This report contains statements that we believe to be "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements give our current expectations or forecasts
of future events. Forward-looking statements generally can be identified by the
use of forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "believe," "project," or "continue," or similar words
or the negative thereof. From time to time, we also may provide oral or written
forward-looking statements in other materials we release to the public. Any or
all of our forward-looking statements in this report and in any public
statements we make could be materially different from actual results. They can
be affected by assumptions we might make or by known or unknown risks or
uncertainties. Consequently, we cannot guarantee any forward-looking
statements. Investors are cautioned not to place undue reliance on any
forward-looking statements. Investors should also understand that it is not
possible to predict or identify all such factors and should not consider the
potential risks and uncertainties set forth herein and in our Report on
Form 10-K for the year ended December 31, 2011 as being exhaustive, and new
factors may emerge that could affect our business. We assume no obligation, and
disclaim any duty, to update the forward-looking statements in this report. Past
performance is no guarantee of future results. You should read the following
discussion in conjunction with the condensed consolidated financial statements
and notes appearing elsewhere in this filing.
Executive Summary:
We are a fully integrated, self-administered and self-managed Real Estate
Investment Trust ("REIT"), engaged in the acquisition, ownership, and management
of real properties. We currently own seven rentable parcels of real property,
four of which are leased to the City of New York, two of which are leased to
commercial tenants (all six on a triple net basis), and one of which a portion
is leased to a commercial tenant and the remainder is leased to various tenants.
There is an additional property of negligible size which is not rentable.
Additionally, in connection with the Tax Relief Extension Act of 1999 ("RMA"),
we are permitted to participate in activities outside the normal operations of
the REIT so long as these activities are conducted in entities which elect to be
treated as taxable subsidiaries under the Internal Revenue Code, as amended (the
"Code"), subject to certain limitations. In addition, we owned a group of
outdoor maintenance businesses, and electrical contracting business, and a
parking business, which are presented as part of discontinued operations on our
statements of income. On December 27, 2011, we entered into an asset purchase
agreement to sell the assets and business of the outdoor maintenance businesses
and on January 12, 2012, the sale was completed. On February 1, 2012, we exited
the parking business.
We continue to seek opportunities to acquire stabilized properties. To the
extent it is in the interests of our stockholders, we will seek to invest in a
diversified portfolio of real properties within geographic areas that will
satisfy our primary investment objectives of providing our stockholders with
stable cash flow, preservation of capital and growth of income and principal
without taking undue risk. Because a significant factor in the valuation of
income-producing property is the potential for future income, we anticipate that
the majority of properties that we will acquire will have both the potential for
growth in value and provide for cash distributions to stockholders.
Accounting Pronouncements:
See Note 2, "Recently Issued Accounting Pronouncements," in the Notes to the
Condensed Consolidated Financial Statements contained in Part I, Item 1.
"Financial Statements" of this Form 10-Q for a detailed discussion regarding
recently issued accounting pronouncements.
Critical Accounting Policies:
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon our condensed consolidated financial statements, which
have been prepared in accordance with generally accepted accounting principles
in the United States of America ("GAAP"). The preparation of financial
statements in conformity with GAAP requires the use of estimates and assumptions
that could affect the reported amounts in our consolidated financial statements.
Actual results could differ from these estimates. Please refer to the section of
our Annual Report on Form 10-K for the year ended December 31, 2011, entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies" for a discussion of our critical
accounting policies. During the six months ended June 30, 2012, there were no
material changes to these policies. Set forth below is a summary of the
accounting policies that management believes are critical to the preparation of
the consolidated financial statements included in this report.
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Revenue Recognition-Real Estate Operations:
We recognize 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 we fund tenant improvements and the improvements are deemed to be owned
by us, revenue recognition will commence when the improvements are substantially
completed and possession or control of the space is turned over to the tenant.
When we determine that the tenant allowances are lease incentives, we commence
revenue recognition when possession or control of the space is turned over to
the tenant for tenant work to begin. The properties are being leased to tenants
under operating leases. Minimum rental income is recognized on a straight-line
basis over the term of the lease.
Property operating expense recoveries from tenants of common area maintenance,
real estate, and other recoverable costs are recognized in the period the
related expenses are incurred.
Revenue Recognition-Electrical Contracting Operations:
We recognize revenues from long-term construction contracts on the
percentage-of-completion method in accordance with ASC 605-35.
