Item 1 C (3) at Page 8 hereof). The Line of Credit is secured by a blanket mortgage lien filed as against all of the Registrant's developed properties except the Spring Lake Heights, Westwood, New Jersey and Frederick, Maryland properties which support individual mortgages described above. In addition, Summit Bank's mortgage lien has not been filed as against any of the vacant property held by the Registrant in Rockaway, New Jersey and South Brunswick, New Jersey.
(c) Westwood Hills, LLC
The Registrant holds a forty (40%) percent interest in Westwood Hills, a New Jersey Limited Liability Company (the "LLC") which owns a 210 unit apartment complex located in Westwood, New Jersey.
The Westwood Hills, LLC purchased the Westwood Hills Apartment Complex in 1994 for a purchase price of $15,389,000.00 including closing costs. At the time of the purchase, the LLC secured a short term mortgage in the amount of $9,520,000.00 from United Jersey Bank.
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In September 1995 Westwood Hills, LLC refinanced Westwood Hills Apartment Complex. A new mortgage in the amount of $10,500,000.00 was secured from USG Annuity (the "USG Mortgage"). The USG Mortgage is for a term of seven (7) years with a twenty- five (25) year payment, the interest rate is 7.80% per annum. The principal balance of the mortgage is $10,346,000, as of October 31, 1996.
At the end of the seven (7) year term of the USG Mortgage, a substantial balloon payment will be due in the amount of $9,230,965.00. The LLC has made no provision to reserve cash to meet this balloon payment obligation. (See, Liquidity and Capital Reserves). Westwood Hills, LLC intends to refinance the apartment complex prior to the time the balloon payment is due on the then prevailing terms and conditions which could be less than favorable than the present mortgage terms and conditions.
ITEM 3 LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Registrant is a party of which any of its properties is the subject. There are, however, ordinary and routine litigation involving the Registrant's business including various tenancy and related matters.
There are no legal proceedings concerning environmental issues with respect to any property owned by the Registrant.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the Registrant's fourth quarter of fiscal year 1996.
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS.
(A) The following tables set forth, for the periods indicated, are the highest and lowest bid and asked quotations in the over-the-counter market NASDAQ Bulletin Board. It should be noted that over-the-counter quotations reflect inter-dealer prices, without retail markup, markdown or commission and may not necessarily represent actual transactions. There is no established public trading market, the trading is sporadic and in small volumes, all as set forth below.
The source of the foregoing is Janney Montgomery Scott, Inc., members of New York and other principal exchanges, 505 Main Street, Hackensack, New Jersey.
(B) There is one class of stock of beneficial interest with no par value. A total of 1,559,788. shares of beneficial interest outstanding at the close of Registrant's last fiscal year ended October 31, 1996. As of December 31, 1996, the Registrant's shares where held by 393 Shareholders.
The computation of the number of holders of Registrant's shares of beneficial interest was based upon a report of shareholders which was prepared by the Registrant's transfer agent as of December 13, 1996 and has been updated through December 31, 1996.
ITEM 6 SELECTED FINANCIAL DATA
As of or for the Year Ended October 31, 1996.
* The dividend shown for 1996 includes the dividend paid in December 1996 of $0.66 per share. This dividend was related to the earnings for fiscal year 1996 but was not paid out to Registrant's shareholders until December 1996.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(A) Liquidity and Capital Resources.
(a) Overview. The following discussion should be read in conjunction with the Registrant's Financial Statements and Notes thereto appearing elsewhere in this Form 10-K. Such financial statements and information have been prepared to reflect the historical operations and financial condition of the Registrant.
(b) Results of Operations. Rental revenues for the fiscal year ended October 31, 1996, were $13,678,000.00 as compared to $13,250,000.00 for the same period in 1995. The rental expenses increased to $10,218,000.00 for 1996 as compared to $9,592,000.00 for 1995.
The Registrant's net income for the fiscal year 1996 was $2,662,000.00 or $1.71 per share as compared to a net income of $2,786,000.00 for fiscal year 1995 or $1.79 per share.
The Registrant has continued to raise rents whenever possible consistent with market conditions while maintaining its vacancy factors at acceptable levels.
