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EX-10.1 - EXHIBIT 10.1 - FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEYex10-1.htm
EX-31.1 - EXHIBIT 31.1 - FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEYex31-1.htm
EX-10.6 - EXHIBIT 10.6 - FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEYex10-6.htm
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended October 31, 2009
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-25043
 
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY
(Exact name of registrant as specified in its charter)
     
New Jersey
 
22-1697095
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
505 Main Street, Hackensack, New Jersey
 
07601
(Address of principal executive offices)
 
(Zip Code)
 
201-488-6400

(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each Class
 
Name of each exchange on which registered
None
 
Not Applicable
 
Securities registered pursuant to Section 12(g) of the Act:
 
Shares of Beneficial Interest

 (Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o
Accelerated Filer x
Non-Accelerated Filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
 
The aggregate market value of the registrant’s shares of beneficial interest held by non-affiliates was approximately $79 million. Computation is based on the closing sales price of such shares as quoted on the over-the-counter-market on April 30, 2009, the last business day of the registrant’s most recently completed second quarter.
 
As of January 14, 2010, the number of shares of beneficial interest outstanding was 6,942,143
 
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement for the Registrant’s 2010 Annual Meeting of Shareholders to be held on April 7, 2010 are incorporated by reference in Part III of this Annual Report.

 
 

 



TABLE OF CONTENTS
FORM 10-K

PART I
   
Page No.
 
Item 1
Business
3
 
 
Item 1A
 
Risk Factors
10
 
 
Item 1B
 
Unresolved Staff Comments
13
 
 
Item 2
 
Properties
13
 
 
Item 3
 
Legal Proceedings
16
 
 
Item 4
 
Submission of Matters to a Vote of Security Holders
16
       
PART II
     
 
Item 5
Market for FREIT’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities
16
 
 
Item 6
 
Selected Financial Data
18
 
 
Item 7
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
 
 
Item 7A
 
Quantitative and Qualitative Disclosures About Market Risk
35
 
 
Item 8
 
Financial Statements and Supplementary Data
35
 
 
Item 9
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
35
 
 
Item 9A
 
Controls and Procedures
35
 
 
Item 9B
 
Other Information
 35
       
PART III 
 
Item 10
 
Directors, Executive Officers and Corporate Governance
37
 
 
Item 11
 
Executive Compensation
37
 
 
Item 12
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
37
 
 
Item 13
 
Certain Relationships and Related Transactions, and Director Independence
37
 
 
Item 14
 
Principal Accountant Fees and Services
37
       
PART IV
 
Item 15
 
Exhibits, Financial Statement Schedules
38
       
       
FORWARD-LOOKING STATEMENTS
 
Certain information included in this Annual Report contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The registrant cautions readers that forward-looking statements, including, without limitation, those relating to the registrant’s investment policies and objectives; the financial performance of the registrant; the ability of the registrant to borrow and service its debt; the economic and competitive conditions which affect the registrant’s business; the ability of the registrant to obtain the necessary governmental approvals for the development, expansion or renovation of its properties, the impact of environmental conditions affecting the registrant’s properties, and the registrant’s liquidity and capital resources, are subject to certain risks and uncertainties. Actual results or outcomes may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors, including, without limitation, the registrant’s future financial performance; the availability of capital; general market conditions; national and local economic conditions, particularly long-term interest rates; federal, state and local governmental regulations that affect the registrant; and the competitive environment in which the registrant operates, including, the availability of retail space and residential apartment units in the areas where the registrant’s properties are located. In addition, the registrant’s continued qualification as a real estate investment trust involves the application of highly technical and complex rules of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The forward-looking statements are made as of the date of this Annual Report and the registrant assumes no obligation to update the forward-looking statements or to update the reasons actual results could differ from those projected in such forward-looking statements.

 
2

 


PART I
ITEM 1
BUSINESS
 
(a)
General Business
 
First Real Estate Investment Trust of New Jersey (“FREIT”) is an equity real estate investment trust (“REIT”) organized in New Jersey in 1961. FREIT acquires, develops, constructs and holds real estate properties for long-term investment and not for resale.
 
FREIT’s long-range investment policy is to review and evaluate potential real estate investment opportunities for acquisition that it believes will (i) complement its existing investment portfolio, (ii) generate increased income and distributions to its shareholders, and (iii) increase the overall value of FREIT’s portfolio. FREIT’s investments may take the form of wholly-owned fee interests, or if the circumstances warrant diversification of risk, ownership on a joint venture basis with other parties, including employees and affiliates of Hekemian & Co., Inc., FREIT’s managing agent (“Hekemian”) (See “Management Agreement”), provided FREIT is able to maintain management control over the property. While our general investment policy is to hold and maintain properties long-term, we may, from time-to-time, sell or trade certain properties in order to (i) obtain capital to be used to purchase, develop or renovate other properties which we believe will provide a higher rate of return and increase the value of our investment portfolio, and (ii) divest properties which we have determined or determine are no longer compatible with our growth strategies and investment objectives for our real estate portfolio.
 
FREIT Website
All of FREIT’s Securities and Exchange Commission filings for the past two years are available free of charge on FREIT’s website, which can be accessed at http://www.FREITNJ.com.
 
Fiscal Year 2009 Developments
 
(i)
FINANCING
 
 
(a)
In addition to a $27.3 million construction loan obtained by Damascus Centre, LLC, a 70% owned affiliate of FREIT (“Damascus Centre”), FREIT has elected to fund, on a selective basis, construction costs for the redevelopment project at the Damascus Shopping Center (the “Damascus Center”), located in Damascus, MD and owned by Damascus Centre, at the prevailing interest rate for similar loans. As of October 31, 2009, FREIT had loaned to Damascus Centre approximately $2.2 million to cover construction costs. The loan between FREIT and Damascus  Centre is considered an intercompany loan, which has been eliminated in consolidation and is not presented as a receivable on FREIT’s Consolidated Balance Sheet.
 
 
(b) 
The $22.5 million mortgage loan entered into by Grande Rotunda, LLC, a 60% owned affiliate of FREIT (“Grande Rotunda”), for the acquisition of the Rotunda, located in Baltimore, MD (the “Rotunda”), was scheduled to come due on July 19, 2009, and has been extended by the bank until February 1, 2010. FREIT is currently negotiating with the bank for a two to three year extension of this loan. It is expected that the extension will require the posting of additional collateral, and Grande Rotunda reducing the loan by up to $3 million. Under the agreement with the equity owners of Grande Rotunda, FREIT would be responsible for 60% of any cash required by Grande Rotunda, and 40% would be the responsibility of the minority interest. (See Notes 5, 7 and 14 to FREIT’s consolidated financial statements.)
 

 
3

 

 
 
(c)
FREIT has an $18 million line of credit provided by the Provident Bank. The line of credit is for a two year term ending in January 2010, but can be cancelled by the bank, at its will, within 60 days before or after each anniversary date. The credit line will automatically be extended at the termination date of the current term and each subsequent term for an additional period of 24 months, provided there is no default and the credit line has not been cancelled. Draws against the credit line can be used for general corporate purposes, for property acquisitions, construction activities, and letters of credit. Draws against the credit line are secured by mortgages on FREIT’s Franklin Crossing Shopping Center, Franklin Lakes, NJ, retail space in Glen Rock, NJ, Palisades Manor Apartments, Palisades Park, NJ, and Grandview Apartments, Hasbrouck Heights, NJ. Interest rates on draws will be set at the time of each draw for 30, 60, or 90-day periods, based on our choice of the prime rate or at 175 basis points over the 30, 60, or 90-day LIBOR rates at the time of the draws. The interest rate on the line of credit has a floor of 4%. As of October 31, 2009, $18 million was available under the line of credit.
 
 (ii)
CONSTRUCTION
 
A modernization and expansion is underway at the Damascus Center. Total construction costs are expected to approximate $21.9 million. The building plans incorporate an expansion of retail space from its current configuration of approximately 140,000 sq. ft. to approximately 150,000 sq. ft., anchored by a modern 58,000 sq. ft. Safeway supermarket. Construction on Phase I began in June 2007, and was completed in June 2008. Phase I construction costs were approximately $6.2 million, of which $1.1 million related to tenant improvements. Phase II, which comprises a new 58,000 sq. ft. Safeway supermarket, was started in December 2008. The new Safeway supermarket space was completed in August 2009, and the remainder of the Phase II construction should be completed in 2010. As of October 31, 2009, construction and other costs for Phase II approximated $9.2 million. The Phase III construction is expected to begin in mid-2010. Total construction costs were initially funded from the $27.3 million construction loan entered into on February 12, 2008. The construction loan is secured by the Damascus Center. As of October 31, 2009, $9.9 million of this loan was drawn down to cover construction costs. In addition to the construction loan, FREIT elected to fund, on a selective basis, construction costs for the Damascus Center redevelopment project, at the prevailing interest rate for similar loans. As of October 31, 2009, FREIT had loaned to Damascus Centre approximately $2.2 million to cover construction costs. Because of this expansion, leases for certain tenants have been allowed to expire and have not been renewed. This has caused occupancy to decline, on a temporary basis, during the construction phase.
 
Development plans and studies for the expansion and renovation of the Rotunda, have been prepared. The Rotunda, on an 11.5-acre site, currently consists of an office building containing 138,000 sq. ft. of office space and 78,000 sq. ft. of retail space on the lower floor of the main building. The building plans incorporate an expansion of approximately 180,500 sq. ft. of retail space, approximately 302 residential rental apartments, 56 condominium units and 120 hotel rooms, and structured parking. Development costs for this project are expected to approximate  $200 million. As of October 31, 2009, the Company has incurred approximately $7.5 million of such costs, which are included in Construction in Progress (“CIP”) on the Consolidated Balance Sheet. City Planning Board approval has been received. Due to the adverse economic and credit conditions, the start date for the construction has not yet been determined.
 
(b)
Financial Information about Segments
 
FREIT has two reportable segments: Commercial Properties and Residential Properties. These reportable segments have different types of tenants and are managed separately because each requires different operating strategies and management expertise. Segment information for the three years ended October 31, 2009 is included in Note 12, “Segment Information” to FREIT’s consolidated financial statements.
 
(c)
Narrative Description of Business
 
FREIT was founded and organized for the principal purpose of acquiring, developing, and owning a portfolio of diverse income producing real estate properties. FREIT’s developed properties include residential apartment communities and commercial properties that consist of multi and single tenanted properties. Our properties are located in New Jersey, Maryland and on Long Island, NY. We also currently own approximately 40.37 acres of unimproved land in New Jersey. See “Item 2 Properties - Portfolio of Investments.”
 
FREIT elected to be taxed as a REIT under the Internal Revenue Code. FREIT operates in such a manner as to qualify for taxation as a REIT in order to take advantage of certain favorable tax aspects of the REIT structure. Generally, a REIT will not be subject to federal income taxes on that portion of its ordinary income or capital gain that is currently distributed to its equity holders.
 
As an equity REIT, we generally acquire interests in income producing properties to be held as long-term investments. FREIT’s return on such investments is based on the income generated by such properties mainly in the form of rents.
 


 
4

 

 

 
From time to time, FREIT has sold, and may sell again in the future, certain of its properties in order to (i) obtain capital used or to be used to purchase, develop or renovate other properties which we believe will provide a higher rate of return and increase the value of our investment portfolio, and (ii) divest properties which FREIT has determined or determines are no longer compatible with our growth strategies and investment objectives for our real estate portfolio.
We do not hold any patents, trademarks, or licenses. 
 