Percentage-of-completion is measured principally by the percentage of costs
incurred to date for each contract to the estimated total costs for such
contract at completion. Contract costs include all direct costs related to the
performance and completion of the contracts. Estimated losses on the long term
construction contracts are recognized in the period in which such losses are
determined. Revenues are presented as part of discontinued operations in the
condensed consolidated statements of income (see Note 8 for further discussion
regarding discontinued operations).
Accounts Receivable:
Accounts receivable consist of trade receivables recorded at the original
invoice amounts, less an estimated allowance for uncollectible accounts. Trade
credit is generally extended on a short-term basis; thus trade receivables
generally do not bear interest. Trade receivables are periodically evaluated for
collectability based on past credit histories with customers and their current
financial conditions. Changes in the estimated collectability of trade
receivables are recorded in the results of operations for the period in which
the estimate is revised. Trade receivables that are deemed uncollectible are
offset against the allowance for uncollectible accounts. We generally do not
require collateral for trade receivables.
Real Estate Investments:
Real estate assets are stated at cost, less accumulated depreciation and
amortization. All costs related to the improvement or replacements of real
estate properties are capitalized. Additions, renovations and improvements that
enhance and/or extend the useful life of a property are also capitalized.
Expenditures for ordinary maintenance, repairs and improvements that do not
materially prolong the normal useful life of an asset are charged to operations
as incurred.
Upon the acquisition of real estate properties, the fair value of the real
estate purchased is allocated to the acquired tangible assets (consisting of
land, buildings and building improvements) and identified intangible assets and
liabilities (consisting of above-market and below-market leases and in-place
leases) in accordance with ASC 805. We utilize methods similar to those used by
independent appraisers in estimating the fair value of acquired assets and
liabilities. The fair value of the tangible assets of an acquired property
considers the value of the property "as-if-vacant." The fair value reflects the
depreciated replacement cost of the asset. In allocating purchase price to
identified intangible assets and liabilities of an acquired property, the value
of above-market and below-market leases is estimated based on the differences
between (i) contractual rentals and the estimated market rents over the
applicable lease term discounted back to the date of acquisition utilizing a
discount rate adjusted for the credit risk associated with the respective
tenants and (ii) the estimated cost of acquiring such leases giving effect to
our history of providing tenant improvements and paying leasing commissions,
offset by a vacancy period during which such space would be leased. The
aggregate value of in-place leases is measured by the excess of (i) the purchase
price paid for a property after adjusting existing in-place leases to market
rental rates over (ii) the estimated fair value of the property "as-if-vacant,"
determined as set forth above.
Above and below market leases acquired are recorded at their fair value. The
capitalized above-market lease values are amortized as a reduction of rental
revenue over the remaining term of the respective leases and the capitalized
below-market lease values are amortized as an increase to rental revenue over
the remaining term of the respective leases. The value of in-place leases is
based on our evaluation of the specific characteristics of each tenant's lease.
Factors considered include estimates of carrying costs during expected lease-up
periods, current market conditions, and costs to execute similar leases. The
value of in-place leases are
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amortized over the remaining term of the respective leases. If a tenant vacates
its space prior to its contractual expiration date, any unamortized balance of
the related intangible asset is expensed.
Asset Impairment:
We apply the provisions of ASC 360-10-05 to recognize and measure impairment of
long-lived assets. Management reviews each real estate investment for impairment
whenever events or circumstances indicate that the carrying value of a real
estate investment may not be recoverable. The review of recoverability is based
on an estimate of the future cash flows that are expected to result from the
real estate investment's use and eventual disposition. These cash flows consider
factors such as expected future operating income, trends and prospects, as well
as the effects of leasing demand, competition and other factors. If an
impairment event exists due to the projected inability to recover the carrying
value of a real estate investment, an impairment loss is recorded to the extent
that the carrying value exceeds estimated fair value. Management is required to
make subjective assessments as to whether there are impairments in the value of
its real estate properties. These assessments have a direct impact on net
income, because an impairment loss is recognized in the period that the
assessment is made. There were no indicators of impairment at June 30, 2012.
When impairment indicators are present, investments in affiliated companies are
reviewed for impairment by comparing their fair values to their respective
carrying amounts. We make our estimate of fair value by considering certain
factors including discounted cash flow analyses. If the fair value of the
investment has dropped below the carrying amount, management considers several
factors when determining whether an other-than-temporary decline in market value
has occurred, including the length of the time and the extent to which the fair
value has been below cost, the financial condition and near-term prospects of
the affiliated company, and other factors influencing the fair market value,
such as general market conditions. As a result of the Company's assessment, the
Company recorded an additional impairment allowance of approximately $0.1
million against notes receivable as of June 30, 2012.