Operating expenses increased during fiscal year 1996 due, primarily, to the cost for heating and snow removal. The Northeast endured a severe winter during calendar year 1995-1996 with record snow falls. As a result, both heating and snow removal costs were substantially increased over the same costs for fiscal year 1995.
Registrant also took various writeoffs in fiscal year 1996 for accrued rent together with other matters.
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In addition to the foregoing, the Registrant has been in the process of closing the existing Franklin Lakes Shopping Center. As a result, during the past several quarters, leases were not renewed and leasable space was left vacant. The existing center has been closed as of November 1, 1996. The income for the center was $29,635 for fiscal year 1996 as compared to $91,300 for fiscal year 1995.
During the demolition and construction of the new Franklin Lakes Shopping Center the costs of construction, including all interest on any construction loan and real property taxes, will be incurred by the Registrant. In accordance with generally accepted accounting principles, the costs will be capitalized. As a result, Registrant's expenses during fiscal year 1997 will, except for the period of time after October 31, 1996 (the last day of fiscal year 1996) to the first day of construction (sometime during January or February, 1997 weather permitting) will not be reflected in its expenses for fiscal year 1997. The affect of the forgoing is that while expenses are being incurred from a cash point of view, the items which would ordinarily be expenses will be capitalized for fiscal year 1997.
(c) Liquidity and Capital Resources. Cash flows from operations, debt financing and the sale of Registrant's Shares have been the principal sources of capital used to fund the Registrant's property acquisitions and expansion.
The Registrant has a $20 million line of credit from Summit Bank that may be used to finance the acquisition or development of additional properties and for general business purposes. Borrowings under the Line of Credit bear interest: (i) at a variable fluctuating rate equal to Summit Bank's Base Lending Rate or at the LIBOR Based, plus 200 basis points (2.0%) on all borrowings up to $10,000,000; and (ii) at Summit's Base Lending Rate, plus one half of one percent (1/2%) or at the LIBOR Base, plus 250 basis points (2.5%) on all borrowings in excess of $10,000,000. At October 31, 1996, the sum of $5,662,000.00 was outstanding under the Line of Credit.
The Registrant may seek, under certain circumstances, to obtain funds through additional equity offerings and/or debt financing (other than the Line of Credit), such as purchase money financing from the sellers of real estate or mortgage loans from institutions. Such funds may be used in connection with the acquisition of additional properties, the renovation or expansion of existing properties or, as necessary, to meet the distribution requirements for REITs under the Code. The availability and terms of any such equity offering will depend upon market and other conditions. There can be no assurance that such additional equity capital will be available on terms acceptable to the Registrant. Economic conditions and prevailing banking standards have generally restricted the availability of debt financing, particularly in connection with mortgage loans for real estate acquisitions. The Registrant is unable to project in a definitive manner what impact such economic conditions and prevailing banking standards will have on the Registrant's ability to finance new acquisitions.
The Registrant continues to make capital improvements to, primarily, its apartment properties as it determines to be appropriate, including new roofs, windows and kitchens. The short term impact of such capital outlays will be to depress the Registrant's then current cash flow. The Registrant is now experiencing the benefits of these expenditures by preserving the physical integrity of its properties and securing increased rentals.
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Other than the apartment rehabilitation program described above, the Registrant has made no commitments, and has no understandings for additional capital expenditures except with respect to the re-development of the Franklin Lakes Shopping Center and the purchase of the Patchogue Shopping Center described in detail at Item 1(C)(d)(i) and (ii) at Pages 7 and 8 hereof.
i. Short Term Liquidity. The cash flow from operations has been sufficient to meet all current operational needs of the Registrant. Nevertheless, the commitment made by the Registrant to demolish and erect the new Franklin Lakes Shopping Center and to purchase the Patchogue Shopping Center will require the Registrant to secure a permanent mortgage for each of the properties representing approximately seventy-five (75%) of the costs to purchase the Patchogue Shopping Center and to construct the new Franklin Lakes Shopping Center. The balance of the funds required will be secured from the Line of Credit. The cash flow from operations will not be sufficient to fund the purchase of the Patchogue Shopping Center or to meet the cash requirements for the construction of the new Franklin Lakes Shopping Center.
