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EX-32.1 - EXHIBIT 32.1 CERTIFICATION - GTJ REIT, Inc.exhibit321.htm
EX-32.2 - EXHIBIT 32.2 CERTIFICATION - GTJ REIT, Inc.exhibit322.htm
EX-31.2 - EXHIBIT 31.2 CERTIFICATION - GTJ REIT, Inc.exhibit312.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATION - GTJ REIT, Inc.exhibit311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011 or

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ________

Commission file number:  0001368757
 
GTJ REIT, INC.
(Exact name of registrant as specified in its charter)

MARYLAND
20-5188065
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

444 Merrick Road
Lynbrook, New York
11563
 
(Address of principal executive offices)
(Zip Code)
 
(516) 881-3535
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “small reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer  o
Accelerated filer  o
Non-accelerated filer  o
(Do not check if smaller reporting company)
Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).       Yes  o No  x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date: 13,529,131 shares of common stock as of May 16, 2011.
 

 
 

 

GTJ REIT, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2011
TABLE OF CONTENTS

 

 
PART I. FINANCIAL INFORMATION
  2
Item 1. Financial Statements
  2
Consolidated Balance Sheets at March 31, 2011 (Unaudited) and December 31, 2010
  2
Consolidated Statements of Income (Unaudited) for the Three Months Ended March 31, 2011 and 2010
  3
Consolidated Statement of Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2011
  4
Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2011 and 2010
  5
Notes to the Consolidated Financial Statements (Unaudited)
  6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
Item 3. Quantitative and Qualitative Disclosures about Market Risk
36
Item 4. Controls and Procedures
36
PART II. OTHER INFORMATION
36
Item 1. Legal Proceedings
36
Item 1A. Risk Factors
36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
36
Item 3. Defaults Upon Senior Securities
36
Item 4. Removed and Reserved
36
Item 5. Other Information
36
Item 6. Exhibits
37
Signatures
38
   
EX-31.1: CERTIFICATION
 
EX-31.2: CERTIFICATION
 
EX-32.1: CERTIFICATION
 
EX-32.2: CERTIFICATION
 
 

 

 
1

 

 
GTJ REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)


   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
ASSETS
           
Real estate at cost:
           
    Land
  $ 88,584     $ 88,584  
    Buildings and improvements
    24,539       24,539  
      113,123       113,123  
   Less: accumulated depreciation and amortization
    (9,490 )     (9,221 )
   Net real estate held for investment
    103,633       103,902  
Cash and cash equivalents
    10,276       11,174  
Available-for-sale securities
    2,466       2,748  
Restricted cash
    837       875  
Accounts receivable, net
    4,036       4,476  
Other assets
    10,423       9,663  
Deferred charges, net
    3,323       3,368  
Assets of discontinued operation
    -       10  
Intangible assets, net
    1,578       1,810  
Machinery and equipment, net
    2,490       2,488  
   Total assets
  $ 139,062     $ 140,514  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Mortgage note payable
  $ 45,500     $ 45,500  
Accounts payable and accrued expenses
    894       719  
Unpaid losses and loss-adjustment expenses
    2,126       2,174  
Other liabilities, net
    3,832       3,630  
     Total liabilities
    52,352       52,023  
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; 13,529,131 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively
    1       1  
   Additional paid-in capital
    137,496       137,470  
   Cumulative distributions in excess of net income
    (51,200 )     (49,398 )
   Accumulated other comprehensive income
    413       418  
      Total stockholders’ equity
    86,710       88,491  
   Total liabilities and stockholders’ equity
  $ 139,062     $ 140,514  
                 
 

 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 

 
2

 

GTJ REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2011 and 2010
(Unaudited, amounts in thousands, except share and per share data)

   
Three Months Ended, March 31,
 
   
2011
   
2010
 
Revenues:
           
      Property rentals
  $ 3,375     $ 3,337  
      Outdoor maintenance and cleaning operations
    4,656       4,216  
         Total revenues
    8,031       7,553  
Operating expenses:
               
      General and administrative expenses
    1,929       1,897  
      Equipment maintenance and garage expenses
    389       436  
      Transportation expenses
    244       323  
      Contract maintenance and station expenses
    2,813       2,677  
      Insurance and safety expenses
    485       527  
      Operating and highway taxes
    70       114  
      Other operating expenses
    524       241  
      Depreciation and amortization expense
    412       419  
         Total operating expenses
    6,866       6,634  
         Operating income
    1,165       919  
Other income (expense):
               
Interest income
    52       104  
Interest expense
    (630 )     (458 )
Change in insurance reserves
    (21 )     (45 )
Other
    7       2  
       Total other income (expense):
    (592 )     (397 )
Income from continuing operations before income from equity
affiliates and income taxes
    573       522  
Income from equity affiliates
    37       -  
Income  before benefit from (provision for) income taxes
    610       522  
Benefit from (provision for) income taxes
    23       (4 )
Income from continuing operations, net of income taxes
    633       518  
                 
Discontinued Operations:
               
   Income from discontinued operations, net of income taxes
    -       1  
                 
Net income
  $ 633     $ 519  
Income per common share - basic and diluted:
               
        Income from continuing operations
  $ 0.05     $ 0.04  
        Income from discontinued operations
  $ -     $      -  
        Net income
  $ 0.05     $ 0.04  
Weighted-average common shares outstanding - basic and diluted
    13,529,131       13,472,281  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 
3

 


GTJ REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Three Months Ended March 31, 2011
(Unaudited, amounts in thousands, except share and per share data)


 
Preferred Stock
Common Stock
                 
 
Outstanding Shares
Amount
Outstanding Shares
Amount
Additional-Paid-In-Capital
 
Cumulative Distributions in Excess of Net Income
 
Accumulated Other Comprehensive Income
 
Total Stockholders’ Equity
 
                         
Balance at December 31, 2010
               -
  $       -
 13,529,131
 $       1
$     137,470
 
   $     (49,398)
 
    $           418
 
$     88,491
 
                         
Distributions - common stock, $0.18 per share
               -
               -
                -
               -
                 -
 
          (2,435)
 
                -
 
          (2,435)
 
                         
Stock-based compensation
               -
               -
                -
               -
                26
 
                  -
 
                -
 
                26
 
                         
Comprehensive income:
                       
                         
Net income
               -
               -
                -
               -
                 -
 
               633
 
                -
 
           633
 
         
 
             
Unrealized loss on available-for-sale securities, net
               -
               -
                -
               -
                 -
 
                   -
 
             (5)
 
              (5)
 
 
Total comprehensive income
               -
               -
                -
               -
                 -
 
                  -
 
                -
 
          628
 
                         
Balance at March 31, 2011
               -
  $       -
 13,529,131
 $       1
 $    137,496
 
 $       (51,200)
 
 $            413
 
$     86,710
 























The accompanying notes are an integral part of these condensed consolidated financial statements.

 
4

 
GTJ REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2011 and 2010
(Unaudited, amounts in thousands, except share and per share data)
 
   
Three Months Ended March 31,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 633     $ 519  
Income from discontinued operations
    -       (1 )
Income from continuing operations
    633       518  
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities
               
  Stock-based compensation
    26       141  
  Changes in insurance reserves
    (48 )     53  
  Depreciation and amortization
    360       366  
  Amortization of deferred financing costs
    29       51  
  Amortization of deferred charges
    54       26  
  Amortization of intangible assets
    232       232  
  Income  in equity affiliates
    37       -  
Changes in operating assets and liabilities:
               
   Accounts receivable
    440       1,613  
   Other assets
    (797 )     (2,010 )
   Deferred charges
    (38 )     -  
   Accounts payable and other liabilities
    376       (399 )
Net cash provided by operating activities
    1,304       591  
Cash flow from investing activities:
               
   Purchases of machinery and equipment
    (92 )     (251 )
   Purchase of investments
    (10 )     (13 )
   Proceeds from sale of investments
    287       25  
   Restricted cash
    38       10  
Net cash provided by (used in) investing activities
    223       (229 )
Cash Flow from financing activities:
               
   Dividends paid
    (2,435 )     (2,155 )
   Earnings and profits distribution
    -       (90 )
Net cash used in financing activities
    (2,435 )     (2,245 )
Cash flow provided by discontinued operations:
               
Operating activities
    10       -  
Net decrease in cash and cash equivalents
    (898 )     (1,883 )
Cash and cash equivalents at the beginning of period
    11,174       12,906  
Cash and cash equivalents at the end of period
  $ 10,276     $ 11,023  
Supplemental cash flow information:
               
Cash paid for interest
  $ 574     $ 407  
Cash paid for taxes
  $ 16     $ 46  
 

 
The accompanying notes are an integral part of these condensed consolidated financial statements.


 
5

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION:

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, 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 taxable 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, and operates and manages parking garages located in New York City.

On March 29, 2007, the Company commenced operations upon the completion of the Reorganization described below. Effective July 1, 2007, the Company elected to be treated as a REIT under the Code and elected December 31st as its fiscal year end. Additionally, in connection with the Tax Relief Extension Act of 1999 (“RMA”), the Company is permitted to participate in activities outside the normal operations of the REIT so long as these activities are conducted in entities which elect to be treated as taxable subsidiaries under the Code subject to certain limitations.

At March 31, 2011, the Company owned seven properties containing a total of approximately 561,000 square feet of leasable area.
 
