GTJ REIT, INC. - Quarter Report: 2013 March (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 March 31, 2013

 

or

 

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

For the transition period from              to            

 

Commission file number:  0001368757

 

GTJ REIT, INC.

(Exact name of registrant as specified in its charter)

 

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

 

60 Hempstead Avenue

West Hempstead, New York

11552

(Address of principal executive offices)

(Zip Code)

(516) 693-5500

(Registrant’s telephone number, including area code)

N/A

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x No  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: 13,666,385 shares of common stock as of May 10, 2013.

 

Table of Contents

 

GTJ REIT, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2013

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION	2
Item 1. Financial Statements	2
Condensed Consolidated Balance Sheets at March 31, 2013 (Unaudited) and December 31, 2012	2
Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2013 and 2012	3
Condensed Consolidated Statements of Comprehensive Loss (Unaudited) for the Three Months Ended March 31, 2013 and 2012	4
Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2013	5
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2013 and 2012	6
Notes to the Consolidated Financial Statements (Unaudited)	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3. Quantitative and Qualitative Disclosures about Market Risk	43
Item 4. Controls and Procedures	43
PART II. OTHER INFORMATION	44
Item 1. Legal Proceedings	44
Item 1A. Risk Factors	44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3. Defaults Upon Senior Securities	44
Item 4. Mine Safety Disclosures	44
Item 5. Other Information	44
Item 6. Exhibits	44
Signatures	46

 

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)

 

		March 31,				December 31,
		2013				2012
		(Unaudited)
ASSETS
Real estate at cost:
Land		$	135,210			$	88,584
Buildings and improvements		167,362				28,892
		302,572				117,476
Less: accumulated depreciation and amortization		(12,124)				(11,090)
Net real estate held for investment		290,448				106,386
Cash and cash equivalents		6,909				3,377
Available-for-sale securities		554				528
Restricted cash		1,517				376
Accounts receivable, net		408				334
Rental income in excess of amount billed		9,477				8,570
Deferred charges, net		4,240				4,175
Assets of discontinued operations		3,841				4,694
Intangible assets, net		21,369				-
Other assets		2,349				1,318
Total assets		$	341,112			$	129,758
LIABILITIES AND STOCKHOLDERS’ EQUITY
Secured revolving credit facility		$	-			$	5,000
Mortgage notes payable		178,642				45,500
Accounts payable and accrued expenses		601				232
Unpaid losses and loss-adjustment expenses		1,582				1,479
Liabilities of discontinued operations		1,633				1,639
Other liabilities, net		17,269				4,379
Total liabilities		199,727				58,229
GTJ REIT, Inc. 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; 13,666,385 and 13,648,084 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively		1				1
Additional paid-in capital		138,413				138,218
Cumulative distributions in excess of net income		(75,751)				(66,971)
Accumulated other comprehensive income		319				281
Total GTJ REIT, Inc. stockholders’ equity		62,982				71,529
Noncontrolling interest in consolidated entity		78,403				-
Total equity		141,385				71,529
Total liabilities and equity		$	341,112			$	129,758

 

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 OPERATIONS

For the Three Months Ended March 31, 2013 and 2012

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

 

		Three Months Ended, March 31,
		2013				2012
Revenues:
Property rentals		$	6,837			$	3,448
Tenant reimbursements		1,209				102
Other revenue		-				10
Total revenues		8,046				3,560
Operating expenses:
General and administrative expenses		2,879				2,658
Property operating expenses		1,527				226
Depreciation and amortization expense		2,278				338
Total operating expenses		6,684				3,222
Operating income		1,362				338
Other income (expense):
Interest income		2				14
Interest expense		(1,870)				(652)
Change in insurance reserves		(399)				77
Acquisition costs and other		(4,444)				5
Total other income (expense):		(6,711)				(556)
Loss from continuing operations before provision for income taxes		(5,349)				(218)
Provision for income taxes		-				-
Loss from continuing operations, net of income taxes		(5,349)				(218)
Discontinued Operations:
Loss from discontinued operations, net of income taxes		(668)				(730)
Net loss		(6,017)				(948)
Net income attributable to noncontrolling interest		393				-
Net loss attributable to GTJ REIT, Inc.		$	(6,410)			$	(948)
Loss per common share - basic and diluted:
Loss from continuing operations, net of noncontrolling interest		$	(0.42)			$	(0.02)
Loss from discontinued operations		$	(0.05)			$	(0.05)
Net loss attributable to GTJ REIT, Inc.		$	(0.47)			$	(0.07)
Weighted-average common shares outstanding – basic and diluted		13,641,693				13,587,051