ii. Long Term Liquidity. The Registrant anticipates that the cash flow from operations after the purchase of the Patchogue Shopping Center and construction of the new Franklin Lakes Shopping Center will be more than sufficient to meet the new mortgagee obligations for each project. Registrant also expects that the cash flow from operations will permit the Registrant to pay down the Line of Credit over a period of time.
iii. Under the terms of the Leases relating to the shopping center/retail properties, the tenants are responsible for various operating expenses and real estate taxes. As a result of these arrangements, the Registrant does not believe it will be responsible for any major expenses in connection with such properties during the lease term of any tenant. The Registrant anticipates entering into similar leases with respect to the properties. After the lease term or in the event a tenant is unable to meet its obligations, the Registrant anticipates that any expenditures it might become responsible for in maintaining the properties will be funded by cash from operations and, in the case of major expenditures, possibly by borrowings. To the extent that expenditures or significant borrowings are required, the Registrant's cash available for distribution and liquidity may be adversely affected.
iv. Registrant may also seek purchase money financing or institutional financing, other than the Line of Credit, to finance any new acquisitions in addition to the Patchogue Shopping Center and the renovation of the Franklin Lakes Shopping Center as described in Item 1(c)(d)(i)(ii) at pages 7 and 8 hereof. As of December 31, 1996, institutional money is available at relatively reasonable rates. The Registrant may, as a result, seek to raise additional monies for investment purposes, subject to the restrictions of the Line of Credit, by securing mortgage financing on one or more of its properties. In addition, Registrant may seek to refinance one or more of its properties where mortgage financing is currently in place.
(d) Capital Strategy
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Since its inception in 1961, the Registrant has elected to be treated as a REIT for Federal income tax purposes. The Registrant anticipates making distributions to its stockholders from operating cash flows, which are expected to increase from future growth in rental revenues and other sources. Although cash used to make distributions reduces amounts available for capital investment, the Registrant generally intends to distribute not less than 95% of net income.
Although the Registrant receives most of its rental payments on a monthly basis, it intends to make regular quarterly dividend payment distributions. The funds accumulated for dividend distributions may be invested by the Registrant in short-term marketable instruments.
(e) Economic Conditions
The Registrant anticipates that the U.S. Mid-Atlantic states will continue to experience moderate growth with limited inflation. Continued economic strength in the employment market should allow the Registrant to realize its current occupancy rates for its apartments with a sound support base for its shopping center operations.
Any sustained inflation may, however, negatively impact Registrant in at least two areas: (a) its Line of Credit is based upon a floating rate of interest which would, if increased over the 7.875% interest rate as of December 31, 1996, result in increased costs of operations; and (b) Registrant will be seeking two permanent mortgages to finance the purchase of the Patchogue Shopping Center and to replace the present mortgage for its Frederick, Maryland Shopping Center which is due as of August 1, 1997. In addition, Registrant will also seek a construction and then a permanent mortgage for the new Franklin Lakes Shopping Center. Any increase in mortgage interest rates would necessarily increase the costs of operations during fiscal 1997.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements in accordance with the provisions of Regulation S-K are annexed hereto.
ITEM 9 CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There are no matters of disagreement on accounting and financial disclosures as between the Registrant and J.H. Cohn, LLP required to be reported pursuant to Regulation S-K. There has not been in either of the past two years an adverse opinion or disclaimer of opinion, nor was any opinion qualified or modified as to uncertainty, audit scope or accounting principles.
J.H. Cohn, LLP has acted as the Registrant's principal accountants and auditors since December of 1991.
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PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
(A) Identification of Trustees
(B) Identification of Executive Officers
All of the Officers of the Registrant serve at the pleasure of the Board of Trustees.
The Officers devote the following proximate portions of their business activities to the Trust:
(C) Identification of Certain Significant Employees
Registrant has no employees. Hekemian & Co. serves as the managing agent for the Registrant and manages all of its properties. Hekemian & Co. retains the services of a number of individuals who work on a full or part time basis in connection with Registrant's properties. The Registrant reimburses Hekemian & Co. for certain expenses related to such employees. (See Item 1, (C)(13) at pp. 16-17 hereof).
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(D) Identification of Certain Significant Family Relationships
Mr. Hekemian is the brother-in-law of Dr. Voskian. Mr. Barney was formerly the brother-in-law of Mr. DeLorenzo. There are no other family relationships between any other Trustees or Executive Officers.
