| UNITED STATES |
| SECURITIES AND EXCHANGE COMMISSION |
| Washington, D.C. 20549 |
| FORM 10-Q |
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009 or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ________
Commission file number: 0001368757 |
| GTJ REIT, INC. |
| (Exact name of registrant as specified in its charter) |
| MARYLAND | 20-5188065 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
| 444 Merrick Road |
| Lynbrook, New York 11563 |
| (Address of principal executive offices) |
| (Zip Code) |
| (516) 881-3535 |
| (Registrant’s telephone number, including area code) |
| N/A |
| (Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer [ ] | Accelerated filer [ ] | Non-accelerated filer [X] | Smaller reporting company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date: 13,472,281 shares of common stock as of November 9, 2009.
GTJ REIT, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2009
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EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION
1
PART I. FINANCIAL INFORMATION |
Item 1. Financial Statements
GTJ REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
| September 30, | December 31, | |||||||
| 2009 | 2008 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Real estate at cost: | ||||||||
| Land | $ | 88,584 | $ | 88,584 | ||||
| Buildings and improvements | 24,222 | 24,222 | ||||||
| 112,806 | 112,806 | |||||||
| Less: accumulated depreciation and amortization | (7,860 | ) | (7,019 | ) | ||||
| Net real estate held for investment | 104,946 | 105,787 | ||||||
| Cash and cash equivalents | 14,198 | 11,901 | ||||||
| Available for sale securities | 3,615 | 4,313 | ||||||
| Restricted cash | 1,387 | 1,996 | ||||||
| Accounts receivable, net | 6,420 | 5,830 | ||||||
| Other assets, net | 7,081 | 5,160 | ||||||
| Deferred charges, net | 1,931 | 2,128 | ||||||
| Intangible assets, net | 3,103 | 2,933 | ||||||
| Machinery and equipment, net | 2,446 | 1,845 | ||||||
| Assets of discontinued operation | 166 | 730 | ||||||
| Total assets | $ | 145,293 | $ | 142,623 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Secured revolving credit facility | $ | 43,215 | $ | 43,215 | ||||
| Accounts payable and accrued expenses | 971 | 1,015 | ||||||
| Unpaid losses and loss adjustment expenses | 1,831 | 2,040 | ||||||
| Other liabilities, net | 8,123 | 5,998 | ||||||
| 54,140 | 52,268 | |||||||
| Commitments and contingencies | ||||||||
| Stockholders' equity: | ||||||||
| Preferred stock, $.0001 par value; 10,000,000 shares authorized and none issued and outstanding | - | - | ||||||
Common stock, $.0001 par value; 100,000,000 shares authorized and 13,472,281 shares issued and outstanding at September 30, 2009 and December 31, 2008 | 1 | 1 | ||||||
| Additional paid-in capital | 137,001 | 136,907 | ||||||
| Cumulative distributions in excess of net income | (46,252 | ) | (46,845 | ) | ||||
| Accumulated other comprehensive income | 403 | 292 | ||||||
| 91,153 | 90,355 | |||||||
| Total liabilities and stockholders' equity | $ | 145,293 | $ | 142,623 | ||||
2
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 2009 and 2008
(Unaudited, amounts in thousands, except share and per share data)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Revenues: | ||||||||||||||||
| Property rentals | $ | 3,305 | $ | 2,822 | $ | 9,842 | $ | 9,004 | ||||||||
| Outdoor maintenance and cleaning operations | 7,875 | 7,376 | 22,759 | 22,307 | ||||||||||||
| Total revenues | 11,180 | 10,198 | 32,601 | 31,311 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative expenses | 2,825 | 2,685 | 8,430 | 8,524 | ||||||||||||
| Equipment maintenance and garage expenses | 540 | 514 | 1,606 | 2,306 | ||||||||||||
| Transportation expenses | 521 | 663 | 1,481 | 1,938 | ||||||||||||
| Contract maintenance and station expenses | 3,468 | 2,973 | 8,922 | 9,079 | ||||||||||||
| Insurance and safety expenses | 665 | 668 | 1,876 | 2,118 | ||||||||||||
| Operating and highway taxes | 367 | 344 | 1,213 | 1,131 | ||||||||||||
| Other operating expenses | 248 | 295 | 751 | 677 | ||||||||||||
| Depreciation and amortization expense | 548 | 269 | 1,290 | 1,086 | ||||||||||||
| Total operating expenses | 9,182 | 8,411 | 25,569 | 26,859 | ||||||||||||
| Operating income | 1,998 | 1,787 | 7,032 | 4,452 | ||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 127 | 70 | 252 | 247 | ||||||||||||
| Interest expense | (461 | ) | (554 | ) | (1,406 | ) | (1,559 | ) | ||||||||
| Litigation reserve | (1,713 | ) | - | (1,713 | ) | - | ||||||||||
| Other | (121 | ) | (391 | ) | (335 | ) | (319 | ) | ||||||||
| Total other income (expense): | (2,168 | ) | (875 | ) | (3,202 | ) | (1,631 | ) | ||||||||
| (Loss) income from continuing operations before income taxes | (170 | ) | 912 | 3,830 | 2,821 | |||||||||||
| Benefit (provision) for income taxes | 20 | (242 | ) | - | (430 | ) | ||||||||||
| (Loss) income from continuing operations | (150 | ) | 670 | 3,830 | 2,391 | |||||||||||
| Discontinued Operation: | ||||||||||||||||
| Loss from operations of discontinued operation, net of income taxes | (38 | ) | (1,272 | ) | (4 | ) | (1,679 | ) | ||||||||
| Net (loss) income | $ | (188 | ) | $ | (602 | ) | $ | 3,826 | $ | 712 | ||||||
| (Loss) income per common share - basic and diluted: | ||||||||||||||||
| (Loss) income from continuing operations | $ | (0.01 | ) | $ | 0.05 | $ | 0.28 | $ | 0.18 | |||||||
| Loss from discontinued operations | $ | 0.00 | $ | (0.09 | ) | $ | 0.00 | $ | (0.13 | ) | ||||||
| Net (loss) income | $ | (0.01 | ) | $ | (0.04 | ) | $ | 0.28 | $ | 0.05 | ||||||
| Weighted-average common shares outstanding - basic and diluted | 13,472,281 | 13,472,281 | 13,472,281 | 13,472,281 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
GTJ REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2009
(Unaudited, amounts in thousands, except share and per share data)
| Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||
| Outstanding Shares | Amount | Outstanding Shares | Amount | Additional-Paid-In-Capital | Cumulative Distributions in Excess of Net Income | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | |||||||||||||||||||||||||
| Balance at January 1, 2009 | - | $ | - | 13,472,281 | $ | 1 | $ | 136,907 | $ | (46,845 | ) | $ | 292 | $ | 90,355 | |||||||||||||||||
| Distributions - common stock, $0.24 per share | - | - | - | - | - | (3,233 | ) | - | (3,233 | ) | ||||||||||||||||||||||
| Stock-based compensation related to employee stock options | - | - | - | - | 94 | - | - | 94 | ||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | 3,826 | - | 3,826 | ||||||||||||||||||||||||
| Unrealized gain on available-for-sale securities, net | - | - | - | - | - | - | 111 | 111 | ||||||||||||||||||||||||
| Total comprehensive income | - | - | - | - | - | - | - | 3,937 | ||||||||||||||||||||||||
| Balance at September 30, 2009 | - | $ | - | 13,472,281 | $ | 1 | $ | 137,001 | $ | (46,252 | ) | $ | 403 | $ | 91,153 | |||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
GTJ REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2009 and 2008
(Unaudited, amounts in thousands, except share and per share data)
Nine Months Ended September 30, | ||||||||
| 2009 | 2008 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income | $ | 3,826 | $ | 712 | ||||
| Loss from discontinued operation | 4 | 1,679 | ||||||
| Income from continuing operations | 3,830 | 2,391 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
| Deferred taxes | - | 412 | ||||||
| Stock-based compensation | 94 | 189 | ||||||
| Changes in insurance reserves | (209 | ) | (446 | ) | ||||
| Provision for uncollectible receivables | 119 | - | ||||||
| Depreciation and amortization | 1,002 | 836 | ||||||
| Amortization of deferred financing costs | 152 | 152 | ||||||
| Amortization of deferred charges | 76 | 106 | ||||||
| Amortization of intangible assets | 776 | 477 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (708 | ) | (1,131 | ) | ||||
| Other assets | (1,920 | ) | (494 | ) | ||||
| Deferred charges | (32 | ) | - | |||||
| Accounts payable and other liabilities | 2,080 | 2,976 | ||||||
| Net cash provided by operating activities | 5,260 | 5,468 | ||||||
| Investing activities: | ||||||||
| Real estate assets acquired | - | (19,781 | ) | |||||
| Lease intangible assets acquired | - | (3,614 | ) | |||||
| Assets acquired less liabilities assumed | (946 | ) | - | |||||
| Purchases of property and equipment | (762 | ) | (925 | ) | ||||
| Purchase of investments | (55 | ) | (222 | ) | ||||
| Proceeds from sale of investments | 864 | 452 | ||||||
| Restricted cash | 609 | 672 | ||||||
| Net cash used in investing activities | (290 | ) | (23,418 | ) | ||||
| Financing activities: | ||||||||
| Proceeds from revolving credit facility | - | 23,215 | ||||||
| Dividends paid | (3,233 | ) | (3,840 | ) | ||||
| Earnings and profits distribution | - | (548 | ) | |||||
| Net cash (used in) provided by financing activities | (3,233 | ) | 18,827 | |||||
| Cash flow provided by (used in) discontinued operations: | ||||||||
| Operating activities | 560 | (2 780 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | 2,297 | (1,903 | ) | |||||
| Cash and cash equivalents at the beginning of period | 11,901 | 11,362 | ||||||
| Cash and cash equivalents at the end of period | $ | 14,198 | $ | 9,459 | ||||
| Supplemental cash flow information: | ||||||||
| Interest paid | $ | 1,254 | $ | 1,566 | ||||
| Cash paid for taxes | $ | 161 | $ | 108 | ||||
| Assumption of liabilities from assets acquired | $ | 505 | $ | - | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
1. ORGANIZATION AND BASIS OF PREPARATION:
Description of Business
GTJ REIT, Inc. (the “Company” or “GTJ REIT”) was incorporated in Maryland on June 23, 2006 to engage in any lawful act or activity including, without limitation or obligation, qualifying as a real estate investment trust (“REIT”) under Sections 856 through 860, or any successor sections of the Internal Revenue Code of 1986, as amended (the “Code”), for which corporations may be organized under Maryland General Corporation Law. The Company has focused primarily on the ownership and management of commercial real estate located in New York City and one property located near Hartford, Connecticut. In addition, the Company, through its non-REIT subsidiaries, provides outdoor maintenance and shelter cleaning services to outdoor advertising companies and government agencies in New York, New Jersey, Arizona and California.
On March 29, 2007, the Company commenced operations upon the completion of the Reorganization described below. Effective July 1, 2007, the Company elected to be treated as a REIT under the Code and elected December 31st as its fiscal year end. Additionally, in connection with the Tax Relief Extension Act of 1999 (“RMA”), the Company is permitted to participate in activities outside the normal operations of the REIT so long as these activities are conducted in entities which elect to be treated as taxable subsidiaries under the Code subject to certain limitations.
At September 30, 2009, the Company owned seven properties containing a total of approximately 561,000 square feet of leasable area.
Reorganization
On July 24, 2006, the Company entered into an Agreement and Plan of Merger (the “Agreement”) with Triboro Coach Corp., a New York corporation (“Triboro”); Jamaica Central Railways, Inc., a New York corporation (“Jamaica”); Green Bus Lines, Inc., a New York corporation (“Green” and together with Triboro and Jamaica, collectively referred to as the “Bus Companies” and each referred to as a “Bus Company”); GTJ REIT, Triboro Acquisition, Inc., a New York corporation (“Triboro Acquisition”); Jamaica Acquisition, Inc., a New York corporation (“Jamaica Acquisition”); and Green Acquisition, Inc., a New York corporation (“Green Acquisition,” and together with Jamaica Acquisition and Triboro Acquisition collectively referred to as the “Acquisition Subsidiaries” and each referred to as an “Acquisition Subsidiary”). The transactions contemplated under the Agreement closed on March 29, 2007. The effect of the merger transactions was to complete a reorganization (“Reorganization”) of the ownership of the Bus Companies into the Company with the surviving entities of the merger of the Bus Companies with the Acquisition Subsidiaries becoming wholly-owned subsidiaries of the Company and the former shareholders of the Bus Companies becoming stockholders in the Company.
Under the terms of the Agreements, each share of common stock of each Bus Company’s issued and outstanding shares immediately prior to the effective time of the mergers, was converted into the right to receive the following shares of the Company’s common stock:
| · | Each share of Green common stock was converted into the right to receive 1,117.429975 shares of the Company’s common stock. |
| · | Each share of Triboro common stock was converted into the right to receive 2,997.964137 shares of the Company’s common stock. |
| · | Each share of Jamaica common stock was converted into the right to receive 195.001987 shares of the Company’s common stock. |
The Bus Companies, including their subsidiaries, owned a total of seven rentable parcels of real property at September 30, 2009 and December 31, 2008, four of which are leased to the City of New York (the “City”), two of which are leased to commercial tenants (five on a triple net basis), and one of which a portion is leased to a commercial tenant and the remainder, which was utilized by the Company’s discontinued paratransit business is available for lease. There is an additional property of negligible size which is not rentable. Prior to
6
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
1. ORGANIZATION AND BASIS OF PREPARATION (Continued):
the Reorganization, the Bus Companies and their subsidiaries, collectively, operated a group of outdoor maintenance businesses and a paratransit business (which was discontinued as of September 30, 2008), which were acquired as part of the merger.
Following the completion of the Reorganization, on July 1, 2007, the Company elected to be treated as a REIT under the applicable provisions of the Code. In order to adopt a REIT structure, it was necessary to combine the Bus Companies and their subsidiaries under a single holding company. The Company is the holding company. The Company has formed three wholly- owned New York corporations and each of the Bus Companies merged with one of these subsidiaries to become wholly-owned subsidiaries of the Company. The mergers required the approval of the holders of at least 66 2/3% of the outstanding shares of common stock of each of Green, Triboro and Jamaica, voting separately and not as one class, which was obtained on March 26, 2007.