 

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 Three Months Ended March 31, 2013 and 2012

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

 

		For the Three Months Ended March 31,
		2013				2012
Net loss:		$	(6,017)			$	(948)
Other comprehensive income:
Available-for-sale securities:
Net change in unrealized gains		38				43
Comprehensive loss		(5,979)				(905)
Less: Comprehensive income attributable to noncontrolling interest		393				-
Comprehensive loss attributable to GTJ REIT, Inc.		$	(6,372)			$	(905)

 

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 Three Months Ended March 31, 2013

(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 GTJ REIT, Inc. Stockholders’ Equity			Noncontrolling Interest			Total Equity
Balance at December 31, 2012		-		$	-		13,648,084		$	1		$	138,218		$	(66,971	)	$	281		$	71,529		$	-		$	71,529
Distributions - common stock, $0.1734 per share		-		-			-		-			-			(2,370		)	-			(2,370)			-			(2,370)
Stock-based compensation		-		-			-		-			195			-			-			195			-			195
Net issuance of restricted shares		-		-			18,301		-			-			-			-			-			-			-
Equity contribution from noncontrolling interest		-		-			-		-			-			-			-			-			79,505			79,505
Distributions to Partners		-		-			-		-			-			-			-			-			(1,495)			(1,495)
Comprehensive loss:
Net loss		-		-			-		-			-			(6,410		)	-			(6,410)			393			(6,017)
Unrealized gain on available-for-sale securities, net		-		-			-		-			-			-			38			38			-			38
Total comprehensive loss (income)		-		-			-		-			-			-			-			(6,372)			393			(5,979)
Balance at March 31, 2013		-		$	-		13,666,385		$	1		$	138,413		$	(75,751	)	$	319		$	62,982		$	78,403		$	141,385

 

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 Three Months Ended March 31, 2013 and 2012

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

 

		Three Months Ended March 31,
		2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(6,017)			$	(948)
Loss from discontinued operations		668				730
Loss from continuing operations		(5,349)				(218)
Adjustments to reconcile net loss from continuing operations to net cash (used in) provided by operating activities
Stock-based compensation		195				44
Changes in insurance reserves		103				(56)
Depreciation and amortization		1,098				278
Amortization of deferred financing costs		567				51
Amortization of deferred charges		93				60
Amortization of intangible assets		1,718				205
Amortization of mark to market on debt		(189)				-
Amortization of below market leases		(285)				-
Changes in operating assets and liabilities:
Accounts receivable		(73)				22
Rental income in excess of amount billed		(907)				(155)
Deferred charges		(725)				(6)
Other assets		(202)				(448)
Accounts payable and other liabilities		3,388				229
Net cash (used in) provided by operating activities		(568)				6
Cash flow from investing activities:
Acquisition of real estate		(911)				-
Purchase of marketable securities		(1)				(360)
Purchase of machinery and equipment		-				28
Proceeds from sale of marketable securities		13				365
Restricted cash		(1,140)				(1)
Net cash (used in) provided by investing activities		(2,039)				32
Cash Flow from financing activities:
Repayment of revolving credit facility		(5,000)				-
Proceeds from mortgage note payable		15,000				-
Payment of mortgage principal		(174)				-
Distributions to partners		(1,495)				-
Dividends paid		(2,370)				(2,853)
Net cash provided by (used in) financing activities		5,961				(2,853)
Cash flow provided by discontinued operations:
Operating activities		178				212
Net increase (decrease) in cash and cash equivalents		3,532				(2,603)
Cash and cash equivalents at the beginning of period		3,377				7,159
Cash and cash equivalents at the end of period		$	6,909			$	4,556
Supplemental cash flow information:
Cash paid for interest		$	2,077			$	574
Cash paid for taxes		$	1			$	10

 

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

March 31, 2013

(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 metropolitan areas (“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”). The Outdoor Maintenance Operations and Parking Operations have been discontinued, and the Company is continuing to focus on its Real Estate Operations.

