PATRIOT TRANSPORTATION HOLDING, INC.
501 Riverside Ave., Ste 500
Jacksonville, Florida 32202
April 14, 2010
Ms. Linda Cvrkel
Division of Corporation Finance
Securities and Exchange Commission
100 F. Street, N.E.
Washington, D.C. 20549
Re: Patriot Transportation Holding, Inc. (the "Company")
Form 10-K for the Year Ended September 30, 2009
Filed December 3, 2009
Filer No. 0-17554
Dear Ms. Cvrkel:
This letter responds to the Staff's comment letter dated April 2, 2010
and received by the Company on April 2, 2010 (the "Comment Letter") regarding
the above-referenced filing. For your convenience, each of the comments has
been duplicated below, followed by our responses.
Annual Report on Form 10-K for the year ended September 30, 2009
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Note 1. Notes to Consolidated Statements-Accounting Policies
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Property, Plant and Equipment
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1. We note your response to prior comment numbers 2 and 3. As requested
in our prior comment, supplementally provide us with the significant
assumptions that were used in your impairment analysis to derive the
$253 million of undiscounted cash flows for the expected book life of
the buildings, and provide us with a detailed summary of the results
of your impairment analysis for your various properties. As part of
your response, please provide us with your basis or rationale for
establishing when the various buildings are expected to be occupied
and related expected occupancy levels, and your basis for establishing
the estimated rental revenues and expenses, including property taxes
and insurance. In addition, even though we understand that you intend
to hold these properties for the foreseeable future, supplementally
advise us whether you have performed any market appraisals for these
properties, or alternatively, if you are aware of market values of
comparable properties in the respective areas and how those values
compare to the carrying values. We may further comment upon reviewing
your response.
Company Response:
As explained in the Company's prior response detailed cash flow estimates were
prepared for the remaining useful life of each of the properties identified for
further review based upon our recently completed business plan. The business
plan considers anticipated delays in leasing, lower market rates, and any future
capital expenditures.
Although our twenty-year historical experience is approximately 12 months to
lease up empty space, the leasing timeframe in our business plan was based on
10-36 months due to the weak economic climate. We have assumed a 39 year life
for the purpose for cash flow projection with no residual value. While these
buildings are of various ages from 1 to 13 years old, we believe the actual
life of these buildings to generate cash for the company under leasing
arrangements, with proper maintenance, will be well beyond the 39 year time
frame, however we have used 39 years as a conservative and consistent policy
estimate.
Detailed assumptions by property for Interchange and the three recently
completed buildings are:
Property A (2 Buildings):
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1. Leasing assumptions based on projected market in this area: No new
leases for 1 year for any portion of building. Beginning in first
quarter 2011, a gradual lease up of the building begins with
approximately 1/4th of the building. The remaining 3/4ths
(or 3 suites) are assumed to be leased one suite every 8 months after
that, and will not be assumed fully occupied until 2013. Any
existing leases that expire in the 5 year timeframe will assume a 6
month re-let program.
2. The rental rates assumed to be approximately 10% lower than rates
on existing lease in this building and equates to a low $4.00 per sq
foot range ($4.05-$4.19 exclusive of any market driven tenant
improvement amortization) with a 3% escalation for the first five
years.
3. Operating expenses are detailed for first 5 years and assumed fixed
based upon actual historical results and include a 3-4% per year
inflationary factor. Real estate taxes based upon actual assessed
rates per taxing authority with 3% inflation factor. NOI
subsequent to the first 5 years assumed at 1.5% growth, based upon
a conservative historical review.
4. Our cash flow analysis also anticipates approximately $2.7 million
in additional capital expenditures for the 2 buildings over the next
3 years.
Property B2:
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1. Leasing assumption: Estimated 11 month vacancy in 2010 with approximately
1/4th of the building (16,000 sq ft) coming on board in last month of the
year. The remaining 3/4ths (or 3 suites) of the building is assumed to
be leased in 18 months, 24 months and 30 months, consecutively, with
full occupancy expected by 2013.
2. Rental rates were projected based upon current LOI activity and proposals
received from a Federal Government Agency for the entire building as well
consideration from a private sector company for half of the building.
The NNN rate used in these assumptions was $20.19, net electric. This
approximates a 20% decline of market rates a year earlier.
3. Operating expenses are detailed for first 5 years and assumed fixed
based upon actual historical results and include a 3-4% per year
inflationary factor. Real estate taxes based upon actual assessed rates
per taxing authority with 3% inflation factor. NOI subsequent to the
first 5 years assumed at 1.5% growth, based upon a conservative
historical review.
4. Our cash flow analysis also anticipates approximately $2.6 million in
additional capital expenditures over the next 3 years.
5. Other factors: Our projections anticipate higher demand and lease up in
the out years due to the favorable impact of BRAC on the Fort Meade and
surrounding areas.
Property C:
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1. Leasing assumption: Estimated 10 months vacancy in 2010 with
approximately 1/3rd of the building being occupied the last 2 months of
2010. This assumption was based on the on-going negotiations with a
prospective tenant for over half of the building. The 1/3rd assumption
took into account the possibility of deal not closing. The remaining
2 suites assume a leasing timeframe of 18 months and 24 months,
respectively.
