UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
FORM 10-K |
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009 |
[ ] 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 incorporation or organization) | (I.R.S. Employer Identification No.) |
444 Merrick Road, Lynbrook, New York | 11563 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code (516) 881-3535
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
NONE | NONE | |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. | Yes [ ] No [X] |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. | Yes [ ] No [X] |
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 [ ] |
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 [ ] No [ ] |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. | Yes [ ] No [X] |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act). Check one:
Large accelerated filer [ ] | Accelerated filer [ ] | Non-accelerated filer [X] | or a 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] |
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked priced of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter: | N/A |
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. As of March 15, 2010, there were 13,472,281 shares of common stock issued and outstanding.
GTJ REIT, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2009
TABLE OF CONTENTS
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PART I | |||
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PART II | |||
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F-1 – F-44 | |||
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PART III | |||
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PART IV | |||
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PART I
FORWARD-LOOKING STATEMENTS
Certain information included in this Annual Report contains or may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Historical results and trends should not be taken as indicative of future operations. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," "prospects," or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions generally and the real estate market specifically; legislative or regulatory changes, including changes to laws governing the taxation of real estate investment trusts (“REITs”); availability of capital; interest rates; our ability to service our debt; competition; supply and demand for operating properties in our current and proposed market areas; generally accepted accounting principles; and policies and guidelines applicable to REITs; and litigation. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Although we believe the assumptions underlying the forward-looking statements, and the forward-looking statements themselves, are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that these forward-looking statements will prove to be accurate. In light of the significant uncertainties inherent in these forward-looking statements, the inclusion of this information should not be regarded as a representation by us or any other person that our objectives and plans, which we consider to be reasonable, will be achieved. The forward-looking statements are made as of the date of this Annual Report, and the Registrant assumes no obligation to update the forward-looking statements or to update the reasons actual results could differ from those projected in such forward-looking statements.
Introduction
The use of the words “we”, “us” or “our” refers to GTJ REIT, Inc., a Maryland corporation, and its subsidiaries, except where the context otherwise requires.
We were 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”), for which corporations may be organized under Maryland General Corporation Law. We have focused primarily on the ownership and management of commercial real estate located in New York City and also have one property located in Farmington, Connecticut. In addition, we provide, through our Taxable REIT subsidiaries, outdoor 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.
At March 29, 2007, we commenced operations upon the completion of the Reorganization described below. Effective July 1, 2007, we elected to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). We have selected December 31 as our fiscal year end. 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 Code subject to certain limitations.
At December 31, 2009, we owned seven properties containing a total of approximately 561,000 square feet of leasable area.
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On July 24, 2006, we entered into an Agreement and Plan of Merger (the "Agreement") by and between 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"); and 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 and the Acquisition Subsidiaries becoming our wholly-owned subsidiaries and the former shareholders of the Bus Companies becoming shareholders in our Company.
Under the terms of the Agreement, each issued and outstanding share of common stock of each of the Bus Companies immediately prior to the effective date of the mergers, was converted into the right to receive the following shares of our common stock:
• | Each share of Green common stock was converted into a right to receive 1,117.429975 shares of the Company’s common stock. | |
• | Each share of Triboro common stock was converted into a right to receive 2,997.964137 shares of the Company’s common stock. | |
• | Each share of Jamaica common stock was converted into a right to receive 195.001987 shares of the Company’s common stock. |
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). A seventh property is leased two commercial tenants, with the remainder available for lease. There is an additional property of negligible size which is not rentable. In addition, we operate a group of outdoor maintenance businesses and until September 30, 2008, operated a paratransit business. We also have an insurance subsidiary which insured the former bus company operations, and is being wound down as cases are resolved.
Description of REIT Business
Our REIT business consists of the acquisition, ownership and management of real properties. We currently own seven rentable parcels of real property. For a description, please see “Portfolio of Real Properties.” We intend to develop the real property portfolio beyond these seven parcels.
Investing in real properties
We seek to acquire quality real properties at favorable prices. We believe that quality tenants seek well-managed properties that offer superior and dependable services, particularly in competitive markets.
We believe that a critical success factor in property acquisition lies in possessing the flexibility to move quickly when an opportunity presents itself to buy or sell a property. We believe that employing highly qualified industry professionals will allow us to better achieve this objective.
We intend to acquire fee ownership of real properties, but may also enter into joint venture arrangements. We seek to maximize current and long-term net income and the value of our assets. Our policy is to acquire assets where we believe opportunities exist for reasonable investment returns.
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Decisions relating to the purchase or sale of properties are made by our Board of Directors. Our Board of Directors is responsible for monitoring the administrative procedures, investment operations and performance of our company to ensure our policies are carried out. Our Board of Directors oversees our investment policies to determine that our policies are in the best interests of our stockholders. Stockholders have no voting rights with respect to implementing our investment objectives and policies, all of which are the responsibility of our Board of Directors and may be changed at any time.
Types of investments
We intend to invest primarily in quality real 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 real property is the potential for future income, we anticipate that the majority of properties we acquire will have both the potential for growth in value and the ability to provide cash distributions to stockholders.
We intend to acquire properties with mortgage or other debt. We may also acquire properties for shares of our common stock. As for real properties purchased using our credit facility, we anticipate we will incur mortgage indebtedness by obtaining loans secured by selected properties, if favorable financing terms are available. The proceeds from such loans would be used to repay funds borrowed under our credit facility.
We do not intend to incur aggregate indebtedness in excess of 75% of the gross fair value of our real properties. Fair value will be determined by an independent certified appraiser and in a similar manner as the fair determination at the time of purchase satisfactory to our Board of Directors.
Considerations related to possible real property acquisitions
The following are some of the material considerations that are evaluated by us in relation to potential purchases of real property:
• | geographic location and type of property; | |
• | construction quality and condition; | |
• | potential for capital appreciation; | |
• | the general credit quality of current and potential tenants; | |
• | the potential for rent increases; | |
• | the interest rate environment; | |
• | potential for economic growth in the tax and regulatory environment of the community in which the property is located; | |
• | potential for expanding the physical layout of the property; | |
• | occupancy and demand by tenants for properties of a similar type in the same geographic vicinity; |
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• | prospects for liquidity through sale, financing or refinancing of the property; | |
• | competition from existing properties and the potential for the construction of new properties in the area; and | |
• | treatment under applicable federal, state and local tax and other laws and regulations. |
We will not purchase any property until we obtain an environmental assessment, a Phase I review, for each property considered and are satisfied with the environmental status of the property.
In determining whether to purchase a particular parcel of real property, we may obtain an option on such property. The amount paid for an option, if any, is normally surrendered if the real property is not purchased, and is normally credited against the purchase price if the real property is purchased.
In purchasing real properties, we will be subject to risks, including:
• | changes in general economic or local conditions; | |
• | changes in supply of or demand for similar competing properties in an area; | |
• | changes in interest rates and availability of permanent mortgage funds which may render the sale of a property difficult or unattractive; | |
• | changes in tax, real estate, environmental and zoning laws; | |
• | periods of high interest rates and tight money supply which may make the sale of properties more difficult; | |
• | tenant turnover; and | |
• | general overbuilding or excess supply in the market area. |
For a more detailed description of risks relating to our real estate business, see Item 1A-“Risk Factors.”
We anticipate that the purchase price of properties we acquire will vary depending on a number of factors, including size and location. In addition, our operating cost will vary based on the amount of debt we incur in connection with financing the acquisition. We may not be able to purchase a diverse portfolio of real properties unless we find sources of financing. It is difficult to predict the actual number of properties that we will actually acquire because the purchase prices of properties varies widely and our investment in each will vary based on the amount and cost of leverage we use.
Real property acquisition process
We intend to acquire real properties using newly formed wholly-owned subsidiaries. In addition to fee simple interests, we may acquire long-term ground leases. Other methods of acquiring a real property may be used when advantageous. For example, we may acquire properties through a joint venture or the acquisition of substantially all of the interests of an entity that in turn owns a parcel of real property.
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We currently have a $72.5 million revolving line of credit with a financial institution, which we plan to use to facilitate our acquisition opportunities, with the intention of placing permanent financing on the acquired property at a later date and repaying our revolving line of credit with the proceeds. We believe our line of credit will allow us to secure acquisitions and is an attractive feature of our bids to sellers seeking to complete a sale quickly. As of March 15, 2010, we have approximately $43.2 million outstanding under our line of credit.
We may commit to purchase real properties subject to completion of construction in accordance with terms and conditions specified by our Board of Directors. In such cases, we will be obligated to purchase the real property at the completion of construction, provided that (1) the construction conforms to definitive plans, specifications and costs approved by us in advance and embodied in the construction contract and (2) an agreed upon percentage of the real property is leased beforehand. We would receive a certificate of an architect, engineer or other appropriate party, stating that the real property complies with all plans and specifications. Our intent is to leave development risk with the developer.
If remodeling is required prior to the purchase of a real property, we would anticipate paying a negotiated maximum amount either upon completion or in installments commencing prior to completion. Such amount would be based on the estimated cost of such remodeling. In such instances, we would also have the right to review the seller's books during and following completion of the remodeling to verify actual costs. In the event of substantial disparity between estimated and actual costs, an adjustment in purchase price may be negotiated.
We are not specifically limited in the number or size of real properties we may acquire. The number and mix of properties we may acquire will depend upon real estate and market conditions and other circumstances existing at the time we are acquiring our real properties.
Joint ventures
We may invest in general partnership and joint venture arrangements with other real estate investors. There is a potential risk that we or a joint venture partner will be unable to agree on a matter material to the joint venture and we may not control the decision. Furthermore, we cannot assure you that we will have sufficient financial resources to exercise any right of first refusal that may be part of a partnership or joint venture agreement.
Our policies with respect to borrowing
We presently anticipate that we will borrow funds to acquire real properties. We may later refinance or increase mortgage indebtedness by obtaining additional loans secured by selected properties. We may use the proceeds from such loans to repay our revolving credit, which can then be used to acquire additional real properties for the purpose of increasing our cash flow and providing further diversification. We anticipate that aggregate borrowings, both secured and unsecured, will not exceed 75% of our real property fair value. Our Board of Directors reviews our aggregate borrowings to ensure that such borrowings are reasonable in relation to our assets.
We may also incur indebtedness to finance improvements to properties and, if necessary, for working capital needs or to meet the distribution requirements applicable to us under the Code.
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When incurring secured debt, we will seek to incur nonrecourse indebtedness, which means that the lenders' rights in the event of our default generally will be limited to foreclosure on the property that secured the obligation, but we may have to accept recourse financing, where we remain liable for any shortfall between the debt and the proceeds of sale of the mortgaged real property. If we incur mortgage indebtedness, we will endeavor to obtain level payment financing, meaning that the amount of debt service payable would be substantially the same each year, although some mortgages are likely to provide for one large payment and we may incur floating or adjustable rate financing depending on market conditions and when our Board of Directors determines it to be in our best interest.
Our Board of Directors controls our policies with respect to borrowing and may change such policies at any time without stockholder approval.
Sale or other disposition of our real property
Our Board of Directors determines whether a particular real property should be sold or otherwise disposed of after consideration of the relevant factors, including performance or projected performance of the property and market conditions, with a view toward achieving our principal investment objectives.
When appropriate to minimize our tax liabilities, we may structure the sale of a real property as a "like-kind exchange" under the federal income tax laws so that we may acquire qualifying like-kind replacement property meeting our investment objectives without recognizing taxable gain on the sale. Furthermore, our general policy will be to reinvest in additional real properties proceeds from the sale, financing, refinancing or other disposition of our real properties that represent our initial investment in such real property or, secondarily, to use such proceeds for the maintenance or repair of existing properties or to increase our reserves for such purposes. The objective of reinvesting such portion of the sale, financing and refinancing proceeds is to increase the total value of real estate assets that we own, and the cash flow derived from such assets to pay distributions to our stockholders.
Despite this policy, our Board of Directors may determine to distribute to our stockholders all or a portion of the proceeds from the sale, financing, refinancing or other disposition of real properties. In determining whether any of such proceeds should be distributed to our stockholders, our Board of Directors considers, among other factors, the desirability of real properties available for purchase, real estate market conditions and compliance with the REIT distribution requirements.
In connection with a sale of a property, our preference will be to obtain an all-cash sale price. However, we may accept a purchase money obligation secured by a mortgage on the property as partial payment. There are no limitations or restrictions on our taking such purchase money obligations. The terms of payment upon sale will be affected by custom in the area in which the property being sold is located and the then economic conditions. To the extent we receive notes, securities or other property instead of cash from sales, such proceeds, other than any interest payable on such proceeds, will not be included in net sale proceeds available for distribution until and to the extent the notes or other property are actually paid, sold, refinanced or otherwise disposed of. Thus, the distribution of the proceeds of a sale to you as a stockholder, may be delayed until such time. In such cases, we will receive payments in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years.
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A real property may be sold before the end of the planned holding period if:
• | in the judgment of our Board of Directors, the value of a property may decline; | |
• | an opportunity has arisen to improve other or acquire properties; | |
• | we can increase cash flow through the disposition of the property; or | |
• | in the judgment of our Board of Directors , the sale of the property is otherwise in our best interest. |
The determination of whether a particular property should be sold or otherwise disposed of will be made after consideration of the relevant factors, including prevailing economic conditions, with a view to achieving maximum capital appreciation. We cannot assure you that this objective will be realized. The selling price of a property will be determined in large part by the amount of rent payable under the lease. If a tenant has a repurchase option at a formula price or if operating expenses increase without a commensurate increase in rent under our gross leases, we may be limited in realizing any appreciation. In connection with our sales of properties, we may lend the purchaser all or a portion of the purchase price. In these instances, our taxable income may exceed the cash received in the sale. The terms of payment will be affected by custom in the area in which the property being sold is located and the then-prevailing economic conditions.
Presently, we do not intend to sell the real properties we acquired from the Bus Companies for a period of ten years after we made our REIT election, which ends, July, 2017. Under the Code, if real property acquired from the Bus Companies is sold within such ten year period, we would be taxed on the gain from the sale, as if such real property were in the hands of the Bus Companies, and a subsequent distribution of any of the profits would be taxed to the stockholder as a dividend. This would subject the proceeds of such sale to double taxation meaning taxation both at the corporate and stockholder level.
Purchases of Leases
To the extent consistent with our REIT status, we may acquire long-term ground leases, or master leases for real property which we could then sublet as determined by our Board of Directors.
Making loans and investments in mortgages
We do not plan to make loans to other entities or persons unless secured by mortgages, although we may advance funds to our subsidiaries. We will not make or invest in mortgage loans unless we obtain an appraisal concerning the underlying property from a certified independent appraiser. In addition to the appraisal, we will obtain a customary lender's title insurance policy or commitment as to the priority of the mortgage or condition of the title.
We will not make or invest in mortgage loans on any one property if the aggregate amount of all mortgage loans outstanding on the property, including the loans of our company, would exceed an amount equal to 75% of the fair market value of the property, unless we find substantial justification due to the presence of other underwriting criteria.
Investment in securities
We will not invest in equity securities of another entity, other than a wholly-owned subsidiary, directly or indirectly, unless our Board of Directors approves the investment as part of a real property investment. We may purchase our own securities if the Board of Directors determines such purchase to be in our best interests. We may in the future acquire some, all or substantially all of the securities or assets of other REITs or similar entities where that investment would be consistent with our investment policies and REIT qualification requirements. There are no limitations on the amount or percentage of our total assets that may be invested in any one issuer, other than those imposed by the gross income and asset tests that we must satisfy to qualify as a REIT. In any event, we do not intend that our investments in securities will require us to register as an "investment company" under the Investment Company Act of 1940, and we would intend to divest securities before any registration would be required.
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Changes in our investment objectives
Subject to the limitations in our charter, our bylaws and the Maryland General Corporation Law (“MGCL”), our business and policies will be controlled by our Board of Directors. Our Board of Directors has the right to establish policies concerning investments and the right, power and obligation to monitor our procedures, investment operations and performance of our company. Thus, stockholders must be aware that the Board of Directors, acting consistently with our organizational documents, applicable law and their fiduciary obligations, may elect to modify our objectives and policies from time to time.
Distribution policy
We cannot assure you that we will make distributions. In order to continue to qualify as a REIT for federal income tax purposes, we are required, among other things, to distribute each taxable year at least 90% of our net REIT income, other than net capital gains, but we may be unable to do so.
