GTJ REIT, INC. - Quarter Report: 2012 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2012

 

or

 

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

For the transition period from           to          

 

Commission file number:  0001368757

 

GTJ REIT, INC.

(Exact name of registrant as specified in its charter)

 

 

444 Merrick Road

Lynbrook, New York

11563

 

(Address of principal executive offices)

(Zip Code)

 

(516) 881-3535

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x No  o

 

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

 

Large accelerated filer [  ]

Accelerated filer [  ]

Non-accelerated filer [  ] (Do not check if smaller reporting company)

Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [  ] No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date: 13,648,084 shares of common stock as of November 5, 2012.

 

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GTJ REIT, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2012

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PART I. FINANCIAL INFORMATION	2
Item 1. Financial Statements	2
Condensed Consolidated Balance Sheets at September 30, 2012 (Unaudited) and December 31, 2011	2
Condensed Consolidated Statements of (Loss) Income (Unaudited) for the Three and Nine Months Ended September 30, 2012 and 2011	3
Condensed Consolidated Statements of Comprehensive Loss (Unaudited) for the Nine Months Ended September 30, 2012 and 2011	4
Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2012	5
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2012 and 2011	6
Notes to the Consolidated Financial Statements (Unaudited)	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3. Quantitative and Qualitative Disclosures about Market Risk	42
Item 4. Controls and Procedures	42
PART II. OTHER INFORMATION	42
Item 1. Legal Proceedings	42
Item 1A. Risk Factors	43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3. Defaults Upon Senior Securities	43
Item 4. Mine Safety Disclosures	43
Item 5. Other Information	43
Item 6. Exhibits	43
Signatures	44

 

EX-31.1: CERTIFICATION

EX-31.2: CERTIFICATION

EX-32.1: CERTIFICATION

EX-32.2: CERTIFICATION

 

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GTJ REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

 

 

 

		September 30,			December 31,
		2012			2011
		(Unaudited)
ASSETS
Real estate at cost:
Land		$	88,584		$	88,584
Buildings and improvements		28,894			24,874
		117,478			113,458
Less: accumulated depreciation and amortization		(10,887)			(10,194)
Net real estate held for investment		106,591			103,264
Cash and cash equivalents		4,484			7,613
Available-for-sale securities		554			1,896
Restricted cash		478			627
Accounts receivable, net		241			295
Other assets		8,485			7,585
Deferred charges, net		3,986			3,186
Assets of discontinued operations		4,708			6,673
Intangible assets, net		-			478
Machinery and equipment, net		1,074			1,274
Total assets		$	130,601		$	132,891
LIABILITIES AND STOCKHOLDERS’ EQUITY
Secured revolving credit facility		$	5,000		$	—
Mortgage note payable		45,500			45,500
Accounts payable and accrued expenses		26			32
Unpaid losses and loss-adjustment expenses		1,591			1,909
Liabilities of discontinued operations		1,820			1,602
Other liabilities, net		4,354			2,403
Total liabilities		58,291			51,446
Stockholders’ equity:
Preferred stock, $.0001 par value; 10,000,000 shares authorized and none issued and outstanding		-			-
Common stock, $.0001 par value; 100,000,000 shares authorized; 13,648,084 and 13,587,051 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively		1			1
Additional paid-in capital		138,148			137,845
Cumulative distributions in excess of net income		(66,131)			(56,710)
Accumulated other comprehensive income		292			309
Total stockholders’ equity		72,310			81,445
Total liabilities and stockholders’ equity		$	130,601		$	132,891

 

 

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

 

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GTJ REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME

For the Three and Nine Months Ended September 30, 2012 and 2011

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

 

 

