FIRST HARTFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
|
|
July 31, 2017
|
|
April 30, 2017
|
|
|
|
|
|
|
Real estate and equipment:
|
|
|
|
|
Developed properties and property under construction (including
$78,114,859 in July and $77,898,958 in April for VIEs)
|
$238,883,938
|
|
$236,865,867
|
|
Equipment and tenant improvements (including $2,446,428
in July and $2,424,964 in April for VIEs)
|
4,206,723
|
|
3,689,442
|
|
|
243,090,661
|
|
240,555,309
|
|
|
|
|
|
|
Less accumulated depreciation and amortization (including
$16,447,144 in July and $15,918,495 in April for VIEs)
|
(48,685,410)
|
|
(47,449,316)
|
|
|
194,405,251
|
|
193,105,993
|
|
|
|
|
|
|
Property held for sale
|
2,209,034
|
|
11,389,591
|
|
Cash and cash equivalents (including $2,512,323 in July
and $2,063,103 in April for VIEs)
|
7,145,794
|
|
6,250,757
|
|
|
|
|
|
|
Cash and cash equivalents – restricted (including $12,398
in July and $396,361 in April for VIEs)
|
287,683
|
|
526,012
|
|
|
|
|
|
|
Marketable securities (including $1,361,812 in July and $1,538,839
in April for VIEs)
|
1,361,812
|
|
1,538,839
|
|
|
|
|
|
|
Accounts and notes receivable, less allowance for
doubtful accounts of
$127,423
as of July 31, 2017 and $135,002 as of April 30, 2017 (including $100,583 in
July and $66,543 in April for VIEs)
|
4,128,421
|
|
3,505,541
|
|
|
|
|
|
|
Other receivables
|
3,409,636
|
|
4,064,876
|
|
|
|
|
|
|
Deposits and escrow accounts (including $8,514,565 in
July and $8,866,586 in April for VIEs)
|
15,819,894
|
|
15,930,999
|
|
|
|
|
|
|
Prepaid expenses (including $560,435 in July and $327,481
in April for VIEs)
|
2,109,974
|
|
1,644,320
|
|
|
|
|
|
|
Deferred expenses (including $163,058 in July and $167,273
in April for VIEs)
|
4,390,477
|
|
5,712,547
|
|
|
|
|
|
|
Investments in affiliates
|
100
|
|
100
|
|
|
|
|
|
|
Due from related parties and affiliates
|
2,972
|
|
152,776
|
|
|
|
|
|
|
Deferred tax asset
|
399,388
|
|
671,147
|
|
|
|
|
|
|
Total assets
|
$235,670,436
|
|
$244,493,498
|
See accompanying notes.
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIENCY)
|
|
July 31, 2017
|
|
April 30, 2017
|
|
Liabilities:
|
|
|
|
|
Mortgages and notes payable:
|
|
|
|
|
Construction loans payable
|
$28,027,318
|
|
$26,929,537
|
|
Mortgages payable (including $64,352,785 in July and $64,598,997
in April for VIEs)
|
190,859,403
|
|
195,763,409
|
|
Notes payable (including $1,704,697 in July and $1,704,697
in April for VIEs)
|
1,704,697
|
|
1,704,697
|
|
Lines of credit
|
1,400,000
|
|
6,400,000
|
|
Less: Deferred debt issuance costs, net (including $1,558,752
in July and $1,575,494 in April for VIEs)
|
(3,134,493)
|
|
(3,067,098)
|
|
|
218,856,925
|
|
227,730,545
|
|
|
|
|
|
|
Accounts payable (including $640,328 in July and $569,600
in April for VIEs)
|
2,860,120
|
|
2,915,400
|
|
Other payables
|
4,100,536
|
|
4,966,246
|
|
Accrued liabilities (including $3,369,771 in July and $3,382,307
in April for VIEs)
|
6,643,823
|
|
5,699,875
|
|
Derivative liability
|
2,227,698
|
|
2,023,793
|
|
Deferred income (including $226,276 in July and $227,936
in April for VIEs)
|
492,729
|
|
622,461
|
|
Other liabilities
|
1,256,050
|
|
1,328,909
|
|
Due to related parties and affiliates (including $448,457
in July and $446,990 in April for VIEs)
|
600,310
|
|
598,843
|
|
Total liabilities
|
237,038,191
|
|
245,886,072
|
|
|
|
|
|
|
Shareholders’ Equity (Deficiency):
|
|
|
|
|
First Hartford Corporation:
|
|
|
|
|
Preferred stock, $1 par value; $.50 cumulative and
convertible; authorized
4,000,000 shares; no shares issued and outstanding
|
-0-
|
|
-0-
|
|
Common stock, $1 par value; authorized 6,000,000 shares;
issued 3,211,843 and
3,236,843 shares and outstanding 2,315,799 and 2,340,799
shares as of July 31, 2017 and April 30, 2017
|
3,211,843
|
|
3,236,843
|
|
Capital in excess of par
|
5,043,779
|
|
5,093,779
|
|
Accumulated deficit
|
(5,370,001)
|
|
(5,612,263)
|
|
Accumulated other comprehensive income
|
-0-
|
|
-0-
|
|
Treasury stock, at cost, 896,044 and 896,044 shares as of
July 31, 2017 and April 30, 2017
|
(4,989,384)
|
|
(4,989,384)
|
|
Total First Hartford Corporation
|
(2,103,763)
|
|
(2,271,025)
|
|
Noncontrolling interests
|
736,008
|
|
878,451
|
|
|
|
|
|
|
Total shareholders’ equity (deficiency)
|
(1,367,755)
|
|
(1,392,574)
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity (deficiency)
|
$235,670,436
|
|
$244,493,498
|
See accompanying notes.
