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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2013

or

 

¨ 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: 333-136110

 

 

GTJ REIT, INC.

(Exact name of registrant as specified in its charter)

 

 

 

MARYLAND   20-5188065

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

60 Hempstead Avenue

West Hempstead, New York

11552

(Address of principal executive offices)

(Zip Code)

(516) 693-5500

(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  ¨

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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (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  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date: 13,678,704 shares of common stock as of August 9, 2013.

 

 

 


Table of Contents

GTJ REIT, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2013

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

  
 

Item 1.

  

Financial Statements

  
    

Condensed Consolidated Balance Sheets at September 30, 2013 (Unaudited) and December 31, 2012

     2   
    

Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2013 and 2012

     3   
    

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three and Nine Months Ended September 30, 2013 and 2012

     4   
    

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2013

     5   
    

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September  30, 2013 and 2012

     6   
    

Notes to the Consolidated Financial Statements (Unaudited)

     7   
 

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     18   
 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     27   
 

Item 4.

  

Controls and Procedures

     27   

PART II. OTHER INFORMATION

  
 

Item 1.

  

Legal Proceedings

     28   
 

Item 1A.

  

Risk Factors

     28   
 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     28   
 

Item 3.

  

Defaults Upon Senior Securities

     28   
 

Item 4.

  

Mine Safety Disclosures

     28   
 

Item 5.

  

Other Information

     28   
 

Item 6.

  

Exhibits

     28   

Signatures

     29   

EX-31.1: CERTIFICATION

EX-31.2: CERTIFICATION

EX-32.1: CERTIFICATION

EX-32.2: CERTIFICATION

 

1


Table of Contents

GTJ REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

 

     September 30,
2013
    December 31,
2012
 
     (Unaudited)        

ASSETS

    

Real estate, at cost:

    

Land

   $ 135,238      $ 88,584   

Buildings and improvements

     168,151        28,892   
  

 

 

   

 

 

 

Total real estate, at cost

     303,389        117,476   

Less: accumulated depreciation and amortization

     (14,595     (11,090
  

 

 

   

 

 

 

Net real estate held for investment

     288,794        106,386   

Cash and cash equivalents

     6,474        3,349   

Rental income in excess of amount billed

     11,404        8,570   

Assets of discontinued operations

     1,515        5,631   

Acquired lease intangible assets, net

     18,757        —    

Other assets

     10,110        5,822   
  

 

 

   

 

 

 

Total assets

   $ 337,054      $ 129,758   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Liabilities:

    

Dividends payable

   $ 1,094      $ 1,092   

Mortgage notes payable

     179,524        45,500   

Secured revolving credit facility

     —         5,000   

Accounts payable and accrued expenses

     1,861        921   

Acquired lease intangible liabilities, net

     9,305        —    

Liabilities of discontinued operations

     3,367        5,116   

Other liabilities

     3,685        600   
  

 

 

   

 

 

 

Total liabilities

     198,836        58,229   
  

 

 

   

 

 

 

Commitments and contingencies

    

Equity:

    

Series A, Preferred stock, $.0001 par value; 10,000,000 shares authorized; none issued and outstanding

     —         —    

Series B, Preferred stock, $.0001 par value; non voting; 6,500,000 shares authorized; none issued and outstanding

     —         —    

Common stock, $.0001 par value; 100,000,000 shares authorized; 13,678,704 and 13,648,084 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively

     1        1   

Additional paid-in capital

     138,458        138,218   

Distributions in excess of net income

     (78,148     (66,971

Accumulated other comprehensive income

     381        281   
  

 

 

   

 

 

 

Total stockholders’ equity

     60,692        71,529   

Noncontrolling interests

     77,526         
  

 

 

   

 

 

 

Total equity

     138,218        71,529   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 337,054      $ 129,758   
  

 

 

   

 

 

 

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

 

2


Table of Contents

GTJ REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Nine Months Ended September 30, 2013 and 2012

(Unaudited, amounts in thousands, except share and per share data)

 

     Three Months Ended,
September 30,
    Nine Months Ended,
September 30,
 
     2013     2012     2013     2012  

Revenues:

        

Rental income

   $ 7,828      $ 3,355      $ 21,897      $ 10,279   

Tenant reimbursements and other

     1,443        47        3,924        258   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     9,271        3,402        25,821        10,537   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

General and administrative

     1,223        472        4,511        3,160   

Property operating expenses

     1,536        569        5,196        844   

Depreciation and amortization

     2,278        300        7,068        938   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     5,037        1,341        16,775        4,942   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     4,234        2,061        9,046        5,595   

Interest expense

     (2,164     (675     (6,276     (1,981

Insurance recovery

     81        —         1,238        —    

Acquisition costs

     125        (589     (5,133     (1,542

Other

     59        630        (220     681   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     2,335        1,427        (1,345     2,753   

Discontinued Operations:

        

Loss from discontinued operations, including loss on disposal of $0 and $1,963 for the three and nine months ended September 30, 2013, respectively

     (311     (4,181     (4,120     (7,138
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     2,024        (2,754     (5,465     (4,385

Net income attributable to noncontrolling interest

     671        —         1,154        —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

   $ 1,353      $ (2,754   $ (6,619   $ (4,385
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) per common share attributable to common stockholders - basic and diluted:

        

Income (loss) from continuing operations, net of noncontrolling interest

   $ 0.12      $ 0.10      $ (0.18   $ 0.20   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

   $ (0.02   $ (0.30   $ (0.30   $ (0.52
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

   $ 0.10      $ (0.20   $ (0.48   $ (0.32
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding – basic and diluted

     13,678,704        13,648,084        13,664,354        13,620,538   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

3


Table of Contents

GTJ REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three and Nine Months Ended September 30, 2013 and 2012

(Unaudited, amounts in thousands, except share and per share data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013      2012     2013     2012  

Net income (loss):

   $ 2,024       $ (2,754   $ (5,465   $ (4,385

Other comprehensive income (loss):

         

Available-for-sale securities:

         

Net change in unrealized gains

     8         28        100        (17
  

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     2,032         (2,726     (5,365     (4,402

Less: Net income attributable to noncontrolling interest

     671         —         1,154        —    
  

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to common stockholders

   $ 1,361       $ (2,726   $ (6,519   $ (4,402
  

 

 

    

 

 

   

 

 

   

 

 

 

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

 

4


Table of Contents

GTJ REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2013

(Unaudited, amounts in thousands, except share and per share data)

 

    Preferred
Stock
   

 

Common Stock

    Additional-
Paid-In-Capital
    Distributions
in Excess of
Net Income
    Accumulated
Other
Comprehensive
Income
    Total
Stockholders’
Equity
    Noncontrolling
Interests
    Total Equity  
      Outstanding
Shares
    Par
Value
             

Balance at December 31, 2012

  $ —          13,648,084      $ 1      $ 138,218      $ (66,971   $ 281      $ 71,529      $ —        $ 71,529   

Distributions – common stock

    —          —          —          —          (4,558     —          (4,558     —          (4,558

Repurchases – common stock

      —          —          (115     —          —          (115     —          (115

Stock-based compensation

    —          —          —          355        —          —          355        —          355   

Net issuance of restricted shares

    —          30,620        —          —          —          —          —          —          —     

Equity contribution from noncontrolling interest

    —          —          —          —          —          —          —          79,505        79,505   

Distributions to noncontrolling interests

    —          —          —          —          —          —          —          (3,133     (3,133

Net income (loss)

    —          —          —          —          (6,619     —          (6,619     1,154        (5,465

Unrealized gain on available-for-sale securities, net

    —          —          —          —          —          100        100        —          100   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

  $ —          13,678,704      $ 1      $ 138,458      $ (78,148   $ 381      $ 60,692      $ 77,526      $ 138,218   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

5


Table of Contents

GTJ REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2013 and 2012

(Unaudited, amounts in thousands, except share and per share data)

 

