Description

I am recommending First Real Estate Investment Trust of New Jersey (FREVs) as a Long/Arb.  FREVs has never been written up on VIC before.

FREVs has a long history (since 1961) of owning properties in New Jersey and surrounding states, both apartments and retail (and the occasional odd and end).  They’ve done all right – not covering themselves with glory, perhaps due to overly high management take – but at least people haven’t lost money and a lot of dividends have been paid.  Last year long-time management retired and the Board initiated a strategic process.  In January they announced a pending sale of the six NJ and one NY apartment properties as the first step of a liquidation.  Assuming this sale goes through, then management expects ultimate proceeds in liquidation to shareholders of $25.64 to $31.71, which compares decently to the current share price of $24.25 (5.7% through 30.7%).  Here’s the critical press release describing the sale and outlining the plan for liquidation:

http://www.freitnj.com/pdf/25d82249a76a5135407aaee601b2c29a167a9f5a

Sales of several properties are subject to various contingencies, which should be resolved by the end of February.  There is no financing or due diligence contingency.  Closing is expected in 2Q, after which I hope/suspect that management will pay a substantial initial liquidating dividend, juicing IRRs.

Assuming that the seven listed properties are sold as advertised, the remaining properties fall into three categories: five shopping centers (three in NJ, two in MD); Icon/Rotunda, a mixed-use property in Baltimore; and several small miscellaneous assets.

Shopping Centers

These are strip malls, and so there’s little to get excited about.  Overall I suspect the NJ strip malls are ok, if for no other reason than they are located in good areas.  Franklin Crossing is in Franklin Lakes, one of the wealthier towns in the state.  It was acquired in 1966, so it’s probably worth more than carrying value even if it is a strip mall.  Westwood Plaza, in Westwood, and Preakness SC, in Wayne, are all nearby.  Westwood was acquired in 1988, a better time for strip malls, but I’d think that 32 years of appreciation on the land would help; Preakness was acquired in 2002.  All of these towns are close to New York City.  Franklin Crossing is 91.6% leased, Westwood Plaza is 92.7% leased, and Preakness is 60.9% leased.  Happily, FREVs only owns 40% of Preakness.  Franklin Crossing has no mortgage outstanding.

I don’t have the same confidence for the MD strip malls, but they might be ok.  Westridge Square S/C is in Frederick and Damascus Shopping Center is in Damascus.  They were purchased in 1992 and 2003, respectively.  Westridge might be a bit of a pit but it’s a 92% occupied pit.  FREVs only owns 70% of Damascus—former management got a sweetheart deal to tag along using FREVs money in 2005.  Occupancy is 85% but they do get a decent rent per square foot.

Icon/Rotunda

This is a trophy property, or at least as close as one gets, given that it’s in Baltimore.  It’s a mixed-use (retail and apartments) development.  You’re very close to Johns Hopkins and the Rotunda – the retail portion – is a well-regarded heritage building.

FREVs bought the Rotunda some time ago and completely refurbished it.  It’s still leasing up – about 83% leased at the moment, and that seems to tick up a bit more every quarter.  They get $28.41 per square foot on average, which strikes me as rather amazing for Baltimore.  My hope and expectation is that they will try to finish leasing it up before shopping it to a buyer for the liquidation.

The Icon is the residential portion of the property – this was constructed in 2016.  This is fully leased up (95.1% occupied) and is charging good rents.  Probably the reason they didn’t sell it with their other residential properties is because they want to sell it as a unit with the Rotunda.

Former management got another sweetheart deal to tag along using FREVs money in Icon/Rotunda, so shareholders own only 60%.  That’s annoying but nothing can be done about it now.

Miscellaneous Assets

FREVs also owns a pair of commercial stores in Glen Rock, NJ; an acre of land lease in Rockaway NJ (I believe to TD Bank); 4.27 acres in Franklin Lakes NJ that are zoned residential; 1 acre of land in Rockaway NJ that is zoned residential; 2.1 acres of land zoned commercial in Wayne NJ.  Of these I suspect the Franklin Lakes land might have some hidden value (acquired 1966 and it’s an upscale area); the land in Rockaway NJ was acquired in 1964 but while I’m sure it’s worth more than carrying value I’m not hoping for miracles.  The commercial land in Wayne NJ was acquired in 2002.

Summary

As mentioned above, management claims shareholders will get $25.64 to $31.71.  Although it’s dangerous to apply statistical evidence to individual cases, in my experience liquidations often are above the midpoint of the range – there’s not much reason for management to put aggressive numbers out there.  Assuming the residential properties sale goes through, I’d expect a large distribution in 2Q or 3Q.  This will boost the IRR nicely for those who buy now, regardless of where the final number lies.

I suspect they are marketing the strip malls today – they are the hardest things to sell since they are big enough to matter to the bottom line but not exactly sexy these days.  I assume that they’ve taken into account current market values when they made their $25.64-$31.71 prediction.

Icon/Rotunda is also important, and it wouldn’t surprise me if they try to hold off on selling until Rotunda is leased up – management owns 40% of this property directly under sweetheart terms so I imagine there is incentive to maximize value even if it takes longer.  So that might take another year or two?  Maybe I’m being a bit cynical.  Once they put it on the market I suspect they will find a buyer without too much trouble.

The miscellaneous assets are interesting to speculate about, but at the end of the day they will find buyers – they are too small to try to get the last dollar out of so it will happen.

Catalyst

Liquidation