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
Three Months Ended
|
|
|
July 31, 2017
|
|
July 31, 2016
|
|
Operating revenues:
|
|
|
|
|
Rental income
|
$7,796,540
|
|
$8,066,447
|
|
Service income
|
640,563
|
|
1,228,605
|
|
Sales of real estate
|
21,360,000
|
|
12,210,051
|
|
Other revenues
|
1,222,265
|
|
993,554
|
|
|
31,019,368
|
|
22,498,657
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
Rental expenses
|
4,974,166
|
|
5,099,712
|
|
Service expenses
|
1,239,990
|
|
1,193,326
|
|
Cost of real estate sales
|
18,623,718
|
|
9,623,667
|
|
Selling, general and administrative expenses
|
2,924,064
|
|
1,843,825
|
|
|
27,761,938
|
|
17,760,530
|
|
|
|
|
|
|
Income from operations
|
3,257,430
|
|
4,738,127
|
|
|
|
|
|
|
Non-operating income (expense):
|
|
|
|
|
Interest expense
|
(2,629,789)
|
|
(2,589,494)
|
|
Other income / (loss)
|
(83,418)
|
|
21,460
|
|
Loss on derivatives (non-cash)
|
(203,905)
|
|
(793,169)
|
|
Equity in earnings of unconsolidated subsidiaries
|
162,860
|
|
177,126
|
|
|
(2,754,252)
|
|
(3,184,077)
|
|
|
|
|
|
|
Income before income taxes
|
503,178
|
|
1,554,050
|
|
|
|
|
|
|
Income tax expense
|
365,489
|
|
811,647
|
|
|
|
|
|
|
Consolidated net income
|
137,689
|
|
742,403
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interests
|
104,573
|
|
84,451
|
|
|
|
|
|
|
Net income attributable to First Hartford Corporation
|
$242,262
|
|
$826,854
|
|
|
|
|
|
|
Net income per share – basic
|
$0.10
|
|
$0.35
|
|
|
|
|
|
|
Net income per share – diluted
|
$0.10
|
|
$0.35
|
|
|
|
|
|
|
Shares used in basic per share computation
|
2,328,299
|
|
2,391,078
|
|
|
|
|
|
|
Shares used in diluted per share computation
|
2,328,299
|
|
2,391,078
|
See accompanying notes.
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
|
Three Months Ended
|
|
|
July 31, 2017
|
|
July 31, 2016
|
|
|
|
|
|
|
Consolidated net income
|
$137,689
|
|
$742,403
|
|
|
|
|
|
|
Other comprehensive income / (loss), net of taxes:
|
|
|
|
|
Unrealized gains / (losses) on
marketable securities
|
100,386
|
|
(131,304)
|
|
|
|
|
|
|
Total comprehensive income
|
238,075
|
|
611,099
|
|
|
|
|
|
|
Amounts attributable to noncontrolling
interests:
|
|
|
|
|
Net loss
|
104,573
|
|
84,451
|
|
Unrealized (gains) / losses on marketable
securities
|
(100,386)
|
|
131,304
|
|
|
|
|
|
|
|
4,187
|
|
215,755
|
|
|
|
|
|
|
Comprehensive income attributable to First Hartford
Corporation
|
$242,262
|
|
$826,854
|
See accompanying notes.
