10-Q 1 ck0001368757-10q_20180630.htm GTJ-Q2-20180630 ck0001368757-10q_20180630.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2018

or

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

For the transition period from                      to                      

Commission file number: 333-136110

 

GTJ REIT, INC.

(Exact name of registrant as specified in its charter)

 

 

Maryland

20-5188065

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

60 Hempstead Avenue

West Hempstead, New York

11552

(Address of principal executive offices)

(Zip Code)

(516) 693-5500

(Registrant’s telephone number, including area code)

N/A

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

 

 

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

 

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

 

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 13,569,664 shares of common stock as of August 7, 2018.

 

 

 

 

 


 

GTJ REIT, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2018

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets at June 30, 2018 (Unaudited) and December 31, 2017

2

 

 

 

 

Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2018 and 2017

3

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) for the Six Months Ended June 30, 2018

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2018 and 2017

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

6

 

 

 

Item 2.

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

24

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

 

 

 

Item 4.

Controls and Procedures

30

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

31

 

 

 

Item 1A.

Risk Factors

31

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

 

 

 

Item 3.

Defaults Upon Senior Securities

31

 

 

 

Item 4.

Mine Safety Disclosures

31

 

 

 

Item 5.

Other Information

31

 

 

 

Item 6.

Exhibits

32

 

 

Signatures

33

 

 

 

1


 

Part I – Financial Information

 

Item 1. Financial Statements

 

GTJ REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

 

 

June 30,

 

 

December 31,

 

 

2018

 

 

2017

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Real estate, at cost:

 

 

 

 

 

 

 

Land

$

197,839

 

 

$

199,782

 

Buildings and improvements

 

304,771

 

 

 

322,404

 

Total real estate, at cost

 

502,610

 

 

 

522,186

 

Less: accumulated depreciation and amortization

 

(52,082

)

 

 

(55,136

)

Net real estate held for investment

 

450,528

 

 

 

467,050

 

Cash and cash equivalents

 

13,345

 

 

 

8,423

 

Restricted cash

 

3,945

 

 

 

3,471

 

Rental income in excess of amount billed

 

14,937

 

 

 

16,261

 

Acquired lease intangible assets, net

 

13,247

 

 

 

14,576

 

Investment in unconsolidated affiliate

 

5,250

 

 

 

1,209

 

Asset held for sale

 

17,466

 

 

 

 

Other assets

 

9,778

 

 

 

10,551

 

Total assets

$

528,496

 

 

$

521,541

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Mortgage notes payable, net

$

361,161

 

 

$

370,194

 

Secured revolving credit facility

 

55,000

 

 

 

35,857

 

Accounts payable and accrued expenses

 

2,811

 

 

 

3,608

 

Dividends payable

 

1,357

 

 

 

1,359

 

Acquired lease intangible liabilities, net

 

5,431

 

 

 

5,867

 

Liabilities related to asset held for sale

 

20

 

 

 

 

Other liabilities

 

6,851

 

 

 

7,070

 

Total liabilities

 

432,631

 

 

 

423,955

 

Commitments and contingencies (Note 8)

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Series A, Preferred stock, $.0001 par value; 500,000 shares authorized; none

   issued and outstanding

 

 

 

 

 

Series B, Preferred stock, $.0001 par value; non-voting; 6,500,000 shares authorized;

   none issued and outstanding

 

 

 

 

 

Common stock, $.0001 par value; 100,000,000 shares authorized; 13,569,664 and 13,594,125 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively

 

1

 

 

 

1

 

Additional paid-in capital

 

161,059

 

 

 

161,812

 

Distributions in excess of net income

 

(103,729

)

 

 

(103,025

)

Total stockholders’ equity

 

57,331

 

 

 

58,788

 

Noncontrolling interest

 

38,534

 

 

 

38,798

 

Total equity

 

95,865

 

 

 

97,586

 

Total liabilities and equity

$

528,496

 

 

$

521,541

 

 

 

 

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

 

2


 

GTJ REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Six Months Ended June 30, 2018 and 2017

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

 

 

 

Three Months Ended,

 

 

Six Months Ended,

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

11,690

 

 

$

10,878

 

 

$

23,270

 

 

$

21,743

 

Tenant reimbursements

 

 

2,606

 

 

 

1,705

 

 

 

5,424

 

 

 

3,768

 

Total revenues

 

 

14,296

 

 

 

12,583

 

 

 

28,694

 

 

 

25,511

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

2,930

 

 

 

2,202

 

 

 

6,207

 

 

 

4,834

 

General and administrative

 

 

2,073

 

 

 

2,605

 

 

 

3,921

 

 

 

4,305

 

Acquisition costs

 

 

 

 

 

62

 

 

 

 

 

 

161

 

Depreciation and amortization

 

 

3,579

 

 

 

3,203

 

 

 

7,223

 

 

 

6,350

 

Total expenses

 

 

8,582

 

 

 

8,072

 

 

 

17,351

 

 

 

15,650

 

Operating income

 

 

5,714

 

 

 

4,511

 

 

 

11,343

 

 

 

9,861

 

Interest expense

 

 

(4,728

)

 

 

(3,958

)

 

 

(9,254

)

 

 

(7,905

)

Equity in gains (losses) of unconsolidated affiliate

 

 

 

 

 

 

 

 

2,458

 

 

 

(198

)

Other income (expense)

 

 

(9

)

 

 

(301

)

 

 

51

 

 

 

(411

)

Net income from operations

 

 

977

 

 

 

252

 

 

 

4,598

 

 

 

1,347

 

Less: Net income attributable to noncontrolling interest

 

 

312

 

 

 

164

 

 

 

1,499

 

 

 

550

 

Net income attributable to common stockholders

 

$

665

 

 

$

88

 

 

$

3,099

 

 

$

797

 

Net income per common share attributable to common stockholders - basic and diluted earnings per share

 

$

0.05

 

 

$

0.01

 

 

$

0.23

 

 

$

0.06

 

Weighted average common shares outstanding – basic

 

 

13,581,655

 

 

 

13,640,027

 

 

 

13,587,192

 

 

 

13,629,514

 

Weighted average common shares outstanding – diluted

 

 

13,603,552

 

 

 

13,661,510

 

 

 

13,609,089

 

 

 

13,650,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

3


 

GTJ REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Six Months Ended June 30, 2018

 

(Unaudited, amounts in thousands, except share data)

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

Distributions

 

 

Total

 

 

 

 

 

 

 

 

 

 

Preferred

 

 

Outstanding

 

 

Par

 

 

Additional-

 

 

in Excess of

 

 

Stockholders’

 

 

Noncontrolling

 

 

 

 

 

 

Stock

 

 

Shares

 

 

Value

 

 

Paid-In-Capital

 

 

Net Income

 

 

Equity

 

 

Interest

 

 

Total Equity

 

Balance at January 1, 2018

$

 

 

 

13,594,125

 

 

$

1

 

 

$

161,812

 

 

$

(103,025

)

 

$

58,788

 

 

$

38,798

 

 

$

97,586

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,803

)

 

 

(3,803

)

 

 

 

 

 

(3,803

)

Repurchases - common stock

 

 

 

 

(82,399

)

 

 

 

 

 

(1,035

)

 

 

 

 

 

(1,035

)

 

 

 

 

 

(1,035

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

513

 

 

 

 

 

 

513

 

 

 

 

 

 

513

 

Issuance of shares

 

 

 

 

57,938

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,994

)

 

 

(1,994

)