     Nine Months
Ended September 30
 
     2013     2012  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net loss

   $ (5,465   $ (4,385

Loss from discontinued operations

     4,120        7,138   
  

 

 

   

 

 

 

Income (loss) from continuing operations

     (1,345     2,753   

Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities

    

Stock-based compensation

     355        303   

Depreciation

     3,750        827   

Realized gain on available-for-sale securities

     —          (29

Amortization of intangible assets and deferred charges

     3,069        824   

Changes in operating assets and liabilities:

    

Rental income in excess of amount billed

     (2,834     (661

Other assets

     (2,007     (1,177

Accounts payable and accrued expenses

     941        1   

Other liabilities

     1,335        191   
  

 

 

   

 

 

 

Net cash provided by operating activities

     3,264        3,032   
  

 

 

   

 

 

 

Cash flow from investing activities:

    

Acquisition of real estate

     (1,722     (4,017

Purchase of marketable securities

     (2     —     

Proceeds from sale of marketable securities

     33        —     

Deal pursuit costs

     (513     —     
  

 

 

   

 

 

 

Net cash (used in) investing activities

     (2,204     (4,017
  

 

 

   

 

 

 

Cash Flow from financing activities:

    

Repayment of revolving credit facility

     (5,000     —     

Proceeds from revolving credit facility

       5,000   

Proceeds from mortgage notes payable

     16,775        —     

Payment of mortgage principal

     (700     —     

Repurchases of common stock

     (115     —     

Distributions to noncontrolling interests

     (2,587     —     

Dividends paid

     (4,556     (5,032
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     3,817        (32
  

 

 

   

 

 

 

Cash flow used in discontinued operations:

    

Operating activities

     (1,752     (3,207
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     3,125        (4,224

Cash and cash equivalents at the beginning of period

     3,349        8,684   
  

 

 

   

 

 

 

Cash and cash equivalents at the end of period

   $ 6,474      $ 4,460   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash paid for interest

   $ 6,093      $ 1,723   
  

 

 

   

 

 

 

Cash paid for income taxes

   $ 1      $ 7   
  

 

 

   

 

 

 

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

 

6


Table of Contents

GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

1. ORGANIZATION AND DESCRIPTION OF BUSINESS:

GTJ REIT, Inc. (the “Company” or “GTJ REIT”) was incorporated on June 23, 2006 under Maryland General Corporation Law. The Company is focused primarily on the acquisition, ownership, management, and operation of commercial real estate located in the New York tri-state area.

On March 29, 2007, the Company completed a merger transaction with Triboro Coach Corp., Jamaica Central Railways, Inc., and Green Bus Lines, Inc., (together collectively referred to as the “Bus Companies”). The effect of the merger transaction was to complete a reorganization (the “Reorganization”) of the ownership of the Bus Companies into GTJ REIT, with the former shareholders of the Bus Companies becoming stockholders in GTJ REIT. Upon completion of the Reorganization, the Company commenced operations as a fully integrated real estate company. At the time, the Bus Companies, including their subsidiaries, owned a total of six rentable properties and one non-rentable property of negligible size.

Effective July 1, 2007, the Company elected to be treated as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended and elected December 31st as its fiscal year end. Under the REIT operating structure, the Company is permitted to deduct the dividends paid to its stockholders when determining its taxable income. Assuming dividends equal or exceed the Company’s taxable income, the Company generally will not be required to pay Federal corporate income taxes on such income. Accordingly, no provision has been made for Federal income taxes in the accompanying financial statements. In connection with the Tax Relief Extension Act of 1999 (“RMA”), subject to certain limitations, 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.

On January 17, 2013, the Company closed on a transaction with Wu/Lighthouse Portfolio, LLC, in which a limited partnership (the “UPREIT”) owned and controlled by the Company, acquired all outstanding ownership interests of a portfolio consisting of 25 commercial properties (the “Acquired Properties”) located in New York, New Jersey and Connecticut, in exchange for 33.29% of the outstanding limited partnership interests in the UPREIT. The acquisition was recorded as a business combination and accordingly the purchase price was allocated to the assets acquired and liabilities assumed at fair value. As a result of this acquisition the Company currently beneficially owns a 66.71% interest in a total of 32 properties (including the seven previously-owned properties) consisting of over 2.4 million square feet of office and industrial properties on 210 acres of land in New York, New Jersey, and Connecticut. At September 30, 2013, subject to certain anti-dilutive and other provisions contained in the governing agreements, the limited partnership interests in the UPREIT may be convertible in the aggregate, into approximately 1.8 million shares of the Company’s common stock and approximately 5.0 million shares of Series B preferred stock.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation:

The accompanying unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the financial statements of the Company, its wholly owned subsidiaries, and the UPREIT, as the Company makes all operating and financial decisions for (i.e. exercises control over) the UPREIT. All material intercompany transactions have been eliminated.

The accompanying unaudited condensed consolidated interim financial information has been prepared according to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with such rules and regulations. The Company’s management believes that the disclosures presented in these unaudited condensed consolidated financial statements are adequate to make the information presented not misleading. In Management’s opinion, all adjustments and eliminations, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of operations for the reported periods have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year. The accompanying unaudited condensed consolidated interim financial information should be read in conjunction with the Company’s December 31, 2012 audited financial statements, as previously filed with the SEC on Form 10-K on April 1, 2013 and other public information.

Certain amounts included in the accompanying unaudited condensed consolidated financial statements for 2012 have been reclassified to conform to the 2013 financial statement presentation.

 

7


Table of Contents

Use of Estimates:

The preparation of the Company’s condensed 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 condensed 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 the useful lives of long lived assets including property, equipment and intangible assets, impairment of assets, collectibility of receivables, contingencies, and stock-based compensation.

Real Estate:

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 (generally consisting of land, buildings, and building improvements) and identified intangible assets and liabilities (generally consisting of above-market and below-market leases and the origination value of in-place leases) in accordance with GAAP. 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.” 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.

Mortgage notes payable assumed in connection with acquisitions are recorded at their fair value using current market interest rates for similar debt at the time of acquisitions. Acquisition related costs are expensed as incurred. 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 assets or liabilities is recorded as income or expense in the period. The total net impact to rental revenues due to the amortization of above and below market leases was a net decrease of approximately $.2 million for the nine months ended September 30, 2013.

As of September 30, 2013, approximately $3.8 million and $15.0 million (net of accumulated amortization) relating to above market and in place leases, respectively, are included in acquired lease intangible assets, net in the accompanying condensed consolidated balance sheet. Approximately $9.3 million (net of accumulated amortization) relating to below market leases are included in acquired lease intangible liabilities, net in the accompanying condensed consolidated balance sheet.

The following table presents the projected impact during the next five years related to the increase to rental revenue from the amortization of the acquired above market and below market lease intangibles and the increase to amortization expense of the in place lease intangibles for properties owned at September 30, 2013 (in thousands):

 

     Net increase to
rental revenues
     Increase to
amortization
expense
 

2014

   $ 270       $ 3,065   

2015

     329         2,367   

2016

     543         1,652   

2017

     455         975   

2018

     479         934   

Thereafter

     3,288         5,136   
  

 

 

    

 

 

 
   $ 5,364       $ 14,129   
  

 

 

    

 

 

 

 

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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 5 to 40 years. Furniture, fixtures, and 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:

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 undiscounted future cash flows that are expected to result from the real estate investment’s use and eventual disposition. Such cash flow analyses 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 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. Management has determined that there were no indicators of impairment relating to its long-lived assets at September 30, 2013.

Reportable Segments:

As of September 30, 2013, the Company primarily operated in one reportable segment, its Real Estate Operations, which rents Company owned commercial real estate located in New York, New Jersey, and Connecticut.

In 2011, the Board of Directors voted to divest the Company of all non-real estate operations, including its outdoor maintenance, shelter cleaning, electrical contracting, and parking garage businesses. These operations are presented as discontinued operations in the condensed consolidated financial statements.