		Three Months Ended, September 30,						Nine Months Ended, September 30,
		2012			2011			2012			2011
Revenues:
Property rentals		$	3,355		$	3,431		$	10,279		$	10,079
Tenant reimbursements		47			90			259			317
Other revenue		-			11			17			307
Total revenues		3,402			3,532			10,555			10,703
Operating expenses:
General and administrative expenses		2,184			2,193			7,100			5,994
Property operating expenses		204			198			638			592
Depreciation and amortization expense		322			336			1,002			980
Total operating expenses		2,710			2,727			8,740			7,566
Operating income		692			805			1,815			3,137
Other income (expense):
Interest income		3			20			27			66
Interest expense		(702)			(632)			(2,009)			(1,889)
Change in insurance reserves		(23)			(113)			38			(149)
Pension withdrawal expense		(1,488)			-			(1,488)			-
Other		639			(156)			678			(141)
Total other income (expense):		(1,571)			(881)			(2,754)			(2,113)
(Loss) income from continuing operations before provision for income taxes		(879)			(76)			(939)			1,024
Provision for income taxes		-			23			-			1
(Loss) income from continuing operations, net of income taxes		(879)			(99)			(939)			1,023
Discontinued Operations:
Loss from discontinued operations, net of income taxes		(1,875)			(1,594)			(3,446)			(1,870)
Net loss		$	(2,754)		$	(1,693)		$	(4,385)		$	(847)
(Loss) income per common share - basic and diluted:
(Loss) income from continuing operations		$	(0.06)		$	(0.01)		$	(0.07)		$	0.08
Loss from discontinued operations		$	(0.14)		$	(0.11)		$	(0.25)		$	(0.14)
Net loss		$	(0.20)		$	(0.12)		$	(0.32)		$	(0.06)
Weighted-average common shares outstanding – basic and diluted		13,648,084			13,587,051			13,620,538			13,553,105

 

 

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

 

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GTJ REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

For the Nine Months Ended September 30, 2012 and 2011

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

 

 

		For the Nine Months Ended September 30,
		2012			2011
Net loss:		$	(4,385)		$	(847)
Other comprehensive loss:
Available-for-sale securities:
Net change in unrealized losses		(17)			(127)
Comprehensive loss		$	(4,402)		$	(974)

 

 

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

 

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GTJ REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2012

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

 

 

		Preferred Stock					Common Stock
		Outstanding Shares		Amount			Outstanding Shares		Amount			Additional- Paid-In- Capital			Cumulative Distributions in Excess of Net Income			Accumulated Other Comprehensive Income			Total Stockholders’ Equity
Balance at December 31, 2011		-		$	-		13,587,051		$	1		$	137,845		$	(56,710)		$	309		$	81,445
Distributions - common stock, $0.37 per share		-		-			-		-			-			(5,036)			-			(5,036)
Stock-based compensation		-		-			-		-			303			-			-			303
Issuance of restricted shares		-		-			61,033		-			-			-			-			-
Comprehensive loss:
Net loss		-		-			-		-			-			(4,385)			-			(4,385)
Unrealized loss on available-for-sale securities, net		-		-			-		-			-			-			(17)			(17)
Total comprehensive loss		-		-			-		-			-			-			-			(4,402		)
Balance at September 30, 2012		-		$	-		13,648,084		$	1		$	138,148		$	(66,131)		$	292		$	72,310

 

 

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

 

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GTJ REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2012 and 2011

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

 

		Nine Months Ended September 30,
		2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(4,385)		$	(847)
Loss from discontinued operations		3,446			1,870
(Loss) income from continuing operations		(939)			1,023
Adjustments to reconcile net (loss) income from continuing operations to net cash provided by operating activities
Stock-based compensation		303			314
Changes in insurance reserves		(318)			(170)
Depreciation and amortization		894			893
Realized gain on available for sale securities		(29)			-
Amortization of deferred financing costs		238			163
Amortization of deferred charges		109			84
Amortization of intangible assets		477			614
Changes in operating assets and liabilities:
Accounts receivable		54			(91)
Other assets		(900)			(888)
Deferred charges		(1,147)			(276)
Accounts payable and other liabilities		1,945			(14)
Net cash provided by operating activities		687			1,652
Cash flow from investing activities:
Purchases of leasehold improvements		(4,020)			(280)
Purchase of marketable securities		(2)			—
Proceeds from sale of marketable securities		1,356			295
Restricted cash		149			119
Net cash (used in) provided by investing activities		(2,517)			134
Cash Flow from financing activities:
Proceeds from revolving credit facility		5,000			-
Dividends paid		(5,036)			(4,609)
Net cash used in financing activities		(36)			(4,609)
Cash flow provided by discontinued operations:
Operating activities		(1,263)			121
Net decrease in cash and cash equivalents		(3,129)			(2,702)
Cash and cash equivalents at the beginning of period		7,613			11,137
Cash and cash equivalents at the end of period		$	4,484		$	8,435
Supplemental cash flow information:
Cash paid for interest		$	1,726		$	1,723
Cash paid for taxes		$	55		$	7

