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EX-31.1 - EX-31.1 - GTJ REIT, INC.ck0001368757-ex311_9.htm
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EX-32.2 - EX-32.2 - GTJ REIT, INC.ck0001368757-ex322_6.htm
EX-32.1 - EX-32.1 - GTJ REIT, INC.ck0001368757-ex321_8.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended September 30, 2015

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: 13,788,674 shares of common stock as of November 11, 2015.

 

 

 

 

 


GTJ REIT, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2015

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets at September 30, 2015 (Unaudited) and December 31, 2014

2

 

 

 

 

Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2015 and 2014

3

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2015

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2015 and 2014

5

 

 

 

 

Notes to the Consolidated Financial Statements (Unaudited)

6

 

 

 

Item 2.

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

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

 

 

 

Item 4.

Controls and Procedures

24

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

25

 

 

 

Item 1A.

Risk Factors

25

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

 

 

 

Item 3.

Defaults Upon Senior Securities

25

 

 

 

Item 4.

Mine Safety Disclosures

25

 

 

 

Item 5.

Other Information

25

 

 

 

Item 6.

Exhibits

26

 

 

Signatures

28

 

 

 

1


GTJ REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

 

 

September 30,

 

 

December 31,

 

 

2015

 

 

2014

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Real estate, at cost:

 

 

 

 

 

 

 

Land

$

187,943

 

 

$

171,958

 

Buildings and improvements

 

253,126

 

 

 

196,290

 

Total real estate, at cost

 

441,069

 

 

 

368,248

 

Less: accumulated depreciation and amortization

 

(34,211

)

 

 

(28,317

)

Net real estate held for investment

 

406,858

 

 

 

339,931

 

Cash and cash equivalents

 

14,830

 

 

 

8,299

 

Rental income in excess of amount billed

 

14,718

 

 

 

13,747

 

Acquired lease intangible assets, net

 

16,950

 

 

 

15,619

 

Assets of discontinued operations

 

246

 

 

 

139

 

Other assets

 

19,232

 

 

 

17,022

 

Total assets

$

472,834

 

 

$

394,757

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Mortgage notes payable

$

342,711

 

 

$

201,280

 

Revolving credit facility

 

 

 

 

43,841

 

Accounts payable and accrued expenses

 

2,019

 

 

 

1,751

 

Dividends payable

 

1,241

 

 

 

1,098

 

Acquired lease intangible liabilities, net

 

7,086

 

 

 

7,846

 

Liabilities of discontinued operations

 

1,720

 

 

 

2,098

 

Other liabilities

 

4,126

 

 

 

4,178

 

Total liabilities

 

358,903

 

 

 

262,092

 

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; 13,788,674 and

   13,729,228 shares  issued and outstanding at September 30, 2015 and December 31,

   2014, respectively

 

1

 

 

 

1

 

Additional paid-in capital

 

139,321

 

 

 

138,857

 

Distributions in excess of net income

 

(94,662

)

 

 

(82,069

)

Total stockholders’ equity

 

44,660

 

 

 

56,789

 

Noncontrolling interest

 

69,271

 

 

 

75,876

 

Total equity

 

113,931

 

 

 

132,665

 

Total liabilities and equity

$

472,834

 

 

$

394,757

 

 

 

 

 

 

 

 

 

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

 

 

 

2


GTJ REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Nine Months Ended September 30, 2015 and 2014

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

 

 

Three Months Ended,

 

 

Nine Months Ended,

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

$

10,272

 

 

$

8,664

 

 

$

29,876

 

 

$

24,434

 

Tenant reimbursements

 

2,044

 

 

 

1,464

 

 

 

5,797

 

 

 

4,423

 

Total revenues

 

12,316

 

 

 

10,128

 

 

 

35,673

 

 

 

28,857

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

2,317

 

 

 

1,916

 

 

 

7,141

 

 

 

5,805

 

General and administrative

 

1,152

 

 

 

1,054

 

 

 

4,903

 

 

 

4,963

 

Acquisition costs

 

 

 

 

353

 

 

 

614

 

 

 

936

 

Depreciation and amortization

 

3,250

 

 

 

2,360

 

 

 

9,234

 

 

 

6,980

 

Total expenses

 

6,719

 

 

 

5,683

 

 

 

21,892

 

 

 

18,684

 

Operating income

 

5,597

 

 

 

4,445

 

 

 

13,781

 

 

 

10,173

 

Interest expense

 

(3,607

)

 

 

(2,650

)

 

 

(10,333

)

 

 

(7,151

)

Loss on extinguishment of debt

 

 

 

 

 

 

 

(14,876

)

 

 

 

Other

 

3

 

 

 

(100

)

 

 

(42

)

 

 

(27

)

Income (loss) from continuing operations

 

1,993

 

 

 

1,695

 

 

 

(11,470

)

 

 

2,995

 

Discontinued Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

5

 

 

 

(130

)

 

 

(107

)

 

 

(181

)

Net income (loss)

 

1,998

 

 

 

1,565

 

 

 

(11,577

)

 

 

2,814

 

Less: Net income (loss) attributable to noncontrolling interest

 

585

 

 

 

545

 

 

 

(3,945

)

 

 

944

 

Net income (loss) attributable to common stockholders

$

1,413

 

 

$

1,020

 

 

$

(7,632

)

 

$

1,870

 

Income (loss) per common share attributable to common

   stockholders - basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, net of noncontrolling

   interest

$

0.10

 

 

$

0.08

 

 

$

(0.55

)

`

$

0.15

 

Income (loss) from discontinued operations

$

0.00

 

 

$

(0.01

)

 

$

0.00

 

 

$

(0.01

)

Net income (loss) attributable to common stockholders

$

0.10

 

 

$

0.07

 

 

$

(0.55

)

 

$

0.14

 

Weighted average common shares outstanding – basic and diluted

 

13,788,674

 

 

 

13,729,521

 

 

 

13,765,326

 

 

 

13,700,638

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

3


GTJ REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2015

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

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

Distributions

 

 

Total

 

 

 

 

 

 

 

 

 

 

Preferred

 

 

Outstanding

 

 

Par

 

 

Additional-

 

 

in Excess of

 

 

Stockholders’

 

 

Noncontrolling

 

 

 

 

 

 

Stock

 

 

Shares

 

 

Value

 

 

Paid-In-Capital

 

 

Net Income

 

 

Equity

 

 

Interest

 

 

Total Equity

 

Balance at December 31, 2014

$

 

 

 

13,729,228

 

 

$

1

 

 

$

138,857

 

 

$

(82,069

)

 

$

56,789

 

 

$

75,876

 

 

$

132,665

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,961

)

 

 

(4,961

)

 

 

 

 

 

(4,961

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

464

 

 

 

 

 

 

464

 

 

 

 

 

 

464

 

Net issuance of restricted shares

 

 

 

 

59,446

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,660

)

 

 

(2,660

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,632

)

 

 

(7,632

)

 

 

(3,945

)

 

 

(11,577

)

Balance at September 30, 2015

$

 

 

 

13,788,674

 

 

$

1

 

 

$

139,321

 

 

$

(94,662

)

 

$

44,660

 

 

$

69,271

 

 

$

113,931

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

4


GTJ REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2015 and 2014

(Unaudited, amounts in thousands)

 

 

Nine Months Ended,

 

 