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three Months
Ended
|
|
|
July 31, 2017
|
|
July 31, 2016
|
|
Operating activities:
|
|
|
|
|
Consolidated net income
|
$137,689
|
|
$742,403
|
|
Adjustments to reconcile consolidated net income to net
cash provided by /
(used in) operating activities:
|
|
|
|
|
Equity in earnings of unconsolidated subsidiaries,
net of distributions of
$90,000 in 2017 and $90,000 in 2016
|
(72,859)
|
|
(87,126)
|
|
Gain on sale of real estate
|
(2,736,282)
|
|
(2,586,384)
|
|
Depreciation of real estate and equipment
|
1,366,512
|
|
1,318,924
|
|
Amortization of deferred expenses
|
135,663
|
|
232,903
|
|
Deferred income taxes
|
271,759
|
|
505,819
|
|
Loss on derivatives
|
203,905
|
|
793,169
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Accounts, notes and other receivables
|
32,360
|
|
1,191,407
|
|
Deposits and escrow accounts
|
232,025
|
|
1,626,526
|
|
Prepaid expenses
|
(465,654)
|
|
(415,608)
|
|
Deferred expenses
|
1,119,012
|
|
(2,064,363)
|
|
Cash and cash equivalents – restricted
|
238,329
|
|
369,135
|
|
Accrued liabilities
|
943,948
|
|
(284,131)
|
|
Deferred income
|
(129,732)
|
|
583,011
|
|
Accounts and other payables
|
(920,990)
|
|
(2,738,244)
|
|
|
|
|
|
|
Net cash provided by / (used in) operating activities
|
355,685
|
|
(812,559)
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
Investments in marketable securities
|
(96,946)
|
|
-0-
|
|
Proceeds from sale of marketable securities
|
374,359
|
|
-0-
|
|
Purchase of equipment and tenant improvements
|
(647,699)
|
|
(61,272)
|
|
Proceeds from sale of real estate
|
21,360,000
|
|
12,210,051
|
|
Additions to developed properties and properties under
construction
|
(11,461,232)
|
|
(4,684,042)
|
|
|
|
|
|
|
Net cash provided by investing activities
|
9,528,482
|
|
7,464,737
|
See accompanying notes.
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
|
|
Three
Months Ended
|
|
|
July 31, 2017
|
|
July 31, 2016
|
|
Financing activities:
|
|
|
|
|
Distributions to noncontrolling interests
|
$(138,256)
|
|
$(108,650)
|
|
Repurchase of common stock
|
(75,000)
|
|
(79,968)
|
|
Proceeds from:
|
|
|
|
|
Construction loans
|
7,793,353
|
|
1,785,458
|
|
Mortgage loans
|
2,876,407
|
|
920,310
|
|
Notes
|
-0-
|
|
-0-
|
|
Credit lines
|
-0-
|
|
375,000
|
|
Principal payments on:
|
|
|
|
|
Construction loans
|
(1,127,899)
|
|
(7,385,755)
|
|
Mortgage loans
|
(13,469,006)
|
|
(2,071,417)
|
|
Notes
|
-0-
|
|
-0-
|
|
Credit lines
|
(5,000,000)
|
|
-0-
|
|
Payments (to) / from related parties and affiliates, net
|
151,271
|
|
(498,968)
|
|
|
|
|
|
|
Net cash used in financing activities
|
(8,989,130)
|
|
(7,063,990)
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
895,037
|
|
(411,812)
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
6,250,757
|
|
5,982,506
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
$7,145,794
|
|
$5,570,694
|
|
|
|
|
|
|
Cash paid during the period for interest
|
$2,672,437
|
|
$2,497,810
|
|
|
|
|
|
|
Cash paid during the period for income taxes
|
$60,750
|
|
$249,148
|
|
|
|
|
|
|
Debt refinancing in 1
st
quarter:
New mortgage loans
|
$8,565,000
|
|
$14,300,000
|
|
Debt reduced
|
(5,567,673)
|
|
(5,359,713)
|
|
Escrow funded
|
(120,920)
|
|
(8,019,977)
|
|
Net cash from refinancing in 1
st
quarter
|
$2,876,407
|
|
$920,310
|
See accompanying notes.
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business and Significant Accounting Policies:
Business
First Hartford Corporation,
which was incorporated in Maine in 1909, and its subsidiaries (the Company), is
engaged in two business segments: 1) the purchase, development, ownership,
management and sale of real estate and 2) providing preferred developer
services for two corporate franchise operators (i.e., “Fee for Service”).
