ITEM 1. BUSINESS
Introduction
The use of the words "we", "us", or "our" refers to GTJ REIT, Inc., a Maryland corporation, and its subsidiaries, except where the context otherwise requires.
We are a real estate investment trust ("REIT") which, as of the date of this report, owns and operates a total of 32 commercial properties in New York, New Jersey, and Connecticut. We were incorporated in Maryland on June 23, 2006 to engage in any lawful act or activity including, without limitation, qualifying as a REIT, under Sections 856 through 860, or any successor sections of the Internal Revenue Code of 1986, as amended (the "Code"), for which corporations may be organized under Maryland General Corporation Law. We have focused primarily on the ownership and management of commercial real estate located in New York City metropolitan areas. In addition, we provided, through our taxable REIT subsidiaries, outdoor maintenance and shelter cleaning services to outdoor advertising companies and government agencies in New York, New Jersey, Arizona, and California, as well as electrical construction services to a broad range of commercial, industrial, institutional, and governmental customers in New York, and operated and managed a parking garage facility located in New York City. Most of these operations have been discontinued, and we are continuing our focus on our real estate-related businesses.
On March 29, 2007, we commenced operations upon the completion of the Reorganization described below. Effective July 1, 2007, we elected to be treated as a REIT under the Code, and elected December 31st as our fiscal year end. Additionally, in connection with the Tax Relief Extension Act of 1999, we are permitted to participate in activities outside the normal operations of the REIT so long as these activities are conducted in entities which elect to be treated as taxable subsidiaries under the Code subject to certain limitations.
On July 24, 2006, we entered into an Agreement and Plan of Merger (the "Agreement") with Triboro Coach Corp., a New York corporation ("Triboro"); Jamaica Central Railways, Inc., a New York corporation ("Jamaica"); Green Bus Lines, Inc., a New York corporation ("Green" and together with Triboro and Jamaica, collectively referred to as the "Bus Companies" and each referred to as a "Bus Company"); Triboro Acquisition, Inc., a New York corporation ("Triboro Acquisition"); Jamaica Acquisition, Inc., a New York corporation ("Jamaica Acquisition"); and Green Acquisition, Inc., a New York corporation ("Green Acquisition" and together with Jamaica Acquisition and Triboro Acquisition collectively
referred to as the "Acquisition Subsidiaries" and each referred to as an "Acquisition Subsidiary"). The transactions contemplated under the Agreement closed on March 29, 2007. The effect of the merger transactions was to complete a reorganization ("Reorganization") of the ownership of the Bus Companies into GTJ REIT, Inc. (the "Company") with the surviving entities of the merger of the Bus Companies and the Acquisition Subsidiaries becoming wholly-owned subsidiaries and the former shareholders of the Bus Companies becoming stockholders in the Company. Under the Reorganization approximately 10,000,000 shares of our common stock were distributed to the former shareholders of Green, Triboro, and Jamaica in exchange for their shares in the Bus Companies.
At the time of the Reorganization, the Bus Companies, including their subsidiaries, owned a total of six rentable parcels of real property, four of which are currently leased to the City of New York on a triple-net basis, one of which is currently leased to a commercial tenant on a triple net basis, and one of which is leased to various tenants. There is an additional property of negligible size which is not rentable. At December 31, 2012, we owned seven properties containing a total of approximately 561,000 square feet of leasable area.
Prior to the Reorganization, the Bus Companies and their subsidiaries, collectively, operated a group of outdoor maintenance businesses and the discontinued paratransit business, which was acquired as part of the Reorganization. Additionally, we have an insurance subsidiary, which used to insure the former bus company operations, in which we are in the process of transferring the assets and liabilities to a liquidating trust. In 2009, we expanded our operations to include electrical construction services, and in 2010, began operating and managing a parking garage facility.
On July 25, 2011, our Board of Directors (the "Board") voted to divest substantially all of our taxable REIT subsidiaries. Although the parking garage operations were not divested at this time, the Board subsequently voted to divest the operations on November 7, 2011. Following the completion of the divestiture, our plan is to continue focusing on the growth and expansion of our real estate operations.
On November 15, 2011, in accordance with our lease, we gave notice to our landlord of our intention to terminate our parking garage lease early, and on February 1, 2012, we exited the parking garage business.
On December 27, 2011, MetroClean Express Corp. ("MetroClean") and Shelter Clean Inc. ("Shelter Clean") entered into an asset purchase agreement with Triangle Services, Inc. (the "Purchaser") for the sale of substantially all of the assets and business of MetroClean and Shelter Clean to the Purchaser. On January 12, 2012, the sale was completed. Additionally, on January 12, 2012, Shelter Clean of Arizona, Inc. entered into a certain Bill of Sale and Assignment and Assumption Agreement for the sale of certain assets and the business of Shelter Clean of Arizona, Inc. to a wholly-owned subsidiary of the Purchaser.
On January 17, 2013, we and our wholly-owned subsidiaries GTJ GP, LLC (the "General Partner") and GTJ Realty, LP (the "UPREIT") (collectively, "the Company"), and Wu/Lighthouse Portfolio, LLC ("Wu/Lighthouse Portfolio"), Jeffrey Wu ("Wu"), the Wu Family 2012 Gift Trust (the "Wu Trust"), Paul Cooper ("P. Cooper"), Louis Sheinker ("L. Sheinker"), Jerome Cooper ("J. Cooper"), Jeffrey Ravetz ("J. Ravetz") and Sarah Ravetz ("S. Ravetz"), and together with Wu/Lighthouse Portfolio, Wu, the Wu Trust, P. Cooper, L. Sheinker, J. Cooper, J. Ravetz and S. Ravetz collectively hereinafter referred to as "Sellers"), entered into a certain contribution agreement effective as of January 1, 2013 (the "Contribution Agreement") pursuant to which the UPREIT acquired all of the Sellers' outstanding ownership interests in 25 commercial properties located in New York, New Jersey and Connecticut (the "Acquired Properties").
In consideration of the acquisition of the Acquired Properties, the UPREIT issued to the Sellers limited partnership units of the UPREIT such that immediately following closing, we beneficially owned 66.71% of the outstanding partnership units of the UPREIT and the Sellers (other than Wu/Lighthouse Portfolio) collectively received 33.29% of the partnership units therein.
The General Partner is the general partner of the UPREIT (through its 1% general partnership interest in the UPREIT) and as a result thereof, we, through our ownership of General Partner, will exercise managerial control over the properties, business and operations of the UPREIT. The UPREIT is authorized to issue common limited partnership units, Class A limited partnership units and Class B limited partnership units. While all limited partnership units have the same economic rights, holders of the UPREIT's Class B limited partnership units have no voting rights. We hold Class A limited partnership units.
Description of REIT Business
Our REIT business consists of the acquisition, ownership, and management of real properties. At December 31, 2012, we owned seven parcels of real property, each of which are described in further detail in the "Portfolio of Real Properties" section. As a result of the January 17, 2013 acquisition discussed above, we currently own a total of 32 properties, including our seven previously-owned properties. We intend to further expand our real property portfolio beyond these 32 parcels.
Investing in Real Properties
We seek to acquire quality real properties at favorable prices. We believe that quality tenants seek well-managed properties that offer superior and dependable services, particularly in competitive markets. We believe that a critical success factor in property acquisition lies in possessing the flexibility to move quickly when an opportunity presents itself.
We intend to acquire fee ownership of real properties, but may also enter into joint venture arrangements. We seek to maximize current and long-term net income and the value of our assets. Our policy is to acquire assets where we believe opportunities exist for reasonable investment returns.
Decisions relating to the purchase or sale of properties are made by our Board of Directors. Our Board of Directors is responsible for monitoring the administrative procedures, investment operations, and performance of our Company to ensure our policies are carried out. Our Board of Directors oversees our investment policies to determine that our policies are in the best interests of our stockholders. Stockholders have no voting rights with respect to implementing our investment objectives and policies, all of which are the responsibility of our Board of Directors and may be changed at any time.
Types of Investments
We intend to invest primarily in quality commercial real properties. To the extent it is in the interests of our stockholders, we will seek to invest in a diversified portfolio of real properties within our geographic area that will satisfy our primary investment objectives of providing our stockholders with stable cash flow, preservation of capital, and growth of income and principal, without taking undue risk. Because a significant factor in the valuation of income-producing real property is the potential for future income, we anticipate that the majority of properties we acquire will have both the potential for growth in value and the ability to provide cash distributions to stockholders.
We intend to acquire properties with financing from mortgage or other debt or may acquire properties subject to existing indebtedness. We may also acquire properties for shares of our common stock. We do not intend to incur aggregate indebtedness in excess of 75% of the gross fair value of our real properties. Fair value will be determined by an independent certified appraiser or in a similar manner as the fair determination at the time of purchase satisfactory to our Board of Directors.
Considerations Related to Potential Real Property Acquisitions
The following are some of the material considerations which we evaluate in relation to potential acquisitions of real property:
•geographic location and type of property;
•construction quality and condition;
•potential for capital appreciation;
•the general credit quality of current and potential tenants;
•the potential for rent increases;
•the interest rate environment;
•potential for economic growth in the tax and regulatory environment of the community in which the property is located;
•potential for expanding the physical layout of the property;
•occupancy and demand by tenants for properties of a similar type in the same geographic vicinity;
•prospects for liquidity through sale, financing, or refinancing of the property;
•competition from existing properties and the potential for the construction of new properties in the area; and
•treatment under applicable federal, state, and local tax and other laws and regulations.
We will not acquire any real property until we obtain an environmental assessment for each property and are satisfied with the environmental status of the property.
In determining whether to acquire a particular parcel of real property, we may obtain an option on such property. Typically, the amount paid for an option, if any, is surrendered if the real property is not acquired. In the event that the real property is acquired, the amount paid for the option, if any, is typically credited against the purchase price of the real property.
In acquiring real properties, we will be subject to risks, including:
•changes in general economic or local conditions;
•changes in supply of or demand for similar competing properties in an area;
•changes in interest rates and availability of permanent mortgage funds which may render the sale of a property difficult or unattractive;
•changes in tax, real estate, environmental, and zoning laws;
•periods of high interest rates and tight money supply which may make the sale of properties more difficult;
•tenant turnover; and
•general overbuilding or excess supply in the market area.
For a more detailed description of risks relating to our real estate business, see Item 1A
ITEM 1A. RISK FACTORS
You should carefully consider the specific factors listed below, together with the cautionary statement under the caption "Cautionary Statement Regarding Forward Looking Statements" and the other information included in this Report on Form 10-K. If any of the following significant risk factors set forth below actually occur, our business, financial condition, or results of operation could be materially adversely affected and the value of our common stock could decline.
Risks Related to our Organization and Structure
Our failure to qualify as a REIT would subject us to corporate level income tax, which would materially impact funds available for distribution.
We intend to operate in a manner so as to qualify as a REIT. Qualifying as a REIT will require us to meet several tests regarding the nature of our assets and income on an ongoing basis. A number of the tests established to qualify as a REIT for tax purposes are factually dependent. Therefore, while we intend to qualify as a REIT, it may not be possible at this time to assess our ability to satisfy these various tests on a continuing basis. Additionally, we cannot guarantee that we will in fact qualify as a REIT or remain qualified as a REIT.
If we fail to qualify as a REIT in any year, we would be required to pay federal income tax on our net income. In order to pay this tax, we may need to borrow money or sell assets. Our payment of income tax would substantially decrease the amount of cash available to be distributed to our stockholders. In addition, we would no longer be required to distribute substantially all of our taxable income to our stockholders. Unless our failure to qualify as a REIT is excused under relief provisions of the federal income tax laws, we could not re-elect REIT status until the fifth calendar year following the year in which we failed to qualify.
In addition, even if we qualify as a REIT in any year, we would still be subject to federal taxation on certain types of income. For example, we would be subject to federal income taxation on the net income earned by our taxable REIT subsidiaries which consist of our corporate subsidiaries with respect to which elections are made to treat the same as separate, taxable subsidiaries, presently including our electrical contracting business.
Real Property Business, Investment, Diversification, and Environmental Risks
Financing of our real property could lead to loss of the real property if there is a default.
The growth and diversification of our real property business is expected to be financed by borrowed funds. We may borrow sums up to 75% of the value of our real property portfolio. Such loans may result in substantial interest charges which can materially reduce distributions to our stockholders. The documentation related to such loans is expected to contain covenants regulating the manner in which we may conduct our businesses and may restrict us from pursuing opportunities which could be beneficial to our stockholders. In addition, if we are unable to meet our payment or other obligations to our lenders, we risk loss of some or all of our real property portfolio.
We depend upon our tenants to pay rent in a timely manner, and their inability or refusal to pay rent could impact our ability to pay our indebtedness, leading to possible defaults, and reduce cash available for distribution to our stockholders.
Our real property, particularly those we may purchase in the future, will be subject to varying degrees of risk that generally arise from such ownership. The underlying value of our properties and the ability to make distributions to you depend upon the ability of the tenants of our properties to generate enough income to pay their rents in a timely manner. Their inability or unwillingness to do so may be impacted by employment and other constraints on their finances, including debts, purchases and other factors. Additionally, the ability of commercial tenants of commercial properties would depend upon their ability to generate income in excess of their operating expenses to make their lease payments to us. Changes beyond our control may adversely affect our tenants' ability to make lease payments and consequently would substantially reduce our income from operations and our ability to meet our debt service requirements and make distributions to you. These changes include, among others, the following:
•changes in national, regional, or local economic conditions;
•changes in local market conditions; and
•changes in federal, state, or local regulations and controls affecting rents, prices of goods, interest rates, fuel, and energy consumption.
Due to these changes or others, tenants may be unable to make their lease payments. A default by a tenant, the failure of a tenant's guarantor to fulfill its obligations, or other premature termination of a lease could, depending upon the size of the leased premises and our ability to successfully find a substitute tenant, have a materially adverse effect on our revenues and the value of our common stock or our cash available for distribution to our stockholders.
If we are unable to find tenants for our properties, particularly those we may purchase in the future, or find replacement tenants when leases expire and are not renewed by the tenants, our revenues and cash available for distribution to our stockholders will be substantially reduced.
We may not be able to diversify our real property portfolio due to the number and size of our competitors.
Competition may adversely affect acquisition of properties and leasing operations. We compete for the purchase of commercial property with many entities, including other REITs, some of which are publicly traded. Many of our competitors have substantially greater financial recourses than ours. In addition, our competitors may be willing to accept lower returns on their investments. If our competitors prevent us from buying the properties that we have targeted for acquisition, we may not be able to meet our property acquisition and development goals. We may incur costs on unsuccessful acquisitions that we will not be able to recover.
If our competitors offer space at rental rates below our current rates or the market rates, we may lose current or potential tenants to other properties in our markets. Additionally, we may need to reduce rental rates below our current rates or offer free rental periods in order to retain tenants upon expiration of their leases or to attract new tenants. As a result, our results of operations and cash flow may be adversely affected.
Lack of diversification and liquidity of real estate will make it difficult for us to sell underperforming properties or recover our investment in one or more properties.
Our business is subject to risks associated with investment primarily in real property. Real property investments are relatively illiquid. Our ability to vary our portfolio in response to changes in economic and other conditions will be limited. We cannot assure you that we will be able to dispose of a property when we want or need to. Consequently, the sale price for any property we may purchase in the future may not recoup or exceed the amount of our investment.
Our real property portfolio currently includes six real properties which have been, and continue to be, used as a bus depot or automobile facility and has certain environmental conditions resulting in continuing exposure to environmental liabilities.
Generally our real properties have had activity relating to removal and replacement of underground storage tanks and soil removal; however, there are still some levels of contamination at the sites for which groundwater monitoring programs have been put into place. In addition, our properties are being used as transit depots including the maintenance of vehicles which may expose us to additional environmental liabilities. We cannot assess what further liability may arise from these factors.
Discovery of previously undetected environmentally hazardous conditions at our real properties would result in additional expenses, resulting in a decrease in our cash flows and the return on your shares of common stock.
Under various federal, state, and local environmental laws, ordinances, and regulations, a current or previous real property owner or operator may be liable for the cost to remove or remediate hazardous or toxic substances on, under, or in such property. These costs could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us from entering into leases with prospective tenants that may be impacted by such laws. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials into the air. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could reduce the amounts available for distribution to you.
A number of risks to which our real properties may be exposed may not be covered by insurance, which could result in losses which are uninsured.
We could suffer a loss due to the cost to repair any damage to properties that are not insured or are underinsured. There are types of losses, generally of a catastrophic nature, such as losses due to terrorism, wars, earthquakes, or acts of
God that are either uninsurable or not economically insurable. Generally, we will not obtain insurance for hurricanes, earthquakes, floods, or other acts of God unless required by a lender or we determine that such insurance is necessary and may be obtained on a cost-effective basis. If such a catastrophic event were to occur, or cause the destruction of one or more of our properties, we could lose both our invested capital and anticipated profits from such property.
You may not receive any distributions from the sale of one of our properties, or not receive such distributions in a timely manner, because we may have to provide financing to the purchaser of such property, resulting in an inability or delay of distributions to stockholders.
If we sell a property, you may experience a delay before receiving your share of the proceeds of such liquidation. In a forced or voluntary liquidation, we may sell our properties either subject to or upon the assumption of any then outstanding mortgage debt or, alternatively, may provide financing to purchasers. We may take a purchase money obligation secured by a mortgage as partial payment. To the extent we receive promissory notes or other property instead of cash from sales, such proceeds, other than any interest payable on those proceeds, will not be available for distribution until the promissory notes or other property are actually paid, sold, refinanced or otherwise disposed of. In many cases, we will receive initial down payments in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years. Therefore, you may experience a delay in the distribution of the proceeds of a sale until such time.
Electrical Contracting Business Risk
Our electrical contracting business depends largely on profitable contracts and performance.
We provide electrical contracting services to various customers. The loss of any of our larger customers would have a material adverse effect on our business. In addition, these businesses have required significant capital and may require significant additional capital in the future. In addition to the risks related to additional investment, the capital may have to be funded by borrowing or asset sales. We have also publicly disclosed our intention to divest our taxable REIT subsidiaries, including our electrical contracting business. While we presently are in contract to sell our electrical contracting business to a third-party, we may incur substantial costs associated with the completion of our remaining contracts and winding up this business.
In connection with the completion of the divestiture of our electrical contracting business we may be subject to certain liabilities including union wages, benefits, severance, and pension withdrawal.
The possibility exists that we will incur additional liabilities as a result of the sale of our electrical contracting business. Such costs include union wages, benefits, severance, and pension withdrawal. The extent to which we may potentially owe will not be reasonably estimable until the after the sale has been completed. As a result, our results of operations and cash flow may be adversely affected.
Risks Related to Possible Conflicts of Interest
Our officers and directors may have other interests which may conflict with their duties to us and our stockholders, and which may have adverse effects on the interests of us and our stockholders.
Our officers and directors may have other interests which could conflict with their duties to us and our stockholders, and which may have adverse effects on the interests of us and our stockholders. For example, certain of such persons may have interests in other real estate related ventures and may have to determine how to allocate an opportunity between us and such other ventures. Also, such persons may have to decide on whether we should purchase or dispose of real property from or to an entity with which they are related, or conduct other transactions, and if so, the terms thereof. Such determinations may either benefit us or be detrimental to us. Our officers and directors are expected to behave in a fair manner toward us, and we require that potential conflicts be brought to the attention of our Board of Directors and that determinations will be made by a majority of directors who have no interest in the transaction. As of this time, only three officers and directors conduct a real property business apart from his activities with us. These individuals are Paul A.
Cooper, our Chief Executive Officer and director, Louis Sheinker, our President, Chief Operating Officer, and director, and Jeffrey Wu, who is a member of our Board of Directors.
Risks Related to our Common Stock
The absence of a public market for our common stock will make it difficult for a stockholder to sell shares, which may have to be held for an indefinite period.
Prospective stockholders should understand that our common stock is illiquid, as there is currently no public market, and they must be prepared to hold their shares of common stock for an indefinite length of time. We have no current plans to cause our common stock to be listed on any securities exchange or quoted on any market system or in any established market either immediately or at any definite time in the future. While our Board of Directors may attempt to cause our common stock to be listed or quoted in the future, there can be no assurance that this event will occur. Accordingly, stockholders will find it difficult to resell their shares of common stock. Thus, our common stock should be considered a long-term investment. In addition, there are restrictions on the transfer of our common stock. In order to qualify as a REIT, our shares must be beneficially owned by 100 or more persons at all times and no more than 50% of the value of our issued and outstanding shares may be owned directly or indirectly by five or fewer individuals and certain entities at all times. Our charter provides that no person may own more than 9.9% of the issued and outstanding shares of our common stock. Any attempted ownership of our shares that would result in a violation of one or more of these limits will result in such shares being transferred to an "excess share trust" so that such shares will be disposed of in a manner consistent with the REIT ownership requirements. In addition, any attempted transfer of our shares that would cause us to be beneficially owned by less than 100 persons will be void ab initio (i.e., the attempted transfer will be considered to never have occurred).
Our stockholder' interests may be diluted by issuances under our 2007 Incentive Award Plan and other common stock or preferred stock issuances, which could result in lower returns to our stockholders.
We have adopted the 2007 Incentive Award Plan, under which 1,000,000 shares of common stock are reserved for issuance, and under which we may grant stock options, restricted stock, and other performance awards to our officers, employees, consultants, and independent directors. The effect of these grants, including the subsequent exercise of stock options, could be to dilute the value of the stockholders' investments.
In addition, our Board of Directors is authorized, without stockholder approval, to cause us to issue additional shares of our common stock, or shares of preferred stock on which it can set the terms, and to raise capital through the issuance of options, warrants and other rights, on terms and for consideration as the Board of Directors in its sole discretion may determine, subject to certain restrictions in our charter in the instance of options and warrants. Any such issuance such as which may result from the January 2013 transaction described above, could result in dilution to stockholders. The Board of Directors may, in its sole discretion, authorize us to issue common stock or other interests or our securities to persons from whom we purchase real property or other assets, as part or all of the purchase price. The Board of Directors, in its sole discretion, may determine the value of any common stock or other equity or debt securities issued in consideration of property or services provided, or to be provided, to us.
Federal Income Tax and Regulatory Requirements
The requirement to distribute at least 90% of our taxable REIT income may require us to incur debt, sell assets, or issue additional securities for cash, which would increase the risks associated with your investment.
In order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our net income, other than any capital gains. To the extent that we distribute at least 90% but less than 100% of our net income in a calendar year, we will incur no federal corporate income tax on our distributed net income, but will incur a federal corporate income tax on any undistributed amounts. In addition, we will incur a 4% nondeductible excise tax if the actual amount we distribute to our stockholders in a calendar year is less than a minimum amount specified under federal income tax law. We intend to distribute at least 90% of our net income to our stockholders each year so that we will satisfy the distribution requirement
and avoid the 4% excise tax. However, we could be required to include earnings in our taxable income before we actually receive the related cash. That timing difference could require us to borrow funds or raise additional capital to meet the distribution requirement and avoid corporate income tax and the 4% excise tax in a particular year. In the event that we don't distribute 100% of our net income, we will be subject to taxation at the REIT level on the amount of undistributed net income and to the extent we distribute such amount, you will be subject to taxation on it at the stockholder level.
The minimum distribution requirements for REIT's may require us to borrow, sell assets, or issue additional securities for cash to make required distributions, which would increase the risks associated with your investment in our company.
Under existing tax law, we would be taxed at the corporate level if, within 10 years of our election to be taxed as a REIT, we sell any real property acquired in the Reorganization in a taxable transaction. For that reason, we presently intend to hold such real property for at least 10 years from our election to be taxed as a REIT. This policy would eliminate a sale as a way to obtain liquidity and would prevent a sale which would otherwise be made to take advantage of favorable market conditions. As part of the January 17, 2013 acquisition of the Wu/Lighthouse Portfolio, LLC properties, we agreed to refrain from, directly or indirectly, making any sale, transfer, exchange or other disposition of the 25 acquired properties for a period of seven years following the closing date.
We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and furnish a report on our internal control over financial reporting.