Reorganization
 
On July 24, 2006, the Company entered into an Agreement and Plan of Merger (the “Agreement”) with Triboro Coach Corp., a New York corporation (“Triboro”); Jamaica Central Railways, Inc., a New York corporation (“Jamaica”); Green Bus Lines, Inc., a New York corporation (“Green” and together with Triboro and Jamaica, collectively referred to as the “Bus Companies” and each referred to as a “Bus Company”); Triboro Acquisition, Inc., a New York corporation (“Triboro Acquisition”); Jamaica Acquisition, Inc., a New York corporation (“Jamaica Acquisition”); and Green Acquisition, Inc., a New York corporation (“Green Acquisition,” and together with Jamaica Acquisition and Triboro Acquisition collectively referred to as the “Acquisition Subsidiaries” and each referred to as an “Acquisition Subsidiary”). The transactions contemplated under the Agreement closed on March 29, 2007. The effect of the merger transactions was to complete a reorganization (“Reorganization”) of the ownership of the Bus Companies into the Company with the surviving entities of the merger of the Bus Companies with the Acquisition Subsidiaries becoming wholly-owned subsidiaries of the Company and the former shareholders of the Bus Companies becoming stockholders in the Company.

Under the terms of the Agreements, each share of common stock of each Bus Company’s issued and outstanding shares immediately prior to the effective time of the mergers, was converted into the right to receive the following shares of the Company’s common stock:

 
Each share of Green common stock was converted into the right to receive 1,117.429975 shares of the Company’s common stock.
     
 
Each share of Triboro common stock was converted into the right to receive 2,997.964137 shares of the Company’s common stock.
     
 
Each share of Jamaica common stock was converted into the right to receive 195.001987 shares of the Company’s common stock.




 
6

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION (Continued):

The Bus Companies, including their subsidiaries, owned a total of six rentable parcels of real property (all on a triple net basis), four of which are leased to the City of New York, one of which is leased to a commercial tenant, 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, and is available for lease. There was an additional property of negligible size which was not rentable. Prior to the Reorganization, the Bus Companies and their subsidiaries, collectively, operated a group of outdoor maintenance businesses and the discontinued paratransit business, which was acquired as part of the Reorganization.

Following the completion of the Reorganization, on July 1, 2007, the Company elected to be treated as a REIT under the applicable provisions of the Code. In order to adopt a REIT structure, it was necessary to combine the Bus Companies and their subsidiaries under a single holding company. The Company is the holding company. The Company has formed three wholly-owned New York corporations and each of the Bus Companies merged with one of these subsidiaries to become wholly-owned subsidiaries of the Company. The mergers required the approval of the holders of at least 66 2/3% of the outstanding shares of common stock of each of Green, Triboro and Jamaica, voting separately and not as one class, which was obtained on March 26, 2007.

Based on third-party valuations of the real property, outdoor maintenance businesses, and the paratransit business (which was discontinued as of September 30, 2008), and considering the ownership of the same in whole or part by each of the Bus Companies, the Company was advised by an independent appraisal firm that the relative valuation of each of the Bus Companies (as part of GTJ REIT, Inc.) and in connection with the Reorganization was as follows: Green-42.088%, Triboro-38.287% and Jamaica-19.625%. Accordingly, under the Reorganization, 10,000,361 shares (including 361 fractional shares) of the Company’s common stock were distributed to the former shareholders of Green, Triboro, and Jamaica in exchange for their shares in the Bus Companies. Exclusive of fractional shares, 4,208,800 shares were distributed to the shareholders of Green, 3,828,700 shares to the shareholders of Triboro and 1,962,500 shares to the shareholders of Jamaica, in proportion to the outstanding shares held by such shareholders of each Bus Company, respectively.

As part of becoming a REIT, the Company was required, after the Reorganization, to make a distribution of the Bus Companies’ historical undistributed earnings and profits, calculated to be an estimated $62.1 million (see Note 9). 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 for purposes of Post Earnings and Profits distribution
 
$11.14

The Reorganization was accounted for under the purchase method of accounting as required by Accounting Standards Codification (“ASC”) 805. Because the Company has been formed to issue equity interests to effect a business combination, as required by ASC 805, one of the existing combining entities was required to be determined the acquiring entity. Under ASC 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 805, in determining the acquiring entity, consideration was given to which combining entity initiated the combination and whether the assets, revenues, and earnings of one of the combining entities significantly exceed those of the others.
 
 
 
 
7

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION (Continued):
 
Each stockholder elected to receive cash or stock, or a combination of both. 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 would 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 $19.9 million in cash and 3,775,400 shares of common stock (with a value of approximately $42.1 million). The undistributed cash balance of approximately $0.1 million is included in other liabilities in the condensed consolidated balance sheet at March 31, 2011. Green’s assets at December 31, 2006 totaled approximately $23.9 million as compared to Triboro’s assets of approximately $19.4 million, and Jamaica’s assets of approximately $10.2 million, and Green’s revenues on a going forward basis are expected to exceed that of Triboro and Jamaica. As a result of these facts, Green was deemed to be the accounting acquirer and the historical financial statements of the Company are those of Green.

Under the purchase method of accounting, Triboro’s and Jamaica’s assets and liabilities were acquired by Green and have been recorded at their estimated fair value. Accordingly, under the Reorganization, 10,000,000 shares of the Company’s common stock were distributed (exclusive of 361 fractional shares), 4,208,800 shares to the shareholders of Green, 3,828,700 shares to the shareholders of Triboro and 1,962,500 shares to the shareholders of Jamaica, in such case in proportion to the outstanding shares held by such shareholders of each Bus Company, respectively.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The fair values are based on third-party valuations. The fair value of the net assets acquired for the remaining interest in GTJ, not previously owned by Green, exceeded the total consideration for the acquisition by approximately $6.0 million (of which an additional adjustment of  approximately $1.1 million was recorded at December 31, 2007 to adjust certain acquired deferred tax liabilities), resulting in negative goodwill. The excess negative goodwill was allocated on a pro rata basis and recorded as a reduction of long-lived assets.

The following table summarizes the allocation of the purchase price in the form of a condensed consolidated balance sheet reflecting the estimated fair values (after the allocation of negative goodwill) of the amounts assigned to each major asset and liability caption of the acquired entities at the date of acquisition (in thousands):

   
Triboro
   
Jamaica
   
Total
 
Issuance of stock
  $ 66,402     $ 34,035     $ 100,437  
                         
Cash and cash equivalents
  $ 6,126     $ 974     $ 7,100  
Restricted cash
    1,275       637       1,912  
Accounts receivable
    2,627       1,314       3,941  
Operating subsidies receivables
    1,752       941       2,693  
Deferred leasing commissions
    782       -       782  
Other assets
    2,682       1,549       4,231  
Securities available for sale
    1,668       593       2,261  
Real property and equipment
    55,038       30,919       85,957  
Machinery and equipment
    149       75       224  
Total assets
    72,099       37,002       109,101  
                         
Accounts payable and accrued  expenses
    741       371       1,112  
Revolving credit borrowings
    168       84       252  
Note payable
    666       333       999  
Income tax payable
    294       157       451  
Deferred tax liability
    248       124       372  
Unpaid losses and loss adjustment expenses
    1,736       868       2,604  
Other liabilities
    1,844       1,030       2,874  
Total liabilities
    5,697       2,967       8,664  
Fair value of net assets acquired
  $ 66,402     $ 34,035     $ 100,437  


 
8

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION (Continued):
 
On March 29, 2010, Shelter Electric Maintenance Corp. and Shelter Electric Acquisition Subsidiary LLC invested approximately four hundred dollars in exchange for a 40% interest in a joint venture with Morales Electrical Contracting, Inc., a Minority Women Owned Business Enterprise (“MWBE”). The joint venture was formed to secure MWBE contracts for the purpose of providing electrical construction services.

On August 13, 2010, the Company formed Shelter Parking Corp., a New York corporation, to operate and manage parking facilities in the New York tri-state area. On September 30, 2010, Shelter Parking Corp., through its wholly owned subsidiary, Shelter Parking Brevard, LLC, entered into a fifteen year lease agreement to operate a parking garage facility at 245 East 54th Street. At March 31, 2011, this was the only parking garage facility operated by the Company.

Basis of Presentation and Principles of Consolidation:

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements, although management believes that the disclosures presented herein are adequate to make the accompanying unaudited consolidated interim financial statements presented not misleading.
 
The accompanying unaudited consolidated financial statements include the financial statements of the Company, its wholly-owned subsidiaries, and partnerships or other joint ventures. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All significant inter-company transactions and balances have been eliminated in consolidation.

            The results of operations for the three months ended March 31, 2011 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2011. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated annual financial statements and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Use of Estimates:

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. All of these estimates reflect management’s best judgment about current economic and market conditions and their effects based on information available as of the date of these consolidated financial statements.  If such conditions persist longer or deteriorate further than expected, it is reasonably possible that the judgments and estimates could change, which may result in impairments of certain assets. Significant estimates include those related to uncollectible receivables, the useful lives of long lived assets including property and equipment and intangible assets, income taxes, contingencies, environmental matters, insurance liabilities, and stock-based compensation.

Reclassifications:

Certain prior period amounts have been reclassified to conform to the current year presentation.

 
9

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Real Estate Investments:

Real estate assets are stated at cost, less accumulated depreciation and amortization. All costs related to the improvement or replacement 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 are allocated to the acquired tangible assets (consisting of land, buildings, and building improvements) and identified intangible assets and liabilities (consisting of above-market and below-market leases and in-place leases) in accordance with ASC 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.

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 are depreciated over estimated useful lives that range from 5 to 10 years. Tenant improvements are amortized over the shorter of the remaining non-cancellable term of the related leases or their useful lives.

Deferred Charges:
 
           Deferred charges consist principally of leasing commissions (which are amortized ratably over the life of the related tenant leases) and financing costs (which are amortized over the terms of the respective debt agreements).

Asset Impairment:

           The Company applies the guidance in ASC 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 analyses 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.

 
10

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

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 makes its estimate of fair value by considering certain factors including discounted cash flow analyses. If the fair value of the investment has dropped below the carrying amount, management considers several factors when determining whether an other-than-temporary decline in market value has occurred, including the length of the time and the extent to which the fair value has 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 March 31, 2011.

