LEASES | 12 Months Ended |
Dec. 31, 2013 |
Leases [Abstract] | ' |
LEASES | ' |
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2. LEASES |
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The majority of our properties are leased on a triple-net basis primarily to petroleum distributors and, to a lesser extent, individual operators. Generally our tenants supply fuel and either operate our properties directly or sublet our properties to operators who operate their gas stations, convenience stores, automotive repair service facilities or other businesses at our properties. Our triple-net tenants are responsible for the payment of all taxes, maintenance, repairs, insurance and other operating expenses relating to our properties, and are also responsible for environmental contamination occurring during the terms of their leases and in certain cases also for preexisting environmental contamination. (See note 5 for additional information regarding environmental obligations.) Substantially all of our tenants’ financial results depend on the sale of refined petroleum products and rental income from their subtenants. As a result, our tenants’ financial results are highly dependent on the performance of the petroleum marketing industry, which is highly competitive and subject to volatility. As of December 31, 2013, we owned 840 properties and leased 125 properties from third-party landlords. Our 965 properties are located in 20 states across the United States and Washington, D.C., with concentrations in the Northeast and Mid-Atlantic regions. |
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Revenues from rental properties included in continuing operations for the years ended December 31, 2013, 2012 and 2011 were $95,940,000, $92,873,000 and $91,053,000, respectively. For the year ended December 31, 2013, we recorded $3,126,000 of revenue from rental properties attributable to the partial recovery of damages resulting from Marketing’s default of its obligations under the Master Lease, which was received as a result of the Lukoil Settlement (as described in more detail below). Revenues from rental properties contractually due or received from Marketing under the Master Lease through its termination on April 30, 2012 (as described in more detail below) were $16,850,000 and $43,731,000, respectively, for the years ended December 31, 2012 and 2011. Revenues from rental properties contractually due or received from other tenants were $89,504,000, $69,827,000 and $45,044,000, respectively, for the years ended December 31, 2013, 2012 and 2011. Revenues from rental properties and rental property expenses included in continuing operations included $15,405,000, $10,854,000 and $6,243,000 for the years ended December 31, 2013, 2012 and 2011, respectively, for “pass-through” real estate taxes and other municipal charges paid by us which were reimbursable by our tenants pursuant to the terms of triple-net lease agreements. Revenues from rental properties included in continuing operations for the year ended December 31, 2013 also include a net loss of $1,374,000 for amounts realized under interim fuel supply agreements, as compared to a net gain of $1,763,000 for the year ended December 31, 2012. |
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In accordance with GAAP, we recognize rental revenue in amounts which vary from the amount of rent contractually due or received during the periods presented. As a result, revenues from rental properties include non-cash adjustments recorded for deferred rental revenue due to the recognition of rental income on a straight-line (or average) basis over the current lease term, net amortization of above-market and below-market leases and recognition of rental income recorded under direct financing leases using the effective interest method which produces a constant periodic rate of return on the net investments in the leased properties (the “Revenue Recognition Adjustments”). Revenue Recognition Adjustments included in continuing operations increased rental revenue by $7,810,000, $4,433,000 and $2,278,000 for the years ended December 31, 2013, 2012 and 2011, respectively. We provide reserves for a portion of the recorded deferred rent receivable if circumstances indicate that a tenant will not make all of its contractual lease payments during the current lease term. Our assessments and assumptions regarding the recoverability of the deferred rent receivable are reviewed on an ongoing basis and such assessments and assumptions are subject to change. |
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The components of the $97,147,000 net investment in direct financing leases as of December 31, 2013 are minimum lease payments receivable of $203,438,000 plus unguaranteed estimated residual value of $13,979,000 less unearned income of $120,270,000. |
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Future contractual minimum annual rentals receivable from our tenants, which have terms in excess of one year as of December 31, 2013, are as follows (in thousands): |
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YEAR ENDING | | OPERATING LEASES | | | DIRECT | | | TOTAL(a) | |
| FINANCING |
DECEMBER 31, | LEASES |
2014 | | $ | 70,577 | | | $ | 11,945 | | | $ | 82,522 | |
2015 | | | 68,195 | | | | 12,121 | | | | 80,316 | |
2016 | | | 68,642 | | | | 12,308 | | | | 80,950 | |
2017 | | | 68,103 | | | | 12,622 | | | | 80,725 | |
2018 | | | 67,080 | | | | 12,872 | | | | 79,952 | |
Thereafter | | | 506,281 | | | | 141,570 | | | | 647,851 | |