Based on third-party valuations of the real property, outdoor maintenance businesses, and the paratransit business (which was discontinued as of September 30, 2008), and considering the ownership of the same in whole or part by each of the Bus Companies, the Company was advised by an outside appraisal firm that the relative valuation of each of the Bus Companies (as part of GTJ REIT, Inc.) and in connection with the Reorganization was as follows: Green-42.088%, Triboro-38.287% and Jamaica-19.625%. Accordingly, under the Reorganization, 10,000,361 shares (including 361 fractional shares) of the Company’s common stock were distributed to the former shareholders of Green, Triboro, and Jamaica in exchange for their shares in the Bus Companies. Exclusive of fractional shares, 4,208,800 shares were distributed to the shareholders of Green, 3,828,700 shares to the shareholders of Triboro and 1,962,500 shares to the shareholders of Jamaica, in proportion to the outstanding shares held by such shareholders of each Bus Company, respectively.
As part of becoming a REIT, the Company was required, after the Reorganization, to make a distribution of the Bus Companies’ historical undistributed earnings and profits, calculated to be an estimated $62.1 million (see Note 8). The Company agreed to distribute up to $20.0 million in cash, and 3,775,400 shares of the Company’s common stock, valued at $11.14 per share solely for purposes of the distribution calculated as follows:
Total Value of the Bus Companies | $ | 173,431,797 | ||
Assumed Earnings and Profits—Cash distribution | 20,000,000 | |||
Total value after cash distribution | 153,431,797 | |||
Assumed Earnings and Profits—Stock distribution | 42,000,000 | |||
Total value after stock distribution | $ | 111,431,797 | ||
Reorganization shares | 10,000,000 | |||
Share Value Post Earnings and Profits | $ | 11.14 | ||
The Reorganization was accounted for under the purchase method of accounting as required by ASC No. 805. Because GTJ REIT has been formed to issue equity interests to effect a business combination, as required by ASC No. 805, one of the existing combining entities was required to be determined the acquiring entity. Under ASC No. 805, the acquiring entity is the combining entity whose owners as a group retained or received the larger portion of the voting rights in the combined entity. Immediately following the Reorganization, the former Green shareholders had a 42.088% voting and economic interest in the Company, the former Triboro shareholders had a 38.287% voting and economic interest in the Company, and the former Jamaica shareholders had a 19.625% voting and economic interest in the company. Additionally, under ASC No. 805, in determining the acquiring entity, consideration was given to which combining entity initiated the combination and whether the assets, revenues, and earnings of one of the combining entities significantly exceed those of the others.
7
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
1. ORGANIZATION AND BASIS OF PREPARATION (Continued):
Each stockholder elected to receive a combination of cash and stock, or exclusively cash or stock. If more than $20.0 million of cash was elected in the aggregate, cash distributed to each stockholder electing to receive some or all of his or her distribution in cash was to be reduced such that the aggregate cash distribution will total approximately $20.0 million and the balance of the distribution to each such stockholder will be made in the Company’s common stock. The Company distributed approximately $19.7 million in cash and 3,775,400 shares of common stock (with a value of approximately $42.1 million). The undistributed cash balance of approximately $0.3 million is included in other liabilities in the consolidated balance sheet at September 30, 2009. Green’s assets at December 31, 2006 totaled approximately $23.9 million as compared to Triboro’s assets of approximately $19.4 million, and Jamaica’s assets of approximately $10.2 million, and Green’s revenues on a going forward basis are expected to exceed that of Triboro and Jamaica. As a result of these facts, Green was deemed to be the accounting acquirer and the historical financial statements of the Company are those of Green.
Under the purchase method of accounting, Triboro’s and Jamaica’s assets and liabilities were acquired by Green and have been recorded at their estimated fair value. Accordingly, under the Reorganization, 10,000,000 shares of the Company’s common stock were distributed (exclusive of 361 fractional shares), 4,208,800 shares to the shareholders of Green, 3,828,700 shares to the shareholders of Triboro and 1,962,500 shares to the shareholders of Jamaica, in such case in proportion to the outstanding shares held by such shareholders of each Bus Company, respectively.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The fair values are based on third-party valuations. The fair value of the net assets acquired for the remaining interest in GTJ, not previously owned by Green, exceeded the total consideration for the acquisition by approximately $6.0 million (of which an additional adjustment of approximately $1.1 million was recorded at December 31, 2007 to adjust certain acquired deferred tax liabilities), resulting in negative goodwill. The excess negative goodwill was allocated on a pro rata basis and recorded as a reduction of long-lived assets.
The following table summarizes the allocation of the purchase price in the form of a condensed consolidated balance sheet reflecting the estimated fair values (after the allocation of negative goodwill) of the amounts assigned to each major asset and liability caption of the acquired entities at the date of acquisition (in thousands):
| Triboro | Jamaica | Total | ||||||||||
Issuance of stock | $ | 66,402 | $ | 34,035 | $ | 100,437 | ||||||
Cash and cash equivalents | $ | 6,126 | $ | 974 | $ | 7,100 | ||||||
Restricted cash | 1,275 | 637 | 1,912 | |||||||||
Accounts receivable | 2,627 | 1,314 | 3,941 | |||||||||
Operating subsidies receivables | 1,752 | 941 | 2,693 | |||||||||
Deferred leasing commissions | 782 | - | 782 | |||||||||
Other assets | 2,682 | 1,549 | 4,231 | |||||||||
Securities available for sale | 1,668 | 593 | 2,261 | |||||||||
Real property and equipment | 55,038 | 30,919 | 85,957 | |||||||||
Machinery and equipment | 149 | 75 | 224 | |||||||||
Total assets | 72,099 | 37,002 | 109,101 | |||||||||
Accounts payable and accrued expenses | 741 | 371 | 1,112 | |||||||||
Revolving credit borrowings | 168 | 84 | 252 | |||||||||
Note payable | 666 | 333 | 999 | |||||||||
Income tax payable | 294 | 157 | 451 | |||||||||
Deferred tax liability | 248 | 124 | 372 | |||||||||
Unpaid losses and loss adjustment expenses | 1,736 | 868 | 2,604 | |||||||||
Other liabilities | 1,844 | 1,030 | 2,874 | |||||||||
Total liabilities | 5,697 | 2,967 | 8,664 | |||||||||
Fair value of net assets acquired | $ | 66,402 | $ | 34,035 | $ | 100,437 | ||||||
8
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
1. ORGANIZATION AND BASIS OF PREPARATION (Continued):
On June 30, 2009, GTJ REIT, Inc. through its wholly-owned subsidiaries, Shelter Electric Maintenance Corp. and Shelter Electric Acquisition Subsidiary LLC, (collectively, “Shelter Electric”) entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Morales Electrical Contracting, Inc. (“Morales”), a Valley Stream, New York based electrical construction company, pursuant to which Morales sold certain of its assets and assigned certain contracts and employees to Shelter Electric.
Pursuant to the Asset Purchase Agreement, Shelter Electric purchased these assets, free and clear of all liens and other encumbrances, in consideration for the payment of approximately $1.0 million, consisting primarily of the satisfaction and payment of certain liabilities of Morales. The $1.0 million purchase price was allocated to identifiable intangible assets with approximately $0.3 million allocated to the contracts assumed, $0.4 million allocated to the non-compete agreement, $0.2 million allocated to customer relationships and $0.1 million allocated to goodwill. Shelter Electric will also provide a line of credit of up to approximately $0.6 million, through a Credit and Security Agreement to finance the completion of two contracts currently in progress. In addition, the former Vice President of Morales has been employed by Shelter to manage and expand the electrical construction operations. The employment is subject to usual and customary conditions and restrictive covenants.
Basis of Presentation and Principles of Consolidation:
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States ("GAAP") for complete financial statements, although management believes that the disclosures presented herein are adequate to make the accompanying unaudited consolidated interim financial statements presented not misleading.
The accompanying unaudited consolidated financial statements include the financial statements of the Company, its wholly-owned subsidiaries, and partnerships or other joint ventures which the Company controls. In the opinion of management, all adjustments (consisting of normal recurring accruals and a litigation reserve) considered necessary for a fair presentation have been included. All significant inter-company transactions and balances have been eliminated in consolidation.
In connection with preparation of the consolidated interim financial statements and in accordance with ASC No. 855-10-25, the Company evaluated subsequent events after the balance sheet date of September 30, 2009 through November 12, 2009.
The results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2009. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated annual financial statements and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates:
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. All of these estimates reflect management’s best judgment about current economic and market conditions and their effects based on information available as of the date of these consolidated financial statements. If such conditions persist longer or deteriorate further than expected, it is reasonably possible that the judgments and estimates could change, which
9
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued):
may result in impairments of certain assets. Significant estimates include those related to uncollectible receivables, the useful lives of long lived assets including property and equipment, and intangible assets, income taxes, contingencies, environmental matters, insurance liabilities and stock-based compensation.
Reclassifications:
Certain prior period amounts have been reclassified to conform to the current year presentation.
Real Estate Investments:
Real estate assets are stated at cost, less accumulated depreciation and amortization. All costs related to the improvement or replacements of real estate properties are capitalized. Additions, renovations and improvements that enhance and/or extend the useful life of a property are also capitalized. Expenditures for ordinary maintenance, repairs and improvements that do not materially prolong the normal useful life of an asset are charged to operations as incurred.
Upon the acquisition of real estate properties, the fair values of the real estate purchased is allocated to the acquired tangible assets (consisting of land, buildings and buildings improvements) and identified intangible assets and liabilities (consisting of above-market and below-market leases and in-place leases) in accordance with ASC No. 805. The Company utilizes methods similar to those used by independent appraisers in estimating the fair value of acquired assets and liabilities. The fair value of the tangible assets of an acquired property considers the value of the property “as-if-vacant.” The fair value reflects the depreciated replacement cost of the asset. In allocating purchase price to identified intangible assets and liabilities of an acquired property, the values of above-market and below-market leases are estimated based on the differences between (i) contractual rentals and the estimated market rents over the applicable lease term discounted back to the date of acquisition utilizing a discount rate adjusted for the credit risk associated with the respective tenants and (ii) the estimated cost of acquiring such leases giving effect to the Company’s history of providing tenant improvements and paying leasing commissions, offset by a vacancy period during which such space would be leased. The aggregate value of in-place leases is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property “as-if-vacant,” determined as set forth above.
Above and below market leases acquired are recorded at their fair values. The capitalized above-market lease values are amortized as a reduction of rental revenue over the remaining term of the respective leases and the capitalized below-market lease values are amortized as an increase to rental revenue over the remaining term of the respective leases. The value of in-place leases is based on the Company’s evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during expected lease-up periods, current market conditions, and costs to execute similar leases. The values of in-place leases are amortized over the remaining term of the respective leases. If a tenant vacates its space prior to its contractual expiration date, any unamortized balance of the related intangible asset is expensed.
On March 3, 2008, the Company acquired a 110,000 square foot office building located in Farmington, Connecticut for approximately $23,395,000 including closing costs. The property is triple net leased to a single tenant under a long-term lease arrangement. The cost of approximately $19,781,000 was allocated to land, buildings and improvements, approximately $2,183,000 to in-place lease intangibles and approximately $1,431,000 to above market leases (both intangibles are included in intangible assets, net in the accompanying condensed consolidated balance sheets). These costs are amortized over the remaining lives of the associated leases in place at the time of acquisition, approximately 4 years. Amortization expense related to these intangible assets for the three and nine months ended September 30, 2009 and 2008 was approximately $205,000, $614,000, $205,000 and $477,000, respectively.
The results of operations of the acquired office building have been included in operations from the date of acquisition, March 3, 2008. Assuming the office building was acquired at the beginning of the period, proforma rental revenue for the three months ended March 31, 2008 was $532,350. Actual revenue recorded for the period from the date of acquisition through March 31, 2008 was $187,866. Pursuant to the terms of the lease the tenant is responsible for all operating expenses related to the property, including insurance and property taxes. Accordingly, such expenses have been excluded from the proforma information.
10
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued):
Depreciation and Amortization:
The Company uses the straight-line method for depreciation and amortization. Properties and property improvements are depreciated over their estimated useful lives, which range from 10 to 25 years. Furniture and fixtures, equipment, and transportation equipment is depreciated over estimated useful lives that range from 5 to 10 years. Tenant improvements are amortized over the shorter of the remaining non-cancellable term of the related leases or their useful lives.
Deferred Charges:
Deferred charges consist principally of leasing commissions (which are amortized ratably over the life of the related tenant leases) and financing fees (which are amortized over the terms of the respective agreements). Deferred charges in the accompanying condensed consolidated balance sheets are shown at cost, net of accumulated amortization of $1,931,000 and $2,128,000 as of September 30, 2009 and December 31, 2008, respectively.
Asset Impairment:
The Company applies the guidance in ASC No. 360-10-05 to recognize and measure impairment of long-lived assets. Management reviews each real estate investment for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability is based on an estimate of the future cash flows that are expected to result from the real estate investment’s use and eventual disposition. Such cash flow analysis includes factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If an impairment event exists due to the projected inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair value. Management is required to make subjective assessments as to whether there are impairments in the value of its real estate holdings. These assessments could have a direct impact on net income, because an impairment loss is recognized in the period that the assessment is made.
When impairment indicators are present, investments in affiliated companies are reviewed for impairment by comparing their fair values to their respective carrying amounts. The Company made its estimate of fair value by considering certain factors including discounted cash flow analyses. If the fair value of the investment had dropped below the carrying amount, management considered several factors when determining whether an other-than-temporary decline in market value had occurred, including the length of the time and the extent to which the fair value had been below cost, the financial condition and near-term prospects of the affiliated company, and other factors influencing the fair market value, such as general market conditions. There were no indicators of impairment for the three and nine months ended September 30, 2009.