Net income from operations

 

 

 

 

 

 

 

 

 

 

 

 

 

3,099

 

 

 

3,099

 

 

 

1,499

 

 

 

4,598

 

Reallocation of equity

 

 

 

 

 

 

 

 

 

 

(231

)

 

 

 

 

 

(231

)

 

 

231

 

 

 

 

Balance at June 30, 2018

$

 

 

 

13,569,664

 

 

$

1

 

 

$

161,059

 

 

$

(103,729

)

 

$

57,331

 

 

$

38,534

 

 

$

95,865

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

4


 

GTJ REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2018 and 2017

(Unaudited, amounts in thousands)

 

 

Six Months Ended,

 

 

June 30,

 

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income from operations

$

4,598

 

 

$

1,347

 

Adjustments to reconcile net income from operations to net cash provided by

   operating activities:

 

 

 

 

 

 

 

Depreciation

 

5,438

 

 

 

4,705

 

Amortization of intangible assets and deferred charges

 

2,058

 

 

 

1,940

 

Stock-based compensation

 

513

 

 

 

525

 

Rental income in excess of amount billed

 

(341

)

 

 

(113

)

(Income) loss from equity investment in unconsolidated affiliate

 

(2,458

)

 

 

198

 

Proceeds from sale of property from unconsolidated affiliate

 

1,842

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Other assets

 

(588

)

 

 

(492

)

Accounts payable and accrued expenses

 

(777

)

 

 

414

 

Other liabilities

 

(1,172

)

 

 

(36

)

Net cash provided by operating activities

 

9,113

 

 

 

8,488

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Expenditures for improvements to real estate

 

(3,097

)

 

 

(6,219

)

Investment in unconsolidated affiliate

 

(5,250

)

 

 

 

Return of capital from unconsolidated affiliate

 

1,825

 

 

 

 

Contract deposits

 

 

 

 

(1,720

)

Net cash used in investing activities

 

(6,522

)

 

 

(7,939

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from mortgage notes payable

 

33,000

 

 

 

 

Loan costs from mortgage notes payable

 

(781

)

 

 

 

Proceeds from revolving credit facility

 

19,143

 

 

 

1,085

 

Payment of mortgage principal

 

(41,726

)

 

 

(3,458

)

Repurchases of common stock

 

(1,035

)

 

 

 

Cash distributions to noncontrolling interests

 

(1,991

)

 

 

(4,810

)

Cash dividends paid

 

(3,805

)

 

 

(4,085

)

Net cash provided by (used in) financing activities

 

2,805

 

 

 

(11,268

)

Net increase (decrease) in cash and cash equivalents

 

5,396

 

 

 

(10,719

)

Cash and cash equivalents including restricted cash of $3,471 and $2,584, respectively, at the beginning of period

 

11,894

 

 

 

18,516

 

Cash and cash equivalents including restricted cash of $3,945 and $2,290, respectively, at the end of period

$

17,290

 

 

$

7,797

 

SUPPLEMENTAL DISCLOSURE CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Cash paid for interest

$

8,581

 

 

$

7,395

 

Non-cash expenditures for real estate

$

951

 

 

$

 

Taxes paid

$

42

 

 

$

61

 

 

 

 

 

 

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

 

5


 

GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. ORGANIZATION AND DESCRIPTION OF BUSINESS:

GTJ REIT, Inc. (the “Company” or “GTJ REIT”) was incorporated on June 26, 2006, under the Maryland General Corporation Law. The Company is focused primarily on the acquisition, ownership, management, and operation of commercial real estate located in New York, New Jersey, Connecticut and Delaware.

The Company has elected to be treated as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended (the “Code”). The Company elected December 31 as its fiscal year end. Under the REIT operating structure, the Company is permitted to deduct the dividends paid to its stockholders when determining its taxable income. Assuming dividends equal or exceed the Company’s taxable income, the Company generally will not be required to pay federal corporate income taxes on such income.

On January 17, 2013, the Company closed on a transaction with Wu/Lighthouse Portfolio, LLC, in which a limited partnership (the “Operating Partnership”) owned and controlled by the Company, acquired all outstanding ownership interests of a portfolio consisting of 25 commercial properties (the “Acquired Properties”) located in New York, New Jersey and Connecticut, in exchange for 33.29% of the outstanding limited partnership interest in the Operating Partnership. The outstanding limited partnership interest in the Operating Partnership exchanged for the Acquired Properties was increased to 33.78% due to post-closing adjustments, and to 34.48% due to the redemption of certain shares of GTJ REIT, Inc. common stock. The acquisition was recorded as a business combination and accordingly the purchase price was allocated to the assets acquired and liabilities assumed at fair value. At June 30, 2018, subject to certain anti-dilutive and other provisions contained in the governing agreements, the limited partnership interests in the Operating Partnership may be convertible in the aggregate, into approximately 1.9 million shares of the Company’s common stock and approximately 5.2 million shares of the Company’s Series B preferred stock.

As of June 30, 2018, the Operating Partnership owned and operated 49 properties consisting of approximately 6.0 million square feet of primarily industrial and office space on approximately 400 acres of land in New York, New Jersey, Connecticut and Delaware.

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation:

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

The accompanying unaudited condensed consolidated interim financial information has been prepared according to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with such rules and regulations. The Company’s management believes that the disclosures presented in these unaudited condensed consolidated financial statements are adequate to make the information presented not misleading. In management’s opinion, all adjustments and eliminations, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of operations for the reported periods have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year. The accompanying unaudited condensed consolidated interim financial information should be read in conjunction with the Company’s December 31, 2017, audited consolidated financial statements, as previously filed with the SEC on Form 10-K on March 29, 2018, and other public information.

 

The Company has determined that redemptions of Company shares result in a reallocation between the Operating Partnership’s non-controlling interest (“OP NCI”) and Additional Paid-in-Capital (“APIC”). During the six months ended June 30, 2018, the Company decreased its APIC with an offsetting increase to OP NCI of approximately $0.2 million.

 

6


 

Use of Estimates:

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

Real Estate:

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

Upon the acquisition of real estate properties, the fair value of the real estate purchased is allocated to the acquired tangible assets (generally consisting of land, buildings and building improvements, and tenant improvements) and identified intangible assets and liabilities (generally consisting of above-market and below-market leases and the origination value of in-place leases) in accordance with GAAP. We utilize methods similar to those used by independent appraisers in estimating the fair value of acquired assets and liabilities.  The fair value of the tangible assets of an acquired property considers the value of the property “as-if-vacant.” In allocating the purchase price to identified intangible assets and liabilities of an acquired property, the value of above-market and below-market leases is estimated based on the differences between contractual rentals and estimated market rents over the applicable lease term discounted back to the date of acquisition utilizing a discount rate adjusted for the credit risk associated with the respective tenants. The aggregate value of in-place leases is measured based on the avoided costs associated with lack of revenue over a market oriented lease-up period, the avoided leasing commissions, and other avoided costs common in similar leasing transactions.

Mortgage notes payable assumed in connection with acquisitions are recorded at their fair value using current market interest rates for similar debt at the time of acquisitions. Effective 2018, acquisition related costs are capitalized. The capitalized above-market lease values are amortized as a reduction of rental revenue over the remaining term of the respective leases and the capitalized below-market lease values are amortized as an increase to rental revenue over the remaining term of the respective leases. The value of in-place leases is based on the Company’s evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during expected lease-up periods, current market conditions, and costs to execute similar leases. The values of in-place leases are amortized over the remaining term of the respective leases. If a tenant terminates its lease prior to its contractual expiration date, any unamortized balance of the related intangible assets or liabilities is recorded as income or expense in the period. The total net impact to rental revenues due to the amortization of above and below-market leases was a net increase of approximately $0.3 million and $0.2 million for the six months ended June 30, 2018 and 2017, respectively.