 

 

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

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

 

1.              ORGANIZATION AND BASIS OF PRESENTATION:

 

Description of Business

 

GTJ REIT, Inc. (the “Company” or “GTJ REIT”) was incorporated in Maryland on June 23, 2006 to engage in any lawful act or activity including, without limitation, qualifying as a real estate investment trust (“REIT”) under Sections 856 through 860, or any successor sections of the Internal Revenue Code of 1986, as amended (the “Code”), for which corporations may be organized under Maryland General Corporation Law. The Company has focused primarily on the ownership and management of commercial real estate located in New York City and also has one property located in Farmington, Connecticut (“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 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 September 30, 2012, the Company owned seven properties containing a total of approximately 561,000 square feet of leasable area.

 

Reorganization

 

On July 24, 2006, the Company entered into an Agreement and Plan of Merger (the “Agreement”) with Triboro Coach Corp., a New York corporation (“Triboro”); Jamaica Central Railways, Inc., a New York corporation (“Jamaica”); Green Bus Lines, Inc., a New York corporation (“Green” and together with Triboro and Jamaica, collectively referred to as the “Bus Companies” and each referred to as a “Bus Company”); Triboro Acquisition, Inc., a New York corporation (“Triboro Acquisition”); Jamaica Acquisition, Inc., a New York corporation (“Jamaica Acquisition”); and Green Acquisition, Inc., a New York corporation (“Green Acquisition,” and together with Jamaica Acquisition and Triboro Acquisition collectively referred to as the “Acquisition Subsidiaries” and each referred to as an “Acquisition Subsidiary”). The transactions contemplated under the Agreement closed on March 29, 2007. The effect of the merger transactions was to complete a reorganization (“Reorganization”) of the ownership of the Bus Companies into the Company with the surviving entities of the merger of the Bus Companies with the Acquisition Subsidiaries becoming wholly-owned subsidiaries of the Company and the former shareholders of the Bus Companies becoming stockholders in the Company. Under the 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 (five of which are on a triple net basis), four of which are leased to the City of New York, one of which is leased to a commercial tenant, and one of which is leased to various tenants. There was an additional property of negligible size which is not rentable. Prior to the Reorganization, the Bus Companies and their subsidiaries, collectively, operated a group of outdoor maintenance businesses and the discontinued paratransit business, which was acquired as part of the Reorganization.

 

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

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

 

1.              ORGANIZATION AND BASIS OF PRESENTATION (Continued):

 

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. 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 Accounting Standards Codification (“ASC”) 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 condensed consolidated balance sheet at September 30, 2012.

 

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 its 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 business.

 

Basis of Presentation and Principles of Consolidation:

 

The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements, although management believes that the disclosures presented herein are adequate to make the accompanying unaudited consolidated interim financial statements presented not misleading.

 

The accompanying unaudited condensed consolidated financial statements include the financial statements of the Company, its wholly-owned subsidiaries, and partnerships or other joint ventures. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All significant intercompany transactions and balances have been eliminated in consolidation.

 

The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2012. The accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated annual financial statements and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

2.              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

Use of Estimates:

 

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

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

 

2.              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

 

Reclassifications:

 

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

 

Real Estate Investments:

 

Real estate assets are stated at cost, less accumulated depreciation and amortization. All costs related to the improvement or replacement of real estate properties are capitalized. Additions, renovations, and improvements that enhance and/or extend the useful life of a property are also capitalized. Expenditures for ordinary maintenance, repairs, and improvements that do not materially prolong the normal useful life of an asset, are charged to operations as incurred.