We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 which requires us to assess and attest to the effectiveness of our internal control over financial reporting. As of December 31, 2012, our independent registered public accounting firm is not required to opine as to the adequacy of our assessment and effectiveness of our internal control over financial reporting. If any deficiencies or material weaknesses exist as a result of our assessment of our internal controls over financial reporting, our financial statements may be materially adversely affected.
Acquisition Risks
Our inability to identify or find funding for acquisitions could prevent us from diversification or growth and could adversely impact the value of an investment in us.
We may not be able to identify or obtain financing to acquire additional real properties. We are required to distribute at least 90% of our net income, excluding net capital gains, to our stockholders in each taxable year, and thus our ability to retain internally generated cash is very limited. Accordingly, our ability to acquire properties or to make capital improvements to or remodel properties will depend on our ability to obtain debt financing from third parties or the sellers of properties.
If mortgage debt is unavailable at reasonable rates, we may not be able to finance the purchase of additional properties. If we place mortgage debt on our current properties, we will run the risk of being unable to refinance the additional properties when the loans become due, or of being unable to refinance on favorable terms. If interest rates are higher when we refinance the properties, our income would be reduced. We may be unable to refinance properties. If any of these events occurs, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to our stockholders and may hinder our ability to raise more capital.
We have incurred and plan to incur mortgage and other indebtedness, which could result in material damage to our business if there is a default.
Significant borrowings by us will increase the risks of owning shares of our company. If there is a shortfall between the cash flow generated by our properties and the cash flow needed to service our indebtedness, then the amount available for distributions to our stockholders will be reduced or eliminated. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, thus reducing the value of your investment. If any mortgages
or other indebtedness contain cross-collateralization or cross-default provisions, a default on a single loan could affect multiple properties.
Additionally, when providing financing, a lender may impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property, merge with another company, or discontinue insurance coverage. These or other limitations may limit our flexibility and our ability to achieve our operating plans. Our failure to meet such restrictions and covenants could result in an event of default under our line of credit and result in the foreclosure of some or all of our properties.
Investing in properties through joint ventures creates a risk of loss to us as a result of the possible inaction or misconduct of a joint venture partner.
Joint venture investments may involve risks not present in a direct acquisition, including, for example:
•the risk that our co-venturer or partner in an investment might become bankrupt;
•the risk that such co-venturer or partner may at any time have economic or business interests or goals which are inconsistent with our business interests or goals; or
•the risk that such co-venturer or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, such as selling a property at a time when it would have adverse consequences for our stockholders.
Actions by such a co-venturer or partner might have the result of subjecting the applicable property to liabilities in excess of those otherwise contemplated and may have the effect of reducing our cash available for distribution. It also may be difficult for us to sell our interest in any such joint venture or partnership in such property.
Borrowings May Increase Our Business Risks
Income distributions may cause us to borrow, resulting in borrowing costs and risk of defaults.
We are required to distribute at least 90% of our taxable net income, excluding net capital gains to our stockholders in each taxable year. However, depending on the size of our operations, we will require a minimum amount of capital to fund our daily operations. In addition, we may require working capital for our electrical contracting business. We may have to obtain financing from either affiliated or unaffiliated sources to meet such cash needs. This financing may not be available to us on acceptable terms or at all, which could adversely affect our operations and decrease the value of your investment in our company.
As we incur indebtedness which may be needed for operations, we increase expenses which could result in a decrease in cash available for distribution to our stockholders.
The risk associated with ownership of our common stock depends upon, among other factors, the amount of debt we incur. We have incurred and intend to incur additional indebtedness in connection with our acquisition of properties. We may also borrow for the purpose of maintaining our operations or funding our working capital needs. Lenders may require restrictions on future borrowings, distributions, and operating policies. We also may incur indebtedness if necessary to satisfy the federal income tax requirement that we distribute at least 90% of our taxable net income, excluding net capital gains, to our stockholders in each taxable year. Borrowing increases our business risks.
Debt service decreases cash available for distribution since we will be responsible for retiring the debt and paying the attendant interest. In the event the fair market value of our properties was to increase, we could incur more debt without a commensurate increase in cash flow to service the debt. In addition, our Board of Directors can change our policy relating to the incurrence of debt at any time without stockholder approval.
Prolonged disruptions in the financial markets could affect our ability to obtain financing on reasonable terms and have other adverse effects on us and the market price of our common stock.
Global stock and credit markets have recently experienced significant price volatility, dislocations, and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and, in certain cases, have resulted in the unavailability of certain types of financing. If these conditions persist, lending institutions may be forced to exit markets such as repurchase lending, become insolvent or further tighten their lending standards, or increase the amount of equity capital required to obtain financing, and in such event, could make it more difficult for us to obtain financing on favorable terms or at all. Our profitability will be adversely affected if we are unable to obtain cost-effective financing for our investments. A prolonged downturn in the stock or credit markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly. In addition, these factors may make it more difficult for our borrowers to repay our loans as they may experience difficulties in selling assets, increased costs of financing, or obtaining financing at all. These events in the stock and credit markets may also make it more difficult or unlikely for us to raise capital through the issuance of our common stock or preferred stock. These disruptions in the financial markets also may have a material adverse effect on the market value of our common stock and other adverse effects on us or the economy generally.
We have incurred and will incur indebtedness secured by our properties, which may subject our properties to foreclosure in the event of a default.
Incurring mortgage indebtedness increases the risk of possible loss. Most of our borrowings to acquire properties would be secured by mortgages on our properties. If we default on our secured indebtedness, the lender may foreclose and we could lose our entire investment in the properties securing such loan, which would adversely affect distributions to stockholders. For federal tax purposes, any such foreclosure would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage and, if the outstanding balance of the debt secured by the mortgage exceeds the basis of the property to our company, there could be taxable income upon a foreclosure. Such taxes would be payable by us if the sale was of our current real properties and took place within 10 years after our REIT election. To the extent lenders require our company to cross-collateralize our properties, or our loan agreements contain cross-default provisions, a default under a single loan agreement could subject multiple properties to foreclosure. In addition, the foreclosure of certain of our properties may trigger additional liabilities for us, such as payments which may be required pursuant to the Tax Protection Agreement.
Increases in interest rates will increase the amount of our debt service and increased interest payments will adversely affect our ability to make cash distributions to our stockholders.
A change in economic conditions which results in higher interest rates would increase debt service requirements on variable rate debt and could reduce the amounts available for distribution to you as a stockholder. A change in economic conditions could cause the terms on which borrowings become available to be unfavorable. In such circumstances, if we are in need of capital to repay indebtedness in accordance with its terms or otherwise, we could be required to liquidate one or more of our investments in properties at times which may not permit realization of the maximum return on such investments.
Difficulty obtaining permanent financing would limit the possible growth in our real property operations.
The United States is presently experiencing a significant reduction in available credit. When we acquire real property using a revolving credit facility, we plan to refinance the same with permanent mortgage lending on the real property. If due to a lending contraction we are unable to find such financing with terms acceptable to us, we would be unable to restore the borrowings made under a revolving credit facility and we would be limited in further acquirements of real property.
Our Ability to Change Policies Without a Stockholder Vote
Our policies, including the limits on debt, may be changed or eliminated by our Board of Directors at any time without a vote of our stockholders.
Our policies, including policies intended to protect our stockholders and the policies described in this annual report with respect to acquisitions, financing, limitations on debt, and investment limitations, have been determined by our Board of Directors and can be changed at any time without a vote of our stockholders or notice to you as a stockholder if our Board of Directors so determines in the exercise of its duties.
Possible Adverse Consequences of Limits on Ownership and Transfer of our Shares
The limitation on ownership of our stock in our charter will prevent you from acquiring more than 9.9% of our common stock and may force you to sell common stock back to us.
Our charter limits the beneficial and constructive ownership of our capital stock by any single stockholder to 9.9% of the number of outstanding shares of each class or series of our stock including our common stock. We refer to these limitations as the ownership limits. Our charter also prohibits the beneficial or constructive ownership of our capital stock by any stockholder that would result in (1) our capital stock being beneficially owned by fewer than 100 persons, (2) five or fewer individuals, including natural persons, private foundations, specified employee benefit plans and trusts, and charitable trusts, owning more than 50% of our capital stock, applying broad attribution rules imposed by the federal tax laws, (3) our company otherwise failing to qualify as a REIT for federal tax purposes. In addition, any attempted transfer of our capital stock that would result in the Company being beneficially owned by less than 100 persons will be void ab initio (i.e., such transfer will be considered to never have happened). If you acquire shares in excess of the ownership limits or in violation of the ownership limitations, we:
•will consider the transfer (in whole or part) to be null and void;
•will not reflect the transaction on our books;
•may institute legal action to enjoin the transaction;
•will not pay dividends or other distributions to you with respect to those excess shares;
•will not recognize your voting rights for those excess shares; and
•will consider the excess shares held in trust for the benefit of a charitable beneficiary.
If such shares are transferred to a trust for the benefit of a charitable beneficiary, you will be paid for such excess shares a price per share equal to the lesser of the price you paid or the "market price" of our stock. Unless shares of our common stock are then traded on a national securities exchange or quoted on a national market system, the market price of such shares will be a price determined by our Board of Directors in good faith. If shares of our common stock are traded on a national securities exchange or quoted on a national market system, the market price will be the average of the last sales prices or the average of the last bid and ask prices for the date of determination.
If you acquire our common stock in violation of the ownership limits or the restrictions on transfer described above:
•you may lose your power to dispose of the stock;
•you may not recognize profit from the sale of such stock if the "market price" of the stock increases; and
•you may incur a loss from the sale of such stock if the "market price" decreases.
Anti-takeover Provisions Related to Us
Our Stockholder Rights Agreement is designed to discourage takeover attempts without approval of our Board of Directors, which could discourage a potential takeover bid and the related payment to our stockholders.
The Stockholder Rights Agreement provides that a right is deemed to be issued and outstanding in conjunction with each outstanding share of our common stock. If any person or group, as defined in the agreement, acquires more than 15% of our outstanding common stock without the approval of our Board of Directors, each holder of a right, other than such 15% or more holder(s), will be entitled to purchase 1000th of a share of our Series A preferred stock for $50.00 which is convertible into our common stock at one-half of the market value of our common stock, or to purchase, for each right, $50.00 of our common stock at one-half of the market value. The effect of this provision is to materially dilute the holdings of such 15% or more holders and substantially increase the cost of acquiring a controlling interest in us. These types of provisions generally inhibit tender offers or other purchases of a controlling interest in a company such as ours.
Limitations on share ownership and transfer may deter a sale of our company in which you could profit.
The limits on ownership and transfer of our equity securities in our charter may have the effect of delaying, deferring, or preventing a transaction or a change in control of our company that might involve a premium price for your common stock. The ownership limits and restrictions on transferability will continue to apply until our Board of Directors determines that it is no longer in our best interest to continue to qualify as a REIT.
Our ability to issue preferred stock with terms fixed by the Board of Directors may include a preference in distributions superior to our common stock and also may deter or prevent a sale of our company in which a stockholder could otherwise profit.
Our ability to issue preferred stock and other securities without your approval also could deter or prevent someone from acquiring our company. Our charter authorizes our Board of Directors to issue up to ten million shares of preferred stock. Our Board of Directors may establish the preferences and rights, including a preference in distributions superior to our common stockholders, of any issued preferred stock designed to prevent, or with the effect of preventing, someone from acquiring control of our company.
Maryland anti-takeover statute restrictions may deter others from seeking to acquire our company in a transaction in which a stockholder could profit.
Maryland law contains many provisions, such as the business combination statute and the control share acquisition statute, that are designed to prevent, or have the effect of preventing, someone from acquiring control of our company without approval of our Board of Directors. Our bylaws exempt our company from the control share acquisition statute (which eliminates voting rights for certain levels of shares that could exercise control over us) and our Board of Directors has adopted a resolution opting out of the business combination statute (which prohibits a merger or consolidation of us and a 10% stockholder for a period of time) with respect to affiliates of our company. However, if the bylaw provisions exempting our company from the control share acquisition statute or the board resolution opting out of the business combination statute were repealed by the Board of Directors, in its sole discretion, these provisions of Maryland Law could delay or prevent offers to acquire our company and increase the difficulty of consummating any such offers.
Because of our staggered Board of Directors, opposition candidates would have to be elected in two separate years to constitute a majority of the Board of Directors, which may deter a change of control from which a stockholder could profit.
We presently have ten members of our Board of Directors. Each director has or will have a three year term, and only approximately one-third of the directors will stand for election each year. Accordingly, in order to change a majority of our Board of Directors, a third party would have to wage a successful proxy contest in two successive years, which is a situation that may deter proxy contests.
Certain provisions of our charter make stockholder action more difficult, which could deter changes beneficial to our stockholders.
We have certain provisions in our charter and bylaws that require super-majority voting and regulate the opportunity to nominate directors and to bring proposals to a vote by the stockholders.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
Portfolio of Real Estate Investments
The following table sets forth information relating to each of our real estate investments in addition to the specific mortgages encumbering the properties:
A.Acquired by the Company in 2007 upon the consummation of the Reorganization. The Bus Companies acquired these properties from 10 to 70 years ago.
B.These properties are all subject to a mortgage under the Hartford Loan Agreement in the principal amount of $45,500,000.
C.In connection with the M&T Revolving Credit Facility, a mortgage was filed as collateral on this property. As of December 31, 2012, there was $5.0 million outstanding under this credit facility. Our obligations under this facility were satisfied in full on February 22, 2013.
For additional information about our portfolio of real estate investments, see Item 1 - Business-Portfolio of Real Properties.
On January 17, 2013, we entered into a certain contribution agreement with Wu/Lighthouse Portfolio, LLC effective as of January 1, 2013 in which we acquired all outstanding ownership interests of a portfolio consisting of 25 commercial properties located in New York, New Jersey and Connecticut. As a result of this acquisition we currently own a total of 32 properties, including our seven previously-owned properties as of the date of this report. The 25 acquired properties are listed below:
Insurance
We believe that we have property and liability insurance with reputable, commercially rated companies. We also believe that our insurance policies contain commercially reasonable deductibles and limits, adequate to cover our properties. We expect to maintain this type of insurance coverage and to obtain similar coverage with respect to any additional properties we acquire in the near future. Further, we have title insurance relating to our properties in an aggregate amount that we believe to be adequate.
Regulations
Our real properties, as well as any other real properties that we may acquire in the future, are subject to various federal, state, and local laws, ordinances, and regulations. They include, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution, and indirect environmental impacts such as increased motor vehicle activity. We believe that we have all permits and approvals necessary under current law to operate our properties.
Real Property Used By Us in Our Businesses
The real properties used by us at December 31, 2012, for the day to day conduct of our businesses are as follows (all of which are leased):
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are involved in several lawsuits and other disputes which arose in the ordinary course of business; however, management believes that these matters will not have a material adverse effect, individually or in the aggregate, on our financial position or results of operations.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Common Equity
Currently, there is no public market for our common stock, and we do not expect a market to develop in the near future. We have no current plans to cause our common stock to be listed on any securities exchange or quoted on any market system in any established market either immediately or at any definite time in the future. Therefore, it is likely that a stockholder may not be able to sell such stockholder's common stock at a time or price acceptable to the stockholder.
Outstanding Common Stock and Holders
As of March 25, 2013, we had 13,648,084 shares issued and outstanding, held by approximately 450 shareholders of record.
Distributions
Our Board of Directors has declared and paid cash dividends on a quarterly basis. On March 21, 2013, our Board of Directors declared a special distribution of $0.0934 per share of common stock, payable with respect to the year ended December 31, 2012, to stockholders of record at the close of business on March 31, 2013 which is payable on or about April 15, 2013. On March 21, 2013, our Board of Directors also declared a quarterly cash dividend of $0.08 per share of common stock, payable with respect to the first quarter ended March 31, 2013 to common stockholders of record as of the close of business on March 31, 2013 payable on or about April 15, 2013. The following table shows the declaration dates and the amounts distributed per share for the years ended December 31, 2012 and 2011:
Declaration Date
Distribution Date
Amount Paid Per Share
January 23, 2012
February 15, 2012
$0.13
March 26, 2012
April 15, 2012
$0.08
June 7, 2012
July 15, 2012
$0.08
August 6, 2012
October 15, 2012
$0.08
December 20, 2012
January 15, 2013
$0.08
January 5, 2011
January 21, 2011
$0.10
March 21, 2011
April 15, 2011
$0.08
June 1, 2011
July 15, 2011
$0.08
August 8, 2011
October 15, 2011
$0.08
November 7, 2011
January 15, 2012
$0.08
Although we intend to continue to declare and pay quarterly dividends, no assurances can be made as to the amounts of any future payments. The declaration of any future dividends is within the discretion of the Board of Directors and will be dependent upon, among other things, our earnings, financial condition and capital requirements, as well as any other factors deemed relevant by the Board of Directors. Two principal factors in determining the amounts of distributions are (i) the requirement Code that a REIT distribute to shareholders at least 90% of its REIT taxable income, and (ii) the amount of available cash.
Equity Compensation Plan Information
On June 11, 2007, the Board of Directors approved the Company's 2007 Incentive Award Plan (the "Plan"). The effective date of the Plan was June 11, 2007, subject to stockholder approval. The stockholders of the Company approved the Plan on February 7, 2008. The aggregate number of shares of common stock which may be awarded under the Plan is 1,000,000 shares. These shares were registered on September 23, 2010. See Item 11 and Footnote 10 of this Report Form 10-K for additional information regarding the Plan.
The following information is provided as of December 31, 2012 with respect to compensation plans, including individual compensation arrangements, under which our equity securities are authorized for issuance:
(1)This equity compensation is under the 2007 Stock Incentive Award Plan.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
We did not have a plan for the purchase of any shares of our common stock, and did not purchase any of the same during the year ended December 31, 2012.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected historical consolidated financial information for the periods indicated. The selected historical consolidated financial information presented below under the captions "Balance Sheet Data", "Operating Data", "Per Share Data", and "Other Data" have been derived from our audited consolidated financial statements and include all adjustments, which management considers necessary for a fair presentation of the historical consolidated financial statements for such period. In addition, since the information presented below is only a summary and does not provide all of the information contained in our historical consolidated financial statements, including the related notes, you should read it in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our historical consolidated financial statements, including the related notes, for information regarding business acquisitions, discontinued operations, critical accounting policies, and items affecting comparability of the amounts below.
Selected Financial Data
(in thousands, except per share data)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussions contain forward-looking statements that involve numerous risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements as a result of these risks and uncertainties, including those set forth in this report under "Forward-Looking Statements" and under "Risk Factors." You should read the following discussion in conjunction with "Selected Financial Data" and our consolidated financial statements and notes appearing elsewhere in this filing. Past performance is not a guarantee of future results.
Executive Summary
We are a fully integrated, self-administered and self-managed REIT, engaged in the acquisition, ownership, and management of real properties. As of December 31, 2012, we owned seven rentable parcels of real property, four of which are leased to the City of New York, two of which are leased to commercial tenants (five on a triple net basis), and one of which a portion is leased to various tenants. There is an additional property of negligible size which is not rentable. Additionally, in connection with the Tax Relief Extension Act of 1999 ("RMA"), we are permitted to participate in activities outside the normal operations of the REIT so long as these activities are conducted in entities which elect to be treated as taxable subsidiaries under the Internal Revenue Code, as amended (the "Code"), subject to certain limitations. In addition, we owned a group of outdoor maintenance businesses, an electrical contracting business, and a parking garage business, which are presented as part of discontinued operations on our statements of (loss) income. On December 27, 2011, we entered into an asset purchase agreement to sell the assets and business of the outdoor maintenance businesses and on January 12, 2012, the sale was completed. On February 1, 2012, we exited the parking business. On January 17, 2013, we entered into a certain contribution agreement with Wu/Lighthouse Portfolio, LLC effective as of January 1, 2013 in which we acquired all outstanding ownership interests of a portfolio consisting of 25 commercial properties located in New York, New Jersey and Connecticut. As a result of this acquisition we currently own a total of 32 properties, including our seven previously-owned properties.
We continue to seek opportunities to acquire stabilized properties. To the extent it is in the interests of our stockholders, we will seek to invest in a diversified portfolio of real properties within our geographic area that will satisfy our primary investment objectives of providing our stockholders with stable cash flow, preservation of capital and growth of income and principal without taking undue risk. Because a significant factor in the valuation of income-producing property is the potential for future income, we anticipate that the majority of properties that we will acquire will have both the potential for growth in value and provide for cash distributions to stockholders.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"). The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that could affect the reported amounts in our consolidated financial statements. Actual results could differ from these estimates. A summary of our significant accounting policies is presented in Note 1 of the "Notes to Consolidated Financial Statements" set forth in Item 8 hereof. Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements included in this report. Certain of the accounting policies used in the preparation of these consolidated financial statements are particularly important for an understanding of the financial position and results of operations presented in the historical consolidated financial statements included in this report and require the application of significant judgment by management and, as a result, are subject to a degree of uncertainty.
Revenue Recognition-Real Estate Operations:
We recognize revenue in accordance with ASC No. 840-20-25, which requires that revenue be recognized on a straight-line basis over the term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. In those instances in which we fund tenant improvements and the improvements are deemed to be owned by us, revenue recognition will commence when the
improvements are substantially completed and possession or control of the space is turned over to the tenant. When we determine that the tenant allowances are lease incentives, we commence revenue recognition when possession or control of the space is turned over to the tenant for tenant work to begin. The properties are being leased to tenants under operating leases. Minimum rental income is recognized on a straight-line basis over the term of the lease.
Property operating expense recoveries from tenants of common area maintenance, real estate, and other recoverable costs are recognized in the period the related expenses are incurred.
Revenue Recognition-Electrical Contracting Operations:
We recognize revenues from long-term construction contracts on the percentage-of-completion method in accordance with ASC No. 605-35. Percentage-of-completion is measured principally by the percentage of costs incurred to date for each contract to the estimated total costs for such contract at completion. Contract costs include all direct costs related to the performance and completion of the contracts. Estimated losses on the long term construction contracts are recognized in the period in which such losses are determined. Revenues are presented as part of discontinued operations in the consolidated statements of (loss) income.
Accounts Receivable:
Accounts receivable consist of trade receivables recorded at the original invoice amounts, less an estimated allowance for uncollectible accounts. Trade credit is generally extended on a short-term basis; thus trade receivables generally do not bear interest. Trade receivables are periodically evaluated for collectability based on past credit histories with customers and their current financial conditions. Changes in the estimated collectability of trade receivables are recorded in the results of operations for the period in which the estimate is revised. Trade receivables that are deemed uncollectible are offset against the allowance for uncollectible accounts. We generally do not require collateral for trade receivables. We recorded an impairment charge of approximately $0.1 million against accounts receivable and wrote off approximately $0.1 million of notes receivable as of December 31, 2012.
Real Estate Investments:
Real estate assets are stated at cost, less accumulated depreciation and amortization. All costs related to the improvement or replacement of real estate properties are capitalized. Additions, renovations, and improvements that enhance and/or extend the useful life of a property are also capitalized. Expenditures for ordinary maintenance, repairs, and improvements, that do not materially prolong the normal useful life of an asset are charged to operations as incurred.
Upon the acquisition of real estate properties, the fair values of the real estate purchased are allocated to the acquired tangible assets (consisting of land, buildings, and building improvements) and identified intangible assets and liabilities (consisting of above-market and below-market leases and in-place leases) in accordance with ASC No. 805. We utilize methods similar to those used by independent appraisers in estimating the fair value of acquired assets and liabilities. The fair value of the tangible assets of an acquired property considers the value of the property "as-if-vacant." The fair value reflects the depreciated replacement cost of the asset. In allocating purchase price to identified intangible assets and liabilities of an acquired property, the value of above-market and below-market leases are estimated based on the differences between (i) contractual rentals and the estimated market rents over the applicable lease term discounted back to the date of acquisition utilizing a discount rate adjusted for the credit risk associated with the respective tenants and (ii) the estimated cost of acquiring such leases giving effect to our history of providing tenant improvements and paying leasing commissions, offset by a vacancy period during which such space would be leased. The aggregate value of in-place leases is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property "as-if-vacant," determined as set forth above.