As of June 30, 2018, above-market and in-place leases of approximately $1.3 million and $12.0 million (net of accumulated amortization), respectively, are included in acquired lease intangible assets, net in the accompanying condensed consolidated balance sheets. As of December 31, 2017, above-market and in-place leases of approximately $1.5 million and $13.1 million (net of accumulated amortization), respectively, are included in the acquired lease intangible assets, net in the accompanying condensed consolidated balance sheets. As of June 30, 2018 and December 31, 2017, approximately $5.4 million and $5.9 million (net of accumulated amortization), respectively, relating to below-market leases are included in acquired lease intangible liabilities, net in the accompanying condensed consolidated balance sheets.

7


 

The following table presents the projected impact for the remainder of 2018, the next five years and thereafter related to the net increase to rental revenue from the amortization of the acquired above-market and below-market lease intangibles and the increase to amortization expense of the in-place lease intangibles for properties owned at June 30, 2018 (in thousands):

 

 

 

 

 

 

Increase to

 

 

Net increase to

 

 

amortization

 

 

rental revenues

 

 

expense

 

Remainder of 2018

$

275

 

 

$

1,104

 

2019

 

560

 

 

 

1,955

 

2020

 

660

 

 

 

1,627

 

2021

 

510

 

 

 

1,400

 

2022

 

534

 

 

 

1,344

 

2023

 

635

 

 

 

1,189

 

Thereafter

 

974

 

 

 

3,345

 

 

$

4,148

 

 

$

11,964

 

 

Investment in Unconsolidated Affiliates:

The company has investments in other entities that have been accounted for under the equity method of accounting. The equity method of accounting is used when an investor has influence, but not control, over the investee. The Company records its share of the profits and losses of the investee in the period when theses profits and losses are also reflected in the accounts of the investee.

On February 28, 2018, the Company purchased a 50% interest in Two CPS Developers LLC (the “Investee”) for $5.25 million. The Company has the ability to exercise significant influence over the Investee, does not have a controlling interest in the Investee, and the Investee is not a variable interest entity. Therefore, the Company has accounted for this investment under the equity method of accounting. The Company did not record any income or loss from this investment for the three months and six months ended June 30, 2018, respectively, as the property owned by the investee was under development.

 

Assets Held for Sale:

On April 25, 2018, the Company entered into a purchase and sale agreement for the sale of the property located at 8 Farm Springs Road, Farmington, Connecticut. The transaction closed on July 16, 2018. In accordance with Accounting Standards Update (“ASU”) No. 2014-08, the sale will not be considered a discontinued operation.

The property has been classified as held for sale as of June 30, 2018, as shown in the following table (in thousands):

June 30, 2018

 

Farm Springs Road

 

Real estate, net

 

$

15,162

 

Deferred leasing costs, net

 

 

628

 

Rental income in excess of amounts billed and other assets

 

 

1,676

 

Asset held for sale

 

$

17,466

 

Accounts payable and accrued expenses

 

 

20

 

Liabilities related to asset held for sale

 

$

20

 

 

Depreciation and Amortization:

The Company uses the straight-line method for depreciation and amortization. Properties and property improvements are depreciated over their estimated useful lives, which range from 5 to 40 years. Furniture, fixtures, and equipment are depreciated over estimated useful lives that range from 5 to 10 years. Tenant improvements are amortized over the shorter of the remaining non-cancellable term of the related leases or their useful lives.

8


 

Asset Impairment:

Management reviews each real estate investment for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability is based on an estimate of the undiscounted future cash flows that are expected to result from the real estate investment’s use and eventual disposition. Such cash flow analyses consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If an impairment event exists due to the projected inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair value. Management is required to make subjective assessments as to whether there are impairments in the value of the Company’s real estate holdings. These assessments could have a direct impact on net income, because an impairment loss is recognized in the period the assessment is made. Management has determined that there was no impairment related to its long-lived assets at June 30, 2018.

Deferred Charges:

Deferred charges consist principally of leasing commissions, which are amortized over the life of the related tenant leases, and financing costs, which are amortized over the terms of the respective debt agreements. Deferred financing costs relating to the secured revolving credit facility and deferred leasing charges are included in other assets on the condensed consolidated balance sheets. Deferred financing costs related to mortgage notes payable are included as a reduction of mortgage notes payable, net on the condensed consolidated balance sheets.

Reportable Segments:

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

Revenue Recognition:

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

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

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

Earnings Per Share Information:

The Company presents both basic and diluted earnings per share. Basic earnings per share excludes dilution and is computed by dividing net income attributable 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 and stock options were included in the computation of diluted earnings per share.

Cash and Cash Equivalents:

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

Restricted Cash:

Restricted cash represents reserves used to pay real estate taxes, insurance, repairs, leasing costs and capital improvements.

9


 

Fair Value Measurement:

The Company determines fair value in accordance with Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurement.” This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.

Assets and liabilities disclosed at fair values are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, which are defined by ASC 820-10-35, are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities. Determining which category an asset or liability falls within the hierarchy requires significant judgment, and the Company evaluates its hierarchy disclosures each quarter. The three-tier fair value hierarchy 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 distributable income that qualifies as REIT taxable income, to the extent that it distributes at least 90% of its REIT taxable income to its stockholders and complies with certain other requirements as defined in 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 June 30, 2018, and December 31, 2017, the Company had determined that no liabilities are required in connection with uncertain tax positions. As of June 30, 2018, the Company’s tax returns for the prior three years are subject to review by the Internal Revenue Service. Any interest and penalties would be expensed as incurred.

The recently enacted Tax Cuts and Jobs Act (the “Act”) is a complex revision to the U.S. federal income tax laws with impacts on different categories of taxpayers and industries, and will require subsequent rulemaking and interpretation in a number of areas. The long-term impact of the Act on the overall economy, government revenues, our tenants, our Company, and the real estate industry cannot be reliably predicted at this time. Furthermore, the Act may impact certain of our tenants’ operating results, financial condition, and future business plans. There can be no assurance that the Act will not impact our operating results, financial condition, and future business operations.

10


 

Concentrations of Credit Risk:

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, which from time-to-time exceed the federal depository insurance coverage. Beginning January 1, 2013, all noninterest bearing transaction accounts deposited at an insured depository institution are insured by the Federal Deposit Insurance Corporation up to the standard maximum deposit amount of $250,000. Management believes that the Company is not exposed to any significant credit risk due to the credit worthiness of the financial institutions.

Annual contractual rent of $9.7 million derived from five leases with the City of New York, represents approximately 21% of the Company’s total 2018 contractual rental income.

Stock-Based Compensation:

The Company has a stock-based compensation plan, which is described below in Note 5. The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation,” which establishes accounting for stock-based awards exchanged for employee services. Under the provisions of ASC 718, share-based compensation cost is measured at the grant date or service-inception date (if it precedes the grant date), based on the fair value of the award. Share-based compensation is expensed at the grant date (for awards or portion of awards that vested immediately), or ratably over the respective vesting periods, determined from the start of the grant date or service-inception date through the date of vesting.