We have a policy of making distributions on a quarterly basis. We will seek to avoid, to the extent possible, the fluctuations in distributions that might result if distribution payments were based solely on actual cash received during the distribution period. To implement this policy, we may use cash received during prior periods or cash received subsequent to the distribution period and prior to the payment date for such distribution payment, to pay annualized distributions consistent with the distribution level established from time to time by our Board of Directors. Our ability to maintain this policy will depend upon among, other things, the availability of cash and applicable requirements for qualification as a REIT under the Code. Therefore, we cannot assure you that there will be cash available to pay distributions or that distributions will not fluctuate. If cash available for distribution is insufficient to pay distributions to you as a stockholder, we may obtain the necessary funds by borrowing, issuing new securities or selling assets. These methods of obtaining funds could affect future distributions by increasing operating costs.
To the extent that distributions to our stockholders are made out of our current or accumulated earnings and profits, such distributions would be taxable as ordinary income. To the extent that our distributions exceed our current and accumulated earnings and profits, such amounts will constitute a return of capital to our stockholders for federal income tax purposes, to the extent of their basis in their stock, and thereafter will constitute capital gains.
One Time Earnings and Profits Distribution
On August 20, 2007, our Board of Directors declared a onetime special distribution of accumulated earnings and profits on our common stock of $6.40 per share, payable in cash and in common stock. For the purposes of the special distribution, our common stock was valued at $11.14. The special distribution totaled approximately $62.1 million. The holders of our shares of common stock 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 our shares and/or cash the Holders wished to receive as such Holders’ respective portion 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 may not be in the proportion of cash and shares they elected, but could be based on a pro ration of the available cash after all elections (ie: not on a first come-first served basis). In October 2007, we paid or accrued approximately $20.0 million in cash and issued 3,775,400 of our shares, valued at approximately $42.1 million, to our stockholders in connection with the special distribution.
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Portfolio of Real Properties
165-25 147th Avenue. 165-25 147th Avenue, Jamaica, New York (the "147th Avenue Property") is owned in fee simple. The 147th Avenue Property consists of a 151,068 square foot industrial building located on 6.567 acres. The 147th Avenue Property is comprised of three parcels. The main parcel contains an entire block which is bordered by Rockaway Boulevard to the South, 167th Street to the North, 146th Avenue to the West and 147th Avenue to the East. A second parcel is located on the SE corner of 147th Avenue and 167th Street and a third parcel is located on the NE corner of 147th Avenue and 167th Street. The real property is leased to New York City as a bus depot for an initial term of twenty-one years with a first year rent of approximately $2.8 million which rent escalates to a 21st year rent of approximately $4.1 million. Rent continues to escalate during the following two fourteen year extension terms.
49-19 Rockaway Beach Boulevard. 49-19 Rockaway Beach Boulevard, Queens, New York (the "Rockaway Beach Property") is owned in fee simple. The Rockaway Beach Property consists of a 28,790 square foot industrial building on 3.026 acres. The Rockaway Beach Property is located on both the north and south side of Rockaway Beach Boulevard. One parcel is located on the South side of Rockaway Beach Boulevard between Beach 47th and Beach 49th Street. This parcel is developed with a 28,790 square foot industrial building. The second parcel which is comprised of six contiguous tax lots is located on the North side of Rockaway Beach Boulevard between Beach 49th Street and Beach 50th Street. The Rockaway Beach property has been leased to New York City as a bus depot for an initial term of 21 years with a first year rent of approximately $0.6 million escalating over the term to a 21st year rent of approximately $0.9 million. The rent escalates during the following two fourteen year extension terms.
85-01 24th Avenue. 85-01 24th Avenue, East Elmhurst, New York (the "24th Avenue Property") is owned in fee simple. The 24th Avenue Property consists of a 118,430 square foot industrial building on 6.432 acres. The 24thAvenue Property is located on the block front bordered by 23rd Avenue to the North, 24th Avenue to the South, 85th Street to the West and 87th Street to the East in East Elmhurst, New York. The 24th Avenue Property has been leased to New York City as a bus depot for an initial term of 21 years, with a first year rent of approximately $2.6 million escalating during the term to a 21st year rent of approximately $3.8 million. The rent escalates during the two fourteen year extension terms.
114-15 Guy Brewer Boulevard. 114-15 Guy Brewer Boulevard, Jamaica, New York (the "Guy Brewer Property") is owned in fee simple. The Guy Brewer Property consists of a 75,800 square foot industrial building on 4.616 acres. The Guy Brewer Property is located on the NE corner of 115th Avenue and Guy Brewer Boulevard in Jamaica, New York. The Guy Brewer Property has been leased to New York City as a bus depot for an initial term of twenty one years with a first year rent of approximately $1.5 million escalating to a 21st year rent of approximately $2.2 million. Escalations continue during the following two fourteen year renewal terms.
612 Wortman Avenue. 612 Wortman Avenue, Brooklyn, New York (the "Wortman Avenue Property") is owned in fee simple. The Wortman Avenue Property consists of an industrial building of 27,250 square feet located on 10.389 acres. The Wortman Avenue Property is located along the entire block front surrounded by Wortman Avenue to the North, Cozine Avenue to the Sourth, Fountain Avenue to the East and Montauk Avenue to the West. An additional parcel made up of three tax lots is located along the entire block front bordered by Cozine Avenue, Milford Avenue, Flatlands Avenue and Logan Street. The Wortman Avenue Property is primarily leased to Varsity Bus Co., Inc. ("Varsity Bus") as a bus depot, which purchased certain bus routes and buses from the Bus Companies in 2003 (see "Related Party Transactions"). Varsity Bus has occupied a portion of the Wortman Avenue Property since 2003 based on an oral agreement, and has now entered into a written lease related to its tenancy. Under the lease, Varsity Bus is leasing 238,182 square feet of outdoor parking and approximately 16,928 square feet of indoor maintenance and office space for $311,800 per year from February 2006 to August 2006, increasing by the cost of living index from September 2006 to August 2010, when the term ends. In December 2009, Varsity Bus executed one of the extension options under the lease through August 2015. Varsity Bus also pays a 60% share of utility and building maintenance costs. Varsity Bus has the right to terminate the term on six months notice at an earlier date. Varsity Bus also has the right to lease the space for up to four–five year consecutive extension terms after 2010 at a rental rate equal to 90% of then fair market value at the beginning of the first extension term, with rent for following years at a compounding of annual CPI index increases. The balance of the Wortman Avenue Property was occupied by Transit Facility Management Corp. (“TFM”), a subsidiary of the Company, as a bus depot through September 30, 2008, at which time TFM’s operations were discontinued. We are presently seeking a tenant for the portion of this property which was occupied by TFM.
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23-85 87th Street. 23-85 87th Street, East Elmhurst, New York (the "87th Street Property") is owned in fee simple. The 87th Street Property consists of a 52,020 square foot industrial building on 7.016 acres. The 87th Street Property is located on the block front bordered by 23rd Avenue to the North, 24th Avenue to the South, 87th Street to the West and 89th Street to the East in East Elmhurst, New York. The 87th Street Property is leased to Avis Rent-A-Car Systems, Inc. as an automobile leasing and maintenance depot under a lease dated October 31, 2003 with a term ending October 31, 2023, with a base rent of approximately $1.8 million per year. For the sixth, eleventh and sixteenth years, the base rent will be increased by the greater of 105% of the immediately preceding base rent or the cumulative cost of living index increase for the preceding five years but not in excess of 115% of the immediately preceding base rent. The initial base rent had been reduced to approximately $1.5 million per year until the property was rezoned (which occurred in 2008). As a result of the rezoning, the base rent was increased to approximately $1.8 million per year plus an adjustment tied into the increase in the Consumer Price Index (“CPI”) pursuant to the lease as noted above.
8 Farm Springs Road. 8 Farm Springs Road, Farmington, Connecticut (the “Farm Springs Property”) is owned in fee simple. The Farm Springs Property consists of a 107,654 square foot office building on approximately 10.53 acres. The Farm Springs Property has been leased to the Hartford Insurance Company as a an office building for a term of 10 years with current annual rent of approximately $2.2 million escalating to approximately $2.3 million in 2012, in which year the lease expires.
No plans for renovation or improvement
Our real properties, except for the 87th Street Property and the Farm Spring Property, are used as bus depots. We have no plans or obligations to renovate or further develop any of our real properties.
Financing
On July 2, 2007, we and certain subsidiaries (the “Borrowers”) entered into a Loan Agreement, dated as of June 30, 2007 (the “Loan Agreement”) with 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 are providing 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. Interest on the loan is paid monthly. The principal is due and payable on the maturity date pursuant to the terms set forth in the Loan Agreement, namely July 1, 2010 unless otherwise extended or renewed. We are currently exploring the market to refinance the existing Loan Agreement.
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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; (iii) 85-01 24th Avenue and (d) 114-15 Guy Brewer Boulevard; (2) Pledge Agreements under which (i) the Company 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% ownership interest in each of (a) 49-19 Rockaway Beach Boulevard, LLC and (b) 165-25 147th Avenue, LLC, (iii) Triboro Acquisition, Inc. pledged its 100% ownership interest in 85-01 24th Avenue, LLC, and (d) Jamaica Acquisition, Inc. 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. We had assigned our interest in the interest rate cap transaction to GTJ Rate Cap LLC prior to entering into the Loan Agreement.
In addition to customary non-financial covenants, the Borrowers are obligated to comply with certain financial covenants. As of December 31, 2009, we are in compliance with our non-financial and financial covenants. As of March 15, 2010, we had an outstanding balance of approximately $43.2 million under the Loan Agreement.
Competitive Position of Our Real Properties
We believe our real properties dedicated to use as bus depots, located in New York City, are in a favorable competitive position, as we believe that there are not many sites in Queens and Brooklyn, New York that are suitable as bus depots or for the mass parking of automobiles. We believe the Farm Springs Property is in a favorable competitive position since it is located in an area of Hartford, Connecticut which also is the residence of many corporate executives, and offers very short commutation times for such persons, and in addition, is close to major highways and has substantial parking.
Insurance Coverage
Our real properties are covered under an umbrella liability insurance policy. We believe that our insurance is adequate in amount and coverage.
Occupancy
With the exception of the Wortman Avenue Property, our real properties are fully occupied. New York City is the sole tenant of four of the real properties, (147th Avenue Property, Rockaway Beach Property, 24th Avenue Property and Guy Brewer Property), Avis Rent A Car is the sole tenant of the fifth real property (87th Street Property), Varsity Bus is the majority tenant of the sixth real property (Wortman Avenue Property), the balance of which is available for lease, and Hartford Life Insurance is the sole tenant of the seventh property (Farm Springs Property). The loss of these above-mentioned tenants or their inability to pay rent could have a material adverse effect on our business and results of operation.
Expiration of Our Leases
The New York City leases expire in 2026 and 2027. The Avis Rent A Car lease expires in 2023. The Hartford lease which represents approximately 19% of our building space and approximately 19% of our gross rental income expires in 2012. The Varsity Bus lease expires in 2010 and represents approximately 9% of our building space and 3% of our gross rental income.
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Depreciation
The following table provides information on tax depreciation of our real property:
Property | Tax Basis | Depreciation Method (1) | Remaining Life | |||
147th Avenue Property and Rockaway Beach Property | $ 3,020,180 | MACRS | 18 years | |||
24th Avenue Property | $ 1,593,731 | MACRS | 18 years | |||
Guy Brewer Property | $ 2,114,746 | MACRS | 18 years | |||
Wortman Avenue Property and 87th Street Property | $ 4,415,964 | MACRS | 18 years | |||
Farm Springs Property | $ 22,482,306 | MACRS | 37 years |
(1) | Modified Accelerated Cost Recovery System (MACRS) is the current method of accelerated asset depreciation under the Code |
The following table sets forth certain rental data of our real property. It should be noted that rentals include outdoor parking and indoor maintenance and office space. For purposes of the following, aggregate rent is divided by aggregate square footage used, since the leases do not differentiate between outdoor parking and indoor maintenance and office space.
Rental Per Square Foot For 2009 | ||||
Property/Tenant | Building | Land | ||
147th Avenue Property (New York City) | $ 18.50 | $ 9.77 | ||
Rockaway Beach Property (New York City) | $ 21.01 | $ 4.59 | ||
24th Avenue Property (New York City) | $ 21.83 | $ 9.23 | ||
Guy Brewer Property (New York City) | $ 19.99 | $ 7.53 | ||
Wortman Avenue Property (Various) | $ 13.92 | $ 0.84 | ||
87th Street Property (Avis Rent A Car) | $ 39.79 | $ 6.77 | ||
Farm Springs Property (Hartford Insurance) | $ 20.78 | $ 4.87 |
Environmental Matters
Our real property, except for the Farm Springs 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 which has an estimated cost range of approximately $1.4 million to $2.6 million 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.
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As of December 31, 2009 and 2008, we have recorded a liability of approximately $1.1 million and $1.6 million, respectively related to the Study as disclosed in the engineering report. Presently, we are not aware of any claims or remediation requirements from any local, state or federal government agencies.
Each of the properties, except for the Farm Springs Property, is still used as transit depots, including maintenance of vehicles. Our tenants are responsible for environmental conditions which occur during their tenancies, based on the terms of their respective leases.
Competition for Additional Real Properties
Our real property operations are subject to normal competition with other investors to acquire real property and to profitably manage such real property. Numerous other REITs, banks, insurance companies and pension funds, as well as corporate and individual developers and owners of real estate, compete with us in seeking properties for acquisition and for tenants. Many of these competitors have significantly greater financial resources than us. Since our real properties are leased under long-term lease arrangements that are not due to expire in the next twelve months, except for a portion of the Wortman Avenue Property, we do not currently face any immediate competitive re-leasing pressures.
Employees
We have four employees involved on a full time or part time basis with respect to our REIT operations. We believe that our relationship with our employees is good.
Outdoor Maintenance Operations
We, through our wholly-owned subsidiary, Shelter Express Corp., operate a group of outdoor maintenance businesses, electrical construction services business and until September 30, 2008, operated a paratransit business. These subsidiaries (Taxable REIT Subsidiaries) are taxed as corporations. The majority of these operations are based in the New York metropolitan area, with additional operations based in the Los Angeles, California and Phoenix, Arizona metropolitan areas. This group also includes a number of other subsidiaries which are inactive and have little or no assets. The active subsidiaries are described below.
New York metropolitan area operations
These operations include MetroClean Express Corp. (“MetroClean”), Shelter Express Corp. (“Shelter Express”), Shelter Electric Maintenance Corp. (“Shelter Electric”), and Transit Facility Management Corp. (“TFM”).
MetroClean
MetroClean was founded in 1998 and has two major divisions, the outdoor advertising service division and the traffic control services division.
The outdoor advertising service division provides services to outdoor advertising agencies for which we install and maintain bus shelters, urban panels, banners, murals, kiosks, automated pay toilets, video screens and information centers. The work provided under these contracts is for the installation and maintenance of these structures, as well as the posting of advertisements in our customers’ illuminated and non-illuminated display boxes.
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The traffic control services division provides operation support to engineering and construction companies for which it protects road crews working on highways and roadways. With the use of safety barriers and vehicles equipped with protectors and attenuators, our crews secure work areas to allow contractors to conduct their services. Other aspects of this division are the installation of concrete barriers which provide protection and security on highways and buildings. In addition, this division owns and offers for lease bucket trucks, light towers, cargo vans, back-up trucks, display boards, arrow boards, concrete barriers, wooden barriers, man-lifts and under bridge inspection units.
Shelter Express
In 2006, a new contract was awarded by New York City to Cemusa USA (“Cemusa”), a subsidiary to a Spanish corporation. Under the contract, Cemusa is expected to replace the existing 3,200 New York City bus shelters, install over 330 newsstands and construct 20 automated pay toilets. On June 26, 2006, Shelter Express entered into an agreement with CEMUSA Inc. to provide labor, equipment and supervision to service existing bus shelters throughout New York City. During the term, Shelter Express maintained all shelters existing at the beginning of the term which were not subsequently removed. 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. terminated on December 31, 2009 in accordance with its terms. The Services Agreement with CEMUSA, Inc. represented annual revenues of approximately $11.8 million.