 

Upon the acquisition of real estate properties, the fair values of the real estate purchased are allocated to the acquired tangible assets (consisting of land, buildings, and building improvements) and identified intangible assets and liabilities (consisting of above-market and below-market leases and in-place leases) in accordance with ASC 805. The Company utilizes methods similar to those used by independent appraisers in estimating the fair value of acquired assets and liabilities. The fair value of the tangible assets of an acquired property considers the value of the property “as-if-vacant.” The fair value reflects the depreciated replacement cost of the asset. In allocating purchase price to identified intangible assets and liabilities of an acquired property, the values of above-market and below-market leases are estimated based on the differences between (i) contractual rentals and the estimated market rents over the applicable lease term discounted back to the date of acquisition utilizing a discount rate adjusted for the credit risk associated with the respective tenants and (ii) the estimated cost of acquiring such leases giving effect to the Company’s history of providing tenant improvements and paying leasing commissions, offset by a vacancy period during which such space would be leased. The aggregate value of in-place leases is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property “as-if-vacant,” determined as set forth above.

 

Above and below market leases acquired are recorded at their fair values. The capitalized above-market lease values are amortized as a reduction of rental revenue over the remaining term of the respective leases and the capitalized below-market lease values are amortized as an increase to rental revenue over the remaining term of the respective leases. The value of in-place leases is based on the Company’s evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during expected lease-up periods, current market conditions, and costs to execute similar leases. The values of in-place leases are amortized over the remaining term of the respective leases. If a tenant vacates its space prior to its contractual expiration date, any unamortized balance of the related intangible asset is expensed.

 

Depreciation and Amortization:

 

The Company uses the straight-line method for depreciation and amortization. Properties and property improvements are depreciated over their estimated useful lives, which range from 10 to 25 years. Furniture and fixtures, equipment, and transportation equipment are depreciated over estimated useful lives that range from 5 to 10 years. Tenant improvements are amortized over the shorter of the remaining non-cancellable term of the related leases or their useful lives.

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

 

2.              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

 

Deferred Charges:

 

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

 

Asset Impairment:

 

The Company applies the guidance in ASC 360-10-05 to recognize and measure impairment of long-lived assets. Management reviews each real estate investment for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability is based on an estimate of the future cash flows that are expected to result from the real estate investment’s use and eventual disposition. Such cash flow analyses includes factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If an impairment event exists due to the projected inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair value. Management is required to make subjective assessments as to whether there are impairments in the value of its real estate holdings. These assessments could have a direct impact on net income, because an impairment loss is recognized in the period that the assessment is made. Management has determined that there were no indicators of impairment at September 30, 2012.

 

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. As a result of Management’s assessment, 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 September 30, 2012.

 

Reportable Segments:

 

As of September 30, 2012, the Company primarily operated 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.

 

·                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.

 

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 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 in accordance with ASC 840-20-25, which requires that revenue be recognized on a straight-line basis over the term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. For the nine months ended September 30, 2012, four tenants constituted approximately 63%, 16%, 12%, and 7% of rental revenue, and two tenants each constituted approximately 1% of rental revenue. For the nine months ended September 30, 2011, four tenants constituted approximately 63%, 16%, 12%, and 8% of rental revenue, and two tenants each constituted approximately 1% of rental revenue.

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

 

2.              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

 

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 due pursuant to the underlying leases amounted to approximately $8.0 million and $7.4 million at September 30, 2012 and December 31, 2011, respectively (see Note 5).

 

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

 

Revenue Recognition—Electrical Contracting Operations:

 

The Company recognizes revenues from long-term construction contracts on the percentage-of-completion method in accordance with ASC 605-35. Percentage-of-completion is measured principally by the percentage of costs incurred to date for each contract to the estimated total costs for such contract at completion. Contract costs include all direct costs related to the performance and completion of the contracts. Estimated losses on the long term construction contracts are recognized in the period in which such losses are determined. Revenues are presented as part of discontinued operations in the condensed consolidated statements of (loss) income (see Note 8 for further discussion regarding discontinued operations).

 

Earnings Per Share Information:

 

In accordance with ASC 260-10-45, the Company presents both basic and diluted earnings per share. Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower per share amount. Restricted stock was included in the computation of diluted earnings per share and stock option awards were excluded from the computation of diluted earnings per share because the option awards would have been antidilutive for the periods presented.

 

Discontinued Operations:

 

The condensed consolidated financial statements of the Company present the operations of the outdoor maintenance, shelter cleaning, electrical contracting, and parking operations as discontinued operations (Note 8) in accordance with ASC 205-20-55 for the three and nine months ended September 30, 2012 and 2011.

 

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 September 30, 2012 and December 31, 2011, the Company had restricted cash in the amount of $0.5 million and $0.6 million, respectively.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

 

2.              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

 

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.

