FHRT First Hartford Corp (PK)

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”. 

The slight changes in residential rental income was primarily caused by rent increases at the Somerville, MA property (i.e., Clarendon), partially offset 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 and prior year rents on some of the Company’s development properties that have since been sold (e.g., Olathe, KS; Conroe, TX; Stanhope, NJ), partially offset by additional rents from a new tenant at the Company’s Lubbock, TX property.

The increase in management fees was due to higher fees received from the Company’s unconsolidated Claymont, DE property.

The third quarter and full year decrease in preferred developer fees primarily reflected lower fees received from CVS, partially offset by higher fees received from 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 increase in Cumberland Farms was the result of timing of closings based on the construction schedule. 

Sales (and Cost of Sales) of Real Estate

Nine months ended January 31, 2018:

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 $9,027,022).  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 $2,993,692).  A loan with a balance of $1,102,899 was paid off with the proceeds. 

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 $664,312).

Wethersfield, CT – Sale of Condominium: On November 14, 2017, the Company sold a condominium in Wethersfield, CT for $225,000 (cost of $271,802).  The net proceeds were used to pay off a mortgage loan on this property.  The Company owned another two condominiums on this site after this sale. The loss on the sale of this property resulted in the Company recording an impairment on the remaining properties.

Spring, TX – Partial Sale of Property : On January 30, 2018, the Company purchased three adjacent parcels of land in Spring, TX for $1,161,240 including closing costs.  Simultaneously, one of these parcels was sold to another party for $1,404,504 (cost of $459,611).  The purchase was financed by working capital and the proceeds from the sale.  The Company netted $27,807 of cash for these two transactions, which was received on February 2, 2018.  The remaining two parcels will be marketed to retail establishments.  

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS (continued):

Sales (and Cost of Sales) of Real Estate (continued):

In fiscal year 2018, there were also adjustments of costs incurred related to property sales that occurred in prior fiscal years.  The net amount of these adjustments resulted in a $41,792 reduction of costs.

Nine months ended January 31, 2017:

On June 29, 2016, the Company sold a property in Stanhope, NJ for $10,000,051 (cost of $8,280,570).  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.

On August 16, 2016, the Company sold a condominium in Wethersfield, CT for $285,000 (cost of $277,191).  The net proceeds were used to reduce a mortgage loan on this property. 

On September 20, 2016, the Company sold a parcel of land in Austin, TX for $6,100,000 (cost of $4,190,523) that was previously ground leased. 

On December 14, 2016, the Company sold a property in Conroe, TX for $8,778,442 (cost of $6,721,794).  A mortgage loan with a balance of $5,363,913 was paid off with the proceeds.

On December 28, 2016, the Company sold a property in Olathe, KS for $7,000,000 (cost of $6,867,228).  A mortgage loan with a balance of $5,335,000 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. 

The slight increase in residential rental expenses were mainly from 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 22 for more information.  This was partially offset by lower repairs and maintenance expenses at the Somerville, MA (i.e., Clarendon) property.    

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS (continued):

The increase in commercial rental expenses were primarily related to the Company’s New Orleans, LA shopping center, which was completed and refinanced in the first quarter of fiscal 2018, and higher expenses at the Edinburg, TX shopping center, including higher property taxes and a fee paid to a tenant to allow the Company to lease to another tenant.  Partially offsetting these increases were expenses incurred in the prior year related to a lawsuit against a former tenant, including a legal settlement of $200,000.  Also, in the prior year there was accelerated amortization expense of deferred commissions arising from the sale of a portion of its property in Edinburg, TX (i.e., Texas Roadhouse) and accelerated depreciation of tenant improvements at the Lubbock, TX properties upon the departure of two tenants. 

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 24 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, legal and professional expenses related to a potential residential housing deal in the Bronx, NY, and costs incurred related to 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 24 for more information).

The increase in commercial interest expense was the result of interest on loans related to the Company’s development properties and the Company’s new restaurant it built and owns at its Edinburg, TX property.

The change in residential commercial interest expense was minimal; the nine month increase was the result of the prior year first quarter refinancing at Rockland.  Note the loans paid off as part of this refinancing did not accrue interest. 

The decrease in investment income for the first nine months reflected realized losses on sales of securities in the current year first quarter.

During the nine months ended January 31, 2018, the Company received $200,000 from a settlement of a lawsuit filed against another party for breach (relating to an alleged wrongful termination) of a contract to purchase a commercial shopping center owned by the Company and located in New Orleans, LA. As a result, the sale did not go through and the Company retains ownership of the shopping center. 

Loss on Impairment

In the third quarter, the Company recorded an impairment loss of $40,000 on its two remaining condominiums it owns in Wethersfield, CT.  The amount of the impairment loss represents the excess of the cost over the estimated sales proceeds from the condominiums.

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS (continued):

Gain (Loss) on Derivatives

On January 1, 2018, the Company entered into three interest rate swap agreements to fix the interest rate on its outstanding debt on its Brentwood, NY property at 4.42%.  The swap agreements expire on December 2027, which corresponds to the maturity date of the underlying debt.   

The Company, through its 50% owned consolidated subsidiaries, has two additional floating-to-fixed interest rate swap agreements with banks that expire in May 2025 and July 2031. 

The aggregate fair value of the Company’s interest rate swap agreements as of January 31, 2018 is a $1,551,002 liability.

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.

Loss on Defeasance

During the three and nine months ended January 31, 2017, the Company paid a defeasance premium of $437,776 when refinancing its mortgage loan on its shopping center in Lubbock, TX.

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. 

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS (continued):

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.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the Tax Act) was signed into law. The Tax Act makes significant changes to the Internal Revenue Code, including but not limited to, decreasing the statutory corporate tax rate from 35% to 21% effective January 1, 2018 and repealing AMT tax treatment. The Company calculated its best estimate of the impact of the Tax Act in its income tax provision and re-measured its deferred tax assets and liabilities at the enacted corporate tax rate of 21% in accordance with its understanding of the Tax Act and available guidance. The primary impact of this re-measurement was a reduction in deferred tax assets and liabilities in connection with the reduction of the U.S. corporate income tax rate and resulted in the Company recording approximately $200,000 of additional income tax expense during the three and nine month periods ended January 31, 2018.

On October 26, 2017, the Company was informed that its fiscal year 2016 Federal tax return was selected for examination.  This examination is currently in process.

Capital Resource and Liquidity

At January 31, 2018, the Company had $6,958,982 of unrestricted cash and cash equivalents. This includes $4,836,027 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 $273,670 and tenant security deposits held by VIEs of $378,929 are included in restricted cash and cash equivalents.

At January 31, 2018, the Company had $816,575 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 January 31, 2018, the Company had borrowings of $6,760,000 against these credit lines.

The sources of future borrowings that may be needed for new construction operations, 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 24, has an unfavorable outcome.