  Portfolio of Real Estate Investments
 
At October 31, 2009, FREIT’s real estate holdings included (i) nine (9) apartment buildings or complexes containing 1,075 rentable units, (ii) ten (10) commercial properties (retail and office) containing approximately 1,265,000 square feet of leasable space, including one (1) single tenant store, two (2) separate one acre parcels subject to ground leases, and (iii) four (4) parcels of undeveloped land consisting of approximately 40.37 acres. FREIT and its subsidiaries own all such properties in fee simple. See “Item 2 Properties - Portfolio of Investments” of this Annual Report for a description of FREIT’s separate investment properties and certain other pertinent information with respect to such properties that is relevant to FREIT’s business.
 
           Investment in Subsidiaries
 
The consolidated financial statements (See Note 1 to the Consolidated Financial Statements included in this Form 10-K) include the accounts of the following subsidiaries of FREIT:
 
Westwood Hills, LLC (“Westwood Hills”): FREIT owns a 40% membership interest in Westwood Hills, which owns and operates a 210-unit residential apartment complex in Westwood, NJ.
 
Wayne PSC, LLC (“WaynePSC”): FREIT owns a 40% membership interest in Wayne PSC, which owns a 322,000 sq. ft. community center in Wayne, NJ.
 
S And A Commercial Associates Limited Partnership (“S And A”): S And A owns a 100% interest in Pierre Towers, LLC, which owns a 269-unit residential apartment complex in Hackensack, NJ. FREIT owns a 65% partnership interest in S And A.
 
Grande Rotunda: FREIT owns a 60% membership interest in Grande Rotunda, which owns a 217,000 square foot mixed use property in Baltimore, MD.
 
Damascus Centre: FREIT owns a 70% membership interest in Damascus Centre, which owns the Damascus Center that is currently being renovated and expanded. (See Item 1-a(ii) Construction.)
 
Damascus Second, LLC:  FREIT owns a 70% interest in Damascus Second, LLC, which assumed a $27.3 million construction loan from Bank of America for the purpose of assisting Damascus Centre in owning, operating, managing and, as required, repairing the land and premises of the Damascus Center.
 
WestFREIT Corp: FREIT owns a 100% membership interest in WestFREIT, which owns the Westridge Square Shopping Center, a 257,000 square foot shopping center in Frederick, MD.
 
WestFredic LLC: FREIT owns a 100% membership interest in WestFredic, which assumed a $22 million mortgage loan that is secured by the Westridge Square Shopping Center in Frederick, MD.
 
            Employees
 
On October 31, 2009 FREIT and its subsidiaries had twenty-one (21) full-time employees and twelve (12) part-time employees who work solely at the properties owned by FREIT or its subsidiaries. The number of part-time employees varies seasonally.
 
Mr. Robert S. Hekemian, Chairman of the Board and Chief Executive Officer, Mr. Donald W. Barney, President, Treasurer and Chief Financial Officer, and Mr. John A. Aiello, Esq., Secretary and Executive Secretary, are the executive officers of FREIT. Mr. Hekemian devotes approximately seventy percent (70%) of his business activities to FREIT, Mr. Barney devotes approximately fifteen percent (15%) of his business activities to FREIT, and Mr. Aiello devotes approximately seven percent (7%) of his business activities to FREIT. Refer to “Item 10 – Directors, Executive Officers and Corporate Governance.” Hekemian  has been retained by FREIT to manage FREIT’s properties and is responsible for recruiting, on behalf of FREIT, the personnel required to perform all services related to the operation of FREIT’s properties. See “Management Agreement.”



 
5

 


Management Agreement
 
On April 10, 2002, FREIT and Hekemian executed a Management Agreement whereby Hekemian would continue as Managing Agent for FREIT. The term of the Management Agreement currently runs until October 31, 2011 and shall be automatically renewed for periods of two years unless either party gives not less than six (6) months prior notice to the other of non-renewal. The salient provisions of the Management Agreement are as follows: FREIT retains the Managing Agent as the exclusive management and leasing agent for properties which FREIT owned as of April 2002 and for the Preakness Shopping Center acquired on November 1, 2002 by WaynePSC. However, FREIT may retain other managing agents to manage certain other properties acquired after April 10, 2002 and to perform various other duties such as sales, acquisitions, and development with respect to any or all properties. The Managing Agent does not serve as the exclusive advisor for FREIT to locate and recommend to FREIT investments, which the Managing Agent deems suitable for FREIT, and is not required to offer potential acquisition properties exclusively to FREIT before acquiring those properties for its own account. The Management Agreement includes a detailed schedule of fees for those services, which the Managing Agent may be called upon to perform. The Management Agreement provides for a termination fee in the event of a termination or non-renewal of the Management Agreement under certain circumstances.
 
Pursuant to the terms of the Management Agreement, FREIT pays Hekemian certain fees and commissions as compensation for its services. From time to time, FREIT engages Hekemian to provide certain additional services, such as consulting services related to development and financing activities of FREIT. Separate fee arrangements are negotiated between Hekemian and FREIT or its affiliates, with respect to such additional services. During the 4th quarter of Fiscal 2007, FREIT’s Board of Trustees approved, in general, development fee arrangements for the development services to be performed at the Rotunda (owned by Grande Rotunda), the Damascus Center (owned by Damascus Centre), and the South Brunswick project.  These fees will be payable to Hekemian Development Resources LLC (“Resources”), a wholly owned affiliate of Hekemian. Definitive agreements for the development services to be performed at the Rotunda and the Damascus Center have been executed. The development fee arrangement for the Rotunda provides for Resources to receive a fee equal to 6.375% of the total development costs of up to $136 million (as may be modified), and the fee for the redevelopment of the Damascus Center to be equal to 7% of the redevelopment costs of up to approximately $17.3 million (as may be modified). The minority ownership interests of Grande Rotunda and Damascus Centre are owned by Rotunda 100, LLC and Damascus 100, LLC, which are principally owned by employees of Hekemian, including certain members of the immediately family of Robert S. Hekemian, FREIT’s CEO and Chairman, and Robert S. Hekemian, Jr., a trustee of FREIT, and the members of the Hekemian family have majority management control of these entities. In connection with the development activities at South Brunswick, the fees with respect to this project are 7% of development costs of up to $21,000,000 (as may be modified). A definitive contract regarding the specific services to be provided at the South Brunswick project has not yet been finalized and approved. See Note 7 to FREIT’s consolidated financial statements.
 
Mr. Robert S. Hekemian, Chairman of the Board, Chief Executive Officer and a Trustee of FREIT, is the Chairman of the Board and Chief Executive Officer of Hekemian. Mr. Hekemian owns approximately 0.2% of all of the issued and outstanding shares of Hekemian. Mr. Robert S. Hekemian, Jr, a Trustee of FREIT, is the President of Hekemian, and owns approximately 33.3% of all of the issued and outstanding shares of Hekemian.
 
Real Estate Financing
 
FREIT funds acquisition opportunities and the development of its real estate properties largely through debt financing, including mortgage loans against certain of its properties. At October 31, 2009, FREIT’s aggregate outstanding mortgage debt was $202.3 million with an average interest cost on a weighted average basis of 5.09%. FREIT has mortgage loans against certain properties, which serve as collateral for such loans. See the tables in “Item 2 Properties - Portfolio of Investments” for the outstanding mortgage balances at October 31, 2009 with respect to each of these properties.
 
FREIT is currently highly leveraged and will continue to be for the foreseeable future. This increased level of indebtedness also presents an increased risk of default on the obligations of FREIT and an increase in debt service requirements that could adversely affect the financial condition and results of operations of FREIT. A number of FREIT’s mortgage loans are being amortized over a period that is longer than the terms of such loans; thereby requiring balloon payments at the expiration of the terms of such loans. FREIT has not established a cash reserve sinking fund with respect to such obligations and at this time does not expect to have sufficient funds from operations to make such balloon payments when due under the terms of such loans. See “Liquidity and Capital Resources” under Item 7.
 

 


 
6

 

 

 
FREIT is subject to the normal risks associated with debt financing, including the risk that FREIT’s cash flow will be insufficient to meet required payments of principal and interest; the risk that indebtedness on its properties will not be able to be renewed, repaid or refinanced when due; or that the terms of any renewal or refinancing will not be as favorable as the terms of the indebtedness being replaced. If FREIT were unable to refinance its indebtedness on acceptable terms, or at all, FREIT might be forced to dispose of one or more of its properties on disadvantageous terms which might result in losses to FREIT. These losses could have a material adverse effect on FREIT and its ability to make distributions to shareholders and to pay amounts due on its debt. If a property is mortgaged to secure payment of indebtedness and FREIT is unable to meet mortgage payments, the mortgagee could foreclose upon the property, appoint a receiver and receive an assignment of rents and leases or pursue other remedies, all with a consequent loss of revenues and asset value to FREIT. Further, payment obligations on FREIT’s mortgage loans will not be reduced if there is a decline in the economic performance of any of FREIT’s properties. If any such decline in economic performance occurs, FREIT’s revenues, earnings, and funds available for distribution to shareholders would be adversely affected.
 
Neither FREIT’s Declaration of Trust nor any policy statement formally adopted by FREIT’s Board of Trustees limits either the total amount of indebtedness or the specified percentage of indebtedness (based on the total capitalization of FREIT), which may be incurred by FREIT. Accordingly, FREIT may incur in the future additional secured or unsecured indebtedness in furtherance of its business activities, including, if or when necessary, to refinance its existing debt. Future debt incurred by FREIT could bear interest at rates, which are higher than the rates on FREIT’s existing debt. Future debt incurred by FREIT could also bear interest at a variable rate. Increases in interest rates would increase FREIT’s variable interest costs (to the extent that the related indebtedness was not protected by interest rate protection arrangements), which could have a material adverse effect on FREIT and its ability to make distributions to shareholders and to pay amounts due on its debt or cause FREIT to be in default under its debt. Further, in the future, FREIT may not be able to, or may determine that it is not able to, obtain financing for property acquisitions or for capital expenditures to develop or improve its properties on terms, which are acceptable to FREIT. In such event, FREIT might elect to defer certain projects unless alternative sources of capital were available, such as through an equity or debt offering by FREIT.
 
Competitive Conditions
 
FREIT is subject to normal competition with other investors to acquire real property and to profitably manage such property. Numerous other REITs, banks, insurance companies and pension funds, as well as corporate and individual developers and owners of real estate, compete with FREIT in seeking properties for acquisition and for tenants. Many of these competitors have significantly greater financial resources than FREIT.
 
In addition, retailers at FREIT's commercial properties face increasing competition from discount shopping centers, outlet malls, sales through catalogue offerings, discount shopping clubs, marketing and shopping through cable and computer sources, particularly over the internet, and telemarketing. In many markets, the trade areas of FREIT's commercial properties overlap with the trade areas of other shopping centers. Renovations and expansions at those competing shopping centers and malls could negatively affect FREIT's commercial properties by encouraging shoppers to make their purchases at such new, expanded or renovated shopping centers and malls. Increased competition through these various sources could adversely affect the viability of FREIT's tenants, and any new commercial real estate competition developed in the future could potentially have an adverse effect on the revenues of and earnings from FREIT's commercial properties.
 
  
(A)
General Factors Affecting Investment in Commercial and Apartment Properties; Effect of Economic and Real Estate Conditions
 
The revenues and value of FREIT’s commercial and residential apartment properties may be adversely affected by a number of factors, including, without limitation, the national economic climate; the regional economic climate (which may be adversely affected by plant closings, industry slow downs and other local business factors); local real estate conditions (such as an oversupply of retail space or apartment units); perceptions by retailers or shoppers of the security, safety, convenience and attractiveness of a shopping center; perception by residential tenants of the safety, convenience and attractiveness of an apartment building or complex; the proximity and the number of competing shopping centers and apartment complexes; the availability of recreational and other amenities and the willingness and ability of the owner to provide capable management and adequate maintenance. In addition, other factors may adversely affect the fair market value of a commercial property or apartment building or complex without necessarily affecting the revenues, including changes in government regulations (such as limitations on development or on hours of operation) changes in tax laws or rates, and potential environmental or other legal liabilities.