Discontinued Operations:
The condensed consolidated financial statements present the operations of our
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 and six months ended June 30, 2012 and 2011.
Fair Value Measurements:
We determine fair value in accordance with ASC 820-10-05 for financial assets
and liabilities. ASC 820-10-05 defines fair value, provides guidance for
measuring fair value and requires certain disclosures. This standard does not
require any new fair value measurements, but rather applies to all other
accounting pronouncements that require or permit fair value measurements.
Fair value is defined as the price that would be received to sell an asset or
transfer a liability in an orderly transaction between market participants at
the measurement date. Where available, fair value is based on observable market
prices or parameters or derived from such prices or parameters. Where observable
prices or inputs are not available, valuation models are applied. These
valuation techniques involve some level of management estimation and judgment,
the degree of which is dependent on the price transparency for the instruments
or market and the instruments' complexity.
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Assets and liabilities disclosed at fair value are categorized based upon the
level of judgment associated with the inputs used to measure their fair value.
Hierarchical levels, defined by ASC 820-10-35 and directly related to the amount
of subjectivity associated with the inputs to fair valuation of these assets and
liabilities, are as follows:
† Level 1 - Inputs are unadjusted, quoted prices in active markets for
identical assets or liabilities at the measurement date.
† Level 2 - Inputs (other than quoted prices included in Level 1) are
either directly or indirectly observable for the asset or liability through
correlation with market data at the measurement date and for the duration of the
instrument's anticipated life. Level 2 inputs include quoted market prices in
markets that are not active for an identical or similar asset or liability, and
quoted market prices in active markets for a similar asset or liability.
† Level 3 - Inputs reflect management's best estimate of what market
participants would use in pricing the asset or liability at the measurement
date. These valuations are based on significant unobservable inputs that require
a considerable amount of judgment and assumptions. Consideration is given to the
risk inherent in the valuation technique and the risk inherent in the inputs to
the model.
Determining which category an asset or liability falls within the hierarchy
requires significant judgment and we evaluate its hierarchy disclosures each
quarter.
Income Taxes:
We are organized and conduct our operations to qualify as a REIT for federal
income tax purposes. Accordingly, we will generally not be subject to federal
income taxation on that portion of our income that qualifies as REIT taxable
income, to the extent that we distribute at least 90% of our taxable income to
our stockholders and comply with certain other requirements as defined under
Section 856 through 860 of the Code.
We also participate in certain activities conducted by entities which elected to
be treated as taxable subsidiaries under the Code. As such we are subject to
federal, state and local taxes on the income from these activities. We account
for income taxes under the asset and liability method, as required by the
provisions of ASC 740-10-30. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse. We
provide a valuation allowance for deferred tax assets for which we do not
consider realization of such assets to be more likely than not.
Investment in Equity Affiliates:
We invested in a joint venture that was formed to perform electrical
construction services. This investment is recorded under the equity method of
accounting. We record our share of the net income and losses from the underlying
properties and any other-than-temporary impairment on this investment as part of
discontinued operations on the condensed consolidated statements of income.
Variable Interest Entities:
We account 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 June 30, 2012, we have one investment which was made to a VIE entity with
an aggregate carrying amount of $1.4 million, which is included in assets of
discontinued operations on the condensed consolidated balance sheet. For the VIE
identified, we are not the primary beneficiary and as such, the VIE is not
consolidated in our financial statements. We account for this investment under
the equity method.
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Stock-Based Compensation:
We have a stock-based compensation plan, which is described in Note 11. We
account 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 the expense is
recognized in earnings at the grant date (for the portion that vests
immediately) or ratably over the respective vesting periods.
Real Estate:
Farm Springs Road, LLC Property:
On June 6, 2012, Farm Springs Road, LLC ("Farm Springs"), our wholly-owned
subsidiary, and United Technologies Corporation ("United Technologies") entered
into a lease agreement (the "Lease") pursuant to which United Technologies will
lease approximately 107,654 square feet of office space and the adjacent parking
structure located at 8 Farm Springs Road, Farmington, Connecticut (the
"Premises").
The target commencement date of the Lease is 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 (the "CPI") during the three successive five year options and fixed
at the same base rent as the fifteenth year of the Lease during the one year
option, or (ii) three successive five year options with base rent increasing by
the CPI. United Technologies has certain rights to the first offer to purchase
the Premises in the event Farm Springs sells the Premises in a "one-off" sale.