 

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 and two of which are leased to various commercial tenants. Additionally, the Bus Companies owned a non-rentable property of negligible size. Prior to the Reorganization, the Bus Companies and their subsidiaries, collectively, operated a group of outdoor maintenance businesses, which was acquired as part of the Reorganization, and subsequently discontinued in 2011.

 

On March 29, 2007, the Company commenced operations upon the completion of the Reorganization described above. 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.

 

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 (the “UPREIT”) owned and controlled by the Company acquired all outstanding ownership interests of a portfolio consisting of 25 commercial properties located in New York, New Jersey and Connecticut in exchange for 33.29% of the outstanding limited partnership interests in the UPREIT. At March 31, 2013, subject to certain anti-dilutive and other provisions contained in the agreement, the 33.29% interest in the UPREIT held by the Wu/Lighthouse Portfolio are convertible, in the aggregate, into approximately 1.8 million shares of the Company’s common stock and approximately 5.0 million shares of preferred stock. As a result of this acquisition, the Company currently beneficially owns a 66.71% interest in a total of 32 properties (including the seven previously-owned properties) consisting of over 2.4 million square feet of office and industrial properties on 210 acres of land in New York, New Jersey, and Connecticut. The acquisition of the properties was recorded as a business combination and accordingly the purchase price was allocated to the assets acquired and liabilities assumed at fair value.

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

 

1.    ORGANIZATION AND BASIS OF PRESENTATION (Continued):

 

On December 20, 2012, Shelter Express Corp. (“Shelter Express”), a wholly owned subsidiary of the Company, entered into a share purchase agreement with Manisha Patel for the sale of all of the issued and outstanding stock of Shelter Electric Maintenance Corp., a wholly owned subsidiary of Shelter Express.  The sale was completed in May 2013.  The operations of Shelter Electric Maintenance Corp. are included as part of discontinued operations on the accompanying condensed consolidated financial statements.

 

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 months ended March 31, 2013 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2013. 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, 2012 and the Company’s other filings with the Securities and Exchange Commission.

 

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.

 

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

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

 

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 Accounting Standards Codification (“ASC”) 805, “Business Combinations”. 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 5 to 39 years. Furniture and fixtures, equipment, and transportation equipment are depreciated over estimated useful lives that range from 5 to 10 years. Tenant improvements are amortized over the shorter of the remaining non-cancellable term of the related leases or their useful lives.

 

Deferred Charges:

 

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

 

Asset Impairment:

 

The Company applies the guidance in ASC 360-10-05 to recognize and measure impairment of long-lived assets. Management reviews each real estate investment for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability is based on an estimate of the undiscounted future cash flows that are expected to result from the real estate investment’s use and eventual disposition. Such cash flow analyses consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If an impairment event exists due to the projected inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair value. Management is required to make subjective assessments as to whether there are impairments in the value of its real estate holdings. These assessments could have a direct impact on net income, because an impairment loss is recognized in the period that the assessment is made. Management has determined that there were no indicators of impairment relating to its long-lived assets at March 31, 2013.

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

 

When impairment indicators are present, investments in affiliated companies are reviewed for impairment by comparing their fair values to their respective carrying amounts. The Company makes its estimate of fair value by considering certain factors including discounted cash flow analyses. If the fair value of the investment has dropped below the carrying amount, management considers several factors when determining whether an other-than-temporary decline in market value has occurred, including the length of the time and the extent to which the fair value has been below cost, the financial condition and near-term prospects of the affiliated company, and other factors influencing the fair market value, such as general market conditions. Management has determined that there were no indicators of impairment relating to its investments in affiliated companies at March 31, 2013.

 

Reportable Segments:

 

As of March 31, 2013, the Company primarily operated in one reportable segment, its Real Estate Operations, which rents Company owned commercial real estate located in New York, New Jersey, and Connecticut. This segment’s operations are conducted within the United States of America.

 

On 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 operations.

 

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. 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 $9.6 million and $8.6 million at March 31, 2013 and December 31, 2012, 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 from the electrical contracting business are presented as part of discontinued operations in the condensed consolidated statements of operations (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

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

 

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 months ended March 31, 2013 and 2012.

 

Cash and Cash Equivalents:

 

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

 

Restricted Cash:

 

Restricted cash represents (i) funds held by the insurance carrier for the purpose of the payment of insured losses (ii) reserves used to pay real estate taxes, insurance, and tenant improvements and (iii) an earnout reserve which was funded from mortgage loan proceeds.  At March 31, 2013 and December 31, 2012, the Company had restricted cash in the amount of $1.5 million and $0.4 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.