(E) Business Experience
(1) Robert S. Hekemian - Mr. Hekemian is the Chief Executive Officer and Chairman of the Board of Hekemian & Co. a real estate brokerage firm. He is a director of Summit Bank. Summit Bank is a banking institution with principal offices in Princeton, New Jersey. He is also a director, partner and/or officer of numerous private real estate corporations and partnerships. He has been active in real estate for over forty-two (42) years.
(2) Donald W. Barney - Mr. Barney is Vice President and Treasurer of Union Camp Corporation, a Virginia corporation with executive offices in Wayne, New Jersey; director of Ramapo Financial Corp. a New Jersey financial institution located in Wayne, New Jersey and successor to Ramapo Bank. Mr. Barney is also a partner and director of several real estate investment companies, partnerships and corporations.
(3) Dr. John B. Voskian - Dr. Voskian is a physician. He is also a director and an officer of a number of private real estate companies. Dr. Voskian is not currently practicing medicine.
(4) Herbert C. Klein - Mr. Klein is a director of the law firm of Hannoch Weisman located in Roseland, New Jersey and Washington, D.C. Mr. Klein's practice is devoted to real estate, corporate matters and government relations. Mr. Klein is a former member of the United States House of Representatives for the 8th Congressional District of New Jersey. Mr. Klein was formerly a member of the law firm of Klein Chapman. Mr. Klein is also a former member of the New Jersey legislature. He is a member of the Bars of New Jersey and the District of Columbia, an attorney since 1956, and a member of the Board of Trustees of Rutgers University.
Mr. Klein is also a director and partner in a number of private real estate companies.
(5) Nicholas A. Laganella - Mr. Laganella is the President of P.T. & L. Construction Company and a real estate investor on his own account.
(6) Charles J. Dodge - Mr. Dodge is the Chief Executive Officer of Cronheim Mortgage Co. Mr. Dodge is also a partner in a real property development company and is a real estate investor on his own account.
(7) Alan L. Aufzien - Mr. Aufzien is a principal partner, Meadowlands Basketball Association, t/a New Jersey Nets (Member of the National Basketball Association), Chairman of New York Harbour Associates which is a real estate developer, Treasurer and Partner of Capital Formation Associates, a group of venture capital investors and operators, Chairman of Ral International, Ltd. and is active in various civic and business organizations.
(8) Ronald J. Artinian - Mr. Artinian is the Managing Director, National Sales Manager at Smith Barney, Inc.
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(9) William R. DeLorenzo, Jr. - Mr. DeLorenzo is an attorney in private practice as of counsel to the firm of Nowell Amoroso, P.A. His law office is located in Hackensack, New Jersey. Mr. DeLorenzo is the former Chairman of the New Jersey Commission on Capital Budget and Planning.
Directorships - Messrs. Klein, Hekemian, Laganella, Barney, Aufzien and Artinian are Directors of closely held corporations and partnerships that own real estate.
(F) Involvement in Certain Legal Proceedings
No Trustee or Officer of the Registrant has been the subject of a petition in bankruptcy, criminal proceeding or order of a Court or governmental agency barring him from participating in any commodities trading, security transactions, type of business practice or any other practice set forth in Section 229.401 subparagraph (f) of Regulation S-K.
ITEM 11 EXECUTIVE COMPENSATION.
Set forth below is a Summary Compensation Table for each of the Registrant's Officers and Trustees for the past three fiscal years:
The Registrant has determined to compensate all Trustees for fiscal 1997 at the same base rate as in 1996. Each of the Trustees or the Executive Secretary who attends regular or special meetings of the Board of Trustees shall receive an additional sum of $400 for each meeting attended. Registrant will continue to pay to each Trustee or the Executive Secretary who attends a site visit to inspect a property being reviewed for purchase, a fee of $400 together with actual and reasonable out-of-pocket expenses.
The fee to be paid to the Chairman, President and Treasurer will continue at the rate of $5,000.00 for fiscal year 1997.
No Officer or Trustee of the Registrant:
a) has any stock options to purchase stock of the Registrant;
b) receives any perquisites or other personal benefits, security or property; and
c) is entitled to any long-term compensation of any kind from the Registrant.