September 30,

 

 

2015

 

 

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net (loss) income

$

(11,577

)

 

$

2,814

 

Loss from discontinued operations

 

107

 

 

 

181

 

Net (loss) income from continuing operations

 

(11,470

)

 

 

2,995

 

Adjustments to reconcile net (loss) income from continuing operations to net cash

   provided by operating activities

 

 

 

 

 

 

 

Depreciation

 

5,963

 

 

 

4,292

 

Amortization of intangible assets and deferred charges

 

3,389

 

 

 

1,874

 

Stock-based compensation

 

464

 

 

 

300

 

Loss on extinguishment of debt

 

14,876

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Rental income in excess of amount billed

 

(971

)

 

 

(1,385

)

Other assets

 

770

 

 

 

(531

)

Accounts payable and accrued expenses

 

267

 

 

 

(149

)

Other liabilities

 

(123

)

 

 

(1,328

)

Net cash provided by operating activities

 

13,165

 

 

 

6,068

 

Cash flow from investing activities:

 

 

 

 

 

 

 

Cash paid for property acquisitions

 

(76,170

)

 

 

(40,697

)

Cash paid for property improvements

 

(1,609

)

 

 

(2,220

)

Deal pursuit costs

 

 

 

 

 

(1,045

)

Restricted Cash

 

(1,503

)

 

 

 

Net cash used in investing activities

 

(79,282

)

 

 

(43,962

)

Cash flow from financing activities:

 

 

 

 

 

 

 

Proceeds from mortgage notes payable

 

272,200

 

 

 

13,033

 

Financing costs on debt

 

(6,588

)

 

 

 

Return of good faith deposit for mortgage note payable

 

3,097

 

 

 

 

Repayment due to extinguishment of mortgage debt

 

(143,363

)

 

 

 

Payment of mortgage principal

 

(860

)

 

 

(853

)

Repayment of revolving credit facility

 

(55,941

)

 

 

 

Proceeds from revolving credit facility

 

12,100

 

 

 

29,818

 

Cash distributions to noncontrolling interests

 

(2,588

)

 

 

(1,777

)

Cash dividends paid

 

(4,818

)

 

 

(3,556

)

Net cash provided by financing activities

 

73,239

 

 

 

36,665

 

Cash flow from discontinued operations:

 

 

 

 

 

 

 

Operating activities

 

(591

)

 

 

(92

)

Net increase (decrease) in cash and cash equivalents

 

6,531

 

 

 

(1,321

)

Cash and cash equivalents at the beginning of period

 

8,299

 

 

 

6,323

 

Cash and cash equivalents at the end of period

$

14,830

 

 

$

5,002

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

$

9,485

 

 

$

7,019

 

 

 

 

 

 

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

 

 

 

 

5


GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(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 on the acquisition, ownership, management, and operation of commercial real estate located in the New York, New Jersey and Connecticut.

The Company elected to be treated as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended. 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.

On January 17, 2013, the Company closed on a transaction with Wu/Lighthouse Portfolio, LLC, in which a limited partnership (the “Operating Partnership”) 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 Operating Partnership. The outstanding limited partnership interest was increased to 33.78% due to post-closing adjustments. 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. At September 30, 2015, subject to certain anti-dilutive and other provisions contained in the governing agreements, the limited partnership interests in the Operating Partnership may be convertible in the aggregate, into approximately 1.9 million shares of the Company’s common stock and approximately 5.1 million shares of Series B preferred stock.

As of September 30, 2015, the Operating Partnership owned 45 properties consisting of approximately 5.3 million square feet of office and industrial space on 335 acres of land in New York, New Jersey, and Connecticut.

Prior to 2013, the Company operated a group of outdoor maintenance, shelter cleaning, and electrical contracting businesses, as well as a parking garage facility. During 2011, the Board voted to divest these operations which were sold in 2012 and 2013. Accordingly, the operations of these entities, including any impact of insurance claims associated with those entities, are reported as discontinued operations in the condensed consolidated statements of operations.

 

 

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 Operating Partnership, as the Company makes all operating and financial decisions for (i.e., exercises control over) the Operating Partnership. All material intercompany transactions have been eliminated. The ownership interests of the other investors in the Operating Partnership are presented as non-controlling interests.

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, 2014, audited consolidated financial statements, as previously filed with the SEC on Form 10-K on March 27, 2015, and other public information.

Certain reclassifications of prior period amounts have been made in the financial statements in order to conform to the 2015 presentation.

 

6


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, collectability 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 value of the real estate purchased is allocated to the acquired tangible assets (generally consisting of land, buildings and building improvements, and tenant 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 liabilities of an acquired property, the value of above-market and below-market leases is estimated based on the differences between contractual rentals and 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. Fixed-rate-renewal options have been included in the calculation of the fair value of acquired leases where applicable.  The aggregate value of in-place leases is measured based on the avoided costs associated with lack of revenue over market oriented lease-up period, the avoided leasing commissions, and other avoided costs common in similar leasing transactions.

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 terminates its lease 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 increase of approximately $0.3 million for the nine months ended September 30, 2015.

As of September 30, 2015, above-market and in-place leases of approximately $2.6 million and $14.4 million (net of accumulated amortization), respectively, are included in acquired lease intangible assets, net in the accompanying condensed consolidated balance sheets. As of December 31, 2014, above-market and in-place leases of approximately $2.5 million and $13.1 million (net of accumulated amortization), respectively, are included in the acquired lease intangible assets, net in the accompanying condensed consolidated balance sheets. As of September 30, 2015, and December 31, 2014, approximately $7.1 million and $7.8 million, respectively, (net of accumulated amortization) relating to below-market leases are included in acquired lease intangible liabilities, net in the accompanying condensed consolidated balance sheets.

7


The following table presents the projected impact for the remainder of 2015, the next five years and thereafter related to the net 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, 2015 (in thousands):

 

 

 

 

 

 

Increase to

 

 

Net increase to

 

 

amortization

 

 

rental revenues

 

 

expense

 

Remainder of 2015

$

69

 

 

$

837

 

2016

 

464

 

 

 

2,649

 

2017

 

357

 

 

 

2,018

 

2018

 

379

 

 

 

1,853

 

2019

 

464

 

 

 

1,480

 

2020

 

564

 

 

 

1,151

 

Thereafter

 

2,160

 

 

 

4,440

 

 

$

4,457

 

 

$

14,428

 

 

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.

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 the assessment is made. Management has determined that there were no indicators of impairment relating to its long-lived assets at September 30, 2015.

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. These deferred charges are included in other assets on the consolidated balance sheets.

Reportable Segments:

The Company operates in one reportable segment, commercial real estate.

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 tenant 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, subject to certain maximums and minimums.

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.

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.

8


Earnings Per Share Information:

The Company presents both basic and diluted earnings (loss) per share. Basic earnings (loss) per share excludes dilution and is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) 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 (loss) per share and stock option awards were excluded from the computation of diluted earnings (loss) 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 reserves used to pay real estate taxes, insurance, and tenant improvements. At September 30, 2015 and December 31, 2014, the Company had restricted cash in the amount of $2.6 million and $1.0 million, respectively, which was included in other assets on the condensed consolidated balance sheets.

Fair Value Measurement:

The Company determines fair value in accordance with ASC Topic 820, “Fair Value Measurement.” 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.