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(a) | Includes $85,524,000 of future minimum annual rentals receivable under subleases. | | | | | | | | | | | |
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Rent expense, substantially all of which consists of minimum rentals on non-cancelable operating leases, amounted to $7,092,000, $7,903,000 and $8,009,000 for the years ended December 31, 2013, 2012 and 2011, respectively, and is included in rental property expenses using the straight-line method. Rent received under subleases for the years ended December 31, 2013, 2012 and 2011 was $10,715,000, $11,809,000 and $13,325,000, respectively. |
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We have obligations to lessors under non-cancelable operating leases which have terms in excess of one year, principally for gasoline stations and convenience stores. The leased properties have a remaining lease term averaging over 11 years, including renewal options. Future minimum annual rentals payable under such leases, excluding renewal options, are as follows: 2014 — $7,296,000, 2015 — $6,417,000, 2016 — $5,399,000, 2017 — $3,931,000, 2018 — $2,863,000 and $5,229,000 thereafter. |
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Marketing and the Master Lease |
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Approximately 590 of the properties we own or lease as of December 31, 2013 were previously leased to Getty Petroleum Marketing Inc. (“Marketing”) pursuant to a master lease (the “Master Lease”). In December 2011, Marketing filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court. The Master Lease was terminated effective April 30, 2012, and in July 2012, the Bankruptcy Court approved Marketing’s Plan of Liquidation and appointed a trustee (the “Liquidating Trustee”) to oversee liquidation of the Marketing estate (the “Marketing Estate”). We incurred significant costs associated with Marketing’s bankruptcy, including legal expenses, of which $3,700,000 and $2,600,000, respectively, are included in general and administrative expense for the years ended December 31, 2013 and 2012. |
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In December 2011, the Marketing Estate filed a lawsuit (the “Lukoil Complaint”) against Marketing’s former parent, Lukoil Americas Corporation, and certain of its affiliates (collectively, “Lukoil”). In October 2012, we entered into an agreement with the Marketing Estate to make loans and otherwise fund up to an aggregate amount of $6,725,000 to prosecute the Lukoil Complaint and for certain other expenses incurred in connection with the wind-down of the Marketing Estate (the “Litigation Funding Agreement”). We ultimately advanced $6,526,000 in the aggregate to the Marketing Estate pursuant to the Litigation Funding Agreement. The Litigation Funding Agreement also provided that we were entitled to be reimbursed for up to $1,300,000 of our legal fees incurred in connection with the Litigation Funding Agreement. |
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On July 29, 2013, the Bankruptcy Court approved a settlement of the claims made in the Lukoil Complaint (the “Lukoil Settlement”). The terms of the Lukoil Settlement included a collective payment to the Marketing Estate of $93,000,000. In August 2013, the settlement payment was received by the Marketing Estate of which $25,096,000 was distributed to us pursuant to the Litigation Funding Agreement and $6,585,000 was distributed to us in full satisfaction of our post-petition priority claims related to the Master Lease. |
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Of the $25,096,000 received by us in the third quarter of 2013 pursuant to the Litigation Funding Agreement, $7,976,000 was applied to the advances made to the Marketing Estate plus accrued interest; $13,994,000 was applied to unpaid rent and real estate taxes due from Marketing and the related bad debt reserve was reversed; and the remainder of $3,126,000 was recorded as additional income attributed to the partial recovery of damages resulting from Marketing’s default of its obligations under the Master Lease and is reflected in continuing operations in our consolidated statements of operations as other revenue. |
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In accordance with GAAP, we recognized in revenue from rental properties in our consolidated statements of operations the full contractual rent and real estate obligations due to us by Marketing during the term of the Master Lease and provided bad debt reserves included in general and administrative expenses and in earnings (loss) from discontinued operations in our consolidated statements of operations for our estimate of uncollectible amounts due from Marketing. During the year ended December 31, 2013 we received $34,251,000 of funds from the Marketing Estate from our post-petition priority claims and the Lukoil Settlement thereby eliminating the previously provided reserves. The reduction in our bad debt reserve for uncollectible amounts due from Marketing for the year ended December 31, 2013 of $22,782,000 is reflected in our consolidated statements of operations by reducing general and administrative expenses in continuing operations by $16,851,000 and increasing earnings from operating activities included in discontinued operations by $5,931,000. |