Above and below market leases acquired are recorded at their fair values. The capitalized above-market lease values are amortized as a reduction of rental revenue over the remaining term of the respective leases and the capitalized below-market lease values are amortized as an increase to rental revenue over the remaining term of the respective leases. The value of in-place leases is based on our evaluation of the specific characteristics of each tenant's lease. Factors considered include estimates of carrying costs during expected lease-up periods, current market conditions, and costs to execute similar leases. The value of in-place leases are amortized over the remaining term of the respective leases. If a
tenant vacates its space prior to its contractual expiration date, any unamortized balance of the related intangible asset is expensed.
Asset Impairment:
We apply the guidance in ASC No. 360-10-05, to recognize and measure impairment of long-lived assets. Management reviews each real estate investment for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability is based on an estimate of the undiscounted future cash flows that are expected to result from the real estate investment's use and eventual disposition. Such cash flow analyses consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition, and other factors. If an impairment event exists due to the projected inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair value. Management is required to make subjective assessments as to whether there are impairments in the value of its real estate properties. These assessments can have a direct impact on net income, because an impairment loss is recognized in the period that the assessment is made. Management has determined that there were no indicators of impairment at December 31, 2012.
When impairment indicators are present, investments in affiliated companies are reviewed for impairment by comparing their fair values to their respective carrying amounts. We make our estimate of fair value by considering certain factors including discounted cash flow analyses. If the fair value of the investment has dropped below the carrying amount, management considers several factors when determining whether an other-than-temporary decline in market value has occurred, including the length of the time and the extent to which the fair value has been below cost, the financial condition and near-term prospects of the affiliated company, and other factors influencing the fair market value, such as general market conditions. Management has determined that there were no indicators of impairment at December 31, 2012.
Discontinued Operations:
The consolidated financial statements present the operations of our outdoor maintenance, shelter cleaning, electrical contracting, and parking operations as discontinued operations in accordance with ASC 205-20-55 for all periods presented.
Fair Value Measurements:
We determine fair value in accordance with ASC No. 820-10-05 for financial assets and liabilities. ASC No. 820-10-05 defines fair value, provides guidance for measuring fair value, and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements.
Fair value is defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments' complexity.
Assets and liabilities disclosed at fair value are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC No. 820-10-35 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
•Level 1-Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
•Level 2-Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument's anticipated life. Level 2 inputs include quoted market prices in markets that are not active for an identical or similar asset or liability, and quoted market prices in active markets for a similar asset or liability.
•Level 3-Inputs reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. These valuations are based on significant unobservable inputs that require a considerable amount of judgment and assumptions. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
Determining which category an asset or liability falls within the hierarchy requires significant judgment and we evaluate its hierarchy disclosures each quarter.
At December 31, 2012, we measured certain financial assets at fair value on a recurring basis, including available-for-sale securities. In accordance with ASC No. 820-10-35, the fair value of our available-for-sale securities were based on current market quotes received from financial sources that trade such securities.
Income Taxes:
We are organized and conduct our operations to qualify as a REIT for federal income tax purposes. Accordingly, we will generally not be subject to federal income taxation on that portion of our distributed income that qualifies as REIT taxable income, to the extent that we distribute at least 90% of our taxable income to our stockholders and comply with certain other requirements as defined under Section 856 through 860 of the Code.
We also participate in certain activities conducted by entities which elected to be treated as taxable subsidiaries under the Code. As such we are subject to federal, state, and local taxes on the income from these activities.
We account for income taxes under the asset and liability method, as required by the provisions of ASC No. 740-10-30. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We provide a valuation allowance for deferred tax assets for which we do not consider realization of such assets to be more likely than not.
Investment in Equity Affiliates:
We invested in a joint venture that was formed to perform electrical contracting services. This investment is recorded under the equity method of accounting. We record our share of the net income and losses from the underlying operations and any other-than-temporary impairment on these investments as part of discontinued operations on the consolidated statements of (loss) income.
Variable Interest Entities:
We account for variable interest entities ("VIEs") in accordance with ASC No. 810-10-50. A VIE is defined as an entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that (i) has the power to control the activities that impact the VIE's economic performance and (ii) has the right to receive the majority of expected returns or the obligation to absorb the majority of expected losses that could be material to the VIE.
As of December 31, 2012, we have one investment which was made to a VIE entity with a net carrying amount of $0.5 million, which is included in assets of discontinued operations on the consolidated balance sheet. For the VIE identified, we are not the primary beneficiary, and as such, the VIE is not consolidated in our financial statements. We account for this investment under the equity method.
Stock-Based Compensation:
We have a stock-based compensation plan, which is described in Note 10. We account for stock based compensation in accordance with ASC No. 718-30-30, which establishes accounting for stock-based awards exchanged for employee services. Under the provisions of ASC No. 718-10-35, share-based compensation cost is measured at the grant date, based on the fair value of the award, and the expense is recognized in earnings at the grant date (for the portion that vests immediately) or ratably over the respective vesting periods.
Results of Operations
The following results of operations pertain to GTJ REIT, Inc. for the years ended December 31, 2012, 2011, and 2010.
Year Ended December 31, 2012 vs. Year Ended December 31, 2011
The following table sets forth our results of operations for the years indicated (in thousands):
nm-not meaningful
Property Rental Revenues
Property rentals revenue increased $0.1 million, or 1%, to $13.6 million for the year ended December 31, 2012 from $13.5 million for the year ended December 31, 2011. This increase is primarily attributable to new tenants with leases that began in the second and third quarters of 2012 partially offset by a decrease in revenue due to the early termination of the Varsity lease.
Tenant Reimbursements
Tenant reimbursements decreased $0.1 million, or 23%, to $0.3 million for the year ended December 31, 2012 from $0.4 million for the year ended December 31, 2011. This decrease is primarily attributable to the early termination of the Varsity lease in the third quarter of 2012.
Other Revenue
Other revenue decreased $0.3 million, or 94%, to $18,000 for the year ended December 31, 2012 from $318,000 for the year ended December 31, 2011. This decrease is primarily attributable to the decrease in revenue from the termination of the Metropolitan Transit Authority Bus Company contract which terminated in June 2011.
Operating Expenses
Operating expenses increased $1.0 million, or 10%, to $11.1 million for the year ended December 31, 2012 from $10.1 million for the year ended December 31, 2011. This increase is primarily attributable to consulting and legal fees relating to the divestiture of our taxable REIT subsidiaries and professional fees and expenses related to potential real estate acquisitions, an increase in stock compensation expense associated with the grant of restricted shares in 2012, and severance costs related to the divestiture.
Other Income (Expense)
Other income (expense) increased $0.6 million, or 23%, to ($3.2) million for the year ended December 31, 2012 from ($2.6) million for the year ended December 31, 2011. This increase is primarily attributable to the pension withdrawal expenses incurred in 2012 of approximately $1.5 million offset by income received from the former tenant at our Farm Springs property of $0.6 million as a result of incidental property damages during the term of the lease.
Provision For Income Taxes
The provision for income taxes represents federal, state, and local taxes on income of the taxable REIT subsidiaries.
Loss from Operations of Discontinued Operations, net of income taxes
Loss from discontinued operations, net of taxes reflects the operating results, accruals, allowances, and asset write offs of our taxable REIT subsidiaries (outdoor maintenance, shelter cleaning, electrical contracting, and parking operations), and paratransit businesses.
Year Ended December 31, 2011 vs. Year Ended December 31, 2010
The following table sets forth our results of operations for the years indicated (in thousands):
nm-not meaningful
Property Rental Revenues
Property rentals revenue increased $0.3 million, or 2%, to $13.5 million for the year ended December 31, 2011 from $13.2 million for the year ended December 31, 2010. This increase was primarily due to an increase in rent from the Varsity lease extension in September 2010 as well as rental revenue from new tenants in the second quarter of 2011.
Tenant Reimbursements
Tenant reimbursements increased $0.2 million, or 81%, to $0.4 million for the year ended December 31, 2011 from $0.2 million for the year ended December 31, 2010. This increase is primarily attributable to an increase in tenant reimbursements from the Varsity lease.
Other Revenues
Other revenues decreased $0.5 million, or 60%, to $0.3 million for the year ended December 31, 2011 from $0.8 million for the year ended December 31, 2010. This decrease is primarily attributable to the decrease in revenue from the termination of the Metropolitan Transit Authority Bus Company contract in July 2011.
Operating Expenses
Operating expenses increased $3.0 million, or 42%, to $10.1 million for the year ended December 31, 2011 from $7.1 million for the year ended December 31, 2010. This increase is primarily attributable to consulting and legal fees relating to the divestiture of our taxable REIT subsidiaries, an increase in stock compensation expense associated with the grant of restricted shares and options in 2011, and severance payments.
Other Income (Expense)
Other income (expense) increased $1.1 million, or 72%, to ($2.6) million for the year ended December 31, 2011 from ($1.5) million for the year ended December 31, 2010. This increase was primarily due to an increase in interest rates and related interest expense as a result of the refinancing of our mortgage debt on July 1, 2010.
Provision For Income Taxes
The provision for income taxes represents federal, state, and local taxes on income of the taxable REIT subsidiaries.
Loss from Operations of Discontinued Operations, net of income taxes
Loss from discontinued operations reflects the operating results, accruals, allowances, and asset write offs of our Outdoor Maintenance (Outdoor Maintenance, Shelter Cleaning, Electrical Contracting, and Parking Operations). The Outdoor Maintenance businesses were discontinued as of July 25, 2011.
Financings
Aviva Loan Agreement
On February 22, 2013 (the "Closing Date"), Farm Springs Road, LLC ("Farm Springs"), a wholly owned-subsidiary of the UPREIT, and Aviva Life and Annuity Company ("Aviva") entered into a Open-End First Mortgage Deed, Security Agreement and Fixture Filing (the "Agreement"), as well as a promissory note (the "Note"). Pursuant to the Agreement and Note, Farm Springs borrowed fifteen million dollars ($15,000,000) (the "Proceeds") from Aviva, at an interest rate of three percent (3)% per annum. Pursuant to the Note, Farm Springs shall pay interest only in the amount of thirty seven thousand five hundred dollars ($37,500) in fifty nine (59) consecutive installments from April 1, 2013 until February 1, 2018. On March 1, 2018, Farm Springs shall make a final payment of the entire remaining balance of the Proceeds, in addition to any unpaid interest. In addition, Farm Springs executed a Reserve Agreement dated as of the Closing Date, whereby Farm Springs provided additional collateral to Aviva of two hundred twenty-five thousand dollars ($225,000). Ten million seventy thousand nine hundred ten dollars ($10,070,910) from the Proceeds was used to satisfy in full the our obligations to M&T Bank relating to a prior mortgage on the Property including the release of the guaranty given by the Company to M&T Bank. The remaining Proceeds will be used for general working capital and other corporate purposes and partner distributions.
For the purposes of securing the Proceeds, Farm Springs has granted Aviva a security interest in 8 Farm Springs Road, Farmington, Connecticut. Such security interest includes, but is not limited to, all rents, insurance claims and all fixtures relating to such Property. The obligations under the Agreement are guaranteed by us, pursuant to the terms of that certain Guaranty entered into by us and Aviva.
Secured Revolving Credit Facility:
On August 26, 2011, we entered into a certain credit agreement ("the Credit Agreement) with Manufacturers and Traders Trust Company ("M&T"). The Credit Agreement provides for, among other things, a $10 million revolving credit facility (the "Revolver"). The Revolver is available to us to be used for Permitted Acquisitions (as defined in the Credit Agreement) and for general working capital and other corporate purposes. The Credit Agreement requires that we satisfy certain financial covenants, including: (i) minimum Net Worth, (ii) Fixed Charge Coverage Ratio, (iii) Leverage Ratio and (iv) Liquidity all as defined in the Credit Agreement, and other usual and customary restrictions and covenants, as defined. As a condition to M&T entering into the Credit Agreement, we agreed to indemnify M&T against certain claims pursuant to that certain Environmental Compliance and Indemnification Agreement, dated as of August 26, 2011.
The obligations under the Revolver are guaranteed by Farm Springs Road, LLC, our wholly-owned subsidiary ("Farm Springs"). The guaranty of Farm Springs is secured by a first priority mortgage lien and security interest on real property owned by Farm Springs and located at 8 Farm Springs Road, Farmington, Connecticut, as more specifically described in that certain Open-End Mortgage Agreement, dated as of August 26, 2011, and that certain General Assignment of Rents, dated as of August 26, 2011, by and between M&T and us. The maturity date for the Revolver is August 26, 2014. Borrowings under the Revolver bear interest, at the Borrower's option, at either: (i) the M&T's prime rate plus 2.0% or (ii) the London Interbank Offered Rate ("LIBOR") plus 3.5% which is subject to a minimum rate of 4.0%.
As part of the Credit agreement, we are obligated to comply with certain financial and nonfinancial covenants As of December 31, 2012, we were in compliance with all financial and nonfinancial covenants.
As of December 31, 2012, we have $5.0 million outstanding under the Credit Agreement. Our obligations under the Credit Agreement were satisfied in full on February 22, 2013.
Hartford Loan Agreement:
On July 1, 2010, two of our indirect subsidiaries, 165-25 147th Avenue, LLC and 85-01 24th Avenue, LLC (collectively, the "Borrower") entered into a Fixed Rate Term Loan Agreement (the "Hartford Loan Agreement") with Hartford Life Insurance Company, Hartford Life and Accident Insurance Company and Hartford Life and Annuity Insurance Company (collectively, the "Lenders") pursuant to which the Lenders made a term loan to Borrower in the aggregate principal amount of $45,500,000 (the "Loan"). The Loan was evidenced by certain promissory notes, executed simultaneously therewith, payable to the order of (i) Hartford Life Insurance Company in the stated amount of $25,000,000; (b) Hartford Life and Accident Insurance Company in the stated principal amount of $10,500,000; and (c) Hartford Life and Annuity Insurance Company in the stated principal amount of $10,000,000 (collectively, the "Notes"). The proceeds from the Loan were used to satisfy in full our obligations under the previous ING Loan Agreement and to pay related transaction costs and expenses.
The obligations under the Hartford Loan Agreement are secured by, among other things, a first priority mortgage lien and security interest on certain (a) improved real estate commonly known as 165-25 147th Avenue, Laurelton, Queens, New York and 85-01 24th Avenue, East Elmhurst, Queens, New York (collectively, the "Real Estate"), and (b) personal property and other rights of the Borrower, all as more specifically described in that certain Consolidated, Amended and Restated Mortgage, Security Agreement and Fixture Filing dated as of July 1, 2010 (the "Mortgage") and that certain Assignment of Leases and Rents dated as of July 1, 2010 among the Lenders and the Borrower, and other ancillary documents. The outstanding principal balance of the Loan shall bear interest at the fixed rate of 5.05% per annum. The Borrower is required to make monthly payments of interest only in the amount of $191,479. The principal is payable on the maturity date July 1, 2017.
Earnings and Profit Distribution
As of December 31, 2012, cash of approximately $19.9 million and 3,775,400 shares of our common stock have been distributed to the holders in connection with a one-time special distribution of accumulated earnings and profits which was declared by our Board of Directors on August 7, 2007. The remaining payable balance of $0.1 million is included in other liabilities in the accompanying consolidated balance sheet at December 31, 2012.
Contractual Obligations
We, through our subsidiaries, lease certain operating facilities and certain equipment under operating leases, expiring at various dates through fiscal 2015. In addition, we, through our subsidiaries, have a secured revolving credit facility and mortgage payable as previously described in the "Financings" section. The table below summarizes the principal balances of our obligations for indebtedness and lease obligations as of December 31, 2012 in accordance with their required payment terms (in thousands):
(1)Our obligations under the secured revolving credit facility were satisfied in full on February 22, 2013.
Net Cash Flows
Year Ended December 31, 2012 vs. Year Ended December 31, 2011
Operating Activities
Net cash provided by operating activities was $1.0 million for 2012 compared to net cash provided by operating activities of $2.7 million in 2011. For the 2012 period, cash provided by operating activities was primarily related to (i) loss from continuing operations of approximately $0.4 million (ii) an increase in accounts payable and other liabilities of $2.2 million (iii) an increase in accounts receivable of $0.1 million (iv) depreciation and amortization expense of $2.1 million (v) a decrease in insurance reserves of $0.4 million (vi) stock compensation expense of approximately $0.4 million, (vii) an increase in other assets of $1.3 million, and (viii) an increase in deferred charges of $1.5 million. For the 2011 period, cash provided by operating activities was primarily related to (i) income from continuing operations of approximately $1.5 million (ii) a decrease in accounts payable and other liabilities of $0.2 million (iii) an increase in accounts receivable of $0.1 million (iv) depreciation and amortization expense of $2.4 million (v) a decrease in insurance reserves of $0.3 million (vi) stock compensation expense of approximately $0.4 million, (vii) an increase in other assets of $0.6 million, and (viii) an increase in deferred charges of $0.3 million.
Investing Activities
Net cash used in investing activities was $2.4 million for the year ended December 31, 2012 compared to cash provided by investing activities of $0.1 million for the year ended December 31, 2011. For the 2012 period, cash used in investing activities primarily related to purchases of leasehold improvements of approximately $4.0 million, proceeds from the sale of investments of approximately $1.4 million, and restricted cash of approximately $0.2 million. For the 2011 period, cash provided by investing activities primarily related to purchases of leasehold improvements of approximately $0.4 million, proceeds from the sale of investments of approximately $0.3 million, and restricted cash of approximately $0.2 million.
Financing Activities
Net cash used in financing activities was approximately $1.1 million for the year ended December 31, 2012 and was related to the payment of the Company's quarterly and supplemental dividends offset by proceeds from the revolving credit facility. Net cash used in financing activities for the year ended December 31, 2011 was approximately $5.7 million and was related to the payment of the Company's quarterly and supplemental dividends.
Year Ended December 31, 2011 vs. Year Ended December 31, 2010
Operating Activities
Net cash provided by operating activities was $2.7 million for 2011 compared to net cash provided by operating activities of $5.1 million in 2010. For the 2011 period, cash provided by operating activities was primarily related to (i) income from continuing operations of approximately $1.5 million (ii) a decrease in accounts payable and other liabilities of $0.2 million (iii) an increase in accounts receivable of $0.1 million (iv) depreciation and amortization expense of $2.4 million (v) a decrease in insurance reserves of $0.3 million (vi) stock compensation expense of approximately $0.4 million, (vii) an increase in other assets of $0.6 million, and (viii) an increase in deferred charges of $0.3 million. For the 2010 period, cash provided by operating activities was primarily related to (i) income from continuing operations of approximately $5.5 million (ii) a decrease in accounts payable and other liabilities of $1.2 million (iii) an increase in accounts receivable of $1.1 million (iv) depreciation and amortization expense of $2.4 million (v) a decrease in insurance reserves of $0.1 million (vi) stock compensation expense of approximately $0.4 million, (vii) an increase in other assets of $1.3 million, and (viii) an increase in deferred charges of $1.7 million.
Investing Activities
Net cash provided by investing activities was $0.1 million for the year ended December 31, 2011 compared to cash provided by investing activities of $0.6 million for the year ended December 31, 2010. For the 2011 period, cash provided by investing activities primarily related to purchases of leasehold improvements of approximately $0.4 million, proceeds from the sale of investments of approximately $0.3 million, and restricted cash of approximately $0.2 million. For the 2010 period, cash provided by investing activities primarily related to purchases of leasehold improvements of approximately $0.4 million, proceeds from the sale of investments of approximately $0.8 million, and restricted cash of approximately $0.2 million.
Financing Activities
Net cash used in financing activities was approximately $5.7 million for the year ended December 31, 2011 and was related to the payment of the Company's quarterly and supplemental dividends. Net cash used in financing activities for the year ended December 31, 2010 was approximately $3.3 million and was related to (i) the payment of the Company's quarterly and supplemental dividends of approximately $5.4 million, (ii) net proceeds from debt refinancing of approximately $2.3 million, and (iii) payments for earnings and profits of $0.2 million.
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 (loss) income and net cash provided by operating activities. Management has adopted the definition suggested by The National Association of Real Estate Investment Trusts ("NAREIT") and defines FFO to mean net (loss) income computed in accordance with GAAP excluding gains or losses from sales of property, plus real estate-related depreciation and amortization and after adjustments for unconsolidated joint ventures.
Management considers FFO a meaningful, additional measure of operating performance because it primarily excludes the assumption that the value of our real estate assets diminishes predictably over time and industry analysts have accepted it as a performance measure. FFO is presented to assist investors in analyzing our performance. It is helpful as it excludes various items included in net income that are not indicative of our operating performance, such as gains or losses from sales of property and depreciation and amortization.
However, FFO:
•does not represent cash flows from operating activities in accordance with GAAP (which, unlike FFO, generally reflects all cash effects of transactions and other events in the determination of net income); and
•should not be considered an alternative to net income as an indication of our performance.
In determining AFFO we do not consider the operations of our taxable REIT subsidiaries (outside maintenance, shelter cleaning, electrical contracting, and parking operations) as part of our real estate operations and therefore exclude the net income or net loss when arriving at AFFO. This is the one difference between our definition of AFFO and the NAREIT definition of FFO, which includes net income or net loss from taxable REIT subsidiaries.
FFO and AFFO as defined by us may not be comparable to similarly titled items reported by other real estate investment trusts due to possible differences in the application of the NAREIT definition used by such REITs. The table below provides a reconciliation of net (loss) income in accordance with GAAP to FFO and AFFO for each of the three years ended December 31, 2012, 2011, and 2010 (amounts in thousands, except per share data).
Acquisitions, Dispositions, and Investments
On March 29, 2010, we invested approximately four hundred dollars in exchange for a 40% interest in a joint venture with Morales, a Minority Women Owned Business Enterprise ("MWBE"). The joint venture was formed to secure MWBE contracts for the purpose of providing electrical construction services.
On August 13, 2010, we formed Shelter Parking Corp., a New York corporation, to operate and manage parking garage facilities in the New York tri-state area. On September 30, 2010, Shelter Parking Corp., through its wholly owned subsidiary, Shelter Parking Brevard, LLC, entered into a fifteen year lease agreement to operate a garage facility at 245 East 54th Street. This was the only parking garage facility we operated.
On July 25, 2011, our Board of Directors voted to divest substantially all of our taxable REIT subsidiaries and on November 7, 2011 voted to divest our parking garage operations. Following the divestiture, our plan is to continue focusing on the growth and expansion of our real estate operations.
On December 27, 2011, MetroClean Express Corp. ("MetroClean") and Shelter Clean Inc. ("Shelter Clean") entered into an asset purchase agreement with Triangle Services, Inc. (the "Purchaser") for the sale of substantially all of the assets and business of MetroClean and Shelter Clean to the Purchaser. On January 12, 2012, the sale was completed. Additionally, on January 12, 2012, Shelter Clean of Arizona, Inc. entered into a certain Bill of Sale and Assignment and Assumption Agreement for the sale of certain assets and the business of Shelter Clean of Arizona, Inc. to a wholly-owned subsidiary of the Purchaser.
On November 15, 2011, in accordance with our lease, we gave notice to our landlord of our intention to terminate our lease early, and on February 1, 2012, we exited the parking garage business.
As previously disclosed, on December 20, 2012, Shelter Express entered into a share purchase agreement with Manisha Patel for the sale of all of the issued and outstanding stock of Shelter Electric. It is expected that the sale will be completed in the beginning of the second quarter of 2013.
On January 17, 2013, we entered into a certain contribution agreement with Wu/Lighthouse Portfolio, LLC effective as of January 1, 2013 in which we acquired all outstanding ownership interests of a portfolio consisting of 25 commercial properties located in New York, New Jersey and Connecticut. As a result of this acquisition we currently own a total of 32 properties, including our seven previously-owned properties.
Cash Payments for Financing
Payment of interest under the Hartford Loan Agreement and borrowings under the Secured Revolving Credit Facility will consume a portion of our cash flow, reducing net income and the resulting distributions to be made to our stockholders.
Trend in Financial Resources
We expect to receive additional rent payments over time due to scheduled increases in rent set forth in the leases on our real properties. It should be noted, however, that the additional rent payments are expected to result in an approximately equal obligation to make additional distributions to stockholders, and will therefore not result in a material increase in working capital.