 

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 operations. 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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

 

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

 

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

 

Income Taxes:

 

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

 

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

 

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

 

ASC 740-10-65 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10-65, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740-10-65 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of March 31, 2013 and December 31, 2012, the Company had determined that no liabilities are required in connection with unrecognized tax positions.

 

Comprehensive Loss:

 

The Company follows the provisions of ASC 220-10-45, which sets forth rules for the reporting and display of comprehensive 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, 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 Note 14).

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

 

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. 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 contracting 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 condensed consolidated statements of operations.

 

Variable Interest Entities:

 

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

 

As of March 31, 2013, the Company has one investment which was made to a VIE with a net carrying amount of $0.3 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:

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

 

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. 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of ASU 2013-02 did not have a material impact on the Company’s consolidated financial statements.

 

3.   REAL ESTATE:

 

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 “United Technologies 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 United Technologies 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 United Technologies 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 United Technologies Lease. During the first seven years of the United Technologies Lease, base annual rental income will increase at a fixed rate of 2%. After the seventh year of the United Technologies 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.

 

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. During December 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 commenced October 1, 2012 and terminated 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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

 

3.   REAL ESTATE (Continued):

 

Acquisition of Wu/Lighthouse Portfolio, LLC Properties:

 

On January 17, 2013, the Company and its wholly-owned subsidiaries GTJ GP, LLC (the “General Partner”) and GTJ Realty, LP (the “UPREIT”), 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 $194.4 million, and are subject to an aggregate of approximately $115.0 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 the Company’s 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 previously-owned properties. Following the closing, the Company beneficially owned 66.71% of the outstanding limited partnership interests in the UPREIT and the Sellers collectively owned 33.29%. The Company exercises managerial control over the UPREIT’s operations.

 

4.    AVAILABLE-FOR-SALE SECURITIES:

 

The following is a summary of available-for-sale securities at March 31, 2013 and December 31, 2012 (in thousands):

 

		Available-for-Sale Securities
March 31, 2013		Face Value			Amortized Cost			Unrealized Gains			Estimated Fair Value
Equity securities		$	-		$	-		$	289		$	289
Money market fund		172			172			-			172
U.S. Treasury/U.S. Government debt securities		83			90			3			93
Total available-for-sale securities		$	255		$	262		$	292		$	554
		Available-for-Sale Securities
December 31, 2012		Face Value			Amortized Cost			Unrealized Gains			Estimated Fair Value
Equity securities		$	-		$	-		$	250		$	250
Money market fund		185			185			-			185
U.S. Treasury/U.S. Government debt securities		83			89			4			93
Total available-for-sale securities		$	268		$	274		$	254		$	528

 

Accumulated other comprehensive income for the three months ended March 31, 2013 and year ended December 31, 2012 includes net unrealized holding gain (losses) of approximately $38,000 and ($28,000), respectively. No amounts were reclassified from other comprehensive income to income for the three months ended March 31, 2013, or for the year ended December 31, 2012.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

 

5.    OTHER ASSETS:

 

Other assets consist of the following (in thousands):

 

		March 31,			December 31,
		2013			2012
Prepaid expenses		$	1,317		$	224
Machinery and equipment		923			1,007
Other assets		109			87
		$	2,349		$	1,318

 

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):

 

		March 31, 2013			December 31, 2012
Reported claims		$	1,510		$	1,333
Provision for incurred but not reported claims		72			146
		$	1,582		$	1,479

 

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 $1.5 million at March 31, 2013 and December 31, 2012, 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 included $0.8 million for outstanding losses which was not a part of the actuarial study. 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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

 

7.    OTHER LIABILITIES:

 

Other liabilities consist of the following (in thousands):

 

		March 31,			December 31,
		2013			2012
Accrued dividends		$	2,370		$	1,092
Accrued professional fees		728			803
Deposit liability		1,304			101
Prepaid rent		731			298
Pension withdrawal liability		1,422			1,436
Below market leases		9,871			-
Other		843			649
		$	17,269		$	4,379

 

8.    DISCONTINUED OPERATIONS:

 

The following table sets forth the detail of the Company’s loss from discontinued operations for the three months ended March 31, 2013 and 2012 (in thousands):