New Accounting Pronouncements:

In July 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” which amended ASC Topic 842, to provide a practical expedient to lessors to elect to not separate non-lease components from the associated leases. The Company is currently assessing the impact this guidance will have on its consolidated financial statements.

In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases.” These amendments provide clarifications and corrections to ASU 2016-02, Leases (Topic 842). The Company is currently assessing the impact this guidance will have on it consolidated financial statements.

In July 2018, the FASB issued ASU 2018-09, “Codification Improvements.” These amendments provide clarifications and corrections to certain ASC subtopics including the following: 220-10 (Income Statement – Reporting Comprehensive Income – Overall), 470-50 (Debt – Modifications and Extinguishments), 480-10 (Distinguishing Liabilities from Equity – Overall), 718-740 (Compensation – Stock Compensation – Income Taxes), 805-740 (Business Combinations – Income Taxes), 815-10 (Derivatives and Hedging – Overall), and 820-10 (Fair Value Measurement – Overall). The Company is currently assessing the impact this guidance will have on its consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, “Compensation - Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based Payment Accounting.” These amendments provide specific guidance for transactions for acquiring goods and services from nonemployees and specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (i) financing to the issuer or (ii) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. This guidance is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted but not earlier than the adoption of Topic 606. The Company does not believe that this guidance will have a material effect on its consolidated financial statements as it has not historically issued share-based payments in exchange for goods or services to be consumed within its operations.

In March 2018, the FASB issued ASU No. 2018-05, “Income Taxes (Topic 740) – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”, which allowed public companies to record provisional amounts in earnings for the year ended December 31, 2017 due to the complexities involved in accounting for the enactment of the Tax Cuts and Jobs Act. ASU 2018-05 was effective upon issuance. The Company did not recognize any estimated income tax effects of the Tax Cuts and Jobs Act in its 2017 consolidated financial statements in accordance with SEC Staff Accounting Bulletin No. 118.

11


 

In May 2017, the FASB issued ASU No. 2017-09, “CompensationStock Compensation (Topic 718) - Scope of Modification Accounting.” ASU 2017-09 clarifies Topic 718 such that an entity must apply modification accounting to changes in the terms or conditions of a share-based payment award unless all of the following criteria are met: (a) the fair value of the modified award is the same as the fair value of the original award immediately before the modification, (b) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the modification, and (c) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the modification. The amendments are effective for all entities for fiscal years beginning after December 15, 2017, including interim periods within those years. The adoption of ASU 2017-09 did not have a material impact on the Company’s consolidated financial statements.

In February 2017, the FASB issued ASU No. 2017-05, “Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.” ASU 2017-05 was issued to clarify the scope of Subtopic 610-20 and to add guidance for partial sales of nonfinancial assets, including partial sales of real estate. ASU 2017-05 clarifies the scope of Subtopic 610-20 by defining the term “in substance nonfinancial asset.” If substantially all of the fair value of the assets (recognized and unrecognized) promised to a counterparty in a contract is concentrated in nonfinancial assets, a financial asset in the same arrangement would still be considered part of an “in substance nonfinancial asset”. Additionally, ASU 2017-05 indicates an entity should identify each distinct nonfinancial asset (e.g., real estate and inventory) or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it. ASU 2017-05 requires an entity to derecognize a distinct nonfinancial asset or distinct in substance nonfinancial asset in a partial sale transaction when two criteria are met: 1) the entity does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset in accordance with Topic 810, and 2) the entity transfers control of the asset in accordance with Topic 606. The effective date and transition requirements of ASU 2017-05 are the same as Topic 606.  The amendments are effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within those periods. The adoption of ASU 2017-05 did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business.” ASU 2017-01 provides new guidance that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets is not a business. ASU 2017-01 also requires a business to include at least one substantive process.  ASU 2017-01 is effective for public business entities for fiscal years beginning after December 15, 2017 and has been adopted by the Company effective January 1, 2018. It is expected that the standard will reduce the number of future real estate acquisitions accounted for as a business combination and therefore, reduce the amount of acquisition costs that will be expensed. The adoption of ASU 2017-01 will result in a reduction of expensed acquisition costs and a corresponding increase to net income. There were no acquisitions during the six months ended June 30, 2018.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash.” ASU 2016-18 updates Topic 230 to require cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts on the statement of cash flows. Consequently, transfers between cash and restricted cash will not be presented as a separate line item in the operating, investing or financing sections of the cash flow statement. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years and should be applied retrospectively.  Upon the adoption of ASU 2016-18, the Company reclassified $0.3 million of its cash inflows from investing activities to change in cash and restricted cash in its historical presentation of cash flows for the six months ended June 30, 2017.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are intended to reduce diversity in practice. The ASU contains additional guidance clarifying when an entity should separate cash receipts and cash payments and classify them into more than one class of cash flows (including when reasonable judgment is required to estimate and allocate cash flows) versus when an entity should classify the aggregate amount into one class of cash flows on the basis of predominance. The amendments are effective for public business entities for annual periods beginning after December 15, 2017 and interim periods within those annual periods. The adoption of ASU 2016-15 did not have a material impact on the Company’s consolidated financial statements.

12


 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 requires all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity should also recognize excess tax benefits, and assess the need for a valuation allowance, regardless of whether the benefits reduce taxes payable in the current period. Off-balance sheet accounting for net operating losses stemming from excess tax benefits would no longer be required and instead such net operating losses would be recognized when they arise. Existing net operating losses that are currently tracked off balance sheet would be recognized, net of a valuation allowance if required, through an adjustment to opening retained earnings in the period of adoption.  ASU 2016-09 also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity in the statement of cash flows. The amendments are effective for public business entities for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The adoption of ASU 2016-09 did not have a material impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323) - Simplifying the Transition to the Equity Method of Accounting.” ASU 2016-07 requires an investor to initially apply the equity method of accounting from the date it qualifies for that method, such as the date the investor obtains significant influence over the operating and financial policies of an investee. It eliminates the previous requirement to retroactively adjust the investment and record a cumulative catch up for the periods that the investment had been held, but did not qualify for the equity method of accounting. ASU 2016-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively to increases in the level of ownership interest or degree of influence that result in the application of the equity method. The adoption of ASU 2016-07 did not have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic No. 842).” ASU 2016-02 requires lessees to recognize at the commencement date, a lease liability, which is the lessee’s obligation to make lease payments arising from a lease and measure it on a discounted basis. A lessee must recognize an asset when it represents a lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged.  ASU 2016-02 is effective for fiscal periods and interim periods within those fiscal periods beginning after December 15, 2018.  Early adoption is permitted. The adoption of ASU 2016-02 is not expected to have a material impact on the Company’s consolidated financial statements. As a lessee, the Company is a party to an office lease with future lease obligations aggregating to $705,522 as of June 30, 2018, for which the Company expects to record right-of-use assets upon the adoption of ASU 2016-02.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration an entity expects to receive for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. ASU 2014-09 does not apply to the Company’s lease revenues but will apply to reimbursed tenant costs after ASU 2016-02 is adopted.  Additionally, this guidance modifies disclosures regarding the nature, timing, amount and uncertainty of revenue and cash flows arising from contracts with customers. Entities may adopt ASU 2014-09 using either a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients or a retrospective approach with the cumulative effect recognized at the date of adoption. ASU 2014-09 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company has determined that the majority of its revenue falls outside the scope of this guidance and does not anticipate any significant changes to the timing of the Company’s revenue recognition. The Company implemented the standard using the modified retrospective approach. However, there was no cumulative effect recognized in retained earnings at the date of application.