Shelter Electric
Shelter Electric is a licensed electrical contractor which provides support services for the activities of MetroClean Express and Shelter Express and electrical contracting services to other customers. Based on the growth and development of outdoor furniture advertising, Shelter Electric clients now also include Clear Channel Outdoor for electrification of bus shelters in Westchester County, New York and wall hangings in malls and various outdoor kiosks and furniture and CBS Outdoor for urban panels. In addition, it provides electrical construction services to a broad range of commercial, industrial, institutional and governmental customers in New York.
Los Angeles metropolitan area operations
Shelter Clean, Inc. is based in Los Angeles, California. Shelter Clean, Inc. was established in 2000 and provides support services for outdoor furniture advertisements to advertising agencies. Shelter Clean also engages in the installation, maintenance, posting, repair and cleaning of bus shelters, kiosks and other related structures where additional displays are located. Shelter Clean's major contracts at the present time are with CBS Outdoor, JC DeCaux Outdoor, Van Wagner Outdoor, Orange County Transit Authority and the City of Los Angeles Department of Transportation. As part of its services Shelter Clean provides its customers with site selection and marking, permit acquisition and execution, sub-contractor liaison, assembly and installation, record keeping, cost analysis and inventory control. Its services include cleaning, trash containment, damage repair, graffiti removal, glass replacement, lighting repair and repainting.
Phoenix area operations
On May 1, 2006 Shelter Clean of Arizona commenced outdoor maintenance operations in Phoenix, Arizona with a three year contract and the possibility of a two year extension option. The contract was extended pursuant to the extension option through December 31, 2010. This operation requires capital expenditures for leased premises and trucks and other equipment. At present, we operate 24 vehicles providing bus shelter maintenance services for the City of Phoenix and other services for the adjoining City of Glendale.
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Transit Facility Management
TFM was one of several private paratransit bus companies in New York City under contract to the Metropolitan Transit Authority as part of the joint plan between the Metropolitan Transit Authority and the New York City Department of Transportation to provide paratransit service. This service is provided by the Metropolitan Transportation Authority to comply with the Americans with Disabilities Act of 1990. TFM began operating paratransit service in October 2001, providing door-to-door public transportation service to people with disabilities unable to use conventional public transit services. The routes held by TFM included transit services in each of the five boroughs of New York City.
As of September 30, 2008, TFM discontinued its operations.
Employees
As of March 1, 2010, Shelter Express, MetroClean and Shelter Electric had a total of 102 employees, 73 of whom are union members; Shelter Clean, Inc. (California) had 93 employees, none of whom are union members; Shelter Clean of Arizona, Inc. had 39 employees, none of whom are union members. The union agreements expire on May 20, 2010 and June 30, 2012 for Shelter Electric while Shelter Express and Metro Clean union agreements expire on June 30, 2010. We consider our relations with our employees to be good.
Litigation
The outdoor maintenance and discontinued paratransit businesses are presently not parties to any litigation except litigation in the ordinary course of their business, carrying no material liabilities for such businesses.
Competition
Each of the outdoor maintenance businesses faces substantial competition in its respective market. Competition is based on price and level of service. These companies compete with companies with greater financial and physical resources, including greater numbers of vehicles and other equipment. We believe that our outdoor services operations are significant in each market in which it operates as a percentage of all such services in the market.
Our Compliance with Governmental Regulations
Many laws and government regulations are applicable to our properties and changes in these laws and regulations, or their interpretation by agencies and the courts, occur frequently.
Costs of Compliance with the Americans with Disabilities Act.
Under the Americans with Disabilities Act of 1990, or ADA, all public accommodations must meet federal requirements for access and use by disabled persons. Although we believe that we are in substantial compliance with present requirements of the ADA, none of our properties have been audited, nor have investigations of our properties been conducted to determine compliance. We may incur additional costs in connection with the ADA. Additional federal, state and local laws also may require modifications to our properties or restrict our ability to renovate our properties. We cannot predict the cost of compliance with the ADA or other legislation. If we incur substantial costs to comply with the ADA or any other legislation, our financial condition, results of operations, cash flow and ability to satisfy our debt service obligations and pay liquidating distributions could be adversely affected.
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Costs of Government Environmental Regulation and Private Litigation.
Environmental laws and regulations hold us liable for the costs of removal or remediation of certain hazardous or toxic substances which may be on our properties. These laws could impose liability without regard to whether we are responsible for the presence or release of the hazardous materials. Government investigations and remediation actions may have substantial costs and the presence of hazardous substances on a property could result in personal injury or similar claims by private plaintiffs. Various laws also impose liability on persons who arrange for the disposal or treatment of hazardous or toxic substances for the cost of removal or remediation of hazardous substances at the disposal or treatment facility. These laws often impose liability whether or not the person arranging for the disposal ever owned or operated the disposal facility. As the owner and operator of our properties, we may be deemed to have to arrange for the disposal or treatment of hazardous or toxic substances.
Use of Hazardous Substances by Some of Our Tenants.
Some of our tenants may handle hazardous substances and wastes on our properties as part of their routine operations. Environmental laws and regulations subject these tenants, and potentially us, to liability resulting from such activities. We require the tenants, in their leases, to comply with these environmental laws and regulations and to indemnify us for any related liabilities. We are unaware of any material noncompliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with any of our properties.
Other Federal, State and Local Regulations.
Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these various requirements, we may incur governmental fines or private damage awards. While we believe that our properties are currently in material compliance with all of these regulatory requirements, we do not know whether existing requirements will change or whether future requirements will require us to make significant unanticipated expenditures that will adversely affect our ability to make liquidating distributions to our stockholders. We believe, based in part on engineering reports which we generally obtain at the time we acquire the properties, that all of our properties comply in all material respects with current regulations. However, if we were required to make significant expenditures under applicable regulations, our financial condition, results of operations, cash flow and ability to satisfy our debt service obligations and to pay liquidating distributions could be adversely affected.
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You should carefully consider the specific factors listed below, together with the cautionary statement under the caption "Cautionary Statement Regarding Forward Looking Statements" and the other information included in this Report on Form 10-K. If any of the following risks actually occur, our business, financial condition or results of operations could be adversely affected. In such case, a stockholder may lose all or part of any investment in our common stock.
Risks Related to our Organization and Structure
Our company has a very limited operating history as a REIT, which makes our future performance and the performance of your investment difficult to predict. |
Our company was incorporated on June 23, 2006 and effective July 1, 2007 elected to be treated as a REIT under the Code. We have a very limited operating history as a REIT. Therefore, our future performance and the performance of an investment in our common stock cannot be predicted at this time.
Our failure to qualify as a REIT would subject us to corporate level income tax, which would materially impact funds available for distribution. |
We intend to operate in a manner so as to qualify as a REIT. Qualifying as a REIT will require us to meet several tests regarding the nature of our assets and income on an ongoing basis. A number of the tests established to qualify as a REIT for tax purposes are factually dependent. Therefore, you should be aware that while we intend to qualify as a REIT, it may not be possible at this early stage to assess our ability to satisfy these various tests on a continuing basis. Therefore, we cannot assure you that our company will in fact qualify as a REIT or remain qualified as a REIT.
If we fail to qualify as a REIT in any year, we would pay federal income tax on our net income. We might need to borrow money or sell assets to pay that tax. Our payment of income tax would substantially decrease the amount of cash available to be distributed to our stockholders. In addition, we no longer would be required to distribute substantially all of our taxable income to our stockholders. Unless our failure to qualify as a REIT is excused under relief provisions of the federal income tax laws, we could not re-elect REIT status until the fifth calendar year following the year in which we failed to qualify.
In addition, even if we qualify as a REIT in any year, we would still be subject to federal taxation on certain types of income. For example, we would be subject to federal income taxation on the net income earned by our "taxable REIT subsidiaries", that is, our corporate subsidiaries with respect to which elections are made to treat the same as separate, taxable subsidiaries, presently including our outdoor maintenance businesses.
We may have to spin off our taxable REIT subsidiaries.
On a going forward basis, at least 75% of our assets must be those which may be held by REITs. Our outdoor maintenance business assets, and any other assets we may add to that group, are not qualified to be held directly by a REIT. Accordingly, we may be required, in the future, to spin off these businesses in order to protect our status as a REIT. If we do so, we may be distributing a significant portion of our assets, which could materially and adversely affect the value of our common stock. It should be noted, however, that such distribution would be made to the then holders of our common stock.
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Real property business risks
The majority of our real properties are currently comprised of six rentable real properties in the New York area, and we may not grow or diversify our real estate portfolio substantially in the future, leaving us vulnerable to New York area problems.
We own seven income producing real properties, six of which are located in New York City and one of which is located near Hartford, Connecticut. The six New York City real properties are commercial and are located in Queens and Brooklyn, New York. New York City is the sole tenant of four of the properties. The lack of diversity in the properties which we own, and their principal tenant, New York City, should we not diversify, could increase your risk of owning our shares. Adverse conditions at that limited number of properties or in the location in which the properties exist would have a direct negative impact on your return as a stockholder.
Negative characteristics of real property investments
Financing of our real property could lead to loss of the same if there is a default.
The growth and diversification of our real property business is expected to be financed by borrowed funds. We may borrow sums up to 75% of the value of our real property portfolio. Such loans may result in substantial interest charges which can materially reduce distributions to our stockholders. The documentation related to such loans is expected to contain covenants regulating the manner in which we may conduct our businesses and may restrict us from pursuing opportunities which could be beneficial to our stockholders. In addition, if we are unable to meet our payment or other obligations to our lenders, we risk loss of some or all of our real property portfolio.
We depend upon our tenants to pay rent in a timely manner, and their inability or refusal to pay rent could impact our ability to pay our indebtedness, leading to possible defaults, and reduce cash available for distribution to our stockholders.
Our real property, particularly those we may purchase in the future, will be subject to varying degrees of risk that generally arise from such ownership. The underlying value of our properties and the ability to make distributions to you depend upon the ability of the tenants of our properties to generate enough income to pay their rents in a timely manner. Their inability or unwillingness to do so may be impacted by employment and other constraints on their finances, including debts, purchases and other factors. Additionally, the ability of commercial tenants of commercial properties would depend upon their ability to generate income in excess of their operating expenses to make their lease payments to us. Changes beyond our control may adversely affect our tenants' ability to make lease payments and consequently would substantially reduce our income from operations and our ability to meet our debt service requirements and make distributions to you. These changes include, among others, the following:
• | changes in national, regional or local economic conditions; | |
• | changes in local market conditions; and | |
• | changes in federal, state or local regulations and controls affecting rents, prices of goods, interest rates, fuel and energy consumption. |
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Due to these changes or others, tenants may be unable to make their lease payments. A default by a tenant, the failure of a tenant's guarantor to fulfill its obligations or other premature termination of a lease could, depending upon the size of the leased premises and our ability to successfully find a substitute tenant, have a materially adverse effect on our revenues and the value of our common stock or our cash available for distribution to our stockholders.
If we are unable to find tenants for our properties, particularly those we may purchase in the future, or find replacement tenants when leases expire and are not renewed by the tenants, our revenues and cash available for distribution to our stockholders will be substantially reduced.
Competition may adversely affect acquisition of properties and leasing operations. We compete for the purchase of commercial property with many entities, including other publicly traded REITs. Many of our competitors have substantially greater financial recourses than ours. In addition, our competitors may be willing to accept lower returns on their investments. If our competitors prevent us from buying the properties that we have targeted for acquisition, we may not be able to meet our property acquisition and development goals. We may incur costs on unsuccessful acquisitions that we will not be able to recover.
If our competitors offer space at rental rates below our current rates or the market rates, we may lose current or potential tenants to other properties in our markets and we may need to reduce rental rates below our current rates in order to retain tenants upon expiration of their leases. As a result, our results of operations and cash flow may be adversely affected.
Lack of diversification and liquidity of real estate will make it difficult for us to sell underperforming properties or recover our investment in one or more properties.
Our business is subject to risks associated with investment primarily in real property. Real property investments are relatively illiquid. Our ability to vary our portfolio in response to changes in economic and other conditions will be limited. We cannot assure you that we will be able to dispose of a property when we want or need to. Consequently, the sale price for any property we may purchase in the future may not recoup or exceed the amount of our investment.
Our real property portfolio currently includes six real properties which have been, and continue to be, used as a bus depot or automobile facility and has certain environmental conditions resulting in continuing exposure to environmental liabilities.
Generally our real properties have had activity relating to removal and replacement of underground storage tanks and soil removal; however, there are still some levels of contamination at the sites for which groundwater monitoring programs have been put into place. In addition, our properties are being used as transit depots including the maintenance of vehicles which may expose us to additional environmental liabilities. We cannot assess what further liability may arise from these factors.
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Discovery of previously undetected environmentally hazardous conditions at our real properties would result in additional expenses, resulting in a decrease in our cash flows and the return on your shares of common stock.
Under various federal, state and local environmental laws, ordinances and regulations, a current or previous real property owner or operator may be liable for the cost to remove or remediate hazardous or toxic substances on, under or in such property. These costs could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us from entering into leases with prospective tenants that may be impacted by such laws. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials into the air. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could reduce the amounts available for distribution to you.
A number of risks to which our real properties may be exposed may not be covered by insurance, which could result in losses which are uninsured.
We could suffer a loss due to the cost to repair any damage to properties that are not insured or are underinsured. There are types of losses, generally of a catastrophic nature, such as losses due to terrorism, wars, earthquakes or acts of God that are either uninsurable or not economically insurable. Generally, we will not obtain insurance for hurricanes, earthquakes, floods or other acts of God unless required by a lender or we determine that such insurance is necessary and may be obtained on a cost-effective basis. If such a catastrophic event were to occur, or cause the destruction of one or more of our properties, we could lose both our invested capital and anticipated profits from such property.
You may not receive any distributions from the sale of one of our properties, or not receive such distributions in a timely manner, because we may have to provide financing to the purchaser of such property, resulting in an inability or delay of distributions to stockholders.
If we sell a property, you may experience a delay before receiving your share of the proceeds of such liquidation. In a forced or voluntary liquidation, we may sell our properties either subject to or upon the assumption of any then outstanding mortgage debt or, alternatively, may provide financing to purchasers. We may take a purchase money obligation secured by a mortgage as partial payment. To the extent we receive promissory notes or other property instead of cash from sales, such proceeds, other than any interest payable on those proceeds, will not be available for distribution until the promissory notes or other property are actually paid, sold, refinanced or otherwise disposed of. In many cases, we will receive initial down payments in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years. Therefore, you may experience a delay in the distribution of the proceeds of a sale until such time.
Our outdoor maintenance businesses depend on large direct or indirect municipal contracts, which are subject to the conduct of customers and municipalities and require substantial capital, which may be difficult to obtain.
We operate several outdoor maintenance businesses focused on bus shelters, bill board advertising displays and outdoor construction and maintenance support. Much of this business is related to large contracts between our customers and various municipalities. The loss by our customers of one or more of those contracts would have a material adverse effect on our business. In addition, these businesses have required significant capital and may require significant additional capital in the future. In addition to the risks related to additional investment, the capital may have to be funded by borrowing or asset sales since funding from our REIT operations is not likely, increasing the cost of such capital.
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Risks related to possible conflicts of interest
Our officers and directors may have other interests which may conflict with their duties to us and our stockholders, and which may have adverse effects on the interests of us and our stockholders.
Our officers and directors may have other interests which could conflict with their duties to us and our stockholders, and which may have adverse effects on the interests of us and our stockholders. For example, certain of such persons may have interests in other real estate related ventures and may have to determine how to allocate an opportunity between us and such other ventures. Also, such persons may have to decide on whether we should purchase or dispose of real property from or to an entity with which they are related, or conduct other transactions, and if so, the terms thereof. Such determinations may either benefit us or be detrimental to us. Our officers and directors are expected to behave in a fair manner toward us, and we require that potential conflicts be brought to the attention of our Board of Directors and that determinations will be made by a majority of directors who have no interest in the transaction. As of this time, only one officer and director, Paul A. Cooper, conducts a real property business apart from his activities with us.
Risks related to our common stock
The absence of a public market for our common stock will make it difficult for a stockholder to sell shares, which may have to be held for an indefinite period.