 

 Available-for-Sale Securities:

 

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

 

Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income, a component of stockholders’ equity. Interest on securities is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary are included in the accompanying condensed 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 management’s own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

 

Income Taxes:

 

The Company is organized and conducts its operations to qualify as a REIT for federal income tax purposes. Accordingly, the Company is generally not subject to federal income taxation on the portion of its income that qualifies as REIT taxable income, to the extent that it distributes at least 90% of its taxable income to its stockholders and complies with certain other requirements as defined under Section 856 through 860 of the Code.

 

The Company also participates in certain activities conducted by entities which elected to be treated as taxable subsidiaries under the Code. As such, the Company is subject to federal, state, and local taxes on the income from these activities.

 

The Company accounts for income taxes under the asset and liability method, as required by the provisions of ASC 740-10-30. Under this method, deferred tax assets and liabilities are established based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

 

2.              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

 

ASC 740-10-65 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10-65, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740-10-65 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of September 30, 2012 and December 31, 2011, the Company has determined that no liabilities are required in connection with unrecognized tax positions.

 

Comprehensive Income (Loss):

 

The Company follows the provisions of ASC 220-10-45, which sets forth rules for the reporting and display of comprehensive income (loss) and its components. ASC 220-10-45 requires unrealized gains or losses on the Company’s available-for-sale securities to be included in accumulated other comprehensive income (loss), 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 14).

 

Insurance Liabilities:

 

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

 

Concentrations of Credit Risk:

 

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

 

Investment in Equity Affiliates:

 

The Company 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 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.

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

 

2.              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

 

Variable Interest Entities:

 

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

 

As of September 30, 2012, the Company has one investment which was made to a VIE with a net carrying amount of $0.5 million, which is included in assets of discontinued operations on the condensed 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 condensed consolidated financial statements. The Company accounts for this investment under the equity method of accounting.

 

Stock-Based Compensation:

 

The Company has a stock-based compensation plan, which is described in Note 11. The Company accounts for stock-based compensation in accordance with ASC 718-30-30, which establishes accounting for stock-based awards exchanged for employee services. Under the provisions of ASC 718-10-35, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is expensed at the grant date (for the portion that vests immediately) or ratably over the respective vesting periods.

 

Recently Issued Accounting Pronouncements:

 

There were no recently issued accounting pronouncements that would affect the Company’s financial statements.

 

3.              REAL ESTATE:

 

Farm Springs Road, LLC Property:

 

On June 6, 2012, Farm Springs Road, LLC (“Farm Springs”), a wholly-owned subsidiary of the Company, 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 commencement date of the Lease was 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”), 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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

 

3.   REAL ESTATE (Continued):

 

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 of the Company, 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. 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.  Currently, the Company is actively marketing the property in order to secure a lease with a new tenant.

 

4.    AVAILABLE-FOR-SALE SECURITIES:

 

The Company accounts for debt and equity securities as available-for-sale securities in accordance with ASC 320-10-35. Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income, a component of stockholders’ equity. Interest on securities is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in the accompanying condensed consolidated statements of (loss) income.

 

The following is a summary of available-for-sale securities at September 30, 2012 and December 31, 2011 (in thousands):

 

		Available-for-Sale Securities
September 30, 2012		Face Value			Amortized Cost			Unrealized Gains			Estimated Fair Value
Equity securities		$	-		$	-		$	262		$	262
Money market fund		200			200			-			200
U.S. Treasury/U.S. Government debt securities		113			86			6			92
Total available-for-sale securities		$	313		$	286		$	268		$	554

 

		Available-for-Sale Securities
December 31, 2011		Face Value			Amortized Cost			Unrealized Gains			Estimated Fair Value
Equity securities		$	-		$	-		$	237		$	237
Money market fund		260			260			-			260
U.S. Treasury/U.S. Government debt securities		1,363			1,351			48			1,399
Total available-for-sale securities		$	1,623		$	1,611		$	285		$	1,896

 

Accumulated other comprehensive income for the nine months ended September 30, 2012 and year ended December 31, 2011 includes net unrealized holding losses of approximately $17,000 and $109,000, respectively. No amounts were reclassified from other comprehensive income to income for the nine months ended September 30, 2012, or for the year ended December 31, 2011.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