9


ASC 740-10-65 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10-65, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740-10-65 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of September 30, 2015, and December 31, 2014, the Company had determined that no liabilities are required in connection with uncertain tax positions. As of September 30, 2015, the Company’s tax returns for the prior three years are subject to review by the Internal Revenue Service.

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 deposited at an insured depository institution are insured by the Federal Deposit Insurance Corporation up to the standard maximum deposit amount of $250,000. 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, “Compensation – Stock Compensation,” 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.

New Accounting Pronouncements

In September 2015, the FASB issued ASU No. 2015-16, “Business Combination (Topic 805): Simplifying the Accounting for Measurement Period Adjustments.” ASU 2015-16 requires adjustments to provisional amounts that are identified during the measurement period to be recognized in the reporting period in which the adjustment amounts are determined. This includes any effect on earnings of changes in depreciation, amortization, or other income effects as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. ASU 2015-16 requires an entity to disclose the nature and amount of measurement-period adjustments recognized in the current period, including separately the amounts in current-period income statement line items that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal periods and interim periods within those fiscal periods beginning after December 15, 2015. The adoption of ASU 2015-16 is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2015, the FASB issued ASU 2015-15, “Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.” ASU 2015-15 clarifies that an entity can defer and present debt issuance costs related to line-of-credit arrangements as an asset that can subsequently be amortized ratably over the team of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-15 is effective for fiscal periods and interim periods within those fiscal periods beginning after December 15, 2015. The adoption of ASU 2015-15 is not expected to have a material impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” ASU 2015-03 is intended to simplify the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03.  ASU 2015-03 is effective for fiscal periods and interim periods within those fiscal periods beginning after December 15, 2015. The adoption of ASU 2015-03 is not expected to have a material impact on the Company’s consolidated financial statements.

10


In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810) – Amendments to the Consolidation Analysis.” ASU 2015-02 amends the consolidation requirements in Accounting Standards Codification (“ASC”) 810 “Consolidation” and changes the required consolidation analysis.  The amendments in ASU No. 2015-02 affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. The amendments impact limited partnerships and legal entities, the evaluation of fees paid to a decision maker or service provider of a variable interest, the effect of fee arrangements on the primary beneficiary determination, the effect of related parties on the primary beneficiary determination, and certain investment funds.  ASU No. 2015-02 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The Company is currently evaluating the impact of its pending adoption of ASU 2015-02 on its consolidated financial statements.  

In January 2015, the FASB issued ASU No. 2015-01, “Income Statement – Extraordinary and Unusual Items.” ASU 2015-01 eliminates the concept of extraordinary items.  However, the presentation and disclosure requirements for items that are either unusual in nature of infrequent in occurrence remain and will be expanded to include items that are both unusual in nature and infrequent in occurrence. ASU 2015-01 is effective for periods beginning after December 15, 2015.  The adoption of ASU 2015-01 is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.”  The amendments in ASU 2014-15 are intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamentals of measuring and classifying assets and liabilities. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations in financial statement footnotes. This accounting standard is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016.  Early adoption is permitted.  The Company is currently evaluating the impact of its pending adoption of ASU 2014-15 on its consolidated financial statements.

During June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments when the Terms of an Award Profile That a Performance Target Could be Achieved after the Requisite Service Period.” ASU 2014-12 provides explicit guidance on how to account for share-based payments that require a specific performance target to be achieved which may be achieved after an employee completes the requisite service period. ASU 2014-12 is effective for periods beginning after December 15, 2015 and may be applied either prospectively or retrospectively. The adoption of ASU 2014-12 is not expected to have a material impact on the Company’s consolidated financial statements.

During May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transaction methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact of its pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which the standard will be adopted in 2018.

In April 2014, the FASB issued 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The amendments in ASU 2014-08 change the criteria for reporting a discontinued operation and require new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. Only disposals representing a strategic shift in operations should be presented as discontinued operations. This accounting standards update is effective for annual filings beginning on or after December 15, 2014. Early adoption is permitted.  The adoption of ASU 2014-08 has had no impact to the Company in 2015.  The impact of the adoption of ASU 2014-08 on the Company’s results of operations, financial position, cash flows and disclosures will be based on the Company’s future disposal activity.

 

 

11


3. REAL ESTATE:

 

On January 20, 2015, the Company acquired a 92,500 square foot single story office/flex/warehouse building located on 12 acres of land in Rocky Hill, CT for $12.4 million.  The purchase was financed from the Company’s revolving credit facility with Capital One, N.A. Permanent financing of $8.0 million closed in February 2015 as part of the $233.1 million financing with American General Life Insurance Company and affiliates described in further detail in Note 5. The permanent financing is for a 10-year term loan maturing March 1, 2025, that requires interest only payments at the rate of 4.05% per annum.

On March 13, 2015, the Company completed the acquisition of six properties totaling approximately 681,754 square feet in Piscataway, NJ.  The aggregate net purchase price including closing costs was $64.6 million.  The acquisition was funded from a combination of $25.5 million from the net proceeds of the Company’s February 20, 2015, AIG Loan and the remaining $39.1 million from a cross-collateralized mortgage (the “Allstate Loan”) from Allstate Life Insurance Company, Allstate Life Insurance Company of New York and American Heritage Life Insurance Company. The Allstate Loan Agreement provided a secure facility with a 10-year term loan. During the first three years of the term of the loan, it requires interest only payments at the rate of 4% per annum. Following this interest-only period until the loan matures on April 1, 2025, payments will be based on a 30-year amortization schedule.

The acquired assets and liabilities associated with the Rocky Hill and Piscataway properties are based upon management’s best available information at the time of the preparation of the condensed consolidated financial statements. However, the business acquisition accounting for these properties are not complete and accordingly, such estimates of the value of acquired assets and liabilities are provisional until the valuations are finalized. Therefore, the provisional measurements of fair value reflected are subject to change and such changes could be significant. The Company expects to finalize the valuations and complete the purchase price allocations as soon as practical, but no later than one year from the respective acquisition dates.

 

 

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”).

The following table sets forth the detail of the Company’s income (loss) from discontinued operations for the three and nine months ended September 30, 2015 and 2014, respectively (in thousands):

 

 

Three  Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenues from discontinued operations

$

 

 

$

 

 

$

 

 

$

 

Income (loss) from discontinued operations

$

5

 

 

$

(130

)

 

$

(107

)

 

$

(181

)

 

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

 

 

September 30,

 

 

December 31,

 

 

2015

 

 

2014

 

Assets:

 

 

 

 

 

 

 

Cash

$

244

 

 

$

138

 

Accounts receivable, net

 

2

 

 

 

1

 

 

$

246

 

 

$

139

 

Liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

$

14

 

 

$

13

 

Insurance reserve

 

407

 

 

 

741

 

Pension withdrawal liability

 

1,274

 

 

 

1,320

 

Other liabilities

 

25

 

 

 

24

 

 

$

1,720

 

 

$

2,098

 

 

 

 

12


5. MORTGAGE NOTES PAYABLE:

The following table sets forth a summary of the Company’s mortgage notes payable (in thousands):

 

 

 

 

 

 

 

Principal

 

 

Principal

 

 

 

 

 

 

 

 

 

Outstanding as of

 

 

Outstanding as of

 

 

 

Loan

 

Interest Rate

 

 

September 30, 2015

 

 