Reportable Segments:
The Company primarily operates in three reportable segments: Real Estate Operations, Outside Maintenance and Shelter Cleaning Operations and Insurance Operations, all of which are conducted throughout the U.S., with the exception of the Insurance Operations which are conducted in the Cayman Islands.
| · | Real Estate Operations rents Company owned real estate located in New York and Connecticut. |
| · | Outside Maintenance, Shelter Cleaning Operations and Electrical Contracting provide outside maintenance and shelter cleaning services to outdoor advertising companies and government agencies in New York, New Jersey, Arizona and California and electrical construction services to a broad range of commercial, industrial, institutional and governmental customers in New York. |
| · | Insurance Operations assumes reinsurance of worker's compensation, vehicle liability and covenant liability of the Company and its affiliated companies from unrelated insurance companies based in the United States of America |
11
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Revenue Recognition—Real Estate Operations:
The Company recognizes revenue in accordance with ASC No. 840-20-25 which requires that revenue be recognized on a straight-line basis over the term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. In those instances in which the Company funds tenant improvements and the improvements are deemed to be owned by the Company, revenue recognition will commence when the improvements are substantially completed and possession or control of the space is turned over to the tenant. When the Company determines that the tenant allowances are lease incentives, the Company commences revenue recognition when possession or control of the space is turned over to the tenant for tenant work to begin. The properties are being leased to tenants under operating leases. The excess revenue recognized over amounts due pursuant to the underlying leases amounted to approximately $4,968,000 and $3,883,000 at September 30, 2009 and December 31, 2008, respectively (see Note 4).
Property operating expense recoveries from tenants of common area maintenance, real estate and other recoverable costs are recognized in the period the related expenses are incurred.
Revenue Recognition—Outside Maintenance and Shelter Cleaning Operations:
Cleaning and maintenance revenue is recognized upon completion of the related service.
Revenue Recognition—Electrical Contracting Operations:
The Company recognizes revenues from long-term construction contracts on the percentage-of-completion method in accordance with ASC No. 605-35. Percentage-of-completion is measured principally by the percentage of costs incurred to date for each contract to the estimated total costs for such contract at completion.
Revenue Recognition—Insurance Operations:
Premiums are recognized as revenue on a pro-rata basis over the policy term. The portion of premiums that will be earned in the future are deferred and reported as unearned premiums.
Earnings Per Share Information:
In accordance with ASC No. 260-10-45, the Company presents both basic and diluted earnings (loss) per share. Basic earnings (loss) per share excludes dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower per share amount. The stock option awards were excluded from the computation of diluted earnings per share because the awards would have been antidilutive for the periods presented.
Discontinued Operations:
The condensed consolidated financial statements of the Company present the operations of the Paratransit Operations as discontinued operations in accordance with ASC No. 205-20-05 for the three and nine months ended September 30, 2009 and 2008.
Cash and Cash Equivalents:
The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.
12
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Restricted Cash:
Restricted cash includes certificates of deposit amounting to $408,000 at December 31, 2008, that were on deposit with various government agencies as collateral to meet statutory self-insurance funding requirements. In addition, at September 30, 2009 and December 31, 2008 AIG held $1,387,346 and $1,598,358, respectively, on behalf of the Company that was restricted by AIG for the purpose of the payment of insured losses.
Accounts Receivable:
Accounts receivable consist of trade receivables recorded at the original invoice amounts, less an estimated allowance for uncollectible accounts. Trade credit is generally extended on a short-term basis; thus trade receivables generally do not bear interest. Trade receivables are periodically evaluated for collectibility based on past credit histories with customers and their current financial conditions. Changes in the estimated collectibility of trade receivables are recorded in the results of operations for the periods in which the estimates are revised. Trade receivables that are deemed uncollectible are offset against the allowance for uncollectible accounts. The Company generally does not require collateral for trade receivables.
Available for Sale Securities:
The Company accounts for debt and equity securities as available-for-sale securities in accordance with ASC No. 320-10-35. Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date.
Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income, a component of stockholders’ equity. Interest on securities is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in the accompanying condensed consolidated statements of income. The cost of securities sold is based on the specific identification method. Estimated fair value is determined based on quoted market prices.
Income Taxes:
The Company is organized and conducts its operations to qualify as a REIT for federal income tax purposes. Accordingly, the Company is generally not subject to federal income taxation on that portion of its income that qualifies as REIT taxable income, to the extent that it distributes at least 90% of its taxable income to its shareholders and complies with certain other requirements as defined under Section 856 through 860 of the Code.
In connection with the RMA, the Company is permitted to participate in certain activities so long as these activities are conducted by entities which elected to be treated as taxable subsidiaries under the Code. As such, the Company is subject to federal, state and local taxes on the income from these activities. The Company accounts for income taxes under the asset and liability method, as required by the provisions of ASC No. 740-10-30. Under this method, deferred tax assets and liabilities are established based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.
During January 2008, the Company elected to change its year end from June 30th to December 31st. As a result, the Company filed a tax return for the period July 1, 2007 through December 31, 2007 which included the results of operations for subsidiaries that qualify for REIT status. The tax period did not change for the taxable REIT subsidiaries. During February 2009, the taxable REIT subsidiaries elected to change their fiscal year end from June 30th to December 31st and as a result will file a tax return for the period July 1, 2008 to December 31, 2008.
13
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
ASC No. 740-10-65 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC No. 740-10-65, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC No. 740-10-65 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. At the date of adoption, and as of September 30, 2009 and December 31, 2008, the Company does not have a liability for unrecognized tax benefits.
Green filed its final tax return for the period January 1, 2007 through March 29, 2007. Green is subject to U.S. Federal or state income tax examinations by tax authorities for years after 2004. During the periods open to examination, the Company has net operating loss and tax credit carry forwards for U.S. Federal and state tax purposes that have attributes from closed periods. Since these net operating losses and tax credit carry forwards may be utilized in future periods, they remain subject to examination. The Company's policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of September 30, 2009, the Company has no accrued interest or penalties related to uncertain tax positions. The Company believes that it has not taken any uncertain tax positions that would impact its condensed consolidated financial statements as of September 30, 2009.
Green and its subsidiary were under examination by the Internal Revenue Service for its U.S. corporate income tax return for the tax year ended December 31, 2005. The audit was completed in 2008 and there were no adjustments proposed in connection with the examination.
Comprehensive Income:
The Company follows the provisions of ASC No. 220-10-45, which sets forth rules for the reporting and display of comprehensive income and its components. ASC No. 220-10-45 requires unrealized gains or losses on the Company's available-for-sale securities to be included in comprehensive income, net of taxes and as a component of stockholders’ equity.
Environmental Matters:
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information become available.
Environmental costs are capitalized if the costs extend the life of the property, increase its capacity, and/or mitigate or prevent contamination from future operations. Environmental costs are also capitalized in recognition of legal asset retirement obligations resulting from the acquisition, construction and/or normal operation of a long-lived asset. Costs related to remedial investigation and feasibility studies, environmental contamination treatment and cleanup are charged to expense. Estimated future incremental operations, maintenance and management costs directly related to remediation are accrued when such costs are probable and estimable (see Notes 6 and 11).
Insurance Liabilities:
The liability for losses and loss-adjustment expenses includes an amount for claims reported and a provision for adverse claims development. The liability for claims reported is based on the advice of independent legal counsel, while the liability for adverse claims development is based on management’s best estimates. Such liabilities are necessarily based on
14
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
estimates and, while management believes that the amounts are adequate, the ultimate liabilities may be in excess of or less than the amounts recorded and it is reasonably possible that the expectations associated with these amounts could change in the near-term (that is within one year) and that the effect of such changes could be material to the condensed consolidated financial statements. The methods for making such estimates and for establishing the resulting liabilities are continually reviewed, and any adjustments are reported in current earnings.
Concentrations of Credit Risk:
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash equivalents, which from time-to-time exceed the Federal depository insurance coverage. Cash balances are insured by the Federal Deposit Insurance Corporation up to $250,000 through December 31, 2013.
Derivative Financial Instruments:
The Company utilizes derivative financial instruments, principally interest rate caps, to manage its exposure in fluctuations to interest rates related to the Company’s floating rate debt. The Company has established policies and procedures for risk assessment, and the approval, reporting and monitoring of derivative financial instrument activities. The Company has not entered into, and does not plan to enter into, derivative financial instruments for trading or speculative purposes. Additionally, the Company has a policy of only entering derivative contracts with major financial institutions.
The Company accounts for derivative financial instruments in accordance with ASC No. 815-10-10 which requires an entity to measure derivative instruments at fair value and to record them in the condensed consolidated balance sheet as an asset or liability, depending on the Company’s rights or obligations under the applicable derivative contract with any change in fair value as a component of interest expense.
Stock-Based Compensation:
The Company has a stock-based compensation plan, which is described in Note 8. The Company accounts for stock based compensation in accordance with ASC No. 718-30-30, which establishes accounting for stock-based awards exchanged for employee services. Under the provisions of ASC No. 718-10-35, share-based compensation cost is measured at the grant date, based on the fair value of the award established by usage of the Black-Scholes option pricing model, and is recognized ratably as expense over the employee’s requisite service period (generally the vesting period of the equity grant).
Recently Issued Accounting Pronouncements:
In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05 which amends Accounting ASC No. 820-10, Fair Value Measurements and Disclosures, for the fair value measurement of liabilities not exchanged in an orderly transaction. The guidance provided is effective for the first reporting period (including interim periods) beginning after issuance. The adoption of ASU No. 2009-05 did not have a material effect on the Company’s Consolidated Financial Statements.
In June 2009, the FASB issued a standard that established the FASB Accounting Standards Codification TM (“ASC”) and amended the hierarchy of generally accepted accounting principles such that the ASC became the single source of authoritative nongovernmental U.S. GAAP. The ASC did not change current U.S. GAAP, but was intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All previously existing accounting standard documents were superseded and all other accounting literature not included in the ASC is considered non-authoritative. New accounting standards issued subsequent to June 30, 2009 are communicated by the FASB through Accounting Standards Updates (ASUs). The adoption of ASC had no impact on the Company’s Consolidated Financial Statements.
15
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
In May 2009, the FASB issued ASC No. 855-10 (formerly Statement of Financial Accounting Standards No. 165, “Subsequent Events”), which establishes general standards of accounting and disclosure for events that occur after the balance sheet date but before financial statements are available to be issued, including disclosure of the date through which subsequent events have been evaluated and whether the date corresponds with the release of the financial statements. ASC No. 855-10 is effective for interim and annual periods ending after June 15, 2009. The adoption of ASC No. 855-10 did not have a material effect on the Company’s Consolidated Financial Statements.
In April 2009, the FASB issued an update to ASC No. 805-20 (formerly FASB Staff Position No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies”). ASC No. 805-20 provides guidance on accounting for business combinations. It addresses issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. ASC No. 805-20 applies to all assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of ASC No. 805-20 did not have a material effect on the Company’s Consolidated Financial Statements.
In April 2009, the FASB issued an update to ASC No. 820-10 (formerly FASB Staff Position No. FSP 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”). ASC No. 820-10 provides additional guidance on determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurement. ASC No. 820-10 applies to all fair value measurements prospectively and is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of ASC No. 820-10 did not have a material effect on the Company’s Consolidated Financial Statements.
In April 2009, the FASB issued an update to ASC No. 825-10 (formerly FASB Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”). ASC No. 825-10 requires the Company to disclose in the notes of its interim financial statements as well as its annual financial statements, the fair value of all financial instruments. ASC No. 825-10 applies to all financial instruments within the scope of ASC 825-10 and is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Because ASC No. 825-10 impacts disclosure, the Company does not currently expect its adoption to have a material effect on the Company’s Consolidated Financial Statements.
In April 2009, the FASB issued an update to ASC No. 320-10 (formerly FASB Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”). ASC No. 320-10 provides greater clarity about the credit and noncredit component of an other-than-temporary impairment event and more effectively communicates when it has occurred. ASC No. 320-10 applies only to debt securities and is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. When adopting ASC No. 320-10, the Company will be required to record a cumulative-effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other-than-temporary impairment from retained earnings to accumulated other comprehensive income. The adoption of ASC No. 320-10 did not have a material effect on the Company’s Consolidated Financial Statements.
3. AVAILABLE FOR SALE SECURITIES:
The Company accounts for debt and equity securities as available-for-sale securities in accordance with ASC No. 320-10-35. Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income (loss), a component of stockholders’ equity. Interest on securities is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in the accompanying consolidated statement of income.
16
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
The following is a summary of available-for-sale securities at September 30, 2009 and December 31, 2008 (in thousands):
| Available-for-Sale Securities | ||||||||||||||||
| September 30, 2009 | Face Value | Amortized Cost | Unrealized Gains | Estimated Fair Value | ||||||||||||
| Equity securities | $ | - | $ | - | $ | 289 | $ | 289 | ||||||||
| Money market fund | 1,246 | 1,246 | - | 1,246 | ||||||||||||
| U.S. Treasury/U.S. Government debt securities | 1,982 | 1,990 | 90 | 2,080 | ||||||||||||
| Total available-for-sale securities | $ | 3,228 | $ | 3,236 | $ | 379 | $ | 3,615 | ||||||||
| Available-for-Sale Securities | ||||||||||||||||
| December 31, 2008 | Face Value | Amortized Cost | Unrealized Gains | Estimated Fair Value | ||||||||||||
| Equity securities | $ | - | $ | - | $ | 265 | $ | 265 | ||||||||
| Money market fund | 2,050 | 2,050 | - | 2,050 | ||||||||||||
| U.S. Treasury/U.S. Government debt securities | 1,985 | 1,995 | 3 | 1,998 | ||||||||||||
| Total available-for-sale securities | $ | 4,035 | $ | 4,045 | $ | 268 | $ | 4,313 | ||||||||
Other comprehensive income for the three months ended September 30, 2009 and year ended December 31, 2008 includes net unrealized holding gains of approximately $403,000 and $292,000, respectively. No amounts were reclassified from other comprehensive income to income for the three and nine months ended September 30, 2009 or for the year ended December 31, 2008.