Prospective stockholders should understand that our common stock, is illiquid, and they must be prepared to hold their shares of common stock for an indefinite length of time. There has been no public market for our common stock, and initially we do not expect a market to develop. We have no current plans to cause our common stock to be listed on any securities exchange or quoted on any market system or in any established market either immediately or at any definite time in the future. While our Board of Directors may attempt to cause our common stock to be listed or quoted in the future, there can be no assurance that this event will occur. Accordingly, stockholders will find it difficult to resell their shares of common stock. Thus, our common stock should be considered a long-term investment. In addition, there are restrictions on the transfer of our common stock. In order to qualify as a REIT, our shares must be beneficially owned by 100 or more persons at all times and no more than 50% of the value of our issued and outstanding shares may be owned directly or indirectly by five or fewer individuals and certain entities at all times. Our charter provides that no person may own more than 9.9% of the issued and outstanding shares of our common stock. Any attempted ownership of our shares that would result in a violation of one or more of these limits will result in such shares being transferred to an "excess share trust" so that such shares will be disposed of in a manner consistent with the REIT ownership requirements. In addition, any attempted transfer of our shares that would cause us to be beneficially owned by less than 100 persons will be void ab initio (i.e., the attempted transfer will be considered to never have occurred).
Our stockholders' interests may be diluted by issuances under our 2007 Incentive Award Plan and other common stock issuances, which could result in lower returns to our stockholders.
We have adopted the 2007 Incentive Award Plan, under which 1,000,000 shares of common stock are reserved for issuance, and under which we may grant stock options, restricted stock and other performance awards to our officers, employees, consultants and independent directors. The effect of these grants, including the subsequent exercise of stock options, could be to dilute the value of the stockholders' investments.
In addition, our Board of Directors is authorized, without stockholder approval, to cause us to issue additional shares of our common stock, or shares of preferred stock on which it can set the terms, and to raise capital through the issuance of options, warrants and other rights, on terms and for consideration as the Board of Directors in its sole discretion may determine, subject to certain restrictions in our charter in the instance of options and warrants. Any such issuance could result in dilution to stockholders. The Board of Directors may, in its sole discretion, authorize us to issue common stock or other interests or our securities to persons from whom we purchase real property or other assets, as part or all of the purchase price. The Board of Directors, in its sole discretion, may determine the value of any common stock or other equity or debt securities issued in consideration of property or services provided, or to be provided, to us.
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Federal income tax and regulatory requirements
The requirement to distribute at least 90% of our net income may require us to incur debt, sell assets or issue additional securities for cash, which would increase the risks associated with your investment.
In order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our net income, other than any capital gains. To the extent that we distribute at least 90% but less than 100% of our net income in a calendar year, we will incur no federal corporate income tax on our distributed net income, but will incur a federal corporate income tax on any undistributed amounts. In addition, we will incur a 4% nondeductible excise tax if the actual amount we distribute to our stockholders in a calendar year is less than a minimum amount specified under federal income tax law. We intend to distribute at least 90% of our net income to our stockholders each year so that we will satisfy the distribution requirement and avoid the 4% excise tax. However, we could be required to include earnings in our taxable income before we actually receive the related cash. That timing difference could require us to borrow funds or raise additional capital to meet the distribution requirement and avoid corporate income tax and the 4% excise tax in a particular year. In case we don't distribute 100% of our net income, we will be subject to taxation at the REIT level on the amount of undistributed net income and to the extent we distribute such amount, you will be subject to taxation on it at the stockholder level.
The minimum distribution requirements for REIT's may require us to borrow, sell assets or issue additional securities for cash to make required distributions, which would increase the risks associated with your investment in our company.
Under existing tax law, we would be taxed at the corporate level if, within 10 years of our election to be taxed as a REIT, we sell any real property acquired in the Reorganization in a taxable transaction. For that reason, we presently intend to hold such real property for at least 10 years from our election to be taxed as a REIT. This policy would eliminate a sale as a way to obtain liquidity and would prevent a sale which would otherwise be made to take advantage of favorable market conditions.
We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and furnish a report on our internal control over financial reporting.
We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 requires us to assess and attest to the effectiveness of our internal control over financial reporting and, beginning in the fiscal year ending December 31, 2010, will require our independent registered public accounting firm to opine as to the adequacy of our assessment and effectiveness of our internal control over financial reporting. We may not receive an unqualified opinion from our independent registered public accounting firm with regard to our internal control over financial reporting.
Acquisition risks
Our inability to identify or find funding for acquisitions could prevent us from diversification or growth and could adversely impact the value of an investment in us.
We may not be able to identify or obtain financing to acquire additional real properties. We are required to distribute at least 90% of our net income, excluding net capital gains, to our stockholders in each taxable year, and thus our ability to retain internally generated cash is very limited. Accordingly, our ability to acquire properties or to make capital improvements to or remodel properties will depend on our ability to obtain debt financing from third parties or the sellers of properties.
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If mortgage debt is unavailable at reasonable rates, we may not be able to finance the purchase of additional properties. If we place mortgage debt on our current properties, we will run the risk of being unable to refinance the additional properties when the loans become due, or of being unable to refinance on favorable terms. If interest rates are higher when we refinance the properties, our income would be reduced. We may be unable to refinance properties. If any of these events occurs, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to our stockholders and may hinder our ability to raise more capital.
We have incurred and plan to incur mortgage and other indebtedness, which could result in material damage to our business if there is a default.
Significant borrowings by us will increase the risks of owning shares of our company. If there is a shortfall between the cash flow generated by our properties and the cash flow needed to service our indebtedness, then the amount available for distributions to our stockholders will be reduced or eliminated. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, thus reducing the value of your investment. If any mortgages or other indebtedness contain cross-collateralization or cross-default provisions, a default on a single loan could affect multiple properties.
Additionally, when providing financing, a lender may impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property, merge with another company, or discontinue insurance coverage. These or other limitations may limit our flexibility and our ability to achieve our operating plans. Our failure to meet such restrictions and covenants could result in an event of default under our line of credit and result in the foreclosure of some or all of our properties.
Investing in properties through joint ventures creates a risk of loss to us as a result of the possible inaction or misconduct of a joint venture partner.
Joint venture investments may involve risks not present in a direct acquisition, including, for example:
• | the risk that our co-venturer or partner in an investment might become bankrupt; |
• | the risk that such co-venturer or partner may at any time have economic or business interests or goals which are inconsistent with our business interests or goals; or |
• | the risk that such co-venturer or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, such as selling a property at a time when it would have adverse consequences for our stockholders. |
Actions by such a co-venturer or partner might have the result of subjecting the applicable property to liabilities in excess of those otherwise contemplated and may have the effect of reducing our cash available for distribution. It also may be difficult for us to sell our interest in any such joint venture or partnership in such property.
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Borrowings may increase our business risks
Income distributions may cause us to borrow, resulting in borrowing costs and risk of defaults.
We are required to distribute at least 90% of our taxable net income, excluding net capital gains to our stockholders in each taxable year. However, depending on the size of our operations, we will require a minimum amount of capital to fund our daily operations. In addition, we may require working capital for our outdoor maintenance businesses. We may have to obtain financing from either affiliated or unaffiliated sources to meet such cash needs. This financing may not be available to us on acceptable terms or at all, which could adversely affect our operations and decrease the value of your investment in our company.
In addition, in October, 2007, we utilized approximately $20.0 million from our ING loan facility in connection with our distribution of undistributed historical earnings and profits to our stockholders.
As we incur indebtedness which may be needed for operations, we increase expenses which could result in a decrease in cash available for distribution to our stockholders.
The risk associated with your ownership of our common stock depends upon, among other factors, the amount of debt we incur. We have incurred and intend to incur additional indebtedness in connection with our acquisition of properties. We may also borrow for the purpose of maintaining our operations or funding our working capital needs. Lenders may require restrictions on future borrowings, distributions and operating policies. We also may incur indebtedness if necessary to satisfy the federal income tax requirement that we distribute at least 90% of our taxable net income, excluding net capital gains, to our stockholders in each taxable year. Borrowing increases our business risks.
Debt service decreases cash available for distribution since we will be responsible for retiring the debt and paying the attendant interest. In the event the fair market value of our properties was to increase, we could incur more debt without a commensurate increase in cash flow to service the debt. In addition, our Board of Directors can change our policy relating to the incurrence of debt at any time without stockholder approval.
Prolonged disruptions in the financial markets could affect our ability to obtain financing on reasonable terms and have other adverse effects on us and the market price of our common stock.
Global stock and credit markets have recently experienced significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and, in certain cases, have resulted in the unavailability of certain types of financing. If these conditions persist, lending institutions may be forced to exit markets such as repurchase lending, become insolvent or further tighten their lending standards or increase the amount of equity capital required to obtain financing, and in such event, could make it more difficult for us to obtain financing on favorable terms or at all. Our profitability will be adversely affected if we are unable to obtain cost-effective financing for our investments. A prolonged downturn in the stock or credit markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly. In addition, these factors may make it more difficult for our borrowers to repay our loans as they may experience difficulties in selling assets, increased costs of financing or obtaining financing at all. These events in the stock and credit markets may also make it more difficult or unlikely for us to raise capital through the issuance of our common stock or preferred stock. These disruptions in the financial markets also may have a material adverse effect on the market value of our common stock and other adverse effects on us or the economy generally.
We have incurred and will incur indebtedness secured by our properties, which may subject our properties to foreclosure in the event of a default.
Incurring mortgage indebtedness increases the risk of possible loss. Most of our borrowings to acquire properties would be secured by mortgages on our properties. If we default on our secured indebtedness, the lender may foreclose and we could lose our entire investment in the properties securing such loan which would adversely affect distributions
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to stockholders. For federal tax purposes, any such foreclosure would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage and, if the outstanding balance of the debt secured by the mortgage exceeds the basis of the property to our company, there could be taxable income upon a foreclosure. Such taxes would be payable by us if the sale was of our current real properties and took place within 10 years after our REIT election. To the extent lenders require our company to cross-collateralize our properties, or our loan agreements contain cross-default provisions, a default under a single loan agreement could subject multiple properties to foreclosure.
Increases in interest rates will increase the amount of our debt payments and increased interest payments will adversely affect our ability to make cash distributions to our stockholders.
A change in economic conditions which results in higher interest rates would increase debt service requirements on variable rate debt and could reduce the amounts available for distribution to you as a stockholder. A change in economic conditions could cause the terms on which borrowings become available to be unfavorable. In such circumstances, if we are in need of capital to repay indebtedness in accordance with its terms or otherwise, we could be required to liquidate one or more of our investments in properties at times which may not permit realization of the maximum return on such investments.
Difficulty obtaining permanent financing would limit the possible growth in our real property operations.
The United States is presently experiencing a significant reduction in available credit. When we acquire real property using our revolving credit facility, we plan to refinance the same with permanent mortgage lending on the real property. If due to a lending contraction we are unable to find such financing with terms acceptable to us, we would be unable to restore the borrowings made under our revolving credit facility and we would be limited in further acquirements of real property. At the present time, we have approximately $30.0 million available for such purpose under our revolving credit facility.
We might not be able to replace or extend our credit facility when it matures in July 2010. Recent disruptions in the credit markets could adversely affect our ability to access funds under our credit facility or any replacement credit facility.
Our credit facility has a term that expires in July 2010. We plan to seek to put in place a new revolving credit facility in advance of the expiration of the current facility. At this time, it is difficult to forecast the future state of the credit market. If, because of our indebtedness, the level of our cash flows, lenders’ perceptions of our creditworthiness, or for other reasons, we are unable to renew, replace or extend our credit facility on terms attractive to us, or to arrange for alternative financing, we might be required to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding could be arranged, if such financing is available on acceptable terms, or at all. Such measures could include deferring new property acquisitions or other capital expenditures, dispositions of one or more assets on unfavorable terms and further reducing or eliminating future cash dividend payments or other discretionary uses of cash, or other, more severe actions.
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Also, disruptions in the credit markets and uncertainty in the U.S. economy could adversely affect one or more lenders that currently participate in our credit facility, could cause them to elect not to participate in any new credit facility we might seek, or could cause other banks that are not currently participants in the credit facility to be unwilling or unable to participate in any such new facility. Our access to funds under the current credit facility or any future facility is dependent on the ability of the banks that are currently, or other banks that might in the future be, parties to the current or any replacement facility to meet their funding commitments. These banks might have incurred losses or might now have reduced capital reserves. As a result, these banks might be or become capital constrained and might tighten their lending standards, or become insolvent. If they experience shortages of capital and liquidity, banks that are parties to the credit facility (or any banks that become parties in the future) could fail or refuse to honor their legal commitments and obligations under the credit facility, including by not extending credit up to the maximum amount permitted by the credit facility and/or by not honoring their loan commitments at all. Current or prospective future bank participants could also elect not to participate in any renewal or replacement of the credit facility. If we were unable to draw funds under our credit facility because of a lender default or failure, or if we were unable to enter into a new credit facility with current or prospective other lenders, and we were unable to obtain alternative cost-effective financing from other sources of unsecured or secured debt capital, our financial condition, results of operations, cash flow and our ability to make distributions to stockholders would be materially adversely affected.
Our ability to change policies without a stockholder vote
Our policies, including the limits on debt, may be changed or eliminated by our Board of Directors at any time without a vote of our stockholders.
Our policies, including policies intended to protect our stockholders and the policies described in this annual report with respect to acquisitions, financing, limitations on debt and investment limitations, have been determined by our Board of Directors and can be changed at any time without a vote of our stockholders or notice to you as a stockholder if our Board of Directors so determines in the exercise of its duties.
Possible adverse consequences of limits on ownership and transfer of our shares
The limitation on ownership of our stock in our charter will prevent you from acquiring more than 9.9% of our common stock and may force you to sell common stock back to us.
Our charter limits the beneficial and constructive ownership of our capital stock by any single stockholder to 9.9% of the number of outstanding shares of each class or series of our stock including our common stock. We refer to these limitations as the ownership limits. Our charter also prohibits the beneficial or constructive ownership of our capital stock by any stockholder that would result in (1) our capital stock being beneficially owned by fewer than 100 persons, (2) five or fewer individuals, including natural persons, private foundations, specified employee benefit plans and trusts, and charitable trusts, owning more than 50% of our capital stock, applying broad attribution rules imposed by the federal tax laws, (3) our company otherwise failing to qualify as a REIT for federal tax purposes. In addition, any attempted transfer of our capital stock that would result in the Company being beneficially owned by less than 100 persons will be void ab initio (i.e., such transfer will be considered to never have happened). If you acquire shares in excess of the ownership limits or in violation of the ownership limitations, we:
• | will consider the transfer (in whole or part) to be null and void; | |
• | will not reflect the transaction on our books; | |
• | may institute legal action to enjoin the transaction; | |
• | will not pay dividends or other distributions to you with respect to those excess shares; | |
• | will not recognize your voting rights for those excess shares; and | |
• | will consider the excess shares held in trust for the benefit of a charitable beneficiary. |
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If such shares are transferred to a trust for the benefit of a charitable beneficiary, you will be paid for such excess shares a price per share equal to the lesser of the price you paid or the "market price" of our stock. Unless shares of our common stock are then traded on a national securities exchange or quoted on a national market system, the market price of such shares will be a price determined by our Board of Directors in good faith. If shares of our common stock are traded on a national securities exchange or quoted on a national market system, the market price will be the average of the last sales prices or the average of the last bid and ask prices for the date of determination.
If you acquire our common stock in violation of the ownership limits or the restrictions on transfer described above:
• | you may lose your power to dispose of the stock; | |
• | you may not recognize profit from the sale of such stock if the "market price" of the stock increases; and | |
• | you may incur a loss from the sale of such stock if the "market price" decreases. |
Anti-takeover provisions related to us
Our Stockholder Rights Agreement is designed to discourage takeover attempts without approval of our Board of Directors, which could discourage a potential takeover bid and the related payment to our stockholders.
The Stockholder Rights Agreement provides that a right is deemed to be issued and outstanding in conjunction with each outstanding share of our common stock. If any person or group, as defined in the agreement, acquires more than 15% of our outstanding common stock without the approval of our Board of Directors, each holder of a right, other than such 15% or more holder(s), will be entitled to purchase 1000th of a share of our Series A preferred stock for $50.00 which is convertible into our common stock at one-half of the market value of our common stock, or to purchase, for each right, $50.00 of our common stock at one-half of the market value. The effect of this provision is to materially dilute the holdings of such 15% or more holders and substantially increase the cost of acquiring a controlling interest in us. These types of provisions generally inhibit tender offers or other purchases of a controlling interest in a company such as ours.