 
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(B)
Commercial Shopping Center Properties' Dependence on Anchor Stores and Satellite Tenants
 
FREIT believes that its revenues and earnings; its ability to meet its debt obligations; and its funds available for distribution to shareholders would be adversely affected if space in FREIT's multi-store shopping center properties could not be leased or if anchor store tenants or satellite tenants failed to meet their lease obligations.
 
The success of FREIT's investment in its shopping center properties is largely dependent upon the success of its tenants. Unfavorable economic, demographic, or competitive conditions may adversely affect the financial condition of tenants and consequently the lease revenues from and the value of FREIT's investments in its shopping center properties. If the sales of stores operating in FREIT's shopping center properties were to decline due to deteriorating economic conditions, the tenants may be unable to pay their base rents or meet other lease charges and fees due to FREIT. In addition, any lease provisions providing for additional rent based on a percentage of sales would not be operative in this economic environment. In the event of default by a tenant, FREIT could suffer a loss of rent and experience extraordinary delays while incurring additional costs in enforcing its rights under the lease, which may or may not be recaptured by FREIT. As at October 31, 2009 the following table lists the ten (10) largest commercial tenants, which account for approximately 52.4% of FREIT’s leased commercial rental space and 36.9% of fixed commercial rents.
 
Tenant
Center
 Sq. Ft.
Burlington Coat Factory
 Westridge Square
         85,992
Kmart Corporation
 Westwood Plaza
         84,254
Macy's Federated Department Stores, Inc.
 Preakness
         81,160
Pathmark Stores Inc.
 Patchoque
         63,932
Stop & Shop Supermarket Co.
 Preakness
         61,020
Safeway Stores Inc.
 Damascus Center
         57,860
Giant Of Maryland Inc.
 Westridge Square
         55,330
Stop & Shop Supermarket Co.
 Franklin Crossing
         48,673
Giant Food of Maryland
 The Rotunda
         35,994
TJ MAXX
 Westwood Plaza
         28,480
 
  
(C)
Renewal of Leases and Reletting of Space
 
There is no assurance that we will be able to retain tenants at our commercial properties upon expiration of their leases. Upon expiration or termination of leases for space located in FREIT's commercial properties, the premises may not be relet or the terms of reletting (including the cost of concessions to tenants) may not be as favorable as lease terms for the terminated lease. If FREIT were unable to promptly relet all or a substantial portion of this space or if the rental rates upon such reletting were significantly lower than current or expected rates, FREIT's revenues and earnings, FREIT’s ability to service its debt, and FREIT’s ability to make expected distributions to its shareholders, could be adversely affected. During Fiscal 2009 and Fiscal 2008 there were no material lease expirations, and there are no material lease expirations expected during Fiscal 2010.

  
(D)
Illiquidity of Real Estate Investments; Possibility that Value of FREIT's Interests may be less than its Investment
 
Equity real estate investments are relatively illiquid. Accordingly, the ability of FREIT to vary its portfolio in response to changing economic, market or other conditions is limited. Also, FREIT's interests in its partially owned subsidiaries are subject to transfer constraints imposed by the operating agreements which govern FREIT’s investment in these partially owned subsidiaries. Even without such restrictions on the transfer of its interests, FREIT believes that there would be a limited market for its interests in these partially owned subsidiaries.
 
If FREIT had to liquidate all or substantially all of its real estate holdings, the value of such assets would likely be diminished if a sale was required to be completed in a limited time frame. The proceeds to FREIT from any such sale of the assets in FREIT’s real estate portfolio might be less than the fair market value of those assets.
 
Impact of Governmental Laws and Regulations on Registrant's Business
 
FREIT’s properties are subject to various federal, state and local laws, ordinances and regulations, including those relating to the environment and local rent control and zoning ordinances.

 
8

 

 

  
(A)
Environmental Matters
 
Both federal and state governments are concerned with the impact of real estate construction and development programs upon the environment. Environmental legislation affects the cost of selling real estate, the cost to develop real estate, and the risks associated with purchasing real estate.
 
Under various federal, state and local environmental laws, statutes, ordinances, rules and regulations, an owner of real property may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, in or under such property, as well as certain other potential costs relating to hazardous or toxic substances (including government fines and penalties and damages for injuries to persons and adjacent property). Such laws often impose such liability without regard to whether the owners knew of, or were responsible for, the presence or disposal of such substances. Such liability may be imposed on the owner in connection with the activities of any operator of, or tenant at the property. The cost of any required remediation, removal, fines or personal or property damages and the owner's liability therefore could exceed the value of the property and/or the aggregate assets of the owner. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. If FREIT incurred any such liability, it could reduce FREIT's revenues and ability to make distributions to its shareholders.
 
A property can also be negatively impacted by either physical contamination or by virtue of an adverse effect upon value attributable to the migration of hazardous or toxic substances, or other contaminants that have or may have emanated from other properties.
 
At this time, FREIT is aware of the following environmental matters affecting its properties:
 
  
(i)
Westwood Plaza Shopping Center, Westwood, NJ
 
This property is in a HUD Flood Hazard Zone and serves as a local flood retention basin for part of Westwood, New Jersey. FREIT maintains flood insurance in the amount of $500,000 for the subject property, which is the maximum available under the HUD Flood Program for the property. Any reconstruction of that portion of the property situated in the flood hazard zone is subject to regulations promulgated by the New Jersey Department of Environmental Protection ("NJDEP"), which could require extraordinary construction methods.
 
 
(ii)
 
Franklin Crossing, Franklin Lakes, NJ
 
The redeveloped Franklin Crossing shopping center was completed during the summer of 1997. Also in 1997, a historical discharge of hazardous materials was discovered at Franklin Crossing. The discharge was reported to the NJDEP in accordance with applicable regulations. FREIT completed the remediation required by the NJDEP.
 
In November 1999, FREIT received a No Further Action Letter from the NJDEP concerning the contaminated soil at Franklin Crossing. Monitoring of the groundwater will continue pursuant to a memorandum of agreement filed with the NJDEP.
 
  
(iii)
Preakness Shopping Center, Wayne, NJ
 
Prior to its purchase by WaynePSC, a Phase I and Phase II Environmental Assessment of the Preakness shopping center revealed soil and ground water contamination with Percloroethylene (Dry Cleaning Fluid) caused by the mishandling of this chemical by a former Dry Cleaner tenant.
 
The seller of the center to WaynePSC is in the process of performing the remedial work in accordance with the requirements of the NJDEP. Additionally, the seller has escrowed the estimated cost of the remediation and has purchased a cap-cost insurance policy covering any expenses over and above the estimated cost.
 
In performing the remedial work, possible contamination of this property by groundwater migrating from an offsite source was discovered. The NJDEP has not made any determination with respect to responsibility for remediation of this possible condition, and it is not possible to determine whether or to what extent Wayne PSC will have potential liability with respect to this condition or whether or to what extent insurance coverage may be available.
 
  
(iv)
Other
 
a) The State of New Jersey has adopted an underground fuel storage tank law and various regulations with respect to underground storage tanks.
 
FREIT no longer has underground storage tanks on any of its properties.
 

 


 
9

 

 

 
FREIT has conducted environmental audits for all of its properties except for its undeveloped land; retail properties in Franklin Lakes (Franklin Crossing) and Glen Rock, New Jersey; and residential apartment properties located in Palisades Park and Hasbrouck Heights, New Jersey. Except as noted in subparagraph (iii) above, the environmental reports secured by FREIT have not revealed any environmental conditions on its properties, which require remediation pursuant to any applicable Federal or state law or regulation.
 
b) FREIT has determined that several of its properties contain lead based paint (“LBP”). FREIT complies with all federal, state and local requirements as they pertain to LBP.
 
FREIT does not believe that the environmental conditions described in subparagraphs (i) - (iv) above will have a materially adverse effect upon the capital expenditures, revenues, earnings, financial condition or competitive position of FREIT.
  
(B)
Rent Control Ordinances
 
Each of the apartment buildings or complexes owned by FREIT is subject to some form of rent control ordinance which limits the amount by which FREIT can increase the rent for renewed leases, and in some cases, limits the amount of rent which FREIT can charge for vacated units, except for Westwood Hills and The Boulders at Rockaway which are not subject to any rent control law or regulation.
 
  
(C)
Zoning Ordinances
 
Local zoning ordinances may prevent FREIT from renovating, expanding or converting its existing properties, for their highest and best use as determined by FREIT’s Board of Trustees. The Board of Trustees is not aware of any such zoning impediments to the development of the South Brunswick property described herein.
 
  
(D)
Financial Information about Foreign and Domestic Operations and Export Sale
 
FREIT does not engage in operations in foreign countries and it does not derive any portion of its revenues from customers in foreign countries.
 
 ITEM 1 A
RISK FACTORS
 
Almost all of FREIT’s income and cash flow is derived from the net rental income (revenues after expenses) from our properties. FREIT’s business and financial results are affected by the following fundamental factors:
 
 
·
the national and regional economic climate;
 
·
occupancy rates at the properties;
 
·
tenant turnover rates;
 
·
rental rates;
 
·
operating expenses;
 
·
tenant improvement and leasing costs;
 
·
cost of and availability of capital;
 
·
failure of banking institutions;
 
·
failure of insurance carriers;
 
·
new acquisitions and development projects; and
 
·
changes in governmental regulations, real estate tax rates and similar matters.
 
A negative or adverse quality change in the above factors could potentially cause a detrimental effect on FREIT’s revenue, earnings and cash flow. If rental revenues decline, we would expect to have less cash available to pay our indebtedness and distribute to our shareholders.
 
Adverse Changes in General Economic Climate:  FREIT derives the majority of its revenues from renting apartments to individuals or families, and from retailers renting space at its shopping centers. An adverse decline in general economic conditions, particularly in New Jersey and Maryland, where a majority of our properties are located, has caused, and may continue to cause, reductions in rental revenues. A decline in general economic conditions has caused, and may continue to cause, apartment tenants to double-up or vacate, causing increases in vacancies, or to resist rent increases. Additionally, a general decline in economic conditions has caused, and may continue to cause, a lack of consumer confidence, resulting in lower levels of consumer spending that could adversely affect the financial condition of some of our retail tenants, resulting in their inability to pay rent and/or expense recovery charges (represents recovery of certain common area maintenance charges, including insurance and real estate taxes). These retail tenants have vacated, and may continue to vacate or fail to exercise renewal options for their space.
 


 
10

 

 

 
We receive a substantial portion of our operating income as rent under long-term leases with commercial tenants. At any time, any of our commercial tenants could experience a downturn in its business that might weaken its financial condition. These tenants might defer or fail to make rental payments when due, delay lease commencement, voluntarily vacate the premises or declare bankruptcy, which could result in the termination of the tenant’s lease, and could result in material losses to us and harm to our results of operations. Also, it might take time to terminate leases of underperforming or nonperforming tenants and we might incur costs to remove such tenants. Given current conditions in the capital markets, retailers that have sought protection from creditors under bankruptcy law have had difficulty in some instances in obtaining debtor-in-possession financing, which has decreased the likelihood that such retailers will emerge from bankruptcy protection and has limited their alternatives. Also, if tenants are unable to comply with the terms of our leases, we might modify lease terms in ways that are less favorable to us.
 