Reportable Segments:

As of March 31, 2011, the Company primarily operated in three reportable segments: (i) Real Estate Operations, (ii) Outside Maintenance Operations (including shelter cleaning, electrical contracting, and operating and managing parking facilities), and (iii) Insurance Operations. Each segment’s operations are conducted throughout the U.S., with the exception of the Insurance Operations which is conducted in the Cayman Islands.

Real Estate Operations rent Company owned real estate located in New York and Connecticut.
   
Outside Maintenance, Shelter Cleaning Operations, Electrical Contracting, and Parking Operations provide outside maintenance and shelter cleaning services to outdoor advertising companies and government agencies in New York, New Jersey, Arizona, and California, electrical construction services to a broad range of commercial, industrial, institutional, and governmental customers in New York, and operate and manage parking facilities in the New York area.
   
Insurance Operations assumes reinsurance of worker’s compensation, vehicle liability, and covenant liability of the Company and its affiliated companies from unrelated insurance companies based in the United States of America.

Revenue Recognition—Real Estate Operations:

The Company recognizes revenue in accordance with ASC 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. For the three months ended March 31, 2011, five tenants constituted approximately 60%, 17%, 16%, 6%, and 1% of rental revenue and for the three months ended March 31, 2010, five tenants constituted approximately 66%, 16%, 12%, 5%, and 1% of rental revenue.

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 cumulative excess revenue recognized over amounts due pursuant to the underlying leases amounted to approximately $7.1 million and $6.7 million at March 31, 2011 and December 31, 2010, respectively (see Note 4).

Property operating expense recoveries from tenants of common area maintenance, real estate, and other recoverable costs are recognized in the period that 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.


 
11

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

2.    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 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. Contract costs include all direct costs related to the performance and completion of the contracts. Estimated losses on the long term construction contracts are recognized in the period in which such losses are determined.

Revenue Recognition—Parking Garage Operations:

Our parking garage facility charges a monthly or hourly fee to provide parking services.  Revenue is recognized during the period services are performed.

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.  No premiums were earned for the three months ended March 31, 2011 and 2010.

Earnings Per Share Information:

In accordance with ASC 260-10-45, the Company presents both basic and diluted earnings per share. Basic earnings per share excludes dilution and is computed by dividing net income 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. Restricted stock was included in the computation of diluted earnings per share and stock option awards were excluded from the computation of diluted earnings per share because the awards would have been antidilutive for the periods presented.

Discontinued Operations:
 
The condensed consolidated financial statements of the Company present the operations of the Paratransit Operations as discontinued operations in accordance with ASC 205-20-55 for the three months ended March 31, 2011 and 2010.

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:

The Company has restricted cash held by AIG on behalf of the Company that is restricted by the insurance carrier for the purpose of the payment of insured losses.  At March 31, 2011, and December 31, 2010, the Company had restricted cash in the amount of $0.8 million and $0.9 million, respectively.

Accounts Receivable:

Accounts receivable consist of trade receivables recorded at the original invoice amounts, less an estimated allowance for uncollectible accounts. Trade credit is generally extended on a short-term basis; thus trade receivables generally do not bear interest. Trade receivables are periodically evaluated for collectibility based on past credit histories with customers and their current financial conditions. Changes in the estimated collectibility of trade receivables are recorded in the results of operations for the periods in which the estimates are revised. Trade receivables that are deemed uncollectible are offset against the allowance for uncollectible accounts. The Company generally does not require collateral for trade receivables.
 
12

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Available-for-Sale Securities:

The Company accounts for its marketable debt and equity securities as available-for-sale securities in accordance with ASC 320-10-35. Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date.

Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income, a component of stockholders’ equity. Interest on securities is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in the accompanying condensed consolidated statements of income. The cost of securities sold is based on the specific identification method. Estimated fair value is determined based on quoted market prices.

Fair Value Measurement:

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measurements, a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:
 
Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
   
Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. Level 2 inputs include quoted market prices in markets that are not active for an identical or similar asset or liability, and quoted market prices in active markets for a similar asset or liability.
   
Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. These valuations are based on significant unobservable inputs that require a considerable amount of judgment and assumptions. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
 
Income Taxes:

The Company is organized and conducts its operations to qualify as a REIT for federal income tax purposes. Accordingly, the Company is generally not subject to federal income taxation on the 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 stockholders and complies with certain other requirements as defined under Section 856 through 860 of the Code.

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 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 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 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 740-10-65 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of March 31, 2011 and December 31, 2010, the Company has determined that no liabilities are required in connection with unrecognized tax positions.

 
13

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
 
Comprehensive Income:

The Company follows the provisions of ASC 220-10-45, which sets forth rules for the reporting and display of comprehensive income and its components. ASC 220-10-45 requires unrealized gains or losses on the Company’s available-for-sale securities to be included in accumulated other comprehensive income, net of taxes and as a component of stockholders’ equity.

Environmental Matters:

Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information become available.

Environmental costs are capitalized if the costs extend the life of the property, increase its capacity, and/or mitigate or prevent contamination from future operations. Environmental costs are also capitalized in recognition of legal asset retirement obligations resulting from the acquisition, construction and/or normal operation of a long-lived asset. Costs related to remedial investigation and feasibility studies, environmental contamination treatment and cleanup are charged to expense. Estimated future incremental operations, maintenance, and management costs directly related to remediation are accrued when such costs are probable and estimable (see Notes 6 and 12).

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 management’s best estimates, while the liability for adverse claims development is based on independent actuarial reports. While management believes that the estimated liabilities are adequate, the ultimate liabilities may be in excess of or less than the amounts recorded. It is reasonably possible that the expectations associated with these amounts could change in the near-term (within one year). The effect of such changes could be material to the condensed consolidated financial statements. The methods for making such estimates and for establishing the resulting liabilities are continually reviewed, and any adjustments are reported in current earnings.

Concentrations of Credit Risk:

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash equivalents, which from time-to-time exceed the Federal depository insurance coverage. All non-interest bearing transaction accounts are fully insured by the Federal Deposit Insurance Corporation through December 31, 2012.

Investment in Equity Affiliates:

The Company invests in joint ventures that are formed to perform electrical construction services. These investments are generally recorded under either the equity or cost method of accounting. Under the equity method of accounting, the Company records its share of the net income and losses from the underlying operations and any other-than-temporary impairment on these investments on a single line item in the condensed consolidated statements of income as income or losses from equity affiliates.

Variable Interest Entities:

The Company accounts for variable interest entities (“VIEs”) in accordance with ASC 810-10-50. A VIE is defined as an entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that (i) has the power to control the activities that impact the VIE’s economic performance and (ii) has the right to receive the majority of expected returns or the obligation to absorb the majority of expected losses that could be material to the VIE.
 
14

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

As of March 31, 2011, the Company has one investment in a VIE with an aggregate carrying amount of $1.0 million. For the VIE identified, the Company is not the primary beneficiary and as such the VIE is not consolidated in the Company’s accompanying condensed consolidated financial statements. The Company accounts for this investment under the equity method of accounting.

Stock-Based Compensation:

The Company has a stock-based compensation plan, which is described in Note 9. The Company accounts for stock-based compensation in accordance with ASC 718-30-30, which establishes accounting for stock-based awards exchanged for employee services. Under the provisions of ASC 718-10-35, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is expensed against earnings at the grant date (for the portion that vests immediately) or ratably over the respective vesting periods.

Recently Issued Accounting Pronouncements:
 
There were no recently issued accounting pronouncements that would affect the Company’s financial statements.

3.    AVAILABLE-FOR-SALE SECURITIES:

The Company accounts for debt and equity securities as available-for-sale securities in accordance with ASC 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 following is a summary of available-for-sale securities at March 31, 2011 and December 31, 2010 (in thousands):

   
Available-for-Sale Securities
 
 
March 31, 2011
 
Face Value
   
Amortized Cost
   
Unrealized Gains
   
Estimated Fair
Value
 
                         
Equity securities
  $ -     $ -     $ 340     $ 340  
Money market fund
    475       475       -       475  
U.S. Treasury/U.S. Government debt  securities
    1,597       1,602       49       1,651  
Total available-for-sale securities
  $ 2,072     $ 2,077     $ 389     $ 2,466  
 
   
Available-for-Sale Securities
 
December 31, 2010
 
Face Value
   
Amortized Cost
   
Unrealized Gains
   
Estimated Fair
Value
 
                         
Equity securities
  $ -     $ -     $ 338     $ 338  
Money market fund
    752       752       -       752  
U.S. Treasury/U.S. Government debt  securities
    1,597       1,602       56       1,658  
Total available-for-sale securities
  $ 2,349     $ 2,354     $ 394     $ 2,748  


 
15

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)


3.    AVAILABLE-FOR-SALE SECURITIES (Continued):

Accumulated other comprehensive income for the three months ended March 31, 2011 and year ended December 31, 2010 includes net unrealized holding (losses) gains of approximately ($5,000) and $51,000, respectively. No amounts were reclassified from other comprehensive income to income for the three months ended March 31, 2011, or for the year ended December 31, 2010.