Environmental Matters
During 2012, our real property, except for our Farm Springs Property, has had activity regarding removal and replacement of underground storage tanks. Upon removal of the old tanks, any soil found to be unacceptable was thermally treated off site to burn off contaminants. Fresh soil was brought in to replace earth which had been removed. There are still some levels of contamination at the sites, and groundwater monitoring programs have been put into place at certain locations. In July 2006, we entered into an informal agreement with the New York State Department of Environmental Conservation ("NYSDEC") whereby we have committed to a three-year remedial investigation and feasibility study (the "Study") for all site locations. We concluded that the estimated cost range to perform full remediation on all site locations would be between approximately $1.4 million and $2.6 million While management believes that the amount of the Study and related remediation is likely to fall within the estimated cost range, no amount within that range can be determined to be the better estimate. Therefore, management believes that recognition of the low-range estimate is appropriate. In May 2008, we received an updated draft of the remedial and investigation feasibility study and recorded an additional accrual of approximately $0.8 million for additional remediation costs. As of December 31, 2012 and December 31, 2011, we have recorded a liability for remediation costs of approximately $0.1 million and $0.2 million, respectively. Presently, we are not aware of any claims or remediation requirements from any local, state, or federal government agencies. Each of the properties is in a commercial zone and is still used as transit depots, including maintenance of vehicles.
Insurance Regulations
The provisions of the Insurance Law of the Cayman Islands require our insurance operations to maintain a minimum net worth of $120,000. At December 31, 2012 and 2011, we were not in compliance with this minimum net worth requirement. A meeting was held with the Cayman Islands Monetary Authority ("CIMA") on March 23, 2011, at which time we informed CIMA of our intention to transfer the insurance balances into a New York based liquidating trust and dissolve our Cayman Islands based insurance operations once the transfer is complete. As of December 31, 2012, we are in the process of transferring the insurance balances in a liquidating trust.
Divestiture:
In connection with the completion of the divestiture of our taxable REIT subsidiaries, we may be subject to certain liabilities including union wages, benefits, and severance. On January 27, 2012, we received a notice from Local Union No. 3's counsel asserting a severance liability of approximately $0.1 million for those employees terminated in connection
with the divestiture. An arbitration hearing was held May 2, 2012 in which the arbitrator ruled in favor of Local Union No. 3 in the amount of approximately $0.1 million. On July 13, 2012, we paid the full amount of the settlement.
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. We determined the liability was probable and as a result we accrued $1.5 million in other liabilities on our consolidated balance sheet. The liability will be paid in installments of approximately $8,000 per month over a twenty year term. As of December 30, 2012, we have made eleven installment payments.
Inflation
Low to moderate levels of inflation during the past several years have favorably impacted our operations by stabilizing operating expenses. At the same time, low inflation has had the indirect effect of reducing our ability to increase tenant rents. However, our properties have tenants whose leases include expense reimbursements and other provisions to minimize the effect of inflation.
Off Balance Sheet Arrangements
As part of our electrical contracting operations, we may put up performance bonds to guarantee completion of services to be performed. As of December 31, 2012, we have three performance bonds outstanding in the amount of $10.2 million.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2012 and 2011, we did not have any variable rate liabilities.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GTJ REIT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2012 and 2011
Consolidated Statements of (Loss) Income for the years ended December 31, 2012, 2011, and
Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2012, 2011, and 2010
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2012, 2011, and 2010
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011, and
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
GTJ REIT, Inc. and Subsidiaries
Lynbrook, New York
We have audited the accompanying consolidated balance sheets of GTJ REIT, Inc. and Subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of (loss) income, comprehensive (loss) income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GTJ REIT, Inc. and Subsidiaries at December 31, 2012 and 2011 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
Melville, New York
April 1, 2013
GTJ REIT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
The accompanying notes should be read in conjunction with the consolidated financial statements.
GTJ REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(amounts in thousands, except share and per share data)
The accompanying notes should be read in conjunction with the consolidated financial statements.
GTJ REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(amounts in thousands, except share and per share data)
The accompanying notes should be read in conjunction with the consolidated financial statements.
GTJ REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(amounts in thousands, except share and per share data)
The accompanying notes should be read in conjunction with the consolidated financial statements.
GTJ REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
The accompanying notes should be read in conjunction with the consolidated financial statements.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of Business:
GTJ REIT, Inc. (the "Company" or "GTJ REIT") was incorporated in Maryland on June 23, 2006 to engage in any lawful act or activity including, without limitation, qualifying as a real estate investment trust ("REIT") under Sections 856 through 860, or any successor sections of the Internal Revenue Code of 1986, as amended (the "Code"), for which corporations may be organized under Maryland General Corporation Law. The Company has focused primarily on the ownership and management of commercial real estate located in New York City and also has one property located in Farmington, Connecticut ("Real Estate Operations"). In addition, the Company, through its taxable REIT subsidiaries, provided outdoor maintenance and shelter cleaning services to outdoor advertising companies and government agencies in New York, New Jersey, Arizona and California as well as electrical construction services to a broad range of commercial, industrial, institutional and governmental customers in New York ("Outdoor Maintenance Operations"), and beginning October 1, 2010 until February 2012, operated and managed a parking garage facility located in New York City ("Parking Operations").
On March 29, 2007, the Company commenced operations upon the completion of the Reorganization described below. Effective July 1, 2007, the Company elected to be treated as a REIT under the Code and elected December 31st as its fiscal year end. Additionally, in connection with the Tax Relief Extension Act of 1999 ("RMA"), the Company is permitted to participate in activities outside the normal operations of the REIT so long as these activities are conducted in entities which elect to be treated as taxable subsidiaries under the Code subject to certain limitations.
At December 31, 2012, the Company owned seven properties containing a total of approximately 561,000 square feet of leasable area. On January 17, 2013, the Company entered into a certain contribution agreement with Wu/Lighthouse Portfolio, LLC effective as of January 1, 2013 in which a limited partnership owned and controlled by the Company acquired all outstanding ownership interests of a portfolio consisting of 25 commercial properties located in New York, New Jersey and Connecticut in exchange for 33.29% of the outstanding limited partnership interests. As a result of this acquisition the Company currently owns interests in a total of 32 properties, including the seven previously-owned properties as of the date of this report.
Reorganization:
On July 24, 2006, the Company entered into an Agreement and Plan of Merger (the "Agreement") with Triboro Coach Corp., a New York corporation ("Triboro"); Jamaica Central Railways, Inc., a New York corporation ("Jamaica"); Green Bus Lines, Inc., a New York corporation ("Green" and together with Triboro and Jamaica, collectively referred to as the "Bus Companies" and each referred to as a "Bus Company"); Triboro Acquisition, Inc., a New York corporation ("Triboro Acquisition"); Jamaica Acquisition, Inc., a New York corporation ("Jamaica Acquisition"); and Green Acquisition, Inc., a New York corporation ("Green Acquisition," and together with Jamaica Acquisition and Triboro Acquisition collectively referred to as the "Acquisition Subsidiaries" and each referred to as an "Acquisition Subsidiary"). The transactions contemplated under the Agreement closed on March 29, 2007. The effect of the merger transactions was to complete a reorganization ("Reorganization") of the ownership of the Bus Companies into the Company with the surviving entities of the merger of the Bus Companies with the Acquisition Subsidiaries becoming wholly-owned subsidiaries of the Company and the former shareholders of the Bus Companies becoming stockholders in the Company. Under the Reorganization approximately 10,000,000 shares of the Company's common stock were distributed to the former shareholders of Green, Triboro, and Jamaica in exchange for their shares in the Bus Companies.
The Bus Companies, including their subsidiaries, owned a total of six rentable parcels of real property, four of which are leased to the City of New York on a triple net basis, one of which is leased to a commercial tenant on a trip net basis, and one of which is leased to various tenants. There was an additional property of negligible size which was not rentable. Prior to the Reorganization, the Bus Companies and their subsidiaries, collectively, operated a group of outdoor maintenance businesses, which were acquired as part of the Reorganization.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Following the completion of the Reorganization, on July 1, 2007, the Company elected to be treated as a REIT under the applicable provisions of the Code. In order to adopt a REIT structure, it was necessary to combine the Bus Companies and their subsidiaries under a single holding company. The Company is the holding company. The Company has formed three wholly-owned New York corporations and each of the Bus Companies merged with one of these subsidiaries to become wholly-owned subsidiaries of the Company. The mergers required the approval of the holders of at least 662/3% of the outstanding shares of common stock of each of Green, Triboro and Jamaica, voting separately and not as one class, which was obtained on March 26, 2007.
As part of becoming a REIT, the Company was required, after the Reorganization, to make a distribution of the Bus Companies' historical undistributed earnings and profits, calculated to be an estimated $62.1 million (see Note 10). The Company agreed to distribute up to $20.0 million in cash, and 3,775,400 shares of the Company's common stock, valued at $11.14 per share solely for purposes of the distribution. The Reorganization was accounted for under the purchase method of accounting as required by ASC No. 805.
Each stockholder elected to receive cash or stock, or a combination of both. The Company distributed approximately $19.9 million in cash and 3,775,400 shares of common stock (with a value of approximately $42.1 million). The undistributed cash balance of approximately $0.1 million is included in other liabilities in the consolidated balance sheet at December 31, 2012.
On March 29, 2010, Shelter Electric invested approximately four hundred dollars in exchange for a 40% interest in a joint venture with Morales, a Minority Women Owned Business Enterprise ("MWBE"). The joint venture was formed to secure MWBE contracts for the purpose of providing electrical construction services.
On August 13, 2010, the Company formed Shelter Parking Corp., a New York corporation, to operate and manage parking facilities in the New York tri-state area. On September 30, 2010, Shelter Parking Corp., through its wholly owned subsidiary, Shelter Parking Brevard, LLC, entered into a fifteen year lease agreement to operate a parking garage facility at 245 East 54th Street and commenced operations on October 1, 2010.
On July 25, 2011, the Board of Directors (the "Board") voted to divest substantially all of the Company's taxable REIT subsidiaries. Although the parking garage operations were not divested at this time, the Board subsequently voted to divest the operations on November 7, 2011. Following the divestiture, the Company's plan is to continue focusing on the growth and expansion of our real estate operations.
On December 27, 2011, MetroClean Express Corp. ("MetroClean") and Shelter Clean Inc. ("ShelterClean") each entered into an asset purchase agreement with Triangle Services, Inc. (the "Purchaser") for the sale of substantially all of the assets and business of MetroClean and Shelter Clean to the Purchaser. On January 12, 2012, the sale was completed. Additionally, on January 12, 2012, Shelter Clean of Arizona, Inc. entered into a certain Bill of Sale and Assignment and Assumption Agreement for the sale of certain assets and the business of Shelter Clean of Arizona, Inc. to a wholly-owned subsidiary of the Purchaser.
On November 15, 2011, in accordance with the lease, Shelter Parking Brevard gave notice to the landlord of the intention to terminate the parking garage lease early, and on February 1, 2012, the Company exited the parking garage business.
On December 20, 2012, Shelter Express entered into a share purchase agreement with Manisha Patel for the sale of all of the issued and outstanding stock of Shelter Electric. It is expected that the sale will be completed in the beginning of the second quarter of 2013.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
On January 17, 2013, the Company entered into a certain contribution agreement with Wu/Lighthouse Portfolio, LLC effective as of January 1, 2013 in which the Company acquired all outstanding ownership interests of a portfolio consisting of 25 commercial properties located in New York, New Jersey and Connecticut. The acquired properties have a gross asset value of approximately $194 million, and are subject to an aggregate of approximately $115 million in outstanding mortgage indebtedness. As a result of this acquisition the Company currently owns a total of 32 properties, including the seven previously-owned properties.
Basis of Presentation and Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). All significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications:
Certain prior period amounts have been reclassified to conform to the current year presentation.
Use of Estimates:
The preparation of the Company's consolidated financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities, and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. All of these estimates reflect management's best judgment about current economic and market conditions and their effects based on information available as of the date of these consolidated financial statements. If such conditions persist longer or deteriorate further than expected, it is reasonably possible that the judgments and estimates could change, which may result in impairments of certain assets. Significant estimates include those related to uncollectible receivables, the useful lives of long lived assets including property and equipment and intangible assets, income taxes, contingencies, environmental matters, insurance liabilities, and stock-based compensation.
Real Estate Investments:
Real estate assets are stated at cost, less accumulated depreciation and amortization. All costs related to the improvement or replacement of real estate properties are capitalized. Additions, renovations, and improvements that enhance and/or extend the useful life of a property are also capitalized. Expenditures for ordinary maintenance, repairs, and improvements that do not materially prolong the normal useful life of an asset, are charged to operations as incurred.
Upon the acquisition of real estate properties, the fair values of the real estate purchased are allocated to the acquired tangible assets (consisting of land, buildings, and building improvements) and identified intangible assets and liabilities (consisting of above-market and below-market leases and in-place leases) in accordance with ASC No. 805. The Company utilizes methods similar to those used by independent appraisers in estimating the fair value of acquired assets and liabilities. The fair value of the tangible assets of an acquired property considers the value of the property "as-if-vacant." The fair value reflects the depreciated replacement cost of the asset. In allocating purchase price to identified intangible assets and liabilities of an acquired property, the values of above-market and below-market leases are estimated based on the differences between (i) contractual rentals and the estimated market rents over the applicable lease term discounted back to the date of acquisition utilizing a discount rate adjusted for the credit risk associated with the
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
respective tenants and (ii) the estimated cost of acquiring such leases giving effect to the Company's history of providing tenant improvements and paying leasing commissions, offset by a vacancy period during which such space would be leased. The aggregate value of in-place leases is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property "as-if-vacant," determined as set forth above.
Above and below market leases acquired are recorded at their fair values. The capitalized above-market lease values are amortized as a reduction of rental revenue over the remaining term of the respective leases and the capitalized below-market lease values are amortized as an increase to rental revenue over the remaining term of the respective leases. The value of in-place leases is based on the Company's evaluation of the specific characteristics of each tenant's lease. Factors considered include estimates of carrying costs during expected lease-up periods, current market conditions, and costs to execute similar leases. The values of in-place leases are amortized over the remaining term of the respective leases. If a tenant vacates its space prior to its contractual expiration date, any unamortized balance of the related intangible asset is expensed.
The Company has recorded intangible assets relating to in-place leases of approximately $2.2 million and above-market leases of approximately $1.4 million in connection with the purchase of the Farm Springs Property in 2008. Amortization expense related to these intangible assets was approximately $477,000, $818,000, and $818,000 for each of the years ended December 31, 2012, 2011, and 2010, respectively.
Depreciation and Amortization:
The Company uses the straight-line method for depreciation and amortization. Properties and property improvements are depreciated over their estimated useful lives, which range from 10 to 25 years. Furniture and fixtures, equipment, and transportation equipment are depreciated over estimated useful lives that range from 5 to 10 years. Tenant improvements are amortized over the shorter of the remaining non-cancellable term of the related leases or their useful lives.
Deferred Charges:
Deferred charges consist principally of leasing commissions, which are amortized ratably over the life of the related tenant leases, and financing costs, which are amortized over the terms of the respective debt agreements.
Asset Impairment:
The Company applies the guidance in ASC No. 360-10-05 to recognize and measure impairment of long-lived assets. Management reviews each real estate investment for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability is based on an estimate of the 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 the estimated fair value of the property. Management is required to make subjective assessments as to whether there are impairments in the value of its real estate holdings. These assessments could have a direct impact on net income, because an impairment loss is recognized in the period that the assessment is made. Management has determined that there were no indicators of impairment at December 31, 2012.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
When impairment indicators are present, investments in affiliated companies are reviewed for impairment by comparing their fair values to their respective carrying amounts. The Company makes its estimate of fair value by considering certain factors including discounted cash flow analyses. If the fair value of the investment has dropped below the carrying amount, management considers several factors when determining whether an other-than-temporary decline in market value has occurred, including the length of the time and the extent to which the fair value has been below cost, the financial condition and near-term prospects of the affiliated company, and other factors influencing the fair market value, such as general market conditions. Management has determined that there were no indicators of impairment at December 31, 2012.
Reportable Segments:
As of December 31, 2012, the Company primarily operated in two reportable segments: (i) Real Estate Operations, (ii) Other Operations.
•Real Estate Operations rent Company owned real estate located in New York and Connecticut.
•Other Operations provided various services to customers, including (i) personnel support, consulting, and maintenance services to the Metropolitan Transit Authority Bus Company ("MTABC") for payroll, human resource, dispatch, procurement, inventory, and shop management systems for certain bus depots and (ii) insurance operations which assumes reinsurance of worker's compensation, vehicle liability, and covenant liability of the Company and its affiliated companies from unrelated insurance companies based in the United States of America.
Both segment's operations are conducted within the U.S., with the exception of the insurance operations which is also conducted in the Cayman Islands.
As of July 25, 2011, the Board of Directors voted to divest the Company of its outdoor maintenance, shelter cleaning, and electrical contracting businesses. Although the parking garage operations were not divested at this time, the Board of Directors subsequently voted to divest the operations on November 7, 2011. These operations are presented as discontinued operations in the consolidated statements of (loss) income.
Revenue Recognition-Real Estate Operations:
The Company recognizes revenue from real estate operations in accordance with ASC No. 840-20-25, which requires that revenue be recognized on a straight-line basis over the term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. For the year ended December 31, 2012, five tenants included in the consolidated statement of (loss) income, constituted approximately 63%, 16%, 12%, 4%, 3%, two tenants each constituted approximately 1%, and one tenant constituted approximately less than 1% of rental revenue, whereas for the year ended December 31, 2011, six tenants, constituted approximately 63%, 16%, 12%, 8%, 1%, and less than 1% of rental revenue, and for the year ended December 31, 2010, five tenants constituted approximately 66%, 16%, 12%, 5%, and less than 1% of rental income.
In those instances in which the Company funds tenant improvements and the improvements are deemed to be owned by the Company, revenue recognition will commence when the improvements are substantially completed and possession or control of the space is turned over to the tenant. When the Company determines that the tenant allowances are lease incentives, the Company commences revenue recognition when possession or control of the space is turned over to the tenant for tenant work to begin. The Company's properties are being leased to tenants under operating leases. The cumulative excess revenue recognized over amounts billed pursuant to the underlying leases amounted to approximately $8.6 million and $7.4 million at December 31, 2012 and December 31, 2011, respectively (see Note 5).
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Property operating expense recoveries from tenants of common area maintenance, real estate, and other recoverable costs are recognized as revenue in the period the related expenses are incurred.
Revenue Recognition-Electrical Contracting Operations:
The Company recognizes revenues from long-term construction contracts on the percentage-of-completion method in accordance with ASC No. 605-35. Percentage-of-completion is measured principally by the percentage of costs incurred to date for each contract to the estimated total costs for such contract at completion. Contract costs include all direct costs related to the performance and completion of the contracts. Estimated losses on the long term construction contracts are recognized in the period in which such losses are determined. Revenues are presented as part of discontinued operations in the consolidated statements of (loss) income (see Note 4 for further discussion regarding discontinued operations).
Earnings Per Share Information:
In accordance with ASC No. 260-10-45, the Company presents both basic and diluted earnings per share. Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower per share amount. Restricted stock was included in the computation of diluted earnings per share and stock option awards were excluded from the computation of diluted earnings per share because the awards would have been antidilutive for the periods presented.
Discontinued Operations:
The consolidated financial statements of the Company present the operations of the outdoor maintenance, shelter cleaning, electrical contracting, and parking operations as discontinued operations (Note 4) in accordance with ASC No. 205-20-55 for the years ended December 31, 2012, 2011, and 2010.
Cash and Cash Equivalents:
The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.
Restricted Cash:
Restricted cash represents funds held by the insurance carrier for the purpose of the payment of insured losses. At December 31, 2012 and 2011, the Company had restricted cash in the amount of $0.4 million and $0.6 million, respectively.
Accounts Receivable:
Accounts receivable consist of trade receivables recorded at the original invoice amounts, less an estimated allowance for uncollectible accounts. Trade credit is generally extended on a short-term basis; thus trade receivables generally do not bear interest. Trade receivables are periodically evaluated for collectability based on past credit histories with customers and their current financial conditions. Changes in the estimated collectability of trade receivables are recorded in the results of operations for the periods in which the estimates are revised. Trade receivables that are deemed uncollectible are offset against the allowance for uncollectible accounts. The Company generally does not require collateral for trade receivables. The Company recorded an impairment charge of approximately $0.1 million against accounts receivable and wrote off approximately $0.1 million of notes receivable as of December 31, 2012.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Available-for-Sale Securities:
The Company accounts for its marketable debt and equity securities as available-for-sale securities in accordance with ASC No. 320-10-35. Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date.
Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income, a component of stockholders' equity. Interest on securities is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in the accompanying consolidated statements of (loss) income. The cost of securities sold is based on the specific identification method. Estimated fair value is determined based on quoted market prices.
Fair Value Measurement:
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measurements, a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:
Level 1-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 the Company'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 taxable income to its stockholders and complies with certain other requirements as defined under Section 856 through 860 of the Code.
The Company also participates in certain activities conducted by entities which elected to be treated as taxable subsidiaries under the Code. As such, the Company is subject to federal, state, and local taxes on the income from these activities.
The Company accounts for income taxes under the asset and liability method, as required by the provisions of ASC No. 740-10-30. Under this method, deferred tax assets and liabilities are established based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.
ASC No. 740-10-65 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC No. 740-10-65, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
likelihood of being realized upon ultimate settlement. ASC No. 740-10-65 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of December 31, 2012 and 2011, the Company does not have a liability for unrecognized tax positions.
Comprehensive (Loss) Income:
The Company follows the provisions of ASC No. 220-10-45, which sets forth rules for the reporting and display of comprehensive (loss) income and its components. ASC No. 220-10-45 requires unrealized gains or losses on the Company's available-for-sale securities to be included in accumulated other comprehensive income, net of taxes and as a component of stockholders' equity.
Environmental Matters:
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information become available.
Environmental costs are capitalized if the costs extend the life of the property, increase its capacity, and/or mitigate or prevent contamination from future operations. Environmental costs are also capitalized in recognition of legal asset retirement obligations resulting from the acquisition, construction and/or normal operation of a long-lived asset. Costs related to remedial investigation and feasibility studies, environmental contamination treatment and cleanup are charged to expense. Estimated future incremental operations, maintenance, and management costs directly related to remediation are accrued when such costs are probable and estimable (see Notes 7 and 15).
Insurance Liabilities:
The liability for losses and loss-adjustment expenses includes an amount for claims reported and a provision for adverse claims development. The liability for claims reported is based on management's best estimates, while the liability for adverse claims development is based on independent actuarial reports. While management believes that the estimated liabilities are adequate, the ultimate liabilities may be in excess of or less than the amounts recorded. It is reasonably possible that the expectations associated with these amounts could change in the near-term (within one year). The effect of such changes could be material to the consolidated financial statements. The methods for making such estimates and for establishing the resulting liabilities are continually reviewed, and any adjustments are reported in current earnings.
Concentrations of Credit Risk:
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash equivalents, which from time-to-time exceed the federal depository insurance coverage. Beginning January 1, 2013, all noninterest bearing transaction accounts no longer receive unlimited deposit insurance coverage by the Federal Deposit Insurance Corporation ("FDIC") and instead all accounts deposited at an insured depository institution are insured by the FDIC up to the standard maximum deposit insurance amount of $250,000 for each deposit insurance ownership category.
Investment in Equity Affiliates:
The Company invested in a joint venture that was formed to perform electrical construction services. This investment is recorded under the equity method of accounting. Under the equity method of accounting, the Company
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
records its share of the net income and losses from the underlying operations and any other-than-temporary impairment on this investment as part of discontinued operations on the consolidated statements of (loss) income.
Variable Interest Entities:
The Company accounts for variable interest entities ("VIEs") in accordance with ASC No. 810-10-50. A VIE is defined as an entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that (i) has the power to control the activities that impact the VIE's economic performance and (ii) has the right to receive the majority of expected returns or the obligation to absorb the majority of expected losses that could be material to the VIE.
As of December 31, 2012, the Company has one investment which was made to a VIE with a net carrying amount of $0.5 million. For the VIE identified, the Company is not the primary beneficiary and as such the VIE is not consolidated in the Company's financial statements. The Company accounts for this investment under the equity method of accounting.