Tenants unable to pay rent: Financially distressed tenants may be unable to pay rents and expense recovery charges, where applicable, and may default on their leases. Enforcing our rights as landlord could result in substantial costs and may not result in a full recovery of unpaid rent. If a tenant files for bankruptcy, the tenant’s lease may be terminated. In each such instance FREIT’s income and cash flow would be negatively impacted.
 
Costs of re-renting space: If tenants fail to renew leases, fail to exercise renewal options, or terminate their leases early, the lost rents due to vacancy and the costs of re-renting the space could prove costly to FREIT. In addition to cleaning and renovating the vacated space, we may be required to grant concessions to a new tenant, and may incur leasing brokerage commissions.  The lease terms to a new tenant may be less favorable than the prior tenant’s lease terms, and will negatively impact FREIT’s income and cash flow and adversely affect our ability to pay mortgage debt and interest or make distributions to our shareholders.
 
Inflation may adversely affect our financial condition and results of operations: Increased inflation could have a pronounced negative impact on our operating and administrative expenses, as these costs may increase at a higher rate than our rents. While increases in most operating expenses at our commercial properties can be passed on to retail tenants, increases in expenses at our residential properties cannot be passed on to residential tenants. Unreimbursed increased operating expenses may reduce cash flow available for payment of mortgage debt and interest, and for distributions to shareholders.
 
Development and construction risks:  As part of its investment strategy, FREIT seeks to acquire property for development and construction, as well as to develop and build on land already in its portfolio. FREIT is currently renovating the Damascus Center and is planning a major development at the Rotunda property in Baltimore, Maryland. In addition it is contemplating the construction of an industrial building on its South Brunswick, New Jersey property. Development and construction activities are challenged with the following risks, which may adversely affect our cash flow:
 
 
·
financing may not be available in the amounts we seek, or may not be on favorable terms;
 
·
long-term financing may not be available upon completion of the construction;
 
·
failure to complete construction on schedule or within budget may increase debt service costs and construction costs; and
 
·
abandoned project costs could result in an impairment loss.
 
Debt financing could adversely affect income and cash flow:  FREIT relies on debt financing to fund its growth through acquisitions and development activities. To the extent third party debt financing is not available, or not available on favorable terms, acquisitions and development activities will be curtailed.

FREIT currently has approximately $169.9 million of non-recourse mortgage debt subject to fixed interest rates, and $32.4 million of partial recourse mortgage debt subject to variable interest rates ($22.5 million relates to the acquisition of the Rotunda property, and $9.9 million relates to the Damascus Center redevelopment project). These mortgages are being repaid over periods (amortization schedules) that are longer than the terms of the mortgages. Accordingly, when the mortgages become due (at various times) significant balloon payments (the unpaid principal amounts) will be required.  FREIT expects to refinance the individual mortgages with new mortgages when their terms expire. To this extent we have exposure to capital availability and interest rate risk. If interest rates, at the time any individual mortgage note is due, are higher than the current fixed interest rate, higher debt service may be required and/or refinancing proceeds may be less than the amount of the mortgage debt being retired. Our $22.5 million Rotunda acquisition loan matures on February 1, 2010. FREIT is currently negotiating with the bank for a two to three year extension of this loan. It is expected that the extension will require the posting of additional collateral, and Grande Rotunda reducing the loan by up to $3 million. Under the agreement with the equity owners of Grande Rotunda, FREIT would be responsible for 60% of any cash required by Grande Rotunda, and 40% would be the responsibility of the minority interest.
 
To the extent we are unable to refinance our indebtedness on acceptable terms, we may need to dispose of one or more of our properties upon disadvantageous terms.
 


 
11

 

 

 

 
Our revolving $18 million credit line (of which $18 million was available as of October 31, 2009) and our Grande Rotunda acquisition mortgage loan contains financial covenants that could restrict our acquisition activities and result in a default on these loans if we fail to satisfy these covenants.
 
Failure of banking and financing institutions: Banking and financing institutions such as insurance companies provide FREIT with credit lines and construction financing. The credit lines available to FREIT may be used for a variety of business purposes, including general corporate purposes, acquisitions, construction, letters of credit, etc. Construction financing enables FREIT to develop new properties, or renovate or expand existing properties. A failure of the banking institution making credit lines available may render the line unavailable and adversely affect FREIT’s liquidity, and negatively impact our operations in a number of ways. A failure of a financial institution unable to fund its construction financing obligations to FREIT may cause the construction to halt or be delayed. Substitute financing may be significantly more expensive, and construction delays may subject FREIT to delivery penalties.
 
To protect our cash deposits due to the current banking crisis, we have repositioned our bank deposits to fall within the insured limits of the FDIC and the U.S. Treasury Guarantee Program. This necessitated transferring significant balances from interest bearing deposit accounts to non-interest bearing deposit accounts, which will result in reduced earnings from interest income for the current fiscal year and for the foreseeable future.

Failure of insurance carriers:  FREIT’s properties are insured against unforeseen liability claims, property damages, and other hazards.  The insurance companies FREIT uses have good ratings at the time the policies are put into effect. Financial failure of our carriers may result in their inability to pay current and future claims. This inability to pay claims may have an adverse impact on FREIT’s financial condition. In addition, a failure of FREIT’s insurance carrier may cause FREIT’s insurance renewal or replacement policy costs to increase.
 
Real estate is a competitive business: FREIT is subject to normal competition with other investors to acquire real property and to profitably manage such property. Numerous other REITs, banks, insurance companies and pension funds, as well as corporate and individual developers and owners of real estate, compete with FREIT in seeking properties for acquisition and for tenants. Many of these competitors have significantly greater financial resources than FREIT. In addition, retailers at FREIT's commercial properties face increasing competition from discount shopping centers, outlet malls, sales through catalogue offerings, discount shopping clubs, marketing and shopping through cable and computer sources, particularly over the internet, and telemarketing. In many markets, the trade areas of FREIT's commercial properties overlap with the trade areas of other shopping centers. Renovations and expansions at those competing shopping centers and malls could negatively affect FREIT's commercial properties by encouraging shoppers to make their purchases at such new, expanded or renovated shopping centers and malls. Increased competition through these various sources could adversely affect the viability of FREIT's tenants, and any new commercial real estate competition developed in the future could potentially have an adverse effect on the revenues of and earnings from FREIT's commercial properties.
 
Illiquidity of real estate investment: Real estate investments are relatively difficult to buy and sell quickly. Accordingly, the ability of FREIT to vary its portfolio in response to changing economic, market or other conditions is limited. Also, FREIT’s interests in its partially owned subsidiaries are subject to transfer constraints by the operating agreements, which govern FREIT’s investment in these partially owned subsidiaries.
 
Environmental problems may be costly:  Both federal and state governments are concerned with the impact of real estate construction and development programs upon the environment. Environmental legislation affects the cost of selling real estate, the cost to develop real estate, and the risks associated with purchasing real estate.
 
Under various federal, state and local environmental laws, statutes, ordinances, rules and regulations, an owner of real property may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, in or under such property, as well as certain other potential costs relating to hazardous or toxic substances (including government fines and penalties and damages for injuries to persons and adjacent property). Such laws often impose such liability without regard to whether the owners knew of, or were responsible for, the presence or disposal of such substances. Such liability may be imposed on the owner in connection with the activities of any operator of, or tenant at the property. The cost of any required remediation, removal, fines or personal or property damages and the owner's liability therefore could exceed the value of the property and/or the aggregate assets of the owner. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. If FREIT incurred any such liability, it could reduce FREIT's revenues and ability to make distributions to its shareholders.
 
A property can also be negatively impacted by either physical contamination or by virtue of an adverse effect upon value attributable to the migration of hazardous or toxic substances, or other contaminants that have or may have emanated from other properties.

 
12

 

 

 

 
Qualification as a REIT: Since its inception in 1961, FREIT has elected, and will continue to operate so as to qualify as a REIT for federal income tax purposes. In order to qualify as a REIT, we must satisfy a number of highly technical and complex provisions of the Internal Revenue Code. Governmental legislation, new regulations, and administrative interpretations may significantly change the tax laws with respect to the requirements for qualification as a REIT, or the federal income tax consequences of qualifying as a REIT. Although FREIT intends to continue to operate in a manner to allow it to qualify as a REIT, future economic, market, legal, tax or other considerations may cause it to revoke the REIT election or fail to qualify as a REIT. Such a revocation would subject FREIT’s income to federal income tax at regular corporate rates, and failure to qualify as a REIT would also eliminate the requirement that we pay dividends to our shareholders.
 
Change of investment and operating policies: FREIT’s investment and operating policies, including indebtedness and dividends, are exclusively determined by FREIT’s Board of Trustees, and not subject to shareholder approval.
 

ITEM 1 B
UNRESOLVED STAFF COMMENTS
 
None.

ITEM 2
PROPERTIES
 
Portfolio of Investments: The following tables set forth certain information relating to each of FREIT's real estate investments in addition to the specific mortgages encumbering the properties.  
 
Residential Apartment Properties as of October 31, 2009:
 
Property & Location
Year
Acquired
No.
of
Units
Average
Annual
Occupancy
Rate @
10/31/09
Average
Monthly
Rent per
Unit @
10/31/09
Average
Monthly
Rent per
Unit @
10/31/08
Mortgage
Balance ($000)
Depreciated Cost
of Land,
Buildings &
Equipment
($000)
               
Palisades Manor
1962
12
93.6%
$1,107
$1,070
None (1)
$43
Palisades Park, NJ
             
               
Grandview Apts.
1964
20
96.2%
$1,166
$1,147
None (1)
$116
Hasbrouck Heights, NJ
             
               
Berdan Court
1965
176
94.5%
$1,441
$1,412
$19,966 (2)
$1,317
Wayne, NJ
             
               
Heights Manor
1971
79
84.0%
$1,143
$1,119
$3,081
$450
Spring Lake Heights, NJ
             
               
Hammel Gardens
1972
80
96.1%
$1,220
$1,192
$4,478
$655
Maywood, NJ
             
               
Steuben Arms
1975
100
94.8%
$1,263
$1,259
$6,209
$1,264
River Edge, NJ
             
               
Westwood Hills (3)
1994
210
95.6%
$1,448
$1,429
$15,806
$11,691
Westwood Hills, NJ
             
               
Pierre Towers (4)
2004
269
90.2%
$1,813
$1,791
$33,893
$43,688
Hackensack, NJ
             
               
Boulders (5)
2006
129
92.2%
$1,753
$1,771
$19,876
$19,501
Rockaway, NJ
             
 
         
(1) Security for draws against FREIT's Credit Line.
(2) On August 6, 2009, FREIT refinanced the mortgage loans secured by its Berdan Court apartment property in Wayne, NJ, with a new mortgage for approximately $20 million, due in 2019. The refinanced mortgages had outstanding principal balances that aggregated approximately $12.3 million at a weighted average interest rate of 6.7%, and were due January 1, 2010.
(3) FREIT owns a 40% equity interest in Westwood Hills. See "Investment in Subsidiaries".
(4) Pierre Towers is 100% owned by S And A Commercial Associates LP, which is 65% owned by FREIT.
(5) Construction completed in August 2006 on land acquired in 1963 / 1964.
 