 

 

13


 

3. MORTGAGE NOTES PAYABLE:

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

 

 

 

 

 

 

 

Principal

 

 

Principal

 

 

 

 

 

 

 

 

 

Outstanding as of

 

 

Outstanding as of

 

 

 

Loan

 

Interest Rate

 

 

June 30, 2018

 

 

December 31, 2017

 

 

Maturity

Athene Annuity & Life Company

 

 

3.00

%

 

$

 

 

$

15,000

 

 

3/1/2018

Genworth Life Insurance Company

 

 

3.20

%

 

 

 

 

 

26,574

 

 

4/30/2018

Hartford Accident & Indemnity Company

 

 

5.20

%

 

 

6,000

 

 

 

6,000

 

 

3/1/2020

People’s United Bank

 

 

5.23

%

 

 

2,210

 

 

 

2,249

 

 

10/1/2020

People’s United Bank

 

 

4.18

%

 

 

15,500

 

 

 

15,500

 

 

10/15/2024

American International Group

 

 

4.05

%

 

 

233,100

 

 

 

233,100

 

 

3/1/2025

Allstate Corporation

 

 

4.00

%

 

 

38,987

 

 

 

39,100

 

 

4/1/2025

United States Life Insurance Company

 

 

3.82

%

 

 

39,000

 

 

 

39,000

 

 

1/1/2028

United States Life Insurance Company

 

 

4.25

%

 

 

33,000

 

 

 

 

 

4/1/2028

 

 

Subtotal

 

 

 

367,797

 

 

 

376,523

 

 

 

 

 

Unamortized loan costs

 

 

 

(6,636

)

 

 

(6,329

)

 

 

 

 

Total

 

 

$

361,161

 

 

$

370,194

 

 

 

 

 

Athene Annuity & Life Company:

On February 27, 2018, the Company paid its mortgage note payable with Athene Annuity & Life Company in the amount of $15.0 million from funds available from its secured revolving credit facility with Key Bank.

Genworth Life Insurance Company:

On March 21, 2018, the Company paid its mortgage note payable with Genworth Life Insurance Company in the amount of $26.4 million from the proceeds of its loan agreement with the United States Life Insurance Company.

Hartford Accident & Indemnity Loan:

In connection with the April 2014 acquisition of the Windsor Locks, CT property, a wholly owned subsidiary of the Operating Partnership assumed a $9.0 million mortgage that bore interest at 6.07%.  A principal payment of $3.0 million was made in February 2017, and the interest rate was reduced to 5.20%. The balance of the loan matures March 2020.

American International Group Loan Agreement:

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

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

 

14


 

Allstate Loan Agreement:

 

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

United States Life Insurance Company Loan Agreement:

On December 20, 2017 (the “Closing Date”), four wholly owned subsidiaries of the Operating Partnership (collectively, the “U.S. Life Borrowers”) entered in a loan agreement (the “U.S. Life Loan Agreement”) with the United States Life Insurance Company in the City of New York (the “Lender”).

The U.S. Life Loan Agreement provides for a secured loan facility in the principal amount of $39.0 million (the “Loan Facility”). The Loan Facility is a 10-year term loan that requires interest only payments at the rate of 3.82% per annum. During the period from February 1, 2018 to December 1, 2027, payments of interest only on the principal balance of the Note (as defined below) will be payable in arrears, with the entire principal balance due and payable on January 1, 2028, the loan maturity date. Subject to certain conditions, the U.S Life Borrowers may prepay the outstanding loan amount in whole on or about January 1, 2022, by providing advance notice of the prepayment to the Lender and remitting a prepayment premium equal to the greater of 1% of the then outstanding principal amount of the Loan Facility or the then present value of the Note.  The U.S Life Borrowers paid the Lender a one-time application fee of $50,000 in connection with the Loan Facility.  The U.S. Life Borrowers obligation to pay the principal, interest and other amounts under the Loan Facility are evidenced by the secured promissory note executed by the U.S. Life Borrowers as of the Closing Date (the “Note”). The Note is secured by certain mortgages encumbering the U.S Life Borrowers’ properties (a total of four properties) located in New York, New Jersey and Delaware.  In the event of default, the initial rate of interest on the Note will increase to the greatest of (i) 18% per annum, (ii) a per annum rate equal to 4% over the prime established rate, or (iii) a per annum rate equal to 5% over the original interest rate, all subject to the applicable state or federal laws.  The Note contains other terms and provisions that are customary for instruments of this nature.  Approximately $37.5 million from the loan proceeds were used to reduce the Company’s obligation under its secured revolving credit facility with Key Bank.

United States Life Insurance Company Loan Agreement:

On March 21, 2018, four wholly owned subsidiaries of the Operating Partnership refinanced the current outstanding debt on certain properties by entering into a loan agreement with the United States Life Insurance Company in the City of New York. The loan agreement provides for a secured loan facility in the principal amount of $33.0 million. The loan facility is a ten-year term loan that requires interest only payments at the rate of 4.25% per annum on the principal balance for the first five (5) years of the term and principal and interest payments (amortized over a 30-year period) during the second five (5) years of the term. The entire principal balance is due and payable on April 1, 2028, the loan maturity date. The Company used a portion of the proceeds from the loan facility to repay the remaining balance of a mortgage loan from Genworth Life Insurance Company.

The mortgage notes payable are collateralized by certain of the properties and require monthly interest payments until maturity and are generally non-recourse. Some of the loans also require amortization of principal. As of June 30, 2018, scheduled principal repayments for the remainder of 2018, the next five years and thereafter are as follows (in thousands):

 

Remainder of 2018

$

382

 

2019

 

789

 

2020

 

8,825

 

2021

 

852

 

2022

 

1,157

 

2023

 

1,573

 

Thereafter

 

354,219

 

Total

$

367,797

 

 

 

15


 

4. SECURED REVOLVING CREDIT FACILITY:

On December 2, 2015, the Operating Partnership entered into a Credit Agreement (the “Key Bank Credit Agreement”) with Keybank National Association and Keybanc Capital Markets Inc., as lead arranger (collectively, “Key Bank”). The Key Bank Credit Agreement contemplated a $50.0 million revolving line of credit facility, with an initial term of two years, with a one-year extension option, subject to certain other customary conditions.

Loans drawn down by the Operating Partnership under the facility will need to specify, at the Operating Partnership’s option, whether they are base rate loans or LIBOR rate loans. The base rate loans will bear a base rate of interest calculated as the greater of: (a) the fluctuating annual rate of interest announced from time to time by Key Bank as its “prime rate,” (b) 0.5% above the rate announced by the Federal Reserve Bank of Cleveland (or Federal Funds Effective Rate), or (c) LIBOR plus 100 basis points (bps). The LIBOR rate loans will bear interest at a rate of LIBOR rate plus 300 to 350 bps, depending upon the overall leverage of the properties. Each revolving credit loan under the facility will be evidenced by separate promissory note(s). The Operating Partnership agreed to pay to Key Bank a facility unused fee in the amount calculated as 0.30% for usage less than 50% and 0.20% for usage 50% or greater, calculated as a per diem rate, multiplied by the excess of the total commitment over the outstanding principal amount of the loans under the facility at the time of the calculation. Key Bank has the right to reduce the amount of loan commitments under the facility provided, among other things, they give an advance written notice of such reductions and that in no event the total commitment under the facility is less than $25.0 million. The Operating Partnership may at its option convert any of the revolving credit loans into a revolving credit loan of another type which loan will then bear interest as a base rate loan or a LIBOR rate loan, subject to certain conversion conditions. In addition, Key Bank also agreed to extend, from time to time, as the Operating Partnership may request, upon an advance written notice, swing loans in the total amount not to exceed $5.0 million. Such loans, if and when extended, will also be evidenced by separate promissory note(s).