Stock-Based Compensation:
The Company has a stock-based compensation plan, which is described in Note 10. The Company accounts for stock-based compensation in accordance with ASC No. 718-30-30, which establishes accounting for stock-based awards exchanged for employee services. Under the provisions of ASC No. 718-10-35, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is expensed at the grant date (for the portion that vests immediately) or ratably over the respective vesting periods.
Recently Issued Accounting Pronouncements:
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-03, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." ASU 2013-03 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. ASU No. 2013-03 is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of ASU 2013-03 is not expected to have a material impact on the Company's consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, "Comprehensive Income" which requires U.S. GAAP to conform to the disclosure requirements of International Financial Reporting Standards ("IFRS"). The amendment eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity and requires a separate Statement of Comprehensive Income or two consecutive statements in the statement of operations and in a separate statement of comprehensive income. This guidance is effective for interim and annual periods beginning after December 15, 2011, with early adoption permitted. The Company's consolidated financial statements have been prepared in accordance with ASU-2011-05.
In May 2011, the FASB issued ASU No. 2011-04, "Fair Value Measurements" which clarifies the application of existing fair value requirements, including those related to highest and best use concepts, and expands the disclosure requirements for fair value measurements categorized within Level 3 of the fair value hierarchy. This guidance is effective
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
for interim and annual periods beginning after December 15, 2011. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
2. REAL ESTATE:
The Company's components of rental property consist of the following at December 31, 2012 and 2011 (in thousands):
Substantially all of these assets have been pledged as collateral for debt obligations (see Note 8).
Information relating to real estate and accumulated depreciation as of December 31, 2012 are as follows (in thousands):
(A)Acquired by the Company in March 2007 upon the reorganization. See Note 1 to financial statements.
(B)In connection with the Revolving Credit Agreement, a mortgage was filed as collateral on this property. As of December 31, 2012, there was $5.0 million outstanding under this credit facility. Our obligations under this credit facility were satisfied in full on February 22, 2013.
The changes in real estate for the three years ended December 31, 2012, 2011, and 2010 are as follows (in thousands):
The aggregate cost of land, buildings and improvements, before depreciation, for Federal income tax purposes at December 31, 2012 was approximately $40.4 million.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
2. REAL ESTATE (Continued):
The changes in accumulated depreciation, exclusive of amounts relating to equipment, transportation equipment, and furniture and fixtures, for three years ended December 31, 2012, 2011, and 2010 are as follows (in thousands):
Farm Springs Road, LLC Property:
On June 6, 2012, Farm Springs Road, LLC ("Farm Springs"), a wholly-owned subsidiary, and United Technologies Corporation ("United Technologies") entered into a lease agreement (the "Lease") pursuant to which United Technologies will lease approximately 107,654 square feet of office space and the adjacent parking structure located at 8 Farm Springs Road, Farmington, Connecticut (the "Premises").
The lease commenced on September 1, 2012 and the initial term will expire 15 years after the commencement date. United Technologies has the option to extend the initial term by either: (i) a one year option and then three successive five year options with base rent increasing by the Consumer Price Index ("CPI") during the three successive five year options and fixed at the same base rent as the fifteenth year of the Lease during the one year option, or (ii) three successive five year options with base rent increasing by CPI. United Technologies has certain rights to the first offer to purchase the Premises in the event Farm Springs sells the Premises in a "one-off" sale.
The base annual rent for the Premises will begin 12 months from the lease commencement. The base annual rent for the Premises will range from approximately $1.4 million during the first year to $1.8 million for the fifteenth year of the Lease. During the first seven years of the lease, base annual rental income will increase at a fixed rate of 2%. After the seventh year of the Lease, base annual rent will increase based upon CPI with a minimum increase of 1% and a maximum increase of 3%. In addition to the base rent, United Technologies will be responsible for property maintenance and payment of operating expenses, including utilities and real estate taxes subject to limited exceptions, as defined, which will be the Company's responsibility.
On August 31, 2012, Farm Springs and Hartford Fire Insurance Company ("the Hartford"), a former tenant of Farm Springs, entered into a release agreement whereby the Hartford paid Farm Springs $625,000 for certain deferred property maintenance items related to their tenancy which was reported in other income on the accompanying statements of (loss) income.
612 Wortman Ave, LLC Property:
On July 2, 2012, the Company entered into a surrender agreement ("Agreement") with Varsity Bus Co. Inc. ("Varsity"), a tenant of 612 Wortman Ave, LLC, a wholly-owned subsidiary, related to early termination of their existing lease. As consideration for terminating their existing lease early, Varsity has agreed to pay the Company a sum of approximately $0.4 million payable in six equal installments with the last payment being on or before December 14, 2012. As of December 31, 2012, Varsity defaulted on payment of two of the monthly installments totaling approximately $0.1 million. As a result of this, a notice of default was sent to Varsity, and the Company is currently pursuing full payment of amount owed. In addition, on September 30, 2012, the Company entered into a rental agreement with Stanley Brettschneider ("Licensee"), to use certain land consisting of approximately 15,000 square feet at the 612 Wortman Ave property, solely for the purpose of bus parking. Per the terms of the rental agreement, the Licensee is to pay a monthly
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
2. REAL ESTATE (Continued):
rental fee of approximately $9,000 due on the first day of each month during the term of the rental agreement, which is to commence October 1, 2012 and terminate on November 30, 2012. Subsequent to the termination of the rental agreement, the Licensee continued to use the land for the purpose of bus parking throughout December 2012 in which the Licensee incurred an additional sum of approximately $18,000. Currently, the Company is actively marketing the property in order to secure a lease with a new tenant.
Acquisition of Wu/Lighthouse Portfolio, LLC Properties:
On January 17, 2013, GTJ REIT, Inc. ("GTJ") and its wholly-owned subsidiaries GTJ GP, LLC (the "General Partner") and GTJ Realty, LP (the "UPREIT") (collectively, "the Company"), and Wu/Lighthouse Portfolio, LLC ("Wu/Lighthouse Portfolio"), Jeffrey Wu ("Wu"), the Wu Family 2012 Gift Trust (the "Wu Trust"), Paul Cooper ("P. Cooper"), Louis Sheinker ("L. Sheinker"), Jerome Cooper ("J. Cooper"), Jeffrey Ravetz ("J. Ravetz") and Sarah Ravetz ("S. Ravetz"), and together with Wu/Lighthouse Portfolio, Wu, the Wu Trust, P. Cooper, L. Sheinker, J. Cooper, J. Ravetz and S. Ravetz collectively hereinafter referred to as "Sellers"), entered into a certain contribution agreement effective as of January 1, 2013 (the "Contribution Agreement") pursuant to which the UPREIT acquired all of the Sellers' outstanding ownership interests in 25 commercial properties located in New York, New Jersey and Connecticut (the "Acquired Properties"). The Acquired Properties have a gross asset value of approximately $194 million, and are subject to an aggregate of approximately $115 million in outstanding mortgage indebtedness, which was assumed by the UPREIT upon the closing. P. Cooper, the Company's Chief Executive Officer and a director is a 6% owner and principal of Wu/Lighthouse Portfolio and J. Cooper our Chairman of the Board of Directors owns a .666% interest therein. With the acquisition of the Acquired Properties, the UPREIT currently owns a total of 32 properties, including its seven (7) previously-owned properties.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
3. AVAILABLE-FOR-SALE SECURITIES:
The Company accounts for its debt and equity securities as available-for-sale securities in accordance with ASC No. 320-10-35. Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income, a component of stockholders' equity. Interest on securities is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in the accompanying consolidated statement of (loss) income when incurred.
The following is a summary of available-for-sale-securities at December 31, 2012 and 2011 (in thousands):
Accumulated other comprehensive income for the years ended December 31, 2012 and 2011 includes a net unrealized holding loss of approximately $28,000 and $109,000, respectively. No amounts were reclassified from other comprehensive income to income for the years ended December 31, 2012 and 2011, respectively.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
3. AVAILABLE-FOR-SALE SECURITIES (Continued):
The following is a summary of the contractual maturities of U.S. Government Debt Securities as of December 31, 2012:
Proceeds from the sale of available-for-sale securities amounted to approximately $1.4 million, $0.6 million, and $0.9 million, in 2012, 2011, and 2010, respectively, principally from the maturity of the available-for-sale securities. The Company sold the available-for-sale securities at their face value and therefore did not recognize any gains or losses from the sale of available-for-sale securities in 2012, 2011, and 2010, respectively.
4. DISCONTINUED OPERATIONS:
On July 25, 2011, the Board of Directors (the "Board") voted to divest substantially all of the Company's taxable REIT subsidiaries (outdoor maintenance, shelter cleaning, and electrical contracting businesses). Although the parking garage operations were not divested at this time, the Board subsequently voted to divest the operations on November 7, 2011. The assets and liabilities associated with the outdoor maintenance, shelter cleaning, electrical contracting, and parking businesses ("Outdoor Maintenance") businesses have been classified as assets and liabilities of discontinued operations for all periods presented. The results of operations of the Outdoor Maintenance businesses for all periods presented are classified as "Loss from discontinued operations, net of taxes" for all periods presented.
The following table sets forth the detail of the Company's loss from discontinued operations (amounts in thousands):
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
4. DISCONTINUED OPERATIONS (Continued):
The carrying amounts of the major classes of assets and liabilities of the Outdoor Maintenance businesses included in discontinued operations are as follows (in thousands):
The following table presents the uncompleted contracts in progress (in thousands):
The excess of revenues earned to date over billings are included in other other assets of discontinued operations on the accompanying consolidated balance sheets as of (in thousands):
Net cash used in discontinued operations was $1.8 million, $0.7 million, and $1.9 million, for the years ended December 31, 2012, 2011, and 2010, respectively.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
5. OTHER ASSETS:
Other assets, net, consist of the following at December 31, 2012 and 2011 (in thousands):
6. UNPAID LOSSES AND LOSS-ADJUSTMENT EXPENSES:
The liability for losses and loss adjustment expenses with certain previous insurance claims is summarized as follows (in thousands):
Management is responsible for estimating the provisions for outstanding losses. The Company has recognized in the financial statements a provision for outstanding losses of $1.5 million and $1.9 million at December 31, 2012 and 2011, respectively. Effective November 13, 2011, losses originating from the 1999 to 2001 years were commuted back to AAIC for an amount totaling $200,015. In connection with the transfer to a liquidating trust, an actuarial study was completed by the insurance carrier, which estimated that at December 31, 2011, the total outstanding losses are approximately $1.2 million. In their analysis, the insurance carrier used industry based data which may or may not be representative of the Company's ultimate liabilities. In addition, the provision included $0.8 million for outstanding losses which was not a part of the actuarial study. In the opinion of the management, the provision for losses and loss-adjustment expenses is adequate to cover the expected ultimate liability under the insurance policies written. However, the Company's estimated liability for claims is ultimately based on management's expectations of future events. It is reasonably possible that the expectations associated with these amounts could change in the near term (that is, within one year) and that the effect of such changes could be material to the consolidated financial statements.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
7. OTHER LIABILITIES:
Other liabilities consist of the following at December 31, 2012 and 2011 (in thousands):
8. MORTGAGE NOTE PAYABLE:
Hartford Loan Agreement:
On July 1, 2010, two indirect subsidiaries of the Company, 165-25 147th Avenue, LLC and 85-01 24th Avenue, LLC (collectively, the "Borrower") entered into a Fixed Rate Term Loan Agreement (the "Hartford Loan Agreement") with Hartford Life Insurance Company, Hartford Life and Accident Insurance Company and Hartford Life and Annuity Insurance Company (collectively, the "Lenders") pursuant to which the Lenders made a term loan to Borrower in the aggregate principal amount of $45,500,000 (the "Loan"). The Loan was evidenced by certain promissory notes, executed simultaneously therewith, payable to the order of (i) Hartford Life Insurance Company in the stated principal amount of $25,000,000; (b) Hartford Life and Accident Insurance Company in the stated principal amount of $10,500,000; and (c) Hartford Life and Annuity Insurance Company in the stated principal amount of $10,000,000 (collectively, the "Notes"). The proceeds from the Loan were used to satisfy in full the Company's obligations under the previous ING Loan Agreement.
The obligations under the Hartford Loan Agreement are secured by, among other things, a first priority mortgage lien and security interest on certain (a) improved real estate commonly known as 165-25 147th Avenue, Laurelton, Queens, New York and 85-01 24th Avenue, East Elmhurst, Queens, New York (collectively, the "Real Estate"), and (b) personal property and other rights of the Borrower, all as more specifically described in that certain Consolidated, Amended and Restated Mortgage, Security Agreement and Fixture Filing dated as of July 1, 2010 (the "Mortgage") and that certain Assignment of Leases and Rents dated as of July 1, 2010 among the Lenders and the Borrower, and other ancillary documents. The outstanding principal balance of the Loan shall bear interest at the fixed rate of 5.05% per annum. The Borrower is required to make monthly payments of interest only in the amount of $191,479. The principal is payable on the maturity date, July 1, 2017.
9. SECURED REVOLVING CREDIT FACILITY:
M&T Financing Agreement:
On August 26, 2011, the Company and Manufacturers and Traders Trust Company ("M&T") entered into a credit agreement (the "Credit Agreement"). The Credit Agreement provides for, among other things, a $10.0 million revolving credit facility (the "Revolver"). The Revolver is available to the Company to be used for Permitted Acquisitions (as defined in the Credit Agreement) and for general working capital and other corporate purposes. The Credit Agreement requires that the Company satisfy certain financial covenants, including: (i) minimum Net Worth, (ii) Fixed Charge Coverage Ratio,
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
9. SECURED REVOLVING CREDIT FACILITY (Continued):
(iii) Leverage Ratio and (iv) Liquidity, all as defined in the Credit Agreement, and usual and customary restrictions and covenants, as defined. As a condition to M&T entering into the Credit Agreement, the Company agreed to indemnify M&T against certain claims pursuant to the Environmental Compliance and Indemnification Agreement, dated as of August 26, 2011.
The obligations under the Revolver are guaranteed by Farm Springs Road, LLC, a wholly-owned subsidiary of the Company ("Farm Springs"). The guaranty of Farm Springs is secured by a first priority mortgage lien and security interest on real property owned by Farm Springs and located at 8 Farm Springs Road, Farmington, Connecticut, as more specifically described in that certain Open-End Mortgage Agreement, dated as of August 26, 2011, and that certain General Assignment of Rents, dated as of August 26, 2011, by and between M&T and the Company. The maturity date for the Revolver is August 26, 2014. Borrowings under the Revolver bear interest, at the Borrower's option, at either: (i) the M&T's prime rate plus 2.0% or (ii) the London Interbank Offered Rate ("LIBOR") plus 3.5% which is subject to a minimum rate of 4.0%.
As part of the Credit Agreement, the Company is obligated to comply with certain financial and nonfinancial covenants. As of December 31, 2012, the Company was in compliance with all financial and nonfinancial covenants.
As of December 31, 2012, the Company has $5.0 million outstanding under the Credit Agreement. The Company's obligations under the Credit Agreement were satisfied in full on February 22, 2013.
10. STOCKHOLDERS' EQUITY:
Common Stock:
The Company is authorized to issue 100,000,000 shares of common stock, $.0001 par value per share. The Company has authorized the issuance of up to 15,564,454 shares of the Company's common stock in connection with the Reorganization and the earnings and profits distribution of which 13,472,281 has been issued. On June 17, 2010, June 9, 2011, April 30, 2012, and June 7, 2012, the Company issued 56,850, 57,920, 55,149, and 5,884 restricted shares of common stock, respectively, under its stock incentive plan. As of September 30, 2012, a total of 13,648,084 shares have been issued by the Company (see Note 1).
Preferred Stock:
The Company is authorized to issue 10,000,000 shares of preferred stock, $.0001 par value per share, with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. No shares have been issued as of December 31, 2012.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
10. STOCKHOLDERS' EQUITY (Continued):
Dividend Distributions:
On March 21, 2013, the Board of Directors declared a special distribution of $0.0934 per share of common stock, payable with respect to the year ended December 31, 2012, to stockholders of record at the close of business on March 31, 2013 which is payable on or about April 15, 2013. On March 21, 2013, the Board of Directors declared a quarterly cash dividend of $0.08 per share of common stock, payable with respect to the first quarter ended March 31, 2013, to stockholders of record as of the close of business on March 31, 2013 payable on or about April 15, 2013. The following table shows the dividends declared for the years ended December 31, 2012 and 2011:
(1)This represents a supplemental dividend. Stock-Based Compensation:
On June 11, 2007, the Board of Directors approved the Company's 2007 Incentive Award Plan (the "Plan"). The effective date of the Plan was June 11, 2007, subject to stockholder approval. The stockholders of the Company approved the Plan on February 7, 2008.
The Plan covers directors, officers, key employees and consultants of the Company. The purposes of the Plan are to further the growth, development, and financial success of the Company and to obtain and retain the services of the individuals considered essential to the long term success of the Company.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
10. STOCKHOLDERS' EQUITY (Continued):
The Plan may provide for awards in the form of restricted shares, incentive stock options, non-qualified stock options and stock appreciation rights. The aggregate number of shares of common stock which may be awarded under the Plan is 1,000,000 shares. These shares were registered on September 23, 2010. As of December 31, 2012, the Company had 559,197 shares available for future issuance of awards under the Plan.
On February 7, 2008, 55,000 options were granted to non-employee directors and vested immediately and 200,000 options were granted to key officers of the Company and had a three year vesting period. All options expire ten years from the date of grant.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes Option Pricing Model. The fair value of options granted on February 7, 2008 was $1.90 per share. The following assumptions were used for the options granted:
Risk free interest rate:
3.39 %
Expected dividend yield:
3.59 %
Expected life of option in years:
7.94
Expected volatility:(1)
21.00 %
On June 9, 2011, the Company granted 10,000 options to Mr. Joseph F. Barone, a member of the Company's Board of Directors and Chairman of the Compensation Committee. These options, which vested immediately, were granted in connection with Mr. Barone's appointment to the Board on February 12, 2009.
The fair value these options granted is estimated on the date of grant using the Black-Scholes Option Pricing Model. The fair value of options granted on June 9, 2011 was $0.93 per share. The following assumptions were used for the options granted:
Risk free interest rate:
4.00 %
Expected dividend yield:
5.20 %
Expected life of option in years:
10.00
Expected volatility:(1)
30.00 %
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
10. STOCKHOLDERS' EQUITY (Continued):
The following table presents the activity of options outstanding under the Plan for the year ended December 31, 2012:
(a)Of these outstanding and exercisable options, 255,000 options have a remaining contractual life of approximately 5.1 years and the remaining 10,000 options have a remaining contractual life of approximately 8.4 years.
(1)Although the Company is subject to the reporting requirements of the Securities and Exchange Commission, the Company's stock is not listed on an exchange and there is no readily available market for the stock. Therefore, the Company is not able to determine the historical volatility of its common stock. As a result, the volatility was estimated from the historical volatilities of the common stock of the exchange traded comparable firms of both REITs and operating companies similar to the Company's taxable REIT subsidiaries.
(2)The aggregate intrinsic value, which represents the difference between the price of the Company's common stock at December 31, 2012 and the related exercise price of the underlying options, was $0 for outstanding options and exercisable options as of December 31, 2012.
For the three years ended December 31, 2012, 2011, and 2010 stock compensation expense relating to these stock option grants was approximately $0, $20,000, and $127,000, respectively.
On June 17, 2010, the Company issued an aggregate of 56,850 restricted shares of common stock, with a value of approximately $398,000, under the Plan. A total of 13,950 of these shares, with a value of approximately $98,000, were granted to non-management members of the Board of Directors, and vested immediately. The remaining 42,900 shares, with a value of approximately $300,000, were granted to certain executives of the Company, and vest ratably over a four year period. One fourth of the 42,900 shares granted to each of the executives were vested as of the grant date, one fourth vested on January 1, 2011, one fourth vested on January 1, 2012, and the remaining fourth vested on January 1, 2013. Dividends paid on restricted shares are recorded as dividends on shares of the Company's common stock whether or not they are vested. In accordance with ASC No. 718-10-35, the Company measures the compensation costs for these shares at fair value on the date of the grant and the expense is recognized in earnings, at the grant date (for the portion that vest immediately) or ratably over the respective vesting periods. For the years ended December 31, 2012, 2011, and 2010, stock compensation expense relating to the restricted stock granted on January 1, 2010, was approximately $25,000, $63,000, and $310,000 respectively.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
10. STOCKHOLDERS' EQUITY (Continued):
On June 9, 2011, the Company issued an aggregate of 57,920 restricted shares of common stock, with a value of approximately $440,000, under the Plan. A total of 5,280 of these shares, with a value of approximately $40,000, were granted to non-management members of the Board of Directors, and vested immediately. The remaining 52,640 shares, with a value of approximately $400,000, were granted to certain executives of the Company, and vest ratably over a four year period. One fourth of the 52,640 shares granted to each of the executives vested on the grant date, one fourth vested on March 18, 2012, and one fourth will vest each year on the following dates: March 18, 2013, and March 18, 2014. Dividends paid on restricted shares are recorded as dividends on shares of the Company's common stock whether or not they are vested. In accordance with ASC 718-10-35, the Company measures the compensation costs for these shares at fair value on the date of the grant and the expense is recognized in earnings, at the grant date (for the portion that vest immediately) or ratably over the respective vesting periods. For the years ended December 31, 2012, 2011, and 2010, stock compensation expense relating to the restricted stock granted on March 18, 2011, was approximately $100,000, $293,000, and $0, respectively.
On April 30, 2012, and June 7, 2012, the Company issued an aggregate of 55,149 and 5,884 restricted shares of common stock, respectively, under the Plan. The shares issued on June 7, 2012 have a value of approximately $40,000, were granted to non-management members of the Board of Directors, and vested immediately. The shares issued on April 30, 2012 have a value of approximately $375,000, were granted to certain executives of the Company, and vest ratably over a four year period. One fourth of the 55,149 shares granted to each of the executives vested on the grant date and one fourth will vest each year on the following dates: April 30, 2013, April 30, 2014, and April 30, 2015. Dividends paid on restricted shares are recorded as dividends on shares of the Company's common stock whether or not they are vested. In accordance with ASC 718-10-35, the Company measures the compensation costs for these shares as of the date of the grant and the expense is recognized in earnings, at the grant date (for the portion that vest immediately) or ratably over the respective vesting periods. For the years ended December 31, 2012, 2011 and 2010, stock compensation expense relating to the restricted stock granted in 2012, was approximately $248,000, $0, and $0, respectively.
For the year ended December 31, 2012 the Company's total stock compensation expense was approximately $373,000. As of December 31, 2012, there was approximately $214,000 of unamortized stock compensation related to restricted stock.
At December 31, 2012, 265,000 stock options were outstanding, all of which were exercisable, and 175,827 shares of restricted stock were outstanding, 97,396 of which were vested. At December 31, 2012, 559,197 shares of the Company's common stock remain available for future issuance under the Plan.
Special Distribution of Earnings and Profits:
On August 20, 2007, the Board of Directors of the Company declared a special distribution of accumulated earnings and profits on the Company's common stock of $6.40 per share of common stock, payable in $20,000,000 of cash and 3,775,400 of the Company's common stock. As of December 31, 2012, cash of approximately $19.9 million and 3,775,400 shares of the Company's common stock have been distributed. The remaining payable balance of approximately $0.1 million is included in other liabilities in the accompanying consolidated balance sheet at December 31, 2012.
11. EARNINGS PER SHARE:
In accordance with ASC No. 260-10-45, basic earnings per common share ("Basic EPS") is computed by dividing the net (loss) income by the weighted-average number of common shares outstanding. Diluted earnings per common share ("Diluted EPS") is computed by dividing net (loss) income by the weighted-average number of common shares and dilutive common share equivalents and convertible securities then outstanding. There were no common share equivalents for any of the periods presented in the Company's consolidated statements of (loss) income.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
11. EARNINGS PER SHARE (Continued):
The following table sets forth the computation of basic and diluted per share information (in thousands, except share and per share data):
12. OTHER RETIREMENT BENEFITS:
Other Retirement Benefits:
The Company sponsors retirement benefits for its non-union employees under a defined contribution 401(k) plan which covers all employees who, at the plan's anniversary date, had completed one year of service and are at least 21 years of age. Contributions to this plan and charged to benefit costs for the years ended December 31, 2012, 2011, and 2010 were $0.1 million, $0.2 million, and $0.2 million, respectively.