 

		Three Months Ended, March 31,
		2013			2012
Revenues from discontinued operations		$	1,164		$	1,895
Loss from discontinued operations, net income taxes		$	(668)		$	(730)

 

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

 

		March 31,			December 31,
		2013			2012
Assets:
Cash		$	-		$	3
Accounts receivable, net		1,115			1,818
Other assets, net		2,726			2,873
		$	3,841		$	4,694
Liabilities:
Accounts payable and accrued expenses		438			494
Unpaid losses and loss-adjustment expenses		126			13
Other liabilities, net		1,069			1,132
		$	1,633		$	1,639

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

 

8.    DISCONTINUED OPERATIONS (Continued):

 

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

 

		March 31, 2013				December 31, 2012
Costs on contracts in progress		$	9,354			$	8,142
Estimated loss		(1,062)				(1,062)
Accrued loss		898				954
		9,190				8,034
Less: billings to date		(6,751)				(5,776)
		$	2,439			$	2,258

 

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

 

		March 31, 2013			December 31, 2012
Costs and estimated earnings in excess of billings on uncompleted contracts		$	2,439		$	2,258
Billings in excess of costs and estimated earnings on uncompleted contracts		-			-
		$	2,439		$	2,258

 

9.    MORTGAGE NOTES PAYABLE:

 

Financing Arrangements:

 

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 $45.5 million (the “Loan”).  The Loan was evidenced by certain promissory notes, executed simultaneously therewith, payable to the order of (a) Hartford Life Insurance Company in the stated amount of $25.0 million; (b) Hartford Life and Accident Insurance Company in the stated principal amount of $10.5 million; and (c) Hartford Life and Annuity Insurance Company in the stated principal amount of $10.0 million (collectively, the “Notes”).

 

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.

 

Aviva Loan Agreement

 

On February 22, 2013 (the “Closing Date”), Farm Springs 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 $15.0 million (the “Proceeds”) from Aviva, at an interest

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

 

9.    MORTGAGE NOTES PAYABLE (Continued):

 

rate of 3% per annum. Pursuant to the Note, Farm Springs shall pay interest only in the amount of approximately $38,000 in 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 $225,000. Approximately $10.1 million from the Proceeds was used to satisfy in full the obligations under the secured revolving credit facility discussed below. 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 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 the UPREIT, pursuant to the terms of that certain Guaranty entered into by the UPREIT and Aviva.

 

Genworth Loan Agreement

 

On April 3, 2013, four indirect subsidiaries of the Company, Wu/LH 103 Fairview Park LLC (“Fairview”), Wu/LH 404 Fieldcrest LLC (“Fieldcrest”), Wu/LH 300 American LLC (“300 American”) and Wu/LH 500 American LLC (“500 American”), and together with Fairview, Fieldcrest and 300 American, hereinafter collectively referred to as the “Borrowers”) entered into certain mortgage and security agreements (the “Loan Agreements”) with Genworth Life Insurance Company (the “Lender”), pursuant to which the Lender made term loans to the Borrowers in the aggregate principal amount of $29.5 million (the “Loans”). Each of the Borrowers is a wholly-owned subsidiary of the UPREIT. The Loans bear interest at a rate of 3.20% and mature on April 30, 2018. The Loans were evidenced by (i) a promissory note, executed simultaneously therewith, by Fairview and Fieldcrest payable to the order of Genworth Life Insurance Company in the amount of $14.4 million (the “New York Note”) and (ii) a promissory note, executed simultaneously therewith, by 300 American and 500 American in the amount of $15.1 million (the “New Jersey Note” and together with the New York Note, hereinafter referred to as the “Notes”).

 

Pursuant to the New York Note, Fairview and Fieldcrest will make monthly payments of interest only in the amount of approximately $38,000 from June 1, 2013 to and including May 1, 2014. On June 1, 2014, Fairview and Fieldcrest will make monthly payments of principal and interest in the amount of approximately $70,000 until such New York Note becomes due and payable, if not sooner paid.

 

Pursuant to the New Jersey Note, 500 American and 300 American will make monthly payments of interest only in the amount of approximately $40,000 from June 1, 2013 to and including May 1, 2014. On June 1, 2014, 500 American and 300 American will make monthly payments of principal and interest in the amount of approximately $73,000 until such New Jersey Note becomes due and payable, if not sooner paid.