4. OTHER ASSETS:
Other assets consist of the following (in thousands):
| September 30, | December 31, | |||||||
| 2009 | 2008 | |||||||
| Prepaid expenses | $ | 829 | $ | 215 | ||||
| Prepaid and refundable income taxes | 152 | 512 | ||||||
| Rental income in excess of amount billed | 4,968 | 3,883 | ||||||
| Other assets | 1,132 | 550 | ||||||
| $ | 7,081 | $ | 5,160 | |||||
17
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
5. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES:
The liability for losses and loss adjustment expenses in connection with certain previous insurance claims at September 30, 2009 and December 31, 2008 is summarized as follows (in thousands):
September 30, 2009 | December 31, 2008 | |||||||
| Reported claims | $ | $1,614 | $ | 1,767 | ||||
| Provision for incurred but not reported claims | 217 | 273 | ||||||
| $ | 1,831 | $ | 2,040 | |||||
Management is responsible for estimating the provisions for outstanding losses. An actuarial study was independently completed which estimated that at December 31, 2008, the total outstanding losses at an expected level, are between approximately $1,362,000 and $1,697,000. In their analysis, the actuaries have used industry based data which may or may not be representative of the Company's ultimate liabilities.
In the opinion of management, the provision for losses and loss-adjustment expenses is adequate to cover the expected ultimate liability under the insurance policies written. However, consistent with most companies with similar operations, the Company's estimated liability for claims is ultimately based on management's expectations of future events. It is reasonably possible that the expectations associated with these amounts could change in the near term (that is, within one year) and that the effect of such changes could be material to the condensed consolidated financial statements.
6. OTHER LIABILITIES:
Other liabilities consist of the following (in thousands):
| September 30, | December 31, | |||||||
| 2009 | 2008 | |||||||
| Accrued dividends | $ | 1,078 | $ | 1,078 | ||||
| Accrued litigation liability | 1,713 | - | ||||||
| Accrued earnings and profits distribution | 289 | 378 | ||||||
| Accrued professional fees | 133 | 83 | ||||||
| Accrued wages | 258 | 127 | ||||||
| Deposit liability | 465 | 252 | ||||||
| Deferred tax liability | 158 | 158 | ||||||
| Reserve personal property and damage claims | 678 | 631 | ||||||
| Accrued environmental costs | 1,171 | 1,551 | ||||||
| Prepaid rent | 378 | 375 | ||||||
| Other | 842 | 390 | ||||||
| Liabilities of discontinued former bus operations | 853 | 868 | ||||||
| Accrued vacation | 107 | 107 | ||||||
| $ | 8,123 | $ | 5,998 | |||||
18
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
7. SECURED REVOLVING CREDIT FACILITY:
ING Financing Agreement:
On July 2, 2007, the Company entered into a loan agreement, dated as of June 30, 2007 (the “Loan Agreement”), among certain direct and indirect subsidiaries of the Company, namely, Green Acquisition, Inc., Triboro Acquisition, Inc., Jamaica Acquisition, Inc., 165-25 147th Avenue, LLC, 49-19 Rockaway Beach Boulevard, LLC, 85-01 24th Avenue, LLC, 114-15 Guy Brewer Boulevard, LLC, (collectively, the “Borrowers”); and ING USA Annuity and Life Insurance Company; ING Life Insurance and Annuity Company; Reliastar Life Insurance Company; and Security Life of Denver Insurance Company (collectively, the “Lenders”). Pursuant to the terms of the Loan Agreement, the Lenders will provide multiple loan facilities in the amounts and on the terms and conditions set forth in such Loan Agreement. The aggregate of all loan facilities under the Loan Agreement shall not exceed $72.5 million. On July 2, 2007, the Borrowers made an initial term loan draw down of $17.0 million on the facility. In addition to the initial term loan, in October 2007, the Lenders collectively made a mortgage loan of $1.0 million and advanced an additional $2.0 million to the Borrowers. In February 2008, there was an additional draw under the facility of approximately $23.2 million. Interest on the loans is paid monthly. The interest rate on both the initial draw-down and mortgage loan is fixed at 6.59% per annum and the interest rate on the additional draw floats at a spread over one month LIBOR, 1.65% at September 30, 2009. In addition, there is a one-tenth of one percent non-use fee on the unused portion of the facility. Principal is payable on the maturity date July 1, 2010, unless otherwise extended or renewed. At September 30, 2009 and December 31, 2008, the amount outstanding under the Loan Agreement was approximately $43.2 million.
The loan facilities are collateralized by: (1) an Assignment of Leases and Rents on four bus depot properties (the “Depots”) owned by certain of the Borrowers and leased to the City of New York, namely (a) 49-19 Rockaway Beach Boulevard; (b) 165-25 147th Avenue; (c) 85-01 24th Avenue and (d) 114-15 Guy Brewer Boulevard; (2) Pledge Agreements under which (i) GTJ REIT pledged its 100% stock ownership in each of: (a) Green Acquisition; (b) Triboro Acquisition, and (c) Jamaica Acquisition, (ii) Green Acquisition pledged its 100% membership interest in each of (a) 49-19 Rockaway Beach Boulevard, LLC and (b) 165-25 147th Avenue, LLC, (iii) Triboro Acquisition pledged its 100% membership interest in 85-01 24th Avenue, LLC, and (d) Jamaica Acquisition pledged its 100% membership interest in 114-15 Guy Brewer Boulevard, LLC, and (3) a LIBOR Cap Security Agreement under which GTJ Rate Cap LLC, a wholly owned subsidiary of the Company, pledged its interest in an interest rate cap transaction evidenced by the Confirmation and ISDA Master Agreement, dated as of December 13, 2006, with SMBC Derivative Products Limited. The Company had assigned its interest in the interest rate cap to GTJ Rate Cap LLC prior to entering into the Loan Agreement. The $1.0 million mortgage loan is secured by a mortgage in the amount of $250,000 on each of the Depots collectively.
For the nine months ended September 30, 2009 and the year ended December 31, 2008, the fair value of the interest rate cap associated with the debt was insignificant.
The credit facility may be used to fund acquisitions, dividend distributions, working capital and other general corporate purposes.
In addition to customary non-financial covenants, the Company is obligated to comply with certain financial covenants. As of September 30, 2009, the Company is in compliance with its non-financial and financial covenants.
8. STOCKHOLDERS’ EQUITY:
Common Stock
The Company is authorized to issue 100,000,000 shares of common stock, $.0001 par value per share. The Company has authorized the issuance of up to 15,564,454 shares of the Company’s common stock in connection with the Reorganization and the earnings and profits distribution, of which 13,472,281 shares have been issued (see Note 1).
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors.
19
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
8. STOCKHOLDERS’ EQUITY (Continued):
Dividend Distributions
On November 9, 2009, the Company declared distributions of $0.08 per share of common stock, payable with respect to the three months ended December 31, 2009, to stockholders of record at the close of business on December 31, 2009. The Company expects to pay this distribution on or about January 15, 2010.
The following table presents dividends declared by the Company on its common stock from January 1, 2009 through September 30, 2009:
| Declaration | Quarter | Record | Payment | Dividend | ||||
| Date | Ended | Date | Date | Per Share | ||||
| March 23, 2009 | March 31, 2009 | March 31, 2009 | April 15, 2009 | $ 0.08 | ||||
| June 10, 2009 | June 30, 2009 | June 30, 2009 | July 15, 2009 | $ 0.08 | ||||
| August 10, 2009 | September 30, 2009 | September 30, 2009 | October 15, 2009 | $ 0.08 |
Stock Option Plan
On June 11, 2007, the Board of Directors approved the Company’s 2007 Incentive Award Plan (the “Plan”). The effective date of the Plan was June 11, 2007, subject to stockholder approval. The stockholders of the Company approved the Plan on February 7, 2008.
The Plan covers directors, officers, key employees and consultants of the Company. The purposes of the Plan are to further the growth, development and financial success of the Company and to obtain and retain the services of the above individuals considered essential to the long term success of the Company.
The Plan may provide for awards in the form of restricted shares, incentive stock options, non-qualified stock options and stock appreciation rights. The aggregate number of shares of common stock which may be awarded under the Plan is 1,000,000 shares. On February 7, 2008, 55,000 options were granted to non-employee directors and vested immediately and 200,000 options were granted to key officers of the Company and have a three year vesting period. All options expire ten years from the date of grant. At September 30, 2009, 255,000 options were outstanding under the Plan, of which 116,111 were exercisable. At September 30, 2009, 745,000 shares of the Company’s common stock remain available for future issuance.
The fair value of each option grant is estimated on the date of grant using the Black Scholes Option Pricing Model. The fair value of options granted on February 7, 2008 was $1.90 per share. The following assumptions were used for the options granted:
Risk free interest rate: | 3.39% |
Expected dividend yield: | 3.59% |
Expected life of option in years: | 7.94 |
Expected volatility: (1) | 21.00% |
20
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
8. STOCKHOLDERS’ EQUITY (Continued):
The following table presents the activity of options outstanding under the Plan for the nine months ended September 30, 2009:
| Options | Number of Options | Weighted-Average and Exercise Price Per Share | Weighted-Average Grant Date Fair Value Per Share | ||||||||||
| Outstanding at December 31, 2008 | 255,000 | $ | 11.14 | $ | 1.90 | ||||||||
| Granted | - | - | - | ||||||||||
| Exercised | - | - | - | ||||||||||
| Forfeited /Expired | - | - | - | ||||||||||
Outstanding at September 30, 2009 (2) | 255,000 | $ | 11.14 | $ | 1.90 | ||||||||
| Options vested and exercisable at September 30, 2009 | 116,111 | $ | 11.14 | $ | 1.90 | ||||||||
All outstanding and exercisable options have a remaining contractual life of approximately 9.8 years.
________________________
| (1) | Although the Company is subject to the reporting requirements of the Securities and Exchange Commission, the Company’s stock is not listed on an exchange and there is no readily available market for the stock. Therefore, the Company is not able to determine the historical volatility of its common stock. As a result, the volatility was estimated from the historical volatilities of the common stock of the exchange traded comparable firms of both REITs and operating companies similar to the Company’s taxable REIT subsidiaries. |
| (2) | The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at September 30, 2009 and the related exercise price of the underlying options, was $0 for outstanding options and exercisable options as of September 30, 2009. |
As of September 30, 2009, there was approximately $167,000 of unamortized stock compensation related to nonvested stock grants awarded under the Plan. The remaining unamortized expense is expected to be recognized over a weighted average period of 3 years. For the three and nine months ended September 30, 2009 and 2008, stock compensation expense was approximately $32,000, $94,000, $32,000 and $189,000, respectively.
Special Distribution of Earnings and Profits
On August 20, 2007, the Board of Directors of the Company declared a special distribution of accumulated earnings and profits on the Company’s common stock of $6.40 per share of common stock, payable in $20,000,000 of cash and 3,775,400 of the Company’s common stock. For the purposes of the special distribution, the Company’s common stock was valued at $11.14 per share, as indicated in the proxy statement/prospectus dated February 9, 2007 filed with the Securities and Exchange Commission and disseminated to the stockholders of the Bus Companies in connection with the March 26, 2007 special joint meeting of the stockholders of the Bus Companies at which meeting such stockholders voted on a reorganization of those companies with and into the Company. The special distribution aggregated approximately, $62,060,000. The holders of the Company’s shares, and the holders of shares of the Bus Companies, as of the close of business on August 20, 2007, the record date for the special distribution (the “Holders”), were eligible for the special distribution. The Holders were required to make an election as to the amount of the Company’s shares and/or cash the Holders wished to receive as their respective portions of the special distribution. Holders were advised, due to the limitation of the aggregate amount of cash available for the special distribution, that their actual distribution might not be in the proportion of cash and the Company’s shares they elected, but could be based on a proration of the available cash after all elections (i.e. not on a first come-first served basis). The Company calculated the proportion of cash and the Company’s shares that were distributed to the Holders based upon the Holder’s election and the amount of cash available for the special distribution.
21
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
8. STOCKHOLDERS’ EQUITY (Continued):
As of September 30, 2009, cash of approximately $19.7 million and 3,775,400 shares of the Company’s common stock have been distributed to the Holders. The remaining payable balance of approximately $0.3 million is included in other liabilities in the accompanying condensed consolidated balance sheet at September 30, 2009. The cash payment was funded with borrowings under the credit facility. (see Note 7).
9. EARNINGS PER SHARE:
In accordance with ASC No. 260-10-45, basic earnings per common share ("Basic EPS") is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding. Diluted earnings per common share (“Diluted EPS”) is computed by dividing net income by the weighted-average number of common shares and dilutive common share equivalents and convertible securities then outstanding. There were no common stock equivalents for any of the periods presented in the Company's consolidated statements of operations.
The following table sets forth the computation of basic and diluted per share information (in thousands, except share and per share data):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net (loss) income | $ | (188 | ) | $ | (602 | ) | $ | 3,826 | $ | 712 | ||||||
| Denominator: | ||||||||||||||||
| Weighted average common shares outstanding - basic and diluted | 13,472,281 | 13,472,281 | 13,472,281 | 13,472,281 | ||||||||||||
| Basic and Diluted Per Share Information: | ||||||||||||||||
| Net (loss) income per share - basic and diluted | $ | (0.01 | ) | $ | (0.04 | ) | $ | 0.28 | $ | 0.05 | ||||||
10. RELATED PARTY TRANSACTIONS:
Douglas A. Cooper, an officer and director of the Company and the nephew of Jerome Cooper (Chairman of the Board) is a Managing partner of Ruskin, Moscou, Faltischek, P.C. (“RMF”), which has acted as counsel to the Company for approximately eleven years. Fees incurred by the Company to RMF as of and for the three and nine months ended September 30, 2009 and 2008 were approximately $17,000, $420,000, $383,000 and $642,000, respectively.
Paul A. Cooper is an officer and director of the Company and is the son of Jerome Cooper (Chairman of the Board). In April, 2005, Lighthouse 444 Limited Partnership (“Lighthouse”), the owner of the building at 444 Merrick Road, Lynbrook, NY, and of which Paul A. Cooper is a general partner, leased 5,667 square feet of office and storage space to the Bus Companies for a term of five years at an annual rent of approximately $160,000 for the first year, increasing to approximately $177,000 for the fifth year. This space is currently occupied by the Company. In connection with this lease, there was a $231,000 expenditure (allowance) by the landlord for leasehold improvements. This lease will expire in April 2010. In February 2008, Lighthouse leased an adjoining 3,545 square feet of space to the Company at an annual rent of approximately $106,000, which replaced 2,500 square feet of space covered by the prior lease having annual rent of $37,000.