 

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

 

The following is a summary of the contractual maturities of U.S. Government Debt Securities as of September 30, 2012:

 

		Amortized Cost			Estimated Fair Value
Due in:
2012		$	-		$	-
2013 – 2017			86			92
2018 – 2022			-			-
2023 and later			-			-
Total		$	86		$	92

 

5.    OTHER ASSETS:

 

Other assets consist of the following (in thousands):

 

		September 30,				December 31,
		2012				2011
Prepaid expenses		$		357		$	155
Prepaid and refundable income taxes		30				14
Rental income in excess of amount billed		8,034				7,373
Security deposits		30				30
Other assets		34				13
		$	8,485			$		7,585

 

6.    UNPAID LOSSES AND LOSS-ADJUSTMENT EXPENSES:

 

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

 

		September 30, 2012			December 31, 2011
Reported claims		$	999		$	1,712
Provision for incurred but not reported claims		592			197
		$	1,591		$	1,909

 

Management is responsible for estimating the provisions for outstanding losses. The Company has recognized in the financial statements a provision for outstanding losses of $1.6 million and $1.9 million at September 30, 2012 and December 31, 2011, respectively. Effective November 3, 2011, losses originating from the 1999 to 2001 years were commuted back to AAIC for an amount totaling approximately $0.2 million. In connection with the transfer of insurance assets 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 includes $0.8 million for outstanding losses which was not a part of the actuarial study.

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

 

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

 

In the opinion of management, the provision for losses and loss-adjustment expenses is adequate to cover the expected ultimate liability under the insurance policies. 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 condensed consolidated financial statements.

 

7.    OTHER LIABILITIES:

 

Other liabilities consist of the following (in thousands):

 

		September 30,				December 31,
		2012				2011
Accrued dividends		$	1,092			$	1,087
Accrued earnings and profits distribution			99				99
Accrued professional fees			619				97
Accrued vacation			-				30
Accrued environmental costs			94				189
Accrued income taxes			12				31
Deposit liability			447				301
Prepaid rent			-				209
Pension withdrawal liability			1,451				-
Other			540				360
		$	4,354			$	2,403

 

8.    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. Following the divestiture, the Company’s plan is to continue focusing on the growth and expansion of its real estate operations. The assets and liabilities associated with the outdoor maintenance, shelter cleaning, electrical contracting, and parking (“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 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 for the nine months ended September 30, 2012 and 2011 (in thousands):

 

		Three Months Ended, September 30,						Nine Months Ended, September 30,
		2012			2011			2012			2011
Revenues from discontinued operations		$	1,266		$	5,890		$	5,041		$	15,480
Loss from discontinued operations, net income taxes		$	(1,875)		$	(1,594)		$	(3,446)		$	(1,870)

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

 

8.    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):

 

			September 30,					December 31,
			2012					2011
Assets:
Cash			$	20				$	63
Accounts receivable, net			1,796					2,666
Machinery and equipment, net			65					93
Other assets, net			2,827					3,851
			$	4,708				$	6,673
Liabilities:
Accounts payable and accrued expenses			528					467
Unpaid losses and loss-adjustment expenses			18					25
Other liabilities, net			1,274					1,110
			$	1,820				$	1,602

 

The following tables present the uncompleted contracts in progress (in thousands):

 

			September 30, 2012					December 31, 2011
Costs on contracts in progress			$	6,877				$	3,079
Estimated (loss) earnings				(1,062)					146
Accrued loss				1,062					-
				6,877					3,225
Less: billings to date				(4,680)					(2,351)
			$	2,197				$	874

 

The excess of billings over revenues earned to date and revenues earned to date over billings are included in assets of discontinued operations, respectively, on the accompanying condensed consolidated balance sheets as of (in thousands):

 

			September 30, 2012					December 31, 2011
Costs and estimated earnings in excess of billings on uncompleted contracts			$	2,197				$	874
Billings in excess of costs and estimated earnings on uncompleted contracts				-					-
			$	2,197				$	874

 

9.    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

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

 

9.    MORTGAGE NOTE PAYABLE (Continued):

 

the order of (i) Hartford Life Insurance Company in the stated amount of $25,000,000; (b) Hartford Life and Accident Insurance Company in the stated principal amount of $10,500,000; and (c) Hartford Life and Annuity Insurance Company in the stated principal amount of $10,000,000 (collectively, the “Notes”).  The proceeds from the Loan were used to satisfy in full the Company’s obligations under the Company’s previous loan agreement with ING.