Principles
of Consolidation
The accompanying unaudited condensed
consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries, and all other entities in which the Company has a
controlling financial interest, including those where the Company has been
determined to be a primary beneficiary of a variable interest entity or meets
certain criteria as a sole general partner or managing member in accordance
with the consolidation guidance of the Financial Accounting Standards Board
Accounting Standards Codification. As such, included in the unaudited condensed
consolidated financial statements are the accounts of Rockland Place Apartments
Limited Partnership and Clarendon Hill Somerville Limited Partnership, in which
the Company is the sole general partner. The Company’s ownership percentage in
these variable interest entity partnerships is nominal. All significant
intercompany balances and transactions have been eliminated.
Basis
of Presentation
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 8.03 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required
by U.S. generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals and adjustments) considered necessary for a fair
presentation have been included. Operating results for the interim periods are
not necessarily indicative of the results that may be expected for the entire
year. The condensed consolidated balance sheet as of April 30, 2017 was
derived from the audited financial statements for the year then ended. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company’s annual report on Form 10-K for the fiscal
year ended April 30, 2017.
Because the Company is engaged
in the development and sale of real estate at various stages of construction,
the operating cycle may extend beyond one year. Accordingly, following the
usual practice of the real estate industry, the accompanying condensed
consolidated balance sheets are unclassified.
Currently, there are no Accounting Standards Updates (ASUs)
that the Company is required to adopt that are likely to have a material effect
on its financial statements that have not been previously discussed in the
Company’s annual report on Form 10-K for the fiscal year ended April 30, 2017.
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business and Significant Accounting Policies (continued):
Net
Income (Loss) Per Common Share
Basic income
(loss) per share is computed by dividing the net income (loss) attributable to
the common stockholders (the numerator) by the weighted average number of
shares of common stock outstanding (the denominator) during the reporting
periods. Diluted income (loss) per share is computed by increasing the
denominator by the weighted average number of additional shares that could have
been outstanding from securities convertible into common stock, such as stock
options and warrants (using the “treasury stock” method).
There were
no common stock equivalents outstanding at July 31, 2017 or July 31, 2016.
Financial
Instruments and Fair Value
The Company’s financial
instruments include cash and cash equivalents, accounts receivable, marketable
securities, accounts payable, accrued expenses, and debt. The fair values of
accounts receivable, accounts payable and accrued expenses are estimated to
approximate their carrying amounts because of their relative short-term
nature. In general, the carrying amount of variable rate debt approximates its
fair value. Further, the carrying amount of fixed rate debt approximates fair
value since the interest rates on the debt approximates the Company’s current
incremental borrowing rate. Marketable securities consist of equity securities
and are stated at fair value based on the last sale of the period obtained from
recognized stock exchanges (i.e. Level 1). Accumulated other comprehensive
(loss) income consists solely of unrealized gains (losses) on marketable
securities.
Segment Information
The factors used by the
Company to identify reportable segments include differences in products and
services and segregated operations within the Company. The first segment, “Real
Estate Operations” participates in the purchase, development, management,
ownership and sale of real estate. Within its second segment, “Fee for
Service”, the Company provides preferred developer services to CVS and
Cumberland Farms Inc. in certain geographic areas. Summary financial
information for the two reportable segments is as follows:
|
|
Three Months Ended
|
|
|
July 31,
|
|
|
2017
|
|
2016
|
|
Revenues:
|
|
|
|
|
Real
Estate Operations
|
$30,506,118
|
|
$21,424,657
|
|
Fee for
Service
|
513,250
|
|
1,074,000
|
|
Total
|
$31,019,368
|
|
$22,498,657
|
|
|
|
|
|
|
Operating
Costs & Expenses:
|
|
|
|
|
Real
Estate Operations
|
$23,961,465
|
|
$14,758,360
|
|
Fee for
Service
|
876,409
|
|
1,158,345
|
|
Administrative Expenses
|
2,924,064
|
|
1,843,825
|
|
Total
|
$27,761,938
|
|
$17,760,530
|
All costs after operating
expenses are costs of the real estate operation.
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business and Significant Accounting Policies (concluded):
Segment Information
(concluded):
The only assets in the balance
sheet belonging to the Fee for Service segment is restricted cash of $275,285
on July 31, 2017 and $129,651 on April 30, 2017 and receivables of $3,458,604
on July 31, 2017 and $4,262,302 on April 30, 2017.