Stanley Brettschneider, an officer of the Company’s taxable REIT subsidiaries, is the father of the majority owner of Varsity Bus Co., Inc. (“Varsity”) a tenant at one of the Company’s rental properties. Varsity entered into a lease which terminates in 2010 and is subject to four 5 year options to extend the term of the lease in each case at a rent equal to 90% of market rental of the leasehold at the time of the extension. Varsity also utilizes some of the Company’s computer systems for a monthly fee. In addition, Mr. Brettschneider is a compensated employee of Varsity Bus Co., Inc.
Michael Kessman, the Chief Accounting Officer of the Company, provides accounting services to Varsity Bus Co., Inc. In addition, Mr. Kessman is also a member of Varsity’s Board of Directors.
22
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
11. COMMITMENTS AND CONTINGENCIES:
Legal Matters:
Appraisal Proceedings
On March 26, 2007, there was a joint special meeting of the shareholders of the Bus Companies. The business considered at the meeting was the merger of: Green with and into Green Acquisition, Inc.; Triboro with and into Triboro Acquisition, Inc.; and Jamaica with and into Jamaica Acquisition, Inc. Appraisal rights were perfected by shareholders of the Bus Companies who would have received approximately 366,133 shares of the Company’s common stock to be issued following the mergers. The mergers were carried out on March 29, 2007. Consequently, the Company made good faith offers to such shareholders based on the value of the Company’s common share of $7.00 per share, eighty percent (80%) of which was advanced to them. On May 25, 2007, Green Acquisition, Triboro Acquisition and Jamaica Acquisition, commenced appraisal proceedings in Nassau County Supreme Court, as required by the New York Business Corporation Law. Eight of the shareholders (the “Claimants”) who sought appraisal rights (the others had either settled or withdrawn their demands) have answered the petition filed in connection with the appraisal proceeding and moved for pre-trial discovery. The Claimants would have received approximately 241,272 shares of the Registrant’s common stock following the mergers of the Bus Companies. Collectively, the Claimants have been paid $1,351,120 (80%) pursuant to the Company’s good faith offer and would be entitled to an additional sum of approximately $338,000 if the good faith offer was paid in full. The claimants are seeking sums substantially in excess of the Company’s good faith offer. A hearing in this matter, which is the equivalent of a trial, commenced on November 10, 2008. The hearing was completed in January 2009. The Court ordered the parties to submit post-trial memoranda prior to its consideration and ruling on the petition. The Company filed the post-trial memorandum on March 27, 2009 and a reply memorandum on April 24, 2009. On September 29, 2009, a decision in the appraisal proceeding involving certain former shareholders of Green Bus Lines, Inc., Triboro Coach Corporation and Jamaica Central Railways, Inc. (collectively, the “Bus Companies”) was issued by the New York State Supreme Court, Nassau County. In the Court’s decision, the Court determined that the equivalent of the fair value of the respondents’ shares in the Bus Companies immediately prior to the consummation of the reorganization was equal to $11.69 per share of GTJ REIT common stock. This decision will result in additional payments due respondents in the aggregate amount of approximately $1.5 million. In addition, the Court awarded respondents’ 50% of their reasonable professional fees and costs, which amount will be determined by a court-appointed attorney/referee. Respondents’ were also awarded interest with respect to the unpaid amount due for the fair value of their shares in the Bus Companies from the valuation date to the payment date. The Company accrued interest of approximately $0.2 million through September 30, 2009 related to the award. In addition to the above, two shareholders were paid an aggregate of $435,457 pursuant to the good faith offer in satisfaction of their claim for appraisal rights, and are not involved in the proceeding described above. These shareholders would have received approximately 62,208 shares.
The Company is involved in several lawsuits and other disputes which arose in the ordinary course of business; however, management believes that these matters will not have a material adverse effect, individually or in the aggregate, on the Company's financial position or results of operations.
Environmental Matters
The Company’s real property has had activity regarding removal and replacement of underground storage tanks. Upon removal of the old tanks, any soil found to be unacceptable was thermally treated off site to burn off contaminants. Fresh soil was brought in to replace earth which had been removed. There are still some levels of contamination at the sites, and groundwater monitoring programs have been put into place at certain locations. In July 2006, the Company entered into an informal agreement with the New York State Department of Environmental Conservation (“NYSDEC”) whereby the Company has committed to a three-year remedial investigation and feasibility study (the “Study”) for all site locations. In conjunction with this informal agreement, the Company has retained the services of an environmental engineering firm to assess the cost of the Study. The Company’s initial engineering report had an estimated cost range with a low-end of the range, of approximately $1.4 million and a high-end range estimate, of approximately $2.6 million, which provided a “worst case” scenario whereby the Company would be required to perform full remediation on all site locations. While management believes that the amount of the Study and related remediation is likely to fall within the estimated cost range, no amount within that range can be determined to be the better estimate. Therefore, management believes that recognition of the low-range estimate was appropriate.
23
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
11. COMMITMENTS AND CONTINGENCIES (Continued):
In May 2008, the Company received an updated draft of the remedial and investigation feasibility study and recorded an additional accrual of approximately $0.9 million for additional remediation costs. As of September 30, 2009 and December 31, 2008 the Company has recorded a liability for remediation costs of approximately $1.2 million and $1.6 million, respectively. Presently, the Company is not aware of any claims or remediation requirements from any local, state or federal government agencies. Each of the properties is in a commercial zone and is still used as transit depots, including maintenance of vehicles.
Paratransit Operations
In February 2008, the Company was notified by the New York City Transit Agency of the Metropolitan Transit Authority (the "Agency") that a Request for Proposal to renew the Company's existing paratransit service contract after September 30, 2008 would not be considered by the Agency. As a result of this action by the agency, the Company exited the Paratransit Operations business on September 30, 2008 and accordingly, the results have been presented as discontinued operations on the Company’s consolidated financial statements for all periods presented. The Paratransit Operations were acquired as part of the Reorganization that occurred on March 29, 2007.
The Paratransit Operations' revenues and net ilosses for the three and nine months ended September 30, 2009 and 2008 were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues | $ | - | $ | 2,205 | $ | - | $ | 9,422 | ||||||||
Net loss | $ | (38 | ) | $ | (1,272 | ) | $ | (4 | ) | $ | (1,679 | ) | ||||
12. SIGNIFICANT TENANT:
Four tenants, included in the condensed consolidated statement of income, constituted 100% of rental revenue for the three and nine months ended September 30, 2009 and 2008.
13. FAIR VALUE:
Fair Value of Financial Instruments
ASC No. 825-10-50 requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. ASC No. 825-10-65 requires the Company to disclose in the notes of its interim financial statements as of the second quarter of 2009, as well as its annual financial statements, the fair value of all financial instruments as required ASC No. 825-10-50. ASC No. 825-10-65 applies to all financial instruments within the scope of ASC No. 825-10-50.
The following table summarizes the carrying values and the estimated fair values of financial instruments as of September 30, 2009 and December 31, 2008. Fair value estimates are dependent upon subjective assumptions and involve significant uncertainties resulting in variability in estimates with changes in assumptions.
24
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
13. FAIR VALUE (Continued):
| September 30, 2009 | December 31, 2008 | |||||||||||||||
| Carrying | Estimated | Carrying | Estimated | |||||||||||||
| Value | Fair Value | Value | Fair Value | |||||||||||||
Financial assets: | ||||||||||||||||
Available-for-sale securities | $ | 3,615 | $ | 3,615 | $ | 4,313 | $ | 4,313 | ||||||||
Derivative financial instruments | $ | - | $ | - | $ | - | $ | - | ||||||||
Financial liabilities: | ||||||||||||||||
Secured revolving credit facility | $ | 43,215 | $ | 43,215 | $ | 43,215 | $ | 43,215 | ||||||||
Fair Value Measurement
The Company determines fair value in accordance ASC No. 820-10-05 for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements.
Fair value is defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.
Assets and liabilities disclosed at fair values are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC No. 820-10-35 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
| · | Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. |
| · | Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. Level 2 inputs include quoted market prices in markets that are not active for an identical or similar asset or liability, and quoted market prices in active markets for a similar asset or liability. |
| · | Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. These valuations are based on significant unobservable inputs that require a considerable amount of judgment and assumptions. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. |
Determining which category an asset or liability falls within the hierarchy requires significant judgment and the Company evaluates its hierarchy disclosures each quarter.
The Company measures certain financial assets and financial liabilities at fair value on a recurring basis, including available-for-sale securities and derivative financial instruments. The fair value of these financial assets and liabilities was determined using the following inputs as of September 30, 2009.
25
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
13. FAIR VALUE (Continued):
| Fair Value Measurements | ||||||||||||||||||||
| Carrying | Fair | Using Fair Value Hierarchy | ||||||||||||||||||
| Value | Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Available-for-sale securities | $ | 3,615 | $ | 3,615 | $ | 3,615 | $ | - | $ | - | ||||||||||
Derivative financial instruments (1) | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
(1) These are valued using Level 2 inputs. At September 30, 2009 the fair value was insignificant.
Available-for-sale securities: Fair values are approximated on current market quotes received from financial sources that trade such securities.
Derivative financial instruments: Fair values are approximated on current market data received from financial sources that trade such instruments and are based on prevailing market data and derived from third party proprietary models based on well recognized financial principles and reasonable estimates about relevant future market conditions. The value of these instruments are included in other assets and other liabilities on the consolidated balance sheet. In accordance with ASC No. 820-10-35, the Company incorporates credit valuation adjustments in the fair values of its derivative financial instruments to reflect counterparty nonperformance risk.
14. SEGMENTS:
Segment Information:
The operating segments reported below are segments of the Company for which separate financial information is available and for which operating results as measured by income from operations are evaluated regularly by executive management in deciding how to allocate resources and in assessing performance. The accounting policies of the business segments are the same as those described in the Summary of Significant Accounting Policies (see Note 2).
As a result of the Company’s exit from the Paratransit business on September 30, 2008 (See Note 11), the Company primarily operates in three reportable segments: Real Estate Operations, Outside Maintenance and Shelter Cleaning Operations, and Insurance Operations, all of which are conducted throughout the U.S., with the exception of the Insurance Operations which are conducted in the Cayman Islands.
Real Estate Operations rents Company-owned real estate located in New York and Connecticut.
Outside Maintenance, Shelter Cleaning Operations and Electrical Contracting provide outside maintenance and cleaning services to outdoor advertising companies and governmental agencies in New York, New Jersey, Arizona and California and electrical construction services to a broad range of commercial, industrial, institutional and governmental customers in New York.
Insurance Operations assumes reinsurance of worker's compensation, vehicle liability and covenant liability of the Company and its affiliated Companies from unrelated insurance companies based in the United States of America.