The following is a summary of the contractual maturities of U.S. Government Debt Securities as of March 31, 2011:

   
Amortized Cost
 
Estimated Fair Value
 
Due in:
         
2011
  $ 235   $ 236  
2012 – 2016     1,107     1,150  
2017 – 2021     160     165  
2022 and later
    100     100  
Total
  $ 1,602   $ 1,651  

4.    OTHER ASSETS:

Other assets consist of the following (in thousands):
 
   
March 31,
 
December 31,
 
   
2011
 
2010
 
           
Prepaid expenses
  $ 463   $ 207  
Prepaid and refundable income taxes
    86     72  
Rental income in excess of amount billed
    6,896     6,736  
Costs in excess of billings
    900     739  
Investment in equity affiliates
    75     39  
Notes receivable
    1,362     1,331  
Other assets
    641     539  
    $ 10,423   $ 9,663  
               
5.    UNPAID LOSSES AND LOSS-ADJUSTMENT EXPENSES:

The liability for losses and loss-adjustment expenses in connection with certain previous insurance claims is summarized as follows (in thousands):

   
March 31,
2011
     
December 31,
2010
 
       
Reported claims
  $ $1,951   $ 2,042  
Provision for incurred but not reported claims
    175     132  
    $ 2,126   $ 2,174  

Management is responsible for estimating the provisions for outstanding losses. An actuarial study was independently completed and estimated that at December 31, 2010, the total outstanding losses at an expected level, are between approximately $1.3 million and $1.6 million. In their analysis, the actuaries have used industry based data which may or may not be representative of the Company's ultimate liabilities.  In addition, the provision at December 31, 2010, included $0.8 million for outstanding losses which was not a part of the actuarial study.

 
16

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

5.    UNPAID LOSSES AND LOSS-ADJUSTMENT EXPENSES (Continued):

In the opinion of management, the provision for losses and loss-adjustment expenses is adequate to cover the expected ultimate liability under the insurance policies written. However, consistent with most companies with similar operations, the Company’s estimated liability for claims is ultimately based on management's expectations of future events. It is reasonably possible that the expectations associated with these amounts could change in the near term (that is, within one year) and that the effect of such changes could be material to the condensed consolidated financial statements.

6.    OTHER LIABILITIES:

Other liabilities consist of the following (in thousands):

   
March 31,
   
December 31,
 
   
2011
   
2010
 
             
Accrued dividends
  $ 1,082     $ 1,082  
Accrued earnings and profits distribution
    99       99  
Accrued professional fees
    214       199  
Accrued wages
    -       110  
Accrued vacation
    205       185  
Accrued environmental costs
    433       600  
Deposit liability
    83       7  
Deferred tax liability
    -       23  
Prepaid rent
    544       380  
Contract billings in excess of costs
    534       415  
Other
    638       530  
    $ 3,832     $ 3,630  
                 
7.    COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS:

The following tables present the uncompleted contracts in progress:

   
March 31,
2011
   
December 31,
2010
 
Costs on contracts in progress
  $ 1,758     $ 1,590  
Estimated earnings
    389       378  
      2,147       1,968  
Less: billings to date
    (1,781 )     (1,644 )
    $ 366     $ 324  
 
The excess of billings over revenues earned to date and revenues earned to date over billings are included in other liabilities and other assets, respectively, on the accompanying condensed consolidated balance sheets as of:

   
March 31,
2011
   
December 31,
2010
 
Costs and estimated earnings in excess of  billings on uncompleted contracts
    900       739  
Billings in excess of costs and estimated earnings on uncompleted contracts
    (534 )     (415 )
    $ 366     $ 324  

 
17

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

8.    MORTGAGE NOTE PAYABLE:

Hartford Loan Agreement:

On July 1, 2010, two indirect subsidiaries of the Company, 165-25 147th Avenue, LLC and 85-01 24th Avenue, LLC (collectively, the “Borrower”) entered into a Fixed Rate Term Loan Agreement (the “Hartford Loan Agreement”) with Hartford Life Insurance Company, Hartford Life and Accident Insurance Company and Hartford Life and Annuity Insurance Company (collectively, the “Lenders”) pursuant to which the Lenders made a term loan to Borrower in the aggregate principal amount of $45,500,000 (the “Loan”).  The Loan was evidenced by certain promissory notes, executed simultaneously therewith, payable to the order of (i) Hartford Life Insurance Company in the stated amount of $25,000,000; (b) Hartford Life and Accident Insurance Company in the stated principal amount of $10,500,000; and (c) Hartford Life and Annuity Insurance Company in the stated principal amount of $10,000,000 (collectively, the “Notes”).  The proceeds from the Loan were used to satisfy in full the Company’s obligations under the ING Loan Agreement.

The obligations under the Hartford Loan Agreement are secured by, among other things, a first priority mortgage lien and security interest on certain (a) improved real estate commonly known as 165-25 147th Avenue, Laurelton, Queens, New York and 85-01 24th Avenue, East Elmhurst, Queens, New York  (collectively, the “Real Estate”), and (b) personal property and other rights of the Borrower, all as more specifically described in that certain Consolidated, Amended and Restated Mortgage, Security Agreement and Fixture Filing dated as of July 1, 2010 (the “Mortgage”) and that certain Assignment of Leases and Rents dated as of July 1, 2010 among the Lenders and the Borrower, and other ancillary documents. The outstanding principal balance of the Loan shall bear interest at the fixed rate of 5.05% per annum.  The Borrower is required to make monthly payments of interest only in the amount of $191,479. The principal is payable on the maturity date, July 1, 2017.

9.    STOCKHOLDERS’ EQUITY:

Common Stock:

The Company is authorized to issue 100,000,000 shares of common stock, $.0001 par value per share. The Company has authorized the issuance of up to 15,564,454 shares of the Company’s common stock in connection with the Reorganization and the earnings and profits distribution of which a total of 13,529,131 shares have been issued by the Company as of March 31, 2011

Preferred Stock:

 The Company is authorized to issue 10,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. No shares have been issued as of March 31, 2011.
 
Dividend Distributions:

The following table presents dividends declared by the Company on its common stock from January 1, 2011 through March 31, 2011:

Declaration
 
Year / Quarter
 
Record
 
Payment
 
Dividend
Date
 
Ended
 
Date
 
Date
 
Per Share
                 
January 5, 2011
 
December 31, 2010
 
January 14, 2011
 
January 21, 2011
 
 $      0.10   (1)
March 21, 2011
 
March 31, 2011
 
March 31, 2011
 
April 15, 2011
 
 $      0.08       
                 
 
(1)
This represents a supplemental dividend.

 
18

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

9.    STOCKHOLDERS’ EQUITY (Continued):

Stock Based Compensation:

On June 11, 2007, the Board of Directors approved the Company’s 2007 Incentive Award Plan (the “Plan”).  The effective date of the Plan was June 11, 2007, subject to stockholder approval. The stockholders of the Company approved the Plan on February 7, 2008.

The Plan covers directors, officers, key employees and consultants of the Company. The purposes of the Plan are to further the growth, development, and financial success of the Company and to obtain and retain the services of the individuals considered essential to the long term success of the Company.

The Plan may provide for awards in the form of restricted shares, incentive stock options, non-qualified stock options and stock appreciation rights. The aggregate number of shares of common stock which may be awarded under the Plan is 1,000,000 shares. These shares were registered on September 23, 2010. As of March 31, 2011, the Company had 688,150 shares available for future issuance of awards under the Plan. On February 7, 2008, 55,000 options were granted to non-employee directors and vested immediately and 200,000 options were granted to key officers of the Company and had a three year vesting period.  All options expire ten years from the date of grant.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes Option Pricing Model. The fair value of options granted on February 7, 2008 was $1.90 per share. The following assumptions were used for the options granted:
 
Risk free interest rate:
   3.39%
Expected dividend yield:
   3.59%
Expected life of option in years:
   7.94
Expected volatility: (1)
 21.00%
 
The following table presents the activity of options outstanding under the Plan for the three months ended March 31, 2011:
 
Options
 
Number of Options
   
Weighted-Average and Exercise Price Per Share
   
Weighted-Average Grant Date Fair Value Per Share
 
Outstanding at December 31, 2010
    255,000     $ 11.14     $ 1.90  
Granted
    -       -       -  
Exercised
    -       -       -  
Forfeited /Expired
    -       -       -  
Outstanding at March 31, 2011 (2)
    255,000     $ 11.14     $ 1.90  
Options vested and exercisable at March 31, 2011
    255,000     $ 11.14     $ 1.90  
                         
All outstanding and exercisable options have a remaining contractual life of approximately 6.9 years.
________________________
 
(1)
Although the Company is subject to the reporting requirements of the Securities and Exchange Commission, the Company’s stock is not listed on an exchange and there is no readily available market for the stock. Therefore, the Company is not able to determine the historical volatility of its common stock. As a result, the volatility was estimated from the historical volatilities of the common stock of the exchange traded comparable firms of both REITs and operating companies similar to the Company’s taxable REIT subsidiaries.

(2)
The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at March 31, 2011 and the related exercise price of the underlying options, was $0 for outstanding options and exercisable options as of March 31, 2011.

 
19

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

9.    STOCKHOLDERS’ EQUITY (Continued):
 
For the three months ended March 31, 2011, the Company recognized the remaining stock compensation expense of approximately $10,000 related to the stock option grants awarded nder the Plan, and $32,000 for the three months ended March 31, 2010.
 
On June 17, 2010, the Company issued an aggregate of 56,850 restricted shares of common stock, with a value of approximately $398,000, under the Plan. A total of 13,950 of hese shares, with a value of approximately $98,000, were granted to non-management members of the Board of Directors, and vested immediately. The remaining 42,900 shares, with a value of approximately $300,000, were granted to certain executives of the Company, and vest ratably over a four year period. One fourth of the 42,900 shares granted to each of the executives vested on the grant date, one fourth vested on January 1, 2011, and one fourth will vest each year on the following dates: January 1, 2012, and January 1, 2013. Dividends paid on restricted shares are recorded as dividends on shares of the Company’s common stock whether or not they are vested. In accordance with ASC 718-10-35, the Company measures the compensation costs for these shares as of the date of the grant and the expense is recognized in earnings, at the grant date (for the portion that vest immediately) or ratably over the respective vesting periods. For the three months ended March 31, 2011 and 2010 stock compensation expense relating to the restricted stock granted on January 1, 2010, was approximately $16,000 and $109,000, respectively.  As of March 31, 2011, there was approximately $72,000 of unamortized stock compensation related to restricted stock.
 