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During the year ended December 31, 2012 we had a net increase in our bad debt reserves related to Marketing and the Master Lease of $13,980,000. The increase was related to $16,428,000 of uncollected rent and real estate taxes due from Marketing offset by $2,448,000 received from the Marketing Estate pursuant to our post-petition priority claims related to the Master Lease. The net increase in our bad debt reserve for uncollectible amounts due from Marketing for the year ended December 31, 2012 of $13,980,000 is reflected in our consolidated statements of operations by increasing general and administrative expenses in continuing operations by $10,340,000 and decreasing earnings from operating activities included in discontinued operations by $3,640,000. |
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As of December 31, 2011, the gross deferred rent receivable attributable to the Master Lease of $25,630,000 was fully reserved. As a result of the developments described above, we previously concluded that it was probable that we would not receive from Marketing the entire amount of the contractual lease payments owed to us under the Master Lease. Accordingly, during the third and fourth quarters of 2011, we recorded non-cash allowances for deferred rental revenue in continuing and discontinued operations aggregating $11,043,000 and $8,715,000, respectively, fully reserving in the fourth quarter of 2011 for the deferred rent receivable relating to the Master Lease. These non-cash allowances reduced our net earnings for the applicable periods in 2011, but did not impact our cash flow from operating activities. The gross deferred rent receivable and the reserve relating to the Master Lease were derecognized in the second quarter of 2012 upon termination of the Master Lease. |
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We believe that we will receive additional distributions from the Marketing Estate to satisfy our remaining general unsecured claims. We cannot provide any assurance as to our proportionate interest in any Marketing Estate assets, or the amount or timing of recoveries, if any, with respect to our remaining general unsecured claims against the Marketing Estate. |
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Leasing Activities |
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As of December 31, 2013, we have entered into long-term triple-net leases with petroleum distributors for 12 separate property portfolios comprising 462 properties in the aggregate that were previously leased to Marketing. We have also entered into month-to-month license agreements with occupants of 90 properties previously leased to Marketing (substantially all of whom were Marketing’s former subtenants) allowing such occupants to continue to occupy and use these properties as gas stations, convenience stores, automotive repair service facilities or other businesses. Under our month-to-month license agreements, we receive monthly licensing fees and are responsible for the payment of certain Property Expenditures (as defined above) and environmental costs. |
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The long-term triple-net leases with petroleum distributors are unitary triple-net lease agreements generally with an initial term of 15 years, and options for successive renewal terms of up to 20 years. Rent is scheduled to increase at varying intervals of up to three years on the anniversary of the commencement date of the leases. The majority of the leases provide for additional rent based on the aggregate volume of petroleum products sold. In addition, the majority of the leases require the tenants to make capital expenditures at our properties substantially all of which are related to the replacement of underground storage tanks (“USTs”) that are owned by our tenants. We have committed to co-invest up to $14,532,000 in the aggregate with our tenants for a portion of such capital expenditures, which deferred expense is recognized on a straight-line basis as a reduction of rental revenue in our consolidated statements of operations over the terms of the various leases. As of December 31, 2013, we have invested $308,000 of our capital commitment. As part of these triple-net leases, we transferred title of the USTs to our tenants, and the obligation to pay for the retirement and decommissioning or removal of USTs at the end of their useful life or earlier if circumstances warranted was fully or partially transferred to our new tenants. We remain contingently liable for this obligation in the event that our tenants do not satisfy their responsibilities. Accordingly, we removed $12,648,000 of asset retirement obligations and $10,435,000 of net asset retirement costs related to USTs from our balance sheet through December 31, 2013. The net amount of $2,213,000 is recorded as deferred rental revenue and is recognized on a straight-line basis as additional revenues from rental properties over the terms of the various leases. We incurred $365,000 and $3,147,000 of lease origination costs for the years ended December 31, 2013 and 2012, respectively, which deferred expense is recognized on a straight-line basis as amortization expense in our consolidated statements of operations over the terms of the various leases. For the year ended December 31, 2011, we did not incur any lease origination costs. |
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Chestnut Petroleum Dist. Inc. |