Revenue Recognition:

Rental income includes the base rent that each tenant is required to pay in accordance with the terms of their respective leases reported on a straight-line basis over the term of the lease. In order for management to determine, in its judgment, that the unbilled rent receivable applicable to each specific property is collectible, management reviews billed and unbilled rent receivables on a quarterly basis and takes into consideration the tenant’s payment history and financial condition. Some of the leases provide for additional contingent rental revenue in the form of percentage rents and increases based on the consumer price index.

Substantially all of the Company’s properties are subject to long-term net leases under which the tenant is typically responsible to pay for their pro rata share of real estate taxes, insurance, and ordinary maintenance and repairs for the property.

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

Earnings Per Share Information:

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 common 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 option awards would have been antidilutive for the periods presented.

Cash and Cash Equivalents:

The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.

Restricted Cash:

Restricted cash represents (i) funds held by the insurance carrier for the purpose of the payment of insured losses and (ii) reserves used to pay real estate taxes, insurance, and tenant improvements. At September 30, 2013 and December 31, 2012, the Company had restricted cash in the amount of $1.3 million and $0.4 million, respectively, which was included in other assets on the condensed consolidated balance sheets.

 

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Available-for-Sale Securities:

The Company accounts for its marketable debt and equity securities as available-for-sale securities in accordance with Accounting Standards Codification (“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, 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 are included in the accompanying condensed consolidated statements of operations. The cost of securities sold is based on the specific identification method. Estimated fair value is determined based on quoted market prices. At September 30, 2013 and December 31, 2012, the Company had $0.6 million and $0.5 million, respectively, in available-for-sale securities, which was included in other assets on the condensed consolidated balance sheets.

Fair Value Measurement:

The Company determines fair value in accordance with ASC 820-10-05 for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures.

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, which are defined by ASC 820-10-35, are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities. Determining which category an asset or liability falls within the hierarchy requires significant judgment and the Company evaluates its hierarchy disclosures each quarter.

Level 1 — Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2 — Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Valuations based on unobservable inputs reflecting management’s own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

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 distributable income that qualifies as REIT taxable income, to the extent that it distributes at least 90% of its REIT taxable income to its stockholders and complies with certain other requirements as defined.

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

 

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also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of September 30, 2013 and December 31, 2012, the Company had determined that no liabilities are required in connection with unrecognized tax positions.

Concentrations of Credit Risk:

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, which from time-to-time exceed the federal depository insurance coverage. Beginning January 1, 2013, all noninterest bearing transaction accounts no longer receive unlimited deposit insurance coverage by the Federal Deposit Insurance Corporation (“FDIC”) and instead all accounts deposited at an insured depository institution are insured by the FDIC up to the standard maximum deposit insurance amount of $250,000 for each deposit insurance ownership category. Management believes that the Company is not exposed to any significant credit risk due to the credit worthiness of the financial institutions.

Stock-Based Compensation:

The Company has a stock-based compensation plan, which is described below in Note 7. 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 at the grant date (for the portion that vests immediately) or ratably over the respective vesting periods.

Recently Issued Accounting Pronouncements:

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of the statement of operations but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. ASU No. 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of ASU 2013-02 did not have a material impact on the Company’s consolidated financial statements.

 

3. REAL ESTATE:

Acquisition of Wu/Lighthouse Portfolio, LLC Properties:

As disclosed in Note 1, effective January 17, 2013, the Company, through a limited partnership owned and controlled by the Company (the “UPREIT”), acquired from Wu/Lighthouse Portfolio, LLC all of the outstanding ownership interests in 25 commercial properties (the “Acquired Properties”) located in New York, New Jersey and Connecticut in exchange for 33.29% of the outstanding limited partnership interests in the UPREIT. The Acquired Properties had a gross asset value of approximately $194.4 million, subject to an aggregate of approximately $115.0 million in outstanding mortgage indebtedness, which was assumed by the UPREIT upon the January 17, 2013 closing. In addition, the Company acquired other assets and assumed certain liabilities in connection with the transaction. Paul Cooper, the Company’s Chief Executive Officer and a director was a 6% owner and principal of Wu/Lighthouse Portfolio, Louis Sheinker, the Company’s President and Chief Operating Officer and a director was a 6.666% owner and principal of Wu/Lighthouse Portfolio, and Jerome Cooper the Company’s Chairman of the Board of Directors owned a .666% interest therein. Following the closing, the Company beneficially owned 66.71% of the outstanding limited partnership interests in the UPREIT and the former Wu/Lighthouse owners collectively owned 33.29%. The Company exercises managerial control over the UPREIT’s operations.

The acquisition was accounted for in accordance with ASC 805, “Business Combinations.” The following table summarizes our preliminary purchase price allocation, which represents our current best estimate of fair value (in thousands):

 

Assets:

  

Real estate

   $ 185,102   

Acquired lease intangible asset

     23,040   

Other assets

     2,114   
  

 

 

 

Total Assets

   $ 210,256   
  

 

 

 

Liabilities:

  

Mortgage notes payable

     118,485   

Acquired lease intangible liabilities

     10,152   

Other liabilities

     1,203   
  

 

 

 

Total Liabilities

   $ 129,840   
  

 

 

 

Estimated Fair Value of Net Assets Acquired

   $ 80,416   
  

 

 

 

 

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The 25 Acquired Properties are listed below:

 

Property

466 Bridgeport Avenue, Shelton, CT

  

404 Fieldcrest Drive, Elmsford, NY

470 Bridgeport Avenue, Shelton, CT

  

199 Ridgewood Drive, Elmsford, NY

15 Progress Drive, Shelton, CT

  

203 Ridgewood Drive, Elmsford, NY

950-974 Bridgeport Avenue, Milford, CT

  

36 Midland Avenue, Port Chester, NY

12 Cascade Boulevard, Orange, CT

  

100-110 Midland Avenue, Port Chester, NY

15 Executive Boulevard, Orange, CT

  

112 Midland Avenue, Port Chester, NY

25 Executive Boulevard, Orange, CT

35 Executive Boulevard, Orange, CT

  

8 Slater Street, Port Chester, NY

100 American Road, Morris Plains, NJ

22 Marsh Hill Road, Orange, CT

  

200 American Road, Morris Plains, NJ

269 Lambert Road, Orange, CT

  

300 American Road, Morris Plains, NJ

103 Fairview Park Drive, Elmsford, NY

  

400 American Road, Morris Plains, NJ

412 Fairview Park Drive, Elmsford, NY

  

500 American Road, Morris Plains, NJ

401 Fieldcrest Drive, Elmsford, NY

  

The following table represents the Company’s pro forma statements of operation for the three and nine months ended September 30, 2013 and 2012 as if the operations of the Acquired Properties were included in the Company’s operations for the full three and nine months of each period presented:

 

     STATEMENTS OF OPERATIONS (PRO FORMA)  
     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013     2012     2013     2012  

Revenues

   $ 9,271      $ 8,978      $ 25,821      $ 28,163   

Income from continuing operations

     2,210        2,262        3,788        5,375   

Discontinued Operations:

        

Loss from discontinued operations

     (311     (4,181     (4,120     (7,138

Net income (loss) attributable to common stockholders

     1,228        (2,690     (1,486     (2,944

Income (loss) per common share attributable to common stockholders-basic and diluted:

        

Income (loss) from continuing operations, net of noncontrolling interest

   $ 0.11      $ 0.11      $ 0.19      $ 0.32   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

   $ (0.02   $ (0.31   $ (0.30   $ (0.52
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

   $ 0.09      $ (0.20   $ (0.11   $ (0.22
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding-basic and diluted

     13,678,704        13,648,084        13,664,354        13,620,538   
  

 

 

   

 

 

   

 

 

   

 

 

 

Note: Acquisition costs of approximately $(0.1) million and $5.1 million for the three and nine months ended September 30, 2013 and $0.6 million and $1.5 million for the three and nine months ended September 30, 2012 were excluded from the pro forma statements of operations.