December 31, 2014

 

 

Maturity

Hartford Life Insurance Company

 

 

5.05

%

 

$

 

 

$

45,500

 

 

7/1/2017

Athene Annuity & Life Company

 

 

3.00

%

 

 

15,000

 

 

 

15,000

 

 

3/1/2018

John Hancock Life Insurance Company

 

 

6.17

%

 

 

 

 

 

61,834

 

 

3/1/2018

Genworth Life Insurance Company

 

 

3.20

%

 

 

28,450

 

 

 

29,046

 

 

4/30/2018

People’s United Bank

 

 

5.23

%

 

 

2,410

 

 

 

2,459

 

 

10/1/2020

United States Life Insurance Company

 

 

5.76

%

 

 

 

 

 

22,710

 

 

4/1/2018

Hartford Accident & Indemnity Company

 

 

6.07

%

 

 

9,151

 

 

 

9,231

 

 

3/1/2020

People’s United Bank

 

 

4.18

%

 

 

15,500

 

 

 

15,500

 

 

10/15/2024

American International Group

 

 

4.05

%

 

 

233,100

 

 

 

 

 

3/1/2025

Allstate Corporation

 

 

4.00

%

 

 

39,100

 

 

 

 

 

4/1/2025

 

 

 

 

 

 

$

342,711

 

 

$

201,280

 

 

 

 

Mortgage notes payable includes $0.2 million of premium on the debt assumed in connection with the acquisition of the Windsor Locks, CT property in April 2014. The premium is being amortized as a reduction to interest expense over the life of the underlying debt.

 

AIG Loan Agreement

 

On February 20, 2015 (the “Closing Date”), the Company refinanced the current outstanding debt on certain properties and placed new financing on others by entering into a Loan Agreement (the “Loan Agreement”) with American General Life Insurance Company, the Variable Life Insurance Company, the United States Life Insurance Company in the City of New York, American Home Assurance Company and Commerce and Industry Insurance Company.  

 

The Loan Agreement provides a secured loan in the principal amount of $233.1 million (the “AIG Loan”). The AIG Loan is a 10-year term loan that requires interest only payments at the rate of 4.05% per annum. During the period from April 1, 2015, to February 1, 2025, payments of interest only will be payable in arrears with the entire principal balance plus any accrued and unpaid interest due and payable on March 1, 2025. The Company’s obligation to pay the interest, principal and other amounts under the Loan Agreement are evidenced by the secured promissory notes executed on the Closing Date (the “Notes”). The Notes are secured by certain mortgages encumbering 28 properties in New York, New Jersey and Connecticut. Using the proceeds available under the AIG Loan, the Company repaid approximately $199.9 million of its outstanding indebtedness and fees including (i) $68.6 million to John Hancock Life Insurance Company, (ii) $56.0 million to Capital One, N.A., (iii) $50.2 million to Hartford Accident and Indemnity Company, and (iv) $25.1 million to United States Life Insurance Company thereby paying off and terminating those obligations. The loss on the extinguishment of debt of $14.9 million includes approximately $15.7 million in prepayment premiums and other fees.  

 

Allstate Loan Agreement

 

On March 13, 2015, in connection with the acquisition of six properties in Piscataway, NJ, the Company closed on a $39.1 million cross-collateralized mortgage (the “Allstate Loan”) from Allstate Life Insurance Company, Allstate Life Insurance Company of New York and American Heritage Life Insurance Company. The Allstate Loan agreement provided a secured facility with a 10-year term loan. During the first three years of the term of the loan, it requires interest only payments at the rate of 4% per annum. Following this period until the loan matures on April 1, 2025, payments will be based on a 30-year amortization schedule.

    

13


The mortgage notes payable are collateralized by certain of the properties and require monthly interest payments until maturity and are generally non-recourse. Some of the loans also require amortization of principal. Scheduled principal repayments for the remainder of 2015, the next five years and thereafter are as follows (in thousands):

 

Remainder of 2015

$

219

 

2016

 

893

 

2017

 

4,076

 

2018

 

42,108

 

2019

 

789

 

2020

 

8,825

 

Thereafter

 

285,801

 

Total

$

342,711

 

 

 

6. SECURED REVOLVING CREDIT FACILITY:

On April 8, 2014, the Company obtained a $45.0 million Line of Credit with Capital One, N.A. The capacity was increased to $60.0 million on November 20, 2014. Using proceeds available from the AIG Loan, the Company repaid the outstanding balance on the revolving credit facility of approximately $56.0 million, thereby paying off and terminating the revolving credit facility.  

 

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, 2015, the Company has a total of 13,788,674 shares issued and outstanding.

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 6,500,000 shares of Series B preferred stock, $.0001 par value per share. There are no voting rights associated with the Series B preferred stock. There was no preferred stock outstanding as of September 30, 2015, or December 31, 2014.

Dividend Distributions:

The following table presents dividends declared by the Company on its common stock during the nine months ended September 30, 2015:

 

 

 

Record

 

Payment

 

Dividend

 

 

Declaration Date

 

Date

 

Date

 

Per Share

 

 

March 26, 2015

 

March 31, 2015

 

April 15, 2015

 

$

0.09

 

(1)

March 26, 2015

 

March 31, 2015

 

April 15, 2015

 

$

0.09

 

 

June 18, 2015

 

June 30, 2015

 

July 15, 2015

 

$

0.09

 

 

August 11, 2015

 

September 30, 2015

 

October 15, 2015

 

$

0.09

 

 

 

(1)

This represents a supplemental 2014 dividend.

 

The total distributions paid in 2015 were the result of cash flows from operations.

Stock Based Compensation:

The Company has a 2007 Incentive Award Plan (the “Plan”) that has intended purposes to further the growth, development, and financial success of the Company and to obtain and retain the services of those 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. As of September 30, 2015, the Company had 386,850 shares available for future issuance of awards under the Plan.

14


On March 21, 2013, the Company issued an aggregate of 50,002 restricted shares of common stock, with a value of approximately $320,000, 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 shares vested on the grant date and the remaining shares vest in equal installments on the next three anniversary dates of the grant.

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.

On June 4, 2014, 44,704 restricted shares of common stock, with a value of approximately $304,000 (based upon an estimated value of $6.80) were granted to certain executives of the Company. One sixth of the shares vest immediately upon issuance and the remaining shares vest in equal installments on the next five anniversary dates of the grant.

On June 19, 2014, the Company issued an aggregate of 8,820 restricted shares of common stock with a value of approximately $60,000 (based upon an estimated value of $6.80 per share) under the Plan to non-managing members of the Board of Directors. The shares vested immediately upon issuance.

On March 26, 2015, the Company issued 43,010 restricted shares of common stock, with a value of approximately $400,000 (based upon an estimated value of $9.30) were granted to certain executives of the Company.  One sixth of the shares vest immediately upon issuance and the remaining shares vest in equal installments on the next five anniversary dates of the grant.

On June 19, 2015, the Company issued an aggregate of 16,436 restricted shares of common stock with a value of approximately $175,000 (based upon an estimated value of $10.65 per share) under the Plan to non-managing members of the Board of Directors. The shares vested immediately upon issuance.

