10-Q: FREIT Navigates Higher Rates, Boosts Adjusted Earnings

First Real Estate Investment Trust of New Jersey reports increased adjusted net income and FFO for the nine months ended July 31, 2025, despite higher interest rates and commercial segment challenges.

Summary

• Net income attributable to common equity decreased significantly to $2.387 million ($0.32 per share) for the nine months ended July 31, 2025, from $14.812 million ($1.99 per share) in the prior year, primarily due to a large litigation settlement in 2024.
• Adjusted Net Income, which excludes this one-time settlement, increased to $2.021 million ($0.27 per share) from $0.528 million ($0.07 per share) in the prior year.
• Funds From Operations (FFO) rose to $4.903 million ($0.66 per share) from $3.535 million ($0.47 per share), and Adjusted Funds From Operations (AFFO) increased to $4.629 million ($0.62 per share) from $3.140 million ($0.42 per share).
• Total revenue increased by 1.6% to $21.771 million, driven by a 4.4% increase in residential revenue, while commercial revenue declined by 5.7%.
• Residential segment Net Operating Income (NOI) grew by 5.3% with average occupancy increasing to 96.9%, contrasting with a 25.4% decrease in Commercial segment NOI due to declining occupancy (48.0% from 50.9%).
• The company actively managed its debt, extending several loans, including the Regency and Steuben Arms properties at higher interest rates (6.05% and 6.75% respectively).
• A $5.7 million paydown on the Westwood Plaza loan reduced its balance to $10 million and is expected to result in annual debt service savings of approximately $705,000.
• The $25 million mortgage on the Preakness Shopping Center, due August 1, 2025, was extended for 90 days to November 1, 2025, with management working on a five-year modification and potential $5 million paydown, though no assurance is given.

Sentiment

Score: 6

Explanation: The company shows mixed performance with strong adjusted earnings and residential growth, but faces challenges in its commercial segment and higher interest rates on refinanced debt. Proactive debt management is a positive, but the uncertainty around the Preakness loan is a concern.

Positives

• Adjusted Net Income for the nine months ended July 31, 2025, increased significantly by approximately $1.5 million to $2.021 million, excluding the prior year's litigation settlement.
• Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO) per share both increased substantially, indicating improved underlying operational performance.
• Residential segment revenue grew by 4.4% and Net Operating Income (NOI) increased by 5.3%, with average occupancy rising to 96.9%.
• Successful loan extensions for Regency and Steuben Arms properties, securing financing for three additional years.
• A $5.7 million paydown on the Westwood Plaza loan resulted in annual debt service savings of approximately $705,000 and a refund of $704,983 from an escrow account.
• The $13 million revolving line of credit was renewed for a three-year term ending October 31, 2026, and remains fully available.
• General and administrative expenses decreased by approximately $1.5 million for the nine months, primarily due to lower corporate and legal fees compared to the prior year.

Negatives

• Reported Net Income attributable to common equity decreased significantly to $2.387 million ($0.32 per share) for the nine months ended July 31, 2025, from $14.812 million ($1.99 per share) in the prior year, primarily due to the absence of a $15.711 million litigation settlement recorded in 2024.
• Commercial segment revenue declined by 5.7% and Net Operating Income (NOI) decreased by 25.4% for the nine months ended July 31, 2025.
• Average occupancy for commercial properties decreased to 48.0% from 50.9%, with Preakness and Westwood Plaza shopping centers experiencing elevated vacancy rates (43.8% and 29.8% respectively).
• Several loan extensions, including Regency and Steuben Arms, were secured at significantly higher interest rates (6.05% from 3.75% and 6.75% from 4.54% respectively), increasing interest expense.
• Net cash provided by operating activities decreased substantially to $3.928 million for the nine months ended July 31, 2025, from $19.982 million in the prior year.
• The $25 million mortgage on the Preakness Shopping Center was only extended for a short 90-day period, with no definitive long-term modification or extension agreement yet in place.

Risks

• General economic and business conditions, including the impact of internet retail on demand for rental space, tenant financial health, and default rates.
• Interest rate risk, as higher rates at the time of mortgage refinancing could lead to increased debt service or lower refinancing proceeds.
• Adverse changes in real estate markets, including competition from other property owners and competition faced by commercial tenants.
• Governmental actions and initiatives, as well as environmental/safety requirements.
• Risks associated with real estate development and acquisitions, such as increased construction costs, inability to obtain financing, construction delays, and budget overruns.
• Public health crises, epidemics, and pandemics.
• Uncertainty regarding the long-term modification and extension of the $25 million Preakness Shopping Center loan, which could impact liquidity if not resolved favorably.
• The potential adverse impact of elevated interest rates and tariffs on residential properties and the operating and financial performance of existing commercial tenants.

Future Outlook

Management expects cash provided by operating activities and cash reserves to be adequate to cover mandatory debt service payments, real estate taxes, dividends, and recurring capital improvements for at least one year. The Federal Reserve is signaling potential interest rate cuts in the latter part of 2025, though the pace and magnitude remain unclear. Management expects the Preakness Shopping Center loan to be further extended and modified, potentially with a $5 million paydown, but there is no assurance of a definitive agreement.