The base annual rent for the Premises will begin 12 months from the lease
commencement. The base annual rent for the Premises will range from
approximately $1.4 million during the first year to $1.8 million for the
fifteenth year of the Lease. After the seventh year of the Lease, base annual
rent will increase based upon the 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 maintenance and payment of operating expenses, including
utilities and real estate taxes subject to limited exceptions which will be the
our responsibility.
612 Wortman Ave, LLC Property:
On July 2, 2012, we entered into a surrender agreement ("Agreement") with
Varsity Bus Co. Inc. ("Varsity"), a tenant of 612 Wortman Ave, LLC, our
wholly-owned subsidiary, regarding early termination of their existing lease.
Per the Agreement, Varsity's lease will terminate effective on or before
September 7, 2012. As consideration for terminating their existing lease early,
Varsity has agreed to pay us a sum of approximately $0.4 million payable in six
equal installments with the last payment being on or before December 14, 2012. A
sum of approximately $0.8 million represents Varsity's obligations under the
lease through September 30, 2012 and will become immediately due and payable on
September 7, 2012 if Varsity fails to vacate the occupied space on or before
September 7, 2012.
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Results of Operations:
Three Months Ended June 30, 2012 vs. Three Months Ended June 30, 2011
The following table sets forth our results of operations for the periods
indicated (in thousands):
Three Months Ended
June 30, Increase/(Decrease)
2012 2011 Amount Percent
(Unaudited)
Revenues:
Property rentals $ 3,476 $ 3,386 $ 90 3%
Tenant reimbursements 109 114 (5) (4%)
Other revenue 8 149 (141) (95%)
Total revenues 3,593 3,649 (56) (2%)
Operating expenses:
General and administrative expenses 2,258 2,199 59 3%
Property operating expenses 208 221 (13) (6%)
Depreciation and amortization expense 342 327 15 5%
Total operating expenses 2,808 2,747 61 2%
Operating income 785 902 (117) (13%)
Other income (expense):
Interest income 10 22 (12) (55%)
Interest expense (654) (629) (25) 4%
Change in insurance reserves (16) 7 (23) (329%)
Other 33 9 24 267
Total other income (expense): (627) (591) (36) 6
Income from continuing operations 158 311 (153) (49%)
before income taxes
Benefit from income taxes - - - nm
Income from continuing operations, net 158 311 (153) (49%)
of taxes
Discontinued Operations:
Loss from discontinued operations, net (842) (95) (747) 786%
of taxes
Net (loss) income $ (684) $ 216 $ (900) (417%)
nm - not meaningful
Property Rental Revenues
Property rental revenue increased $0.1 million, or 3%, to $3.5 million for the
three months ended June 30, 2012 from $3.4 million for the three months ended
June 30, 2011. This increase is primarily attributable to new tenants with
leases that began in the second quarter of 2012.
Other Revenue
Other revenue decreased $141,000, or 95%, to $8,000 for the three months ended
June 30, 2012 from $149,000 for the three months ended June 30, 2011. This
decrease is primarily attributable to the decrease in revenue from the MTABC
contract which terminated in June 2011.
Operating Expenses
Operating expenses increased $0.1 million, or 2%, to $2.8 million for the three
months ended June 30, 2012 from $2.7 million for the three months ended June 30,
2011. This increase is primarily attributable to write off offs of certain
assets and tenant reimbursements.
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Other Income (Expense)
Other income (expense) increased $0.1 million or 6%, to ($0.6) million for the
three months ended June 30, 2012 from ($0.5) million for the three months ended
June 30, 2011. This increase was primarily due to the change in insurance
reserves as a result of new claims in 2012.
Benefit From Income Taxes
The provision for income taxes represents federal, state, and local taxes
primarily based on the taxable income of the taxable REIT subsidiaries. The
Company did not record a provision for income taxes for the three months ended
June 30, 2012 and June 30, 2011.
Loss from Discontinued Operations, Net of Taxes
Loss from discontinued operations, net of taxes reflects the operating results,
accruals, allowances, and asset write offs of our taxable REIT subsidiaries
(outdoor maintenance, shelter cleaning, electrical contracting, and parking
pperations), and paratransit businesses.