Management has determined the value of a share of common stock to be $10.65 based on a valuation completed June 10, 2015 with the assistance of an independent third-party for the purpose of valuing shares of the Company’s common stock 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 nine months ended September 30, 2015 and 2014, the Company’s total stock compensation expense was approximately $464,000 and $300,000, respectively. As of September 30, 2015, there was approximately $409,000 of unamortized stock compensation related to restricted stock.

The following is a summary of restricted stock activity:

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

Grant Date Fair

 

 

Shares

 

 

Value

 

Non-vested shares outstanding as of December 31, 2014

 

34,089

 

 

$

8.74

 

New shares issued through September 30, 2015

 

59,446

 

 

$

9.67

 

Vested

 

(49,238

)

 

$

8.93

 

Non-vested shares outstanding as of September 30, 2015

 

44,297

 

 

$

9.24

 

 

The following is an amortization schedule of the total unamortized shares of restricted stock outstanding as of September 30, 2015:

 

Non-vested Shares Amortization Schedule

 

Number of Shares

 

2015 (3 months)

 

 

7,052

 

2016

 

 

18,163

 

2017

 

 

10,600

 

2018

 

 

5,890

 

2019

 

 

2,353

 

2020

 

 

239

 

Total Non-vested Shares

 

 

44,297

 

 

 

15


8. EARNINGS (LOSS) PER SHARE:

In accordance with ASC Topic 260 “Earnings Per Share,” basic earnings per common share (“Basic EPS”) is computed by dividing the net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings per common share (“Diluted EPS”) is computed by dividing net income (loss) attributable to common stockholders 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, 2015 and 2014 (in thousands, except share and per share data):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, net of

   noncontrolling interest

$

1,408

 

 

$

1,150

 

 

$

(7,525

)

 

$

2,051

 

Income (loss) from discontinued operations

 

5

 

 

 

(130

)

 

 

(107

)

 

 

(181

)

Net income (loss) attributable to common stockholders

$

1,413

 

 

$

1,020

 

 

$

(7,632

)

 

$

1,870

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding – basic

   and diluted

 

13,788,674

 

 

 

13,729,521

 

 

 

13,765,326

 

 

 

13,700,638

 

Basic and Diluted Per Share Information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share – basic and diluted

$

0.10

 

 

$

0.07

 

 

$

(0.55

)

 

$

0.14

 

 

 

9. RELATED PARTY TRANSACTIONS:

Paul Cooper is the Chief Executive Officer and Chairman of the Company. Louis Sheinker is President, Chief Operating Officer, Secretary and a director of the Company. The Company formerly was subject to 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 were managing members of the general partner. The lease was terminated on January 16, 2014 in exchange for a $150,000 termination fee paid by the Company. Additionally, Lighthouse Sixty, LP, owner of the building at 60 Hempstead Avenue, West Hempstead, NY, of which Paul Cooper and Louis Sheinker are managing members of the general partner, have a lease agreement with the Company expiring in 2020 for office and storage space at a current annual base rent of approximately $246,000 with aggregate lease payments totaling $1.8 million.

On December 11, 2013, the Company and Jerome Cooper, Chairman Emeritus, entered into a separation agreement. The agreement provides for the payment to Mr. Cooper of an aggregate of $360,000; payable in three equal annual installments of $120,000, commencing January 1, 2014. Mr. Cooper passed away on May 20, 2015. Under the terms of the separation agreement, Mr. Cooper’s heirs are entitled to receive the balance of the payments under such agreement.

On November 4, 2014, the Company invested $1.8 million for a limited partnership interest in Garden 1101 Stewart, L.P. (“Garden 1101”). Garden 1101 was formed for the purpose of acquiring a 90,000 square foot office building in Garden City, NY that will be converted to a medical office building. The general partners of Garden 1101 include the members of Green Holland Ventures; Paul Cooper, the Chief Executive Officer and Chairman of the Company and Louis Sheinker, the President and Chief Operating Officer of the Company.

Douglas Cooper, a director of the Company, is a partner of Ruskin, Moscou, Faltischek, P.C. (“RMF”), which previously   acted as counsel to the Company. Fees paid to RMF for the nine months ended September 30, 2015 and 2014, were immaterial.  Effective as of January 15, 2015, following his resignation from the offices of the Company’s Secretary and Treasurer, Douglas Cooper entered into Separation Agreement and General Release (the “Agreement”). The Agreement provides for a severance payment to Mr. Cooper in the aggregate amount of approximately $77,800.  The Severance Agreement contains other provisions that are customary in agreements of this nature.

 

 

 

16


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.

Divestiture:

The Company has a pension withdrawal liability relating to a previous divestiture. As of September 30, 2015 and December 31, 2014, the remaining liability was approximately $1.3 million, respectively, and is included in liabilities of discontinued operations on the accompanying condensed consolidated balance sheets. The liability is payable in monthly installments of approximately $8,100, including interest, over a twenty-year term ending in 2032.

 

11. FAIR VALUE:

Fair Value of Financial Instruments:

The fair value of the Company’s financial instruments are determined based upon applicable accounting guidance. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance requires disclosure of the level within the fair value hierarchy in which the fair value measurements fall, including measurements using quoted prices in active markets for identical assets or liabilities (Level 1), quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active (Level 2), and significant valuation assumptions that are not readily observable in the market (Level 3).

The fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, available-for-sale securities and secured revolving credit facility approximated their carrying value because of the short-term nature based on Level 1 inputs. The fair values of mortgage notes payable and pension withdrawal liability are based on borrowing rates available to the Company, which are Level 2 inputs. The following table summarizes the carrying values and the estimated fair values of the financial instruments (in thousands):

 

 

September 30, 2015

 

 

December 31, 2014

 

 

Carrying

 

 

Estimated

 

 

Carrying

 

 

Estimated

 

 

Value

 

 

Value

 

 

Value

 

 

Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

14,830

 

 

$

14,830

 

 

$

8,299

 

 

$

8,299

 

Accounts receivable

 

1,064

 

 

 

1,064

 

 

432

 

 

432

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

$

2,019

 

 

$

2,019

 

 

$

1,751

 

 

$

1,751

 

Revolving credit facility

 

 

 

 

 

 

 

43,841

 

 

 

43,841

 

Mortgage notes payable

 

342,711

 

 

 

343,458

 

 

 

201,280

 

 

 

202,121

 

Pension withdrawal liability

 

1,274

 

 

 

1,272

 

 

 

1,320

 

 

 

1,330

 

 

 

 

17


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 provide any assurance with respect to these or any other 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 Annual Report on Form 10-K for the year ended December 31, 2014 (or our subsequently filed public reports) 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. You should read the following discussion in conjunction with the condensed consolidated financial statements and notes appearing elsewhere in this filing and our previously filed annual audited financial statements.

Executive Summary:

GTJ REIT, Inc. is a self-administered and self-managed real estate investment trust (“REIT”) which, as of September 30, 2015, owns and operates a total of 45 properties consisting of approximately 5.3 million square feet of primarily industrial properties on approximately 335 acres of land in New York, New Jersey and Connecticut. As of September 30, 2015, our properties were 94% leased to 62 tenants, with certain tenants having lease agreements in place at multiple locations.

We focus primarily on the acquisition, ownership, management and operation of commercial real estate. To the extent it is in the interests of our stockholders, we will seek to invest in a diversified portfolio of properties that will satisfy our primary investment objectives of providing our stockholders with stable cash flow, preservation of capital, income growth, and enhancing shareholder value without taking undue risk. We anticipate that the majority of properties we acquire will have both the potential for growth in value and the ability to provide cash distributions to stockholders.