2. Consolidated Variable Interest Entities and Investments in
Affiliated Partnerships:
The Company has consolidated both Rockland
and Clarendon based on the express legal rights and obligations provided to it
by the underlying partnership agreements and its control of their business
activity. The assets of these partnerships that can only be used to settle
their obligations and their liabilities for which creditors (or beneficial
interest holders) do not have recourse to the general credit of the Company are
shown parenthetically in the line items of the consolidated balance sheets. A
summary of the assets and liabilities of Rockland and Clarendon included in the
Company’s condensed consolidated balance sheets follows:
|
|
July
31, 2017
|
|
April
30, 2017
|
|
|
|
|
|
|
Real estate and equipment, net
|
$66,412,486
|
|
$66,732,664
|
|
Other assets
|
13,223,182
|
|
13,417,929
|
|
Total assets
|
79,635,668
|
|
80,150,593
|
|
Intercompany profit elimination
|
(2,690,250)
|
|
(2,719,143)
|
|
|
$76,945,418
|
|
$77,431,450
|
|
|
|
|
|
|
Mortgages and other notes payable
|
$64,498,730
|
|
$64,728,200
|
|
Other liabilities
|
4,234,460
|
|
4,179,842
|
|
Total liabilities
|
$68,733,190
|
|
$68,908,042
|
The Company accounts for its
50% ownership interest in Dover Parkade, LLC under the equity method of
accounting. A summary of the operating results for this entity follows:
|
|
Three Months
Ended
|
|
|
July 31,
|
|
|
2017
|
|
2016
|
|
Dover Parkade, LLC:
|
|
|
|
|
Revenue
|
$701,909
|
|
$683,913
|
|
Expenses
|
(556,190)
|
|
(509,662)
|
|
Net income
|
$145,719
|
|
$174,251
|
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Income Taxes:
The Company files a Federal consolidated
tax return to report all income and deductions for its subsidiaries. The
Company and its subsidiaries file income tax returns in several states. The tax
returns are filed by the entity that owns the real estate or provides services
in such state. Some states do not allow a consolidated or combined tax filing. This
sometimes creates income taxes to be greater than expected as income for some
subsidiaries cannot be offset by other subsidiaries with operating losses.
4. Litigation:
Following a site inspection of asbestos abatement activities
being conducted at the Spring Gate Apartments in Rockland, Massachusetts
(Facility) on April 14, 2017, the Massachusetts Department of Environmental
Protection (MassDEP) by letter dated April 21, 2017 requested that Rockland
Place Apartments, LP (Company) temporarily cease and desist from any additional
asbestos removal, abatement and/or handling activities at the Facility. Upon
receipt of the MassDEP letter, the Company engaged MassDEP in discussions
regarding the abatement project. Following submission to and approval by
MassDEP of a work plan addressing the issues raised in MassDEP’s April 21
letter, MassDEP permitted the asbestos abatement work to go forward. There
have been no further enforcement actions taken by MassDEP.
By letters dated May 15, May 16 and May 30, 2017, three
attorneys representing tenants in three units at the Facility notified the
Company and/or its management company, FHRC Management Corporation, of claims
related to environmental conditions at the Facility. The first of these
letters alleges that the tenant and her family have been exposed to and have
been living in an apartment containing asbestos for many years. The second
letter claims that the tenant and her three minor children have suffered
injuries believed to be caused by the presence of mold and asbestos in the
apartment. The final letter asserts claims with respect to the tenant and her
three minor children involving the presence and remediation of asbestos
including violation of a tenant’s quiet enjoyment, breach of the warranty of
habitability, causation of emotional distress and the use of unfair and
deceptive practices under M.G.L. c. 93A. The first two letters made no
specific monetary demand; the third letter demanded $312,600. All three claims
were tendered to the Company’s insurer, which agreed to respond under a
reservation of rights. On July 14, 2017, counsel retained by the insurer
provided a timely response to the third letter, adamantly denying the Company’s
liability pursuant to M.G.L. c. 93A or for any of the other claims. By letter
dated July 27, 2017, the insurer acknowledged receipt of the three claims, at
the same time stating however that as no lawsuit had arisen, it did not have a
duty to defend, but nonetheless would continue to investigate.
At this time, the Company cannot assess the likelihood of an
unfavorable outcome or provide any estimate of the amount or range of any
potential loss. There has been no other change in litigation since April 30,
2017.