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Six Months Ended June 30, 2012 vs. Six Months Ended June 30, 2011
The following table sets forth our results of operations for the periods
indicated (in thousands):
Six Months Ended
June 30, Increase/(Decrease)
2012 2011 Amount Percent
(Unaudited)
Revenues:
Property rentals $ 6,924 $ 6,648 $ 276 4%
Tenant reimbursements 212 227 (15) (7%)
Other revenue 17 297 (280) (94%)
Total revenues 7,153 7,172 (19) nm
Operating expenses:
General and administrative expenses 4,916 3,800 1,116 29%
Property operating expenses 433 394 39 10%
Depreciation and amortization expense 681 644 37 6%
Total operating expenses 6,030 4,838 1,192 25%
Operating income 1,123 2,334 (1,211) (52%)
Other income (expense):
Interest income 24 47 (23) (49%)
Interest expense (1,306) (1,257) (49) 4%
Change in insurance reserves 61 (36) 97 (269%)
Other 39 15 24 160
Total other income (expense): (1,182) (1,231) 49 (4%)
Income (loss) from continuing
operations before income taxes (59) 1,103 (1,162) (105%)
Benefit from income taxes - 23 (23) (100%)
Income (loss) from continuing
operations, net of taxes (59) 1,126 (1,185) (105%)
Discontinued Operations:
Loss from discontinued operations,
net of taxes (1,572) (277) (1,295) 468%
Net (loss) income $ (1,631) $ 849 $ (2,480) (292%)
nm - not meaningful
Property Rental Revenues
Property rental revenue increased $0.3 million, or 4%, to $6.9 million for the
six months ended June 30, 2012 from $6.6 million for the six months ended
June 30, 2011. This increase is primarily attributable to new tenants with
leases that began in the second quarter of 2012.
Other Revenue
Other revenue decreased $280,000, or (94%), to $17,000 for the six months ended
June 30, 2012 from $297,000 for the six months ended June 30, 2011. This
decrease is primarily attributable to the decrease in revenue from the MTABC
contract which terminated in June 2011.
Operating Expenses
Operating expenses increased $1.2 million, or 25%, to $6.0 million for the six
months ended June 30, 2012 from $4.8 million for the six months ended June 30,
2011. This increase is primarily attributable to consulting and legal fees
relating to the divestiture of our taxable REIT subsidiaries and professional
fees related to real estate activity, an increase in stock compensation expense
associated with the grant of restricted shares in 2012, and the accrual of
severance related to the divestiture.
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Other Income (Expense)
Other income (expense) decreased $0.1 million or 4%, to $(1.1) million for the
six months ended June 30, 2012 from ($1.2) million for the six months ended
June 30, 2011. This decrease was primarily due to the change in insurance
reserves as a result of claims settled in 2012.
Benefit From Income Taxes
The provision for income taxes represents federal, state, and local taxes
primarily based on the taxable income of the taxable REIT subsidiaries. The
Company did not record a provision for income taxes for the six months ended
June 30, 2012. The benefit from income taxes for the six months ended June 30,
2011 was $23,000.
Loss from Discontinued Operations, Net of Taxes
Loss from discontinued operations, net of taxes reflects the operating results,
accruals, allowances, and asset write offs of our taxable REIT subsidiaries
(outdoor maintenance, shelter cleaning, electrical contracting, and parking
operations), and paratransit businesses.
Liquidity and Capital Resources
At June 30, 2012, we had unrestricted cash and cash equivalents of approximately
$5.3 million compared to $7.6 million at December 31, 2011. We fund operating
expenses and other short-term liquidity requirements, including debt service and
dividend distributions from operating cash flows. We believe that our net cash
provided by operations will be sufficient to fund our short-term liquidity
requirements for the next twelve months and to meet our dividend requirements to
maintain our REIT status.
Financings:
Hartford Loan Agreement:
On July 1, 2010, two of our indirect subsidiaries, 165-25 147th Avenue, LLC and
85-01 24th Avenue, LLC (collectively, the "Borrower") entered into a Fixed Rate
Term Loan Agreement (the "Hartford Loan Agreement") with Hartford Life Insurance
Company, Hartford Life and Accident Insurance Company and Hartford Life and
Annuity Insurance Company (collectively, the "Lenders") pursuant to which the
Lenders made a term loan to Borrower in the aggregate principal amount of
$45,500,000 (the "Loan"). The Loan was evidenced by certain promissory notes,
executed simultaneously therewith, payable to the order of (i) Hartford Life
Insurance Company in the stated amount of $25,000,000; (b) Hartford Life and
Accident Insurance Company in the stated principal amount of $10,500,000; and
(c) Hartford Life and Annuity Insurance Company in the stated principal amount
of $10,000,000 (collectively, the "Notes"). The proceeds from the Loan were used
to satisfy in full our obligations under our previous loan agreement with ING
and to pay related transaction costs and expenses.