Registrant maintains an executive committee which includes a majority of the Trustees and the Executive Secretary as a non-voting attendee. Members of the executive committee and the Executive Secretary receive $400 for each meeting attended.
Robert S. Hekemian was elected Chairman of the Board in 1991. Prior to that time, he had served the Registrant as President.
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Herbert C. Klein was elected President of the Registrant in 1991. Prior to that time, he had not served the Registrant as an Officer. Mr. Klein had, however, served as a Trustee prior to 1991. Mr. Klein had resigned as President of the Registrant effective December 31, 1992 upon election to the United States House of Representatives for the term ending January 4, 1995. Mr. Klein did not receive any compensation from the Registrant for his service as a Trustee during his two-year term as a U.S. Congressman.
Messrs. Artinian and Aufzien were elected to the Board of Trustees in May, 1992. They were paid a partial fee for their services in that position by the Registrant based upon the standard annual fee paid to all Trustees of $5,500.
Donald W. Barney was elected President of the Registrant on May 24, 1993.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(A) No single person owns of record or beneficially five (5) percent or more of the shares of beneficial interest of the Registrant.
(B) Title of Class Amount Beneficially Owned % of Class ------------------ ------------------------- ---------- Shares of beneficial 631,919 40.5% interest no par. All Trustees and Officers and their families as a group(8) of record and beneficial - -------------- (8) No single person owns five percent of the shares. Includes spouses, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, and brothers and sisters-in-law.
(C) Registrant knows of no pledge of securities of the Registrant, the operation of the terms of which may at a subsequent date result in a change in control of the Registrant.
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(D) Security Ownership of Certain Beneficial Owners and Management
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(A) Transactions with Management and others
(i) Hekemian & Co. serves as the managing agent for the Registrant's properties and as a consultant to the Registrant. Robert S. Hekemian serves as Chairman of the Board of Hekemian & Co., Inc. and is also a shareholder. The following family members of Mr. Hekemian are Officers of Hekemian in the position set forth opposite their names.
Samuel P. Hekemian - President Robert S. Hekemian, Jr. - Executive Vice President Bryan S. Hekemian - Vice-President and Secretary David B. Hekemian - Vice-President and Treasurer Serge Krikorian - Vice-President Insurance Department
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Samuel Hekemian is the brother of Robert S. Hekemian. Robert S. Hekemian, Jr., Bryan S. Hekemian and David B. Hekemian are the sons of Robert S. Hekemian. Serge Krikorian is the brother-in-law of Robert S. Hekemian and Samuel Hekemian.
Mr. Hekemian also serves on the Board of Directors of Summit Bank, which holds a first mortgage on the Registrant's property located in Spring Lake Heights as more fully described in Item 2
ITEM 14 EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(A) List of all documents to be filed as a part of this 10-K Report:
1. Financial Statements.
(i) Report of Independent Public Accountant for Registrant, J.H. Cohn, LLP
(ii) Combined Balance Sheets as of October 31, 1996 and 1995
(iii) Combined Statements of Income and Undistributed Earnings Years ended October 31, 1996, 1995 and 1994
(iv) Combined Statements for Cash Flows Years ended October 31, 1996, 1995 and 1994
(v) Notes to Combined Financial Statements
2. Financial Statement Schedules.
(i) Short-Term Borrowings.
(ii) Supplementing Income Statement Information.
(iii) Real Estate and Accumulated Depreciation.
(B) Reports on Form 8-K:
No report on Form 8-K was filed by the Registrant during the last quarter of the fiscal year ending October 31, 1996.
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(C) Exhibits required pursuant to Item 601 of Regulation S-K:
Exhibit 3 - Amended and Restated Declaration of Trust, dated November 7, 1983 which was submitted as part of the Registrant's 10-K for 1991, as amended which Exhibit is incorporated by reference; amendment dated May 31, 1994 to paragraphs 3.5 and 7.5, which was submitted as part of Registrant's 10-K for 1994 is incorporated by reference.
Exhibit 10 - Material Contracts:
(i) December 20, 1961 Management Agreement between the Registrant and Hekemian & Co. (formerly known as S. Hekemian & Co., Inc.), a copy of which was filed as Exhibit 10 with Registration Statement - 2- 19609, which Exhibit is incorporated by reference.