Limitations on share ownership and transfer may deter a sale of our company in which you could profit.
The limits on ownership and transfer of our equity securities in our charter may have the effect of delaying, deferring or preventing a transaction or a change in control of our company that might involve a premium price for your common stock. The ownership limits and restrictions on transferability will continue to apply until our Board of Directors determines that it is no longer in our best interest to continue to qualify as a REIT.
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Our ability to issue preferred stock with terms fixed by the Board of Directors may include a preference in distributions superior to our common stock and also may deter or prevent a sale of our company in which a stockholder could otherwise profit.
Our ability to issue preferred stock and other securities without your approval also could deter or prevent someone from acquiring our company. Our charter authorizes our Board of Directors to issue up to ten million shares of preferred stock. Our Board of Directors may establish the preferences and rights, including a preference in distributions superior to our common stockholders, of any issued preferred stock designed to prevent, or with the effect of preventing, someone from acquiring control of our company.
Maryland anti-takeover statute restrictions may deter others from seeking to acquire our company in a transaction in which a stockholder could profit.
Maryland law contains many provisions, such as the business combination statute and the control share acquisition statute, that are designed to prevent, or have the effect of preventing, someone from acquiring control of our company without approval of our Board of Directors. Our bylaws exempt our company from the control share acquisition statute (which eliminates voting rights for certain levels of shares that could exercise control over us) and our Board of Directors has adopted a resolution opting out of the business combination statute (which prohibits a merger or consolidation of us and a 10% stockholder for a period of time) with respect to affiliates of our company. However, if the bylaw provisions exempting our company from the control share acquisition statute or the board resolution opting out of the business combination statute were repealed by the Board of Directors, in its sole discretion, these provisions of Maryland Law could delay or prevent offers to acquire our company and increase the difficulty of consummating any such offers.
Because of our staggered Board of Directors, opposition candidates would have to be elected in two separate years to constitute a majority of the Board of Directors, which may deter a change of control from which a stockholder could profit.
We presently have an eight person Board of Directors. Each director has or will have a three year term, and only approximately one-third of the directors will stand for election each year. Accordingly, in order to change a majority of our Board of Directors, a third party would have to wage a successful proxy contest in two successive years, which is a situation that may deter proxy contests.
Certain provisions of our charter make stockholder action more difficult, which could deter changes beneficial to our stockholders.
We have certain provisions in our charter and bylaws that require super-majority voting and regulate the opportunity to nominate directors and to bring proposals to a vote by the stockholders.
None.
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Portfolio of Real Estate Investments
The following table sets forth information relating to each of our real estate investments in addition to the specific mortgages encumbering the properties:
Portfolio of Real Properties as of March 15, 2010: | ||||||
Property and Location | Year Acquired | Leasable space – approximate sq. ft. | Average Annual Occupancy Rate | Total Annualized Rents Based on Occupancy $(000) | Mortgage Balance $(000) | Depreciated Cost of Land, Buildings & Equipment $(000) |
147th Avenue Property, Jamaica, NY | A | Building 151,068 Land 286,057 | 100% | $ 2,800 | $1,000 B | $ 722 |
Rockaway Beach Property, Queens, NY | A | Building 28,790 Land 131,802 | 100% | $ 600 | $1,000 B | $ 133 |
24th Avenue Property, Elmhurst, NY | A | Building 118,430 Land 280,180 | 100% | $ 2,600 | $1,000 B | $ 38,982 |
Guy Brewer Property, Jamaica, NY | A | Building 75,800 Land 201,078 | 100% | $ 1,500 | $1,000 B | $ 23,106 |
Wortman Avenue Property, Brooklyn, NY | A | Building 27,250 Land 452,535 | 72% | $ 400 | $0 | $ 14,509 |
87th Street Property, East Elmhurst, NY | A | Building 52,020 Land 309,142 | 100% | $ 2,100 | $0 | $ 9,024 |
Farm Springs Property, Hartford, CT | 2008 | Building 107,654 Land 458,687 | 100% | $ 2,200 | $0 | $ 18,334 |
A. | Acquired by the Company in 2007 upon the consummation of the Reorganization. The Bus Companies acquired these properties from 10 to 70 years ago. |
B. | These properties are all subject to a mortgage to ING in the principal amount of $1,000,000. |
For additional information about our portfolio of real estate investments, see Item 1 – Business-Portfolio of Real Properties.
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Insurance
We believe that we have property and liability insurance with reputable, commercially rated companies. We also believe that our insurance policies contain commercially reasonable deductibles and limits, adequate to cover our properties. We expect to maintain this type of insurance coverage and to obtain similar coverage with respect to any additional properties we acquire in the near future. Further, we have title insurance relating to our properties in an aggregate amount that we believe to be adequate.
Regulations
Our real properties, as well as any other real properties that we may acquire in the future, are subject to various federal, state and local laws, ordinances and regulations. They include, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution and indirect environmental impacts such as increased motor vehicle activity. We believe that we have all permits and approvals necessary under current law to operate our properties.
Real Property Used By Us in Our Businesses
The real properties used by us for the day to day conduct of our business are as follows (all of which are leased):
Location | Square Footage/ Facility | Monthly Rent/ Expiration | Purpose |
Lynbrook, NY | 7,000/office | $16,713 / 8/31/15 | Executive Offices |
Long Island City, NY | 14,000/building on 50,000/lot | $27,500 / 8/31/10 | Shelter Express Corp, MetroClean Express Corp, Shelter Electric Maintenance Corp. |
Long Island City, NY | 2,000/office | $2,000 / 9/30/10 | Shelter Electric Maintenance Corp. |
Long Island City, NY | 6,000/lot | $4,000 / 1/31/10 | Shelter Electric Maintenance Corp. |
New Rochelle, NY | 13,000/building and land | $6,382.57 / 7/31/13 | MetroClean Express Corp |
Phoenix, AZ | 6,200/building on 20,478/lot | $3,400 / 4/30/10 | Shelter Clean of Arizona, Inc. |
Sun Valley, CA | 20,038/building on 39,460/lot | $15,000 / 6/30/15 | Shelter Clean, Inc. |
Signal Hill, CA | 6,256/building on 20,250/lot | $5,000 / 6/30/10 | Shelter Clean, Inc. |
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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 was held on the petition which 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 and on November 7, 2009 a judgment was entered related to the decision. 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 resulted in additional payments due respondents in the aggregate amount of approximately $1.5 million paid on November 19, 2009. In addition, the Court awarded respondents 50% of their reasonable professional fees and costs, which amounted to approximately $0.5 million and was paid on January 6, 2010. 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 interest amounted to approximately $0.3 million and was paid on November 19, 2009.
Collectively, in addition to the above, 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 have been paid an aggregate of $435,457 pursuant to the good faith offer. 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 Registrant's financial position or results of operations.
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PART II
ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market for Common Equity
There is no public market for our common stock, and we do not expect a market to develop in the near future. We have no current plans to cause our common stock to be listed on any securities exchange or quoted on any market system in any established market either immediately or at any definite time in the future. Therefore, it is likely that a stockholder may not be able to sell such stockholder’s common stock at a time or price acceptable to the stockholder.
Outstanding Common Stock and Holders
As of March 15, 2010, we had 13,472,281 shares issued and outstanding, held by approximately 430 shareholders of record.
Distributions
Our Board of Directors has declared and paid cash dividends on a quarterly basis. On January 4, 2010, our Board of Directors declared a special distribution of $0.08 per share of common stock, payable with respect to the year ended December 31, 2009, to stockholders of record at the close of business on January 15, 2010 which was paid on January 22, 2010. The following table shows the declaration dates and the amounts distributed per share:
Declaration Date | Distribution Date | Amount Paid Per Share |
March 31, 2008 | April 15, 2008 | $0.10 |
May 19, 2008 | July 15, 2008 | $0.08 |
September 17, 2008 | October 15, 2008 | $0.08 |
December 31, 2008 | January 15, 2009 | $0.08 |
March 23, 2009 | April 15, 2009 | $0.08 |
June 10, 2009 | July 15, 2009 | $0.08 |
August 10, 2009 | October 15, 2009 | $0.08 |
November 9, 2009 | January 15, 2010 | $0.08 |
Although we intend to continue to declare and pay quarterly dividends, no assurances can be made as to the amounts of any future payments. The declaration of any future dividends is within the discretion of the Board of Directors and will be dependent upon, among other things, our earnings, financial condition and capital requirements, as well as any other factors deemed relevant by the Board of Directors. Two principal factors in determining the amounts of distributions are (i) the requirement Code that a REIT distribute to shareholders at least 90% of its REIT taxable income, and (ii) the amount of available cash.
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Equity Compensation Plan Information
We have reserved 1,000,000 shares of common stock for issuance under our 2007 Incentive Award Plan. The 2007 Incentive Award Plan was approved by our stockholders on February 7, 2008. We have not issued any shares of common stock nor have any options been exercised under this plan. See Item 11 of this Report Form 10-K for additional information regarding our 2007 Stock Incentive Plan.
The following information is provided as of December 31, 2009 with respect to compensation plans, including individual compensation arrangements, under which our equity securities are authorized for issuance:
(a) | (b) | (c) | |
Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) | |
Plan category | |||
Equity compensation plans approved by security holders (1) | 255,000 | 11.14 | 745,000 |
Equity compensation plans not approved by security holders | - | - | - |
Total | 255,000 | 11.14 | 745,000 |
(1) | This equity compensation is under the 2007 Stock Incentive Award Plan. The Plan was approved by stockholders on February 7, 2008. |
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
We did not have a plan for the purchase of any shares of our common stock, and did not purchase any of the same in the year ended December 31, 2009.
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The following tables present selected historical consolidated financial information for the periods indicated. The selected historical consolidated financial information presented below under the captions “Balance Sheet Data”, "Operating Data", "Per Share Data" and "Other Data" have been derived from our audited consolidated financial statements and include all adjustments, which management considers necessary for a fair presentation of the historical consolidated financial statements for such period. In addition, since the information presented below is only a summary and does not provide all of the information contained in our historical consolidated financial statements, including the related notes, you should read it in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements, including the related notes, for information regarding business acquisitions, discontinued operations, critical accounting policies and items affecting comparability of the amounts below.
Selected Financial Data | ||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||
Year Ended December 31, | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Total Assets | $ | 142,776 | $ | 142,623 | $ | 124,697 | $ | 23,942 | $ | 27,082 | ||||||||||
Secured Revolving Credit Facility | $ | 43,215 | $ | 43,215 | $ | 20,000 | $ | - | $ | - | ||||||||||
Operating Data: | ||||||||||||||||||||
Total Revenues | $ | 42,252 | $ | 41,358 | $ | 33,535 | $ | 3,908 | $ | - | ||||||||||
Total Operating Expenses | $ | 34,185 | $ | 35,208 | $ | 26,027 | $ | 940 | $ | 317 | ||||||||||
Income from Continuing Operations | $ | 4,076 | $ | 3,453 | $ | 6,592 | $ | 1,551 | $ | 389 | ||||||||||
Net Income | $ | 4,069 | $ | 721 | $ | 5,400 | $ | 1,825 | $ | 1,727 | ||||||||||
Per Share Data: | ||||||||||||||||||||
Income from Continuing Operations Basic and Diluted | $ | 0.30 | $ | 0.25 | $ | 0.81 | $ | 411.79 | $ | 103.20 | ||||||||||
Net Income - Basic and Diluted | $ | 0.30 | $ | 0.05 | $ | 0.66 | $ | 484.53 | $ | 458.51 | ||||||||||
Dividends Declared per Common Share | $ | 0.32 | $ | 0.34 | $ | 6.615 | $ | - | $ | - | ||||||||||
Other Data: | ||||||||||||||||||||
Net Cash Flow Provided by (Used in): | ||||||||||||||||||||
Operating Activities | $ | 4,455 | $ | 6,783 | $ | 906 | $ | 2,990 | $ | 2,911 | ||||||||||
Investing Activities | $ | 254 | $ | (23,468 | ) | $ | 8,010 | $ | 285 | $ | (32 | ) | ||||||||
Financing Activities | $ | (4,436 | ) | $ | 17,768 | $ | (4,857 | ) | $ | (300 | ) | $ | (301 | ) | ||||||
Cash from discontinued operations | $ | 560 | $ | (544 | ) | $ | (2,216 | ) | $ | 5,533 | $ | (4,757 | ) |
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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 under "Risk Factors." You should read the following discussion in conjunction with "Selected Financial Data" and our consolidated financial statements and notes appearing elsewhere in this filing.
Executive Summary
We are a fully integrated, self-administered and self-managed 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 and our electrical contracting 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.
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 1 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.
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.
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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.
Accounts Receivable:
Accounts receivable consist of trade receivables recorded at the original invoice amount, 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 condition. 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:
Real estate assets are stated at cost, less accumulated depreciation and amortization. All capitalizable 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 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, "Business Combinations." 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.
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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.
Asset Impairment:
We apply 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. 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 can 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 ASC No. 820-10-05 which 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:
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• | 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.
At December 31, 2009, we measured certain financial assets at fair value on a recurring basis, including available-for-sale securities and derivative financial instruments. Fair values of our derivative financial instruments were 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. These items are included in other assets and other liabilities on the consolidated balance sheets. In accordance with ASC No. 820-10-35, we incorporated credit valuation adjustments in the fair values of its derivative financial instruments to reflect counterparty nonperformance risk. In addition, the fair value of our available-for-sale securities were approximated on current market quotes received from financial sources that trade such securities.
Income Taxes:
Effective July 1, 2007, we have elected to be treated as a REIT under the Code. 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 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.
Results of Operations
The following results of operations pertain to GTJ REIT, Inc. for the period April 1, 2007 to December 31, 2007 and years ended December 31, 2008 and 2009. The results of operations for Triboro, Jamaica and GTJ for the period from March 29, 2007 to March 31, 2007 are not reflected in our accompanying consolidated statements of income for the year ended December 31, 2007 as such amounts were not deemed to be material in relation to our consolidated financial statements as a whole.
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Year Ended December 31, 2009 vs. Year Ended December 31, 2008
The following table sets forth our results of operations for the years indicated (in thousands):
Year Ended December 31, | Increase/(Decrease) | ||||||||||||||||
2009 | 2008 | Amount | Percent | ||||||||||||||
Revenues: | |||||||||||||||||
Property rentals | $ | 13,190 | $ | 12,185 | $ | 1,005 | 8% | ||||||||||
Outdoor maintenance and cleaning operations | 29,062 | 29,173 | (111 | ) | nm | ||||||||||||
Total revenues | 42,252 | 41,358 | 894 | 2% | |||||||||||||
Operating expenses: | |||||||||||||||||
General and administrative expenses | 11,535 | 11,498 | 37 | nm | |||||||||||||
Equipment maintenance and garage expenses | 2,188 | 2,840 | (652 | ) | (23% | ) | |||||||||||
Transportation expenses | 2,005 | 2,494 | (489 | ) | (20% | ) | |||||||||||
Contract maintenance and station expenses | 11,526 | 11,912 | (386 | ) | (3% | ) | |||||||||||
Insurance and safety expenses | 2,480 | 2,740 | (260 | ) | (9% | ) | |||||||||||
Operating and highway taxes | 1,593 | 1,479 | 114 | 8% | |||||||||||||
Other operating expenses | 1,002 | 937 | 65 | 7% | |||||||||||||
Depreciation and amortization expense | 1,856 | 1,308 | 548 | 42% | |||||||||||||
Total operating expenses | 34,185 | 35,208 | (1,023 | ) | (3% | ) | |||||||||||
Operating income | 8,067 | 6,150 | 1,917 | 31% | |||||||||||||
Other income (expense): | |||||||||||||||||
Interest income | 378 | 305 | 73 | 24% | |||||||||||||
Interest expense | (1,865 | ) | (2,333 | ) | 468 | (20% | ) | ||||||||||
Change in insurance reserves | (294 | ) | 34 | (328 | ) | (965% | ) | ||||||||||
Litigation settlement | (2,183 | ) | - | (2,183 | ) | nm | |||||||||||
Other | (97 | ) | (120 | ) | 23 | (19% | ) | ||||||||||
Total other income (expense): | (4,061 | ) | (2,114 | ) | (1,947 | ) | 92% | ||||||||||
Income from continuing operations before income taxes | 4,006 | 4,036 | (30 | ) | (1% | ) | |||||||||||
Benefit from (provision for) income taxes | 70 | (583 | ) | 653 | (112% | ) | |||||||||||
Income from continuing operations | 4,076 | 3,453 | 623 | 18% | |||||||||||||
Discontinued Operation: | |||||||||||||||||
Loss from operations of discontinued operation, net of taxes | (7 | ) | (2,732 | ) | 2,725 | 99% | |||||||||||
Net income | $ | 4,069 | $ | 721 | $ | 3,348 | 464% | ||||||||||
nm – not meaningful
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Property Rental Revenues
Property rentals revenue increased $1.0 million, or 8%, to $13.2 million for the year ended December 31, 2009 from $12.2 million for the year ended December 31, 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 twelve months of rental revenue from the Farmington, CT property as compared to only ten months of rental revenue for the year ended December 31, 2008.