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As of December 31, 2013, we leased 142 gasoline station and convenience store properties in two separate unitary leases to subsidiaries of Chestnut Petroleum Dist. Inc. We lease 58 properties to CPD NY Energy Corp. (“CPD NY”) and 84 properties to NECG. CPD NY and NECG together represented 21%, 18% and 12% of our rental revenues for the years ended December 31, 2013, 2012 and 2011, respectively. Although we have separate, non-cross defaulted leases with each of these subsidiaries, because such subsidiaries are affiliated with one another and under common control, a material adverse impact on one subsidiary, or failure of such subsidiary to perform its rental and other obligations to us, may contribute to a material adverse impact on the other subsidiaries and/or failure of the other subsidiaries to perform its rental and other obligations to us. |
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The selected combined audited financial data of CPD NY (from inception on January 13, 2011) and NECG (from inception on May 1, 2012), which has been prepared by Chestnut Petroleum Dist. Inc.’s management, is provided below. |
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(in thousands) |
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Operating Data: |
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December 31, |
| | 2013 | | | 2012 | | | 2011 | |
Total revenue | | $ | 451,145 | | | $ | 424,519 | | | $ | 385,406 | |
Gross profit | | | 28,721 | | | | 26,616 | | | | 25,764 | |
Net income | | | 229 | | | | 1,968 | | | | 9,111 | |
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Balance Sheet Data: |
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| | December 31, | | | December 31, | | | | | |
2013 | 2012 | | | | |
Current assets | | $ | 10,944 | | | $ | 12,942 | | | | | |
Noncurrent assets | | | 28,852 | | | | 23,405 | | | | | |
Current liabilities | | | 13,985 | | | | 5,107 | | | | | |
Noncurrent liabilities | | | 16,043 | | | | 21,641 | | | | | |
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Eviction proceedings are ongoing against a group of former Marketing subtenants (or sub-subtenants) who continue to occupy properties in the State of Connecticut which are subject to the NECG Lease. These ongoing eviction proceedings have materially adversely impacted NECG. In June 2013, the Connecticut Superior Court ruled in our favor with respect to all 24 locations involved in the proceedings. However, in July 2013, the operators against whom these Superior Court rulings were made appealed the decisions. As of the date of this Annual Report on Form 10-K, 13 of the 24 former operators against whom eviction proceedings were brought have reached agreements with NECG to either remain in the properties as bona fide subtenants or vacate the premises, and have withdrawn their appeals. Eleven of the operators remain in occupancy of the subject sites during the pendency of their appeal. We remain confident that we will prevail in the remaining appeals and, although no assurances can be given, we anticipate a favorable resolution of this matter in 2014. We expect that we will enter into a restructuring of the NECG Lease after a final resolution to the eviction proceedings is determined. |
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In August 2013, we entered into an agreement to modify the NECG Lease. This lease modification agreement includes provisions under which we can recapture and sever from the NECG Lease up to 26 properties and, as of December 31, 2013, these properties are accounted for as held for sale. As a result of the disruption and costs associated with the litigation, NECG was not current in its rent and certain other obligations due to us under the NECG Lease. We increased our accounts receivable bad debt reserves by approximately $1,015,000 in 2013 so that the total bad debt reserve related to NECG as of December 31, 2013 is approximately $1,765,000 in aggregate. |
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As a result of the developments with NECG described above, we concluded that it was probable that we would not receive from NECG the entire amount of the contractual lease payments owed to us under the NECG Lease for the likely removal of properties and for rent payment deferrals previously agreed to related to the year ended December 31, 2013. Accordingly, during the year ended 2013, we recorded a non-cash allowance for deferred rent receivable which resulted in a full reserve of the outstanding balance of $4,775,000. This non-cash allowance reduced our net earnings for the year ended December 31, 2013, but did not impact our cash flow from operating activities. |
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Capitol Petroleum Group |
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As of December 31, 2013, we leased 97 gasoline station and convenience store properties in four separate unitary leases to subsidiaries of Capitol Petroleum Group, LLC. We lease 37 properties to White Oak Petroleum, LLC, 24 properties to Hudson Petroleum Realty, LLC, 20 properties to Dogwood Petroleum Realty, LLC and 16 properties to Big Apple Petroleum Realty, LLC. In aggregate, these Capitol affiliates represented 15%, 7% and 6% of our rental revenues for the years ended December 31, 2013, 2012 and 2011, respectively. Although we have separate, non-cross defaulted leases with each of these subsidiaries, because such subsidiaries are affiliated with one another and under common control, a material adverse impact on one subsidiary, or failure of such subsidiary to perform its rental and other obligations to us, may contribute to a material adverse impact on the other subsidiaries and/or failure of the other subsidiaries to perform its rental and other obligations to us. |