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, 2014, 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, 2015, there were no material changes to these policies.

Recent Developments:

Letter of Credit:

On November 4, 2015, the Company posted a $957,708 Letter of Credit with Bank of America, N.A., in connection with a performance guarantee to complete certain site improvements at 20 East Halsey Road in Parsippany, New Jersey. The Township of Parsippany-Troy Hills is the beneficiary. The amount of the Letter of Credit can be reduced with the Township’s approval upon the completion of specific milestones by the Company. The term is for one year plus applicable extensions.

Recent Acquisitions:

Rocky Hill, CT

On January 20, 2015, the Company acquired a 92,500 square foot single story office/flex/warehouse building located on 12 acres of land in Rocky Hill, CT for $12.4 million.  The purchase was financed from the Company’s revolving credit facility with Capital One, N.A. Permanent financing of $8.0 million closed in February 2015 as part of the AIG Loan described in further detail in Note 5. The AIG Loan is a 10-year term loan maturing March 1, 2025 that requires interest only payments at the rate of 4.05% per annum.

18


Piscataway, NJ

On March 13, 2015, the Company completed the acquisition of six properties totaling approximately 681,754 square feet in Piscataway, NJ.  The aggregate net purchase price including closing costs was $64.6 million.  The acquisition was funded from a combination of $25.5 million from the net proceeds of the Company’s February 20, 2015 AIG Loan and the remaining $39.1 million from a cross-collateralized mortgage from Allstate Life Insurance Company, Allstate Life Insurance Company of New York and American Heritage Life Insurance Company. The Allstate Loan Agreement provided a secure facility with a 10-year term loan. During the first three years of the term of the loan, it requires interest only payments at the rate of 4% per annum. Following this period until the loan matures on April 1, 2025, payments will be based on a 30-year amortization schedule.

Financial Condition and Results of Operations:

Three Months Ended September 30, 2015 vs. Three Months Ended September 30, 2014

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

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

Increase/(Decrease)

 

 

2015

 

 

2014

 

 

Amount

 

 

Percent

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

$

10,272

 

 

$

8,664

 

 

$

1,608

 

 

 

19

%

Tenant reimbursements

 

2,044

 

 

 

1,464

 

 

 

580

 

 

 

40

%

Total revenues

 

12,316

 

 

 

10,128

 

 

 

2,188

 

 

 

22

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating

 

2,317

 

 

 

1,916

 

 

 

401

 

 

 

21

%

General and administrative

 

1,152

 

 

 

1,054

 

 

 

98

 

 

 

9

%

Acquisition costs

 

 

 

 

353

 

 

 

(353

)

 

 

-100

%

Depreciation and amortization

 

3,250

 

 

 

2,360

 

 

 

890

 

 

 

38

%

Total operating expenses

 

6,719

 

 

 

5,683

 

 

 

1,036

 

 

 

18

%

Operating income

 

5,597

 

 

 

4,445

 

 

 

1,152

 

 

 

26

%

Interest expense

 

(3,607

)

 

 

(2,650

)

 

 

(957

)

 

 

-36

%

Other

 

3

 

 

 

(100

)

 

 

103

 

 

 

103

%

Income from continuing operations

 

1,993

 

 

 

1,695

 

 

 

298

 

 

 

18

%

Discontinued Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

5

 

 

 

(130

)

 

 

135

 

 

 

104

%

Net income

 

1,998

 

 

 

1,565

 

 

 

433

 

 

 

28

%

Less: Net income attributable to noncontrolling interest

 

585

 

 

 

545

 

 

 

40

 

 

 

7

%

Income attributable to common stockholders

$

1,413

 

 

$

1,020

 

 

$

393

 

 

 

39

%

 

Revenues

Revenues increased $2.2 million, or 22%, to $12.3 million for the three months ended September 30, 2015 from $10.1 million for the three months ended September 30, 2014. The increase is primarily due to the acquisition of four income producing properties in 2014 and seven income producing properties during the first quarter of 2015.

Operating Expenses

Operating expenses increased $1.0 million, or 18%, to $6.7 million for the three months ended September 30, 2015 from $5.7 million for the three months ended September 30, 2014. The increase is primarily due to the acquisition of four income producing properties and two non-income producing properties in 201, and seven properties during the first quarter of 2015.  

Interest Expense

Interest expense increased $1.0 million or 36%, to $3.6 million for the three months ended September 30, 2015 from $2.6 million for the three months ended September 30, 2014. The increase is primarily due to the debt service associated with six property acquisitions in 2014, seven acquisitions during the first quarter of 2015 and the AIG Loan financing.  

.   

19


Nine Months Ended September 30, 2015 vs. Nine Months Ended September 30, 2014

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

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

Increase/(Decrease)

 

 

2015

 

 

2014

 

 

Amount

 

 

Percent

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

$

29,876

 

 

$

24,434

 

 

$

5,442

 

 

 

22

%

Tenant reimbursements

 

5,797

 

 

 

4,423

 

 

 

1,374

 

 

 

31

%

Total revenues

 

35,673

 

 

 

28,857

 

 

 

6,816

 

 

 

24

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating

 

7,141

 

 

 

5,805

 

 

 

1,336

 

 

 

23

%

General and administrative

 

4,903

 

 

 

4,963

 

 

 

(60

)

 

 

-1

%

Acquisition costs

 

614

 

 

 

936

 

 

 

(322

)

 

 

-34

%

Depreciation and amortization

 

9,234

 

 

 

6,980

 

 

 

2,254

 

 

 

32

%

Total operating expenses

 

21,892

 

 

 

18,684

 

 

 

3,208

 

 

 

17

%

Operating income

 

13,781

 

 

 

10,173

 

 

 

3,608

 

 

 

35

%

Interest expense

 

(10,333

)

 

 

(7,151

)

 

 

(3,182

)

 

 

-44

%

Loss on extinguishment of debt

 

(14,876

)

 

 

 

 

 

(14,876

)

 

-

 

Other

 

(42

)

 

 

(27

)

 

 

(15

)

 

 

-57

%

(Loss) income from continuing operations

 

(11,470

)

 

 

2,995

 

 

 

(14,465

)

 

 

-483

%

Discontinued Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

(107

)

 

 

(181

)

 

 

74

 

 

 

41

%

Net (loss) income

 

(11,577

)

 

 

2,814

 

 

 

(14,391

)

 

 

-511

%

Less: Net (loss) income attributable to noncontrolling interest

 

(3,945

)

 

 

944

 

 

 

(4,889

)

 

 

-518

%

(Loss) income attributable to common stockholders

$

(7,632

)

 

$

1,870

 

 

$

(9,502

)

`

 

-508

%

 

Revenues

Revenues increased $6.8 million, or 24%, to $35.7 million for the nine months ended September 30, 2015 from $28.9 million for the nine months ended September 30, 2014. The increase is primarily due to the acquisition of four income producing properties in 2014 and seven income producing properties during the first quarter of 2015.

Operating Expenses

Operating expenses increased $3.2 million, or 17%, to $21.9 million for the nine months ended September 30, 2015 from $18.7 million for the nine months ended September 30, 2014. The increase is primarily due to the acquisition of four income producing properties and two non-income producing properties in 2014, and seven properties during the first quarter of 2015.  