Outside Maintenance and Cleaning Operations Revenues
Outside maintenance and cleaning operations revenues decreased $0.1 million to $29.1 for the year ended December 31, 2009 from $29.2 million for the year ended December 31, 2008. The decrease was primarily due to decrease in ancillary maintenance services and a decrease in maintenance due to the economic environment as compared to the year ended December 31, 2008, partially offset by a net increase in street furniture installations and an increase in contracts associated with the traffic control division.
Operating Expenses
Operating expenses decreased $1.0 million, or 3%, to $34.2 million for the year ended December 31, 2009 from $35.2 million for the year ended December 31, 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 $1.9 million, or 92%, to $4.0 million for the year ended December 31, 2009 from $2.1 million for the year ended December 31, 2008. This increase was primarily due to the legal settlement of $2.2 million in 2009 arising out of the court’s decision in the appraisal proceedings and an increase in insurance reserves partially offset by a 21% decrease in the average cost of our borrowing from 4.78% for the year ended December 31, 2008 to 3.76% for the year ended December 31, 2009 due to a reduction in average LIBOR on our floating rate debt. The reduction in the interest rate was partially offset by a 9% increase in the average balance of our credit facility from $39.5 million for the year ended December 31, 2008 to $43.2 million for the year ended December 31, 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
The benefit from income taxes represents federal, state and local taxes on income before income taxes for the year ended December 31, 2009 is primarily based on the taxable income of the non-REIT subsidiaries. The benefit from income taxes for the 2009 period was $70,000. The provision for income taxes was $583,000 for an effective rate of 14.4% for the year ended December 31, 2008.
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 Paratransit business was discontinued on September 30, 2008 and reflects no operations for the year ended December 31, 2009 compared to a loss from operations and the winding down of the Paratransit business for the year ended December 31, 2008.
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Net Income
For the year ended December 31, 2009, we had net income of $4.1 million compared to net income of $0.7 million for the year ended December 31, 2008. The changes in net income were primarily due to the factors discussed above.
Year Ended December 31, 2008 vs. Year Ended December 31, 2007
The following table sets forth our results of operations for the years indicated (in thousands):
Year Ended December 31, | Increase/(Decrease) | |||||||||||||||
2008 | 2007 | Amount | Percent | |||||||||||||
Revenues: | ||||||||||||||||
Property rentals | $ | 12,185 | $ | 9,451 | $ | 2,734 | 29% | |||||||||
Outdoor maintenance and cleaning operations | 29,173 | 24,084 | 5,089 | 21% | ||||||||||||
Total revenues | 41,358 | 33,535 | 7,823 | 23% | ||||||||||||
Operating expenses: | ||||||||||||||||
General and administrative expenses | 11,498 | 8,060 | 3,438 | 43% | ||||||||||||
Equipment maintenance and garage expenses | 2,840 | 1,356 | 1,484 | 109% | ||||||||||||
Transportation expenses | 2,494 | 1,719 | 775 | 45% | ||||||||||||
Contract maintenance and station expenses | 11,912 | 10,778 | 1,134 | 11% | ||||||||||||
Insurance and safety expenses | 2,740 | 2,025 | 715 | 35% | ||||||||||||
Operating and highway taxes | 1,479 | 951 | 528 | 56% | ||||||||||||
Other operating expenses | 937 | 575 | 362 | 63% | ||||||||||||
Depreciation and amortization expense | 1,308 | 563 | 745 | 132% | ||||||||||||
Total operating expenses | 35,208 | 26,027 | 9,181 | 35% | ||||||||||||
Operating income | 6,150 | 7,508 | (1,358 | ) | (18% | ) | ||||||||||
Other income (expense): | ||||||||||||||||
Interest income | 305 | 881 | (576 | ) | (65% | ) | ||||||||||
Interest expense | (2,333 | ) | (801 | ) | (1,532 | ) | 191% | |||||||||
Change in insurance reserves | 34 | 254 | (220 | ) | (87% | ) | ||||||||||
Other | (120 | ) | (120 | ) | - | - | ||||||||||
Total other income (expense): | (2,114 | ) | 214 | (2,328 | ) | (1088% | ) | |||||||||
Income from continuing operations before income taxes and equity in earnings of affiliated companies | 4,036 | 7,722 | (3,686 | ) | (48% | ) | ||||||||||
Provision for income taxes | (583 | ) | (1,190 | ) | 607 | (51% | ) | |||||||||
Equity in earnings of affiliated companies, net of taxes | - | 60 | (60 | ) | (100% | ) | ||||||||||
Income from continuing operations | 3,453 | 6,592 | (3,139 | ) | (48% | ) | ||||||||||
Discontinued Operation: | ||||||||||||||||
Loss from operations of discontinued operation, net of taxes | (2,732 | ) | (1,192 | ) | (1,540 | ) | 129% | |||||||||
Net income | $ | 721 | $ | 5,400 | $ | (4,679 | ) | (87% | ) | |||||||
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Property Rental Revenues
Property rentals revenue increased $2.7 million, or 29%, to $12.2 million for the year ended December 31, 2008 from $9.5 million for the year ended December 31, 2007. The increase is primarily related to the rental revenue from the Connecticut property which we acquired in March 2008.
Outside Maintenance and Cleaning Operations Revenues
Outside maintenance and cleaning operations revenues increased $5.1 million, or 21%, to $29.2 million for the year ended December 31, 2008 from $24.1 million for the year ended December 31, 2007. The increase is primarily due to twelve months of revenue for the year ended December 31, 2008 compared to nine months of revenue from the period April 1, 2007 to December 31, 2007. Revenues in 2008 have also been affected by decreased volume from a customer where we act as a subcontractor.
Operating Expenses
Operating expenses increased $9.2 million, or 35%, to $35.2 million for the year ended December 31, 2008 from $26.0 million for the year ended December 31, 2007. The increase is primarily due to the inclusion of twelve months of operating expenses for the year ended December 31, 2008 compared to nine months of operating expenses from the period April 1, 2007 to December 31, 2007. In addition there was an increase in fuel costs, insurance and safety expenses primarily related to non-recurring workman’s’ compensation premium audit adjustments and depreciation and amortization expense primarily related to a new property acquired in Connecticut over the same period in 2007.
Other Income (Expense)
Other income (expense) for the year ended December 31, 2008 was an expense of $2.1 million compared to income of $0.2 million for the year ended December 31, 2007. The expense of $2.1 million for the year ended December 31, 2008 primarily represents interest expense of $2.1 million and the loss on the sale of securities of $0.1 offset by interest income of $0.3 million. The income of $0.2 million for the year ended December 31, 2007 represents interest income earned on our cash balances partially offset by interest expense related to our credit facility.
Provision For Income Taxes
The provision for income taxes represents federal, state and local taxes on income before income taxes for the year ended December 31, 2008 is primarily based on the taxable income of the non-REIT subsidiaries. The provision for income taxes for the year ended December 31, 2008 was $0.6 million for an effective rate of 14.4%. The provision for income taxes was $1.2 million with an effective rate of 15.4% for the year ended December 31, 2007.
Loss from Operations of Discontinued Operation, Net of Taxes
For 2008, the $2.7 million loss from operations of discontinued operation represents the operations of the Paratransit business which we exited September 30, 2008 and accordingly were reclassified to discontinued operations. The 2007, loss from operations of discontinued operations, net of taxes represents the loss from operations of the Paratransit business of $0.9 million and the operating results of Green’s bus operations of $0.3 million for a total of $1.2 million. Such loss primarily pertains to the winding down of the bus operations with no corresponding income.
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Net Income
For the year ended December 31, 2008, we had net income of $0.7 million compared to net income of $5.4 million for the year ended December 31, 2007. The changes in net income were primarily due to the factors discussed above.
Liquidity and Capital Resources
At December 31, 2009, we had unrestricted cash and cash equivalents of $12,734,000 compared to $11,901,000 at December 31, 2008. We fund operating expenses and other short-term liquidity requirements, including debt service and dividend distributions from operating cash flows; we also have used our credit facility for these purposes. We believe that our net cash provided by operations, coupled with availability under the credit facility, will be sufficient to fund our short-term liquidity requirements for 2010 and to meet our dividend requirements to maintain our 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, the Lenders made an initial $17.0 million term loan. 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 loan of approximately $23.2 million. Interest on the loans is paid monthly. The interest rate on both the initial and mortgage loan is fixed at 6.59% per annum and interest rate on the additional draw floats at a spread over one month LIBOR. The principal shall be paid on the maturity date pursuant to the terms set forth in the Loan Agreement, namely July 1, 2010, unless otherwise extended or renewed. At December 31, 2009, total outstanding under the Loan Agreement is 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 transaction to GTJ Rate Cap LLC prior to entering into the Loan Agreement. The $1.0 million loan is secured by a mortgage in the amount of $250,000 on each of the Depots collectively.
For the year ended December 31, 2009, the fair value of the interest rate cap associated with the debt was deemed to be insignificant.
43
In addition to customary non-financial covenants, we are obligated to comply with certain financial covenants. As of December 31, 2009, we are in compliance with our non-financial and financial covenants.
Earnings and Profit Distribution
In 2007, we were required to make a one-time distribution of undistributed historical earnings and profits of the Bus Companies. On August 20, 2007, the Board of Directors declared a one-time special distribution of accumulated earnings and profits on our common stock of $6.40 per share, payable in approximately $20.0 million of cash and in 3,775.400 shares of our common stock. For the purposes of the special distribution, common stock was valued at $11.14, as indicated in the proxy statement/prospectus dated February 9, 2007 filed with the Securities and Exchange Commission and distributed to the shareholders of the Bus Companies in connection with the March 26, 2007 special joint meeting of the shareholders of the Bus Companies at which meeting such shareholders voted on a reorganization of those companies with and into the REIT. The special distribution aggregated to approximately $62.1 million. The holders of our shares 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 our shares and/or cash the Holders wished to receive as their respective portion 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 shares they elected, but could be based on a pro ration of the available cash after all elections (ie: not on a first come-first served basis). We calculated the proportion of cash and our shares that were distributed to the Holders based upon the Holder’s election and the amount of cash available for the special distribution.
As of December 31, 2009, cash of approximately $19.6 million and 3,775,400 shares of our common stock have been distributed to the Holders. The remaining payable balance of $252,470 is included in other liabilities in the accompanying consolidated balance sheet at December 31, 2009. The cash payment was funded with borrowings under the credit facility.
Contractual Obligations
We through our subsidiaries lease certain operating facilities and certain equipment under operating leases, expiring at various dates through fiscal 2014. In addition, we through our subsidiaries have a credit facility as described in detail above. The table below summarizes the principal balances of the Company’s obligations for indebtedness and lease obligations as of December 31, 2009 in accordance with their required payment terms (in thousands):
Payments due by calendar year period | ||||||||||||||||||||
Total | 2010 | 2011-2012 | 2013-2014 | Thereafter | ||||||||||||||||
Contractual Obligations-Credit Facility | $ | 43,215 | $ | 43,215 | $ | - | $ | - | $ | - | ||||||||||
Operating Lease Obligations | 3,085 | 810 | 1,041 | 958 | 276 | |||||||||||||||
$ | 46,300 | $ | 44,025 | $ | 1,041 | $ | 958 | $ | 276 |
44
Net Cash Flows
Year Ended December 31, 2009 vs. Year Ended December 31, 2008
Operating Activities
Net cash provided by operating activities was $3,951,000 for 2009 compared to net cash provided by operating activities of $6,783,000 in 2008. For 2009, cash provided by operating activities was primarily related to (i) income from continuing operations of $4,076,000, (ii) depreciation and amortization expense of $2,876,000, (iii) changes in accounts payable and other liabilities of $299,000, (vi) provision for doubtful accounts of $119,000, (v) stock-based compensation of $126,000, offset by (vi) changes in insurance reserves of $484,000 and (vii) changes in other assets of $2,799,000.
For 2008, cash provided by operating activities was primarily related to (i) income from continuing operations of $3,453,000, (ii) depreciation and amortization expense of $2,294,000, (iii) changes in accounts payable and other liabilities of $466,000, (vi) provision for deferred taxes of $421,000, (v) changes in other assets of $504,000, (vi) stock-based compensation of $220,000, offset by (vii) changes in insurance reserves of $919,000.
Net cash provided by investing activities was $758,000 for the year ended December 31, 2009 compared to cash used in investing activities of $23,468,000 for the year ended December 31, 2008. For 2009 cash provided by investing activities was primarily related to (i) proceeds from the sale of investments of $1,296,000 and (ii) changes in restricted cash of $930,000 offset by (iii) the purchase of intangible assets of $442,000 and (iv) purchases of property and equipment of $918,000. For the 2008 year, cash used in investing activities primarily related to real estate assets acquired of $23,395,000.
Financing Activities
Net cash used in financing activities of $4,436,000 for the year ended December 31, 2009 was primarily related to dividend payments of $4,311,000. Net cash provided by financing activities in 2008 of $17,768,000 primarily related to the proceeds from the revolving credit facility of $23,215,000 offset by dividend payments of $4,918,000 and payments of the earnings and profits distribution of $529,000.
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.
45
• | 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. |
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 years ended December 31, 2009 (amounts in thousands).
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Net Income | $ | 4,069 | $ | 721 | $ | 5,400 | ||||||
Plus: Real property depreciation | 1,117 | 331 | 329 | |||||||||
Amortization of intangible assets | 1,142 | 682 | - | |||||||||
Amortization of deferred leasing costs | 102 | 101 | 108 | |||||||||
Funds from operations (FFO) | 6,430 | 1,835 | 5,837 | |||||||||
Loss (income) from Taxable-REIT Subsidiaries | 103 | 3,367 | (945 | ) | ||||||||
Amortization of intangible assets of Taxable-REIT Subsidiaries | (324 | ) | - | - | ||||||||
Adjusted funds from operations (AFFO) | $ | 6,209 | $ | 5,202 | $ | 4,892 | ||||||
FFO per common share - basic and diluted | $ | 0.48 | $ | 0.14 | $ | 0.72 | ||||||
AFFO per common share - basic and diluted | $ | 0.46 | $ | 0.39 | $ | 0.60 | ||||||
Weighted average common shares outstanding - basic and diluted | 13,472,281 | 13,472,281 | 8,126,995 |
Year Ended December 31, 2008 vs. Year Ended December 31, 2007
Operating Activities
Net cash provided by operating activities was $6,783,000 for 2008 compared to net cash provided by operating activities of $906,000 in 2007. For the 2008 period, cash provided by operating activities was primarily related to (i) income from continuing operations of $3,453,000, (ii) depreciation and amortization expense of $2,294,000, (iii) changes in accounts payable and other liabilities of $466,000, (vi) provision for deferred taxes of $421,000, (v) changes in prepaid expenses and other assets of $504,000, (vi) stock-based compensation of $220,000, offset by (vii) changes in insurance reserves of $919,000.
For 2007, cash provided by operating activities was primarily related to (i) income from continuing operations of $6,592,000 and a decrease in operating subsidies receivable of $3,184,000, reduced by (ii) a decrease in income taxes payable of $5,890,000, offset by (iii) an increase in accounts receivable of $1,824,000 and (iv) an increase of due from affiliates of $1,535,000.