Special Distribution of Earnings and Profits

On August 20, 2007, the Board of Directors of the Company declared a special distribution of accumulated earnings and profits on the Company’s common stock of $6.40 per share of common stock, payable in $20,000,000 of cash and 3,775,400 of the Company’s common stock.  For the purposes of the special distribution, the Company’s common stock was valued at $11.14 per share, as indicated in the proxy statement/prospectus dated February 9, 2007 filed with the Securities and Exchange Commission and disseminated to the stockholders of the Bus Companies in connection with the March 26, 2007 special joint meeting of the stockholders of the Bus Companies at which meeting such stockholders voted on a reorganization of those companies with and into the Company.  The special distribution aggregated approximately $62,060,000.  The holders of the Company’s shares, and the holders of shares of the Bus Companies, as of the close of business on August 20, 2007, the record date for the special distribution (the “Holders”), were eligible for the special distribution.  The Holders were required to make an election as to the amount of the Company’s shares and/or cash the Holders wished to receive as their respective portions of the special distribution. Holders were advised, due to the limitation of the aggregate amount of cash available for the special distribution, that their actual distribution might not be in the proportion of cash and the Company’s shares they elected, but could be based on a proration of the available cash after all elections (i.e. not on a first come-first served basis). The Company calculated the proportion of cash and the Company’s shares that were distributed to the Holders based upon the Holder’s election and the amount of cash available for the special distribution.

As of March 31, 2011, cash of approximately $19.9 million and 3,775,400 shares of the Company’s common stock have been distributed to the Holders. The remaining payable balance of approximately $0.1 million is included in other liabilities in the accompanying condensed consolidated balance sheet at March 31, 2011.
 
 
20

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

10.    EARNINGS PER SHARE:

In accordance with ASC 260-10-45, basic earnings per common share (“Basic EPS”) is computed by dividing the net income by the weighted-average number of common shares outstanding. Diluted earnings per common share (“Diluted EPS”) is computed by dividing net income by the weighted-average number of common shares and dilutive common share equivalents and convertible securities then outstanding. There were no common share equivalents for any of the periods presented in the Company’s consolidated statements of income.

The following table sets forth the computation of basic and diluted per share information (in thousands, except share and per share data):
 
   
Three Months Ended
 
 
 
March 31,
 
 
 
2011
   
2010
 
Numerator:
           
  Net income
  $ 633     $ 519  
                 
Denominator:
               
Weighted average common shares outstanding - basic and diluted
    13,529,131       13,472,281  
                 
Basic and Diluted Per Share Information:
               
  Net income per share - basic and diluted
  $ 0.05     $ 0.04  

11.    RELATED PARTY TRANSACTIONS:

Douglas A. Cooper, an officer and director of the Company and the nephew of Jerome Cooper (Chairman of the Board), is a partner of Ruskin, Moscou, Faltischek, P.C. (“RMF”), and has acted as counsel to the Company since 1998. Fees incurred by the Company to RMF as of and for the three months ended March 31, 2011, were $71,000 compared to $39,000 for the three months ended March 31, 2010.

Paul A. Cooper is an officer and director of the Company and is the son of Jerome Cooper (Chairman of the Board). In January 2010, the Company executed an extension option under the lease agreement with Lighthouse 444 Limited Partnership (“Lighthouse”), the owner of the building at 444 Merrick Road, Lynbrook, NY, and of which Paul A. Cooper is a general partner. The executed extension option includes approximately 9,212 square feet of office and storage space for a term of five years expiring August 31, 2015 at an annual rent of approximately $219,000.
 
Stanley Brettschneider, an officer of the Company’s taxable REIT subsidiaries, is the father of the majority owner of Varsity Bus Co., Inc. (“Varsity”) a tenant at one of the Company’s rental properties. Varsity’s lease is subject to four 5 year options to extend the term of the lease in each case at a rent equal to 90% of market rental of the leasehold at the time of the extension. In December 2009, Varsity executed one of the extension options under the lease through August 2015. Rent for the first year under the lease extension, which began on September 1, 2010, was approximately $833,000 and will be subject to increase in accordance with the lease agreement for the remaining four years. Varsity also utilizes some of the Company’s computer systems for a monthly fee. In addition, Mr. Brettschneider is a compensated employee of Varsity Bus Co., Inc.

Michael Kessman, the Chief Accounting Officer of the Company, provides accounting services to Varsity.  In addition, Mr. Kessman is also a member of Varsity’s Board of Directors.


 
21

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

12.    COMMITMENTS AND CONTINGENCIES:
 
Legal Matters:

The Company is involved in several lawsuits and other disputes which arose in the ordinary course of business; however, management believes that these matters will not have a material adverse effect, individually or in the aggregate, on the Company's financial position or results of operations.

Environmental Matters:

The Company’s real property has had activity regarding removal and replacement of underground storage tanks. Upon removal of the old tanks, any soil found to be unacceptable was thermally treated off site to burn off contaminants. Fresh soil was brought in to replace earth which had been removed. There are still some levels of contamination at the sites, and groundwater monitoring programs have been put into place at certain locations. In July 2006, the Company entered into an informal agreement with the New York State Department of Environmental Conservation (“NYSDEC”) whereby the Company has committed to a three-year remedial investigation and feasibility study (the “Study”) for all site locations. In conjunction with this informal agreement, the Company has retained the services of an environmental engineering firm to assess the cost of the Study. The Company’s initial engineering report had an estimated cost range with a low-end of the range of approximately $1.4  million and a high-end range estimate of approximately $2.6 million, which provided a “worst case” scenario whereby the Company would be required to perform full remediation on all site locations. While management believes that the amount of the study and related remediation is likely to fall within the estimated cost range, no amount within that range can be determined to be the better estimate. Therefore, management believes that recognition of the low-range estimate was appropriate.

As of March 31, 2011, and December 31, 2010, included in other liabilities in the accompanying condensed consolidated balance sheet (Note 6) is the estimated liability for remediation costs of approximately $0.4 million and $0.6 million, respectively. The Company is not aware of any claims or remediation requirements from any local, state or federal government agencies. These properties are in a commercial zone and are still used as transit depots, including maintenance of vehicles.

Paratransit Operations:

In February 2008, the Company was notified by the New York City Transit Authority (the “Authority”) that a Request for Proposal to renew the Company’s existing paratransit service contract after September 30, 2008 would not be considered by the Authority. As a result of this action by the Authority, the Company exited the Paratransit Operations business on September 30, 2008, and accordingly, the results have been presented as discontinued operations on the Company’s consolidated financial statements for all periods presented.
 
Insurance Operations:
 
The provisions of the Insurance Law of the Cayman Islands require a minimum net worth of $120,000.  At December 31, 2010, the Company’s insurance operations were not in compliance with this minimum net worth requirement.  A meeting was held with the Cayman Islands Monetary Authority (“CIMA”) on March 23, 2011, at which time they agreed with the Company’s proposal to transfer the insurance balances into a New York based trust and dissolve the Company’s Cayman island insurance operations once the transfer is complete.  The Company's insurance operations would be administered through the trust.  The intent is to have this completed on or before the June 30, 2011 CIMA statutory filing deadline.

 
22

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

13. INVESTMENT IN EQUITY AFFILIATES:
 
Joint Ventures:

The Company invests in joint ventures that are formed to perform electrical construction services. These investments are recorded under either the equity or cost method of accounting as appropriate. The Company records its share of the net income and losses from the underlying operations and any other-than-temporary impairment on these investments on a single line item in the Condensed Consolidated Statements of Income as income or losses from equity affiliates.

In March 2010, the Company invested approximately four hundred dollars in exchange for a 40% interest in a consolidated joint venture with Morales Electrical Contracting, Inc. which is a minority women owned business enterprise that provides electrical construction services.

For the three months ended March 31, 2011, the Company recorded its share of income of approximately $37,000 for this equity investment. During the three months ended March 31, 2011, the Company also recognized $10,875 in management fees and $17,000 in interest on its working capital advances. As of March 31, 2011, the Company has a receivable of approximately $0.9 million related to working capital advances to fund construction projects.

Variable Interest Entities:

The Company accounts for variable interest entities (“VIEs”) in accordance with ASC 810-10-50. A VIE is defined as an entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that (i) has the power to control the activities that impact the VIE’s economic performance and (ii) has the right to receive the majority of expected returns or the obligation to absorb the majority of expected losses that could be material to the VIE.
 
As of March 31, 2011, the Company has one investment in a VIE entity with an aggregate carrying amount of $1.0 million. For the VIE identified, the Company is not the primary beneficiary and as such the VIE is not consolidated in the Company’s financial statements. The Company accounts for this investment under the equity method.

14.    FAIR VALUE:

Fair Value of Financial Instruments:

ASC 825-10-50 requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. ASC 825-10-65 requires the Company to disclose in the notes of its interim financial statements as of the second quarter of 2009, as well as its annual financial statements, the fair value of all financial instruments as required ASC 825-10-50. ASC 825-10-65 applies to all financial instruments within the scope of ASC 825-10-50.
 
Fair value estimates are dependent upon subjective assumptions and involve significant uncertainties resulting in variability in estimates with changes in assumptions. The following table summarizes the carrying values and the estimated fair values of financial instruments (in thousands):

   
March 31, 2011
   
December 31, 2010
 
   
Carrying
   
Estimated
   
Carrying
   
Estimated
 
Financial assets:
 
Value
   
Fair Value
   
Value
   
Fair Value
 
    Cash and cash equivalents
  $ 10,276     $ 10,276     $ 11,174     $ 11,174  
        Available-for-sale securities
    2,466       2,466       2,748       2,748  
        Restricted cash
    837       837       875       875  
        Accounts receivable, net
    4,036       4,036       4,476       4,476  
Financial liabilities:
                               
    Mortgage note payable
  $ 45,500     $ 44,835     $ 45,500     $ 45,340  
 

 
23

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

14.    FAIR VALUE (Continued):
 
Fair Value Measurement:

The Company determines fair value in accordance ASC 820-10-05 for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements.