The obligations under the Hartford Loan Agreement are secured by, among other
things, a first priority mortgage lien and security interest on certain
(a) improved real estate commonly known as 165-25 147th Avenue, Laurelton,
Queens, New York and 85-01 24th Avenue, East Elmhurst, Queens, New
York (collectively, the "Real Estate"), and (b) personal property and other
rights of the Borrower, all as more specifically described in that certain
Consolidated, Amended and Restated Mortgage, Security Agreement and Fixture
Filing dated as of July 1, 2010 (the "Mortgage") and that certain Assignment of
Leases and Rents dated as of July 1, 2010 among the Lenders and the Borrower,
and other ancillary documents. The outstanding principal balance of the Loan
shall bear interest at the fixed rate of 5.05% per annum. The Borrower is
required to make monthly payments of interest only in the amount of
$191,479. The principal is payable on the maturity date July 1, 2017.
Secured Revolving Credit Facility:
On August 26, 2011, we entered into a certain credit agreement ("the Credit
Agreement) with Manufacturers and Traders Trust Company ("M&T"). The Credit
Agreement provides for, among other things, a $10 million revolving credit
facility (the "Revolver"). The Revolver is available to us to be used for
Permitted Acquisitions (as defined in the Credit Agreement) and for general
working capital and other corporate purposes. The Credit Agreement requires that
we satisfy certain financial covenants, including: (i) minimum Net Worth,
(ii) Fixed Charge Coverage Ratio, (iii) Leverage Ratio and (iv) Liquidity all as
defined in the Credit Agreement, and other restrictions and covenants that are
usual and customary in agreements of this type. As a condition to M&T entering
into the Credit Agreement, we agreed to indemnify M&T against certain claims
pursuant to that certain Environmental Compliance and Indemnification Agreement,
dated as of August 26, 2011.
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The obligations under the Revolver are guaranteed by Farm Springs Road, LLC, our
wholly-owned subsidiary ("Farm Springs"). The guaranty of Farm Springs is
secured by a first priority mortgage lien and security interest on real property
owned by Farm Springs and located at 8 Farm Springs Road, Farmington,
Connecticut, as more specifically described in that certain Open-End Mortgage
Agreement, dated as of August 26, 2011, and that certain General Assignment of
Rents, dated as of August 26, 2011, by and between M&T and us. The maturity date
for the Revolver is August 26, 2014. Borrowings under the Revolver bear
interest, at the Borrower's option, at either: (i) the M&T's prime rate plus
2.0% or (ii) the London Interbank Offered Rate ("LIBOR") plus 3.5% which is
subject to a minimum rate of 4.0%.
As part of the Credit Agreement, we are obligated to comply with certain
financial covenants. As of June 30, 2012, we were in compliance with all
financial covenants discussed above.
As of June 30, 2012, we have not utilized the amount available to us under the
Credit Agreement.
Earnings and Profit Distribution:
As of June 30, 2012, cash of approximately $19.9 million and 3,775,400 shares of
our common stock have been distributed in connection with a one-time special
distribution of accumulated earnings and profits. The remaining payable balance
of approximately $0.1 million is included in other liabilities in the
accompanying condensed consolidated balance sheet at June 30, 2012.
Net Cash Flows:
Six Months Ended June 30, 2012 vs. Six Months Ended June 30, 2011
Operating Activities
Net cash provided by operating activities was approximately $0.6 million for the
six months ended June 30, 2012, and approximately $1.8 million for the six
months ended June 30, 2011. For the 2012 period, cash provided by operating
activities was primarily related to (i) a loss from continuing operations of
approximately $1.6 million (ii) a increase in accounts payable and other
liabilities of $0.3 million (iii) depreciation and amortization expense of $1.2
million (iv) a decrease in insurance reserves of $0.2 million (v) stock
compensation expense of approximately $0.2 million, and (vi) an increase in
other assets of $0.7 million. For the 2011 period, cash provided by operating
activities was primarily related to (i) income from continuing operations of
approximately $0.8 million (ii) depreciation and amortization expense of $1.2
million (iii) a decrease in insurance reserves of $0.1 million (iv) stock
compensation expense of approximately $0.2 million, and (vii) an increase in
other assets of $0.6 million.