Exhibit 24 - Report of J.H. Cohn, LLP as the Independent Public Accountants of the Registrant is included in the Financial Statements, attached hereto.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: January , 1997 First Real Estate Investment Trust of New Jersey
By:/s/Robert S. Hekemian --------------------- Robert S. Hekemian, Chairman of the Board and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert S. Hekemian his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
/s/Robert S. Hekemian DATED: January 23, 1997 - --------------------- Robert S. Hekemian, Chairman of the Board, Chief Executive Officer and Trustee (Principal Executive Officer)
/s/Donald W. Barney DATED: January 23, 1997 - ------------------- Donald W. Barney, Trustee and President
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/s/John B. Voskian DATED: January 23, 1997 - ------------------ John B. Voskian, Trustee and Secretary
/s/Herbert C. Klein DATED: January 23, 1997 - ------------------- Herbert C. Klein, Trustee
/s/Charles J. Dodge DATED: January 23, 1997 - ------------------- Charles J. Dodge, Trustee
/s/Nicholas A. Laganella DATED: January 23, 1997 - ------------------------ Nicholas A. Laganella, Trustee
/s/William R. DeLorenzo, Jr. DATED: January 23, 1997 - ---------------------------- William R. DeLorenzo, Jr. Executive Secretary and Treasurer (Principal Financial and Accounting Officer)
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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND AFFILIATE
INDEX TO COMBINED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (ITEMS 8 AND 14(a))
(A) COMBINED FINANCIAL STATEMENTS:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
BALANCE SHEETS OCTOBER 31, 1996 AND 1995
STATEMENTS OF INCOME AND UNDISTRIBUTED EARNINGS YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
NOTES TO FINANCIAL STATEMENTS
(B) FINANCIAL STATEMENT SCHEDULES:
IX - SHORT-TERM BORROWINGS
X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
XI - REAL ESTATE AND ACCUMULATED DEPRECIATION
Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the combined financial statements or notes thereto.
* * *
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders First Real Estate Investment Trust of New Jersey
We have audited the accompanying combined balance sheets of FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND AFFILIATE as of October 31, 1996 and 1995, and the related combined statements of income and undistributed earnings and cash flows for each of the three years in the period ended October 31, 1996. These financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of First Real Estate Investment Trust of New Jersey and Affiliate as of October 31, 1996 and 1995, and their results of operations and cash flows for each of the three years in the period ended October 31, 1996, in conformity with generally accepted accounting principles.
Our audits referred to above included the information in Schedules IX, X and XI which present fairly, when read in conjunction with the combined financial statements, the information required to be set forth therein.
/s/J. H. Cohn LLP ----------------- J. H. COHN LLP Roseland, New Jersey December 3, 1996
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Supplemental schedule of noncash investing and financing activities: During fiscal 1994, the Affiliate financed the purchase of real estate with mortgage proceeds of $9,520,000 (see Note 2). During fiscal 1995, the outstanding mortgage balance of approximately $9,325,000 was repaid using proceeds of a new mortgage. Dividends declared but not paid amounted to $1,029,000 and $1,154,000 at October 31, 1996 and 1995, respectively.
See Notes to Combined Financial Statements.
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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 - Organization and significant accounting policies: Organization: First Real Estate Investment Trust of New Jersey (the "Trust") was organized November 1, 1961 as a New Jersey Business Trust. The Trust is engaged in owning residential and commercial income producing properties located primarily in New Jersey.
The Trust has elected to be taxed as a Real Estate Investment Trust under the provisions of Sections 856-860 of the Internal Revenue Code, as amended. Accordingly, the Trust does not pay Federal income tax on income whenever income distributed to shareholders is equal to at least 95% of real estate investment trust taxable income. Further, the Trust pays no Federal income tax on capital gains distributed to shareholders.
The Trust is subject to Federal income tax on undistributed taxable income and capital gains. The Trust may make an annual election under Section 858 of the Internal Revenue Code to apply part of the regular dividends paid in each respective subsequent year as a distribution for the immediately preceding year. For fiscal 1996, 1995 and 1994, the Trust made such an election.