 

4. DISCONTINUED OPERATIONS:

On May 2, 2013, Shelter Express Corp., a wholly owned subsidiary of the Company, completed the sale of all of the issued and outstanding shares of capital stock of Shelter Electric Maintenance Corp. (“SEM”). As a result of the sale, the Company recorded a loss on sale of $0 million and $1.9 million, respectively, for the three and nine months ended September 30, 2013. The operations of SEM are included as part of discontinued operations on the accompanying condensed consolidated financial statements.

 

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The following table sets forth the detail of the Company’s loss from discontinued operations for the three and nine months ended September 30, 2013 and 2012 (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Revenues from discontinued operations

   $ —        $ 1,361      $ 1,486      $ 5,131   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations

   $ (311   $ (4,181   $ (4,120   $ (7,138
  

 

 

   

 

 

   

 

 

   

 

 

 

The carrying amounts of the major classes of assets and liabilities of the Company’s discontinued operations are as follows (in thousands):

 

     September 30,
2013
     December 31,
2012
 

Assets:

     

Cash

   $ 484       $ 30   

Accounts receivable, net

     699         1,919   

Machinery and equipment, net

     —          221   

Other assets, net

     332         3,461   
  

 

 

    

 

 

 
   $ 1,515       $ 5,631   
  

 

 

    

 

 

 

Liabilities:

     

Accounts payable and accrued expenses

     138         823   

Insurance reserve

     1,660         1,492   

Other liabilities, net

     1,569         2,801   
  

 

 

    

 

 

 
   $ 3,367       $ 5,116   
  

 

 

    

 

 

 

 

5. MORTGAGE NOTES PAYABLE:

Hartford Loan Agreement:

On July 1, 2010, two wholly-owned of subsidiaries of the UPREIT (collectively, the “Borrower”) entered into a non-recourse fixed rate mortgage 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 the Borrower in the aggregate principal amount of $45.5 million. The loan was evidenced by promissory notes in the principal amounts of $25.0 million, $10.5 million, and $10.0 million.

The obligations are secured by, among other things, a first priority mortgage lien on two properties. The outstanding principal balance of the loan bears 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.

Aviva Loan Agreement

On February 22, 2013, a wholly-owned subsidiary of the UPREIT, entered into a $15.0 million mortgage note with Aviva Life and Annuity Company. The loan bears interest at a rate of 3% per annum and requires monthly payments of interest. The principal is payable when the loan matures on March 1, 2018. Approximately $10.1 million from the proceeds was used to satisfy in full the obligations under the secured revolving credit facility discussed in Note 6 below. The remaining proceeds were used for general working capital and other corporate purposes and partner distributions.

The loan is secured by a mortgage on a property. The obligations under this loan agreement are also guaranteed by the UPREIT.

Genworth Loan Agreement

On April 3, 2013, four wholly-owned subsidiaries of the UPREIT (collectively, the “Borrower”) entered into mortgage loan agreements with Genworth Life Insurance Company (the “Lender”), in the aggregate principal amount of $29.5 million. The loan bears interest at a rate of 3.20% and matures on April 30, 2018. The loan was evidenced by promissory notes of $14.4 million (the “New York Note”) and $15.1 million (the “New Jersey Note”), hereinafter referred to as the (“Notes”).

 

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The New York Note requires 12 monthly payments of interest only starting June 1, 2013. On June 1, 2014, monthly payments of principal and interest in the amount of approximately $70,000 are required until the note becomes due and payable.

The New Jersey Note requires 12 monthly payments of interest starting June 1, 2013. On June 1, 2014, monthly payments of principal and interest in the amount of approximately $73,000 are required until such New Jersey Note becomes due and payable.

The Notes are secured by, among other things, property owned by the Borrowers. The proceeds from the Loans were used to satisfy in full the Borrowers’ obligations to John Hancock Life Insurance Company under a prior mortgage agreement (discussed further below).

As a condition to Lender entering into the Loan Agreements, the Borrowers and the UPREIT agreed to indemnify the Lender against certain claims and guaranty certain obligations of the Borrowers pursuant to certain Environmental Indemnity Agreements (the “Environmental Indemnities”). Certain obligations under the Loan Agreements are guaranteed by the UPREIT. In connection with the loan agreements, the Borrowers are required to comply with certain covenants. As of September 30, 2013, the Borrowers were in compliance with all covenants.

Loan Assumptions:

Each of the Acquired Properties discussed above was and continues to be encumbered by certain mortgage indebtedness. Concurrent with the acquisition of these properties, the Company, the UPREIT and the entity owners of the Acquired Properties entered into certain loan assumption and modification documents to facilitate the acquisition of the Acquired Properties. Below is a summary of the material terms of the arrangement with each lender.

United States Life Insurance Company Loan:

Six wholly-owned subsidiaries of the UPREIT, (collectively, the “USLIC Borrowers”) previously entered into mortgage loans with The United States Life Insurance Company in the City of New York (“USLIC”), in the aggregate original principal amount of $23.5 million (the USLIC Mortgage Loan”).

The USLIC Mortgage Loan is secured by the properties owned by the USLIC Borrowers and bears interest at a rate of 5.76%. The Company is required to make payments of principal and interest until the loan matures on April 1, 2018. USLIC has the option of extending the terms of the USLIC Mortgage Loan for an additional five (5) years based on a new market interest rate and a new amortization period. After September 8, 2014, the USLIC Mortgage Loan may be prepaid subject to a prepayment fee. The obligations under this loan agreement are also guaranteed by GTJ REIT.

John Hancock Loan:

Seventeen wholly-owned subsidiaries of the UPREIT, (collectively, the “John Hancock Borrowers”), entered into a mortgage loan with John Hancock Life Insurance Company (U.S.A.), in the aggregate original principal amount of $105 million (the “John Hancock Loan”) which was made pursuant to a loan agreement. The John Hancock Loan is secured by mortgages covering the properties owned by the John Hancock Borrowers. The obligations under this loan agreement are also guaranteed by GTJ REIT.

A portion of the John Hancock Loan matured on March 1, 2013 (the “5 Year Notes”) and was refinanced as part of the Genworth Loan Agreement discussed above. The $61 million remaining portion of the John Hancock Loan matures on March 1, 2018 (the “10 Year Notes”). The 5 Year Notes bore interest at a rate of 5.44%. The 10 Year Notes bear interest at 6.17%. The 5 Year Notes were interest only with a fixed monthly payment. The 10 Year Notes are interest only for the first five (5) years; for years 6 through 10, payments are of principal and interest. After a certain “Lockout Period,” the John Hancock Mortgage Loan may be prepaid subject to a prepayment fee.

 

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People’s United Bank Loan:

Wu/LH 15 Progress Drive L.L.C. (the “PUB Borrower”) entered into a $2.7 million mortgage loan with Peoples United Bank, a Federal savings bank, on September 30, 2010. The loan is secured by the properties located at 15 Progress Road and 30 Commerce Drive, Shelton, Connecticut and bears interest at a rate of 5.23%. The Company is required to make monthly payments of principal and interest until the loan matures on October 1, 2020. The obligations under this loan agreement are also guaranteed by GTJ REIT.

 

6. SECURED REVOLVING CREDIT FACILITY:

M&T Financing Agreement:

On August 26, 2011, the Company and Manufacturers and Traders Trust Company (“M&T”) entered into a certain credit agreement which provided for, among other things, a $10.0 million revolving credit facility (the “Revolver”). The Revolver was available to the Company for acquisitions and for general working capital and other corporate purposes. The Company’s obligations under this credit agreement were satisfied in full on February 22, 2013 and the Revolver was cancelled.

 

7. STOCKHOLDERS’ EQUITY:

Common Stock:

The Company is authorized to issue 100,000,000 shares of common stock, $.0001 par value per share. As of September 30, 2013, the Company has a total of 13,678,704 shares issued and outstanding (see Note 1).