The summarized segment information (excluding discontinued operations), as of and for the three and nine months ended September 30, 2009 and 2008 are as follows (in thousands):
26
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
14. SEGMENTS (Continued):
| Three Months Ended September 30, 2009 | ||||||||||||||||||||
| Real Estate Operations | Outside Maintenance Operations | Insurance Operations | Eliminations | Total | ||||||||||||||||
| Operating revenue | $ | 3,305 | $ | 7,977 | $ | - | $ | (102 | ) | $ | 11,180 | |||||||||
| Operating expenses | 1,053 | 8,095 | 34 | - | 9,182 | |||||||||||||||
| Operating income (loss) | 2,252 | (118 | ) | (34 | ) | (102 | ) | 1,998 | ||||||||||||
| Other income (expense) | (2,245 | ) | 12 | (37 | ) | 102 | (2,168 | ) | ||||||||||||
| Income (loss) from continuing operations before income taxes | 7 | (106 | ) | (71 | ) | - | (170 | ) | ||||||||||||
| Benefit from income taxes | - | 20 | - | - | 20 | |||||||||||||||
| Income (loss) from continuing operations | $ | 7 | $ | (86 | ) | $ | (71 | ) | $ | - | $ | (150 | ) | |||||||
| Capital expenditures | $ | 234 | $ | 118 | $ | - | $ | - | $ | 352 | ||||||||||
| Depreciation and amortization | $ | 346 | $ | 202 | $ | - | $ | - | $ | 548 | ||||||||||
| Total assets (1) | $ | 170,554 | $ | 14,472 | $ | 2,754 | $ | (42,653 | ) | $ | 145,127 | |||||||||
| Three Months Ended September 30, 2008 | ||||||||||||||||||||
| Real Estate Operations | Outside Maintenance Operations | Insurance Operations | Eliminations | Total | ||||||||||||||||
| Operating revenue | $ | 2,822 | $ | 7,648 | $ | - | $ | (272 | ) | $ | 10,198 | |||||||||
| Operating expenses | 1,203 | 7,503 | 116 | (411 | ) | 8,411 | ||||||||||||||
| Operating income (loss) | 1,619 | 145 | (116 | ) | 139 | 1,787 | ||||||||||||||
| Other income (expense) | (457 | ) | 67 | (346 | ) | (139 | ) | (875 | ) | |||||||||||
| Income (loss) from continuing operations before income taxes | 1,162 | 212 | (462 | ) | - | 912 | ||||||||||||||
| Benefit from (provision for) income taxes | 78 | (320 | ) | - | - | (242 | ) | |||||||||||||
| Income (loss) from continuing operations | $ | 1,240 | $ | (108 | ) | $ | (462 | ) | $ | - | $ | 670 | ||||||||
| Capital expenditures | $ | - | $ | 222 | $ | - | $ | - | $ | 222 | ||||||||||
| Depreciation and amortization | $ | 186 | $ | 83 | $ | - | $ | - | $ | 269 | ||||||||||
| Total assets (2) | $ | 181,244 | $ | 15,930 | $ | 3,375 | $ | (57,551 | ) | $ | 142,898 | |||||||||
27
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
14. SEGMENTS (Continued):
| Nine Months Ended September 30, 2009 | ||||||||||||||||||||
| Real Estate Operations | Outside Maintenance Operations | Insurance Operations | Eliminations | Total | ||||||||||||||||
| Operating revenue | $ | 9,842 | $ | 23,065 | $ | - | $ | (306 | ) | $ | 32,601 | |||||||||
| Operating expenses | 3,430 | 22,021 | 118 | - | 25,569 | |||||||||||||||
| Operating income (loss) | 6,412 | 1,044 | (118 | ) | (306 | ) | 7,032 | |||||||||||||
| Other income (expense) | (3,296 | ) | 1 | (213 | ) | 306 | (3,202 | ) | ||||||||||||
| Income (loss) from continuing operations before income taxes | 3,116 | 1,045 | (331 | ) | - | 3,830 | ||||||||||||||
| Benefit from income taxes | - | - | - | - | - | |||||||||||||||
| Income (loss) from continuing operations | $ | 3,116 | $ | 1,045 | $ | (331 | ) | $ | - | $ | 3,830 | |||||||||
| Capital expenditures | $ | 545 | $ | 217 | $ | - | $ | - | $ | 762 | ||||||||||
| Depreciation and amortization | $ | 968 | $ | 322 | $ | - | $ | - | $ | 1,290 | ||||||||||
| Total assets (1) | $ | 170,554 | $ | 14,472 | $ | 2,754 | $ | (42,653 | ) | $ | 145,127 | |||||||||
| Nine Months Ended September 30, 2008 | ||||||||||||||||||||
| Real Estate Operations | Outside Maintenance Operations | Insurance Operations | Eliminations | Total | ||||||||||||||||
| Operating revenue | $ | 9,004 | $ | 23,209 | $ | - | $ | (902 | ) | $ | 31,311 | |||||||||
| Operating expenses | 5,078 | 22,507 | 116 | (842 | ) | 26,859 | ||||||||||||||
| Operating income (loss) | 3,926 | 702 | (116 | ) | (60 | ) | 4,452 | |||||||||||||
| Other income (expense) | (1,375 | ) | (108 | ) | (208 | ) | 60 | (1,631 | ) | |||||||||||
| Income (loss) from continuing operations before income taxes | 2,551 | 594 | (324 | ) | - | 2,821 | ||||||||||||||
| Benefit from (provision for) income taxes | 78 | (508 | ) | - | - | (430 | ) | |||||||||||||
| Income (loss) from continuing operations | $ | 2,629 | $ | 86 | $ | (324 | ) | $ | - | $ | 2,391 | |||||||||
| Capital expenditures | $ | 23,555 | $ | 765 | $ | - | $ | - | $ | 24,320 | ||||||||||
| Depreciation and amortization | $ | 942 | $ | 144 | $ | - | $ | - | $ | 1,086 | ||||||||||
| Total assets (2) | $ | 181,244 | $ | 15,930 | $ | 3,275 | $ | (57,551 | ) | $ | 142,898 | |||||||||
(1) Does not include assets of the discontinued Paratransit operation totaling $166
(2) Does not include assets of the discontinued Paratransit operation totaling $1,720
28
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
On October 27, 2009, the Company received notice from its customer CEMUSA, Inc. that the Services Agreement dated June 26, 2006 between CEMUSA, Inc. and Shelter Express Corp. will terminate on December 31, 2009 in accordance with its terms. The Services Agreement with CEMUSA, Inc. represented annual revenues to the taxable REIT subsidiaries of approximately $11.8 million.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussions contain forward-looking statements that involve numerous risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements as a result of these risks and uncertainties, including those set forth in this report under “Forward-Looking Statements” and in our Report on Form 10-K for the fiscal year ended December 31, 2008 under “Risk Factors.” You should read the following discussion in conjunction with the condensed consolidated financial statements and notes appearing elsewhere in this filing.
Executive Summary
We are a fully integrated, self-administered and self-managed Real Estate Investment Trust (“REIT”), engaged in the acquisition, ownership and management of real properties. We currently own seven rentable parcels of real property, four of which are leased to the City of New York, two of which are leased to commercial tenants (all six on a triple net basis), and one of which a portion is leased to a commercial tenant and the portion that was used by one of our subsidiaries is available for lease. There is an additional property of negligible size which is not rentable. Additionally, in connection with the Tax Relief Extension Act of 1999 (“RMA”), we are permitted to participate in activities outside the normal operations of the REIT so long as these activities are conducted in entities which elect to be treated as taxable subsidiaries under the Internal Revenue Code, as amended (the “Code”), subject to certain limitations. In addition, we own a group of outdoor maintenance businesses. We will consider other investments through taxable REIT subsidiaries should suitable opportunities arise.
We continue to seek opportunities to acquire stabilized properties. To the extent it is in the interests of our stockholders, we will seek to invest in a diversified portfolio of real properties within our geographic area that will satisfy our primary investment objectives of providing our stockholders with stable cash flow, preservation of capital and growth of income and principal without taking undue risk. Because a significant factor in the valuation of income-producing property is the potential for future income, we anticipate that the majority of properties that we will acquire will have both the potential for growth in value and provide for cash distributions to stockholders.
On June 30, 2009, we through our wholly-owned subsidiaries, Shelter Electric Maintenance Corp. and Shelter Electric Acquisition Subsidiary LLC, (collectively, “Shelter Electric”) purchased from Morales Electrical Contracting, Inc. (“Morales”), a Valley Stream, New York based electrical construction company, certain of its assets and certain contracts.
We purchased these assets, free and clear of all liens and other encumbrances, in consideration for the payment of approximately $1.0 million. The $1.0 million purchase price was allocated to identifiable intangibles with approximately $0.3 million allocated to the contracts assumed $0.4 million allocated to the non compete agreement, $0.2 million allocated to customer relationships and $0.1 million allocated to goodwill. Shelter Electric will also provide a line of credit of up to approximately $0.6 million, through a Credit and Security Agreement to finance the completion of two contracts currently in progress. In addition, the former Vice President of Morales has been employed by us to manage and expand the electrical construction operations (subject to usual and customary conditions and restrictive covenants).
Critical Accounting Policies
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that could affect the reported amounts in our consolidated financial statements. Actual results could differ from these estimates. A summary of our significant accounting policies is presented in Note 2 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof. Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements included in this report. Certain of the accounting policies used in the preparation of these consolidated financial statements are particularly important for an understanding of the financial position and results of operations presented in the historical consolidated financial statements included in this report and require the application of significant judgment by management and, as a result, are subject to a degree of uncertainty.
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Revenue Recognition-Real Estate Operations:
We recognize revenue in accordance with ASC No. 840-20-25, which requires that revenue be recognized on a straight-line basis over the term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. In those instances in which we fund tenant improvements and the improvements are deemed to be owned by us, revenue recognition will commence when the improvements are substantially completed and possession or control of the space is turned over to the tenant. When we determine that the tenant allowances are lease incentives, we commence revenue recognition when possession or control of the space is turned over to the tenant for tenant work to begin. The properties are being leased to tenants under operating leases. Minimum rental income is recognized on a straight-line basis over the term of the lease.
Property operating expense recoveries from tenants of common area maintenance, real estate and other recoverable costs are recognized in the period the related expenses are incurred.
Revenue Recognition--Outside Maintenance and Shelter Cleaning Operations:
Cleaning and maintenance revenue is recognized upon completion of the related service.
Revenue Recognition—Electrical Contracting Operations:
We recognize revenues from long-term construction contracts on the percentage-of-completion method in accordance with ASC No. 605-35. Percentage-of-completion is measured principally by the percentage of costs incurred to date for each contract to the estimated total costs for such contract at completion.
Accounts Receivable:
Accounts receivable consist of trade receivables recorded at the original invoice amounts, less an estimated allowance for uncollectible accounts. Trade credit is generally extended on a short-term basis; thus trade receivables generally do not bear interest. Trade receivables are periodically evaluated for collectibility based on past credit histories with customers and their current financial conditions. Changes in the estimated collectibility of trade receivables are recorded in the results of operations for the period in which the estimate is revised. Trade receivables that are deemed uncollectible are offset against the allowance for uncollectible accounts. We generally do not require collateral for trade receivables.
Real Estate Investments:
Upon the acquisition of real estate properties, the fair value of the real estate purchased is allocated to the acquired tangible assets (consisting of land, buildings and buildings improvements) and identified intangible assets and liabilities (consisting of above-market and below-market leases and in-place leases) in accordance with ASC No. 805. We utilize methods similar to those used by independent appraisers in estimating the fair value of acquired assets and liabilities. The fair value of the tangible assets of an acquired property considers the value of the property "as-if-vacant." The fair value reflects the depreciated replacement cost of the asset. In allocating purchase price to identified intangible assets and liabilities of an acquired property, the value of above-market and below-market leases are estimated based on the differences between (i) contractual rentals and the estimated market rents over the applicable lease term discounted back to the date of acquisition utilizing a discount rate adjusted for the credit risk associated with the respective tenants and (ii) the estimated cost of acquiring such leases giving effect to our history of providing tenant improvements and paying leasing commissions, offset by a vacancy period during which such space would be leased. The aggregate value of in-place leases is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property "as-if-vacant," determined as set forth above.
Above and below market leases acquired are recorded at their fair value. The capitalized above-market lease values are amortized as a reduction of rental revenue over the remaining term of the respective leases and the capitalized below-market lease values are amortized as an increase to rental revenue over the remaining term of the respective leases. The value of in-place leases is based on our evaluation of the specific characteristics of each tenant's lease. Factors considered include estimates of carrying costs during expected lease-up periods, current market conditions, and costs to execute similar leases. The value of in-place leases are amortized over the remaining term of the respective leases. If a tenant vacates its space prior to its contractual expiration date, any unamortized balance of the related intangible asset is expensed.
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Asset Impairment:
We apply the provisions of ASC No. 360-10-05 to recognize and measure impairment of long-lived assets. Management reviews each real estate investment for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability is based on an estimate of the future cash flows that are expected to result from the real estate investment's use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If an impairment event exists due to the projected inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair value. Management is required to make subjective assessments as to whether there are impairments in the value of its real estate properties. These assessments have a direct impact on net income, because an impairment loss is recognized in the period that the assessment is made.
Fair Value Measurements:
We determine fair value in accordance with ASC No. 820-10-05 for financial assets and liabilities. ASC No. 820-10-05 defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements.
Fair value is defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.
Assets and liabilities disclosed at fair value are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC No. 820-10-35 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
| · | Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. |
| · | Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. Level 2 inputs include quoted market prices in markets that are not active for an identical or similar asset or liability, and quoted market prices in active markets for a similar asset or liability. |
| · | Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. These valuations are based on significant unobservable inputs that require a considerable amount of judgment and assumptions. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. |
Determining which category an asset or liability falls within the hierarchy requires significant judgment and we evaluate its hierarchy disclosures each quarter.
Income Taxes:
We are organized and conduct our operations to qualify as a REIT for federal income tax purposes. Accordingly, we will generally not be subject to federal income taxation on that portion of our income that qualifies as REIT taxable income, to the extent that we distributes at least 90% of its taxable income to our shareholders and comply with certain other requirements as defined under Section 856 through 860 of the Code.
In connection with the RMA, we are permitted to participate in certain activities so long as these activities are conducted in entities which elected to be treated as taxable subsidiaries under the Code. As such we are subject to federal, state and local taxes on the income from these activities. We account for income taxes under the asset and liability method, as required by the provisions of ASC No. 740-10-30. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and
32
tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
We provide a valuation allowance for deferred tax assets for which we do not consider realization of such assets to be more likely than not.
Stock-Based Compensation:
At September 30, 2009, we have a stock-based compensation plan, which is described in Note 8. We account for stock based compensation pursuant to the provisions of ASC No. 718-30-30, which establishes accounting for stock-based awards exchanged for employee services. Under the provisions of ASC No. 718-10-35, share-based compensation cost is measured at the grant date, based on the fair value of the award established by usage of the Black-Scholes option pricing model, and is recognized ratably as expense over the employee’s requisite service period (generally the vesting period of the equity grant).
33
Results of Operations
| Three Months Ended September 30, 2009 vs. Three Months Ended September 30, 2008 |
The following table sets forth our results of operations for the periods indicated (in thousands):
Three Months Ended September 30, | Increase/(Decrease) | |||||||||||||||
| 2009 | 2008 | Amount | Percent | |||||||||||||
| (Unaudited) | ||||||||||||||||
| Revenues: | ||||||||||||||||
| Property rentals | $ | 3,305 | $ | 2,822 | $ | 483 | 17% | |||||||||
| Outdoor maintenance and cleaning operations | 7,875 | 7,376 | 499 | 7% | ||||||||||||
| Total revenues | 11,180 | 10,198 | 982 | 10% | ||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative expenses | 2,825 | 2,685 | 140 | 5% | ||||||||||||
| Equipment maintenance and garage expenses | 540 | 514 | 26 | 5% | ||||||||||||
| Transportation expenses | 521 | 663 | (142 | ) | (21% | ) | ||||||||||
| Contract maintenance and station expenses | 3,468 | 2,973 | 495 | 17% | ||||||||||||
| Insurance and safety expenses | 665 | 668 | (3 | ) | nm | |||||||||||
| Operating and highway taxes | 367 | 344 | 23 | 7% | ||||||||||||
| Other operating expenses | 248 | 295 | (47 | ) | (16% | ) | ||||||||||
| Depreciation and amortization expense | 548 | 269 | 279 | 104% | ||||||||||||
| Total operating expenses | 9,182 | 8,411 | 771 | 9% | ||||||||||||
| Operating income | 1,998 | 1,787 | 211 | 12% | ||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 127 | 70 | 57 | 81% | ||||||||||||
| Interest expense | (461 | ) | (554 | ) | 93 | 17% | ||||||||||
| Litigation reserve | (1,713 | ) | - | (1,713 | ) | nm | ||||||||||
| Other | (121 | ) | (391 | ) | 270 | 69% | ||||||||||
| Total other income (expense): | (2,168 | ) | (875 | ) | (1,293 | ) | (148% | ) | ||||||||
| (Loss) income from continuing operations before income taxes | (170 | ) | 912 | (1,082 | ) | (119% | ) | |||||||||
| Benefit (provision) for income taxes | 20 | (242 | ) | 262 | (108% | ) | ||||||||||
| (Loss) income from continuing operations | (150 | ) | 670 | (820 | ) | (97% | ) | |||||||||
| Discontinued Operation: | ||||||||||||||||
| Loss from operations of discontinued operation, net of income taxes | (38 | ) | (1,272 | ) | 1,234 | (97% | ) | |||||||||
| Net loss | $ | (188 | ) | $ | (602 | ) | $ | 414 | 69% | |||||||
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Property Rental Revenues
Property rental revenue increased $0.5 million, or 17%, to $3.3 million for the three months ended September 30, 2009 from $2.8 million for the three months ended September 30, 2008. This increase was primarily due to an increase in rental revenue from the rezoning of a portion of the leased space on one of our properties over the same period in 2008.