2. Rental rate projected based upon management's understanding of the market
as represented by outside brokers as well as current, on-going
negotiation with potential prospects. The rental rate used in our
analysis was $5.65 sq ft (exclusive of any market driven tenant
improvement amortization.
3. Operating expenses are detailed for first 5 years and assumed fixed
based upon actual historical results and include a 3-4% per year
inflationary factor. Real estate taxes based upon actual assessed
rates per taxing authority with 3% inflation factor. NOI subsequent
to the first 5 years assumed at 1.5% growth, based upon a conservative
historical review.
4. Our cash flow analysis also anticipates approximately $1.2 million in
additional capital expenditures over the next 3 years.
5. Other factors: Our projections anticipate higher demand and lease up in
the out years due to the favorable impact of BRAC on the Aberdeen Proving
Ground and surrounding areas as well as the location being ideally
situated from I-95 in a brand new commercial area with access to a large
and growing population.
Property D:
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1. Leasing assumption: Estimated 10 months vacancy in 2010 with
approximately 1/4th of the building being occupied the last 2 months
of 2010. This assumption was based on the on-going negotiations with
prospective tenants. The remaining 3 suites assume a leasing
timeframe of 18 months, 24 months and 30 months, respectively.
2. Rental rate projected based upon management's understanding of the
market as represented by outside brokers as well as current, on-going
negotiation with potential prospects. The rental rate used in our
analysis was $5.55 sq ft (exclusive of any market driven tenant
improvement amortization.
3. Operating expenses are detailed for first 5 years and assumed fixed
based upon actual historical results and include a 3-4% per year
inflationary factor. Real estate taxes based upon actual assessed
rates per taxing authority with 3% inflation factor. NOI subsequent
to the first 5 years assumed at 1.5% growth, based upon a
conservative historical review.
4. Other factors: Our projections anticipate higher demand and lease up in
the out years due to the favorable impact of BRAC on the Aberdeen Proving
Ground (within 3 miles) and surrounding areas as well as the location
being ideally situated on I-95.
The following table details the net book value at September 30, 2009 (NBV)
and the undiscounted net cash flows by year and in total for the 39 years by
property for the properties selected for further review. Property B1 is a
building that was 82% leased. Property C2/C3 are prepared construction pads
and the net cash flow assumes construction of buildings in fiscal 2012 and
2013.
000's A1 A2 B1 B2 C C2/C3 D Totals
NBV 5,043 4,919 5,337 7,201 4,855 3,394 7,322 38,070
Cash Flow 37,223 35,495 24,806 41,723 22,097 49,946 42,213 253,504
2010 (201) (356) 446 (880) (368) (4) (232) (1,594)
2011 (286) (5) 455 (611) (49) (450) (137) (1,083)
2012 (300) (534) 557 (388) 205 (6,575) 772 (6,262)
2013 830 833 550 972 499 (6,832) 931 (2,217)
2014 867 472 544 1,006 515 (547) 961 3,818
2015 876 848 549 1,017 520 1,583 971 6,365
2016 886 858 554 1,027 526 1,599 981 6,432
2017 896 867 560 1,038 531 1,615 992 6,500
2018 906 877 565 1,049 537 1,632 1,003 6,570
2019 917 887 571 1,060 543 1,648 1,014 6,640
2020 927 897 577 1,072 548 1,665 1,025 6,711
2021 938 907 583 1,083 554 1,682 1,036 6,783
2022 948 917 589 1,095 560 1,700 1,047 6,857
2023 959 928 595 1,107 566 1,717 1,059 6,931
2024 970 939 601 1,119 572 1,735 1,071 7,007
2025 982 949 607 1,131 579 1,753 1,083 7,083
2026 993 960 613 1,143 585 1,772 1,095 7,161
2027 1,005 971 620 1,156 591 1,791 1,107 7,240
2028 1,016 983 626 1,168 598 1,810 1,119 7,320
2029 1,028 994 633 1,181 604 1,829 1,132 7,402
2030 1,041 1,006 639 1,194 611 1,848 1,145 7,484
2031 1,053 1,017 646 1,208 618 1,868 1,158 7,568
2032 1,065 1,029 653 1,221 625 1,888 1,171 7,653
2033 1,078 1,041 660 1,235 632 1,909 1,185 7,740
2034 1,091 1,054 667 1,249 639 1,930 1,198 7,827
2035 1,104 1,066 674 1,263 646 1,951 1,212 7,916
2036 1,117 1,079 682 1,277 653 1,972 1,226 8,007
2037 1,131 1,092 689 1,292 661 1,994 1,240 8,098
2038 1,144 1,105 697 1,307 668 2,016 1,255 8,192
2039 1,158 1,118 704 1,322 676 2,038 1,270 8,286
2040 1,172 1,132 712 1,337 684 2,061 1,284 8,382
2041 1,186 1,145 720 1,352 692 2,084 1,300 8,479
2042 1,201 1,159 728 1,368 700 2,107 1,315 8,578
2043 1,216 1,173 736 1,384 708 2,131 1,330 8,678
2044 1,231 1,188 744 1,400 716 2,155 1,346 8,780
2045 1,246 1,202 753 1,417 725 2,180 1,362 8,883
2046 1,261 1,217 761 1,433 733 2,204 1,379 8,988
2047 1,277 1,232 770 1,450 742 2,230 1,395 9,095
2048 1,293 1,247 778 1,467 751 2,255 1,412 9,203
The Company does not have market appraisals on these properties, and there has
been little or no sales activity in the Newark market, Baltimore-South
sub-market, or Baltimore-North sub-market to provide adequate comparables.