Preferred Stock:

The Company is authorized to issue 10,000,000 shares of Series A preferred stock, $.0001 par value per share. Voting and other rights and preferences as may be determined from time to time by the Board of Directors. In addition, the Company is authorized to issue 6,500,00 shares of Series B preferred stock. There are no voting rights associated with the Series B preferred stock.

Dividend Distributions:

The following table presents dividends declared by the Company on its common stock during 2013:

 

Declaration Date

  Record
Date
  Payment
Date
  Dividend
Per Share
 
March 21, 2013   January 31, 2013   April 15, 2013   $ 0.0934  (1) 
March 21, 2013   March 31, 2013   April 15, 2013   $ 0.08   
June 6, 2013   June 30, 2013   July 15, 2013   $ 0.08   
August 7, 2013   September 30, 2013   October 15, 2013   $ 0.08   

 

(1) This represents a supplemental 2012 dividend.

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 which was obtained 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 September 30, 2013, the Company had 499,820 shares available for future issuance of awards under the Plan.

On March 21, 2013, the Company issued an aggregate of 50,002 restricted shares of common stock, with a value of approximately $319,000, under the Plan. A total of 3,126 of these shares, with a value of approximately $20,000 ($6.40 per share), were granted to non-management members of the Board of Directors, and vested immediately. The remaining 46,876 shares, with a value of approximately $300,000 ($6.40 per share), were granted to certain executives of the Company, and vest ratably over a four year period. One fourth of the 44,119 shares granted to each of the executives vested on the grant date and one fourth will vest each year on the following dates: March 21, 2014, March 21, 2015, and March 21, 2016.

 

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On June 6, 2013, the Company issued an aggregate of 9,378 restricted shares of common stock, with a value of approximately $60,000 ($6.40 per share), under the Plan. These shares were granted to non-management members of the Board of Directors and vested immediately.

Management determined the value of a share of common stock to be $6.90 based on a recent valuation performed by an independent third-party for the purpose of valuing shares of the Company’s common stock issued pursuant to the Plan. This value is not necessarily indicative of the fair market value of a share of the Company’s common stock.

For the three and nine months ended September 30, 2013, the Company’s total stock compensation expense was approximately $36,000 and $355,000, respectively. For the three and nine months ended September 30, 2012, the Company’s total stock compensation expense was approximately $70,000 and $303,000, respectively. As of September 30, 2013, there was approximately $276,000 of unamortized stock compensation related to restricted stock.

 

8. EARNINGS PER SHARE:

In accordance with ASC 260-10-45, basic earnings per common share (“Basic EPS”) is computed by dividing the net loss by the weighted-average number of common shares outstanding. Diluted earnings per common share (“Diluted EPS”) is computed by dividing net income (loss) 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 dilutive earnings per share.

The following table sets forth the computation of basic and diluted earnings per share information for the three and nine months ended September 30, 2013 and 2012 (in thousands, except share and per share data):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Numerator:

        

Income (loss) from continuing operations, net of noncontrolling interest

   $ 1,664      $ 1,427      $ (2,499   $ 2,753   

Loss from discontinued operations

     (311     (4,181     (4,120     (7,138
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 1,353      $ (2,754   $ (6,619   $ (4,385
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

        

Weighted average common shares outstanding – basic and diluted

     13,678,704        13,648,084        13,664,354        13,620,538   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and Diluted Per Share Information:

        

Net income (loss) per share – basic and diluted

   $ 0.10      $ (0.20   $ (0.48   $ (0.32
  

 

 

   

 

 

   

 

 

   

 

 

 

 

9. 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”). The law firm has acted as counsel to the Company since 1998. Fees incurred by the Company to RMF for the three and nine months ended September 30, 2013 were $0.1 million and $0.3 million, respectively, and $0.2 million and $0.8 million, respectively, for the three and nine months ended September 30, 2012.

Paul Cooper is the Chief Executive Officer, a director of the Company, and the son of Jerome Cooper (Chairman of the Board). The Company has a lease agreement with Lighthouse 444 Limited Partnership (“Lighthouse”), the owner of the building at 444 Merrick Road, Lynbrook, NY in which Paul Cooper and Louis Sheinker, the Company’s President and Chief Operating Officer, are general partners. The lease includes approximately 6,712 square feet of office space for a term of five years expiring August 31, 2015 at an annual rent of approximately $233,000. Additionally, Lighthouse Sixty, LP, owner of the building at 60 Hempstead Avenue, West Hempstead, NY, and of which Paul Cooper and Louis Sheinker are general partners, entered into a seven and a half year lease agreement in 2013 for 11,040 square feet of office space at an initial base rent of approximately $223,000, in which the Company conducts operations.

 

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10. COMMITMENTS AND CONTINGENCIES:

Legal Matters:

The Company is involved in lawsuits and other disputes which arise 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.

Insurance:

The provisions of the Insurance Law of the Cayman Islands require the Company’s captive insurance entity to maintain a minimum net worth of $120,000. At September 30, 2013 and December 31, 2012, the Company’s insurance entity was not in compliance with the minimum net worth requirements. A waiver had been provided due to the Company’s intention to transfer the insurance balances into a liquidating trust and dissolve the Cayman Islands based insurance operations once the transfer is complete. As of September 30, 2013, the Company is in the process of transferring the insurance balances into a liquidating trust.

In June 2013, the Company received an insurance settlement of $1.2 million relating to a fire that had occurred at one of its properties in 2006. The gain is reflected in the accompanying condensed consolidated statements of operations.

Divestiture:

In connection with the completion of the divestiture of the Company’s taxable REIT subsidiaries, the Company may be subject to certain liabilities including union wages and severance. On January 27, 2012, the Company received a notice from Counsel for Local Union No. 3 of the International Brotherhood of Electrical Workers asserting a severance liability of approximately $0.1 million for certain employees terminated in connection with the divestiture of the subsidiary. An arbitration hearing was held on May 2, 2012, in which the arbitrator ruled in favor of the Union in the amount of approximately $0.1 million. The Company paid the amount owed on July 13, 2012. In March 2013, the Company received a second notice regarding union wages and severance for and additional group of employees who were terminated in connection with the divestiture. The Company was not in agreement with the assertion and has retained counsel to contest this matter. The costs associated with these potential liabilities are not currently estimable.

On February 16, 2012, the Company received a notice from the Joint Industry Board of the Electrical Industry claiming a pension withdrawal liability in the amount of $1.5 million in connection with the divestiture. The Company determined the liability was probable and the Company agreed to pay the obligation in monthly installments of approximately $8,000 over a twenty-year term. As of September 30, 2013, the present value of this obligation is approximately $1.3 million and is included in liabilities of discontinued operations on the accompanying condensed consolidated balance sheet.

 

11. FAIR VALUE:

Fair Value of Financial Instruments:

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):

 

     September 30, 2013      December 31, 2012  
     Carrying
Value
     Estimated
Fair Value
     Carrying
Value
     Estimated
Fair Value
 

Financial assets:

           

Cash and cash equivalents

   $ 6,474       $ 6,474       $ 3,349       $ 3,349   

Available-for-sale securities

     597         597         528         528   

Accounts receivable, net

     1,382         1,382         334         334   

Financial liabilities:

           

Secured revolving credit facility

   $ —        $ —        $ 5,000       $ 5,000   

Mortgage notes payable

     179,524         185,788         45,500         49,636   

Pension withdrawal liability

     1,398         1,299         1,436         1,246   

The Company measures certain financial assets and financial liabilities at fair value on a recurring basis, primarily available-for-sale securities. The fair value of these financial assets and liabilities was determined using the following inputs as of September 30, 2013.