Outside Maintenance and Cleaning Operations Revenues
Outside Maintenance and Cleaning Operations revenue increased $0.5 million, or 7%, to $7.9 million for the three months ended September 30, 2009 from $7.4 million for the three months September 30, 2008. This increase was primarily due to a net increase in street furniture installations and an increase in contracts associated with the traffic control division partially offset by a decrease in maintenance due to the economic environment as compared to the three months ended September 30, 2008.
Operating Expenses
Operating expenses increased $0.8 million, or 9%, to $9.2 million for the three months ended September 30, 2009 from $8.4 million for the three months ended September 30, 2008. This increase is primarily due to an increase in direct labor, sub contracting and supplies associated with a net increase in street furniture installation and an increase in amortization of intangibles associated with the electrical contractor acquisition offset by decreases in professional fees and fuel prices over the same period in 2008.
Other Income (Expense)
Other income (expense) increased $1.3 million, or 148%, to $2.2 million for the three months ended September 30, 2009 from $0.9 million for the three months ended September 30, 2008. This increase was primarily due to the accrual of $1.7 million arising out of the court’s decision in the appraisal proceedings offset by a decrease in insurance reserves and a 27% decrease in the average cost of our borrowing from 5.09% for the three months ended September 30, 2008 to 3.73% for the three months ended September 30, 2009 due to a reduction in average LIBOR on our floating rate debt. This was partially offset by an increase in interest income earned on the financing of electrical construction contracts.
Provision for Income Taxes
We are organized and conduct our operations to qualify as a REIT for Federal income tax purposes. As a REIT, we are generally not subject to Federal income tax on our REIT taxable income that we distribute to our stockholders, provided that we distribute at least 90% of our REIT taxable income and meet certain other requirements. As of September 30, 2009 and 2008, we were in compliance with all REIT requirements and, therefore, have not provided for income tax expense on our REIT taxable income for the three months ended September 30, 2009 and 2008.
Certain of our assets that produce non-qualifying income are owned by our taxable REIT subsidiaries, the income of which is subject to federal and state income taxes. During the three months ended September 30, 2009, we recorded a $20,000 benefit on income from these taxable REIT subsidiaries. The provision for the three months ended September 30, 2008 was $242,000 on income from these taxable REIT subsidiaries
Loss from operations of discontinued operation, net of taxes reflects the operating results of the Paratransit business. The discontinued operation reflects no operations for the three months ended September 30, 2009 compared to operations for the three months ended September 30, 2008.
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| Nine Months Ended September 30, 2009 vs. Nine Months Ended September 30, 2008 |
The following table sets forth our results of operations for the periods indicated (in thousands):
Nine Months Ended September 30, | Increase/(Decrease) | |||||||||||||||
| 2009 | 2008 | Amount | Percent | |||||||||||||
| (Unaudited) | ||||||||||||||||
| Revenues: | ||||||||||||||||
| Property rentals | $ | 9,842 | $ | 9,004 | $ | 838 | 9% | |||||||||
| Outdoor maintenance and cleaning operations | 22,759 | 22,307 | 452 | 2% | ||||||||||||
| Total revenues | 32,601 | 31,311 | 1,290 | 4% | ||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative expenses | 8,430 | 8,524 | (94 | ) | (1% | ) | ||||||||||
| Equipment maintenance and garage expenses | 1,606 | 2,306 | (700 | ) | (30% | ) | ||||||||||
| Transportation expenses | 1,481 | 1,938 | (457 | ) | (24% | ) | ||||||||||
| Contract maintenance and station expenses | 8,922 | 9,079 | (157 | ) | (2% | ) | ||||||||||
| Insurance and safety expenses | 1,876 | 2,118 | (242 | ) | (11% | ) | ||||||||||
| Operating and highway taxes | 1,213 | 1,131 | 82 | 7% | ||||||||||||
| Other operating expenses | 751 | 677 | 74 | 11% | ||||||||||||
| Depreciation and amortization expense | 1,290 | 1,086 | 204 | 19% | ||||||||||||
| Total operating expenses | 25,569 | 26,859 | (1,290 | ) | (5% | ) | ||||||||||
| Operating income | 7,032 | 4,452 | 2,580 | 58% | ||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 252 | 247 | 5 | 2% | ||||||||||||
| Interest expense | (1,406 | ) | (1,559 | ) | 153 | 10% | ||||||||||
| Litigation reserve | (1.713 | ) | - | (1,713 | ) | nm | ||||||||||
| Other | (335 | ) | (319 | ) | (16 | ) | (5% | ) | ||||||||
| Total other income (expense): | (3,202 | ) | (1,631 | ) | (1,571 | ) | (96% | ) | ||||||||
| Income from continuing operations before income taxes | 3,830 | 2,821 | 1,009 | 36% | ||||||||||||
| Provision for income taxes | - | (430 | ) | 430 | (100% | ) | ||||||||||
| Income from continuing operations | 3,830 | 2,391 | 1,439 | 60% | ||||||||||||
| Discontinued Operation: | ||||||||||||||||
| Loss from operations of discontinued operation, net of income taxes | (4 | ) | (1,679 | ) | 1,675 | (100% | ) | |||||||||
| Net income | $ | 3,826 | $ | 712 | $ | 3,114 | 437% | |||||||||
nm – not meaningful
36
Property Rental Revenues
Property rental revenue increased $0.8 million, or 9%, to $9.8 million for the nine months ended September 30, 2009 from $9.0 million for the nine months ended September 30, 2008. This increase was primarily due to an increase in rental revenue from the rezoning of a portion of the leased space on one of our properties over the same period in 2008 and a full nine months of rental revenue from the Farmington, CT property as compared to only seven months of rental revenue for the nine months ended September 30, 2008.
Outside Maintenance and Cleaning Operations Revenues
Outside Maintenance and Cleaning Operations revenue increased $0.5 million, or 2%, to $22.8 million for the nine months September 30, 2009 from $22.3 million for the nine months September 30, 2008. This increase was primarily due to a net increase in street furniture installations and an increase in contracts associated with the traffic control division partially offset by a decrease in maintenance due to the economic environment as compared to the nine months ended September 30, 2008.
Operating Expenses
Operating expenses decreased $1.3 million, or 5%, to $25.6 million for the nine months ended September 30, 2009 from $26.9 million for the nine months ended September 30, 2008. This decrease is primarily due to a reduction in remediation expense partially offset by an increase in direct labor, sub contracting and supplies associated with a net increase in street furniture installation and an increase in amortization of intangibles associated with the electrical contractor acquisition and an increase in depreciation expense related to the Farmington, CT property offset by decreases in professional fees and fuel prices over the same period in 2008.
Other Income (Expense)
Other income (expense) increased $1.6 million, or 96%, to $3.2 million for the nine months ended September 30, 2009 from $1.6 million for the nine months ended September 30, 2008. This increase was primarily due to the accrual of $1.7 million arising out of the court’s decision in the appraisal proceedings offset by a decrease in insurance reserves partially offset by a 28% decrease in the average cost of our borrowing from 5.22% for the nine months ended September 30, 2008 to 3.78% for the nine months ended September 30, 2009 due to a reduction in average LIBOR on our floating rate debt. The reduction in the interest rate was partially offset by a 13% increase in the average balance of our credit facility from $38.3 million for the nine months ended September 30, 2008 to $43.2 million for the nine months ended September 30, 2009 as a result of financing the purchase of the Farmington, CT property and a decrease in interest income due to a lower average yield on the cash balances offset by interest income earned on the financing of electrical construction contracts.
Provision for Income Taxes
We are organized and conduct our operations to qualify as a REIT for federal income tax purposes. As a REIT, we are generally not subject to federal income tax on our REIT taxable income that we distribute to our stockholders, provided that we distribute at least 90% of our REIT taxable income and meet certain other requirements. As of September 30, 2009 and 2008, we were in compliance with all REIT requirements and, therefore, have not provided for income tax expense on our REIT taxable income for the nine months ended September 30, 2009 and 2008.
Certain of our assets that produce non-qualifying income are owned by our taxable REIT subsidiaries, the income of which is subject to federal and state income taxes. During the nine months ended September 30, 2009, we did not record a provision for income taxes on income from these taxable REIT subsidiaries compared to a tax provision for the nine months ended September 30, 2008 of $0.4 million on income from these taxable REIT subsidiaries.
Loss from Operations of Discontinued Operation, Net of Taxes
Loss from operations of discontinued operation, net of taxes reflects the operating results of the Paratransit business. The discontinued operation reflects no operations for the nine months ended September 30, 2009 compared to operations for the nine months ended September 30, 2008.
37
Liquidity and Capital Resources
At September 30, 2009, the Company had unrestricted cash and cash equivalents of approximately $14.2 million compared to $11.9 million at December 31, 2008. The Company funds operating expenses and other short-term liquidity requirements, including debt service and dividend distributions from operating cash flows. The Company also has used its secured revolving credit facility for these purposes. The Company believes that its net cash provided by operations, coupled with availability under the revolving credit, will be sufficient to fund its short-term liquidity requirements for the next twelve months and to meet its dividend requirements to maintain its REIT status.
Financings
On July 2, 2007, GTJ REIT entered into a loan agreement, dated as of June 30, 2007 (the "Loan Agreement"), among GTJ REIT and certain direct and indirect subsidiaries of GTJ REIT, namely, Green Acquisition, Inc., Triboro Acquisition, Inc. and Jamaica Acquisition, Inc., 165-25 147th Avenue, LLC, 49-19 Rockaway Beach Boulevard, LLC, 85-01 24th Avenue, LLC, 114-15 Guy Brewer Boulevard, LLC, (collectively, the "Borrowers"); and ING USA Annuity and Life Insurance Company; ING Life Insurance and Annuity Company; Reliastar Life Insurance Company; and Security Life Of Denver Insurance Company (collectively, "Lenders"). Pursuant to the terms of the Loan Agreement, the Lenders will provide multiple loan facilities in the amounts and on the terms and conditions set forth in such Loan Agreement. The aggregate of all loan facilities under the Loan Agreement shall not exceed $72.5 million. On July 2, 2007, we made an initial term loan draw down of $17.0 million on the facility. In addition to the initial term loan, in October 2007, the Lenders collectively made a mortgage loan of $1.0 million and advanced an additional $2.0 million to us. In February 2008, there was an additional draw under the facility of approximately $23.2 million. Interest on the loans is paid monthly. The interest rate on both the initial draw-down and mortgage loan is fixed at 6.59% per annum and the interest rate on the subsequent draw down floats at a spread over one month LIBOR, 1.65% at September 30, 2009. In addition, there is a one-tenth of one percent non-use fee on the unused portion of the facility. Principal is payable on the maturity date, July 1, 2010, unless otherwise extended or renewed. At September 30, 2009 and December 31, 2008, total outstanding under the Loan Agreement was approximately $43.2 million.
The loan facilities are collateralized by: (1) an Assignment of Leases and Rents on four bus depot properties (the "Depots") owned by certain of the Borrowers and leased to the City of New York, namely (a) 49-19 Rockaway Beach Boulevard; (b) 165-25 147th Avenue; (c) 85-01 24th Avenue and (d) 114-15 Guy Brewer Boulevard; (2) Pledge Agreements under which (i) the Registrant pledged its 100% stock ownership in each of: (a) Green Acquisition, Inc.; (b) Triboro Acquisition, Inc. and (c) Jamaica Acquisition, Inc. (ii) Green Acquisition, Inc. pledged its 100% membership interest in each of (a) 49-19Rockaway Beach Boulevard, LLC and (b) 165-25 147th Avenue, LLC, (iii) Triboro Acquisition pledged its 100% membership interest in 85-01 24th Avenue, LLC, and (d) Jamaica Acquisition pledged its 100% membership interest in 114-15 Guy Brewer Boulevard, LLC, and (3) a LIBOR Cap Security Agreement under which GTJ Rate Cap LLC, a wholly owned subsidiary of GTJ REIT, pledged its interest in an interest rate cap transaction evidenced by the Confirmation and ISDA Master Agreement, dated as of December 13, 2006, with SMBC Derivative Products Limited. We had assigned our interest in the interest rate cap to GTJ Rate Cap LLC prior to entering into the Loan Agreement. The $1.0 million mortgage loan is secured by a mortgage in the amount of $250,000 on each of the Depots collectively.
For the nine months ended September 30, 2009, the fair value of the interest rate cap associated with the debt was insignificant.
In addition to customary non-financial covenants, we are obligated to comply with certain financial covenants. As of September 30, 2009, we are in compliance with our non-financial and financial covenants.
Earnings and Profit Distribution
As of September 30, 2009, cash of approximately $19.7 million and 3,775,400 shares of our common stock have been distributed to the Holders in connection with a one-time special distribution of accumulated earnings and profits. The remaining payable balance of approximately $0.3 million is included in other liabilities in the accompanying consolidated balance sheet at September 30, 2009. Cash payments were funded from borrowings under our credit facility.
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Nine Months Ended September 30, 2009 vs. Nine Months Ended September 30, 2008
Operating Activities
Net cash provided by operating activities was approximately $5.3 million for the nine months ended September 30, 2009 and approximately $5.5 million for the nine months ended September 30, 2008. For the 2009 period, cash provided by operating activities was primarily related to (i) income from continuing operations of approximately $3.8 million (ii) an increase in accounts payable and accrued expenses of approximately $2.1 million, (iii) an increase in accounts receivable and other assets of approximately $2.6 million, (iv) depreciation and amortization expense of approximately $2.0 million, and (v) changes in insurance reserves of approximately $0.2 million. For the 2008 period, cash provided by operating activities of approximately $5.5 million was primarily related to (i) net income from continuing operations of approximately $2.4 million, (ii) an increase in accounts payable and accrued expenses of approximately $3.0 million (iii) depreciation and amortization expense of approximately $1.6 million (iii) changes in insurance reserves of approximately $0.5 million, (iv) an increase in accounts receivable and other assets of approximately $1.6 million, (v) changes in insurance reserves of approximately $0.4 million, and (vi) deferred taxes of approximately $0.4 million.