Investing Activities
Net cash provided by investing activities was approximately $1.3 million for the
six months ended June 30, 2012 and approximately $0.2 million for the six months
ended June 30, 2011. For the 2012 period, cash used in investing activities
primarily related to proceeds from the sale of investments of approximately $1.3
million. For the 2011 period, cash provided by investing activities primarily
related to purchases of machinery and equipment of approximately $0.1 million,
proceeds from the sale of investments of approximately $0.3 million, and
restricted cash of approximately $0.1 million.
Financing Activities
Net cash used in financing activities was approximately $3.9 million and $3.5
million, respectively, for the six months ended June 30, 2012 and 2011, and was
related to the payment of the Company's quarterly and supplemental dividends.
Funds from Operations and Adjusted Funds from Operations
We consider Funds from Operations ("FFO") and Adjusted Funds from Operations
("AFFO"), each of which are non-GAAP measures, to be additional measures of an
equity REIT's operating performance. We report FFO in addition to our net (loss)
income and net cash provided by operating activities. Management has adopted the
definition suggested by the National Association of Real Estate Investment
Trusts ("NAREIT") and defines FFO to mean net (loss) income computed in
accordance with GAAP excluding gains or losses from sales of property, plus real
estate-related depreciation and amortization and after adjustments for
unconsolidated joint ventures.
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Management considers FFO a meaningful, additional measure of operating
performance because it primarily excludes the assumption that the value of our
real estate assets diminishes predictably over time and industry analysts have
accepted it as a performance measure. FFO is presented to assist investors in
analyzing our performance. It is helpful as it excludes various items included
in net income that are not indicative of our operating performance, such as
gains or losses from sales of property and depreciation and amortization.
However, FFO:
† does not represent cash flows from operating activities in accordance with
GAAP (which, unlike FFO, generally reflects all cash effects of transactions and
other events in the determination of net income); and
† should not be considered an alternative to net income as an indication of
our performance.
In determining AFFO we do not consider the operations of our taxable REIT
subsidiaries (outside maintenance, shelter cleaning, electrical, and parking
operations) as part of our real estate operations and therefore exclude the net
income or net loss when arriving at AFFO. This is the one difference between our
definition of AFFO and the NAREIT definition of FFO, which includes net income
or net loss from taxable REIT subsidiaries.
FFO and AFFO as defined by us may not be comparable to similarly titled items
reported by other real estate investment trusts due to possible differences in
the application of the NAREIT definition used by such REITs. The following table
provides a reconciliation of net (loss) income in accordance with GAAP to FFO
and AFFO for the three and six months ended June 30, 2012 and 2011 (in
thousands, except for per share data):
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Net (loss) income $ (684) $ 216 $ (1,631) $ 849
Plus: Real property depreciation 284 280 569 548
Amortization of intangible assets 204 204 409 409
Amortization of deferred leasing 37 26 69 54
commissions
Funds from operations (FFO) $ (159) $ 726 $ (584) $ 1,860
Loss from taxable-REIT Subsidiaries 659 924 1,472 1,744
Loss from discontinued operations 842 96 1,572 277
Discontinued operations - depreciation 6 97 13 193
Adjusted funds from operations (AFFO) $ 1,348$ 1,843
$ 2,473 $ 4,074
FFO per common share - basic and diluted $ (0.01) $ 0.05 $ (0.04) $ 0.14
AFFO per common share - basic and diluted $ 0.10 $ 0.14 $ 0.18 $ 0.30
Weighted average common shares 13,626,177 13,542,497 13,606,614 13,535,851
outstanding - basic and diluted
Acquisitions, Dispositions, and Investments
On July 25, 2011, our Board of Directors (the "Board") voted to divest
substantially all of our taxable REIT subsidiaries and on November 7, 2011 voted
to divest our parking garage operations. Following the divestiture, our plan is
to continue focusing on the growth and expansion of our real estate operations.
On December 27, 2011, MetroClean Express Corp. ("MetroClean") and ShelterClean
Inc. ("ShelterClean") entered into an asset purchase agreement with Triangle
Services, Inc. (the "Purchaser") for the sale of substantially all of the assets
and business of MetroClean and ShelterClean to the Purchaser. On January 12,
2012, the sale was completed. Additionally, on January 12, 2012, Shelter Clean
of Arizona, Inc. entered into a certain Bill of Sale and Assignment and
Assumption Agreement for the sale of certain assets and the business of Shelter
Clean of Arizona, Inc. to a wholly-owned subsidiary of the Purchaser.