Interest Expense

Interest expense increased $3.2 million or 44%, to $10.3 million for the nine months ended September 30, 2015 from $7.1 million for the nine months ended September 30, 2014. The increase is primarily due to the debt service associated with six property acquisitions in 2014, seven acquisitions during the first quarter of 2015 and the AIG Loan financing.  

Acquisition Costs

Acquisition costs of  $0.6 million result from the purchase of seven properties during the first quarter of 2015.

Loss from Discontinued Operations

The loss from discontinued operations of $0.1 million for the nine months ended September 30, 2015 represents expenses incurred in connection with the continued wind down of former operating companies.   

20


Loss on Extinguishment of Debt

Loss on extinguishment of debt of $14.9 million represents prepayment fees and the write-off of loan costs associated with the retirement of $127.6 million of the then outstanding principal balances of various loans in connection with the AIG Loan financing which closed in February 2015.

Liquidity and Capital Resources

Our liquidity needs are and will continue to be satisfied through cash flows generated by operations and financing activities. Rental revenue and expense recoveries from tenants are our principal sources of cash that we use to pay operating expenses, debt service, recurring capital expenditures and the distributions required to maintain our REIT status. We seek to increase cash flows from our properties by maintaining quality standards for our buildings that promote high occupancy rates and permit increases in rental rates while reducing tenant turnover and controlling operating expenses. We believe that our revenue will continue to provide the funds necessary for our short-term liquidity needs.

Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, non-recurring capital expenditures and scheduled debt maturities. We intend to satisfy our long-term liquidity needs through cash flow from operations, long-term secured and unsecured borrowings, and refinancings. We may sell properties when we determine that it is in our best interests, which also generates additional liquidity.  

On February 20, 2015, the Company, using proceeds available from the AIG Loan repaid the outstanding balance on the Company’s revolving credit facility of approximately $56.0 million thereby paying off and terminating the revolving credit facility.  

Net Cash Flows:

Nine Months Ended September 30, 2015 vs. Nine Months Ended September 30, 2014

Operating Activities

Net cash provided by operating activities was $13.2 million for the nine months ended September 30, 2015. For the 2015 period, cash provided by operating activities included (i) a loss from continuing operations of $11.5 million, (ii) an increase in rental income in excess of amounts billed of $1 million, (iii) a decrease in other liabilities of $0.1 million offset by (iv) depreciation and amortization of $9.4 million, (v) a decrease in other assets of $0.7 (vi) an increase in accounts payable and accrued expenses of $0.3 million (vii) an increase in stock based compensation of $0.5 million  and (viii) the loss from the early extinguishment of debt of $14.9 million. For the nine months ended September 30, 2014 cash provided by operating activities was $6.1 million and resulted from  (i) income from continuing operations  of $3.0 million, (ii) an increase in depreciation and amortization of $6.1 million and (iii) an increase in stock based compensation of $0.3 million offset by (iv) an increase in rental income in excess of amounts billed of $1.4 million, (v) increases in other assets of $0.5 million, (vi) a decrease in other liabilities of $1.3 million and (vii) a decrease in accounts payable and accrued expenses of $0.1 million.

Investing Activities

Net cash used in investing activities was $79.3 million for the nine months ended September 30, 2015 and $44.0 million for the nine months ended September 30, 2014. For the 2015 period, cash used in investing activities resulted from the  acquisition of seven properties totaling approximately $76.2 million, property improvements of $1.6 million, and the funding of leasing and capital reserves in connection with the AIG Loan of $1.5 million. For the 2014 period, cash used in investing activities was primarily due to the acquisition of four  properties totaling $40.7 million,  property improvements of $1.1 million, and deal pursuit costs of 1.1 million.

Financing Activities

Net cash provided by financings activities was $73.2 million for the nine months ended September 30, 2015. For the 2015 period, cash provided by financing activities included (i) $272.2 million in proceeds from mortgage notes payable, (ii) proceeds of $12.1 million from our revolving credit facility,  (iii) the return of our good faith deposit of $3.1 million in connection with the closing of our AIG Loan in February 2015 offset by (iv) the repayment of the outstanding principal balance and fees associated with  the early extinguishment of debt $143.4 million, (v) the repayment of our revolving credit facility of $56.0 million, (vi) loan costs of $6.6 million in connection with the Company’s AIG and Allstate Loans, (vii) payments of the Company’s quarterly and supplemental dividends of $4.8 million, (viii) distributions to non-controlling interests of $2.6 million and (ix) the payment of mortgage principal of $0.8 million.  Net cash used in financing activities for the nine months ended September 30, 2014 was $36.7 million and included (i) proceeds of $29.8 million from our revolving credit facility offset and (ii) a $13 million bridge loan for a property acquisition offset by (iii) payments of the Company’s quarterly and supplemental dividends of $3.5 million, (iii) distributions to non-controlling interests of $1.8 million and (iv) the payment of mortgage principal of $0.8 million.

21


Non-GAAP Financial Measures

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.

Adjusted EBITDA allows investors to measure our operating performance independent of our capital structure and indebtedness. Additionally, costs related to the extinguishment of debt, acquisition costs and discontinued operations have been excluded from Adjusted EBITDA in order to assist with measuring core real estate operating performance.

The reconciliation of Net income (loss) to EBITDA and Adjusted EBITDA for the three and nine months ended September 30, 2015 and 2014, are as follows (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net income (loss) attributable to common stockholders

$

1,413

 

 

$

1,020

 

 

$

(7,632

)

 

$

1,870

 

Real estate depreciation

 

1,399

 

 

 

1,011

 

 

 

3,965

 

 

 

2,913

 

Amortization of intangible assets and deferred costs

 

817

 

 

 

541

 

 

 

2,245

 

 

 

1,537

 

Interest expense

 

2,269

 

 

 

1,717

 

 

 

6,555

 

 

 

4,762

 

EBITDA

 

5,898

 

 

 

4,289

 

 

 

5,133

 

 

 

11,082

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

9,851

 

 

 

 

Acquisition costs

 

 

 

 

234

 

 

 

407

 

 

 

620

 

(Income) loss from discontinued operations

 

(5

)

 

 

130

 

 

 

107

 

 

 

181

 

Adjusted EBITDA

$

5,893

 

 

$

4,653

 

 

$

15,498

 

 

$

11,883

 

 

Funds from Operations and Adjusted Funds from Operations

We consider Funds from Operations (“FFO”) and Adjusted Funds from Operations (“AFFO”), each of which are non-GAAP measures, to be additional measures of an equity REIT’s operating performance. We report FFO in addition to our net income (loss) 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 loss from discontinued operations. We believe these measurements provide a more complete understanding of our performance when compared year over year and better reflect the impact on our operations from trends in occupancy rates, rental rates, operating costs and general and administrative expense which may not be immediately apparent from net income.

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 because it excludes various items included in net income that are not indicative of operating performance, such as gains or losses from the sales of property and depreciation and amortization. Management believes Core FFO to be a meaningful, additional measure of operating performance because it provides information consistent with the Company’s analysis of the operating performance of its portfolio by excluding items such as the extinguishment of debt and acquisition costs which affect the comparability of the Company’s period over period performance and are not indicative of the results provided by our operating portfolio. Management believes AFFO to be a meaningful, additional measure of operating performance because it provides information consistent with the Company’s analysis of its operating performance by excluding non-cash income and expense items such as straight-lined rent, amortization of lease intangibles, mark to market debt adjustments and financing costs which are not indicative of the results of our operating portfolio.  