Due to the revolving nature of the facility, amounts prepaid under the facility may be borrowed again. The Key Bank Credit Agreement contemplates (i) mandatory prepayments by the Operating Partnership of any borrowings under the facility in excess of the total allowable commitment, among other events, and (ii) optional prepayments, without any penalty or premium, in whole or in part, subject to payments of any amounts due associated with the prepayment of LIBOR rate contracts.

The Operating Partnership’s obligations under the facility are secured by a first priority lien and security interest to be held by the agents for Key Bank, in certain of the property, rights and interests of the Operating Partnership, the Guarantors (as defined below) and their subsidiaries now existing and as may be acquired (collectively, the “Collateral”). GTJ REIT, Inc., and each party to the Guaranty are collectively referred to as the “Guarantors.” The parties to the Key Bank Credit Agreement also entered into several side agreements, including, the Joinder Agreements, the Assignment of Interests, the Acknowledgments, the Mortgages, the Guaranty, and other agreements and instruments to facilitate the transactions contemplated under the Key Bank Credit Agreement. Such agreements contain terms and provisions that are customary for instruments of this nature.

The Operating Partnership’s continuing ability to borrow under the facility will be subject to its ongoing compliance with various affirmative and negative covenants, including, among others, with respect to liquidity, minimum occupancy, total indebtedness and minimum net worth. The Key Bank Credit Agreement contains events of default and remedies customary for loan transactions of this sort including, among others, those related to a default in the payment of principal or interest, a material inaccuracy of a representation or warranty, and a default with regard to performance of certain covenants. In addition, the Key Bank Credit Agreement also includes customary events of default (in certain cases subject to customary cure), in the event of which, amounts outstanding under the facility may be accelerated. The Key Bank Credit Agreement includes customary representations and warranties of the Operating Partnership which must continue to be true and correct in all material respects as a condition to future draws.

On July 27, 2017, the Operating Partnership increased its line of credit facility with Key Bank from $50.0 million to $88.0 million. The $38.0 million increase could only be used for the acquisition of certain properties specified in the second amendment to the Key Bank Credit Agreement (including earnest money deposits) and the payment of customary closing costs.  In addition, the maturity date under the Key Bank Credit Agreement was extended from December 1, 2017 to February 28, 2018, with an additional extension option to June 30, 2019, subject to the satisfaction of certain conditions.

On December 20, 2017, the Operating Partnership refinanced certain properties acquired with its secured line of credit facility with Key Bank. As of result, the secured line of credit facility with Key Bank was reduced to $50.5 million, with the excess over $50.0 million only available for the purchase of a specified property.

On February 27, 2018, the Operating Partnership increased its secured line of credit facility with Key Bank from $50.5 million to $55.0 million. In addition, the Operating Partnership exercised its option to extend the maturity date of the secured revolving line of credit facility with Key Bank to June 30, 2019.

16


 

The contemplated uses of proceeds under the Key Bank Credit Agreement include, among others, repayment of indebtedness, funding of acquisitions, development and capital improvements, as well as working capital expenditures. Outstanding borrowings under the secured revolving credit facility with Key Bank as of June 30, 2018 and December 31, 2017 were $55.0 million and $35.9 million, respectively, which are considered LIBOR rate loans.

In connection with the Key Bank Credit Agreement, the Operating Partnership is required to comply with certain covenants. As of June 30, 2018, the Operating Partnership was in compliance with all covenants.

  

 

5. STOCKHOLDERS’ EQUITY:

Common Stock:

The Company is authorized to issue 100,000,000 shares of common stock, $.0001 par value per share. As of June 30, 2018, and December 31, 2017, the Company had a total of 13,569,664 and 13,594,125 shares issued and outstanding, respectively.

Preferred Stock:

The Company is authorized to issue 10,000,000 shares of preferred stock, $.0001 par value per share. Voting and other rights and preferences may be determined from time to time by the Board of Directors (the “Board”) of the Company. The Company has designated 500,000 shares of preferred stock as Series A preferred stock, $.0001 par value per share.  In addition, the Company has designated 6,500,000 shares of preferred stock as Series B preferred stock, $.0001 par value per share. There are no voting rights associated with the Series B preferred stock. There was no Series A preferred stock or Series B preferred stock outstanding as of June 30, 2018, or December 31, 2017.

Dividend Distributions:

The following table presents dividends declared by the Company on its common stock during the six months ended June 30, 2018:

 

Declaration

 

Record

 

Payment

 

Dividend

 

 

Date

 

Date

 

Date

 

Per Share

 

 

March 22, 2018

 

March 31, 2018

 

April 13, 2018

 

$

0.10

 

 

March 22, 2018

 

March 31, 2018

 

April 16, 2018

 

$

0.08

 

(1)

June 7, 2018

 

June 30, 2018

 

July 13, 2018

 

$

0.10

 

 

 

 

(1)

This represents a 2017 supplemental dividend.

The total distributions paid in 2018 were the result of cash flows from operations.

Purchase of Securities:

On November 8, 2016, the Board approved a share redemption program (the “Program”) authorizing redemption of the Company’s shares of common stock (the “Shares”), subject to certain conditions and limitations. The following is a summary of terms and provisions of the Program:

 

the Company will redeem the Shares on a semi-annual basis (each redemption period ending on May 31st and November 30th of each year), at a specified price per share (which price will be equal to 90% of its net asset value per share for the most recently completed calendar year, subject to adjustment) up to a yearly maximum of $1.0 million in Shares, subject to sufficient funds being available.  

 

the Program will be open to all stockholders (other than current directors, officers and employees, subject to certain exceptions), indefinitely with no specific end date (although the Board may choose to amend, suspend or terminate the Program at any time by providing 30 days advance notice to stockholders).

 

stockholders can tender their Shares for redemption at any time during the period in which the Program is open; stockholders can also withdraw tendered Shares at any time prior to 10 days before the end of the applicable semi-annual period.

 

if the annual volume limitation is reached in any given semi-annual period or the Company determines to redeem fewer Shares than have been submitted for redemption in any particular semi-annual period due to the

17


 

 

insufficiency of funds, the Company will redeem Shares on a pro rata basis in accordance with the policy on priority of redemptions set forth in the Program.

 

the redemption price for the Shares will be paid in cash no later than 3 business days following the last calendar day of the applicable semi-annual period.

 

the Program will be terminated if the Shares are listed on a national securities exchange or included for quotation in a national securities market, or in the event a secondary market for the Shares develops or if the Company merges with a listed company.

 

the Company’s transfer agent, American Stock Transfer & Trust Company, LLC, will act as the redemption agent in connection with the Program.

 

On March 22, 2018, the Company received its annual valuation as of December 31, 2017.  The annual valuation resulted in an adjustment to the redemption price under the Program from $12.55 to $12.92 per share. The Company has filed a Current Report on Form 8-K with the SEC on March 27, 2018 and mailed to its stockholders an announcement of the redemption price adjustment. The redemption price of $12.92 per share was effective for the semi-annual period which began December 1, 2017 and will remain effective until such time as the Board determines a new estimated per share Net Asset Value (“NAV”). Our stockholders are permitted to withdraw any redemption requests upon written notice to us at any time prior to ten (10) days before the end of the applicable semi-annual period.