5. Refinancings:
New Orleans, LA – Refinance
: On June
30, 2017, the Company refinanced its construction loan on its shopping center
property in New Orleans, LA. The construction loan, which had a principal
balance of $5,567,673, was replaced by a mortgage loan
of $8,565,000. The new mortgage loan has an interest rate of 4.75%. The loan
is interest-only until July 1, 2020; thereafter, monthly payments of $44,576
inclusive of principal and interest are due and payable until the maturity date
of July 1, 2027, at which time the remaining principal balance must be repaid
in full.
FIRST HARTFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Purchases
of Real Estate:
Houston, TX – Land Purchase
: On May 12, 2017, the
Company completed its purchase of a parcel of land in Houston, TX for
$8,583,235 including closing costs. This purchase was financed with proceeds
from a construction loan of $5,158,210, utilization of the Company’s lines of
credit of $2,400,000, and working capital of $1,025,025. Key terms of the
construction loan are as follows:
Loan Amount: $8,600,000
Maturity Date: November 15, 2018
Interest Rate: 2.50% plus One Month ICE LIBOR
rate, as defined, up to maturity date and 12.0% thereafter.
Payments: Interest only payable monthly
with principal due at maturity.
Guarantee: The Company (Corporate).
7. Subsequent
Events:
The Company has evaluated for subsequent
events through October 10, 2017, the date the financial statements were issued.
Montgomery, TX – Land Purchase
: On August 16, 2017,
the Company completed its purchase of a 26.43 acre parcel of land in Montgomery,
TX for $6,672,754 including closing costs. This purchase was financed with
proceeds from a land loan of $4,150,000, utilization of the Company’s lines of
credit of $2,360,000, and working capital of $162,754. Key terms of the
construction loan are as follows:
Loan Amount: $4,150,000
Maturity Date: February 16, 2019
Interest Rate: 3.50% plus One Month ICE LIBOR
rate, as defined, up to maturity date and 12.0% thereafter.
Payments: Interest only payable monthly
with principal due at maturity.
Guarantee: The Company (Corporate).
East Providence, RI – Sale of Property
:
On September 7, 2017, the Company sold its property held for sale in East
Providence, RI for $830,000 (cost of approximately $566,672).
Item
2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The financial and business analysis below provides information
which the Company believes is relevant to an assessment and understanding of
the Company’s financial position, results of operations and cash flows. This
analysis should be read in conjunction with the condensed consolidated
financial statements and related notes.
The following discussion and certain other sections of this
Report on Form 10-Q contain statements reflecting the Company’s views about its
future performance and constitute “forward-looking statements” under the
Private Securities Litigation Reform Act of 1995. These views may involve risk
and uncertainties that are difficult to predict and may cause the Company’s
actual results to differ materially from the results discussed in such
forward-looking statements. Readers should consider how various factors
including changes in general economic conditions, cost of materials, interest
rates and availability of funds, and the nature of competition and relationship
with key tenants may affect the Company’s performance. The Company undertakes
no obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or other.
Critical Accounting
Policies
There have been no significant changes in the Company’s
critical accounting policies from those included in Item 7 of its Annual Report
on Form 10-K for the year ended April 30, 2017 under the subheading “Critical
Accounting Policies and Estimates”.
Results of Operations
Rental Income:
Rental income for the
quarters ended July 31, by type of tenant, follows:
|
|
Three Months
Ended
|
|
|
July 31,
|
|
|
2017
|
|
2016
|
|
Residential
|
$3,037,106
|
|
$3,073,023
|
|
Commercial
|
4,759,434
|
|
4,993,424
|
|
|
$7,796,540
|
|
$8,066,447
|
The slight decrease in residential rental income was
primarily caused by lower revenue at the Rockland, MA property due to vacancies
from converted apartments needed for the ongoing renovation project.
The decrease in commercial rental income was primarily
caused by lower common area maintenance (CAM) billings to tenants resulting
from lower associated expenses.
Service Income
Service income for the
quarters ended July 31 follows:
|
|
Three Months
Ended
|
|
|
July 31,
|
|
|
2017
|
|
2016
|
|
Management
fees
|
$127,313
|
|
$154,605
|
|
Preferred
developer fees
|
513,250
|
|
1,074,000
|
|
|
$640,563
|
|
$1,228,605
|
|
|
|
|
|
Item 2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(continued):
Service Income
(continued):
The decrease in preferred developer fees reflected lower
fees received from both CVS and Cumberland Farms. The decrease in CVS fees,
which continues a trend over the past several years, was the result of a recent
acquisition that has impacted in the slowing of their pipeline for new stores.
The decrease in Cumberland Farms was the result of timing of closings based on
the construction schedule.