 

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                   Fair Value Measurements
Using Fair Value Hierarchy
 
     Carrying
Value
     Fair
Value
     Level 1      Level 2      Level 3  

Financial assets:

              

Available-for-sale securities

   $ 597       $ 597       $ 597       $ —        $ —    

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

 

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, 2012 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 interests in a total of 32 properties consisting of over 2.4 million square feet of office and industrial properties on 210 acres of land in New York, New Jersey, and Connecticut. Additionally, we 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.

We continue to seek opportunities to acquire properties. To the extent it is in the interests of our stockholders, we will seek to acquire 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 Report on 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 condensed 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, 2012, 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 nine months ended September 30, 2013, 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.

Revenue Recognition:

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

 

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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. Our 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.

Real Estate:

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 (generally consisting of land, buildings and building improvements) and identified intangible assets and liabilities (generally consisting of above-market and below-market leases and the origination value of in-place leases) in accordance with GAAP. 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.” 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.

Mortgage notes payable assumed in connection with acquisitions are recorded at their fair value using current market interest rates for similar debt at the time of acquisitions. Acquisition related costs are expensed as incurred.

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 assets or liabilities is recorded as income or expense in the period.

Asset Impairment:

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 undiscounted future cash flows that are expected to result from the real estate investment’s use and eventual disposition. Such cash flow analyses 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 could have a direct impact on net income, because an impairment loss is recognized in the period that the assessment is made. Management has determined that there were no indicators of impairment relating to our long lived assets at September 30, 2013.

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.

 

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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.

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 distributable income that qualifies as REIT taxable income, to the extent that we distribute at least 90% of our REIT taxable income to our stockholders and comply with certain other requirements as defined under 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.

Stock-Based Compensation:

We have a stock-based compensation plan, which is described in Note 7. 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.

 

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Results of Operations:

Three Months Ended September 30, 2013 vs. Three Months Ended September 30, 2012

The following table sets forth our results of operations for the periods indicated (in thousands):

 

     Three Months Ended
September 30,
    Increase/(Decrease)  
     2013     2012     Amount     Percent  
     (Unaudited)              

Revenues:

        

Rental income

   $ 7,828      $ 3,355      $ 4,473        133

Tenant reimbursements and other

     1,443        47        1,396        2,970
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     9,271        3,402        5,869        173
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

General and administrative

     1,223        472        751        159

Property operating expenses

     1,536        569        967        170

Depreciation and amortization

     2,278        300        1,978        659
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     5,037        1,341        3,696        276
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     4,234        2,061        2,173        105

Other income (expense):

        

Interest expense

     (2,164     (675     (1,489     221

Insurance recovery

     81        —         81        nm   

Acquisition costs

     125        (589     714        (121 )% 

Other

     59        630        (571     (91 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     2,335        1,427        908        64

Discontinued Operations:

        

Loss from discontinued operations

     (311     (4,181     3,870        (93 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     2,024        (2,754     4,778        (173 )% 

Net income attributable to noncontrolling interest

     671        —         671        nm   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

   $ 1,353      $ (2,754   $ 4,107        (149 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

nm – not meaningful

Property Rental Revenues

Property rental revenue increased $4.5 million, or 133%, to $7.8 million for the three months ended September 30, 2013 from $3.4 million for the three months ended September 30, 2012. This increase is primarily attributable to the additional rental revenue recognized as a result of the acquisition of the 25 properties in the Wu/Lighthouse Portfolio in January 2013.

Tenant Reimbursements

Tenant reimbursements increased $1.4 million, or 2,970%, to $1.4 million for the three months ended September 30, 2013 from $0.1 million for the three months ended September 30, 2012. This increase is primarily attributable to the additional tenant reimbursements received as a result of the acquisition of the 25 properties in the Wu/Lighthouse Portfolio in January 2013.

Operating Expenses

Operating expenses increased $3.7 million, or 276%, to $5.0 million for the three months ended September 30, 2013 from $1.3 million for the three months ended September 30, 2012. This increase is primarily attributable to additional property operating and depreciation expense resulting from the acquisition of the 25 properties in the Wu/Lighthouse Portfolio in January 2013.

Interest Expense

Interest expense increased $1.5 million or 221%, to $2.2 million for the three months ended September 30, 2013 from $0.7 million for the three months ended September 30, 2012. This increase is primarily attributable to the assumption of property debt associated with the 25 Acquired Properties.

 

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Loss from Discontinued Operations

Loss from discontinued operations decreased $3.9 million, or 93%, to $0.3 million for the three months ended September 30, 2013 from $4.2 million for the three months ended September 30, 2012. This decrease reflects the wind down of discontinued operations.

Nine Months Ended September 30, 2013 vs. Nine Months Ended September 30, 2012

The following table sets forth our results of operations for the periods indicated (in thousands):

 

     Nine Months Ended
September 30,
    Increase/(Decrease)  
     2013     2012     Amount     Percent  
     (Unaudited)              

Revenues:

        

Rental income

   $ 21,897      $ 10,279      $ 11,618        113

Tenant reimbursements and other

     3,924        258        3,666        1,421
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     25,821        10,537        15,284        145
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

General and administrative

     4,511        3,160        1,351        43

Property operating expenses

     5,196        844        4,352        516

Depreciation and amortization

     7,068        938        6,130        654
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     16,775        4,942        11,833        239
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     9,046        5,595        3,451        62

Other income (expense):

        

Interest expense

     (6,276     (1,981     (4,295     (217 )% 

Insurance recovery

     1,238        —         1,238        nm   

Acquisition costs

     (5,133     (1,542     (3,591     233

Other

     (220     681        (901     (132 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (1,345     2,753        (4,098     (149 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued Operations:

        

Loss from discontinued operations

     (4,120     (7,138     3,018        (42 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (5,465     (4,385     (1,080     25

Net income attributable to noncontrolling interest

     1,154        —         1,154        nm   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (6,619   $ (4,385   $ (2,234     51
  

 

 

   

 

 

   

 

 

   

 

 

 

nm – not meaningful

Property Rental Revenues

Property rental revenue increased $11.6 million, or 113%, to $21.9 million for the nine months ended September 30, 2013 from $10.3 million for the nine months ended September 30, 2012. This increase is primarily attributable to the additional rental revenue recognized as a result of the acquisition of the 25 properties in the Wu/Lighthouse Portfolio in January 2013.

Tenant Reimbursements

Tenant reimbursements increased $3.7 million, or 1,421%, to $3.9 million for the nine months ended September 30, 2013 from $0.3 million for the nine months ended September 30, 2012. This increase is primarily attributable to the additional tenant reimbursements received as a result of the acquisition of the 25 properties in the Wu/Lighthouse Portfolio in January 2013.

Operating Expenses

Operating expenses increased $11.8 million, or 239%, to $16.8 million for the nine months ended September 30, 2013 from $5 million for the nine months ended September 30, 2012. This increase is primarily attributable to additional property operating and depreciation expense as a result of the acquisition of the 25 properties in the Wu/Lighthouse Portfolio in January 2013.

 

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Interest Expense

Interest expense increased $4.3 million or 217%, to $6.3 million for the nine months ended September 30, 2013 from $2 million for the three months ended September 30, 2012. This increase is primarily attributable to the assumption of property debt associated with the 25 Acquired Properties.

Loss from Discontinued Operations

Loss from discontinued operations decreased $3.0 million, or 42%, to $4.1 million for the nine months ended September 30, 2013 from $7.1 million for the nine months ended September 30, 2012. This decrease reflects the wind down of discontinued operations.

Liquidity and Capital Resources

At September 30, 2013, we had unrestricted cash and cash equivalents of approximately $6.5 million compared to $3.3 million at December 31, 2012. We fund operating expenditures and other short-term liquidity requirements, including debt service and dividend distributions from operating cash flows. We believe that our net cash provided by operations will be sufficient to fund our short-term liquidity requirements for the next twelve months and to meet our dividend requirements to maintain our REIT status.