2. We note that your response to previous comment under number 4. In light of
the declines in revenue and gross profits experienced in the three months ended
December 31, 2009, as shown in your Form 10-Q, please expand your disclosures in
MD&A with respect to your impairment analysis in future filings to include
specific assumptions used in the Company's impairment analysis such as expected
changes in revenue and cost levels used in the analysis. Also, please revise
future filings to include a discussion of how the impact of your declining
revenue and gross profit levels, including any lost business or customers, was
considered in determining that an updated impairment analysis was not required
pursuant to ASC 360-10-35. As part of your response, please provide us with
your proposed disclosures.
Company Response:
The Company's response to prior comment number 4 included a financial analysis,
not an impairment analysis. The Company does not believe that this loss of
revenue is significant to the long-term value of the transportation group due
to the Company's operating history and current expectations. Based on the
financial analysis performed the Company determined that a formal impairment
analysis was not required. This loss of revenue is not considered a
significant adverse change in the extent or manner of use of the long-lived
assets for these reasons.
The Company does not believe there is any circumstance or requirement to
disclose an impairment analysis or why no impairment analysis was required
when no impairment analysis is required. In future filings the Company
will provide appropriate context regarding the impact of the loss of
significant customers.
Note 10-Business Segments
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3. We note your response to previous comment number 5. In light of the
information presented in your response to our prior comment in addition
to the matters noted in our prior comment, we continue to believe that
aggregation of the Royalties and Rents reporting unit and the Developed
Properties reporting unit into a single segment may not be appropriate
based on the criteria for aggregation outlined in ASC 280-10-50-11
(paragraph 17 of SFAS No. 131). In this regard it appears that the
Royalties and Rent division included a different and significantly more
diverse portfolio of real estate assets and related revenue streams than
the Developed Properties unit with these including royalties from
construction aggregates, land rents and timber sales in addition to
office building rents. This would indicate that the reporting units do
not
have the same types or classes of customers for their products and
services and that the methods used to distribute their products or
services would be significantly different. Also, it appears that each
of these reporting units has significantly different economic
characteristics. For example, as noted in your response,
depreciation/depletion for the Royalties and Rent division is
approximately 7% of revenue while it is 28% to 30% of revenue for the
Developed Property division. Also, management company and indirect
expenses were 3% to 4% for the Royalties and Rent division while they
were 9% to 12% of revenue for the Developed Property division. These
factors contribute to different profitability and operating performance
levels and are indicative that the divisions operations are not
economically similar. In addition, as noted in your response, the CODM
reviews the two division financial statements and assesses performance
on that basis indicating that they are reviewed and analyzed by the
CODM on an individual basis as separate operating segments. Given
these factors, we continue to believe that it may not be appropriate to
aggregate the two divisions into a single segment for purposes of your
disclosures pursuant to SFAS No.131. Please confirm that you will revise
your financial statements in future filings to present the operations of
each of divisions as separate operating segments or alternatively,
explain in detail why you do not believe this is required.
Company Response:
The Company will present revised financial statements in future filings to
present the operations of each of the divisions as separate operating segments.
Note 13-Commitments
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4. We note your response to our prior comment number 6. Please confirm that
you will add disclosure in future filings to include the information
provided in your response letter with respect to the reasons the property
is not classified as "held for sale" at September 30, 2009 and the reasons
why management does not believe the property's recorded carrying value is
impaired.
Company Response:
The Company will disclose in future filings the reasons the property is not
classified as held for sale in future filings. The Company discloses in its
filings the value of the contract for sale of the property is $25 million and
the carry value of the property is $5.7 million. The Company does not believe
there is any circumstance or requirement to disclose why management does not
believe the property's recorded carrying value is impaired.
The Company hereby acknowledges that:
* the Company is responsible for the adequacy and accuracy of
the disclosure in the filings;
* staff comments or changes to disclsoure in response to staff
comments do not foreclose the Commission from taking any action
with respect to the filing; and
* the Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
The Company further acknowledges that the Division of Enforcement has
access to all information that it provides to the staff of the Division of
Corporation Finance in your review of its filings or in response to your
comments on its filings.
Please contact the undersigned if you have any additional comments
or questions.
Very truly yours,
/s/ John D. Milton, Jr.
__________________________________
John D. Milton, Jr.
Vice President and Chief Financial Officer