On January 22, 2018, MacKenzie Realty Capital, Inc. and MacKenzie NY Real Estate 2 Corp. (“Mackenzie”) commenced a tender offer to purchase up to 750,000 shares of the Company’s common stock, par value $0.0001 per share, for cash at a purchase price equal to $6.50 per share. The offer and withdrawal rights expired at 11:59 p.m., Pacific Time, on March 2, 2018. No shares were tendered pursuant to the tender offer.

On January 26, 2018, the Company commenced a self-tender offer to purchase up to 750,000 shares of the Company’s common stock, par value $0.0001 per share, for cash at a purchase price equal to $7.00 per share. The offer and withdrawal rights expired at 12:00 midnight, New York City Time, on March 5, 2018. The Program was temporarily suspended during this offer as required by SEC rules. No repurchases of shares were made under the Program during the offer and for 10 business days thereafter. Pursuant to the self-tender offer, 5,000 shares were tendered and the Company purchased these shares for $35,000 on March 8, 2018. The suspension of the Program was terminated on March 20, 2018 and thereafter the Company recommenced purchases under the Program.

On June 5, 2018, the Company redeemed 77,399 shares of the Company’s common stock, $.0001 per share, at a redemption price of $12.92 per share, for aggregate consideration of $999,995. The Company received redemption requests during the most recently completed semi-annual period (December 1, 2017 to May 31, 2018) exceeding the Program’s $1 million per year limit. As a result, the Company was unable to purchase all shares presented for redemption. The Company honored the requests it received on a pro rata basis in accordance with the policy on priority of redemptions set forth in the Program, subject to giving certain priorities in accordance with the Program.

Redemptions under the Program are limited to an aggregate of $1 million during any calendar year. Because this limit has been met for the 2018 calendar year, the Company will not redeem any shares during the current semi-annual period (June 1, 2018 to November 30, 2018). The Company will resume redemptions under the Program for the semi-annual period running from December 1, 2018 to May 31, 2019. Any unsatisfied portions of redemption requests received during the most recently completed semi-annual period and any redemption requests received during the current semi-annual period will be treated as requests for redemption for the semi-annual period running from December 1, 2018 to May 31, 2019, unless such requests are withdrawn in accordance with the terms of the Program.

Stock Based Compensation:

The Company had a 2007 Incentive Award Plan (the “2007 Plan”) that had intended purposes to further the growth, development, and financial success of the Company and to obtain and retain the services of those individuals considered essential to the long-term success of the Company. The 2007 Plan provided 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 have been awarded under the 2007 Plan was 1,000,000 shares. The 2007 Plan expired by its terms on June 11, 2017.

18


 

The 2017 Incentive Award Plan (the “2017 Plan”) was adopted by the Board and effective on April 24, 2017, subject to the approval of the Company’s stockholders, which was obtained on June 8, 2017.  The 2017 Plan has intended purposes to further the growth, development, and financial success of the Company and to obtain and retain the services of those individuals considered essential to the long-term success of the Company. The 2017 Plan provides for awards in the form of stock, stock units, 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 2017 Plan is 2,000,000 shares. As of June 30, 2018, the Company had 1,942,062 shares available for future issuance under the 2017 Plan. Dividends paid on restricted shares are recorded as dividends on shares of the Company’s common stock whether or not they are vested. In accordance with ASC 718-10-35, the Company measures the compensation costs for these shares as of the date of the grant and the expense is recognized in earnings, at the grant date (for the portion that vest immediately) and then ratably over the respective vesting periods.  

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. On June 9, 2011, the Company granted 10,000 options to a non-employee director which vested immediately. On November 8, 2016, 200,000 options were granted to key officers of the Company and had a three-year vesting period. In 2017, 200,000 options were exercised. All options expire ten years from the date of grant. For the six months ended June 30, 2018 and 2017, the stock compensation expense relating to these stock options was approximately $55,000 and $71,000, respectively.

On April 30, 2012, and June 7, 2012, the Company issued an aggregate of 55,149 and 5,884 restricted shares of common stock, respectively, under the 2007 Plan. The shares issued on June 7, 2012 have a value of approximately $40,000 (based upon an estimated value of $6.80 per share), were granted to non-management members of the Board of Directors, and vested immediately. The shares issued on April 30, 2012 have a value of approximately $375,000 (based upon an estimated value of $6.80 per share), were granted to certain executives of the Company, and vest ratably over a four-year period. One fourth of the shares granted to the executives vested on the grant date and one fourth vested each year on the following dates: April 30, 2013, April 30, 2014, and April 30, 2015.

On March 21, 2013, the Company issued an aggregate of 50,002 restricted shares of common stock, with a value of approximately $320,000 (based upon an estimated value of $6.40 per share), under the 2007 Plan. A total of 3,126 of these shares, with a value of approximately $20,000 (based upon an estimated value of $6.40 per share), were granted to non-management members of the Board, and vested immediately. The remaining 46,876 shares, with a value of approximately $300,000 (based upon an estimated value of $6.40 per share), were granted to certain executives of the Company, and vested ratably over a four-year period. One fourth of the shares vested on the grant date and the remaining shares vested in equal installments on the next three anniversary dates of the grant.

On June 6, 2013, the Company issued an aggregate of 9,378 restricted shares of common stock, with a value of approximately $60,000 (based upon an estimated value of $6.40 per share), under the 2007 Plan. These shares were granted to non-management members of the Board and vested immediately.

On June 4, 2014, 44,704 restricted shares of common stock, with a value of approximately $304,000 (based upon an estimated value of $6.80 per share), were granted under the 2007 Plan to certain executives of the Company. One sixth of the shares vested immediately upon issuance and the remaining shares vest in equal installments on the next five anniversary dates of the grant.

On June 19, 2014, the Company issued an aggregate of 8,820 restricted shares of common stock with a value of approximately $60,000 (based upon an estimated value of $6.80 per share) under the 2007 Plan to non-management members of the Board of Directors. The shares vested immediately upon issuance.

On March 26, 2015, the Company issued 43,010 restricted shares of common stock, with a value of approximately $400,000 (based upon an estimated value of $9.30 per share), under the 2007 Plan to certain executives of the Company.  One sixth of the shares vested immediately upon issuance and the remaining shares vest in equal installments on the next five anniversary dates of the grant.

On June 19, 2015, the Company issued an aggregate of 16,436 restricted shares of common stock with a value of approximately $175,000 (based upon an estimated value of $10.65 per share) under the 2007 Plan to non-management members of the Board of Directors. The shares vested immediately upon issuance.

On March 24, 2016, the Company issued 47,043 restricted shares of common stock, with a value of approximately $489,000 (based upon an estimated value of $10.40 per share), under the 2007 Plan to certain executives of the Company.  One sixth of the shares vested immediately upon issuance and the remaining shares vest in equal installments on the next five anniversary dates of the grant.

19


 

On June 9, 2016, the Company issued an aggregate of 14,424 restricted shares of common stock with a value of approximately $150,000 (based upon an estimated value of $10.40 per share) under the 2007 Plan to non-management members of the Board of Directors. The shares vested immediately upon issuance.

On May 22, 2017, the Company issued an aggregate of 34,482 restricted shares of common stock with a value of approximately $400,000 (based upon an estimated value of $11.60 per share) under the 2007 Plan to certain executives of the Company.  One-tenth of the shares vested immediately upon issuance and the remaining shares vest in equal installments on the next nine anniversary dates of the grant.  

