in compensation and benefits expense. The decrease was the result of accelerated vesting of restricted stock grant value upon the death of our former Chairman Emeritus in the second quarter of fiscal 2020. 25 -------------------------------------------------------------------------------- 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 to be 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 six months and three months endedApril 30, 2021 and 2020 (amounts in thousands): Reconciliation of Net Income Available to Common and Class A Common Stockholders To Funds From Operations: Six months ended Three Months Ended April 30, April 30, 2021 2020 2021 2020 Net Income Applicable to Common and Class A Common Stockholders $$9,100 $$7,870 $$4,621 $$2,799 Real property depreciation 11,461 11,336 5,759 5,665 Amortization of tenant improvements and allowances 2,352 2,075 1,037 1,039 Amortization of deferred leasing costs 846 828 370 421 Depreciation and amortization on unconsolidated joint ventures 750 747 375 374 (Gain)/loss on sale of property (406 ) 328
(434 ) (11 )
Funds from Operations Applicable to
Common and Class A Common Stockholders $
FFO amounted to$24.1 million in the six months endedApril 30, 2021 compared to$23.2 million in the comparable period of fiscal 2020. The net increase in FFO is attributable, among other things to:
Increases:
• An increase in variable lease income (cost recovery income) related to an
under-accrual adjustment in recoveries from tenants for real estate taxes and
common area maintenance in the first six months of fiscal 2021, which resulted
in a positive variance in the first half of fiscal 2021 when compared to the
same period of fiscal 2020.
• A
fiscal 2021 when compared with the corresponding prior period as a result of
one tenant who occupied multiple spaces in our portfolio ceasing operations and
buying out the remaining terms of their leases.
• A net decrease in general and administrative expenses of
predominantly related to a decrease in compensation and benefits expense in the
six months ended
period. The decrease was the result of accelerated vesting of restricted stock
grant value upon the death of our former Chairman Emeritus in the second
quarter of fiscal 2020.
• A decrease in uncollectable amounts in lease income of
quarter of fiscal 2020, we significantly increased our uncollectable amounts in
lease income based on our assessment of the collectability of existing
non-credit small shop tenants' receivables given the on-set of the COVID-19
pandemic in
were deemed non-essential by the states where they operate and were forced to
close for a portion of the second and third quarters of fiscal 2020. This
placed stress on our small shop tenants and made it difficult for many of them
to pay their rents when due. Our assessment was that any billed but unpaid
rents for such tenants would likely be uncollectable. During the first six
months ended
improvement as regulatory restrictions were relaxed and individuals began
returning to pre-pandemic activities following significant progress made in
vaccinating the
result, the uncollectable amounts in lease income has been declining.
• A decrease of
decrease was caused by our redemption of noncontrolling units in the second
half of fiscal 2020 and first half of fiscal 2021. In addition, distributions
decreased to noncontrolling unit owners whose distributions per unit were based
on the dividend rate of our Class A Common stock, which was significantly reduced in the six months endedApril 30, 2021 when compared to the corresponding prior period.
Decreases:
• A decrease in lease income related to additional vacancies in the portfolio in
the first six months of 2021, predominantly at 8 properties. In addition, the
vacancy rate increased at our six unconsolidated joint venture properties in
the six months ended
fiscal 2020. This reduced the amount of equity in earnings we record for those
joint ventures.
• An increase in the write-off of lease income in the first six months of
2021 for tenants in our portfolio whose future lease payments were deemed to be
not probable of collection, requiring us under GAAP to convert revenue
recognition for those tenants to cash-basis accounting. This caused a
write-off of lease income in the six months ended
million, which consisted of the reversal of billed but uncollected lease income
for all 89 tenants converted to cash-basis accounting and the write-off of
accounts receivable related to the 9 tenants converted to cash-basis accounting
in the second quarter of fiscal 2021. There were no such reversals in the six
month periods ended
straight-line rents receivable for tenants converted to cash basis in the six
months ended
lease income in the six months ended
FFO amounted to$11.7 million in the three months endedApril 30, 2021 compared to$10.3 million in the comparable period of fiscal 2020. The net increase in FFO is attributable, among other things to:
Increases:
• An increase in variable lease income (cost recovery income) related to an
under-accrual adjustment in recoveries from tenants for common area maintenance
in the second quarter of fiscal 2021, which resulted in a positive variance in
the second quarter of fiscal 2021 when compared to the same period of fiscal
2020.
• A net decrease in general and administrative expenses of
predominantly related to a decrease in compensation and benefits expense in the
second quarter of fiscal 2021 when compared to the corresponding prior period.
The decrease was the result of accelerated vesting of restricted stock grant
value upon the death of our former Chairman Emeritus in the second quarter of
fiscal 2020.
• A decrease in uncollectable amounts in lease income of
quarter of fiscal 2020, we significantly increased our uncollectable amounts in
lease income based on our assessment of the collectability of existing
non-credit small shop tenants' receivables given the on-set of the COVID-19
pandemic in
were deemed non-essential by the states where they operate and were forced to
close for a portion of the second and third quarters of fiscal 2020. This
placed stress on our small shop tenants and made it difficult for many of them
to pay their rents when due. Our assessment was that any billed but unpaid
rents for such tenants would likely be uncollectable. During the first six
months ended
improvement as regulatory restrictions were relaxed and individuals began
returning to pre-pandemic activities following significant progress made in
vaccinating the
result, the uncollectable amounts in lease income has been declining.
• A decrease of
decrease was caused by our redemption of noncontrolling units in the second
half of fiscal 2020 and first half of fiscal 2021. In addition, distributions
decreased to noncontrolling unit owners whose distributions per unit were based
on the dividend rate of our Class A Common stock, which was significantly
reduced in the second quarter of fiscal 2021 when compared to the corresponding
prior period.
Decreases:
• A decrease in lease income related to additional vacancies in the portfolio in
the three months ended
period, predominantly at 8 properties. In addition, the vacancy rate increased
at our six unconsolidated joint venture properties in the three months ended
the amount of equity in earnings we record for those joint ventures.
• An increase in the write-off of lease income in the three months ended April
30, 2021 when compared to the corresponding prior period. This increase was
related to tenants in our portfolio whose future lease payments were deemed to
be not probable of collection, requiring us under GAAP to convert revenue
recognition for those tenants to cash-basis accounting. This caused a
write-off of lease income in the amount of
reversal of billed but uncollected lease income for all 89 tenants converted to
cash-basis accounting and the write-off of accounts receivable related to the 9
tenants converted to cash-basis accounting in the second quarter of fiscal
2021. There were no such reversals in the three months ended
In addition, we reversed accrued straight-line rents receivable for these
aforementioned 9 tenants in the three months ended
There were no such reversals of lease income in the three months ended April
30, 2020.
26
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IndexOff-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
Fixed Interest
Joint Venture AtApril 30 ,
Description Location Original Balance 2021
Rate Per Annum Maturity Date
Midway Shopping
Center Scarsdale, NY $ 32,000 $ 25,200 4.80% Dec-2027
Putnam Plaza
Shopping Center Carmel, NY $ 18,900 $ 18,200 4.81% Oct-2028
Gateway Plaza Riverhead, NY $ 14,000 $ 11,400 4.18% Feb-2024
Applebee's Plaza Riverhead, NY $ 2,300 $ 1,800 3.38% Aug-2026
Environmental Matters
Based on 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.
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Index© Edgar Online, source