46
Investing Activities
Net cash used in investing activities was $23,468,000 for the year ended December 31, 2008 compared to cash provided by investing activities of $8,010,000 for the year ended December 31, 2007. For the 2008 period, cash used in investing activities primarily related to real estate assets acquired of $23,395,000. The 2007 balance primarily pertains to cash acquired in the merger of $8,670,000, proceeds from the sale of investments of $970,000, and change in restricted cash of $786,000, offset by (i) purchases of property and equipment of $584,000, (ii) purchases of investments of $374,000 and (iii) reclassification of investments from cash to investments of $1,458,000.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2008 of $17,768,000 primarily pertains to the proceeds from the revolving credit facility of $23,215,000 offset by dividend payments of $4,918,000 and payments of the earnings and profits distribution of $529,000. Net cash used in financing activities in 2007 of $4,857,000 primarily pertains to the E&P distribution of $19,094,000, principal payments on the notes payable of $1,666,000, the buy-back of common stock of $1,787,000, dividend payments of $1,702,000 and payment of deferred financing costs of $608,000 reduced by the proceeds from the credit facility of $20,000,000.
Possible Acquisitions
Our Board of Directors intends to expand our real property holdings. This would be done through purchases of properties that the Board of Directors determines to be consistent with our investment policies of which would be funded initially from the credit facility. It is anticipated that once these properties are purchased using the credit facility, permanent mortgage financing will be placed on the real properties and the revolving credit will be paid down accordingly. It is also possible that our subsidiaries will desire to make an acquisition, some of which may need to be funded by the REIT. We would, in that case, and subject to the direction of the Board of Directors, provide such financing, which again is expected to be obtained from the $72.5 million credit facility.
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 our stockholders.
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.
47
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 December 31, 2009 and 2008, we have recorded a liability of approximately $1.1 million and $1.6 million, respectively, related to its portion of the Study as disclosed in the engineering report. 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.
48
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The primary market risk facing us is interest rate risk on our 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 a related variable-rate financial instrument.
Based on our variable rate liabilities as of December 31, 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 December 31, 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 December 31, 2009, 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 December 31, 2009, 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.
49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GTJ REIT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |
Report of Independent Registered Public Accounting Firm – BDO Seidman, LLP | F-1 |
Report of Independent Registered Public Accounting Firm – Weiser LLP | F-2 |
Consolidated Balance Sheets as of December 31, 2009 and 2008 | F-3 |
Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007 | F-4 |
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended December 31, 2009, 2008 and 2007 | F-5 |
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007 | F-6 |
Notes to Consolidated Financial Statements. | F-8 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
GTJ REIT, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of GTJ REIT, Inc. and Subsidiaries as of December 31, 2009 and the related consolidated statement of income, stockholders’ equity and comprehensive income, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GTJ REIT, Inc. and Subsidiaries at December 31, 2009, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO Seidman, LLP
Melville, New York
March 30, 2010
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
GTJ REIT, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of GTJ REIT, Inc. and Subsidiaries (the “Company”) as of December 31, 2008 and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the years ended December 31, 2008 and 2007. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2008 and the consolidated results of their operations and their cash flows for the years ended December 31, 2008 and 2007, in conformity with U.S. generally accepted accounting principles.
/s/ Weiser LLP
New York, New York
March 31, 2009
F-2
GTJ REIT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, | ||||||||
ASSETS | 2009 | 2008 | ||||||
Real estate at cost: | ||||||||
Land | $ | 88,584 | $ | 88,584 | ||||
Buildings and improvements | 24,362 | 24,222 | ||||||
112,946 | 112,806 | |||||||
Less: accumulated depreciation and amortization | (8,136 | ) | (7,019 | ) | ||||
Net operating real estate | 104,810 | 105,787 | ||||||
Cash and cash equivalents | 12,734 | 11,901 | ||||||
Available for sale securities | 3,199 | 4,313 | ||||||
Restricted cash | 1,066 | 1,996 | ||||||
Accounts receivable, net | 5,944 | 5,830 | ||||||
Other assets, net | 7,960 | 5,160 | ||||||
Deferred charges, net | 1,855 | 2,128 | ||||||
Assets of discontinued operation | 162 | 730 | ||||||
Intangible assets, net | 2,736 | 2,933 | ||||||
Machinery and equipment, net | 2,310 | 1,845 | ||||||
Total assets | $ | 142,776 | $ | 142,623 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Secured revolving credit facility | $ | 43,215 | $ | 43,215 | ||||
Accounts payable | 799 | 1,015 | ||||||
Unpaid losses and loss adjustment expenses | 1,556 | 2,040 | ||||||
Other liabilities, net | 6,892 | 5,998 | ||||||
52,462 | 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 December 31, 2009 and 2008 | 1 | 1 | ||||||
Additional paid-in capital | 137,033 | 136,907 | ||||||
Cumulative distributions in excess of net income at December 31, 2009 and 2008 | (47,087 | ) | (46,845 | ) | ||||
Accumulated other comprehensive income | 367 | 292 | ||||||
90,314 | 90,355 | |||||||
Total liabilities and stockholders' equity | $ | 142,776 | $ | 142,623 |
The accompanying notes should be read in conjunction with the consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
For the Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenues: | ||||||||||||
Property rentals | $ | 13,190 | $ | 12,185 | $ | 9,451 | ||||||
Outdoor maintenance and cleaning operations | 29,062 | 29,173 | 24,084 | |||||||||
Total revenues | 42,252 | 41,358 | 33,535 | |||||||||
Operating expenses: | ||||||||||||
General and administrative expenses | 11,535 | 11,498 | 8,060 | |||||||||
Equipment maintenance and garage expenses | 2,188 | 2,840 | 1,356 | |||||||||
Transportation expenses | 2,005 | 2,494 | 1,719 | |||||||||
Contract maintenance and station expenses | 11,526 | 11,912 | 10,778 | |||||||||
Insurance and safety expenses | 2,480 | 2,740 | 2,025 | |||||||||
Operating and highway taxes | 1,593 | 1,479 | 951 | |||||||||
Other operating expenses | 1,002 | 937 | 575 | |||||||||
Depreciation and amortization expense | 1,856 | 1,308 | 563 | |||||||||
Total operating expenses | 34,185 | 35,208 | 26,027 | |||||||||
Operating income | 8,067 | 6,150 | 7,508 | |||||||||
Other income (expense): | ||||||||||||
Interest income | 378 | 305 | 881 | |||||||||
Interest expense | (1,865 | ) | (2,333 | ) | (801 | ) | ||||||
Change in insurance reserves | (294 | ) | 34 | 254 | ||||||||
Litigation settlement | (2,183 | ) | - | - | ||||||||
Other | (97 | ) | (120 | ) | (120 | ) | ||||||
Total other income (expense): | (4,061 | ) | (2,114 | ) | 214 | |||||||
Income from continuing operations before income taxes and equity in earnings of affiliated companies | 4,006 | 4,036 | 7,722 | |||||||||
Benefit from (provision) for income taxes | 70 | (583 | ) | (1,190 | ) | |||||||
Equity in earnings of affiliated companies, net of tax | - | - | 60 | |||||||||
Income from continuing operations | 4,076 | 3,453 | 6,592 | |||||||||
Discontinued Operation: | ||||||||||||
Loss from operations of discontinued operations, net of taxes | (7 | ) | (2,732 | ) | (1,192 | ) | ||||||
Net income | $ | 4,069 | $ | 721 | $ | 5,400 | ||||||
Income per common share--basic and diluted: | ||||||||||||
Income from continuing operations | $ | 0.30 | $ | 0.25 | $ | 0.81 | ||||||
Loss from discontinued operations, net of taxes | $ | - | $ | (0.20 | ) | $ | (0.15 | ) | ||||
Net income | $ | 0.30 | $ | 0.05 | $ | 0.66 | ||||||
Weighted-average common shares outstanding--basic and diluted | 13,472,281 | 13,472,281 | 8,126,995 | |||||||||
The accompanying notes should be read in conjunction with the consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(in thousands, except share and per share data)
Cumulative | ||||||||||||||||||||||||||||||||
Distributions in | ||||||||||||||||||||||||||||||||
Excess of Net | ||||||||||||||||||||||||||||||||
of Income | Accumulated | |||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Additional- | December 31, | Other | Total | |||||||||||||||||||||||||||
Outstanding | Outstanding | Paid-In- | 2009, 2008 | Comprehensive | Stockholders' | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | and 2007 | Income | Equity | |||||||||||||||||||||||||
Balance at December 31, 2006 | - | - | 3,767 | 377 | - | 16,789 | 428 | 17,594 | ||||||||||||||||||||||||
Dividends paid, $39.82 per share | - | - | - | - | - | (150 | ) | - | (150 | ) | ||||||||||||||||||||||
Shares issued in connection with merger | - | - | 10,000,361 | 1 | (1 | ) | - | - | - | |||||||||||||||||||||||
Recapitalization of company | - | - | (3,767 | ) | (377 | ) | 96,417 | - | - | 96,040 | ||||||||||||||||||||||
Buy back of shares due to appraisal rights | - | - | (303,480 | ) | - | (1,786 | ) | - | - | (1,786 | ) | |||||||||||||||||||||
Dividends paid, $0.05 per share | - | - | - | - | - | (485 | ) | - | (485 | ) | ||||||||||||||||||||||
Earnings & profits distribution paid, $0.11 per share | - | - | - | - | - | (1,067 | ) | - | (1,067 | ) | ||||||||||||||||||||||
Earnings & profits distribution paid, $0.105 per share | - | - | - | - | - | (1,415 | ) | - | (1,415 | ) | ||||||||||||||||||||||
Distribution of historical earnings & profits, $11.14 per share | - | - | 3,775,400 | - | 42,057 | (62,057 | ) | - | (20,000 | ) | ||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||
Net income | - | - | - | - | - | 5,400 | - | 5,400 | ||||||||||||||||||||||||
Unrealized gain on available-for-sale securities, net | - | - | - | - | - | - | 82 | 82 | ||||||||||||||||||||||||
Total comprehensive income | - | - | - | - | - | - | - | 5,482 | ||||||||||||||||||||||||
Balance at December 31, 2007 | - | $ | - | 13,472,281 | $ | 1 | $ | 136,687 | $ | (42,985 | ) | $ | 510 | $ | 94,213 | |||||||||||||||||
Earnings & profits distribution paid, $.34 per share | - | - | - | - | - | (4,581 | ) | - | (4,581 | ) | ||||||||||||||||||||||
Stock-based compensation related to stock options | - | - | - | - | 220 | - | - | 220 | ||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||
Net income | - | - | - | - | - | 721 | - | 721 | ||||||||||||||||||||||||
Unrealized loss on available-for-sale securities, net | - | - | - | - | - | - | (218 | ) | (218 | ) | ||||||||||||||||||||||
Total comprehensive income | - | - | - | - | - | - | - | 503 | ||||||||||||||||||||||||
Balance at December 31, 2008 | - | $ | - | 13,472,281 | $ | 1 | $ | 136,907 | $ | (46,845 | ) | $ | 292 | $ | 90,355 | |||||||||||||||||
Earnings & profits distribution paid, $.32 per share | - | - | - | - | - | (4,311 | ) | - | (4,311 | ) | ||||||||||||||||||||||
Stock-based compensation related to stock options | - | - | - | - | 126 | - | - | 126 | ||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||
Net income | - | - | - | - | - | 4,069 | - | 4,069 | ||||||||||||||||||||||||
Unrealized gain on available-for-sale securities, net | - | - | - | - | - | - | 75 | 75 | ||||||||||||||||||||||||
Total comprehensive income | - | - | - | - | - | - | - | 4,144 | ||||||||||||||||||||||||
Balance December 31, 2009 | - | $ | - | 13,472,281 | $ | 1 | $ | 137,033 | $ | (47,087 | ) | $ | 367 | $ | 90,314 |
The accompanying notes should be read in conjunction with the consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
Net income | $ | 4,069 | $ | 721 | $ | 5,400 | ||||||
Loss from discontinued operation | 7 | 2,732 | 1,192 | |||||||||
Income from continuing operations | 4,076 | 3,453 | 6,592 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||
Provisions for deferred taxes | - | 421 | 242 | |||||||||
Stock-based compensation | 126 | 220 | - | |||||||||
Changes in insurance reserves | (484 | ) | (919 | ) | (1,382 | ) | ||||||
Provisions for doubtful accounts | 119 | - | - | |||||||||
Equity in loss of affiliated companies, net of tax | - | - | (60 | ) | ||||||||
Depreciation and amortization | 1,429 | 1,308 | 563 | |||||||||
Unrealized gain on available for sale securities | - | - | 60 | |||||||||
Other | - | 125 | 10 | |||||||||
Amortization of deferred financing costs | 203 | 203 | 101 | |||||||||
Amortization of deferred charges | 102 | 101 | 108 | |||||||||
Amortization of intangible assets | 1,142 | 682 | - | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Operating receivable-injuries and damages withholding | - | - | 3,184 | |||||||||
Accounts receivable | (231 | ) | 219 | (1,824 | ) | |||||||
Due from affiliates, net | - | - | (1,535 | ) | ||||||||
Other assets | (2,799 | ) | 504 | 731 | ||||||||
Deferred charges | (31 | ) | - | - | ||||||||
Accounts payable and other liabilities | 299 | 466 | 6 | |||||||||
Income taxes payable | - | - | (5,890 | ) | ||||||||
Net cash provided by operating activities | 3,951 | 6,783 | 906 | |||||||||
Investing activities: | ||||||||||||
Cash acquired in merger | - | - | 8,670 | |||||||||
Real estate assets acquired | - | (19,781 | ) | - | ||||||||
Intangible assets acquired | (442 | ) | (3,614 | ) | - | |||||||
Purchases of property and equipment | (918 | ) | (1,213 | ) | (584 | ) | ||||||
Purchase of investments | (108 | ) | (354 | ) | (374 | ) | ||||||
Proceeds from sale of investments | 1,296 | 638 | 970 | |||||||||
Reclassification from cash to investments | - | - | (1,458 | ) | ||||||||
Restricted cash | 930 | 856 | 786 | |||||||||
Net cash provided by (used in) investing activities | 758 | (23,468 | ) | 8,010 | ||||||||
Financing activities: | ||||||||||||
Proceeds from revolving credit facility | - | 23,215 | 20,000 | |||||||||
Principal repayments on notes payable, bank | - | - | (1,666 | ) | ||||||||
Payment of deferred financing costs | - | - | (608 | ) | ||||||||
Buy back of common stock | - | - | (1,787 | ) | ||||||||
Dividends paid | (4,311 | ) | (4,918 | ) | (1,702 | ) | ||||||
Earnings and profits distribution | (125 | ) | (529 | ) | (19,094 | ) | ||||||
Net cash (used in) provided by financing activities | (4,436 | ) | 17,768 | (4,857 | ) | |||||||
Cash flow provided by (used in) discontinued operations: | ||||||||||||
Operating activities | 560 | (544 | ) | (2,216 | ) | |||||||
Net increase in cash and cash equivalents | 833 | 539 | 1,843 | |||||||||
Cash and cash equivalents at the beginning of period | 11,901 | 11,362 | 9,519 | |||||||||
Cash and cash equivalents at the end of period | $ | 12,734 | $ | 11,901 | $ | 11,362 | ||||||
Supplemental cash flow information: | ||||||||||||
Interest paid | $ | 1,663 | $ | 2,137 | $ | 685 | ||||||
Cash paid for taxes | $ | 161 | $ | 129 | $ | 6,056 | ||||||
Assumption of liabilities from assets acquired | $ | 505 | $ | - | $ | - |
The accompanying notes should be read in conjunction with the consolidated financial statements.
F-6
GTJ REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Supplemental non-cash investing activities-Merger with Triboro
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash and cash equivalents | $ | - | $ | - | $ | 4,559 | ||||||
Operating subsidies receivable | - | - | 1,752 | |||||||||
Deferred leasing commissions | - | - | 782 | |||||||||
Other assets, net | - | - | 1,512 | |||||||||
Securities available for sale | - | - | 1,362 | |||||||||
Property and equipment | - | - | 39,400 | |||||||||
Income tax payable | - | - | (294 | ) | ||||||||
Other liabilities, net | - | - | (629 | ) | ||||||||
Fair value of real property through ownership interest in GTJ | - | - | 15,638 | |||||||||
Fair value of operating assets and liabilities through ownership interest in GTJ | - | - | 2,320 | |||||||||
Total purchase price in common stock | $ | - | $ | - | $ | 66,402 |
Supplemental non-cash investing activities-Merger with Jamaica
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash and cash equivalents | $ | - | $ | - | $ | 190 | ||||||
Operating subsidies receivables | - | - | 941 | |||||||||
Other assets, net | - | - | 964 | |||||||||
Securities available for sale | - | - | 440 | |||||||||
Property and equipment | - | - | 23,100 | |||||||||
Income tax payable | - | - | (157 | ) | ||||||||
Other liabilities, net | - | - | (422 | ) | ||||||||
Fair value of real property through ownership interest in GTJ | - | - | 7,819 | |||||||||
Fair value of operating assets and liabilities through ownership interest in GTJ | - | - | 1,160 | |||||||||
Total purchase price in common stock | $ | - | $ | - | $ | 34,035 |
The accompanying notes should be read in conjunction with the consolidated financial statements.