Sales (and Cost of
Sales) of Real Estate
Three months ended July 31, 2017:
St. Louis, MO – Sale of Property:
On May 30, 2017,
the Company sold its single-tenant property in St. Louis, MO for $6,800,000
(cost of $6,567,195). A loan with a balance of $5,120,000 and a credit line of
$1,000,000 were paid off with the proceeds.
New Orleans, LA – Sale of Property:
On June 7,
2017, the Company sold a parcel of its property in New Orleans, LA for
$11,350,000 (cost of $9,002,022). A loan with a balance of $7,436,745 was paid
off with the proceeds. The Company continues to hold the parcel of the
property that includes the shopping center.
Austin, TX – Sale of Property:
On June 15, 2017,
the Company sold its single-tenant property in Austin, TX for $3,210,000 (cost
of $2,968,692). A loan with a balance of $1,102,899 was paid off with the
proceeds.
There were also costs incurred in fiscal year 2018 related
to property sales that occurred in the fiscal year ended April 30, 2017
totaling $85,809 that were not anticipated as of the prior fiscal year end.
Three months ended July 31, 2016:
On June 29, 2016, the Company sold a property in Stanhope,
NJ for $10,000,051 (cost of $8,268,070). A construction loan with a balance of
$6,329,667 was paid off with the proceeds.
On June 30, 2016, the Company sold a portion of its
property in Edinburg, TX (i.e., Texas Roadhouse) for $2,210,000 (cost of $1,355,597).
A mortgage loan with a balance of $1,279,136 was paid off with the proceeds.
Other Revenues
The increase in other income was primarily due to sales by
the Company’s new restaurant it built and owns at its Edinburg, TX property.
This store was opened on July 14, 2017.
Operating Costs and
Expenses:
Rental Expenses
Rental expenses for the
quarters ended July 31, by type of tenant, follows:
|
|
Three Months
Ended
|
|
|
July 31,
|
|
|
2017
|
|
2016
|
|
Residential
|
$2,562,745
|
|
$2,571,379
|
|
Commercial
|
2,411,421
|
|
2,528,333
|
|
|
$4,974,166
|
|
$5,099,712
|
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued):
Rental Expenses
(continued):
The slight decrease in residential rental expenses were
mainly from lower repairs and maintenance expenses at the Somerville, MA (i.e.,
Clarendon) property, partially offset by higher legal fees incurred at the
Rockland, MA property resulting from a temporary cease and desist order from
the Massachusetts Department of Environmental Protection (MassDEP). See Part
II, Item 1, Legal Proceedings, on page 20 for more information.
The decrease in commercial rental expenses was mainly due
to a prior year legal liability of $198,000 recorded as a result of the Company
losing the first of two companion lawsuits against a former tenant for wrongful
termination of its separate leases at two of the Company’s commercial shopping
centers and prior year accelerated amortization expense of deferred commissions
arising from the sale of a portion of its property in Edinburg, TX (i.e., Texas
Roadhouse). These factors were partially offset by a fee paid to a tenant at
its Edinburg, TX shopping center to allow the Company to lease to another
tenant and higher expenses related to the Company’s New Orleans, LA shopping
center, which was completed and refinanced in the first quarter of fiscal 2018.
Service Expenses
Service expenses for
the quarters ended July 31 follows:
|
|
Three Months
Ended
|
|
|
July 31,
|
|
|
2017
|
|
2016
|
|
Preferred Developer Expenses and Fees
|
$876,409
|
|
$1,158,345
|
|
Construction and Other Cost
|
363,581
|
|
34,981
|
|
|
$1,239,990
|
|
$1,193,326
|
The decrease in preferred developer expenses and fees primarily
reflects lower commissions paid commensurate with the lower revenue, primarily
at CVS.
The increase in construction expenses relates to unbudgeted
costs (i.e., overruns) incurred at the renovation project at the Company’s
Rockland, MA property resulting from a temporary cease and desist order from
the Massachusetts Department of Environmental Protection (MassDEP). See Part
II, Item 1, Legal Proceedings, on page 20 for more information.
Selling, General and
Administrative (“SG&A”)
The increase in SG&A expenses relates primarily to
expenses relating to its new restaurant it built and owns at its Edinburg, TX
property and costs incurred to resolve the Rockland, MA matter discussed above,
including providing hotels and meals to displaced tenants and legal and
professional fees. See Part II, Item 1, Legal Proceedings, on page 20 for more
information.