Management Comments

• Management expects that cash provided by operating activities and cash reserves will be adequate to cover mandatory debt service payments (excluding balloon payments, which are expected to be refinanced and/or extended), real estate taxes, dividends, recurring capital improvements at its properties and other needs to maintain its status as a REIT for at least a period of one year from the date of filing of this quarterly report on Form 10-Q.
• Management, along with third-party advisors, is actively working to attract quality tenants and explore redevelopment options to revitalize the Westwood Plaza and Preakness shopping centers.
• Management expects the Preakness Shopping Center loan to be further extended, however, until such time as a definitive agreement providing for a modification and extension of this loan is entered into, there can be no assurance this loan will be modified and extended.
• The Federal Reserve is signaling it may be ready to lower interest rates in the latter part of this year but the pace and magnitude of these future cuts are still unclear, as they continue to balance inflation concerns against potential labor market downturns.
• The FREIT Board of Directors will continue to evaluate the dividend on a quarterly basis.

Industry Context

The U.S. economic environment shows slightly increased unemployment (4.2%) and inflation (2.7%) as of July 2025. The Federal Reserve has held interest rates steady at 4.5% in 2025, after previous cuts, but signals potential future reductions, balancing inflation concerns against labor market downturns. Mortgage rates remain elevated, impacting real estate financing costs. The residential real estate market is experiencing a slight softening in the rate of rent increases, despite continued positive cash flow and rising average rents. The commercial retail segment faces ongoing challenges, with elevated vacancy rates in some properties, reflecting broader shifts in retail consumption, including the impact of e-commerce.

Comparison to Industry Standards

• NA

Management Changes

Corporate Governance

Legal Proceedings

• No new material legal proceedings were reported for the period. The previously reported litigation with Sinatra Properties, LLC was settled in June 2024, which significantly impacted prior year's net income.

Related Party Transactions

• Hekemian & Co., Inc. (managed by FREIT's CEO, President, CFO, and a Director) manages all properties, receiving management fees of approximately $1,036,000 for the nine months ended July 31, 2025, and $358,000 for the three months ended July 31, 2025.
• Hekemian & Co. also received leasing commissions and reimbursements of approximately $312,000 for the nine months and $110,000 for the three months ended July 31, 2025.
• Commissions for insurance services paid to Hekemian & Co.'s insurance department amounted to approximately $181,000 for the nine months and $168,000 for the three months ended July 31, 2025.
• Additional consulting fees paid to Hekemian & Co. or its affiliates were approximately $60,000 for the nine months and $25,000 for the three months ended July 31, 2025, related to loan modifications and extensions.
• Director fee expense and/or executive compensation for Robert S. Hekemian, Jr. was approximately $515,000 for the nine months and $165,000 for the three months ended July 31, 2025.
• Director fee expense and/or executive compensation for Allan Tubin was approximately $34,000 for the nine months and $11,000 for the three months ended July 31, 2025.
• Director fee expense and/or executive compensation for David B. Hekemian was approximately $65,000 for the nine months and $15,000 for the three months ended July 31, 2025.

Stakeholder Impact

• Shareholders: Impacted by decreased GAAP net income and EPS, but improved FFO and AFFO per share. A dividend of $0.10 per share was declared.
• Tenants (Residential): Experience increasing average rents, though the rate of increase is softening.
• Tenants (Commercial): Face elevated vacancy rates in some properties (Preakness, Westwood Plaza), indicating potential for rent concessions or redevelopment.
• Creditors: Affected by active debt management, including loan extensions at higher interest rates and a short-term extension for the Preakness loan, indicating ongoing refinancing needs.
• Employees/Management: Directors received stock awards in lieu of cash compensation, aligning their interests with long-term company performance.

Next Steps

• Management is working with ConnectOne Bank on a modification and extension of the Preakness Shopping Center loan for five years with a potential pay down of approximately $5 million.
• The Board of Directors will continue to evaluate the dividend on a quarterly basis.
• The company is evaluating the impact of recently issued accounting standards (ASU 2023-07, ASU 2023-09, ASU 2024-03, ASU 2025-01) on its financial statements and disclosures.

Key Dates

Recommendation

The company's core operational performance, as reflected in adjusted net income, FFO, and AFFO, shows improvement, driven by a strong residential segment. However, the commercial portfolio continues to struggle with elevated vacancies and declining NOI. While management is actively addressing debt maturities and has secured some extensions, the higher interest rates on these refinancings will increase future debt service costs. The short-term extension of the $25 million Preakness loan introduces an element of uncertainty regarding future financing terms. Given these mixed signals – operational strengths in residential balanced by commercial weaknesses and ongoing debt management challenges in a high-interest-rate environment – a 'hold' recommendation is appropriate for investors awaiting clearer signs of sustained commercial recovery and long-term debt stability.

Keywords

Real Estate, REIT, Commercial Property, Residential Property, New Jersey, New York, SEC Filing, 10-Q, Financial Results, Occupancy, Net Operating Income, FFO, AFFO, Debt, Interest Rates, Property Management