 

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 bears interest at the fixed rate of 5.05% per annum.  The Borrower is required to make monthly payments of interest only in the amount of $191,479. The principal is payable on the maturity date, July 1, 2017.

 

10.    SECURED REVOLVING CREDIT FACILITY:

 

M&T Financing Agreement:

 

On August 26, 2011, the Company and Manufacturers and Traders Trust Company (“M&T”) entered into a certain credit agreement (the “Credit Agreement”). The Credit Agreement provides for, among other things, a $10 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, (iii) Leverage Ratio and (iv) Liquidity, all as defined in the Credit Agreement, and other restrictions and covenants that are usual and customary in agreements of this type. As a condition to M&T entering into the Credit Agreement, the Company 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, 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 covenants. The Company was in compliance with all financial covenants and restrictions for the periods presented with the exception of the net worth requirement for the nine months ended September 30, 2012. The Company is required to maintain Minimum Net Worth of greater than or equal to $75.0 million measured quarterly and for the trailing four quarters. While the Company’s net worth has been greater than $75.0 million for the trailing four quarters, it was $72.3 million for the quarter ended September 30, 2012. The Company has obtained a waiver for non-compliance with this covenant at September 30, 2012 from M&T and permanently amended this covenant calculation to $70.0 million.

 

As of September 30, 2012, the Company has $5.0 million outstanding under the Credit Agreement.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

 

11.    STOCKHOLDERS’ EQUITY:

 

Common Stock:

 

The Company is authorized to issue 100,000,000 shares of common stock, $.0001 par value per share. The Company has authorized the issuance of up to 15,564,454 shares of the Company’s common stock in connection with the Reorganization and the earnings and profits distribution of which a total of 13,472,281 shares has been issued by the Company.  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 September 30, 2012.

 

Dividend Distributions:

 

The following table presents dividends declared by the Company on its common stock from January 1, 2012 through September 30, 2012:

 

Declaration		Year / Quarter		Record		Payment		Dividend
Date		Ended		Date		Date		Per Share
January 23, 2012		December 31, 2011		January 31, 2012		February 15, 2012		$	0.13	(1)
March 26, 2012		March 31, 2012		March 31, 2012		April 15, 2012		$	0.08
June 7, 2012		June 30, 2012		June 30, 2012		July 15, 2012		$	0.08
August 6, 2012		September 30, 2012		September 30, 2012		October 15, 2012		$	0.08

 

(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.

 

The Plan may provide for awards in the form of restricted shares, incentive stock options, non-qualified stock options and stock appreciation rights. The aggregate number of shares of common stock which may be awarded under the Plan is 1,000,000 shares. These shares were registered on September 23, 2010. As of September 30, 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.

 

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Table of Contents

 

GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

 

11.    STOCKHOLDERS’ EQUITY (Continued):

 

The fair value of these options granted 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 of Directors 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	%

 

The following table presents the activity of options outstanding under the Plan for the nine months ended September 30, 2012:

 

Options			Number of Options				Weighted- Average and Exercise Price Per Share					Weighted- Average Grant Date Fair Value Per Share
Outstanding at December 31, 2011			265,000(a)				$	11.14				$	1.86
Granted			-				-					-
Exercised			-				-					-
Forfeited /Expired			-				-					-
Outstanding at September 30, 2012 (2)			265,000				$	11.14				$	1.86
Options vested and exercisable at September 30, 2012			265,000				$	11.14				$	1.86

 

(a)         Of these outstanding and exercisable options, 255,000 options have a remaining contractual life of approximately 5.4 years and the remaining 10,000 options have a remaining contractual life of approximately 8.7 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 September 30, 2012 and the related exercise price of the underlying options, was $0 for outstanding options and exercisable options as of September 30, 2012.

 

For the three and nine months ended September 30, 2012, the Company did not recognize any expense related to the stock option grants and for the three and nine months ended September 30, 2011, the Company recognized approximately $9,000 and $20,000, respectively, related to the stock option grants awarded under the Plan.

 

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