Financing Arrangements:

Hartford Loan Agreement:

On July 1, 2010, two wholly-owned subsidiaries of the UPREIT, (collectively, the “Borrowers”) entered into a non-recourse fixed rate mortgage 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 the Borrower in the aggregate principal amount of $45.5 million (the “Loan”). The Loan was evidenced by promissory notes in the principal amounts of $25.0 million, $10.5 million, and $10.0 million.

The obligations under the Hartford Loan Agreement are secured by, among other things, a first priority mortgage lien on two properties. The outstanding principal balance of the Loan bears 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.

Aviva Loan Agreement

On February 22, 2013, a wholly-owned subsidiary of the UPREIT, entered into a $15.0 million mortgage note with Aviva Life and Annuity Company. The loan bears interest at a rate of 3% per annum and requires monthly payments of interest. The principal is payable when the loan matures on March 1, 2018. Approximately $10.1 million from the proceeds was used to satisfy in full the obligations under the secured revolving credit facility discussed in Note 6 below. The remaining proceeds were used for general working capital and other corporate purposes and partner distributions.

The loan is secured by a mortgage on a property. The obligations under this loan agreement are also guaranteed by the UPREIT.

Genworth Loan Agreement

On April 3, 2013, four wholly-owned subsidiaries of the UPREIT, (collectively, the “Borrowers”) entered into mortgage loan agreements with Genworth Life Insurance Company (the “Lender”), in the aggregate principal amount of $29.5 million (the “Loans”). The Loans bear interest at a rate of 3.20% and mature on April 30, 2018. The Loans were evidenced by promissory notes of $14.4 million (the “New York Note”) and $15.1 million (the “New Jersey Note”), hereinafter referred to as the (“Notes”).

The New York Note requires 12 monthly payments of interest only starting June 1, 2013. On June 1, 2014, monthly payments of principal and interest in the amount of approximately $70,000 are required until the note becomes due and payable.

The New Jersey Note requires 12 monthly payments of interest starting June 1, 2013. On June 1, 2014, monthly payments of principal and interest in the amount of approximately $73,000 are required until such New Jersey Note becomes due and payable.

The Notes are secured by, among other things, property owned by the Borrowers. The proceeds from the Loans were used to satisfy in full the Borrowers’ obligations to John Hancock Life Insurance Company under a prior mortgage agreement.

As a condition to Lender entering into the Loan Agreements, the Borrowers and the UPREIT agreed to indemnify the Lender against certain claims and guaranty certain obligations of the Borrowers pursuant to certain Environmental Indemnity Agreements (the “Environmental Indemnities”). Certain obligations under the Loan Agreements are guaranteed by the UPREIT. In connection with the loan agreements, the Borrowers are required to comply with certain covenants. As of September 30, 2013, the Borrowers were in compliance with all covenants.

 

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Loan Assumptions:

Each of the Acquired Properties discussed above was and continues to be encumbered by certain mortgage indebtedness. Concurrent with the acquisition of these properties, the Company, the UPREIT and the entity owners of the Acquired Properties entered into certain loan assumption and modification documents to facilitate the acquisition of the Acquired Properties. Below is a summary of the material terms of the arrangement with each lender.

United States Life Insurance Company Loan:

Six wholly-owned subsidiaries of the UPREIT (collectively, the “USLIC Borrowers”) previously entered into mortgage loans with The United States Life Insurance Company in the City of New York (“USLIC”), in the aggregate original principal amount of $23.5 million (the USLIC Mortgage Loan”).

The USLIC Mortgage Loan is secured by the properties owned by the USLIC Borrowers and bears interest at a rate of 5.76%. The Company is required to make payments of principal and interest until the loan matures on April 1, 2018. USLIC has the option of extending the terms of the USLIC Mortgage Loan for an additional five (5) years based on a new market interest rate and a new amortization period. After September 8, 2014, the USLIC Mortgage Loan may be prepaid subject to a prepayment fee. The obligations under this loan agreement are also guaranteed by GTJ REIT.

John Hancock Loan:

Seventeen wholly-owned subsidiaries of the UPREIT (collectively, the “John Hancock Borrowers”), entered into a mortgage loan with John Hancock Life Insurance Company (U.S.A.), in the aggregate original principal amount of $105 million (the “John Hancock Loan”) which was made pursuant to a loan agreement. The John Hancock Loan is secured by mortgages covering the properties owned by the John Hancock Borrowers. The obligations under this loan agreement are also guaranteed by GTJ REIT.

A portion of the John Hancock Loan matured on March 1, 2013 (the “5 Year Notes”) and was refinanced as part of the Genworth Loan Agreement discussed above. The $61 million remaining portion of the John Hancock Loan matures on March 1, 2018 (the “10 Year Notes”). The 5 Year Notes bore interest at a rate of 5.44%. The 10 Year Notes bear interest at 6.17%. The 5 Year Notes were interest only with a fixed monthly payment. The 10 Year Notes are interest only for the first five (5) years; for years 6 through 10, payments are of principal and interest. After a certain “Lockout Period”, the John Hancock Mortgage Loan may be prepaid subject to a prepayment fee.

People’s United Bank Loan:

Wu/LH 15 Progress Drive L.L.C. (the “PUB Borrower”) entered into a $2.7 million mortgage loan with Peoples United Bank, a Federal savings bank, on September 30, 2010. The loan is secured by the properties located at 15 Progress Road and 30 Commerce Drive, Shelton, Connecticut and bears interest at a rate of 5.23%. The Company is required to make monthly payments of principal and interest until the loan matures on October 1, 2020. The obligations under this loan agreement are also guaranteed by GTJ REIT.

M&T Financing Agreement:

On August 26, 2011, the Company and Manufacturers and Traders Trust Company (“M&T”) entered into a certain credit agreement which provided for, among other things, a $10.0 million revolving credit facility (the “Revolver”). The Revolver was available to us for acquisitions and for general working capital and other corporate purposes. Our obligations under this credit agreement were satisfied in full on February 22, 2013 and the Revolver was cancelled.

Net Cash Flows:

Nine Months Ended September 30, 2013 vs. Nine Months Ended September 30, 2012

Operating Activities

Net cash provided by operating activities was approximately $3.3 million for the nine months ended September 30, 2013, and approximately $3.0 million for the nine months ended September 30, 2012. For the 2013 period, cash provided by operating activities was primarily related to (i) cash flow from operations $5.8 million, (ii) increases in accounts payable, accrued expenses and other liabilities totaling $2.3 million and (iii) offset by decreases in rental income in excess of amount billed of $2.8 million and other assets $2.0 million. For the 2012 period, cash provided by operating activities was primarily related to (i) an increase in other liabilities of $0.2 million, offset by (ii) a decrease in other assets of $1.2 million.

 

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Investing Activities

Net cash used in investing activities was approximately $2.2 million for the nine months ended September 30, 2013 and approximately $4.0 million for the nine months ended September 30, 2012. For the 2013 period, cash used in investing activities primarily related to acquisition of real estate of $1.7 million and deal pursuit costs of $0.5 million. For the 2012 period, cash used in investing activities related to tenant improvements.

Financing Activities

Net cash provided by (used in) financing activities was approximately $3.8 million and $(0.1) million, respectively, for the nine months ended September 30, 2013 and 2012. For the 2013 period, cash provided by financing activities was primarily related to proceeds from (i) mortgage notes payable of $16.8 million offset by (ii) repayment of our revolving credit facility of $5.0 million (iii) payment of distributions to noncontrolling interests in the UPREIT of $2.6 million and (iv) payment of the Company’s quarterly and supplemental dividends of $4.6 million. For the 2012 period, cash used in financing activities was related to proceeds from the revolving credit facility offset by the payment of the Company’s quarterly and supplemental dividends.