On May 31, 2017, the Company issued an aggregate of 7,929 shares of common stock under the 2007 Plan to certain current and former executives of the Company in connection with the exercise of previously issued options.  The shares vested immediately upon issuance.

On June 8, 2017, the Company issued an aggregate of 15,516 restricted shares of common stock with a value of approximately $180,000 (based upon an estimated value of $11.60 per share) under the 2007 Plan to non-management members of the Board of Directors.  The shares vested immediately upon issuance.

On June 8, 2018, the Company issued an aggregate of 42,918 restricted shares of common stock with a value of approximately $500,000 (based upon an estimated value of $11.65 per share) under the 2017 Plan to certain executives of the Company.  One-tenth of the shares vested immediately upon issuance and the remaining shares vest in equal installments on the next nine anniversary dates of the grant.  

On June 8, 2018, the Company issued an aggregate of 15,020 restricted shares of common stock with a value of approximately $175,000 (based upon an estimated value of $11.65 per share) under the 2017 Plan to non-management members of the Board of Directors.  The shares vested immediately upon issuance.

The Board of Directors has determined the value of a share of common stock to be $11.65 based on a valuation completed March 27, 2018, with the assistance of an independent third-party for the purpose of valuing shares of the Company’s common stock pursuant to the 2017 Plan.  This value is not necessarily indicative of the fair market value of a share of the Company’s common stock.

For the six months ended June 30, 2018 and 2017, the Company’s total stock compensation expense was approximately $513,000 and $525,000, respectively. As of June 30, 2018, there was approximately $650,000 of unamortized stock compensation related to restricted stock. That cost is expected to be recognized over a weighted average period of 2.3 years.

As of June 30, 2018, there were 210,000 stock options that are outstanding, 76,666 of which are exercisable, and 500,725 shares of restricted stock are outstanding, 442,915 of which are vested.

The following is a summary of restricted stock activity:

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

Grant Date Fair

 

 

Shares

 

 

Value

 

Non-vested shares outstanding as of December 31, 2017

 

40,381

 

 

$

10.73

 

New shares issued through June 30, 2018

 

57,938

 

 

 

11.65

 

Vested

 

(40,509

)

 

 

11.37

 

Non-vested shares outstanding as of June 30, 2018

 

57,810

 

 

$

11.24

 

20


 

 

The following is an amortization schedule of the total unamortized shares of restricted stock outstanding as of June 30, 2018:

 

Non-vested Shares Amortization Schedule

 

Number of Shares

 

2018 (6 months)

 

 

11,254

 

2019

 

 

16,590

 

2020

 

 

10,167

 

2021

 

 

6,557

 

2022

 

 

4,745

 

2023

 

 

3,531

 

Thereafter

 

 

4,966

 

Total Non-vested Shares

 

 

57,810

 

 

 

6. EARNINGS PER SHARE:

In accordance with ASC Topic 260 “Earnings Per Share,” basic earnings per common share (“Basic EPS”) is computed by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings per common share (“Diluted EPS”) is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares and dilutive common share equivalents and convertible securities then outstanding. There are 21,897 and 21,483 common share equivalents in the six months ended June 30, 2018 and 2017, respectively, presented in diluted earnings per share.

The following table sets forth the computation of basic and diluted earnings per share information for the three and six months ended June 30, 2018 and 2017 (in thousands, except share and per share data):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30, 2018

 

 

June 30, 2018

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

$

665

 

 

$

88

 

 

$

3,099

 

 

$

797

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding – basic

 

13,581,655

 

 

 

13,640,027

 

 

 

13,587,192

 

 

 

13,629,514

 

Weighted average common shares outstanding – diluted

 

13,603,552

 

 

 

13,661,510

 

 

 

13,609,089

 

 

 

13,650,997

 

Basic and Diluted Per Share Information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share – basic and diluted

$

0.05

 

 

$

0.01

 

 

$

0.23

 

 

$

0.06

 

 

 

7. RELATED PARTY TRANSACTIONS:

Paul Cooper, the Chairman and Chief Executive Officer of the Company, and Louis Sheinker, the President, Secretary and Chief Operating Officer of the Company, each hold passive, minority interests in a real estate brokerage firm, The Rochlin Organization. The firm acted as the exclusive broker for one of the Company’s properties.  In 2013, the firm introduced a new tenant to the property, resulting in the execution of a lease agreement and subsequent lease modification. The firm earned aggregate brokerage cash commissions of approximately $60,000 based on a total lease value of $1,015,000.  In January 2014, the new tenant expanded further which resulted in approximately $95,000 of brokerage commissions on the additional lease modification value of $2,100,000. In November 2015, the tenant concluded negotiations to expand by an additional 35,000 square feet which resulted in approximately $12,000 of brokerage commissions on the additional lease modification value of $200,000. In December 2016, the tenant concluded negotiations to expand by an additional 35,000 square feet which resulted in approximately $10,000 of brokerage commissions on the additional lease modification value of $332,000.

The Company’s executive and administrative offices, located at 60 Hempstead Avenue, West Hempstead, NY, are leased from Lighthouse Sixty, L.P., a partnership of which Paul Cooper and Louis Sheinker are managing members of the general partner. This lease agreement expires in 2020 and has a current annual base rent of $271,000 with aggregate lease payments totaling $1.8 million.

21


 

On November 4, 2014, the Company invested $1.8 million for a limited partnership interest in Garden 1101 Stewart, L.P. (“Garden 1101”). Garden 1101 was formed for the purpose of acquiring a 90,000 square foot office building in Garden City, NY that was subsequently converted to a medical office building. The general partners of Garden 1101 include the members of Green Holland Ventures, Paul Cooper and Louis Sheinker. On February 9, 2018, the property acquired by Garden 1101 was sold and the Company received a distribution from the partnership of $3.7 million which resulted in a realized gain from unconsolidated affiliate of $2.5 million.

 

 

8. COMMITMENTS AND CONTINGENCIES:

Legal Matters:

The Company is involved in lawsuits and other disputes which arise in the ordinary course of business. However, management believes that these matters will not have a material adverse effect, individually or in the aggregate, on the Company’s financial position or results of operations.

 

Divestiture:

The Company has a pension withdrawal liability relating to a previous divestiture. As of June 30, 2018, and December 31, 2017, the remaining liability was approximately $1.1 million, and is included in other liabilities on the accompanying condensed consolidated balance sheets. The liability is payable in monthly installments of approximately $8,100, including interest, over a twenty-year term ending in 2032.

Environmental Matters:  

As of June 30, 2018, three of the Company’s six former bus depot sites have received final regulatory closure, satisfying outstanding clean-up obligations related to legacy site contamination issues. Three sites continue with on-going cleanup, monitoring and reporting activities. We believe each of the six sites remain in compliance with existing local, state and federal obligations.

 

 

9. FAIR VALUE:

Fair Value of Financial Instruments:

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

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

 

 

June 30, 2018

 

 

December 31, 2017

 

 

Carrying

 

 

Estimated

 

 

Carrying

 

 

Estimated

 

 

Value

 

 

Value

 

 

Value

 

 

Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

13,345

 

 

$

13,345

 

 

$

8,423

 

 

$

8,423

 

Restricted cash

 

3,945

 

 

 

3,945

 

 

 

3,471

 

 

 

3,471

 

Accounts receivable

 

437

 

 

 

437

 

 

 

159

 

 

 

159

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

$

2,811