Fair value is defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date.  Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.

Assets and liabilities disclosed at fair values are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820-10-35 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
 
Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
   
Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. Level 2 inputs include quoted market prices in markets that are not active for an identical or similar asset or liability, and quoted market prices in active markets for a similar asset or liability.
   
Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. These valuations are based on significant unobservable inputs that require a considerable amount of judgment and assumptions. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
 
Determining which category an asset or liability falls within the hierarchy requires significant judgment and the Company evaluates its hierarchy disclosures each quarter.
 
The Company measures certain financial assets and financial liabilities at fair value on a recurring basis, including available-for-sale securities and derivative financial instruments. The fair value of these financial assets and liabilities was determined using the following inputs as of March 31, 2011.

     
Fair Value Measurements
 
Carrying
Fair
Using Fair Value Hierarchy
 
Value
Value
Level 1
Level 2
Level 3
           
Financial assets:
         
  Available-for-sale securities
$2,466
$2,466
$2,466
 $         -
 $         -

Available-for-sale securities:  Fair values are approximated on current market quotes received from financial sources that trade such securities.


 
24

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

15.    SEGMENTS:

Segment Information:

In accordance with ASC 280-10, the Company has established that its reportable segments are Real Estate Operations, Outside Maintenance, and Insurance Operations as of March 31, 2011. These operating segments, whose operations are reported in the tables below, are segments of the Company for which separate financial information is available and operating results are evaluated regularly by executive management in determining how to allocate resources and assessing performance. The accounting policies of these segments are the same as those described in the Summary of Significant Accounting Policies (see Note 2). In connection with the discontinued operations of the Paratransit business, the operating results of the Paratransit business are classified as discontinued operations and, as such, are not reflected in the operating segments reported in the table below.

The Company primarily operates in three reportable segments: (i) Real Estate Operations, (ii) Outside Maintenance Operations (including shelter cleaning, electrical contracting, and operating and managing parking facilities), and (iii) Insurance Operations. Each segment’s operations are conducted throughout the U.S., with the exception of the Insurance Operations which is conducted in the Cayman Islands.

Real Estate Operations rent Company-owned real estate located in New York and Connecticut.

Outside Maintenance, Shelter Cleaning Operations, Electrical Contracting, and Parking Operations provide outside maintenance and cleaning services to outdoor advertising companies and governmental agencies in New York, New Jersey, Arizona, and California, electrical construction services to a broad range of commercial, industrial, institutional, and governmental customers in New York, and operates and manages parking facilities in the New York area.

Insurance Operations assumes reinsurance of worker's compensation, vehicle liability, and covenant liability of the Company and its affiliated Companies from unrelated insurance companies based in the United States of America.

The summarized segment information (excluding discontinued operations), as of and for the three months ended March 31, 2011 and 2010 is as follows (in thousands):



 
25

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

15.    SEGMENTS (Continued):

Three Months Ended March 31, 2011
                             
   
Real Estate Operations
   
Outside Maintenance Operations
   
Insurance Operations
   
Eliminations
   
Total
 
                               
Operating revenue
  $ 3,375     $ 4,656     $ -     $ -     $ 8,031  
Operating expenses
    1,139       5,777       25       (75 )     6,866  
Operating income (loss)
    2,236       (1,121 )     (25 )     75       1,165  
Other (expense) income
    (600 )     77       6       (75 )     (592 )
Income (loss) from continuing operations before income from equity affiliates and income taxes
    1,636       (1,044 )     (19 )     -       573  
Income from equity affiliates
    -       37       -       -       37  
Income (loss) before benefit from income taxes
    1,636       (1,007 )     (19 )     -       610  
Benefit from income taxes
    -       23       -       -       23  
Income (loss) from continuing operations
  $ 1,636     $ (984 )   $ (19 )   $ -     $ 633  
Capital expenditures
  $ -     $ 58     $ -     $ -     $ 58  
Depreciation and amortization
  $ 296     $ 116     $ -     $ -     $ 412  
Total assets
  $ 171,945     $ 9,394     $ 1,271     $ (43,548 )   $ 139,062  
 
 
 
Three Months Ended March 31, 2010
                             
   
Real Estate Operations
   
Outside Maintenance Operations
   
Insurance Operations
   
Eliminations
   
Total
 
                               
Operating revenue
  $ 3,337     $ 4,318     $ -     $ (102 )   $ 7,553  
Operating expenses
    1,196       5,407       31       -       6,634  
Operating income (loss)
    2,141       (1,089 )     (31 )     (102 )     919  
Other (expense) income
    (530 )     74       (43 )     102       (397 )
Income (loss) from continuing operations before income from equity affiliates and income taxes
    1,611       (1,015 )     (74 )     -       522  
Income from equity affiliates
    -       -       -       -       -  
Income (loss) before provision for income taxes
    1,611       (1,015 )     (74 )     -       522  
Provision for income taxes
    (4 )     -       -       -       (4 )
Income (loss) from continuing operations
  $ 1,607     $ (1,015 )   $ (74 )   $ -     $ 518  
Capital expenditures
  $ 176     $ 75     $ -     $ -     $ 251  
Depreciation and amortization
  $ 322     $ 97     $ -     $ -     $ 419  
Total assets (1)
  $ 170,080     $ 12,801     $ 1,983     $ (44,485 )   $ 140,379  
                                         
(1) Does not include assets of the discontinued Paratransit operation totaling $164

 
26

 
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(Unaudited)

 
Item 2.         Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains statements that we believe to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements give our current expectations or forecasts of future events.  Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue,” or similar words or the negative thereof.  From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public.  Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results.  They can be affected by assumptions we might make or by known or unknown risks or uncertainties.  Consequently, we cannot guarantee any forward-looking statements.  Investors are cautioned not to place undue reliance on any forward-looking statements.  Investors should also understand that it is not possible to predict or identify all such factors and should not consider the potential risks and uncertainties set forth herein and in our Report on Form 10-K for the year ended December 31, 2010 as being exhaustive, and new factors may emerge that could affect our business. We assume no obligation, and disclaim any duty, to update the forward-looking statements in this report. Past performance is no guarantee of future results. You should read the following discussion in conjunction with the condensed consolidated financial statements and notes appearing elsewhere in this filing.
 
Executive Summary:

We are a fully integrated, self-administered and self-managed Real Estate Investment Trust (“REIT”), engaged in the acquisition, ownership, and management of real properties. We currently own seven rentable parcels of real property, four of which are leased to the City of New York, two of which are leased to commercial tenants (all six on a triple net basis), and one of which a portion is leased to a commercial tenant and the 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. Additionally, in connection with the Tax Relief Extension Act of 1999 (“RMA”), we are permitted to participate in activities outside the normal operations of the REIT so long as these activities are conducted in entities which elect to be treated as taxable subsidiaries under the Internal Revenue Code, as amended (the “Code”), subject to certain limitations. In addition, we own a group of outdoor maintenance businesses. We will consider other investments through taxable REIT subsidiaries should suitable opportunities arise.
 
We continue to seek opportunities to acquire stabilized properties. To the extent it is in the interests of our stockholders, we will seek to invest in a diversified portfolio of real properties within geographic areas 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.
 
Accounting Pronouncements:
 
See Note 2, “Recently Issued Accounting Pronouncements,” in the Notes to the Condensed Consolidated Financial Statements contained in Part I, Item 1. “Financial Statements” of this Form 10-Q for a detailed discussion regarding recently issued accounting pronouncements.
 
Critical Accounting Policies:

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed 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. Please refer to the section of our Annual Report on Form 10-K for the year ended December 31, 2010, entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” for a discussion of our critical accounting policies. During the three months ended March 31, 2011, there were no material changes to these policies. 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.


 
27

 

Revenue Recognition-Real Estate Operations:

We recognize revenue in accordance with ASC 840-20-25, which requires that revenue be recognized on a straight-line basis over the term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. In those instances in which we fund tenant improvements and the improvements are deemed to be owned by us, revenue recognition will commence when the improvements are substantially completed and possession or control of the space is turned over to the tenant. When we determine that the tenant allowances are lease incentives, we commence revenue recognition when possession or control of the space is turned over to the tenant for tenant work to begin. The properties are being leased to tenants under operating leases. Minimum rental income is recognized on a straight-line basis over the term of the lease.
 
Property operating expense recoveries from tenants of common area maintenance, real estate and other recoverable costs are recognized in the period the related expenses are incurred.

Revenue Recognition--Outside Maintenance and Shelter Cleaning Operations:

Cleaning and maintenance revenue is recognized upon completion of the related service.

Revenue Recognition—Electrical Contracting Operations:

We recognize revenues from long-term construction contracts on the percentage-of-completion method in accordance with ASC 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. Contract costs include all direct costs related to the performance and completion of the contracts. Estimated losses on the long term construction contracts are recognized in the period in which such losses are determined.

Revenue Recognition—Parking Garage Operations:

Our parking facility charges a monthly or hourly fee to provide parking services.  Revenue is recognized during the period services are performed.

Accounts Receivable:

Accounts receivable consist of trade receivables recorded at the original invoice amounts, less an estimated allowance for uncollectible accounts. Trade credit is generally extended on a short-term basis; thus trade receivables generally do not bear interest. Trade receivables are periodically evaluated for collectibility based on past credit histories with customers and their current financial conditions. Changes in the estimated collectibility of trade receivables are recorded in the results of operations for the period in which the estimate is revised. Trade receivables that are deemed uncollectible are offset against the allowance for uncollectible accounts. We generally do not require collateral for trade receivables.
 