Principles of combination: The combined financial statements include the accounts of the Trust and Westwood Hills, LLC (the "Affiliate"), which have been combined on the basis of common control. The Affiliate is a limited liability company that is 40%-owned by the Trust and managed by Hekemian & Co., Inc. ("Hekemian"), a company which manages all of the Trust's properties and in which one of the trustees of the Trust is the chairman of the board. Certain other members of the Affiliate are either trustees of the Trust or their families or officers of Hekemian. The combined financial statements include 100% of the Affiliate's assets, liabilities, operations and cash flows with the 60% interest owned by the other members of the Affiliate reflected as "minority interest." All significant intercompany accounts and transactions have been eliminated in combination.
Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 - Organization and significant accounting policies (continued): Cash: The Trust and its Affiliate maintain their cash in bank deposit accounts which, at times, may exceed Federally insured limits. The Trust considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. At October 31, 1996 and 1995, the Trust had no cash equivalents.
Depreciation: Real estate and equipment are depreciated on the straight-line method by annual charges to operations calculated to absorb costs of assets over their estimated useful lives.
Revenue recognition: Income from leases is recognized on a straight-line basis regardless of when payment is due. Lease agreements between the Trust and commercial tenants generally provide for additional rentals based on such factors as percentage of tenants' sales in excess of specified volumes, increases in real estate taxes, Consumer Price Indices and common area maintenance charges. These additional rentals are generally included in income when reported to the Trust, when billed to tenants or ratably over the appropriate period.
Deferred charges: Deferred charges consist of mortgage costs and leasing commissions. Deferred mortgage costs are amortized on the straight-line method by annual charges to operations over the terms of the mortgages. Deferred leasing commissions are amortized on the straight-line method over the terms of the applicable leases.
Advertising: The Trust expenses the cost of advertising and promotions as incurred. Advertising costs charged to operations amounted to approximately $55,000, $31,000 and $21,000 in 1996, 1995 and 1994, respectively.
Income taxes: The Affiliate, with the consent of its members, elected to be treated as a limited liability company under the applicable sections of the Internal Revenue Code. Under these sections, income or loss, in general, is allocated to the members for inclusion in their individual income tax returns. Accordingly, there is no provision for income taxes applicable to the operations of the Affiliate in the accompanying combined financial statements. - 52 -
FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 - Organization and significant accounting policies (concluded): Earnings per share: Earnings per share are computed based on the weighted average number of shares outstanding. The weighted average number of shares outstanding was 1,559,788 for each of the three years in the period ended October 31, 1996.
Note 2 - Acquisition: During May 1994, the Trust became a 40% member of the Affiliate, a newly formed limited liability company.
On June 2, 1994, the Affiliate consummated the purchase of Westwood Properties, a residential apartment complex located in Westwood, New Jersey (the "Apartment Complex"). The cost of the Apartment Complex was approximately $15,389,000 of which $5,869,000 was paid in cash and $9,520,000 was financed by the proceeds of a mortgage.
The acquisition was accounted for as a purchase and, accordingly, the Apartment Complex's operations have been included in the accompanying combined statements of income since the date of acquisition. Of the total cost of the acquisition (including related acquisition expenses), $3,849,000 was allocated to land and $11,540,000 to buildings and improvements. In connection with the acquisition, the Affiliate paid Hekemian a $500,000 real estate commission, which amount is included in the cost of the Apartment Complex.
The following unaudited proforma information (in thousands of dollars, except per share amounts) shows the results of operations for the year ended October 31, 1994 as though the Apartment Complex had been acquired at the beginning of fiscal 1994:
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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS Note 2 - Acquisition (concluded): In addition to combining the historical results of operations of the Apartment Complex and the Trust, the unaudited proforma results include adjustments for depreciation based on the Affiliate's purchase price, reduced interest income and increased interest expense related to cash paid and obligations incurred to complete the transaction.
The unaudited proforma results of operations set forth above are based on information furnished by the Trust's management. Such proforma information is not necessarily indicative of the results that would have occurred had the acquisition been made at the beginning of fiscal 1994 or of future results of operations of the combined properties.
Note 3 - Real estate: Real estate consists of the following:
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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 4 - Mortgages payable: Mortgages payable consist of the following:
(A) Payable in monthly installments of $160,925 including interest at 9% through August 1997 at which time the outstanding balance is due. The mortgage is secured by a shopping center in Frederick, Maryland having a net book value of approximately $25,755,000.