However, FFO and Core FFO:

 

·

do not represent cash flows from operating activities in accordance with GAAP. Unlike FFO, Core FFO and AFFO generally reflect all cash effects of transactions and other events in the determination of net income;

 

·

are non-GAAP financial measures and do not represent net income as defined by U.S. GAAP; and

 

·

should not be considered alternatives to net income as indications of our performance.

22


FFO, Core FFO and AFFO 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, Core FFO and AFFO for the three and nine months ended September 30, 2015 and 2014 (in thousands, except share and per share data):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net income (loss) attributable to common stockholders

$

1,413

 

 

$

1,020

 

 

$

(7,632

)

 

$

1,870

 

Add (deduct) NAREIT defined adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate depreciation

 

1,399

 

 

 

1,011

 

 

 

3,965

 

 

 

2,913

 

Amortization of intangibles and deferred costs

 

698

 

 

 

503

 

 

 

1,957

 

 

 

1,562

 

(Income) loss from discontinued operations

 

(5

)

 

 

130

 

 

 

107

 

 

 

181

 

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

 

3,505

 

 

 

2,664

 

 

 

(1,603

)

 

 

6,526

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

9,851

 

 

 

 

Acquisition costs

 

 

 

 

234

 

 

 

407

 

 

 

620

 

Core FFO, as defined by GTJ REIT, Inc.

 

3,505

 

 

 

2,898

 

 

 

8,655

 

 

 

7,146

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Straight-lined rents

 

(231

)

 

 

(246

)

 

 

(643

)

 

 

(917

)

Amortization of debt mark-to-market adjustments and

   financing costs

 

120

 

 

 

38

 

 

 

288

 

 

 

(26

)

AFFO

$

3,394

 

 

$

2,690

 

 

$

8,300

 

 

$

6,203

 

FFO per common share- basic and diluted

$

0.25

 

 

$

0.19

 

 

$

(0.12

)

 

$

0.48

 

Core FFO per common share- basic and diluted

$

0.25

 

 

$

0.21

 

 

$

0.63

 

 

$

0.52

 

AFFO per common share- basic and diluted

$

0.25

 

 

$

0.20

 

 

$

0.60

 

 

$

0.45

 

Weighted average common shares outstanding- basic and diluted

 

13,788,674

 

 

 

13,729,521

 

 

 

13,765,326

 

 

 

13,700,638

 

 

Cash Payments for Financing

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

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 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.

Divestiture

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 $8,100 over a twenty year term. As of September 30, 2015, the remaining liability of this obligation was approximately $1.3 million and is included in liabilities of discontinued operations 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.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risks that arise from changes in interest rates, foreign currency exchange rates and other market changes affect market sensitive instruments. In pursuing our business strategies, the primary market risk which we are exposed to is interest rate risk. As of September 30, 2015, we did not have any variable interest rate liabilities.  

23


 

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.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

24


Part II – Other Information

 

Item 1. Legal Proceedings

From time to time, the Company is involved in lawsuits and other disputes that arise in the ordinary course of business. Our management is currently not aware of any legal matters or pending litigation that would have a significant effect, individually or in the aggregate, on the Company’s financial position or results of operations.

 

Item 1A. Risk Factors

During the nine months ended September 30, 2015, 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, 2014 and our subsequent public reports.

 

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

Not applicable.

25


Item 6. Exhibits

 

Exhibit

 

Description

 

 

 

        3.1

 

Articles of Incorporation (Incorporated by reference to S-11 Registration Statement No. 333-136110).

 

 

 

        3.1(a)

 

Form of Amended and Restated Articles of Incorporation (Incorporated by reference to Amendment No. 1 to S-11 Registration Statement No. 333-136110).

 

 

 

        3.2(a)

 

Bylaws (Incorporated by reference to Registration Statement No. 333-136110).

 

 

 

        3.2(b)

 

Amendment to Bylaws (Incorporated by reference to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

 

 

 

        3.2(c)

 

Amendment to Bylaws (Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the SEC on September 8, 2015).

 

 

 

      10.1

 

Loan Agreement, dated as of April 8, 2014 (Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the SEC on April 10, 2014).

 

 

 

      10.2

 

Pledge and Security Agreement, dated as of April 8, 2014 (Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the SEC on April 10, 2014).

 

 

 

      10.3

 

Payment Guaranty Agreement, dated as of April 8, 2014 (Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the SEC on April 10, 2014).

 

 

 

      10.4

 

Promissory Note dated as of April 8, 2014 (Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the SEC on April 10, 2014).

 

 

 

      10.5

 

B. Zimmerman Employment Letter (Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the SEC on June 9, 2014).

 

 

 

      10.6

 

Mortgage, Assignment of Leases, Rents and Contracts, Security Agreement and Fixture Filing (Incorporated by reference to Registrant’s Current Report on Form 8-K/A filed with the SEC on April 14, 2015).

 

 

 

      10.7

 

Form of Mortgage Note (Incorporated by reference to Registrant’s Current Report on Form 8-K/A filed with the SEC on April 14, 2015).

 

 

 

      10.8

 

Nonrecourse Exception Indemnity and Guaranty Agreement dated as March 13, 2015 (Incorporated by reference to Registrant’s Current Report on Form 8-K/A filed with the SEC on April 14, 2015).

 

 

 

      10.9

 

Environmental Indemnity Agreement dated as of March 13, 2015 (Incorporated by reference to Registrant’s Current Report on Form 8-K/A filed with the SEC on April 14, 2015).

 

 

 

      10.10

 

Loan Agreement (CT/NJ) dated as of February 20, 2015 (Incorporated by reference to Registrant’s Current Report on Form 8-K/A filed with the SEC on April 24, 2015).

 

 

 

      10.11

 

Loan Agreement (NY) dated as of February 20, 2015 (Incorporated by reference to Registrant’s Current Report on Form 8-K/A filed with the SEC on April 24, 2015).

 

 

 

      10.12

 

Form of Promissory Note (Incorporated by reference to Registrant’s Current Report on Form 8-K/A filed with the SEC on April 24, 2015).

 

 

 

      10.13

 

Guaranty Agreement dated as of February 20, 2015 (Incorporated by reference to Registrant’s Current Report on Form 8-K/A filed with the SEC on April 24, 2015).

 

 

 

      10.14

 

Pledge and Security Agreement dated as of February 20, 2015 (Incorporated by reference to Registrant’s Current Report on Form 8-K/A filed with the SEC on April 24, 2015).

 

 

 

      10.15

 

D. Cooper Separation Agreement and General Release (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 13, 2015).

 

 

 

      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.

 

 

 

26


Exhibit

 

Description

      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.INS

 

XBRL Instance Document.

 

 

 

    101.SCH

 

XBRL Taxonomy Extension Schema Document.

 

 

 

    101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

    101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

    101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

    101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

27


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 12, 2015

/s/ Paul Cooper

 

Paul Cooper

 

Chief Executive Officer (Principal Executive Officer)

 

 

Dated: November 12, 2015

/s/ Ben Zimmerman

 

Ben Zimmerman

Chief Financial Officer (Principal Financial and Accounting Officer)

 

 

28