The Company sponsors retirement benefits to its union employees under a separate defined contribution 401(k) plan which covers all employees who, at the plan's anniversary date, had completed one year of service and are at least 21 years of age. Contributions to this plan and charged to benefit costs in discontinued operations for the years ended December 31, 2012, 2011, and 2010 were $0.4 million, $0.4 million, and $0.3 million, respectively.
The Company participates in a multiemployer plan that provides additional retirement benefits. Contributions to this plan and charged to benefit costs in discontinued operations for the years ended December 31, 2012, 2011, and 2010 were $0.2 million, $0.3 million, and $0.2 million, respectively.
On January 27, 2012, the Company received a notice from Local Union No. 3's counsel asserting a severance liability of approximately $0.1 million for those employees terminated in connection with the divestiture. An arbitration hearing was held on May 2, 2012, in which the arbitrator ruled in favor of Local Union No. 3 in the amount of approximately $0.1 million. On July 13, 2012, the Company paid the full amount of the settlement.
On February 16, 2012, the Company received a notice from the Joint Industry Board of the Electrical Industry claiming a pension withdrawal liability in the amount of $1.5 million in connection with the divestiture. During the three months ended September 30, 2012, the Company determined the liability was probable and accrued $1.5 million in other liabilities on the consolidated balance sheet. The liability will be paid in installments of approximately $8,000 per month over a twenty year term. As of December 31, 2012, the Company has made eleven installment payments.
13. RELATED PARTY TRANSACTIONS:
Douglas A. Cooper, an officer and director of the Company and the nephew of Jerome Cooper (Chairman of the Board), is a partner of Ruskin, Moscou, Faltischek, P.C. ("RMF"), and has acted as counsel to the Company since 1998. Fees incurred by the Company to RMF for the years ended December 31, 2012, 2011, and 2010 were $1,061,878, $632,088, and $267,056, respectively.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
13. RELATED PARTY TRANSACTIONS (Continued):
Paul A. Cooper is the Chief Executive Officer, a director of the Company, and the son of Jerome Cooper (Chairman of the Board). In January 2010, the Company executed an extension option under the lease agreement with Lighthouse 444 Limited Partnership ("Lighthouse"), the owner of the building at 444 Merrick Road, Lynbrook, NY, and of which Paul A. Cooper is a general partner. The executed extension option includes approximately 6,712 square feet of office space for a term of five years expiring August 31, 2015 at an annual rent of approximately $233,000.
Stanley Brettschneider, a former officer of the Company's taxable REIT subsidiaries, is the father of the majority owner of Varsity Bus Co., Inc. ("Varsity") which was a tenant at one of the Company's rental properties until September 2012. Varsity had entered into a lease agreement which terminated in 2009 and was subject to four 5 year options to extend the term of the lease. In December 2009, Varsity executed one of the extension options under the lease through August 2015. Rent for the first year under the lease extension, which began on September 1, 2010, was approximately $833,000 and was subject to increase in accordance with the lease agreement for the remaining four years. On July 2, 2012, the Company entered into a surrender agreement the ("Surrender Agreement") with Varsity regarding early termination of their existing lease. As consideration for terminating their existing lease early, Varsity has agreed to pay the Company a sum of approximately $0.4 million payable in six equal installments with the last payment being on or before December 14, 2012. As of December 31, 2012, Varsity defaulted on payment of two of the monthly installments totaling approximately $0.1 million. As a result of this, a notice of default was sent to Varsity, and the Company is currently pursuing full payment of amount owed. In addition, on September 30, 2012, the Company entered into a rental agreement with Stanley Brettschneider ("Licensee"), to use certain land consisting of approximately 15,000 square feet at the 612 Wortman Ave property, solely for the purpose of bus parking. Per the terms of the rental agreement, the Licensee is to pay a monthly rental fee of approximately $9,000 due on the first day of each month during the term of the rental agreement, which is to commence October 1, 2012 and terminate on November 30, 2012. Subsequent to the termination of the rental agreement, the Licensee continued to use the land for the purpose of bus parking throughout December 2012 in which the Licensee incurred an additional sum of approximately $18,000. Varsity also utilized some of the Company's computer systems for a monthly fee. In addition, Mr. Brettschneider is also a compensated employee of Varsity. On April 11, 2012, the Company determined that Mr. Brettschneider's employment as Vice President of the Company's taxable REIT subsidiaries will terminate effective July 31, 2012.
14. INCOME TAXES:
Effective July 1, 2007, the Company elected to be taxed as a REIT under Section 856(c) of the Code. A REIT will generally not be subject to federal income taxation on that portion of its income that qualifies as REIT taxable income, to the extent that it distributes at least 90% of its taxable income to its shareholders and complies with certain other requirements. It is management's intention to adhere to these requirements and maintain the Company's REIT status. As a REIT, the Company generally will not be subject to corporate federal income tax, provided that distributions to it stockholders equal at least the amount at its REIT taxable income as defined under the Code. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable minimum tax and may not be able to qualify as a REIT for subsequent taxable years). Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and federal income and excise taxes on its undistributed taxable income. In addition, taxable income from non-REIT activities managed through taxable REIT subsidiaries are subject to federal, state, and local income taxes.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
14. INCOME TAXES (Continued):
Reconciliation between GAAP (Loss) Income From Continuing Operations and Federal Taxable Income:
The following table reconciles GAAP (loss) income from continuing operations to taxable income for the years ended December 31, 2012, 2011, and 2010 (in thousands):
Dividend distributions for the year ended December 31, 2012 were characterized for federal income tax purposes as 100% ordinary income.
Taxable REIT Subsidiaries
The Company is subject to federal, state, and local income taxes on the income from its Taxable REIT subsidiaries ("TRS") activities, which include Shelter Express, Inc. and subsidiaries.
Income taxes have been provided for through the asset and liability method as required by the provisions of ASC No. 740-10-30. Under the asset and liability method, deferred income taxes are recognized for the temporary differences between the financial reporting bases and the tax bases of the TRS assets and liabilities.
The (benefit from) provision for income taxes from continuing operations for the years ended December 31, 2012, 2011, and 2010 are as follows:
There were no provisions for (benefit from) income taxes from discontinued operations for the years ended December 31, 2012, 2011, and 2010.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
14. INCOME TAXES (Continued):
The provision for income taxes differs from the amount computed by applying the federal statutory income tax rate to income before income taxes as follows:
Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities from continuing operations at December 31, 2012 and 2011 are as follows:
Deferred tax assets arise from net operating loss carry-forwards and discounted unpaid losses in the aggregate amount of approximately $11.6 million and $8.3 million at December 31, 2012 and 2011, respectively. The Company has recorded a full valuation allowance against the deferred tax assets as it does not consider realization of such assets to be likely.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
14. INCOME TAXES (Continued):
In accordance with ASC No. 740-10-65, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC No. 740-10-65 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of December 31, 2012, and December 31, 2011, the Company does not have a liability for unrecognized tax positions.
In accordance with ASC No. 740-10-65, the Company has assessed its tax positions for all open tax years, which includes 2007 to 2010, and concluded that there were no material uncertainties to be recognized. The Company's accounting policy with respect to interest and penalties related to tax uncertainties is to classify these amounts as provision for income taxes. The Company has not recognized any interest and penalties related to tax uncertainties for the years ended December 31, 2012, 2011, and 2010. The Company believes that it has not taken any uncertain tax positions that would impact its consolidated financial statements as of December 31, 2012.
The carrying amount of building and improvements on the financial statements exceeds the Company's tax basis by approximately $74.7 million and $71.7 million at December 31, 2012 and 2011, respectively.
15. COMMITMENTS AND CONTINGENCIES:
Legal Matters:
The Company is involved in several lawsuits and other disputes which arose in the ordinary course of business; however, management believes that these matters will not have a material adverse effect, individually or in the aggregate, on the Company's financial position or results of operations.
Environmental Matters:
During 2012, the Company's real property, except for the Farm Springs Property, has had activity regarding removal and replacement of underground storage tanks. Upon removal of the old tanks, any soil found to be unacceptable was thermally treated off site to burn off contaminants. Fresh soil was brought in to replace earth which had been removed. There are still some levels of contamination at the sites, and groundwater monitoring programs have been put into place at certain locations. In July 2006, the Company entered into an informal agreement with the New York State Department of Environmental Conservation ("NYSDEC") whereby the Company has committed to a three-year remedial investigation and feasibility study (the "Study") for all site locations. The Company concluded that the estimated cost range to perform full remediation on all site locations would be between approximately $1.4 million to $2.6 million.While management believes that the amount of the study and related remediation is likely to fall within the estimated cost range, no amount within that range can be determined to be the better estimate. Therefore, management believes that recognition of the low-range estimate was appropriate. In May 2008, the Company received an updated draft of the remedial and investigation feasibility study and recorded an additional accrual of approximately $0.9 million for additional remediation costs.
Included in other liabilities in the accompanying consolidated balance sheets (Note 7) as of December 31, 2012, and 2011 is the estimated liability for remediation costs of approximately $0.1 million and $0.2 million, respectively. The Company is not aware of any claims or remediation requirements from any local, state, or federal government agencies. These properties are in a commercial zone and are still used as transit depots, including maintenance of vehicles.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
15. COMMITMENTS AND CONTINGENCIES (Continued):
Insurance Operations:
The provisions of the Insurance Law of the Cayman Islands require a minimum net worth of $120,000. At December 31, 2012 and 2011, the Company's insurance operations were not in compliance with the minimum net worth requirements. A meeting was held with the Cayman Islands Monetary Authority ("CIMA") on March 23, 2011, at which time the Company informed CIMA of the intention to transfer the insurance balances into a New York based liquidating trust and dissolve the Company's Cayman Islands based insurance operations once the transfer is complete. As of December 31, 2012, the Company is in the process of transferring the insurance balances into a liquidating trust.
Leases:
The Company's principal office is located in 6,712 square feet at 444 Merrick Road, Lynbrook, New York, which it leases from a partnership owned in part by Paul A. Cooper, a Director and Chief Executive Officer of the Company. Future minimum rent payable under the terms of the leases, as amended, amount to approximately $235,000, $242,000, $164,000, and $0 for the years 2012 through 2015, respectively.
The Company records lease payments using the straight line method and, for leases with step rent provisions whereby the rental payments increase over the life of the lease, the Company recognizes the total minimum lease payments on a straight-line basis over the lease term. The Company is obligated under operating leases for warehouse, office facilities, and certain office and transportation equipment, which amounted to $234,884, $221,336, and $215,050 for the years ended December 31, 2012, 2011, and 2010, respectively.
At December 31, 2012, future minimum lease payments in the aggregate and for each year thereafter are as follows (in thousands):
Divestiture:
In connection with the completion of the divestiture of the Company's taxable REIT subsidiaries, the Company may be subject to certain liabilities including union wages and severance. On January 27, 2012, the Company received a notice from Local Union No. 3's counsel asserting a severance liability of approximately $0.1 million for those employees terminated in connection with the divestiture. An arbitration hearing was held on May 2, 2012, in which the arbitrator ruled in favor of Local Union No. 3 in the amount of approximately $0.1 million. On July 13, 2012, the Company paid the full amount of the settlement.
On February 16, 2012, the Company received a notice from the Joint Industry Board of the Electrical Industry claiming a pension withdrawal liability in the amount of $1.5 million in connection with the divestiture. During the three months ended September 30, 2012, the Company determined the liability was probable and accrued $1.5 million in other liabilities on the condensed consolidated balance sheet. The liability will be paid in installments of approximately $8,000 per month over a twenty year term. As of December 31, 2012, the Company has made eleven installment payments.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
16. FUTURE MINIMUM RENT SCHEDULE:
Future minimum lease payments to be received by the Company as of December 31, 2012 under noncancelable operating leases for the next five years and thereafter are as follows (in thousands):
The lease agreements generally contain provisions for reimbursement of real estate taxes and operating expenses over base year amounts, as well as fixed increases in rent.
17. INVESTMENT IN EQUITY AFFILIATES:
Joint Ventures
The Company invested in a joint venture that was formed to perform electrical construction services. This investment is recorded under the equity method of accounting. The Company records its share of the net income and losses from the underlying operations and any other-than-temporary impairment on these investments as part of discontinued operations on the consolidated statements of (loss) income.
In March 2010, the Company invested approximately four hundred dollars in exchange for a 40% interest in a consolidated joint venture with Morales Electrical Contracting, Inc. which is a minority women owned business enterprise that provides electrical construction services.
For the year ended December 31, 2012, 2011, and 2010 the Company recorded its share of (loss) income of approximately ($88,000), ($45,000), and $38,000, respectively, from this equity investment. The Company also recognized $87,000 in management fees and approximately $33,000 in interest on its working capital advances. As of December 31, 2012 and 2011, the Company had a net receivable of approximately $0.4 million related to working capital advances to fund construction projects.
Variable Interest Entities
The Company accounts for variable interest entities ("VIEs") in accordance with ASC No. 810-10-50. A VIE is defined as an entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that (i) has the power to control the activities that impact the VIE's economic performance and (ii) has the right to receive the majority of expected returns or the obligation to absorb the majority of expected losses that could be material to the VIE.
As of December 31, 2012, the Company has one investment which was made to a VIE entity with a net carrying amount of $0.5 million, which is included in assets of discontinued operations on the consolidated balance sheet. For the VIE identified, the Company is not the primary beneficiary and as such the VIE is not consolidated in the Company's financial statements. The Company accounts for this investment under the equity method.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
18. FAIR VALUE:
Fair Value of Financial Instruments:
ASC. 825-10-50 requires disclosure of the estimated fair value of an entity's assets and liabilities considered to be financial instruments. ASC 825-10-65 requires the Company to disclose in the notes of its interim financial statements as well as its annual financial statements, the fair value of all financial instruments as required ASC 825-10-50. ASC 825-10-65 applies to all financial instruments within the scope of ASC 825-10-50.
Fair value estimates are dependent upon subjective assumptions and involve significant uncertainties resulting in variability in estimates with changes in assumptions. The following table summarizes the carrying values and the estimated fair values of financial instruments (in thousands):
Fair Value Measurement:
The Company determines fair value in accordance ASC 820-10-05 for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements.
Fair value is defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments' complexity.
Assets and liabilities disclosed at fair values are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820-10-35 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
•Level 1-Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
•Level 2-Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument's anticipated life. Level 2 inputs include quoted market prices in markets that are not active for an identical or similar asset or liability, and quoted market prices in active markets for a similar asset or liability.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
18. FAIR VALUE (Continued):
•Level 3-Inputs reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. These valuations are based on significant unobservable inputs that require a considerable amount of judgment and assumptions. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
Determining which category an asset or liability falls within the hierarchy requires significant judgment and the Company evaluates its hierarchy disclosures each quarter.
The Company measures certain financial assets and financial liabilities at fair value on a recurring basis, primarily available-for-sale securities. The fair value of these financial assets and liabilities was determined using the following inputs as of December 31, 2012 and 2011.
December 31, 2012
December 31, 2011
Available-for-sale securities: Fair values are approximated on current market quotes received from financial sources that trade such securities.
19. SEGMENTS:
Segment Information:
In accordance with ASC 280-10, the Company has established that its reportable segments are Real Estate Operations and Other Operations as of December 31, 2012. These operating segments, whose operations are reported in the tables below, are segments of the Company for which separate financial information is available and operating results are evaluated regularly by executive management in determining how to allocate resources and assessing performance. The accounting policies of these segments are the same as those described in the Summary of Significant Accounting Policies (see Note 2). In connection with the discontinued operations of the outside maintenance, shelter cleaning, electrical contracting, and parking businesses, the operating results of these businesses are classified as discontinued operations and, as such, are not reflected in the operating segments reported in the table below.
The Company primarily operates in two reportable segments: (i) Real Estate Operations and (ii) Other Operations
Real Estate Operations rent Company owned real estate located in New York and Connecticut.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
19. SEGMENTS (Continued):
Other Operations provided various services to customers, including (i) personnel support, consulting, and maintenance services to the Metropolitan Transit Authority Bus Company ("MTABC") for payroll, human resource, dispatch, procurement, inventory, and shop management systems for certain bus depots and (ii) insurance operations which assumes reinsurance of worker's compensation, vehicle liability, and covenant liability of the Company and its affiliated companies from unrelated insurance companies based in the United States of America.
Both segment's operations are conducted within the U.S., with the exception of the insurance operations which is conducted in the Cayman Islands.
The summarized segment information (excluding discontinued operations), as of and for the years ended December 31, 2012, 2011, and 2010 are as follows (in thousands):
Year Ended December 31, 2012
Year Ended December 31, 2011
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
19. SEGMENTS (Continued):
Year Ended December 31, 2010
(1)Does not include assets of discontinued operations totaling $4,694.
(2)Does not include assets of discontinued operations totaling $6,673.
(3)Does not include assets of discontinued operations totaling $9,174.
20. SELECTED QUARTERLY DATA (Unaudited):
The summarized selected quarterly data for the years ended December 31, 2012 and 2011 are as follows (in thousands except per share data).
(a)Differences between the sum of the four quarterly per share amounts and the annual per share amount are attributable to the effect of the weighted average outstanding share calculations for the respective periods.
GTJ REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
21. DISTRIBUTIONS:
In order to qualify as a REIT, the Company must distribute at least 90% of its taxable income and must distribute 100% of its taxable income in order not to be subject to corporate federal income taxes on retained income. The Company anticipates it will distribute all of its taxable income to its stockholders. Because taxable income differs from cash flow from operations due to non-cash revenues or expenses (such as depreciation), in certain circumstances, the Company may generate operating cash flow in excess of its distributions or, alternatively, may be required to borrow to make sufficient distribution payments.
The following table presents dividends declared by the Company on its common stock for the years ended December 31, 2012, 2011, and 2010.
22. SUBSEQUENT EVENT:
On January 17, 2013, the Company and its wholly-owned subsidiaries GTJ GP, LLC (the "General Partner") and GTJ Realty, LP (the "UPREIT") (collectively, "the Company"), and Wu/Lighthouse Portfolio, LLC ("Wu/Lighthouse Portfolio"), Jeffrey Wu ("Wu"), the Wu Family 2012 Gift Trust (the "Wu Trust"), Paul Cooper ("P. Cooper"), Louis Sheinker ("L. Sheinker"), Jerome Cooper ("J. Cooper"), Jeffrey Ravetz ("J. Ravetz") and Sarah Ravetz ("S. Ravetz"), and together with Wu/Lighthouse Portfolio, Wu, the Wu Trust, P. Cooper, L. Sheinker, J. Cooper, J. Ravetz and S. Ravetz collectively hereinafter referred to as "Sellers"), entered into a certain contribution agreement effective as of January 1, 2013 (the "Contribution Agreement") pursuant to which the UPREIT acquired all of the Sellers' outstanding ownership interests in 25 commercial properties located in New York, New Jersey and Connecticut (the "Acquired Properties").
In consideration of the acquisition of the Acquired Properties, the UPREIT issued to the Sellers, limited partnership units of the UPREIT such that immediately following closing, the Company beneficially owned 66.71% of the outstanding partnership units of the UPREIT and the Sellers (other than Wu/Lighthouse Portfolio) collectively received 33.29% of the partnership units therein.
The General Partner is the general partner of the UPREIT (through its 1% general partnership interest in the UPREIT) and as a result thereof, the Company, through the Company's ownership of General Partner, will exercise managerial control over the properties, business and operations of the UPREIT. The UPREIT is authorized to issue common limited partnership units, Class A limited partnership units and Class B limited partnership units. While all limited partnership units have the same economic rights, holders of the UPREIT's Class B limited partnership units have no voting rights. The Company holds Class A limited partnership units.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. 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.
Management's Annual Report on Internal Control Over Financial Reporting:
Our management is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). There are inherent limitations to the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
We have assessed the effectiveness of our internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) as of December 31, 2012. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Management concluded that, as of December 31, 2012, our internal control over financial reporting was effective based on the criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that require the Company to include only management's report in this annual report.
Internal Control Over Financial Reporting:
There were no changes in our internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
When considering whether directors and nominees have the experience, qualifications, attributes or skills, taken as a whole, to enable the Board of Directors to satisfy its oversight responsibilities effectively in light of the Company's business and structure, the Board of Directors focused primarily on each person's background and experience as reflected in the information discussed in each of the directors' individual biographies set forth below. We believe that our directors provide an appropriate mix of experience and skills relevant to the size and nature of our business. As more specifically described in such person's individual biographies set forth below, our directors possess relevant and industry-specific experience and knowledge, which we believe enhances the Board's ability to oversee, evaluate and direct our overall corporate strategy. The Board of Directors annually reviews and makes recommendations regarding the composition and size of the Board so that the Board consists of members with the proper expertise, skills, attributes, and personal and professional backgrounds needed by the Board, consistent with applicable regulatory requirements.
The Board of Directors believes that all directors, including nominees, should possess the highest personal and professional ethics, integrity, and values, and be committed to representing the long-term interests of our stockholders. The Board of Directors will consider criteria including the nominee's current or recent experience as a senior executive officer, whether the nominee is independent, as that term is defined in existing independence requirements of the Securities and Exchange Commission, the business, scientific or engineering experience currently desired on the Board, geography, the nominee's industry experience, and the nominee's general ability to enhance the overall composition of the Board.
The Board of Directors does not have a formal policy on diversity; however, in recommending directors, the Board considers the specific background and experience of the Board members and other personal attributes in an effort to provide a diverse mix of capabilities, contributions, and viewpoints which the Board believes enables it to function effectively as the Board of Directors of a company with our size and nature of business.
Effective as of January 17, 2013 and pursuant to the Company's Bylaws, the Board of Directors voted to expand the number of members comprising the entire Board of Directors from seven to ten directors. In addition, the Board of Directors voted to elect each of Louis Sheinker, Jeffery Wu, and Stanley Perla to serve as Class II directors of the Company. Messrs. Perla and Wu qualify as "independent directors" as such term is defined in the Company's charter.
Board Leadership:
The Board has no formal policy with respect to separation of the positions of Chairman and Chief Executive Officer ("CEO") or with respect to whether the Chairman should be a member of management or an independent director, and believes that these are matters that should be discussed and determined by the Board from time to time. Currently, Jerome Cooper serves as our Chairman and Paul A. Cooper serves as our CEO. We believe that both Jerome Cooper and Paul A Cooper are tasked with the responsibility of implementing our corporate strategy and are both suited for leading discussions, at the Board level, regarding performance relative to our corporate strategy, which accounts for a significant portion of the time devoted at our Board meetings.
Risk Management:
The Board believes that risk management is an important component of the Company's corporate strategy. While we assess specific risks at our committee levels, the Board, as a whole, oversees our risk management process and discusses and reviews with management major policies with respect to risk assessment and risk management. The Board is regularly informed through its interactions with management and committee reports about risks we face in the course of our business. Finally, the Board believes the Chairman and CEO roles assist us in our implementation of major policies addressing our risks.
For the year ended December 31, 2012, our Board of Directors consisted of seven members, four of whom were deemed independent as defined by the rules of the Nasdaq Capital Market and the North American Securities Administration Association ("NASAA") guidelines. A director is deemed to be independent if in the last two years he or she is not associated, directly or indirectly, with us. Serving as a director of an affiliated company does not, by itself, preclude a director from being considered an independent director, in accordance with the guidelines of NASAA applicable
to REITs. The primary responsibilities of our Board of Directors are to provide oversight, strategic guidance, counseling, and direction to our management. Our Board of Directors meets on a regular basis and additionally as required. Written or electronic materials are distributed in advance of meetings as a general rule and our Board of Directors schedules meetings with, and presentations from, members of our senior management on a regular basis and as required.