 

The obligations represented by the New York Note are secured by, among other things, a first priority mortgage lien and security interest on certain (a) improved real estate located at 103 Fairfield Park Drive, Elmsford, New York and 404 Fieldcrest Drive, Elmsford, New York (collectively, the “New York Properties”) and (b) other property and rights of the Borrowers, all as more specifically described in the Loan Agreements and other ancillary documents.

 

The obligations represented by the New Jersey Note are secured by, among other things, a first priority mortgage lien and security interest on certain (a) improved real estate located at 300 American Road, Morris Plains, New Jersey and 500 American Road, Morris Plains, New Jersey, respectively (collectively, the “New Jersey Properties” and together with the New York Properties, hereinafter referred to as the “Properties”), and (b) other property and rights of the Borrowers, all as more specifically described in the Loan Agreements and other ancillary documents.

 

The proceeds from the Loans were used to satisfy in full the Borrowers’ obligations to John Hancock Life Insurance Company under a prior mortgage and security agreement relating to the Properties.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

 

9.    MORTGAGE NOTES PAYABLE (Continued):

 

As a condition to Lender entering into the Loan Agreements, the Borrowers and the UPREIT agreed to indemnify the Lender against certain claims and guaranty certain obligations of Borrower pursuant to certain Environmental Indemnity Agreements (the “Environmental Indemnities”).

 

The Loan Agreements contain customary representations and warranties, covenants and events of default. Certain obligations under the Loan Agreements are guaranteed by the UPREIT, pursuant to the terms of certain Guaranties entered into by the UPREIT and Lender. As of March 31, 2013, in the Borrower was in compliance with all covenants.

 

Loan Assumptions:

 

Each of the acquired properties in the Wu/Lighthouse Portfolio was and continues to be encumbered by certain mortgage indebtedness from one of three different lenders in the aggregate amount of approximately $115 million.  Concurrent with the acquisition of these properties, the Company, the UPREIT and the entity owners of the acquired properties entered into certain loan assumption and modification documents to facilitate the acquisition of the acquired properties.  Below is a summary of the material terms of the arrangement with each lender.

 

United States Life Insurance Company Loan:

 

Wu/LH 15 Executive L.L.C., a Delaware limited liability company, Wu/LH 22 Marsh Hill L.L.C., a Delaware limited liability company, Wu/LH 35 Executive L.L.C., a Delaware limited liability company, Wu/LH 470 Bridgeport L.L.C., a Delaware limited liability company, Wu/LH 950 Bridgeport L.L.C., a Delaware limited liability company and Wu/LH 8 Slater L.L.C., a Delaware limited liability company (collectively, the “USLIC Borrowers” and all indirect subsidiaries of the Company) previously entered into mortgage loans with The United States Life Insurance Company in the City of New York, successor by merger to First SunAmerica Life Insurance Company, a New York corporation (“USLIC”) in the aggregate original principal amount of $23.5 million (the “USLIC Mortgage Loan”)

 

The USLIC Mortgage Loan bears interest at a rate of 5.76% and matures on April 1, 2018. USLIC has the option of extending the terms of the USLIC Mortgage Loan for an additional five (5) years based on new market interest rate and a new amortization period. After September 8, 2014, the USLIC Mortgage Loan may be prepaid upon the following terms and conditions: (i) USLIC receives not less than 30 days prior written notice and (ii) USLIC receives a prepayment fee equal to the greater of (a) 1% of the outstanding principal and (b) a yield maintenance amount.

 

John Hancock Loan:

 

Wu/LH 12 Cascade L.L.C., Wu/LH 25 Executive L.L.C., Wu/LH 269 Lambert L.L.C., Wu/LH 103 Fairview Park L.L.C., Wu/LH 412 Fairview Park L.L.C., Wu/LH 401 Fieldcrest L.L.C., Wu/LH 404 Fieldcrest L.L.C., Wu/LH 36 midland L.L.C., Wu/LH 100-110 Midland L.L.C., Wu/LH 112 Midland L.L.C., Wu/LH 199 Ridgewood L.L.C., Wu/LH 203 Ridgewood L.L.C., Wu/LH 100 American L.L.C., Wu/LH 200 American L.L.C., Wu/LH 300 American L.L.C., Wu/LH 400 American L.L.C. and Wu/LH 500 American L.L.C., (collectively, the “John Hancock Borrowers”), entered into mortgage loan with John Hancock Life Insurance Company (U.S.A.), a Michigan corporation, successor by merger to John Hancock Life Insurance Company, a Massachusetts corporation, doing its mortgage business in New York as Manulife Financial (“John Hancock”) in the aggregate original principal amount of $105 million (the “John Hancock Loan”) which made pursuant to that certain Loan Agreement dated February 25, 2008 among the John Hancock Borrowers and certain other borrowers who have since been released from the John Hancock Loan. Certain of the notes given in connection with the John Hancock Loan in the original principal amounts of $12 million and $3.9 million were fully paid by Wu/Lighthouse Portfolio prior to the acquisition of the acquired properties.