EBITDA and Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization)

EBITDA and Adjusted EBITDA are non-GAAP financial measures. Our EBITDA and Adjusted EBITDA computation may not be comparable to EBITDA and Adjusted EBITDA reported by other companies that interpret the definitions of EBITDA and Adjusted EBITDA differently than we do. Management believes EBITDA and Adjusted EBITDA to be meaningful measures of a REIT’s performance because they are widely followed by industry analysts, lenders and investors and are used by management as measures of performance. EBITDA and Adjusted EBITDA should be considered along with, but not as alternatives to, net income as measures of our operating performance:

Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Net income (loss) attributable to common stockholders

   $ 1,353      $ (2,754   $ (6,619   $ (4,385

Real estate depreciation

     866        260        2,598        830   

Interest expense

     1,469        594        4,475        1,743   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     3,688        (1,900     454        (1,812

Wu/Lighthouse transaction costs

     (125     589        5,133        1,542   

Amortization of intangible assets and deferred costs

     571        189        2,149        824   

Discontinued operations

     311        4,181        4,120        7,138   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 4,445      $ 3,059      $ 11,856      $ 7,692   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 (loss) 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 (loss) computed in accordance with GAAP; excluding gains or losses from sales of property excluding asset impairments, 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.

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.

 

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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 loss in accordance with GAAP to FFO and AFFO for the three and nine months ended September 30, 2013 and 2012 (in thousands, except for per share data):

Reconciliation of Net Loss to FFO and AFFO.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Net income (loss) attributable to common stockholders

   $ 1,353      $ (2,754   $ (6,619   $ (4,385

Add (deduct) NAREIT defined adjustments

        

real estate depreciation

     866        260        2,598        830   

amortization of intangibles

     582        68        2,221        477   

amortization of deferred leasing commissions

     39        40        116        108   

loss from discontinued operations

     311        4,181        4,120        7,138   
  

 

 

   

 

 

   

 

 

   

 

 

 

Funds From Operations (“FFO”), as defined by NAREIT

     3,151        1,795        2,436        4,168   

Adjustments to arrive at Core FFO

        

Wu/Lighthouse acquisition related costs

     (125     589        5,133        1,542   
  

 

 

   

 

 

   

 

 

   

 

 

 

Core FFO, as defined by GTJ REIT, Inc.

     3,026        2,384        7,569        5,710   

Adjustments to arrive at Adjusted FFO (“AFFO”):

        

straight-lined rents and amortization of lease intangibles

     (804     (289     (1,939     (661

amortization of debt mark to market adjustments and financing costs

     (51     81        (188     238   
  

 

 

   

 

 

   

 

 

   

 

 

 

AFFO

   $ 2,171      $ 2,176      $ 5,442      $ 5,287   
  

 

 

   

 

 

   

 

 

   

 

 

 

FFO per common share- basic and diluted

   $ 0.23      $ 0.13      $ 0.18      $ 0.31   

Core FFO per common share- basic and diluted

   $ 0.22      $ 0.17      $ 0.55      $ 0.42   
  

 

 

   

 

 

   

 

 

   

 

 

 

AFFO per common share- basic and diluted

   $ 0.16      $ 0.16      $ 0.40      $ 0.39   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding- basic and diluted

     13,678,704        13,648,084        13,664,354        13,620,538   
  

 

 

   

 

 

   

 

 

   

 

 

 

Acquisitions, Dispositions, and Investments

On January 17, 2013, the Company closed on a transaction with Wu/Lighthouse Portfolio, LLC effective as of January 1, 2013, in which a limited partnership (the “UPREIT”) owned and controlled by the Company, acquired all outstanding ownership interests of a portfolio consisting of 25 commercial properties located in New York, New Jersey and Connecticut, in exchange for 33.29% of the outstanding limited partnership interests in the UPREIT. The acquisition of the properties was recorded as a business combination and accordingly the purchase price was allocated to the assets acquired and liabilities assumed at fair value. As a result of this acquisition the Company currently beneficially owns a 66.71% interest in a total of 32 properties (including the seven previously-owned properties) consisting of over 2.4 million square feet of office and industrial properties on 210 acres of land in New York, New Jersey, and Connecticut. At September 30, 2013, subject to certain anti-dilutive and other provisions contained in the governing agreements, the limited partnership interests in the UPREIT may be convertible in the aggregate, into approximately 1.8 million shares of the Company’s common stock and approximately 5.0 million shares of preferred stock.

On May 2, 2013, Shelter Express Corp., a wholly owned subsidiary of the Company, completed the sale of all of the issued and outstanding stock of Shelter Electric Maintenance Corp. (“SEM”). As a result of the sale, the Company recorded a loss on sale of $0 million and $1.9 million, respectively, for the three and nine months ended September 30, 2013. The operations of SEM are included as part of discontinued operations on the accompanying condensed consolidated financial statements.

Cash Payments for Financing

Payment of interest under our mortgage notes payable will consume a portion of our cash flow, reducing net income and the resulting distributions to be made to our stockholders.

 

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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.

Insurance

The provisions of the Insurance Law of the Cayman Islands require our captive insurance entity to maintain a minimum net worth of $120,000. At September 30, 2013 and December 31, 2012, we were not in compliance with this minimum net worth requirement. A waiver has been provided due to our intention to transfer the insurance balances into a liquidating trust and dissolve our Cayman Islands based insurance operations once the transfer is complete. As of September 30, 2013, we are in the process of transferring the insurance balances into a liquidating trust.

In June 2013, we received an insurance settlement of $1.2 million relating to a fire that had occurred at one of our properties in 2006. The gain is included as a component of other income in the accompanying condensed consolidated statements of operations.

Divestiture

In connection with the completion of the divestiture of our taxable REIT subsidiaries, we may be subject to certain liabilities including union wages, benefits and severance. On January 27, 2012, we received a notice from counsel for Local Union No. 3 of the International Brotherhood of Electrical Workers asserting a severance liability of approximately $0.1 million for certain employees terminated in connection with the divestiture of the subsidiary. An arbitration hearing was held May 2, 2012 in which the arbitrator ruled in favor of the Union in the amount of approximately $0.1 million. We paid the amount owed on July 13, 2013. In March 2013, the Company received a second notice regarding union wages and severance for an additional group of employees who were terminated in connection with the divestiture. We were not in agreement with the assertion and have retained counsel to contest this matter. The costs associated with these potential liabilities are not currently estimable.

On February 16, 2012, we received a notice from the Joint Industry Board of the Electrical Industry claiming a pension withdrawal liability in the amount of $1.5 million in connection with the divestiture. The Company determined the liability was probable and the Company agreed to pay the obligation in monthly installments of approximately $8,000 over a twenty year term. As of September 30, 2013, the present value of this obligation of approximately $1.3 million is included in other liabilities on our condensed consolidated balance sheet.

Inflation

Low to moderate levels of inflation during the past several years have favorably impacted our operations by stabilizing operating expenses and borrowing costs. 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.

Off Balance Sheet Arrangements

As part of our electrical contracting operations, we were required in certain cases to put up performance bonds to guarantee completion of services to be performed. In May 2013, we completed the sale of our electrical contracting operations and are currently in the process of obtaining the release of the three performance bonds.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of September 30, 2013 and December 31, 2012, 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.

 

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Internal Control Over Financial Reporting

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

Part II – Other Information

 

Item I. Legal Proceedings

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

 

Item 1A. Risk Factors

During the nine months ended September 30, 2013, 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, 2012.

 

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

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

None.

 

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.
101.1    Financial statements from the Quarterly Report on Form 10-Q of GTJ REIT, Inc. for the quarter ended September 30, 2013, filed on November 5, 2013, formatted in XBRL: (i) the Condensed Consolidated Balance Sheet, (ii) the Condensed Consolidated Statement of Operations, (iii) the Condensed Consolidated Statement of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statement of Stockholders’ Equity, (v) the Condensed Consolidated Statement of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements.

 

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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:   November 5, 2013    

/s/ Paul Cooper

      Paul Cooper
      Chief Executive Officer
Dated:   November 5, 2013    

/s/ Joel Hammer

      Joel Hammer
      Chief Financial Officer

 

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