Directors are reelected at the Annual Meetings of stockholders. We have a staggered Board of Directors. Class I directors have a term expiring at the Annual Meeting in 2013 and until their successors are elected and qualified. Class II directors have a term expiring at the Annual Meeting in 2014 and until their successors are elected and qualified. Class III directors have a term expiring at the Annual Meeting in 2015 and until their successors are elected and qualified. Directors relected at such time shall be relected to three year terms. Officers are appointed by the Board of Directors and serve at the pleasure of the Board of Directors.
The Board of Directors held seven meetings during the 2012 fiscal year. All of the Directors attended all of the meetings of the Board of Directors and of the committees on which they served with the exception of one director who attended six of the seven Board of Directors meetings. We encourage all members of the Board of Directors to attend annual meetings of stockholders, but there is no formal policy as to their attendance. At the 2012 Annual Meeting of stockholders, all members of the Board of Directors attended.
The following table sets forth the names and ages of our directors and executive officers and the positions they held with us as of March 15, 2013:
Name
Age
Position
Paul A. Cooper
CEO and Class II Director
Jerome Cooper
Chairman of the Board of Directors and Class III Director
Douglas A. Cooper
Executive Vice President, Treasurer and Secretary and Class I Director
Joseph F. Barone
Class I Director
John J. Leahy
Class III Director
Stanley R. Perla
Class II Director
Donald M. Schaeffer
Class III Director
Harvey I. Schneider
Class I Director
Louis Sheinker
Class II Director
Jeffrey Wu
Class II Director
The principal occupation and business experience of each of the directors and executive officers are as follows:
Paul A. Cooper has been Chief Executive Officer of the Company since June 2012. Mr. Cooper has been a director of the Company since June 2006. Mr. Cooper had previously served as Executive Vice President of the Company since June 2006. Prior to joining the Company, Mr. Cooper has been a principal of Lighthouse Real Estate Ventures and its affiliates (collectively "Lighthouse"). Lighthouse owned, managed, and leased its own portfolio of more than 2 million square feet of commercial buildings in the Greater New York metropolitan area. Mr. Cooper is qualified to serve on the Company's Board due to his extensive experience in the commercial real estate industry. Mr. Cooper received a Bachelor of Science degree from the University of Pennsylvania and a Juris Doctor degree from Fordham University. Paul A. Cooper is the son of Jerome Cooper and the cousin of Douglas A. Cooper.
Jerome Cooper has been a director and Chairman of the Board of Directors of the Company since June 2006. Mr. Cooper had previously served as Chief Executive Officer of the Company from March 2007 through June 2012. Prior to that Mr. Cooper was principally employed as Chief Executive Officer of the Bus Companies and their subsidiaries for ten years. He is uniquely qualified to serve as our Chairman based on his rich experience with our Company and longtime leader. Jerome Cooper received a Bachelors degree in Political Science from Ohio State University and a Bachelor of Laws degree from Fordham School of Law. Jerome Cooper is Paul A. Cooper's father and Douglas A. Cooper's uncle.
Douglas A. Cooper is Executive Vice President of the Company and has been a director of the Company since June 2006. Mr. Cooper has been practicing law for over 38 years and is one of the partners of Ruskin Moscou Faltischek, P.C., counsel to the Company, since 1998. Mr. Cooper is qualified to serve on our board by his long history with our Company and industry. Mr. Cooper graduated from Hamilton College, and received his Juris Doctor degree from Fordham Law
School. Mr. Cooper also earned a masters degree in Corporate Law from NYU Law School. Douglas A. Cooper is the nephew of Jerome Cooper and the cousin of Paul A. Cooper.
Joseph F. Barone has been a director of the Company since February 2009. Mr. Barone has been President of Insurance Financial Services, Inc., a provider of a wide variety of services to the insurance industry, including expert testimony as well as capital raising efforts such as, initial public offerings, private placements, and mergers and acquisitions. Mr. Barone was formerly a member of the Board of Directors of the Bus Companies. In addition, Mr. Barone has been Senior Vice President of Swiss ReServices Corporation, Managing Director of Bear, Stearns & Co. Inc. and Vice President of Salomon Brothers Inc. Mr. Barone is qualified to serve on our board as one of our independent directors based on his prior service as a board member of the Bus Companies and knowledge of our Company. Mr. Barone graduated from Brandeis University with a B.A. in economics in 1956 and received a Masters degree in Business Administration from New York University in 1961. He is a chartered financial analyst.
John J. Leahy has been a director of the Company since June 2006. Mr. Leahy is presently President of JJL Consulting. From 1998 to 2006, Mr. Leahy was Managing Director of Citibank Private Bank operations in Long Island. Prior to that, Mr. Leahy was a Senior Vice President of Chase Manhattan Bank, N.A. Mr. Leahy is qualified to serve on our board as one of our independent directors based on his long history as a private and commercial banker, giving him financial industry experience. Mr. Leahy holds a Bachelors degree in Mechanical Engineering from the University of Dayton, and a Masters degree in Business Administration from Long Island University. Mr. Leahy is deemed an independent director.
Stanley R. Perla has been a director of the Company since January 2013. Mr. Perla was a partner for Ernst & Young LLP, a public accounting firm from September 1978 to June 2003 and Managing Partner of Cornerstone Accounting Group LLP, from June 2008 to May 2011. He served as Ernst & Young's National Director of Real Estate Accounting as well as Ernst & Young's National Accounting and Auditing Committee. He is an active member of the National Association of Real Estate Investment Trusts and the National Association of Real Estate Companies. Mr. Perla has also been a trustee and chair of the audit committees of American Mortgage Acceptance Company and Lexington Realty Trust, Vice President-Director of Internal Audit for Vornado Realty Trust (July 2003-May 2008). Mr. Perla is currently chair of the Madison Harbor Balanced Strategies audit committee and also serves on the valuation and nominating & compensation committees and is chair of the American Realty Capital Daily Net Asset Value Fund audit committee and a member of the board of the American Realty Capital Real Estate Income Fund. Mr. Perla is qualified to serve on our board as one of our independent directors based on his accountant experience within our industry as well his financial industry experience. He graduated from Baruch College, where he obtained his BBA in accounting in 1965, and his MBA in taxation in 1970. He is a licensed Certified Public Accountant in the State of New Jersey and New York. Mr. Perla is deemed an independent director.
Donald M. Schaeffer has been a director of the Company since June 2006. Mr. Schaeffer has extensive accounting and legal experience in real estate and tax. In 1982, he joined the accounting firm, Kandel Schaeffer, in which he eventually became an officer and owner. Through successor accounting firms, he became co-owner and President of Schaeffer & Sam, P.C., which he has practiced with for the past eleven years. Mr. Schaeffer is qualified to serve on our board as one of our independent directors based on his experience as both an attorney and accountant within our industry as well as his financial industry experience. He graduated from the Wharton School, University of Pennsylvania, in 1972 and Columbia University School of Law in 1975. He is a licensed Certified Public Accountant in the State of New York. Mr. Schaeffer is deemed an independent director.
Harvey I. Schneider has been a director of the Company since June 2007. Mr. Schneider is currently a partner at the law firm of Putney, Twombly, Hall & Hirson LLP. Mr. Schneider is admitted to practice law in New York and Florida. For over fifty years he has practiced in the field of trusts and estates for individuals, and employee benefits and succession planning for business entities. Mr. Schneider is qualified to serve on our board as one of our independent directors through his experience as an attorney in the fields of employee benefits and business succession planning. Mr. Schneider is a 1955 graduate of Pennsylvania State University with a B.S. in business administration and a 1958 graduate of the New York University School of Law. Mr. Schneider is deemed an independent director.
Louis Sheinker has been President and Chief Operating Officer and a director of the Company since January 2013. Louis Sheinker brings nearly 27 years of real estate experience to the Company. Prior to joining the Company, Louis
Sheinker was a co-founding partner in Lighthouse Real Estate Ventures. He has participated in restructuring and repositioning of over 4 million square feet of office space and industrial properties having an aggregate value in excess of $1.0 billion. Prior to founding Lighthouse, he was the President of Sheinker Wasserstein Realty Services, Inc., where he managed a $100 million portfolio and rendered management and asset management services on behalf of financial institutions throughout the New York Metropolitan Area. Mr. Sheinker is qualified to serve on the Company's Board due to his extensive experience in the commercial real estate industry. He received a Bachelor of Science degree from Ithaca College, and is currently a licensed Real Estate Broker in New York State.
Jeffrey Wu has been a director of the Company since January 2013. Mr. Wu is an active and accomplished investor in commercial real estate and many other businesses. Since the mid-80's, he has transacted over sixty properties totaling more than four million square feet. He is also the principal shareholder, a founder and director of United International Bank. In addition, he is the sole owner of Hong Kong Supermarket Chain, one of the largest Asian supermarket chains with stores in multi-states. Jeffrey is a major contributor to many charities and non-profit organizations, and serves as a director of the New York Law Enforcement Foundation. Mr. Wu is qualified to serve on the Company's Board due to his extensive experience in the commercial real estate industry. Mr. Wu is deemed an independent director.
Committees of our Board of Directors
Audit Committee:
We have an Audit Committee comprised of three directors, Messrs. Leahy, Schaeffer, and Schneider, all of whom are deemed independent directors. Mr. Schaeffer is designated as Chairman. Our Board of Directors has determined that Mr. Schaeffer is a financial expert and meets the criteria for independence as described in the Securities and Exchange Act of 1934, as amended. The Audit Committee selects and appoints the Company's independent registered public accounting firm and assists the Board in overseeing (1) the integrity of the Company's financial statements, (2) the Company's independent registered public accounting firm's qualifications and independence, (3) the performance of the Company's independent registered public accounting firm and the Company's internal audit function and (4) the Company's compliance with legal and regulatory requirements.
During the fiscal year ended December 31, 2012, the Audit Committee held four meetings and all of the members attended all of the meetings.
Compensation Committee:
We have a Compensation Committee comprised of Messrs. Barone, Leahy, and Schneider, all of whom are deemed independent directors. Mr. Barone is designated as Chairman. The Compensation Committee establishes compensation policies and programs for our directors and executive officers. During the fiscal year ended December 31, 2012, the Executive Compensation Committee held five meetings and all members attended all of the meetings.
Nominating Committee:
The Board of Directors does not have a Nominating Committee. Instead, the full Board of Directors carries out the duties of a nominating committee. The Board of Directors has not adopted written guidelines regarding nominees for director.
Communications Committee:
In February 2009, the Board of Directors formed an executive committee of the Board to be designated the Communications Committee. The purpose of the Communications Committee is to explore and identify improved methods of communication between management and the stockholders. The members of the Communications Committee are Messrs. Barone, Leahy, Schneider, and Douglas A. Cooper.
Special Committee:
In 2011, due to the potential conflicts of interest involved, the Board formed a Special Transaction Committee comprised solely of the independent directors for the specific purpose of evaluating and negotiating the terms of the
transaction with Wu/Lighthouse Portfolio, LLC, and to decide whether to recommend the transaction to the full Board. The members of the Special Transaction Committee were Messrs. Schaeffer (Chairman), Leahy, Barone, and Schneider.
Directors' Compensation:
We pay each of our independent directors an annual retainer of $10,000 and annually grant restricted shares of stock in the amount of approximately $10,000 at fair market value on the date of grant. In addition, we pay our independent directors $1,000 for attending each board meeting and $500 for attending each committee meeting. Each independent director who serves as chairman of the Audit Committee is paid an additional fee of $5,000 per year and each independent director who serves as chairman of the Compensation Committee is paid an additional fee of $3,000 per year. Additionally, each independent director who served on the Special Committee was paid a monthly fee of $3,000.
Code of Business Conduct and Ethics:
The Board of Directors has adopted a Code of Business Conduct and Ethics, which applies to all directors, officers, and employees, including our principal executive officer and principal financial officer. A copy of the Code of Business Conduct and Ethics will be provided to any person without charge upon written request to our address to the attention of the Secretary.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
General Compensation Philosophy:
The primary objective of our compensation program for employees, including our compensation program for executive officers, is to attract, retain, and motivate qualified individuals and reward them in a manner that is fair to all stockholders. We strive to provide incentives for every employee that rewards them for their contribution to the Company.
Our compensation program is designed to be competitive with other employment opportunities and to align the interests of all employees, including executive officers, with the long-term interests of our stockholders. For our executive officers, we link a much higher percentage of total compensation to incentive compensation such as stock based compensation than we do for other employees.
The following discussion and analysis of compensation arrangements of our named executive officers for 2012 should be read together with the compensation tables and related disclosures set forth below.
Overview of Objectives:
The Compensation Committee of the Board of Directors establishes compensation policies, plans, and programs to accomplish three objectives:
•to keep, incentivize, and reward highly capable and well-qualified executives;
•to focus executives' efforts on increasing long-term shareholder value; and
•to reward executives at levels which are competitive with the marketplace for similar positions and consistent with the performance of each executive and of our Company.
Our executive compensation program is designed to reward an individual's success in meeting and exceeding performance in various leadership functions, coupled with the ability to enhance long-term shareholder value. Some of the key elements in considering an executive's level of success are the executive's:
•effectiveness as it relates to our overall financial, operational, and strategic goals;
•individual levels of responsibility and the nature and scope of these responsibilities;
•contribution to our financial results;
•effectiveness in leading initiatives to increase shareholder value and overall productivity; and
•contribution to our commitment to corporate responsibility, as well as, compliance with applicable laws, regulations, and the highest ethical standards.
Elements of Compensation:
Our executive compensation program includes the following elements:
•annual compensation which is comprised of base salary, cash bonus, and other annual types of compensation; and
•long-term compensation which may include the award of stock options, restricted stock, and similar long-term compensation.
The Compensation Committee from time to time evaluates and discusses the performance of certain executives. This evaluation and discussion may include, among other things, a review of the contribution and performance of such executive to our overall performance, strengths, weaknesses, and development plans. Following this evaluation and discussion, input, as needed, is obtained from other senior officers. A discussion is held and the Compensation Committee makes its own assessment and determines the compensation of each executive. The committee continually strives to balance annual and long-term compensation by examining the entire compensation package of each executive.
Annual Compensation:
Each compensation element is specifically designed to meet the objectives outlined above. As such, in determining the annual compensation budget for the current year and in fixing levels of executive compensation, the Compensation Committee considers:
•our performance relative to our growth and profitability goals and our peers' performance, both in the local geographic area and in institutions with similar portfolios; and
•the relative individual performance of each executive.
Base Salary:
In establishing a base salary for executives, the following factors were considered: (i) the duties, complexities, specialization, and responsibilities of the position; (ii) the level of experience and/or training required; (iii) the impact of the executive's decision-making authority; and (iv) the compensation for positions having similar scope and accountability within and outside the Company.
The Compensation Committee, where it deems appropriate, reviews publicly available local, regional, and national compensation data to benchmark executive compensation. We believe that executive talent extends beyond our direct competitors and industry; therefore, the data may include a broad comparison group. While benchmarking provides a very useful tool, the Compensation Committee understands that an effective compensation program is based primarily on performance; therefore, adjustments to base salary benchmarks are driven primarily by individual performance.
Other Compensation:
Jerome Cooper has been granted the use of a company-owned vehicle. The use of the company-owned vehicle provides an expense-saving opportunity, as this vehicle is used for business-related travel as needed, helping to cut out-of-pocket travel expenses. In addition, Paul A. Cooper and Louis Sheinker are provided with a car allowance and are reimbursed for costs associated for gas and tolls as their personal vehicles are used for business-related travel as needed, helping to cut out-of-pocket travel expenses.
Long-Term Compensation:
The Compensation Committee continually strives to achieve a balance between promoting strong annual growth and ensuring long-term viability and success. To reinforce the importance of balancing these views, executives may be provided long-term incentives.
Equity Incentive Awards:
Our Compensation Committee believes that stockholder value of our Company can be further increased by aligning the financial interests of our key executives and certain other employees with those of our stockholders. Awards of stock options and shares of restricted stock pursuant to our 2007 Incentive Award Plan (the "2007 Plan") are intended to meet this objective and constitute the long-term incentive portion of executive compensation. Participation in the 2007 Plan is specifically approved by the Board of Directors and covers our directors and employees.
2007 Incentive Award Plan:
Our Board of Directors adopted the 2007 Plan on June 11, 2007, which was approved by our stockholders on February 7, 2008. The following is a summary of the principal features of the 2007 Plan. Because it is a summary, it may not contain all of the information that is important to you. To fully understand the 2007 Plan, you should carefully read the entire 2007 Plan.
Securities Subject to the 2007 Plan:
The shares of stock subject to the 2007 Plan are our Common Stock. Under the terms of the 2007 Plan, the aggregate number of shares of our common stock subject to options, restricted stock awards, stock purchase rights, stock appreciation rights ("SARs"), and other awards will be no more than 1,000,000 shares, subject to adjustment under specified circumstances.
Awards Under the 2007 Plan:
The Compensation Committee is the administrator of the 2007 Plan. The 2007 Plan provides that the administrator may grant or issue stock options, SARs,
restricted stock, deferred stock, dividend equivalents, performance awards, and stock payments, or any combination thereof. Each award will be set forth in a separate agreement with the person receiving the award and will indicate the type, terms, and conditions of the award.
Our officers, employees, consultants, and non-officer Directors are eligible to receive awards under the 2007 Plan. The Compensation Committee determines which of our officers, employees, consultants, and independent Directors will be granted awards.
Nonqualified stock options ("NQSOs"), provide for the right to purchase our Common Stock at a specified price which, except with respect to NQSOs intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), may not be less than fair market value on the date of grant, and usually will become exercisable, in the discretion of the administrator, in one or more installments after the grant date. The exercisability of the installments of a NQSO may be subject to the satisfaction of individual or company performance criteria established by the administrator. NQSOs may be granted for any term specified by the administrator.
Incentive stock options ("ISOs"), are designed to comply with the provisions of Section 422 of the Code and are subject to certain restrictions contained in the Code. Among such restrictions, ISOs generally must have an exercise price of not less than the fair market value of a share of our common stock on the date of grant, may only be granted to officers and employees, and must expire within ten years from the date of grant. In the case of an ISO granted to an individual who owns, or is deemed to own, at least 10% of the total combined voting power of all of our classes of stock, the 2007 Plan provides that the exercise price must be at least 110% of the fair market value of a share of our common stock on the date of grant and the ISO must expire within five years from the date of grant.
Restricted stock may be sold to participants at various prices or granted with no purchase price, and may be made subject to such restrictions as may be determined by the administrator. Restricted stock, typically, may be repurchased by us at the original purchase price if the vesting conditions are not met. In general, restricted stock may not be sold or otherwise hypothecated or transferred until restrictions are removed or expire. Purchasers of restricted stock, unlike recipients of options, will have voting rights and may receive distributions prior to the time the restrictions lapse. Also, distributions on restricted stock may be subject to vesting conditions and restrictions.
Deferred stock may be awarded to participants, typically without payment of consideration, but subject to vesting conditions based on performance criteria established by the administrator. Like restricted stock, deferred stock may not be sold or otherwise hypothecated or transferred until vesting conditions are removed or expire. Unlike restricted stock, deferred stock will not be issued until the deferred stock award has vested, and recipients of deferred stock generally will have no voting or distribution rights prior to the time when the vesting conditions are satisfied.
Stock appreciation rights may be granted in connection with stock options or separately. SARs granted by the administrator in connection with stock options typically will provide for payments to the holder based upon increases in the price of our common stock over the exercise price of the related option, but alternatively may be based upon an exercise price determined by the administrator. Except as required by Section 162(m) of the Code with respect to any SAR intended to qualify as performance-based compensation, there are no restrictions specified in the 2007 Plan on the exercise prices of SARs, although restrictions may be imposed by the administrator in the SAR agreements. The administrator may elect to pay SARs in cash, our common stock, or a combination of both.
Distribution equivalents represent the value of the distributions per share paid by us, calculated with reference to the number of shares covered by the stock options, SARs, or other awards held by the participant.
Performance awards may be granted by the administrator to officers, employees, or consultants based upon, among other things, the achievement of performance goals. Generally, these awards will be based upon specific performance criteria and may be paid in cash or our common stock or a combination. Performance awards to officers, employees, and consultants may also include bonuses granted by the administrator, which may be payable in cash, our common stock, or a combination of both.
Stock payments may be authorized by the administrator in the form of shares of our common stock or an option or other right to purchase our common stock as part of a deferred compensation arrangement in lieu of all or any part of cash compensation, including bonuses, that would otherwise be payable to the officer, employee, or consultant. Stock payments may be based on the achievement of performance goals.
The administrator may designate officers and employees as Section 162(m) participants, whose compensation for a given fiscal year may be subject to the limit on deductible compensation imposed by Section 162(m) of the Code. The administrator may grant to Section 162(m) participants options, restricted stock, deferred stock, SARs, dividend equivalents, performance awards, cash bonuses, and stock payments that are paid, vest, or become exercisable upon the achievement of performance goals for our company, or any subsidiary, division, or operating unit of our company related to one or more of the following performance criteria net income; pre-tax income; operating income; cash flow; earnings per share; earnings before interest, taxes, depreciation and/or amortization; return on equity; return on invested capital or assets; cost reductions or savings; or appreciation in the market value of a share of our common stock.
Stock Option Grants to Independent Directors:
Until 2012, each of our independent Directors has received an option for 5,000 shares of our common stock as of the date of their appointment and a similar option at each annual meeting of our stockholders thereafter ("Director Options"). Each person who thereafter was elected or appointed as an independent director has received a Director Option on the date such person was first elected as an independent director. The Director Options vested on the date of grant. On June 9, 2011, the Company granted 10,000 options, which vested immediately, to Mr. Joseph F. Barone, in connection with Mr. Barone's appointment to the Board of Directors on February 12, 2009.
Restricted Stock Grants to Independent Directors:
In 2010, the Board of Directors elected to grant shares of restricted stock to our independent Directors on an annual basis. Each of our independent Directors will receive shares of restricted stock as of the date of their appointment and a similar grant at each annual meeting of our stockholders thereafter with a fair market value of approximately $10,000. Each person who thereafter is elected or appointed as an independent director will receive restricted stock on the date such person is first elected as an independent director and on each annual meeting thereafter receive a similar grant with a fair market value of approximately $10,000. The shares of restricted stock will vest on the date of grant.
Amendment and Termination of the 2007 Plan:
The Board of Directors may not, without stockholder approval, amend the 2007 Plan to increase the number of shares of our stock that may be issued under the 2007 Plan.
The Board of Directors may terminate the 2007 Plan at any time. The 2007 Plan will be in effect until terminated by the Board of Directors. However, in no event may any award be granted under the 2007 Plan after ten years following the 2007 Plan's effective date. Except as indicated above, the Board of Directors may modify the 2007 Plan from time to time.
Other Long-Term Compensation:
We offer a variety of health and welfare programs to all eligible employees. The executives generally are eligible for the same benefit programs on the same basis as other employees. The health and welfare programs are intended to protect employees against catastrophic loss and encourage a healthy lifestyle. Our health and welfare programs include medical, prescription, dental, and vision. We provide short-term disability coverage to every full time employee in New York, at no cost to the employee.
We offer a 401(k) plan to all eligible employees, including executives. The 401(k) plan is funded by contributions of participating employees. We do not offer any matching contributions to the participants in this plan.
Summary Compensation Table:
The following table sets forth the compensation of each executive officer of the Company and/or their subsidiaries for the three years ended December 31, 2012:
(1)Consists of 401(K) contributions.
(2)Includes life insurance premiums.
(3)Includes monthly auto allowance.
(4)These columns represent the grant date fair value of the awards as calculated in accordance with FASB ASC 718 (Stock Compensation). Pursuant to SEC rule changes effective February 28, 2010, we are required to reflect the total grant date fair values of the restricted stock grants in the year of grant, rather than the portion of this amount that was recognized for financial statement reporting purposes in a given fiscal year which was required under the prior SEC rules, resulting in a change to the amounts reported in prior Annual Reports.
Compensation Committee Interlocks and Insider Participation:
There are no interlocks or insider participation as to compensation decisions required to be disclosed pursuant to SEC regulations.
Compensation Committee Report:
The following report of the Compensation Committee shall not be deemed to be "soliciting material" or to be "filed" with the SEC nor shall this information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent that the we specifically incorporate it by reference into a filing.
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this Annual Report with management. Based on our review and discussions, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report.