 
13

 

Commercial Properties as of October 31, 2009:
Property & Location
Year
Acquired
Leasable
Space-
Approximate
Sq.Ft.
Average
Annual
Occupancy
Rate @
10/31/09
Average
Annualized
Rent per Sq.
Ft. @ 10/31/09
Average
Annualized
Rent per Sq.
Ft. @
10/31/08
Mortgage
Balance ($000)
Depreciated
Cost of Land,
Buildings &
Equipment
($000)
               
Glen Rock, NJ
1962
4,800
100.0%
$22.73
$20.48
None (1)
$115
               
               
Franklin Crossing
1966 (2)
87,041
90.8%
$24.03
$23.64
None (1)
$8,438
Franklin Lakes, NJ
             
               
Westwood Plaza
1988
173,854
100.0%
$12.95
$12.91
$8,800
$9,874
Westwood, NJ
             
               
Westridge Square (3)
1992
256,620
93.1%
$12.94
$12.45
$22,000
$19,556
Frederick, MD
             
               
Pathmark Super Store
1997
63,962
100.0%
$19.99
$19.99
$5,878 (7)
$8,271
Patchogue, NY
             
               
Preakness Center (4)
2002
322,136
98.0%
$13.01
$12.79
$29,916
$30,303
Wayne, NJ
             
               
Damascus Center (5)
2003
152,001
44.2%
$14.62
$10.57
$9,857 (8)
$25,149
Damascus, MD
             
       
 
 
   
The Rotunda (6)
2005
216,645
90.7%
$18.16
$18.20
$22,500
$39,773
Baltimore, MD
             
               
Rockaway, NJ
1964/1963
1 Acre
100.0%
N/A
N/A
None
$165
   
Landlease
         
               
Rochelle Park, NJ
2007
1 Acre
N/A
N/A
N/A
None
$2,475
   
Landlease
         
_____________________________________________________
(1) Security for draws against FREIT's Credit Line.
 
(2) The original 33,000 sq. ft. shopping center was replaced with a new 87,041 sq. ft. center that opened in October 1997.
 
(3) FREIT owns a 100% interest in WestFREIT Corp, that owns the center.
 
(4) FREIT owns a 40% equity interest in WaynePSC, that owns the center.
 
(5) FREIT owns a 70% equity interest in Damascus Centre, LLC, that owns the center. Undergoing a renovation and expansion project.
(6) FREIT owns a 60% equity interest in Grande Rotunda, LLC, that owns the center.
 
(7) On February 29, 2008, unpaid principal amount of $5.9 million was refinanced with a $6 million mortgage loan bearing fixed interest rate of 6.125%, with a 10 year term.
(8) On February 12, 2008, Damascus Centre, LLC closed on a $27.3 million construction loan, of which $9.9 million was drawn down at 10/31/09.

Supplemental Segment Information:
 
Commercial lease expirations at October 31, 2009 assuming none of the tenants exercise renewal options:
       
Annual Rent of Expiring Leases
Year Ending
Number of
Expiring Leases
Percent of
   
October 31,
Expiring Leases
Sq. Ft.
Commercial Sq. Ft.
Total
Per Sq. Ft.
           
Month to month
25
84,977
7.4%
 $             1,410,942
 $                     16.60
2010
16
39,616
3.4%
 $                734,496
 $                     18.54
2011
23
70,345
6.1%
 $             1,431,051
 $                     20.34
2012
23
150,594
13.1%
 $             1,785,852
 $                     11.86
2013
24
92,552
8.1%
 $             1,689,729
 $                     18.26
2014
17
53,719
4.7%
 $                840,767
 $                     15.65
2015
13
87,561
7.6%
 $             1,026,170
 $                     11.72
2016
9
46,411
4.0%
 $                719,391
 $                     15.50
2017
9
37,608
3.3%
 $                646,690
 $                     17.20
2018
15
42,819
3.7%
 $                952,880
 $                     22.25
2019
2
83,960
7.3%
 $                299,800
 $                       3.57

 
14

 

Land Under Development and Vacant Land as of October 31, 2009:
 
Vacant Land
   
Permitted Use Pre
Acreage Per
Location (1)
Acquired
Current Use
Local Zoning Laws
Parcel
Franklin Lakes, NJ
1966
None
Residential
4.27
         
Wayne, NJ
2002
None
Commercial
2.1
         
Rockaway, NJ
1964
None
Residential
1.0
         
So. Brunswick, NJ (2)
1964
Principally leased
Industrial
33.0
   
as farmland qualifying
   
   
for state farmland assessment
   
   
tax treatment
   
(1)   All of the above land is unencumbered, except as noted.
(2)   Site plan approval received for the construction of a 563,000 square foot industrial building.

FREIT believes that it has a diversified portfolio of residential and commercial properties. FREIT’s business is not materially dependent upon any single tenant or any one of its properties.

FREIT has no properties that have contributed 15% or more of FREIT's total revenue in one or more of the last three fiscal years.
 
Although FREIT’s general investment policy is to hold properties as long-term investments, FREIT could selectively sell certain properties if it determines that any such sale is in FREIT’s and its shareholders’ best interests. With respect to FREIT’s future acquisition and development activities, FREIT will evaluate various real estate opportunities, which FREIT believes would increase FREIT’s revenues and earnings, as well as complement and increase the overall value of FREIT’s existing investment portfolio.
 
Except for the Pathmark supermarket super store located in Patchogue, Long Island, the TD Bank branch located in Rockaway, NJ and the Pascack Community Bank branch to be constructed on our land in Rochelle Park, NJ, all of FREIT’s and its subsidiaries’ commercial properties have multiple tenants.
 
FREIT and its subsidiaries’ commercial properties have nineteen (19) anchor / major tenants, that account for approximately 60% of the space leased. The balance of the space is leased to one hundred and seventy (170) satellite and office tenants. The following table lists the anchor / major tenants at each center and the number of satellite tenants:  
 
Commercial Property
   
No. of
Shopping Center (SC)
Net Leaseable
 
Additional/Satellite
Office Building (O)
Space
Anchor/Major Tenants
Tenants
       
 Westridge Square
 256,620 (SC)
 Burlington Coat Factory
24
 Frederick, MD
 
 Giant Supermarket
 
 Franklin Crossing
 87,041 (SC)
 Stop & Shop
18
 Franklin, Lakes, NJ
     
 Westwood Plaza
 173,854 (SC)
 Kmart Corp
18
 Westwood, NJ
 
 TJMaxx
 
 Preakness Center (1)
 322,136 (SC)
 Stop & Shop
41
 Wayne, NJ
 
 Macy's
 
   
 CVS
 
   
 Annie Sez
 
   
 Clearview Theaters
 
 Damascus Center (2)
 152,001 (SC)
 Safeway Stores
11
 Damascus, MD
     
 The Rotunda (3)
 138,276 (O)
 Clear Channel Broadcasting
49
 Baltimore, MD
 
 US Social Security Office
 
   
 Janus Associates
 
       
 
 78,369 (SC)
 Giant Food of Maryland
8
   
 Rite Aid Corporation
 
   
 Bank of America
 
 Patchogue, NY
 63,962 (SC)
 Pathmark
-
 Glen Rock, NJ
 4,800 (SC)
 Chase Bank
1
(1) FREIT has a 40% interest in this property.
(2) FREIT has a 70% interest in this property.
(3) FREIT has a 60% interest in this property.
   


 
15

 

 
With respect to most of FREIT’s commercial properties, lease terms range from five (5) years to twenty-five (25) years with options, which if exercised would extend the terms of such leases. The lease agreements generally provide for reimbursement of real estate taxes, maintenance, insurance and certain other operating expenses of the properties. During the last three (3) completed fiscal years, FREIT’s commercial properties averaged an 89.8% occupancy rate with respect to FREIT’s available leasable space.
 
Leases for FREIT’s apartment buildings and complexes are usually one (1) year in duration. Even though the residential units are leased on a short-term basis, FREIT has averaged, during the last three (3) completed fiscal years, a 94.2% occupancy rate with respect to FREIT’s available apartment units.
 
FREIT does not believe that any seasonal factors materially affect FREIT’s business operations and the leasing of its commercial and apartment properties.
 
FREIT believes that its properties are covered by adequate fire and property insurance provided by reputable companies and with commercially reasonable deductibles and limits. 
 
ITEM 3
LEGAL PROCEEDINGS
 
Other than the legal proceeding related to the Damascus Center, as described below, there are no other material pending legal proceedings to which FREIT is a party, or of which any of its properties is the subject. There is, however, ordinary and routine litigation involving FREIT's business including various tenancy and related matters. Notwithstanding the environmental conditions disclosed in “Item 1(c) Narrative Description of Business - Impact of Governmental Laws and Regulations on Registrant’s Business; Environmental Matters,” there are no legal proceedings concerning environmental issues with respect to any property owned by FREIT.
 
On August 6, 2009, a complaint was filed against Damascus Centre (a 70% owned subsidiary of FREIT), Hekemian (FREIT’s managing agent), and others in the Circuit Court of Montgomery County, Maryland.  The plaintiffs leased commercial office space at the Damascus Center.  The complaint alleges a number of causes of action in connection with alleged interference with plaintiffs’ business allegedly caused by Damascus Centre’s development activities at the Damascus Center. The complaint seeks compensatory damages of $500,000 for the alleged interference with the plaintiffs’ business and $5,000,000 in punitive damages.  In addition, the plaintiffs seek to enjoin the demolition of the shopping center. FREIT received notice of the lawsuit on September 2, 2009. At this time, based on the limited information available, FREIT believes the claim to be substantially without merit, and will vigorously defend itself against all claims related to this matter. Accordingly, no provisions for this matter have been made in the accompanying financial statements.
 
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
There were no matters submitted to a vote of security holders during the fourth quarter of FREIT's 2009 fiscal year.
 
PART II
 
ITEM 5
MARKET FOR FREIT'S COMMON EQUITY, RELATED SECURITY HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Shares of Beneficial Interest
Beneficial interests in FREIT are represented by shares without par value (the “Shares”). The Shares represent FREIT’s only authorized, issued and outstanding class of equity. As of January 14, 2010, there were approximately 500 holders of record of the Shares.
 
The Shares are traded in the over-the-counter market through use of the OTC Bulletin Board Service (the “OTC Bulletin Board”) provided by FINRA, Inc. FREIT does not believe that an active United States public trading market exists for the Shares since historically only small volumes of the Shares are traded on a sporadic basis. The following table sets forth, at the end of the periods indicated, the Bid and Asked quotations for the Shares on the OTC Bulletin Board.
 
  
 
Bid
 
Asked
 
Fiscal Year Ended October 31, 2009
         
First Quarter
 
$
15.00
 
$
15.80
 
Second Quarter
 
$
15.25
 
$
15.25
 
Third Quarter
 
$
16.00
 
$
16.00
 
Fourth Quarter
 
$
17.20
 
$
17.20
 
 
   
Bid
 
Asked
 
Fiscal Year Ended October 31, 2008
         
First Quarter
 
$
21.60
 
$
21.60
 
Second Quarter
 
$
22.00
 
$
22.05
 
Third Quarter
 
$
23.50
 
$
23.50
 
Fourth Quarter
 
$
18.60
 
$
21.00
 
 

 

 
16

 

 
The bid quotations set forth above for the Shares reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions. The source of the bid and asked quotations is Janney Montgomery Scott, LLC., members of the New York Stock Exchange and other national securities exchanges.
 
Share Repurchase Program
 
On April 9, 2008, FREIT’s Board of Trustees authorized up to $2 million for the repurchase of FREIT shares. The share repurchase plan provided for the repurchase of FREIT shares on or before March 31, 2009. Share repurchases under this program were made from time to time in the open market or through privately negotiated transactions. As of March 31, 2009, FREIT repurchased 50,920 shares of common stock at a cost of $1,133,545.
 