 

A portion of the John Hancock Loan matured on March 1, 2013 (the “5 Year Notes”) and the remaining portion of the John Hancock Loan matures on March 1, 2018 (the “10 Year Notes”) The 5 Year Notes bore interest at a rate of 5.44%. The 10 Year Notes bear interest at 6.17%. The 5 Year Notes were interest only with a fixed monthly payment. The 10 Year Notes are interest only for the first five (5) years; for years 6 through 10, payments are of principal and interest. After a certain “Lockout

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

 

9.    MORTGAGE NOTES PAYABLE (Continued):

 

Period” (three years for the 5 Year Notes and five years for the 10 Year Notes), the John Hancock Mortgage Loan may be prepaid upon the following terms and conditions: (a) Not less then 30 days and not more than 90 days notice must be given to John Hancock; (b) Payment of a prepayment penalty equal to the greater of (i) the sum of the present values of all scheduled payments under the notes minus the principle value of the note immediately prior to prepayment; or (ii) 1% of the principal balance of the notes immediately prior to the prepayment. The 5 year notes were refinanced as part of the Genworth Loan Agreement.

 

People’s United Bank Loan:

 

Wu/LH 15 Progress Drive L.L.C. (the “PUB Borrower”) entered into a mortgage loan with Peoples United Bank, a federal savings bank (the “PUB Lender”) in the original principal amount of $2.7 million (the “PUB Mortgage Loan”) which was made pursuant to a Loan and Security Agreement by and between the PUB Lender and the PUB Borrower dated as of September 30, 2010 encumbering certain real property located at 15 Progress Road, Shelton Connecticut. The PUB Mortgage Loan bears interest at a rate of 5.23% and matures on October 1, 2020.

 

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 which provided for, among other things, a $10.0 million revolving credit facility (the “Revolver”). The Revolver was available to the Company for Permitted Acquisitions (as defined in the credit agreement) and for general working capital and other corporate purposes. The Company’s obligations under this credit agreement were satisfied in full on February 22, 2013.

 

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. On January 17, 2013, the Company entered into a certain contribution agreement with Wu/Lighthouse Portfolio, LLC in which they received a 33.29% interest in the UPREIT. At March 31, 2013, subject to certain anti-dilutive and other provisions contained in the agreement, the 33.29% interest is convertible, in the aggregate, into approximately 1.8 million shares of the Company’s common stock and approximately 5.0 million shares of preferred stock. As of March 31, 2013, the Company has a total of 13,666,385 shares issued and outstanding (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 of preferred stock have been issued as of March 31, 2013.

 

Dividend Distributions:

 

The following table presents dividends declared by the Company on its common stock from January 1, 2013 through March 31, 2013:

 

Declaration		Year / Quarter		Record		Payment		Dividend
Date		Ended		Date		Date		Per Share
March 21, 2013		December 31, 2012		January 31, 2013		April 15, 2013		$  0.0934   (1)
March 21, 2013		March 31, 2013		March 31, 2013		April 15, 2013		$     0.08

 

(1)          This represents a supplemental dividend.

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

 

11.    STOCKHOLDERS’ EQUITY (Continued):

 

Stock Based Compensation:

 

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

 

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

 

The Plan may provide for awards in the form of restricted shares, incentive stock options, non-qualified stock options and stock appreciation rights. The aggregate number of shares of common stock which may be awarded under the Plan is 1,000,000 shares. These shares were registered on September 23, 2010. As of March 31, 2013, the Company had 577,498 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 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:

 

 

On June 9, 2011, the Company granted $10,000 worth of 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:

 

 

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