THE COMPENSATION COMMITTEE
Joseph F. Barone
John J. Leahy
Harvey I. Schneider
Grants of Plan Based Awards and Outstanding Equity Awards at Fiscal Year End:
All options granted to our named executive officers in 2008 are non-qualified stock options. The exercise price per share of each option granted to our named executive officers was determined in good faith by our Board of Directors on the date of the grant. All of the stock options granted to our named executive officers in 2008 were granted under our 2007 Plan. No grants plan-based awards were made to the named executive officers in 2012.
The following table sets forth certain information regarding grants of plan-based awards to our named executive officers for the fiscal year ended December 31, 2012:
Outstanding Equity Awards
The following table sets forth certain information with respect to restricted stock awards held by each named executive officer as of December 31, 2012:
(1)The Board of Directors approved options to certain named executive officers. The stockholders approved the 2007 Stock Incentive Plan on February 7, 2008.
(2)The restricted stock and option awards will be accounted for at their fair value at the grant date which will also be the service inception date and will be amortized over the period of service.
The following table sets forth certain information with respect to outstanding stock option awards granted to our named executive officers outstanding as of December 31, 2012:
(1)Fair market value of shares on the date of grant.
(2)10 years from the date of grant.
(3)The options granted Messrs. J. Cooper, P. Cooper, D. Cooper became exercisable as to 33.3% of the underlying shares on June 11, 2008, 33.3% of the underlying shares became exercisable on June 11, 2009, and 33.3% of the underlying shares became exercisable on June 11, 2010.
Option Exercises and Stock Vested:
No options were exercised by our named executive officers in 2012.
Pension Benefits:
We do not currently maintain qualified or non-qualified defined benefit plans.
Non-qualified Deferred Compensation:
We do not currently maintain non-qualified defined contribution plans or other deferred compensation plans.
Employee Agreements and Potential Payments Upon Termination or Change in Control:
There were no employment agreements or agreements providing for potential payments upon termination or a change in controls at December 31, 2012,
Independent Director Compensation:
The following table sets forth a summary of the compensation we paid to our independent directors in 2012:
(1)Refer to Note 10 for further discussion regarding stockholders' equity.
Our non-officer Directors receive the following forms of compensation:
•Annual Retainer. Our independent Directors receive an annual retainer of $10,000. Each independent director who serves as chairman of the Audit Committee is paid an additional fee of $5,000 per year and each independent director who serves as chairman of the Compensation Committee is paid an additional fee of $3,000 per year.
•Meeting Fees. Prior to June 7, 2012, our independent Directors received $500 for each Board meeting and each committee meeting attended in person or by telephone. Subsequent to June 7, 2012, our independent Directors received $1,000 for each Board meeting attended in person or by telephone and $500 for each committee meeting attended in person or by telephone. In July 2011, the Board of Directors formed a special committee comprised of the independent Directors of the Board for purposes of the Wu/Lighthouse acquisition. The Directors of the special committee received a $3,000 per month fee, and the chairman of the special committee received a $4,000 per month fee. The special committee ended January 31, 2013, as a result of the completion of the acquisition.
•Equity Compensation. Upon their initial election and annually on the date of the Annual Meeting of the Company's stockholders, each independent director receives $10,000 in shares of restricted stock at fair market value on the date of grant.
•Other Compensation. We reimburse our Directors for reasonable out-of-pocket expenses incurred in connection with attendance at meetings, including committee meetings, of the Board of Directors. Independent Directors do not receive other benefits from us.
Limitation of Liability and Indemnification of our Directors and Officers:
We have included in our charter a provision limiting the liability of our Directors and officers to us and our stockholders for money damages, except as may be required by Maryland law.
We will indemnify our present and former Directors and officers, among others, against judgments, penalties, fines, settlements, and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities. However, we shall not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses.
Our charter provides that none of our Directors or officers will be liable to our company or our stockholders for money damages and that we will indemnify and pay or reimburse reasonable expenses in advance of the final disposition of a proceeding to our Directors, our officers, their affiliates and any individual who, while our director or officer at our request, served as a director, trustee, partner, or officer of another corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise for losses they may incur by reason of their service in those capacities; provided, however, we will not indemnify or hold harmless our Directors and officers unless all of the following conditions are met:
•the party was acting on behalf of or performing services on the part of our Company;
•our Directors and officers have determined, in good faith, that the course of conduct which caused the loss or liability was in the best interests of our Company;
•such indemnification or agreement to be held harmless is recoverable only out of our net assets and not from our stockholders; and
•such liability or loss was not the result of:
•negligence or misconduct by our officers or Directors (other than the independent Directors); or
•gross negligence or willful misconduct by the independent Directors.
The SEC takes the position that indemnification against liabilities arising under the Securities Act is against public policy and unenforceable. Furthermore, our charter prohibits us from indemnifying our Directors for liabilities arising from or out of a violation of state or federal securities laws, unless one or more of the following conditions are met:
•there has been a successful determination on the merits of each count involving alleged securities law violations as to the party seeking indemnification;
•such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the party seeking indemnification; or
•a court of competent jurisdiction approves a settlement of the claims against the party seeking indemnification and finds that indemnification of the settlement and related costs should be made and the court considering the request has been advised of the position of the Securities and Exchange Commission and of the published opinions of any state securities regulatory authority in which shares of our stock were offered and sold as to indemnification for securities law violations.
We may advance amounts to persons entitled to indemnification for reasonable expenses and costs incurred as a result of any proceeding for which indemnification is being sought in advance of a final disposition of the proceeding only if all of the following conditions are satisfied:
•the legal action relates to acts or omissions with respect to the performance of duties or services by the indemnified party for or on behalf of our company;
•the legal action is initiated by a third party who is not a stockholder of our company or the legal action is initiated by a stockholder of our company acting in his or her capacity as such and a court of competent jurisdiction specifically approves such advancement;
•the party receiving such advances furnishes our company with a written statement of his or her good faith belief that he or she has met the standard of conduct described above; and
•the indemnified party receiving such advances furnishes to our Company a written undertaking, personally executed on his or her behalf, to repay the advanced funds to our company, together with the applicable legal rate of interest thereon, if it is ultimately determined that he or she did not meet the standard of conduct described above.
Authorizations of payments will be made by a majority vote of a quorum of disinterested Directors.
Also, our Board of Directors may cause our company to indemnify or contract to indemnify any person not specified above who was, is, or may become a party to any proceeding, by reason of the fact that he or she is or was an employee or agent of our company, or is or was serving at the request of our company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, to the same extent as if such person were specified as one whom indemnification is granted as described above. Any determination to indemnify or contract to indemnify will be made by a majority vote of a quorum consisting of disinterested Directors.
We intend to purchase and maintain insurance to indemnify such parties against the liability assumed by them in accordance with our charter in a sum of at least $5 million.
The indemnification provided in our charter is not exclusive to any other right to which any person may be entitled, including any right under policies of insurance that may be purchased and maintained by our company or others, with respect to claims, issues or matters in relation to which our company would not have obligation or right to indemnify such person under the provisions of our charter.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 15, 2013, information regarding the beneficial ownership of the Company's common stock by (1) each person who is known to the Company to be the owner of more than five (5%) percent of the Company's Common Stock (2) each of the Company's directors and executive officers and (3) all directors and executive officers as a group. For purposes of this table, a person or group of persons is deemed to have beneficial ownership of any shares that such person has the right to acquire within 60 days of December 31, 2012.
*Represents less than 1.0% of our outstanding common stock.
(1)Includes options to purchase 100,000 shares which may be purchased under the 2007 Plan and 13,160 restricted share granted under the 2007 Plan.
(2)Includes options to purchase 50,000 shares which may be purchased under the 2007 Plan and 78,926 restricted shares granted under the 2007 Plan.
(3)Includes options to purchase 50,000 shares which may be purchased under the 2007 Plan and 45,843 restricted shares under the 2007 Plan.
(4)Includes 5,581 shares of restricted shares granted under the 2007 Plan.
(5)Includes options to purchase 15,000 shares which may be purchased under the 2007 Plan.
(6)Includes options to purchase 10,000 shares which may be purchased under the 2007 Plan.
(7)Based on 13,648,084 shares outstanding as of March 15, 2013.
As of March 15, 2013, we have approximately 440 stockholders of record. There is no trading market for our common stock and none is expected to develop in the foreseeable future.
Change In Control Or Other Arrangements:
Except for the foregoing, there are no other arrangements for compensation of directors and there are no employment contracts between the Company and the Board of Directors or any change in control arrangements.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Since January 1, 2006, our Directors and executive officers of the Bus Companies, as the case may be, and their affiliates and associates have engaged in the following transactions with the Company, (excluding customary salary payments as employees).
Paul A. Cooper
Paul A. Cooper has been Chief Executive Officer of the Company since June 2012. Mr. Cooper has been a director of the Company since June 2006. Mr. Cooper had previously served as Executive Vice President of the Company since June 2006. Prior to joining the Company, Mr. Cooper has been a principal of Lighthouse Real Estate Ventures and its affiliates (collectively "Lighthouse"). Lighthouse owned, managed, and leased its own portfolio of more than 2 million square feet of commercial buildings in the Greater New York metropolitan area, including the building at 444 Merrick Road, Lynbrook, NY, which the Company has leased 6,712 square feet of office space since April 2005. The lease expires August 31, 2015 and has an annual rent of approximately $233,000.
Douglas A. Cooper
Douglas A. Cooper, an officer and director of the Company, is a partner of Ruskin, Moscou, Faltischek, P.C. ("RMF"), and has acted as counsel to the Company since 1998. Fees paid by the Company to RMF for the years ended December 31, 2012, 2011, and 2010 were $961,033, $554,638, and $268,295, respectively, representing fees and expenses for litigation with New York City and others, the divestiture, preparation of all documentation related to the Reorganization, and general corporate matters.
Policy Concerning Related Party Transactions:
In February 2009, our Board adopted a formal written policy (the "Policy") concerning the identification, review and approval of Related Party Transactions (as such term is defined in the Policy).
Identification of Potential Related Party Transactions:
Related Party Transactions will be brought to management's and the Board's attention in a number of ways. Each of our directors and executive officers is instructed and periodically reminded to promptly inform the Secretary of any potential Related Party Transactions. In addition, each director and executive officer completes a questionnaire on an annual basis designed to elicit information about any potential Related Party Transactions.
Any potential Related Party Transactions that are brought to our attention are analyzed by our outside counsel in consultation with management, as appropriate, to determine whether the transaction or relationship does, in fact, constitute a Related Party Transaction requiring compliance with the Policy.
Review and Approval of Related Party Transactions:
At each of its meetings, the Board will be provided with the details of each new, existing, or proposed Related Party Transaction, including the terms of the transaction, the business purpose of the transaction, and the effects on the Company and the relevant Related Party. In determining whether to approve a Related Party Transaction, the Board will consider, among other factors, the following factors to the extent relevant to the Related Party Transaction:
•whether the terms of the Related Party Transaction are fair to the Company and on the same basis as would apply if the transaction did not involve a Related Party;
•whether there are business reasons for the Company to enter into the Related Party Transaction;
•whether the Related Party Transaction would impair the independence of an outside director; and
•whether the Related Party Transaction would present an improper conflict of interest for any director or executive officer of the Company, taking into account the size of the transaction, the overall financial position of the director, executive officer or Related Party, the direct or indirect nature of the director's, executive officer's or Related Party's interest in the transaction and the ongoing nature of any proposed relationship, and any other factors the Board deems relevant.
Any member of the Board who has an interest in the transaction under discussion will abstain from voting on the approval of the Related Party Transaction, but may, if so requested by the Chairperson of the Board, participate in some or all of the Board's discussions of the Related Party Transaction. Upon completion of its review of the transaction, the Board may determine to permit or to prohibit the Related Party Transaction.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
On April 8, 2009, the Audit Committee appointed BDO USA, LLP as our independent registered public accounting firm and have reported on the financial statements in this 2012 Annual Report.
The following table presents aggregate fees billed for each of the years ended December 31, 2012 and 2011 for professional services rendered by BDO USA, LLP in the following categories:
Audit fees. These are fees for professional services performed for the audit of our annual financial statements and the required review of quarterly financial statements and other procedures performed by BDO USA, LLP in order for them to be able to form an opinion on our consolidated financial statements. These fees also cover services that are normally provided by independent auditors in connection with statutory and regulatory filings or engagements.
Audit-related fees. These are fees for assurance and related services that traditionally are performed by independent auditors that are reasonably related to the performance of the audit or review of the financial statements, such as due diligence related to acquisitions and dispositions, attestation services that are not required by statute or regulation, internal control reviews, and consultation concerning financial accounting and reporting standards.
Tax fees. These are fees for all professional services performed by professional staff in BDO USA, LLP's tax division, except those services related to the audit of our financial statements. These include fees for tax planning and tax advice.
All other fees. These are fees for any services not included in the above-described categories, including assistance with internal audit plans, risk assessments, and other regulatory filings.
The Audit Committee pre-approves all anticipated annual audit and non-audit services provided by our independent registered public accounting firm prior to the engagement of the independent registered public accounting firm with respect to such permissible services. With respect to audit services and permissible non-audit services not previously approved, the Audit Committee has authorized the Chairman of the Audit Committee to approve such audit services and permissible non-audit services, provided the Chairman informs the Audit Committee of such approval at its next regularly scheduled meeting. All "Audit Fees," "Audit-Related Fees," and "Tax Fees" set forth above were pre-approved by the Audit Committee. In accordance with Section 10A(i) of the Exchange Act, before BDO USA, LLP was engaged by us to render audit or non-audit services, the engagement was approved by our Audit Committee.
PART IV
ITEM 15.
ITEM 15. EXHIBITS
Exhibit
Number
Exhibit
2.1
Merger Agreement and Plan of Merger (Incorporated by reference to Registration Statement No. 333-136110)
3.1
Articles of Incorporation of the Registrant (Incorporated by reference to Registration Statement No. 333-136110)
3.1(a)
Form of Amended and Restated Articles of Incorporation of the Registrant (Incorporated by reference to Amendment No. 1 to Registration Statement No. 333-136110)
3.2(a)
Bylaws of the Registrant (Incorporated by reference to Registration Statement No. 333-136110)
3.2(b)
Amendment to Bylaws of the Registrant (Incorporated by reference to Registrants Annual Report on Form 10-K for the year ended December 31, 2008.)
4.1
Specimen Common Stock Certificate (Incorporated by reference to Registration Statement No. 333-136110)
10.1
Form of 2007 Incentive Award Plan (Incorporated by reference to Registrants Annual Report on Form 10-K for the year ended December 31, 2008.)
10.2
Form of Stockholder Rights Agreement (Incorporated by reference to Amendment No. 1 to Registration Statement No. 333-136110)
10.3
Asset Purchase Agreement by and among Green Bus lines, Inc., Command Bus Company, Inc., Triboro Coach Corp., Jamaica Buses, Inc. Varsity Transit, Inc., GTJ Co., Inc. and the City of New York dated November 29, 2005. (Incorporated by reference to Registration Statement No. 333-136110)
10.4
Agreement of Lease between Green Bus Holding Corp., Landlord and the City of New York, Tenant: Premises 49-19 Rockaway Beach Boulevard, Arverne, New York.. (Incorporated by reference to Registration Statement No. 333-136110)
10.5
Agreement of Lease between Green Bus Holding Corp., Landlord and the City of New York, Tenant: Premises 165-25 147th Avenue, Jamaica, New York.. (Incorporated by reference to Registration Statement No. 333-136110)
10.6
Agreement of Lease between Jamaica Bus Holding Corp., Landlord and the City of New York, Tenant: Premises 114-15 Guy Brewer Boulevard, Jamaica, New York.. (Incorporated by reference to Registration Statement No. 333-136110)
10.7
Agreement of Lease between Triboro Coach Holding Corp., Landlord and the City of New York, Tenant: Premises 85-01 24th Avenue East Elmhurst, New York. (Incorporated by reference to Registration Statement No. 333-136110)
10.8
Agreement of Lease between GTJ Co., Inc., Landlord and Avis Rent A Car System, Inc., Tenant: Premises 23-85 87th Street, East Elmhurst, New York. (Incorporated by reference to Registration Statement No. 333-136110)
10.9
Lease by and between GTJ Co., Inc., Landlord and Varsity Bus Co., Inc., Tenant: Premises 626 Wortman Avenue, Brooklyn, New York and Cozine Avenue, Brooklyn, New York dated September 1, 2003. (Incorporated by reference to Registration Statement No. 333-136110)
10.10
Agreement between Transit Facility Management Corporation and NYC Transit dated August 7, 2001. (Incorporated by reference to Amendment No. 1 to Registration Statement No. 333-136110)
10.11
Agreement between ShelterClean, Inc. and the City of Phoenix dated April 15, 2006. (Incorporated by reference to Amendment No. 1 to Registration Statement No. 333-136110)
10.12
Agreement between CEMUSA, Inc. and Shelter Express Corp. dated June 26, 2006. (Incorporated by reference to Amendment No. 1 to Registration Statement No. 333-136110)
10.13
ING Loan Agreement (Incorporated by reference to the Registrant's report on Form 8-K filed on July 10, 2007)
Exhibit
Number
Exhibit
10.14
ING Form of Pledge Agreement (Incorporated by reference to the Registrant's report on Form 8-K filed on July 10, 2007)
10.15
ING Confirmation and ISDA Master Agreement, dated as of December 13, 2006, with SMBC Derivative Products Limited (Incorporated by reference to the Registrant's report on Form 8-K filed on July 10, 2007)
10.16
ING Libor Cap Security Agreement (Incorporated by reference to the Registrant's report on Form 8-K filed on July 10, 2007)
10.17
ING Mortgage Notes (Incorporated by reference to the Registrant's report on Form 8-K filed on July 10, 2007)
10.18
ING Mortgages (Incorporated by reference to the Registrant's report on Form 8-K filed on July 10, 2007)
10.19
ING Assignment of Leases and Rents (Incorporated by reference to the Registrant's report on Form 8-K filed on July 10, 2007)
10.20
Real Estate Purchase and Sale Agreement by and between Eight Farms Springs Road Associates, LLC and Farm Springs Road LLC. (Incorporated by reference to the Registrant's report on Form 8-K filed February 5, 2008)
10.21
Lease by and between Eight Farm Springs Road Associates, L.L.C. and Hartford Fire Insurance Company, including First Lease Amendment. (Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 2008.)
10.22
Agreement of Lease dated April , 2005 between Lighthouse 444 Limited Partnership and GTJ Co., Inc. (Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 2007.)
10.23
Space Substitution Agreement dated November , 2007 between Lighthouse 444 Limited Partnership and Shelter Express Corp. (Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 2007.)
10.24
Fixed Rate Term Loan Agreement dated as of July 1, 2010 by and among 165-25 147th Avenue, LLC, 85-01 24th Avenue, LLC, Hartford Life Insurance Company, Hartford Life and Accident Insurance Company and Hartford Life and Annuity Insurance Company. (Incorporated by reference to Registrant's report on Form 8-K filed on July 2, 2010)
10.25
Consolidated, Amended and Restated Mortgage, Security Agreement and Fixture Filing dated as of July 1, 2010 by and among 165-25 147th Avenue, LLC, 85-01 24th Avenue, LLC, Hartford Life Insurance Company, Hartford Life and Accident Insurance Company and Hartford Life and Annuity Insurance Company. (Incorporated by reference to Registrant's report on Form 8-K filed on July 2, 2010)
10.26
Promissory Notes payable to the order of (i) Hartford Life Insurance Company in the stated amount of $25,000,000; (b) Hartford Life and Accident Insurance Company in the stated principal amount of $10,500,000; and (c) Hartford Life and Annuity Insurance Company in the stated principal amount of $10,000,000. (Incorporated by reference to Registrant's report on Form 8-K filed on July 2, 2010)
10.27
Assignment of Leases and Rents dated as of July 1, 2010 by and among 165-25 147th Avenue, LLC, 85-01 24th Avenue, LLC, Hartford Life Insurance Company, Hartford Life and Accident Insurance Company and Hartford Life and Annuity Insurance Company. (Incorporated by reference to Registrant's report on Form 8-K filed on July 2, 2010)
10.28
Carveout Indemnity Agreement dated as of July 1, 2010 by and among GTJ REIT, Inc. and Hartford Life Insurance Company, Hartford Life and Accident Insurance Company and Hartford Life and Annuity Insurance Company. (Incorporated by reference to Registrant's report on Form 8-K filed on July 2, 2010)
10.29
Environmental Indemnity Agreement dated as of July 1, 2010 by and among GTJ REIT, Inc. and Hartford Life Insurance Company, Hartford Life and Accident Insurance Company and Hartford Life and Annuity Insurance Company. (Incorporated by reference to Registrant's report on Form 8-K filed on July 2, 2010)
10.30
Credit Agreement, dated August 26, 2011, by and between the Company and Manufacturers Trust Company ("M&T"). (Incorporated by reference to Registrant's report on Form 10-Q filed on November 10, 2011)
Exhibit
Number
Exhibit
10.31
Standard LIBOR Grid Note, dated August 26, 2011, by and between the Company and M&T. (Incorporated by reference to Registrant's report on Form 10-Q filed on November 10, 2011)
10.32
Continuing Guaranty, dated August 26, 2011, by and between Farm Springs Road, LLC ("Farm Springs Road") and M&T. (Incorporated by reference to Registrant's report on Form 10-Q filed on November 10, 2011)
10.33
Open-End Mortgage, dated August 26, 2011, by and between Farm Springs Road and M&T. (Incorporated by reference to Registrant's report on Form 10-Q filed on November 10, 2011)
10.34
General Assignment of Rents, dated August 26, 2011, by and between Farm Springs Road and M&T. (Incorporated by reference to Registrant's report on Form 10-Q filed on November 10, 2011)
10.35
Environmental Compliance and Indemnification Agreement, dated August 26, 2011, by and between the Company and Farm Springs Road. (Incorporated by reference to Registrant's report on Form 10-Q filed on November 10, 2011)
10.36
Asset Sale and Purchase Agreement, dated December 27, 2011, by and among Triangle Services Inc., Metroclean Express Corp. and GTJ REIT, Inc. (Incorporated by reference to Registrant's report on Form 8-K/A filed on February 1, 2012)
10.37
Asset Sale and Purchase Agreement, dated December 27, 2011, by and among Triangle Services Inc., ShelterClean, Inc. and GTJ REIT, Inc. (Incorporated by reference to Registrant's report on Form 8-K/A filed on February 1, 2012)
10.38
Bill of Sale, dated January 12, 2012, by and between ShelterClean of Arizona, Inc. and Shelter Clean Services, Inc. (Incorporated by reference to Registrant's report on Form 8-K/A filed on February 1, 2012)
10.39
Assignment and Assumption Agreement, dated January 12, 2012, by and between ShelterClean of Arizona, Inc. and Shelter Clean Services, Inc. (Incorporated by reference to Registrant's report on Form 8-K/A filed on February 1, 2012)
10.40
Lease Agreement, dated June 6, 2012, by and between Farm Springs Road, LLC and United Technologies Corporation. (Incorporated by reference to Registrant's report on Form 8-K filed on June 7, 2012)
10.41
Share Purchase Agreement by and between Shelter Express Corp. and Manisha Patel. (Incorporated by reference to Registrant's report on Form 8-K/A filed on December 26, 2012)
21.1
Subsidiaries of GTJ REIT, Inc. (filed herewith)
23.1
Consent of Independent Registered Public Accounting Firm BDO USA, LLP
31.1
Certification of Director of Finance, acting principal financial officer pursuant to Exchange Act Rule 13a-14 or 15d-14, filed herewith.
31.2
Certification of Director of Finance, acting principal financial officer pursuant to Exchange Act Rule 13a-14 or 15d-14, filed herewith.
32.1
Certification of Director of Finance, acting principal financial officer, filed herewith
32.2
Certification of Director of Finance, acting principal financial officer, filed herewith
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 Labels Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: April 1, 2013
By:
/s/ Paul A. Cooper
Paul A. Cooper
Chief Executive Officer
By:
/s/ Jennifer A. Aloi
Jennifer A. Aloi
Director of Finance, acting principal financial officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.