On March 31, 2009, FREIT announced the adoption of a new share repurchase plan to replace the repurchase plan that expired on March 31, 2009. The new plan complied with Rules 10b5-1 and 10b-18 of the Securities Exchange Act of 1934 and provided for the repurchase of up to $1,000,000 in value of FREIT’s shares for the period beginning April 14, 2009 through June 30, 2009, subject to certain price limitations and other conditions established under the new plan. Share repurchases under the new plan could have been made, from time to time, through privately negotiated transactions or in the open market. The new plan could have been terminated at any time and without prior notice. Rule 10b5-1 permits the implementation of a written plan for repurchasing shares of company stock through a repurchasing agent at times when the issuer is not in possession of material, nonpublic information and allows issuers adopting such plans to repurchase shares on a regular basis, regardless of any subsequent material, nonpublic information it receives. UBS Financial Services, Inc. was engaged as FREIT’s repurchasing agent, pursuant to the terms and conditions set forth in the share repurchase plan.
 
The new share repurchase plan expired on June 30, 2009. Through June 30, 2009, FREIT repurchased a total of 51,009 shares of common stock under both repurchase plans at a cost of $1,135,026, which is reflected in the Shareholders’ Equity section of FREIT’s consolidated balance sheets.
 
Dividends
The holders of Shares are entitled to receive distributions as may be declared by FREIT’s Board of Trustees. Dividends may be declared from time to time by the Board of Trustees and may be paid in cash, property, or Shares. The Board of Trustees’ present policy is to distribute annually at least ninety percent (90%) of FREIT’s REIT taxable income as dividends to the holders of Shares in order to qualify as a REIT for Federal income tax purposes. Distributions are made on a quarterly basis. In Fiscal 2009 and Fiscal 2008, FREIT paid or declared aggregate total dividends of $1.20 and $1.20 per share, respectively, to the holders of shares. See “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Distributions to Shareholders.”

Securities Authorized for Issuance Under Equity Compensation Plans
 
Refer to “Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”



 
17

 





ITEM 6
SELECTED FINANCIAL DATA
 
The selected consolidated financial data for FREIT for each of the five (5) fiscal years in the period ended October 31, 2009 are derived from financial statements herein or previously filed financial statements. This data should be read in conjunction with “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report and with FREIT’s consolidated financial statements and related notes included in this Annual Report. 
 

BALANCE SHEET DATA:
                             
As At October 31,
 
2009
   
2008
   
2007
   
2006
   
2005
 
   
(In thousands of dollars)
 
Total Assets
  $ 251,851     $ 241,756     $ 242,755     $ 234,786     $ 214,998  
Mortgage Loans
  $ 202,260     $ 192,352     $ 189,389     $ 180,679     $ 166,874  
Shareholders' Equity
  $ 20,722     $ 23,561     $ 25,130     $ 24,972     $ 26,115  
Weighted average shares outstanding:
                                       
Basic
    6,944       6,835       6,753       6,574       6,440  
Diluted
    6,944       6,835       6,916       6,816       6,774  
 

INCOME STATEMENT DATA:
                             
Year Ended October 31,
 
2009
   
2008
   
2007
   
2006
   
2005
 
   
(In thousands of dollars, except per share amounts)
 
Revenue:
                             
Revenue from real estate operations
  $ 42,422     $ 42,340     $ 40,738     $ 37,893     $ 33,268  
Expenses:
                                       
Real estate operations
    17,600       16,996       16,673       15,658       13,414  
General and administrative expenses
    1,652       1,542       1,543       1,212       1,001  
Depreciation
    5,870       5,622       5,311       4,726       4,252  
Totals
    25,122       24,160       23,527       21,596       18,667  
                                         
Operating income
    17,300       18,180       17,211       16,297       14,601  
                                         
Investment income
    221       554       634       232       229  
Interest expense including amortization of deferred financing costs
    (10,848 )     (11,557 )     (11,897 )     (11,127 )     (10,039 )
Minority interest
    (1,121 )     (1,138 )     (776 )     (407 )     (426 )
Income from continuing operations
    5,552       6,039       5,172       4,995       4,365  
Discontinued operations:
                                       
Income from discontinued operations, net of Minority Interests *
    -       -       3,771       163       129  
Net income
  $ 5,552     $ 6,039     $ 8,943     $ 5,158     $ 4,494  
 
* Includes gain on disposal of $3,680 in fiscal year 2007.
 
Basic earnings per share:
                             
Continuing operations
  $ 0.80     $ 0.88     $ 0.76     $ 0.76     $ 0.68  
Discontinued operations
    -       -       0.56       0.02       0.02  
Net income
  $ 0.80     $ 0.88     $ 1.32     $ 0.78     $ 0.70  
Diluted earnings per share:
                                       
Continuing operations
  $ 0.80     $ 0.88     $ 0.74     $ 0.73     $ 0.64  
Discontinued operations
    -       -       0.55       0.03       0.02  
Net income
  $ 0.80     $ 0.88     $ 1.29     $ 0.76     $ 0.66  
Cash Dividends Declared Per Common Share
  $ 1.20     $ 1.20     $ 1.30     $ 1.25     $ 1.20  


 
18

 


ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 

Cautionary Statement Identifying Important Factors That Could Cause FREIT’s Actual Results to Differ From Those Projected in Forward Looking Statements.
Readers of this discussion are advised that the discussion should be read in conjunction with the consolidated financial statements of FREIT (including related notes thereto) appearing elsewhere in this Form 10-K. Certain statements in this discussion may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect FREIT’s current expectations regarding future results of operations, economic performance, financial condition and achievements of FREIT, and do not relate strictly to historical or current facts. FREIT has tried, wherever possible, to identify these forward-looking statements by using words such as “believe,” “expect,” “anticipate,” “intend, “ “plan,” “ estimate,” or words of similar meaning.
 
Although FREIT believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties, which may cause the actual results to differ materially from those projected. Such factors include, but are not limited to the following: general economic and business conditions, which will, among other things, affect demand for rental space, the availability of prospective tenants, lease rents, the financial condition of tenants and the default rate on leases, operating and administrative expenses and the availability of financing; adverse changes in FREIT’s real estate markets, including, among other things, competition with other real estate owners, competition confronted by tenants at FREIT’s commercial properties, governmental actions and initiatives; environmental/safety requirements; and risks of real estate development and acquisitions. The risks with respect to the development of real estate include: increased construction costs, inability to obtain construction financing, or unfavorable terms of financing that may be available, unforeseen construction delays and the failure to complete construction within budget.
 
Overview
 
FREIT is an equity real estate investment trust ("REIT") that owns a portfolio of residential apartment and commercial properties. Our revenues consist primarily of fixed rental income from our residential and commercial properties and additional rent in the form of expense reimbursements derived from our income producing commercial properties.  Our properties are primarily located in northern New Jersey and Maryland. We acquire existing properties for investment. We also acquire properties, which we feel have redevelopment potential, and make changes and capital improvements to these properties. We develop and construct properties on our vacant land. Our policy is to acquire and develop real property for long-term investment.
 
The global economic and financial crisis: The U.S. economy is beginning to show signs of recovery from the recession and the bank liquidity and credit market crisis that had plagued the U.S. and the regional economies in which we operate. Continued economic growth is expected throughout 2010. However, job growth is lagging overall economic growth and, many economists are expecting that unemployment will not peak until mid-2010.
 
Residential Properties: While the occupancy at our residential properties generally remains high, the effects of the economic recession have been felt. As a result of higher than normal unemployment in our areas of operations, we are experiencing rent reductions, a higher number of move-outs and higher than usual incidences of delinquencies of rental payments, causing us to more closely review our allowance for doubtful accounts and increase the related bad debt reserve as warranted.
 
Commercial Properties: Overall, retail sales have begun to register increases among retailers, although results have been mixed. The continued low level of consumer spending has had an impact on the sales volumes and profitability of many merchants, including those who are our tenants. As a result, some tenants have closed their business; some have been put on relaxed payment plans, or are seeking reduced rents or other rent concessions. As such, delinquencies have increased, causing us to more closely review our allowance for doubtful accounts and increase the related bad debt reserve as warranted. To date our tenant fall-out has been minor, however, we may experience additional fall-out if the economic recovery is slow.  We expect re-leasing of vacated space to take longer and, generally at lower rents that reflect current economic conditions.
 
Development Projects and Capital Expenditures:  We are concentrating only on those capital expenditures that are absolutely necessary. We continue to pursue the completion of the development and construction activities started at the Damascus Center. Because of reduced demand from residential rental tenants and buyers, curtailed business expansion, and the current state of the credit markets, no date has been determined for the commencement of construction at our Rotunda and South Brunswick projects.
 
Debt Financing Availability: The dislocations in the credit markets have caused significant price volatility and liquidity disruptions. High pricing spreads and very conservative debt service ratio requirements have made certain financing unattractive and, in certain instances, unavailable. Additionally, construction financing for large, mixed use projects is virtually unavailable, or too costly. As a result of this difficult financing environment and reduced end user demand (see above), FREIT has not determined a date for the commencement of construction at its Rotunda Project.
 


 
19

 

 
On August 6, 2009, FREIT refinanced the mortgage loans secured by its Berdan Court apartment property in Wayne, NJ, with a new mortgage for approximately $20 million. The refinanced mortgages had outstanding principal balances that aggregated approximately $12.3 million at a weighted average interest rate of 6.7%, and were due January 1, 2010. The new mortgage bears interest at 6.09%, and is due September 1, 2019.
 
The $22.5 million mortgage loan entered into by Grande Rotunda for the acquisition of the Rotunda was scheduled to come due on July 19, 2009, and has been extended by the bank until February 1, 2010. FREIT is currently negotiating with the bank for a two to three year extension of this loan. It is expected that the extension will require the posting of additional collateral, and Grande Rotunda reducing the loan by up to $3 million. Under the agreement with the equity owners of Grande Rotunda, FREIT would be responsible for 60% of any cash required by Grande Rotunda, and 40% would be the responsibility of the minority interest. (See Notes 5, 7 and 14 to FREIT's consolidated financial statements.)
 
Operating Cash Flow and Dividend Distributions: FREIT’s cash position remains strong. We expect that cash provided by operating activities will be adequate to cover mandatory debt service payments, necessary capital improvements and dividends necessary to retain qualification as a REIT. It is FREIT’s intention to maintain its quarterly dividend at $.30 per share until the economic climate indicates a change is appropriate, but not less than the level required to maintain its REIT status for Federal income tax purposes.

SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
 
Pursuant to the Securities and Exchange Commission ("SEC") disclosure guidance for "Critical Accounting Policies," the SEC defines Critical Accounting Policies as those that require the application of Management's most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
 
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, the preparation of which takes into account estimates based on judgments and assumptions that affect certain amounts and disclosures. Accordingly, actual results could differ from these estimates. The accounting policies and estimates used, which are outlined in Note 1 to our Consolidated Financial Statements which is presented elsewhere in this Form 10-K, have been applied consistently as at October 31, 2009 and 2008, and for the years ended October 31, 2009, 2008 and 2007. We believe that the following accounting policies or estimates require the application of Management's most difficult, subjective, or complex judgments:
 
Revenue Recognition: Base rents, additional rents based on tenants' sales volume and reimbursement of the tenants' share of certain operating expenses are generally recognized when due from tenants. The straight-line basis is used to recognize base rents under leases if they provide for varying rents over the lease terms. Straight-line rents represent unbilled rents receivable to the extent straight-line rents exceed current rents billed in accordance with lease agreements. Before FREIT can recognize revenue, it is required to assess, among other things, its collectibility. If we incorrectly determine the collectibility of revenue, our net income and assets could be overstated.
 
Valuation of Long-Lived Assets: We periodically assess the carrying value of long-lived assets whenever we determine that events or changes in circumstances indicate that their carrying amount may not be recoverable. When FREIT determines that the carrying value of long-lived assets may be impaired, the measurement of any impairment is based on a projected discounted cash flow method determined by FREIT's management. While we believe that our discounted cash flow methods are reasonable, different assumptions regarding such cash flows may significantly affect the measurement of impairment.
 