F-7
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 also has one property located in Farmington, 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 as well as electrical construction services to a broad range of commercial, industrial, institutional and governmental customers in New York.
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 31 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 December 31, 2009, the Company owned seven properties containing a total of approximately 561,000 square feet of leasable area (see Note 23).
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 shareholders 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 date 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. |
F-8
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
The Bus Companies, including their subsidiaries, owned a total of seven rentable parcels of real property at December 31, 2009, 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 the Reorganization, the Bus Companies and their subsidiaries, collectively, operated a group of outdoor maintenance businesses and a paratransit business, which was subsequently discontinued and 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 on 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(including 361 fractional shares) shares of the Company common stock were distributed to the former shareholders of Green, Triboro, and Jamaica in such proportions 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 such case 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 11). 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.
F-9
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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 $19.6 million in cash and 3,775,400 shares of common stock (with an approximate value of approximately $42.1 million). The remaining balance of approximately $0.3 million is included in other liabilities in the consolidated balance sheet at December 31, 2009 and 2008. 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 for this transaction 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 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 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 to long-lived assets.
F-10
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
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 receivable | 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 | 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 |
The results of operations for Triboro, Jamaica and GTJ for the period from March 29, 2007 to March 31, 2007, are not reflected in the Company’s results for the year ended December 31, 2007 in the accompanying consolidated statements of operations as the results were deemed to be insignificant.
F-11
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Unaudited Pro-Forma Financial Information
The following presents the unaudited pro-forma combined results of operations of the Company with Green, Jamaica, Triboro and GTJ included for the periods preceding the merger on March 29, 2007 (in thousands, except per share data).
Year Ended | |||||
December 31, | |||||
2007 | |||||
Revenues | $ | 54,081 | |||
Net income from continuing operations | $ | 6,705 | |||
Net income (1) | $ | 6,291 | |||
Pro-forma basic and diluted net income per common share | $ | 0.59 | |||
Pro-forma weighted average common shares outstanding - basic and diluted | 10,593,109 |
(1) | Net income for the year ended December 31, 2007 includes loss from discontinued operation, net of taxes of $452,000. |
The pro forma combined results are not necessarily indicative of the results that actually would have occurred if the mergers of Triboro, Jamaica and GTJ had been completed as of the beginning of 2007, nor are they necessarily indicative of future consolidated results.
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.
Principles of Consolidation
The consolidated financial statements include the accounts of GTJ REIT, Inc., and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company has included the results of operations of acquired companies from the closing date of the acquisition. The Company has presented unclassified balance sheets. In connection with preparation of the consolidated financial statements and in accordance with ASC No. 855-10-25, the Company evaluated subsequent events after the balance sheet date of December 31, 2009 through the issuance of the Consolidated Financial Statements.
F-12
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Reclassifications:
Certain prior period amounts have been reclassified to conform to the current year presentation.
Use of Estimates:
The preparation of the Company’s consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (“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 may result in further impairments of certain assets. Significant estimates include those related to uncollectible receivables, the useful lives of long lived assets including property, machinery and equipment, income taxes, contingencies, environmental matters, insurance liabilities and stock-based compensation.
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.
F-13
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
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 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 years ended December 31, 2009 and 2008 was approximately $818,000 and $682,000, respectively.
The results of operations of the acquired office building have been included in operations from the date of acquisition, March 3, 2008.
Proforma rental revenue (unaudited) for the years ended December 31, 2008 and 2007 was $2,172,456 and $2,140,162, respectively. Pursuant to the terms of the lease between the former landlord and the single tenant, the single 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.
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 tenant leases) and financing fees (which are amortized over the terms of the respective agreements). Deferred charges in the accompanying consolidated balance sheets are shown at cost, net of accumulated amortization, of $1,855,000 and $2,128,000 as of December 31, 2009 and 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 at December 31, 2009 and 2008.
F-14
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Reportable Segments:
The Company presently 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 rent 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 assume reinsurance of worker’s compensation, vehicle liability and covenant liability of the Company and its affiliated Companies from an unrelated insurance company based in the United States of America. |
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 of amounts recognized over amounts due pursuant to the underlying leases amounted to approximately $5,324,000 and $3,883,000 at December 31, 2009 and 2008, respectively.
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.
F-15
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
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 consolidated financial statements of the Company present the operations of Green’s bus operations as discontinued operations in accordance with ASC No. 205-20-05 for the year ended December 31, 2007 and the Paratransit Operations for the years ended December 31, 2009, 2008 and 2007.
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.
Restricted Cash:
Restricted cash includes certain certificates of deposit of $408,000 at December 31, 2008 that are on deposit with various government agencies as collateral to meet statutory self-insurance funding requirements. In addition, at December 31, 2009 and 2008, AIG held $1,065,576 and $1,587,990, respectively on behalf of the Company that was restricted by the insurance carrier for the purpose of the payment of insurance losses.
Accounts Receivable:
Accounts receivable consist of trade receivables recorded at the original invoice amounts, less an estimated allowance for uncollectible accounts when needed. 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.
F-16
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
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 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:
Effective July 1, 2007, the Company has elected to be taxed as a REIT under the Code. Accordingly, the Company will generally not be 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. The Company has eliminated deferred tax assets and liabilities aggregating approximately $575,000 and $307,000, which are included in the provision for income taxes in the accompanying consolidated statement of income for the year ended December 31, 2007 (see Note 15).
The Company also participates in certain activities 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.
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 December 31, 2009 and 2008, the Company does not have a liability for unrecognized tax positions.
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.
F-17
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
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 8 and 16).
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 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 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.
Fair Value of Financial Instruments:
The carrying values of cash and cash equivalents, restricted cash, accounts receivable and other assets, accounts payable, accrued expenses and other liabilities are reasonable estimates of their fair values because of the short-term nature of the instruments. The carrying value of the credit facility borrowings approximates fair value based upon current market interest rates at which the Company could borrow funds with similar remaining maturities.
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 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.
F-18
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Stock-Based Compensation:
The Company has a stock-based compensation plan, which is described in Note 11. 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 February 2010, the FASB issued ASU No. 2010-09, Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements, that provides updated guidance on subsequent events which states that disclosure of the date through which subsequent events have been evaluated, the issuance date of the financial statements, is no longer required. This guidance is effective upon issuance and its adoption did not have a material effect on the Company’s Consolidated Financial Statements.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements, that provides updated guidance on fair value measurements and disclosures, which requires disclosure of details of significant asset or liability transfers in and out of Level 1 and Level 2 measurements within the fair value hierarchy and inclusion of gross purchases, sales, issuances, and settlements in the rollforward of assets and liabilities valued using Level 3 inputs within the fair value hierarchy. The guidance also clarifies and expands existing disclosure requirements related to the disaggregation of fair value disclosures and inputs used in arriving at fair values for assets and liabilities using Level 2 and Level 3 inputs within the fair value hierarchy. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the gross presentation of the Level 3 rollforward, which is required for annual reporting periods beginning after December 15, 2010 and for interim periods within those years. The Company does not expect the adoption of this guidance to have a material effect on the Company’s Consolidated Financial Statements.
In January 2010, the FASB issued ASU No. 2010-01, Equity: Accounting for Distributions to Shareholders with Components of Stock and Cash—a consensus of the FASB Emerging Issues Task Force, that provides updated guidance on accounting for distributions to shareholders with components of stock and cash, which clarifies the treatment of the stock portion of a distribution to shareholders that allows the election to receive cash or stock. This guidance is effective for interim and annual reporting periods ending after December 15, 2009. The adoption of ASU No. 2010-01 did not have a material effect on the Company’s Consolidated Financial Statements.
In September 2009, the FASB issued ASU No. 2009-07, Accounting for Various Topics – Technical Corrections to SEC Paragraphs. ASU 2009-07 represents technical corrections to various topics containing SEC guidance. The adoption of ASU No. 2009-07 did not have a material effect on the Company’s Consolidated Financial Statements.
In September 2009, the FASB issued ASU No. 2009-06, Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities, which amends ASC No. 740-10. ASU No. 2009-06, provides additional implementation guidance on accounting for uncertainty in income taxes. The guidance provided is effective for the first reporting period (including interim periods) ending after September 15, 2009. The adoption of ASU No. 2009-06 did not have a material effect on the Company’s Consolidated Financial Statements.
F-19
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
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.
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. The adoption of ASC No. 820-10 did not have a material effect on the Company’s Consolidated Financial Statements.
F-20
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
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.
2. REAL ESTATE:
The Company’s components of Rental property consist of the following at December 31, 2009 and 2008 (in thousands):
2009 | 2008 | |||||||||
Land | $ | 88,584 | $ | 88,584 | ||||||
Buildings and improvements | 24,362 | 24,222 | ||||||||
112,946 | 112,806 | |||||||||
Accumulated depreciation and amortization | (8,136 | ) | (7,019 | ) | ||||||
Total | $ | 104,810 | $ | 105,787 |
Substantially all of these assets have been pledged as collateral for debt obligations (see Note 10).
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 statements of income.
The following is a summary of available-for-sale-securities at December 31, 2009 and 2008 (in thousands):
Available-for-Sale Securities | |||||||||||||||||
Face Value | Amortized Cost | Unrealized Gains | Estimated Fair Value | ||||||||||||||
December 31, 2009 | |||||||||||||||||
Equity securities | $ | - | $ | - | $ | 267 | $ | 267 | |||||||||
Money market fund | 897 | 897 | - | 897 | |||||||||||||
U.S. Treasury/U.S. Government debt securities | 1,953 | 1,960 | 75 | 2,035 | |||||||||||||
Total available-for-sale securities | $ | 2,850 | $ | 2,857 | $ | 342 | $ | 3,199 | |||||||||
F-21
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
3. AVAILABLE FOR SALE SECURITIES (Continued):
Available-for-Sale Securities | |||||||||||||||||
Face Value | Amortized Cost | Unrealized Gains | Estimated Fair Value | ||||||||||||||
December 31, 2008 | |||||||||||||||||
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 years ended December 31, 2009 and 2008 includes net unrealized holding gains (losses) of approximately $75,000 and $(218,000), respectively. No amounts were reclassified from other comprehensive income to income for the years ended December 31, 2009 and 2008, respectively.
The following is a summary of the contractual maturities of U.S. Government Debt Securities as of December 31, 2009:
Estimated | |||||||||||||
Amortized | Fair | ||||||||||||
Cost | Value | ||||||||||||
Due in | |||||||||||||
2010 | $ | 350 | $ | 355 | |||||||||
2011 – 2015 | 1,171 | 1,225 | |||||||||||
2016 – 2020 | 340 | 354 | |||||||||||
2021 and later | 99 | 100 | |||||||||||
Total | $ | 1,960 | $ | 2,034 | |||||||||
Proceeds from the sale of available-for-sale securities amounted to approximately $1,296,000, $638,000 and $970,000 in 2009, 2008 and 2007, respectively, principally from the maturity of the available-for-sale securities. The Company sold the available-for-sale securities at their face value and therefore did not recognize any gains or losses from the sale of available-for-sale securities in 2009, 2008 and 2007, respectively.
4. DISCONTINUED OPERATIONS:
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 has 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.
F-22
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
4. DISCONTINUED OPERATIONS (Continued):
The following table sets forth the detail of the Company’s loss from discontinued operations:
Year Ended December 31, | |||||||||||||
2009 | 2008 | 2007 | |||||||||||
Revenues | $ | - | $ | 9,467 | $ | 9,537 | |||||||
Loss, net of taxes (1) | $ | (7 | ) | $ | (2,732 | ) | $ | (868 | ) |
(1) | Does not include losses from discontinued bus operations. The Paratransit Operations represented approximately 30% of the Company's non-REIT revenues during 2008 and 2007. |
The following table presents the major classes of assets and liabilities of the Paratransit Operations as of December 31, 2009 and 2008:
2009 | 2008 | ||||||||||
Assets: | |||||||||||
Cash | $ | - | $ | 549 | |||||||
Accounts receivable | 150 | 175 | |||||||||
Machinery and equipment, net | - | - | |||||||||
Prepaid expenses and other | 12 | 6 | |||||||||
Total assets | $ | 162 | $ | 730 | |||||||
Accounts payable and accrued liabilities | $ | - | $ | 13 |
Bus Operations
On November 29, 2005, the Company entered into an agreement (the "Agreement") and subsequently closed on January 9, 2006 (the "Transition Date") with the City to buy all of the Company's assets used in connection with the Company's bus operations (the "Acquired Assets"). The Acquired Assets included fixtures, furniture and equipment; maintenance records; personnel records; operating schedules; and the intangible value of the development, administration and maintenance of such assets, including the value related to the development and training of employees, the value related to the development of routes and operating schedules, and going concern value or good will for a purchase price of $9,460,000. Under the terms of the Agreement, the City paid additional consideration as follows: (1) an amount equal to the actual invoice cost for the Company's inventory of spare parts and fluids, provided that the Company represent and warrant to the City that it has paid or will pay such invoiced amounts; (2) an amount equal to the book value (net of accumulated depreciation) of the Company's other tangible assets that are Acquired Assets as of the date of closing; (3) if all of the Claimants in the Non-Union Employees v. New York City Department of Transportation and Green Bus Lines, Inc. execute Settlement Authorization Forms, the City will pay the Company an additional $189,200. If less than 100% of the Claimants execute Settlement Authorization Forms, the City will pay the Company an additional amount to be determined by multiplying the percentage of the Claimants who executed the Forms by $300,000, and the Company will receive 37.84% of the amount.
F-23
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
4. DISCONTINUED OPERATIONS (Continued):
Under the Agreement, the City assured, defended and indemnified the Company against the following: (1) all claims as a result from operations and maintenance of buses up through and including the Transition Date; (2) all claims, losses or damages for bodily injury and/or property damage resulting from or alleged to result from the operation and/or maintenance of buses up to the Transition Date; (3) any and all funding obligations, claims, losses, damages, fines, costs and expenses associated with any withdrawal, termination, freezing or other liability related to the various pension plans; (4) all claims with respect to accrued leave; (5) any claims made by any union or any member of any union arising under any collective bargaining agreement; (6) obligation to pay additional or retrospective premiums in connection with any Workers' Compensation Retrospective Policy; (7) obligation to pay accumulated holiday pay; and (8) any claim or demand is made, any and all claims asserted by vendors in regard to Bus Service, up through and including the Transition Date.
In connection with the Agreement, the City leased the depot and facilities from the Company located at 165-25 147th Avenue, Jamaica, New York, for an initial term of 21 years with a first-year rent of $2,795,000 and a 21st-year rent of $4,092,000 and the depot located at 49-19 Rockaway Beach Blvd., Arverne, New York, for an initial term of 21 years with a first-year rent of $605,000 and a 21st-year rent of $866,000.
The leases are "triple net" leases in that the City agrees to pay all expenses on the property. Each lease has two renewal terms at the City's option of 14 years each so that the total term is a maximum of 49 years. The term of each lease commenced on the date the Company in question closed the sale of the bus company to the City. The terms of the leases are consistent with current market rates.
In connection with Green’s agreement to sell all of its assets used in connection with its bus operations, the results of Green’s bus operations have been presented as discontinued operations in the Company's consolidated financial statements for all periods presented.
The following table sets forth the detail of Green's income (loss) from discontinued operations for the year ended December 31, 2007 (in thousands):
Bus Operations | ||||||
For the year ended December 31, 2007: | ||||||
Revenues from discontinued operation | $ | - | ||||
Loss from operations of discontinued operation | $ | (209 | ) | |||
Provision for income taxes | (115 | ) | ||||
Loss from discontinued operation, net of taxes | $ | (324 | ) | |||
Net cash provided by (used in) discontinued operations was $560,000, $(544,000), and $(2,216,000), for the years ended December 31, 2009, 2008, and 2007, respectively.