Real Estate Investments:

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 value of the real estate purchased is allocated to the acquired tangible assets (consisting of land, buildings and building improvements) and identified intangible assets and liabilities (consisting of above-market and below-market leases and in-place leases) in accordance with ASC No. 805. We utilize methods similar to those used by independent appraisers in estimating the fair value of acquired assets and liabilities. The fair value of the tangible assets of an acquired property considers the value of the property “as-if-vacant.” The fair value reflects the depreciated replacement cost of the asset. In allocating purchase price to identified intangible assets and liabilities of an acquired property, the value of above-market and below-market leases is 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 provisions of ASC 360-10-05 to recognize and measure impairment of long-lived assets. Management reviews each real estate investment for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability is based on an estimate of the future cash flows that are expected to result from the real estate investment’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If an impairment event exists due to the projected inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair value. Management is required to make subjective assessments as to whether there are impairments in the value of its real estate properties. These assessments have a direct impact on net income, because an impairment loss is recognized in the period that the assessment is made.

Fair Value Measurements:

We determine fair value in accordance with ASC 820-10-05 for financial assets and liabilities. ASC  820-10-05 defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements.
 
Fair value is defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.
 
Assets and liabilities disclosed at fair value are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820-10-35 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
   
Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. Level 2 inputs include quoted market prices in markets that are not active for an identical or similar asset or liability, and quoted market prices in active markets for a similar asset or liability.
   
Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. These valuations are based on significant unobservable inputs that require a considerable amount of judgment and assumptions. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Determining which category an asset or liability falls within the hierarchy requires significant judgment and we evaluate its hierarchy disclosures each quarter.

 
29

 
Income Taxes:

We are organized and conduct our operations to qualify as a REIT for federal income tax purposes.  Accordingly, we will generally not be subject to federal income taxation on that portion of our income that qualifies as REIT taxable income, to the extent that we distribute at least 90% of our taxable income to our stockholders and comply with certain other requirements as defined under Section 856 through 860 of the Code.
 
We also participate in certain activities conducted by 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 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.

Investment in Equity Affiliates:

We invest in joint ventures that are formed to perform electrical construction services. These investments are generally recorded under either the equity or cost method of accounting as appropriate. We record our share of the net income and losses from the underlying properties and any other-than-temporary impairment on these investments on a single line item in the condensed consolidated statements of income as income or losses from equity affiliates.

Variable Interest Entities:

We account for variable interest entities (“VIEs”) in accordance with ASC 810-10-50. A VIE is defined as an entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that (i) has the power to control the activities that impact the VIE’s economic performance and (ii) has the right to receive the majority of expected returns or the obligation to absorb the majority of expected losses that could be material to the VIE.
 
As of March 31, 2011, we have one investment which was made to a VIE entity with an aggregate carrying amount of $1.0 million. For the VIE identified, we are not the primary beneficiary and as such, the VIE is not consolidated in our financial statements. We account for this investment under the equity method.

Stock-Based Compensation:

We have a stock-based compensation plan, which is described in Note 9. We account for stock based compensation in accordance with ASC 718-30-30, which establishes accounting for stock-based awards exchanged for employee services. Under the provisions of ASC 718-10-35, share-based compensation cost is measured at the grant date, based on the fair value of the award, and the expense is recognized in earnings at the grant date (for the portion that vests immediately) or ratably over the respective vesting periods.
 


 
30

 

Results of Operations:

 
Three Months Ended March 31, 2011 vs. Three Months Ended March 31, 2010
 
The following table sets forth our results of operations for the periods indicated (in thousands):
 
   
Three Months Ended
March 31,
   
Increase/(Decrease)
 
   
2011
   
2010
   
Amount
   
Percent
   
(Unaudited)
             
Revenues:
                       
Property rentals
  $ 3,375     $ 3,337     $ 38       1 %
Outdoor maintenance and cleaning operations
    4,656       4,216       440       10 %
         Total revenues
    8,031       7,553       478       6 %
Operating expenses:
                               
      General and administrative expenses
    1,929       1,897       32       2 %
      Equipment maintenance and garage expenses
    389       436       (47 )     (11 %)
      Transportation expenses
    244       323       (79 )     (24 %)
      Contract maintenance and station expenses
    2,813       2,677       136       5 %
      Insurance and safety expenses
    485       527       (42 )     (8 %)
      Operating and highway taxes
    70       114       (44 )     (39 %)
      Other operating expenses
    524       241       283       117 %
      Depreciation and amortization expense
    412       419       (7 )     (2 %)
         Total operating expenses
    6,866       6,634       232       3 %
         Operating income
    1,165       919       246       27 %
Other income (expense):
                               
Interest income
    52       104       (52 )     (50 %)
Interest expense
    (630 )     (458 )     (172 )     38 %
Change in insurance reserves
    (21 )     (45 )     24       (53 %)
Other
    7       2       5       250 %
  Total other income (expense):
    (592 )     (397 )     (195 )     49 %
Income from continuing operations before income from
equity affiliates and income taxes
    573       522       51       10 %
Income from equity affiliates
    37       -       37    
nm
Income before benefit from (provision for) income taxes
    610       522       88       17 %
Benefit from (provision for) income taxes
    23       (4 )     27       (675 %)
Income from continuing operations, net of taxes
    633       518       115       22 %
Discontinued Operations:
                               
   Income from discontinued operations, net of taxes
    -       1       (1 )     (100 %)
Net income
  $ 633     $ 519     $ 114       22 %
nm – not meaningful
 
                               
Property Rental Revenues

Property rental revenue increased $0.1 million, or 1%, to $3.4 million for the three months ended March 31, 2011 from $3.3 million for the three months ended March 31, 2010. This increase was primarily due to an increase in rent from the Varsity lease extension in September 2010.
 
Outside Maintenance, Shelter Cleaning Operations, and Electrical Contracting Revenues

Outside maintenance, shelter cleaning operations, and electrical contracting revenue increased $0.4 million, or 10%, to $4.6 million for the three months ended March 31, 2011 from $4.2 million for the three months ended March 31, 2010. This increase is primarily attributable to an increase in electrical contracting revenue related to new contracts.

 
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Operating Expenses
 
Operating expenses increased $0.2 million, or 3%, to $6.8 million for the three months ended March 31, 2011 from $6.6 million for the three months ended March 31, 2010. This increase is primarily due to an increase in labor and materials related to new electrical contracting contracts.

Other Income (Expense)

Other income (expense) increased $0.2 million or 49%, to ($0.6) million for the three months ended March 31, 2011 from ($0.4) million for the three months ended March 31, 2010. This increase was primarily due to an increase in interest expense as a result of the refinancing on July 1, 2010.

Benefit From (Provision For) Income Taxes

We are organized and conduct our operations to qualify as a REIT for Federal income tax purposes. As a REIT, we are generally not subject to Federal income tax on our REIT taxable income that we distribute to our stockholders, provided that we distribute at least 90% of our REIT taxable income and meet certain other requirements. As of March 31, 2011 and 2010, we were in compliance with all REIT requirements and, therefore, have not provided for Federal income tax expense on our REIT taxable income for the three months ended March 31, 2011 and 2010. The REIT is subject to certain state and local income taxes, however, we had no income tax expense on our REIT taxable income for the three months ended March 31, 2011.

Certain of our assets that produce non-qualifying income are owned by our taxable REIT subsidiaries, the income of which is subject to federal and state income taxes. During the three months ended March 31, 2011, we recorded a $23,000 benefit from income taxes from these taxable REIT subsidiaries. We did not record a tax provision for the three months ended March 31, 2010 for the taxable REIT subsidiaries.

Income from Discontinued Operations, Net of Taxes

Income from discontinued operations, net of taxes reflects the operating results of the Paratransit business. The Paratransit business was discontinued as of September 30, 2008, and reflects no operations for the three months ended March 31, 2011 and 2010.

Liquidity and Capital Resources

At March 31, 2011, the Company had unrestricted cash and cash equivalents of approximately $10.3 million compared to $11.2 million at December 31, 2010. The Company funds operating expenses and other short-term liquidity requirements, including debt service and dividend distributions from operating cash flows. The Company believes that its net cash provided by operations will be sufficient to fund its short-term liquidity requirements for the next twelve months and to meet its dividend requirements to maintain its REIT status.

Financings:

Hartford Loan Agreement:

On July 1, 2010, two indirect subsidiaries of the Company, 165-25 147th Avenue, LLC and 85-01 24th Avenue, LLC (collectively, the “Borrower”) entered into a Fixed Rate Term Loan Agreement (the “Hartford Loan Agreement”) with Hartford Life Insurance Company, Hartford Life and Accident Insurance Company and Hartford Life and Annuity Insurance Company (collectively, the “Lenders”) pursuant to which the Lenders made a term loan to Borrower in the aggregate principal amount of $45,500,000 (the “Loan”).  The Loan was evidenced by certain promissory notes, executed simultaneously therewith, payable to the order of (i) Hartford Life Insurance Company in the stated amount of $25,000,000; (b) Hartford Life and Accident Insurance Company in the stated principal amount of $10,500,000; and (c) Hartford Life and Annuity Insurance Company in the stated principal amount of $10,000,000 (collectively, the “Notes”).  The proceeds from the Loan were used to satisfy in full the Company’s obligations under the ING Loan Agreement discussed above.