During 2007, FREIT sold its Lakewood, NJ property. FREIT reclassified the gain on the sale, as well as the net income (loss) from the operation of this property as Discontinued Operations for all periods presented. The results of this reclassification can be seen in "Item 6 Selected Financial Data" above and in the Consolidated Financial Statements of FREIT (including related notes thereto) appearing elsewhere in this Form 10-K.
 
Adopted and recently issued accounting standards:
In June 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles-a Replacement of FASB Statement No. 162” (“ASC”). ASC is a major restructuring of accounting and reporting standards designed to simplify user access to all authoritative U.S. GAAP by providing authoritative literature in a topically organized structure for nongovernmental entities, in addition to guidance issued by the SEC. ASC supercedes all then-existing, non-SEC accounting and reporting standards for nongovernmental entities. FASB Statement No. 168 is the final standard issued by the FASB in that form. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted FASB ASC effective with its Form 10-K for the year ended October 31, 2009, and the adoption of this new standard did not have an impact on our financial statements. The Company’s accounting policies were not affected by the adoption of ASC. However, references to specific accounting standards in the footnotes to our consolidated financial statements have been changed to refer to the appropriate topics of ASC.
 

 


 
20

 

 
In June 2009, The FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (Topic 810), which changes guidance for variable interest entities that are insufficiently capitalized or not controlled through voting or similar rights. SFAS No.167 amends FIN 46(R) to require that a variable interest entity (“VIE”) be consolidated by the company that has both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The new standard will be effective for fiscal years beginning after November 15, 2009, or January 1, 2010 for calendar year companies. The adoption of SFAS 167 is not expected to have a material impact on our financial statements.
 
In May 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent Events” (ASC 855-10), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. ASC 855 was effective for interim or annual financial periods ending after June 15, 2009. FREIT has adopted this statement effective with its 3rd Quarter 10-Q for the period ended July 31, 2009. In accordance with the provisions of ASC 855, FREIT has evaluated all events or transactions through January 14, 2010. (See Note 14 – to FREIT’s consolidated financial statements.)
 
On December 4, 2007, the FASB issued SFAS No. 160, “Non-Controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (ASC 810-10). The standard is effective for fiscal years beginning after December 15, 2008 and earlier adoption is prohibited. The objective of ASC 810 is to improve the relevance, comparability and transparency of financial information provided to investors by: (i) requiring all entities to report non-controlling interests (minority interests) as equity in the consolidated financial statements and separate from the parent’s equity; (ii) requiring that the amount of net income attributable to the parent and non-controlling interest be clearly identified and presented on the face of the consolidated statement of income; and (iii) expanding the disclosure requirements with respect to the parent and its non-controlling interests. Adoption of ASC 810 will require separate presentation in the statement of undistributed earnings of the changes in the non-controlling members’ interests, as well as balance sheet presentation of such interests as a separate component of Shareholders’ Equity. Upon adoption by the Company effective November 1, 2009, ASC 810 will require retrospective application for all periods presented.
 

 
Since we consider net income from continuing operations to be the most significant element of net income, all references and comparisons refer to this item unless otherwise stated. All references to per share amounts are on a diluted basis (unless otherwise indicated).
 

 


 
21

 
 
Results of Operations:
 
Fiscal Years Ended October 31, 2009 and 2008
 
Summary revenues and net income for the fiscal years ended October 31, 2009 (“Fiscal 2009”) and October 31, 2008 (“Fiscal 2008”) are as follows:
 
   
Year Ended October 31,
 
   
2009
   
2008
   
Change
 
   
(in thousands, except per share amounts)
 
Real estate revenues:
                 
  Commercial properties
  $ 23,333     $ 23,149     $ 184  
  Residential properties
    19,089       19,191       (102 )
      Total real estate revenues
    42,422       42,340       82  
                         
Operating expenses:
                       
  Real estate operations
    17,600       16,996       604  
  General and administrative
    1,652       1,542       110  
  Depreciation
    5,870       5,622       248  
      Total operating expenses
    25,122       24,160       962  
Operating income
    17,300       18,180       (880 )
                         
Investment income
    221       554       (333 )
                         
  Financing costs
    (10,848 )     (11,557 )     709  
  Minority interest in earnings of subsidiaries
    (1,121 )     (1,138 )     17  
Net income
  $ 5,552     $ 6,039     $ (487 )
                         
Earnings per share:
                       
  Basic
  $ 0.80     $ 0.88     $ (0.08 )
  Diluted
  $ 0.80     $ 0.88     $ (0.08 )
                         
Weighted average shares outstanding:
                       
  Basic
    6,944       6,835          
  Diluted
    6,944       6,835          



Real Estate revenue for Fiscal 2009 experienced a slight increase of 0.2% to $42,422,000 compared to $42,340,000 for Fiscal 2008. The economic recession continues to have a negative impact on FREIT’s financial performance, specifically during the last half of Fiscal 2009, in which both our commercial and residential segments experienced a decline in real estate revenues and operating income. (Refer to the segment disclosure below for a more detailed discussion on the financial performance of FREIT’s commercial and residential segments.)
 


 
22

 



The schedule below provides a detailed analysis of the major changes that impacted revenue and net income for Fiscal 2009 and 2008:
 
NET INCOME COMPONENTS
                 
   
Year Ended
 
   
October 31,
 
   
2009
   
2008
   
Change
 
   
($ in thousands)
 
Income from real estate operations:
                 
    Commercial properties
  $ 14,114     $ 14,332     $ (218 )
                         
    Residential properties
    10,708       11,012       (304 )
      Total income from real estate operations
    24,822       25,344       (522 )
                         
Financing costs:
                       
Fixed rate mortgages
    (10,106 )     (10,119 )     13  
Floating rate - Rotunda
    (432 )     (1,098 )     666  
Corporate interest -floating rate credit line
    (310 )     (340 )     30  
  Total financing costs
    (10,848 )     (11,557 )     709  
                         
Investment income
    221       554       (333 )
                         
General & administrative expenses:
                       
    Accounting fees
    (573 )     (600 )     27  
    Legal & professional fees
    (114 )     (80 )     (34 )
    Trustee fees
    (510 )     (500 )     (10 )
    Corporate expenses
    (455 )     (362 )     (93 )
  Total general & administrative expenses
    (1,652 )     (1,542 )     (110 )
                         
Minority interest in earnings of subsidiaries
    (1,121 )     (1,138 )     17  
                         
Depreciation:
                       
Same properties (1)
    (5,454 )     (5,328 )     (126 )
Damascus center-phase I becoming operational in June 2008
    (416 )     (294 )     (122 )
  Total depreciation
    (5,870 )     (5,622 )     (248 )
                         
Net Income
  $ 5,552     $ 6,039     $ (487 )
                         
(1) Properties operated since the beginning of Fiscal 2008.
                 

SEGMENT INFORMATION
 
The following table sets forth comparative operating data for FREIT’s real estate segments:
 
   
Commercial
 
Residential
 
Combined
 
   
Year Ended
             
Year Ended
               
Year Ended
 
   
October 31,
 
Increase (Decrease)
 
October 31,
   
Increase (Decrease)
 
October 31,
 
   
2009
 
2008
 
$
 
%
 
2009
   
2008
   
$
 
%
 
2009
   
2008
 
   
(in thousands)
       
(in thousands)
       
(in thousands)
 
Rental income
  $ 17,687     $ 17,238     $ 449       2.6 %   $ 18,781     $ 18,978     $ (197 )     -1.0 %   $ 36,468     $ 36,216  
Reimbursements
    5,247       5,370       (123 )     -2.3 %     -       -       -               5,247       5,370  
Other
    196       208       (12 )     -5.8 %     308       213       95       44.6 %     504       421  
Total Revenue
    23,130       22,816       314       1.4 %     19,089       19,191       (102 )     -0.5 %     42,219       42,007  
                                                                                 
Operating expenses
    9,219       8,817       402       4.6 %     8,381       8,179       202       2.5 %     17,600       16,996  
Net operating income
  $ 13,911     $ 13,999     $ (88 )     -0.6 %   $ 10,708     $ 11,012     $ (304 )     -2.8 %     24,619       25,011  
Average
                                                                               
Occupancy %
    89.3 %     89.8 %             -0.5 %     92.8 %     94.8 %             -2.0 %                
                                                                                 
                           
Reconciliation to consolidated net income:
                         
                           
Deferred rents - straight lining
            238       237  
                           
Amortization of acquired leases
            (35 )     96  
                           
Net investment income
            221       554  
                           
General and administrative expenses
              (1,652 )     (1,542 )
                           
Depreciation
          (5,870 )     (5,622 )
                           
Financing costs
            (10,848 )     (11,557 )
                           
Minority interest
              (1,121 )     (1,138 )
                                   
Net income
                      5,552       6,039  
 
The above table details the comparative net operating income (“NOI”) for FREIT’s Commercial and Residential Segments, and reconciles the combined NOI to consolidated Net Income. NOI is based on operating revenue and expenses directly associated with the operations of the real estate properties, but excludes deferred rents (straight lining), lease amortization, depreciation, financing costs and other non-operating activity. FREIT assesses and measures segment operating results based on NOI. NOI is not a measure of operating results or cash flow as measured by generally accepted accounting principles, and is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity.

 
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COMMERCIAL SEGMENT
FREIT’s commercial properties consist of ten (10) properties totaling approximately 1,139,000 sq. ft. of retail space and 138,000 sq. ft. of office space for fiscal 2009.  Seven (7) are multi-tenanted retail or office centers, and one is a single tenanted store. In addition, FREIT has two parcels of leased land, from which it receives rental income. One is from a tenant who has built and operates a bank branch on land FREIT owns in Rockaway, NJ. The other is from a tenant who is currently building and will soon be operating a bank branch on land FREIT owns in Rochelle Park, NJ.
 
As indicated in the table above under the caption Segment Information, total revenue from FREIT’s commercial segment for Fiscal 2009 increased by 1.4% as compared to Fiscal 2008. However, NOI for Fiscal 2009 decreased by 0.6% from Fiscal 2008. The primary reasons for the decrease in NOI for Fiscal 2009 were lower expense reimbursements stemming from prior year common area maintenance adjustments, compounded by an increase in operating expenses, specifically in the allowance for doubtful accounts at the Rotunda. Average occupancy rates for FREIT’s commercial segment (exclusive of the Damascus Center) for Fiscal 2009 was at 95.4%, compared to 95.1% for the prior year’s period. The ongoing renovation at the Damascus Center , caused a temporary decline in occupancy levels. The average occupancy rate for the Damascus Center decreased to 44.2% for Fiscal 2009, as compared to 47.7% for Fiscal 2008. The average occupancy rate for the Damascus Center for the last half of Fiscal 2009 showed signs of improvement with tenants occupying new space due to the completion of the Phase I construction. (See discussion below).
 
Overall, retail sales have registered increases, although among retailers results have been mixed. The continued low level of consumer spending has had an impact on the sales volumes and profitability of many merchants, including those who are our tenants. As a result, some tenants have closed their business, some have been put on relaxed payment plans, and some are seeking reduced rents or other rent concessions. Delinquencies have increased, causing us to closely review our allowance for doubtful accounts and increase the related bad debt reserve as warranted. Bad debt expense for Fiscal 2009 increased $151,000 to $212,000, as compared to $61,000 for last year’s comparable period. Year-to-date, tenant fall-out has been minor as average occupancy declined only 0.5%, however, we may experience additional fall-out if the economic recovery is slow.  We expect re-leasing of vacated space to take longer and, generally at lower rents that reflect current economic conditions.