(B) Payable in monthly installments of $55,287 including interest at 10% through September 2001 at which time the outstanding balance is due. The mortgage is secured by a shopping center in Westwood, New Jersey having a net book value of approximately $11,890,000.
(C) Payable in monthly installments of $79,655 including interest at 7.8% through October 2002 at which time the outstanding balance is due. The mortgage is secured by an apartment complex in Westwood, New Jersey having a net book value of approximately $14,928,000.
(D) Payable in monthly installments of $8,555 including interest at 7.625% through March 1999 at which time the outstanding balance is due. The mortgage is secured by an apartment building in Spring Lake, New Jersey having a net book value of approximately $627,000. One of the directors of the bank is a trustee of the Trust.
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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 4 - Mortgages payable (concluded): Principal amounts (in thousands of dollars) due under the above obligations in each of the five years subsequent to October 31, 1996 are as follows:
The carrying amount of mortgages payable approximates fair value at October 31, 1996.
Note 5 - Note payable - bank: Note payable - bank consists of borrowings under a $20,000,000 revolving line of credit agreement with Summit Bank which expires on February 10, 1997. The first $10,000,000 of borrowings under the line of credit bear interest at either the prime rate or the LIBOR rate plus 200 basis points. Any excess borrowings bear interest at either the prime rate plus 1/2% or the LIBOR rate plus 250 basis points. Outstanding borrowings are secured by all of the Trust's properties except the shopping centers located in Frederick, Maryland and Westwood, New Jersey, the Apartment Complex in Westwood, New Jersey, and any vacant land owned by the Trust.
Note 6 - Commitments and contingencies: Leases: Commercial tenants: The Trust leases commercial space having a net book value of approximately $38,956,000 at October 31, 1996 to tenants for periods of up to twenty years. Most of the leases contain clauses for reimbursement of real estate taxes, maintenance, insurance and certain other operating expenses of the properties. Minimum rental income (in thousands of dollars) to be received from noncancelable operating leases in years subsequent to October 31, 1996 are as follows:
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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 6 - Commitments and contingencies (concluded):
The above amounts assume that all leases which expire are not renewed and, accordingly, neither minimal rentals nor rentals from replacement tenants are included. In addition, the above amounts do not include any future minimum rentals to be received for the shopping center in Franklin Lakes, New Jersey having a net book value of approximately $1,286,000 at October 31, 1996. Management closed the shopping center on September 1, 1995 except for one tenant who vacated the premises on November 1, 1996. Commencement of a complete refurbishing of the premises is scheduled to begin during January or February 1997 and it is expected to be open for operations in the Fall of 1997. The cost of the refurbishing, which has been put out for bid, is currently anticipated to approximate $10,000,000. Rental revenue derived from the shopping center was approximately $140,000, $207,000 and $310,000 in fiscal 1996, 1995 and 1994, respectively, and income from rental operations was approximately $30,000, $91,000 and $166,000, respectively.
Minimum future rentals do not include contingent rentals which may be received under certain leases on the basis of percentage of reported tenants' sales volume or increases in Consumer Price Indices. Contingent rentals included in income for each of the three years in the period ended October 31, 1996 were not material.
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FIRST REAL ESTATE INVESTMENT TRUST OF NEW JERSEY AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 6 - Commitments and contingencies (concluded): Leases (concluded): Residential tenants: Lease terms for residential tenants are usually one year or less.
Acquisition: The Trust has entered into a contract to purchase a 64,000 square foot shopping center to be constructed in Patchogue, New York for approximately $11,000,000 including commissions and estimated professional fees. The contract to purchase the Patchogue center is contingent upon the construction being completed during January 1997.
Note 7 - Management agreement: The properties owned by the Trust and the Affiliate are currently managed by Hekemian. The management agreement requires fees equal to a percentage of rents collected. Such fees were approximately $581,000, $556,000 and $479,000 in 1996, 1995 and 1994, respectively.
Note 8 - Earnings per share: Earnings per share, based on the weighted average number of shares outstanding during each period, are comprised of ordinary income.
* * *
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(A) See Note 5 of notes to combined financial statements.
(B) Calculated using average monthly loan balances and actual interest expense.
(A) Amounts for other items were less than 1% of revenue in all years.