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued):
Non-Operating Income
(Expense):
Interest Expense
Interest expense for
the quarters ended July 31, by type of tenant, follows:
|
|
Three Months
Ended
|
|
|
July 31,
|
|
|
2017
|
|
2016
|
|
Commercial
|
$1,900,783
|
|
$1,894,665
|
|
Residential
|
729,006
|
|
694,829
|
|
|
$2,629,789
|
|
$2,589,494
|
The change in commercial interest expense was minimal; there
were no individually significant changes.
The increase in residential interest expense was the result
of the prior year refinancing at Rockland. Note the loans paid off as part of
this refinancing did not accrue interest.
Other Income /
(Loss)
Other income / (loss)
for the quarters ended July 31 follows:
|
|
Three Months
Ended
|
|
|
July 31,
|
|
|
2017
|
|
2016
|
|
Investment
Income (loss)
|
$(83,418)
|
|
$21,460
|
The decrease in investment income reflected realized losses
on sales of securities in the current year.
Gain / (Loss) on
Derivatives (Non-Cash)
The Company, through its 50% owned consolidated
subsidiaries, has entered into two separate floating-to-fixed interest rate
swap agreements with banks that expire in May 2025 and July 2031. The Company
has determined that these derivative instruments do not meet the requirements
of hedge accounting and have therefore recorded the change in fair value of
these derivative instruments through income. Note that the change in fair
value recorded through income is a non-cash item.
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued):
Equity in Earnings of
Unconsolidated Subsidiary
The equity in earnings
of unconsolidated subsidiary for the quarters ended July 31 follows:
|
|
Three Months
Ended
|
|
|
July 31,
|
|
|
2017
|
|
2016
|
|
Income
from Operations
|
$72,860
|
|
$87,126
|
|
Distributions
|
90,000
|
|
90,000
|
|
|
$162,860
|
|
$177,126
|
The Company has an investment in an affiliated limited
liability entity Dover Parkade, LLC, (Dover). The Company has a 50% interest
in Dover, which owns a shopping center in Dover Township, NJ. The operating
and financial policies of Dover are not controlled by the Company. For years
prior to May 1, 2009, the Company was committed to provide funding to this
equity method investee. The Company’s investment was recorded at cost and
subsequently adjusted for its share of their net income and losses and
distributions. Through April 30, 2009, losses and distributions from Dover exceeded
the Company’s investment and the Company’s investment balance was reduced below
$0 and recorded as a liability. Beginning May 1, 2009, distributions from
Dover have been credited to income and any additional losses have not been
allowed to further reduce the investment balance. The Company does not control
the rate of distributions of Dover. Such distributions are in excess of
Dover’s net assets since its accumulated net losses (including significant
amounts for depreciation and amortization) have exceeded capital contributions.
Income Taxes
The Company files a Federal consolidated tax return to
report all income and deductions for its subsidiaries. The Company and its
subsidiaries file income tax returns in several states. The tax returns are
filed by the entity that owns the real estate or provides services in such
state. Some states do not allow a consolidated or combined tax filing. This
sometimes creates income taxes to be greater than expected as income for some
subsidiaries cannot be offset by other subsidiaries with operating losses.
Capital Resources and Liquidity
At July 31, 2017, the Company had $7,145,794 of
unrestricted cash and cash equivalents. This includes $4,948,976 belonging to
partnership entities in which the Company’s financial interests range from .01%
(VIEs) to 50%. Funds received from CVS, which are to be paid out in connection
with CVS developments, amounted to $275,285 and tenant security deposits held
by VIEs of $12,398 are included in restricted cash and cash equivalents.
At July 31, 2017, the Company had $1,361,812 of investments
in marketable securities, all of which belongs to partner entities.
The Company has three separate credit lines that allows for
borrowings up to $6,760,000. At July 31, 2017, the Company had borrowings of $1,400,000
against these credit lines.
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued):
Capital Resources and Liquidity (continued):
The sources of future borrowings that may be needed for new
construction loans, property purchases, or balloon payments on existing loans
are unclear at this time. As a result of the decreasing CVS fee-for-service
business and the increasingly difficult environment surrounding commercial real
estate, the Company has become more dependent on its ability to buy, develop,
and sell real estate at a profit. Failure to do so would have an adverse
impact on the Company’s liquidity. The Company’s liquidity could also be
adversely impacted if the Company’s new restaurant in Edinburg, TX does not
meet its financial projections or if the Rockland, MA matter discussed in Part
II, Item 1, Legal Proceedings, on page 20, has an unfavorable outcome.