On November 15, 2011, in accordance with our lease term, we gave notice to our
landlord of our intention to terminate our parking garage lease early, and on
February 1, 2012, we exited the parking business.
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Cash Payments for Financing
Payment of interest under the Hartford Loan Agreement and borrowings under the
Secured Revolver will consume a portion of our cash flow, reducing net income
and the resulting distributions to be made to our stockholders.
Trend in Financial Resources
We expect to receive additional rent payments over time due to scheduled
increases in rent set forth in the leases on our real properties. It should be
noted, however, that the additional rent payments are expected to result in an
approximately equal obligation to make additional distributions to stockholders,
and will therefore not result in a material increase in working capital.
Environmental Matters
Our real property has had activity regarding removal and replacement of
underground storage tanks. Upon removal of the old tanks, any soil found to be
unacceptable was thermally treated off site to burn off contaminants. Fresh soil
was brought in to replace earth which had been removed. There are still some
levels of contamination at the sites, and groundwater monitoring programs have
been put into place at certain locations. In July 2006, we entered into an
informal agreement with the New York State Department of Environmental
Conservation ("NYSDEC") whereby we have committed to a three-year remedial
investigation and feasibility study (the "Study") for all site locations.
In conjunction with this informal agreement, we have retained the services of an
environmental engineering firm to assess the cost of the Study. Our initial
engineering report had an estimated cost range with a low-end of the range of
approximately $1.4 million and a high-end range estimate of approximately $2.6
million, which provided a "worst case" scenario whereby we would be required to
perform full remediation on all site locations. While management believes that
the amount of the Study and related remediation is likely to fall within the
estimated cost range, no amount within that range can be determined to be the
better estimate. Therefore, management believes that recognition of the
low-range estimate is appropriate. While additional costs associated with
environmental remediation and monitoring are probable, it is not possible at
this time to reasonably estimate the amount of any future obligation until the
Study has been completed. In May 2008, we received an updated draft of the
remedial and investigation feasibility study and recorded an additional accrual
of approximately $0.8 million for additional remediation costs. As of June 30,
2012 and December 31, 2011, we have recorded a liability for remediation costs
of approximately $0.1 million and $0.2 million. Presently, we are not aware of
any claims or remediation requirements from any local, state or federal
government agencies. Each of the properties is in a commercial zone and is still
used as transit depots, including maintenance of vehicles.
Insurance Regulations
The provisions of the Insurance Law of the Cayman Islands require our insurance
operations to maintain a minimum net worth of $120,000. At December 31, 2011,
we were not in compliance with this minimum net worth requirement. A meeting
was held with the Cayman Islands Monetary Authority ("CIMA") on March 23, 2011,
at which time we informed CIMA of our intention to transfer the insurance
balances into a New York based liquidating trust and dissolve our Cayman Islands
based insurance operations once the transfer is complete. As of June 30, 2012,
we are in the process of transferring the insurance balances into a liquidating
trust.
Divestiture
In connection with the completion of the divestiture of our taxable REIT
subsidiaries, we may be subject to certain liabilities including union wages,
benefits and severance. On January 27, 2012, we received a notice from Local
Union No. 3's counsel asserting a severance liability of approximately $0.1
million for those employees terminated in connection with the divestiture. An
arbitration hearing was held May 2, 2012 in which the arbitrator ruled in favor
of Local Union No. 3 in the amount of approximately $0.1 million. We accrued the
full amount in liabilities of discontinued operations on the condensed
consolidated balance sheet as of June 30, 2012. On July 13, 2012, we paid the
full amount of the settlement. On February 16, 2012, we received a notice from
the Joint Industry Board of the Electrical Industry claiming a pension
withdrawal liability in the amount of $1.5 million in connection with the
divestiture. We are aggressively defending our position and have retained
counsel and an independent actuary to contest this matter. The costs associated
with these potential liabilities are not reasonably estimable at this time.
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Inflation
Low to moderate levels of inflation during the past several years have favorably
impacted our operations by stabilizing operating expenses. At the same time, low
inflation has had the indirect effect of reducing our ability to increase tenant
rents. However, our properties have tenants whose leases include expense
reimbursements and other provisions to minimize the effect of inflation.
Off Balance Sheet Arrangements
As part of our electrical contracting operations, we may put up performance
bonds to guarantee completion of services to be performed. As of June 30, 2012,
we have three performance bonds outstanding in the amount of $10.2 million.