The obligations under the Hartford Loan Agreement are secured by, among other things, a first priority mortgage lien and security interest on certain (a) improved real estate commonly known as 165-25 147th Avenue, Laurelton, Queens, New York and 85-01 24th Avenue, East Elmhurst, Queens, New York  (collectively, the “Real Estate”), and (b) personal property and other rights of the Borrower, all as more specifically described in that certain Consolidated, Amended and Restated Mortgage, Security Agreement and Fixture Filing dated as of July 1, 2010 (the “Mortgage”) and that certain Assignment of Leases and Rents dated as of July 1, 2010 among the Lenders and the Borrower, and other ancillary documents. The outstanding principal balance of the Loan shall bear interest at the fixed rate of 5.05% per annum.  The Borrower is required to make monthly payments of interest only in the amount of $191,479.  The principal is payable on the maturity date July 1, 2017.

 
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Earnings and Profit Distribution:

As of March 31, 2011, cash of approximately $19.9 million and 3,775,400 shares of our common stock have been distributed to the Holders in connection with a one-time special distribution of accumulated earnings and profits. The remaining payable balance of approximately $0.1 million is included in other liabilities in the accompanying condensed consolidated balance sheet at March 31, 2011. Cash payments were funded from borrowings under our credit facility which was repaid in full on July 10, 2010.

Net Cash Flows

Three Months Ended March 31, 2011 vs. Three Months Ended March 31, 2010

Operating Activities

Net cash provided by operating activities was approximately $1.3 million for the three months ended March 31, 2011, and approximately $0.6 million for the three months ended March 31, 2010. For the 2011 period, cash provided by operating activities was primarily related to (i) income from continuing operations of approximately $0.6 million (ii) an increase in accounts payable and other liabilities of $0.4 million (iii) an increase in accounts receivable of $0.4 million (iv) depreciation and amortization expense of $0.4 million (v) a decrease in insurance reserves of $0.1 million (vi) stock compensation expense of approximately $0.1 million, (vii) an increase in other assets of $0.8 million, and (viii) an increase in deferred charges of $0.1 million. For the 2010 period, cash provided by operating activities was primarily related to (i) income from continuing operations of approximately $0.5 million (ii) a decrease in accounts payable and accrued expenses of $0.4 million (iii) a decrease in accounts receivable of $1.6 million (iv) depreciation and amortization expense of $0.4 million (v) an increase in insurance reserves of $0.1 million (vi) stock compensation expense of approximately $0.1 million and (vii) an increase in other assets of $2.0 million.

Investing Activities

Net cash provided by investing activities was approximately $0.2 million for the three months ended March 31, 2011, and approximately $0.2 million for the three months ended March 31, 2010. For the 2011 period, cash used in investing activities primarily related to purchases of machinery, equipment, and investments of approximately $0.1 million, proceeds from the sale of investments of approximately $0.3 million, and restricted cash of approximately $0.1 million. For the 2010 period, cash used in investing activities primarily related to purchases of property, equipment and investment of approximately $0.3 million and proceeds from the sale of investments of approximately $0.1 million.

Financing Activities

Cash used in financing activities was approximately $2.5 million for the three months ended March 31, 2011 and was related to the payment of the Company’s quarterly and supplemental dividends. Net cash used in financing activities for the three months ended March 31, 2010 was approximately $2.2 million and was related to the payment of the Company’s quarterly and supplemental dividends.

Funds from Operations and Adjusted Funds from Operations
 
We consider Funds from Operations (“FFO”) and Adjusted Funds from Operations (“AFFO”), each of which are non-GAAP measures, to be additional measures of an equity REIT’s operating performance.  We report FFO in addition to our net income and net cash provided by operating activities.  Management has adopted the definition suggested by the National Association of Real Estate Investment Trusts (“NAREIT”) and defines FFO to mean net income computed in accordance with GAAP excluding gains or losses from sales of property, plus real estate-related depreciation and amortization and after adjustments for unconsolidated joint ventures.

Management considers FFO a meaningful, additional measure of operating performance because it primarily excludes the assumption that the value of our real estate assets diminishes predictably over time and industry analysts have accepted it as a performance measure.  FFO is presented to assist investors in analyzing our performance.  It is helpful as it excludes various items included in net income that are not indicative of our operating performance, such as gains or losses from sales of property and depreciation and amortization.


 
33

 
However, FFO:
 
 
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, shelter cleaning, electrical, and parking 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 following table provides a reconciliation of net income in accordance with GAAP to FFO and AFFO for each of the three months ended March 31, 2011 and 2010 (in thousands, except for per share data):

   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Net Income
  $ 633     $ 519  
Plus:  Real property depreciation
    296       322  
          Amortization of intangible assets
    205       205  
          Amortization of deferred leasing commissions
    54       26  
Funds from operations (FFO)
  $ 1,188     $ 1,072  
Loss from Taxable-REIT Subsidiaries
    1,003       1,089  
Amortization of intangible assets of Taxable-REIT Subsidiaries
    (27 )     (27 )
Adjusted funds from operations (AFFO)
  $ 2,164     $ 2,134  
FFO per common share - basic and diluted
  $ 0.09     $ 0.08  
AFFO per common share - basic and diluted
  $ 0.16     $ 0.16  
Weighted average common shares outstanding - basic and diluted
    13,529,131       13,472,281  

Acquisitions and Investments

On June 30, 2009, we through our wholly-owned subsidiaries, Shelter Electric Maintenance Corp. and Shelter Electric Acquisition Subsidiary LLC, (collectively, “Shelter Electric”) entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Morales Electrical Contracting, Inc. (“Morales”), a Valley Stream, New York based electrical construction company, pursuant to which Morales sold certain of its assets and assigned certain contracts and employees to Shelter Electric for approximately $1.0 million. The acquisition was funded using our cash.

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.

On March 29, 2010, we invested approximately four hundred dollars in exchange for a 40% interest in a joint venture with Morales, a Minority Women Owned Business Enterprise (“MWBE”). The joint venture was formed to secure MWBE contracts for the purpose of providing electrical construction services.

 
34

 
 
 On August 13, 2010, we formed Shelter Parking Corp., a New York corporation, to operate and manage parking facilities in the New York tri-state area. On March 31, 2011, Shelter Parking Corp., through its wholly owned subsidiary, Shelter Parking Brevard, LLC, entered into a fifteen year lease agreement to operate a garage facility at 245 East 54th Street.

Cash Payments for Financing
 
Payment of interest under the $45.5 million Fixed Rate Term Loan Agreement will consume a portion of our cash flow, reducing net income and the resulting distributions to be made to the stockholders of GTJ REIT.

Trend in Financial Resources

We expect to receive additional rent payments over time due to scheduled increases in rent set forth in the leases on our real properties. It should be noted, however, that the additional rent payments are expected to result in an approximately equal obligation to make additional distributions to stockholders, and will therefore not result in a material increase in working capital.

Environmental Matters

Our real property has had activity regarding removal and replacement of underground storage tanks. Upon removal of the old tanks, any soil found to be unacceptable was thermally treated off site to burn off contaminants. Fresh soil was brought in to replace earth which had been removed. There are still some levels of contamination at the sites, and groundwater monitoring programs have been put into place at certain locations. In July 2006, we entered into an informal agreement with the New York State Department of Environmental Conservation (“NYSDEC”) whereby we have committed to a three-year remedial investigation and feasibility study (the “Study”) for all site locations.

In conjunction with this informal agreement, we have retained the services of an environmental engineering firm to assess the cost of the Study. Our initial engineering report had an estimated cost range with a low-end of the range of approximately $1.4 million and a high-end range estimate of approximately $2.6 million, which provided a “worst case” scenario whereby 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 $0.8 million for additional remediation costs. As of March 31, 2011 and December 31, 2010, we have recorded a liability for remediation costs of approximately $0.6 million. 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.
 
Insurance Regulations
 
The provisions of the Insurance Law of the Cayman Islands require our insurance operations to maintain a minimum net worth of $120,000.  At December 31, 2010, we were not in compliance with this minimum net worth requirement.  A meeting was held with the Cayman Islands Monetary Authority (“CIMA”) on March 23, 2011, at which time they agreed with our proposal to transfer the insurance balances into a New York based trust and dissolve our Cayman Islands based insurance operations once the transfer is complete.  Our insurance operations would be administered through the trust.  The intent is to have this completed on or before the June 30, 2011 CIMA statutory filing deadline.

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.

 
35

 


Off Balance Sheet Arrangements

As part of our outdoor maintenance and electrical contracting operations, we may put up performance bonds to guarantee completion of services to be performed.  As of March 31, 2011, we have one performance bond outstanding in the amount of $5.8 million.
 
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
 
As of March 31, 2011 and December 31, 2010, we did not have any variable rate liabilities.

Item 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act).  As required by Rule 13a-15(b) under the Exchange Act, management, under the direction of our Company’s Chief Executive Officer and Chief Financial Officer, reviewed and performed an evaluation of the effectiveness of design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. During our review we determined that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that (i) information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15-d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The Company continues, however, to implement suggestions from its independent accounting consultant on ways to strengthen existing controls.

Part II – Other Information

Item I.       Legal Proceedings
 
 
See Note 12, “Commitments and Contingencies,” in the Notes to the Condensed Consolidated Financial Statements contained in Part I, Item 1. “Financial Statements” of this Form 10-Q for information regarding legal proceedings.

Item 1A.    Risk Factors

During the three months ended March 31, 2011, there were no material changes to the risk factors that were disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Item 2.               Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.               Defaults Upon Senior Securities

None.

Item 4.               Removed and Reserved

Item 5.               Other Information

None.

 
36

 
 
   
Item 6.
Exhibits
   
Exhibit
Description
   
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.


 
37

 
 
SIGNATURES
 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


  
   
 GTJ REIT, INC.
 
    Dated: May 19, 2011
 
By:  /s/ Jerome Cooper   
Jerome Cooper
President, Chief Executive Officer and
Chairman of the Board of Directors