Investing Activities
Net cash used in investing activities was approximately $0.3 million for the nine months ended September 30, 2009 versus net cash used in investing activities of approximately $23.4 million for the nine months ended September 30, 2008. For the 2009 period, cash used in investing activities primarily related to purchases of property, equipment and investment of approximately $0.8 million, purchases of intangible assets of approximately $0.9 million and proceeds from the sale of investments of approximately $0.9 million. For the 2008 period, cash used in investing activities primarily related to real estate assets acquired of approximately $23.4 million.
Financing Activities
Cash used in financing activities was approximately $3.2 million for the nine months ended September 30, 2009 and was related to the payment of dividends. Net cash provided by financing activities for the nine months ended September 30, 2008 was approximately $18.8 million and primarily pertains to the proceeds from the revolving credit facility of approximately $23.2 million offset by dividend payments of approximately $3.8 million.
Funds from Operations and Adjusted Funds from Operations
We consider Funds from Operations (“FFO”) and Adjusted Funds from Operations (“AFFO”), each of which are non-GAAP measures, to be additional measures of an equity REIT’s operating performance. We report FFO in addition to our net income and net cash provided by operating activities. Management has adopted the definition suggested by The National Association of Real Estate Investment Trusts (“NAREIT”) and defines FFO to mean net income computed in accordance with GAAP excluding gains or losses from sales of property, plus real estate-related depreciation and amortization and after adjustments for unconsolidated joint ventures.
Management considers FFO a meaningful, additional measure of operating performance because it primarily excludes the assumption that the value of our real estate assets diminishes predictably over time and industry analysts have accepted it as a performance measure. FFO is presented to assist investors in analyzing our performance. It is helpful as it excludes various items included in net income that are not indicative of our operating performance, such as gains (or losses) from sales of property and depreciation and amortization.
| · | does not represent cash flows from operating activities in accordance with GAAP (which, unlike FFO, generally reflects all cash effects of transactions and other events in the determination of net income); and |
| · | should not be considered an alternative to net income as an indication of our performance. |
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In determining AFFO we do not consider the operations of our taxable REIT subsidiaries (outside maintenance and shelter cleaning operations) as part of our real estate operations and therefore exclude the net income or net loss when arriving at AFFO. This is the one difference between our definition of AFFO and the NAREIT definition of FFO, which includes net income or net loss from taxable REIT subsidiaries.
FFO and AFFO as defined by us may not be comparable to similarly titled items reported by other real estate investment trusts due to possible differences in the application of the NAREIT definition used by such REITs. The table below provides a reconciliation of net income in accordance with GAAP to FFO and AFFO for each of the three and nine months ended September 30, 2009 and 2008 (amounts in thousands).
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Net (loss) income | $ | (188 | ) | $ | (602 | ) | $ | 3,826 | $ | 712 | ||||||
| Plus: Real property depreciation | 276 | 277 | 841 | 703 | ||||||||||||
| Amortization of intangible assets | 367 | 205 | 776 | 478 | ||||||||||||
| Amortization of deferred leasing commissions | 25 | 25 | 75 | 106 | ||||||||||||
| Funds from operations (FFO) | $ | 480 | $ | (95 | ) | $ | 5,518 | $ | 1,999 | |||||||
| Loss (income) from Taxable-REIT Subsidiaries | 196 | 2,036 | (710 | ) | 1,916 | |||||||||||
| Amortization of intangible assets of Taxable-REIT Subsidiaries | (162 | ) | - | (162 | ) | - | ||||||||||
| Adjusted funds from operations (AFFO) | $ | 514 | $ | 1,941 | $ | 4,646 | $ | 3,915 | ||||||||
| FFO per common share - basic and diluted | $ | 0.04 | $ | (0.01 | ) | $ | 0.41 | $ | 0.15 | |||||||
| AFFO per common share - basic and diluted | $ | 0.04 | $ | 0.14 | $ | 0.34 | $ | 0.29 | ||||||||
| Weighted average common shares outstanding - basic and diluted | 13,472,281 | 13,472,281 | 13,472,281 | 13,472,281 | ||||||||||||
In March 2008, we acquired a 110,000 square foot office building located in Farmington, Connecticut for approximately $23,395,000 including closing costs. The property is triple net-leased to a single tenant under a long-term lease arrangement. The acquisition was funded from our secured credit facility.
On June 30, 2009, we through our wholly-owned subsidiaries, Shelter Electric Maintenance Corp. and Shelter Electric Acquisition Subsidiary LLC, (collectively, “Shelter Electric”) entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Morales Electrical Contracting, Inc. (“Morales”), a Valley Stream, New York based electrical construction company, pursuant to which Morales sold certain of its assets and assigned certain contracts and employees to Shelter Electric for approximately $1.0 million. The acquisition was funded using our cash.
Cash payments for financing
Payment of interest under the $72.5 million credit facility, and under permanent mortgages, will consume a portion of our cash flow, reducing net income and the resulting distributions to be made to the stockholders of GTJ REIT.
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Trend in financial resources
Other than the credit facility discussed above under ING Financing Agreement, we can expect to receive additional rent payments over time due to scheduled increases in rent set forth in the leases on our real properties. It should be noted, however, that the additional rent payments are expected to result in an approximately equal obligation to make additional distributions to stockholders, and will therefore not result in a material increase in working capital.
Environmental Matters
Our real property has had activity regarding removal and replacement of underground storage tanks. Upon removal of the old tanks, any soil found to be unacceptable was thermally treated off site to burn off contaminants. Fresh soil was brought in to replace earth which had been removed. There are still some levels of contamination at the sites, and groundwater monitoring programs have been put into place at certain locations. In July 2006, we entered into an informal agreement with the New York State Department of Environmental Conservation ("NYSDEC") whereby we have committed to a three-year remedial investigation and feasibility study (the "Study") for all site locations.
In conjunction with this informal agreement, we have retained the services of an environmental engineering firm to assess the cost of the Study. The engineering report has an estimated cost range of approximately $1.4 million to $2.6 million was included which provided a "worst case" scenario whereby we would be required to perform full remediation on all site locations. While management believes that the amount of the Study and related remediation is likely to fall within the estimated cost range, no amount within that range can be determined to be the better estimate. Therefore, management believes that recognition of the low-range estimate is appropriate. While additional costs associated with environmental remediation and monitoring are probable, it is not possible at this time to reasonably estimate the amount of any future obligation until the Study has been completed. In May 2008, we received an updated draft of the remedial and investigation feasibility study and recorded an additional accrual of approximately $0.9 million for additional remediation costs. As of September 30, 2009 and December 31, 2008, we have recorded a liability for remediation costs of approximately $1.2 million and $1.6 million, respectively. Presently, we are not aware of any claims or remediation requirements from any local, state or federal government agencies. Each of the properties is in a commercial zone and is still used as transit depots, including maintenance of vehicles.
Inflation
Low to moderate levels of inflation during the past several years have favorably impacted our operations by stabilizing operating expenses. At the same time, low inflation has had the indirect effect of reducing our ability to increase tenant rents. However, our properties have tenants whose leases include expense reimbursements and other provisions to minimize the effect of inflation.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk facing us is interest rate risk on its variable-rate mortgage loan payable and secured revolving credit facility. We will, when advantageous, hedge its interest rate risk using derivative financial instruments. We are not subject to foreign currency risk.
We are exposed to interest rate changes primarily through the secured floating-rate revolving credit facility used to maintain liquidity, fund capital expenditures and expand the real estate investment portfolio. Our objective with respect to interest rate risk is to limit the impact of interest rate changes on operations and cash flows, and to lower overall borrowing costs. To achieve these objectives, we may borrow at fixed rates and may enter into derivative financial instruments such as interest rate caps in order to mitigate our interest rate risk on our variable-rate borrowings.
Based on our variable rate liabilities as of September 30, 2009 and assuming the balances of these variable rate liabilities remain unchanged for the subsequent twelve months, a 1.0% increase in our borrowing rate index would decrease our net income and cash flows by approximately $0.3 million. Based on our variable rate liabilities as of September 30, 2009 and assuming the balances of these variable rate liabilities remain unchanged for the subsequent twelve months, a 1.0% decrease in our borrowing rate index would increase our net income and cash flows by approximately $0.1 million.
At December 31, 2008, a 1.0% increase in our borrowing rate index would have decreased our net income and cash flows by approximately $0.2 million. At December 31, 2008, a 1.0% decrease in our borrowing rate index would have increased our net income and cash flows by approximately $0.1 million.
As of September 30, 2009 and December 31, 2008, we have one interest rate cap outstanding with a notional value of $54.0 million. The market value of this interest rate cap is dependent upon existing market interest rates and swap spreads, which change over time. As of September 30, 2009 and December 31, 2008, given a 100 basis point increase or decrease in forward interest rates, the change in value of this interest rate cap would be insignificant.
Our hedging transactions using derivative instruments also involve certain additional risks such as counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in the contract. The counterparties to our derivative arrangements are major financial institutions with high credit ratings with which we and our affiliates may also have other financial relationships. As a result, we do not anticipate that any of these counterparties will fail to meet their obligations. There can be no assurance that we will be able to adequately protect against the foregoing risks and will ultimately realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging strategies.
We utilize an interest rate cap to limit interest rate risk. Derivatives are used for hedging purposes rather than speculation. We do not enter into financial instruments for trading purposes.
Item 4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). As required by Rule 13a-15(b) under the Exchange Act, management, under the direction of our Company’s Chief Executive Officer and Chief Financial Officer, reviewed and performed an evaluation of the effectiveness of design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. During our review we determined that the Company did not have sufficient accounting staff which impacts financial reporting by limiting expertise available to adequately review and resolve technical accounting and financial reporting matters. During the fourth quarter of 2008, we hired a Chief Financial Officer which has had a significant positive impact on our disclosure controls and procedures over financial reporting. Based on that review, evaluation and subsequent remediation, our Chief Executive Officer and Chief Financial Officer, along with our management, have determined that as of September 30, 2009, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and were effective to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
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Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15-d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The Company continues, however, to implement suggestions from its independent accounting consultant on ways to strengthen existing controls.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
On March 26, 2007, there was a joint special meeting of the shareholders of the Bus Companies. The business considered at the meeting was the merger of: Green with and into Green Acquisition, Inc.; Triboro with and into Triboro Acquisition, Inc.; and Jamaica with and into Jamaica Acquisition, Inc. Appraisal rights were perfected by shareholders of the Bus Companies who would have received approximately 366,133 shares of our common stock to be issued following the mergers. The mergers were carried out on March 29, 2007. Consequently, we made good faith offers to such shareholders based on the value of our common share of $7.00 per share, eighty percent (80%) of which was advanced to them. On May 25, 2007, Green Acquisition, Triboro Acquisition and Jamaica Acquisition, commenced appraisal proceedings in Nassau County Supreme Court, as required by the New York Business Corporation Law. Eight of the shareholders (the “Claimants”) who sought appraisal rights (the others had either settled or withdrawn their demands) have answered the petition filed in connection with the appraisal proceeding and moved for pre-trial discovery. In March 2008, certain pre-trial discovery was ordered by the Court and provided by the Bus Companies. A hearing in this matter, which is the equivalent of a trial, commenced on November 10, 2008. The hearing was completed in January 2009. The Court ordered the parties to submit post-trial memoranda prior to its consideration and ruling on the petition. The Company filed the post-trial memorandum on March 27, 2009 and a reply memorandum on April 24, 2009. On September 29, 2009, a decision in the appraisal proceeding involving certain former shareholders of Green Bus Lines, Inc., Triboro Coach Corporation and Jamaica Central Railways, Inc. (collectively, the “Bus Companies”) was issued by the New York State Supreme Court, Nassau County. In the Court’s decision, the Court determined that the equivalent of the fair value of the respondents’ shares in the Bus Companies immediately prior to the consummation of the reorganization was equal to $11.69 per share of GTJ REIT common stock. This decision will result in additional payments due respondents in the aggregate amount of approximately $1.5 million.
In addition, the Court awarded respondents’ 50% of their reasonable professional fees and costs, which amount will be determined by a court-appointed attorney/referee. Respondents’ were also awarded interest with respect to the unpaid amount due for the fair value of their shares in the Bus Companies from the valuation date to the payment date. The Company accrued interest of approximately $0.2 million through September 30, 2009 related to the award.
Collectively, the Claimants have been paid $1,351,120 pursuant to the Registrant’s good faith offer. The Claimants would have received approximately 241,272 shares of the Registrant’s common stock following the mergers of the Bus Companies. In addition, two shareholders were paid an aggregate of $435,457 pursuant to the good faith offer in satisfaction of their claim for appraisal rights, and are not involved in the proceeding described above. These shareholders would have received approximately 62,208 shares.
In addition to the above, we are involved in several lawsuits and other disputes which arose in the ordinary course of business; however, management believes that these matters will not have a material adverse effect, individually or in the aggregate, on the Company's financial position or results of operations.
Item 1A. Risk Factors
During the nine months ended September 30, 2009, there were no material changes to the risk factors that were disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
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Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On October 27, 2009, the Company received notice from its customer CEMUSA, Inc. that the Services Agreement dated June 26, 2006 between CEMUSA, Inc. and Shelter Express Corp. will terminate on December 31, 2009 in accordance with its terms. The Services Agreement with CEMUSA, Inc. represented annual revenues of approximately $11.8 million.
| Exhibits | |
| Exhibit | Description |
| 31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| GTJ REIT, INC. | |
| Dated: November 12, 2009 | /s/ Jerome Cooper |
| Jerome Cooper | |
| President and Chief Executive Officer and Chairman of the Board of Directors | |
| Dated: November 12, 2009 | /s/ David J. Oplanich |
| David J. Oplanich | |
| Chief Financial Officer |