DEVELOPMENT ACTIVITIES
A modernization and expansion is underway at the Damascus Center. Total construction costs are expected to approximate $21.9 million. The building plans incorporate an expansion of retail space from its current configuration of approximately 140,000 sq. ft. to approximately 150,000 sq. ft., anchored by a modern 58,000 sq. ft. Safeway supermarket. Construction on Phase I began in June 2007, and was completed in June 2008. Phase I construction costs were approximately $6.2 million, of which $1.1 million related to tenant improvements. Phase II, which comprises a new 58,000 sq. ft. Safeway supermarket, was started in December 2008. The new Safeway supermarket space was completed in August 2009, and the remainder of the Phase II construction should be completed in 2010. As of October 31, 2009, construction and other costs for Phase II approximated $9.2 million. The Phase III construction is expected to begin in mid-2010. Total construction costs will be funded from a $27.3 million construction loan entered into on February 12, 2008. The construction loan is secured by the Damascus Center.   This loan will be drawn upon as needed to fund already expended and future construction costs at the Damascus Center. As of October 31, 2009, $9.9 million of this loan was drawn down to cover construction costs. (See “Liquidity and Capital Resources” for additional information regarding this loan.) Because of this expansion, leases for certain tenants have been allowed to expire and have not been renewed. This has caused occupancy to decline, on a temporary basis, during the construction phase.
 
Development plans and studies for the expansion and renovation of our Rotunda property in Baltimore, MD (owned by our 60% owned affiliate Grande Rotunda) were substantially completed during Fiscal 2008. The Rotunda property, on an 11.5-acre site, currently consists of an office building containing 138,000 sq. ft. of office space and 78,000 sq. ft. of retail space on the lower floor of the main building. The building plans incorporate an expansion of approximately 180,500 sq. ft. of retail space, approximately 302 residential rental apartments, 56 condominium units and 120 hotel rooms, and structured parking. Development costs for this project are expected to approximate $200 million. City Planning Board approval has been received. As of October 31, 2009, we have incurred approximately $7.5 million for planning and feasibility studies. Due to the adverse economic and credit conditions, the start date for the construction has not yet been determined.



 
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RESIDENTIAL SEGMENT
FREIT operates nine (9) multi-family apartment communities totaling 1,075 apartment units. As indicated in the table above, total revenue and NOI from our residential segment for Fiscal 2009 decreased 0.5% and 2.8%, respectively, to $19,089,000 and $10,708,000 from last year’s comparable period. The primary reasons for the decrease in total revenue and NOI for Fiscal 2009 were a drop in average occupancy, lower base rental income, and an overall increase in operating expenses.
 
While average occupancy at our residential properties for Fiscal 2009 is at 92.8%, the effects of the economic recession have been felt. Year-to-date, average occupancy has fallen 2.0% compared to Fiscal 2008. The declines are attributable to higher than normal unemployment in our areas of operation. Additionally, we are experiencing rent reductions, a higher number of move-outs, and higher than usual incidences of delinquencies of rental payments. As with our commercial segment, we are closely reviewing our allowance for doubtful accounts and increasing the related bad debt reserve as warranted. Bad debt expense for Fiscal 2009 increased $85,000 to $155,000, as compared to $70,000 for last year’s comparable period.
 
Our residential revenue is principally composed of monthly apartment rental income. Total rental income is a function of occupancy and monthly apartment rents. Monthly average residential rents at the end of Fiscal 2009 and Fiscal 2008 period were $1,526 and $1,554, respectively. A 1% decline in annual average occupancy, or a 1% decline in average rents from current levels, results in an annual revenue decline of approximately $197,000 and $181,000, respectively.
 
Capital expenditures: Since all of our apartment communities, with the exception of The Boulders, were constructed more than 25 years ago, we tend to spend more in any given year on maintenance and capital improvements than may be spent on newer properties. A major renovation program is ongoing at The Pierre Towers apartment complex (“The Pierre”). We have substantially completed modernizing, where required, all apartments and some of the buildings’ mechanical services. This renovation was expected to cost approximately $3 - $4 million, and apartments were renovated as they became temporarily vacant.  It is anticipated that this renovation will be completed in fiscal 2010. These costs are being financed from operating cash flow and cash reserves. Through October 31, 2009, we expended approximately $3.9 million in capital improvements at The Pierre.

FINANCING COSTS
Financing costs are summarized as follows:
 
   
Year Ended October 31,
 
   
2009
   
2008
 
   
(in thousands)
 
 Fixed rate mortgages:
           
    1st Mortgages
           
    Existing
  $ 8,771     $ 8,547  
    New (1)
    653       244  
    2nd Mortgages
               
    Existing
    465       1,188  
Variable rate mortgages:
               
    Acquisition loan-Rotunda
    531       1,198  
    Construction loan-Damascus
    147       112  
 Other
    310       245  
      10,877       11,534  
 Amortization of Mortgage Costs
    239       371  
 Total Financing Costs
    11,116       11,905  
      Less amount capitalized
    (268 )     (348 )
 Financing costs expensed
  $ 10,848     $ 11,557  
                 
(1) Mortgages not in place at beginning of Fiscal 2008.
 
 
Total financing costs before capitalized amounts for Fiscal 2009 decreased 6.6%, over the prior year’s comparable period. This decrease was primarily attributable to our $22.5 million acquisition loan for The Rotunda property, which bears a floating interest rate. Lower interest rates over the course of the current year decreased the level of interest expense for the Rotunda by approximately $667,000 to $531,000 for Fiscal 2009.


 
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INVESTMENT INCOME
Investment income for Fiscal 2009 decreased 60.1% to $221,000, as compared to the comparable prior year’s period. Investment income is principally derived from interest earned from cash on deposit in institutional money market funds and interest earned from secured loans receivable (loans made to Hekemian employees, including certain members of the immediate family of Robert S. Hekemian, FREIT CEO and Chairman of the Board, and Robert S. Hekemian, Jr., a trustee of FREIT, for their equity investment in Grande Rotunda, a limited liability company in which FREIT owns a 60% equity interest, and Damascus Centre, a limited liability company in which FREIT owns a 70% equity interest). The decrease in investment income was primarily attributable to lower interest income on the Company’s investments in cash and cash equivalents, and lower interest income relative to secured loans made to Hekemian employees in connection with the sale of equity interests in the Rotunda and the Damascus Center, due in part to lower interest rates.
 
To protect our cash deposits due to the current banking crisis, we have repositioned our bank deposits to fall within the insured limits of the FDIC and the U.S. Treasury Guarantee Program. This necessitated transferring significant balances from interest bearing deposit accounts to non-interest bearing deposit accounts, which resulted in reduced earnings from interest income for the current fiscal year and for the foreseeable future.

GENERAL AND ADMINISTRATIVE EXPENSES (“G & A”)
During Fiscal 2009, G & A was $1,652,000, as compared to $1,542,000 for the prior year’s period. The increases for Fiscal 2009 was primarily attributable to increased office expense, Trustees’ fees, development costs related to FREIT’s new website, expenditures related to the settlement of certain litigation amounting to approximately $42,000, and higher legal and professional fees related to this litigation.

DEPRECIATION
Depreciation expense for Fiscal 2009 was $5,870,000, as compared to $5,622,000 for the prior year’s period. The increase was primarily attributable to current renovation and construction projects becoming operational at the Damascus Center, the Westridge Square Shopping Center, and the Pierre Towers apartments, respectively.

 

 

 


 
26

 

 
Results of Operations:
 
Fiscal Years Ended October 31, 2008 and 2007
 
Summary revenues and net income for the fiscal years ended October 31, 2008 (“Fiscal 2008”) and  October 31, 2007 (“Fiscal 2007”) are as follows:
 
   
Year Ended October 31,
 
   
2008
   
2007
   
Change
 
   
(in thousands, except per share amounts)
 
Real estate revenues:
                 
  Commercial properties
  $ 23,149     $ 22,112     $ 1,037  
  Residential properties
    19,191       18,626       565  
      Total real estate revenues
    42,340       40,738       1,602  
                         
Operating expenses:
                       
  Real estate operations
    16,996       16,673       323  
  General and administrative
    1,542       1,543       (1 )
  Depreciation
    5,622       5,311       311  
      Total operating expenses
    24,160       23,527       633  
Operating income
    18,180       17,211       969  
                         
Investment income
    554       634       (80 )
                         
  Financing costs
    (11,557 )     (11,897 )     340  
  Minority interest in earnings of subsidiaries
    (1,138 )     (626 )     (512 )
  Distribution to certain minority interests
    -       (150 )     150  
Income from continuing operations
    6,039       5,172       867  
Income from discontinued operations
    -       3,771       (3,771 )
Net income
  $ 6,039     $ 8,943     $ (2,904 )
                         
Basic earnings per share:
                       
  Continuing operations
  $ 0.88     $ 0.76     $ 0.12  
  Discontinued operations
  $ -     $ 0.56     $ (0.56 )
Net income
  $ 0.88     $ 1.32     $ (0.44 )
                         
Diluted earnings per share:
                       
  Continuing operations
  $ 0.88     $ 0.74     $ 0.14  
  Discontinued operations
  $ -     $ 0.55     $ (0.55 )
Net income
  $ 0.88     $ 1.29     $ (0.41 )
                         
Weighted average shares outstanding:
                       
  Basic
    6,835       6,753          
  Diluted
    6,835       6,916          
 
Revenue for Fiscal 2008 increased 3.9% to $42,340,000 compared to $40,738,000 for Fiscal 2007. The increase in revenues was attributable to both of FREIT’s real estate segments, with the commercial segment contributing 65% of the increase, and the residential segment contributing 35% of the increase.

During the 3rd quarter of Fiscal 2007, FREIT sold its Lakewood Apartments in Lakewood, New Jersey. In compliance with  applicable accounting guidance, the gain on the sale, as well as the current and prior year’s earnings of the Lakewood operation are classified as “Income from discontinued operations”, which is included within “Net Income” after “Income from continuing operations”. (See Note 3 for a further discussion of the sale.) Net income for Fiscal 2008 was $6,039,000 ($0.88 diluted) compared to $8,943,000 ($1.29 diluted) for the prior year. Income from continuing operations for Fiscal 2008 was $6,039,000 ($0.88 diluted) compared to $5,172,000 ($0.74 diluted) for the prior year.
 

 
27

 

 
The schedule below provides a detailed analysis of the major changes that impacted revenue and net income for Fiscal 2008 and 2007:
 
NET INCOME COMPONENTS
                 
                   
   
Year Ended October 31,
 
   
2008
   
2007
   
Change
 
   
(in thousands)
 
                   
Commercial Properties (except Damascus)
  $ 13,812     $ 13,085     $ 727  
Damascus Center - undergoing renovation
    520       406       114  
Total Commercial Properties
    14,332       13,491       841  
                         
Residential Properties
    11,012       10,574       438  
                         
Total income from real estate operations
    25,344       24,065       1,279  
                         
Financing costs:
                       
Fixed rate mortgages
    (10,119 )     (9,966 )     (153 )
Floating Rate - Rotunda
    (1,098 )     (1,638 )     540  
Corporate Interest - floating rate credit line
    (340 )     (293 )     (47 )
Total financing costs
    (11,557 )     (11,897 )     340  
                         
Investment income
    554       634       (80 )
                         
Corporate expenses
    (862 )     (816 )     (46 )
Accounting & other professional fees
    (680 )     (727 )     47  
Minority interest in earnings of subsidiaries
    (1,138 )     (626 )     (512 )
Distribution to Westwood Hills minority interests
    -       (150 )     150