GTJ REIT, INC. – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Edgar Online, Inc.

 The following discussions contain forward-looking statements that involve numerous risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements as a result of these risks and uncertainties, including those set forth in this report under "Forward-Looking Statements" and under "Risk Factors." You should read the following discussion in conjunction with "Selected Financial Data" and our consolidated financial statements and notes appearing elsewhere in this filing. Past performance is not a guarantee of future results.  

Executive Summary

       We are a fully integrated, self-administered and self-managed REIT, engaged in the acquisition, ownership, and management of real properties. 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 portion that was used by one of our subsidiaries is available for lease. There is an additional property of negligible size which is not rentable. Additionally, in connection with the Tax Relief Extension Act of 1999 ("RMA"), we are permitted to participate in activities outside the normal operations of the REIT so long as these activities are conducted in entities which elect to be treated as taxable subsidiaries under the Internal Revenue Code, as amended (the "Code"), subject to certain limitations. In addition, we owned a group of outdoor maintenance businesses, an electrical contracting business, and a parking business at December 31, 2011. 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 our geographic area that will satisfy our primary investment objectives of providing our stockholders with stable cash flow, preservation of capital and growth of income and principal without taking undue risk. Because a significant factor in the valuation of income-producing property is the potential for future income, we anticipate that the majority of properties that we will acquire will have both the potential for growth in value and provide for cash distributions to stockholders.  

Critical Accounting Policies

         Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"). The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that could affect the reported amounts in our consolidated financial statements. Actual results could differ from these estimates. A summary of our significant accounting policies is presented in Note 1 of the "Notes to Consolidated Financial Statements" set forth in Item 8 hereof. Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements included in this report. Certain of the accounting policies used in the preparation of these consolidated financial statements are particularly important for an understanding of the financial position and results of operations presented in the historical consolidated financial statements included in this report and require the application of significant judgment by management and, as a result, are subject to a degree of uncertainty.  

Revenue Recognition-Real Estate Operations:

         We recognize revenue in accordance with ASC No. 840-20-25, which requires that revenue be recognized on a straight-line basis over the term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. In those instances in which we fund tenant improvements and the improvements are deemed to be owned by us, revenue recognition will commence when the improvements are substantially completed and possession or control of the space is turned over to the tenant. When we determine that the tenant allowances are lease incentives, we commence revenue recognition when possession or control of the space is turned over to the tenant for tenant work to begin. The properties are being leased to tenants under operating leases. Minimum rental income is recognized on a straight-line basis over the term of the lease.                                         31

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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-Outside Maintenance and Shelter Cleaning           Operations: 

Cleaning and maintenance revenue is recognized upon completion of the related service and is presented as part of discontinued operations in the consolidated statements of income.

Revenue Recognition-Electrical Contracting Operations:

       We recognize revenues from long-term construction contracts on the percentage-of-completion method in accordance with ASC No. 605-35. Percentage-of-completion is measured principally by the percentage of costs incurred to date for each contract to the estimated total costs for such contract at completion. Contract costs include all direct costs related to the performance and completion of the contracts. Estimated losses on the long term construction contracts are recognized in the period in which such losses are determined. Revenues are presented as part of discontinued operations in the consolidated statements of income.  

Revenue Recognition-Parking Garage Operations:

         Our parking facility charges a monthly or hourly fee to provide parking services. Revenue is recognized during the period services are performed. Revenues are presented as part of discontinued operations in the consolidated statements of income.  

Accounts Receivable:

         Accounts receivable consist of trade receivables recorded at the original invoice amounts, less an estimated allowance for uncollectible accounts. Trade credit is generally extended on a short-term basis; thus trade receivables generally do not bear interest. Trade receivables are periodically evaluated for collectability based on past credit histories with customers and their current financial conditions. Changes in the estimated collectability of trade receivables are recorded in the results of operations for the period in which the estimates are 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 replacement of real estate properties are capitalized. Additions, renovations and improvements that enhance and/or extend the useful life of a property are also capitalized. Expenditures for ordinary maintenance, repairs, and improvements, that do not materially prolong the normal useful life of an asset, are charged to operations as incurred.         Upon the acquisition of real estate properties, the fair values of the real estate purchased are allocated to the acquired tangible assets (consisting of land, buildings, and buildings improvements) and identified intangible assets and liabilities (consisting of above-market and below-market leases and in-place leases) in accordance with ASC No. 805. We utilize methods similar to those used by independent appraisers in estimating the fair value of acquired assets and liabilities. The fair value of the tangible assets of an acquired property considers the value of the property "as-if-vacant." The fair value reflects the depreciated replacement cost of the asset. In allocating purchase price to identified intangible assets and liabilities of an acquired property, the value of above-market and below-market leases are estimated based on the differences between (i) contractual rentals and the estimated market rents over the applicable lease term discounted back to the date of acquisition utilizing a discount rate adjusted for the credit risk associated with the respective tenants and (ii) the estimated cost of acquiring such leases giving effect to our history of providing tenant improvements and paying leasing commissions, offset by a vacancy period during which such space would be leased. The aggregate value of in-place leases is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property "as-if-vacant," determined as set forth above.                                         32

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

Asset Impairment:

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

Discontinued Operations:

The consolidated financial statements present the operations of our Outdoor Maintenance Operations (Outdoor Maintenance, Shelter Cleaning, Electrical Contracting, and Parking), and Paratransit Operations as discontinued operations in accordance with ASC 205-20-55 for all periods presented.

Fair Value Measurements:

         We determine fair value in accordance with ASC No. 820-10-05 for financial assets and liabilities. ASC No. 820-10-05 defines fair value, provides guidance for measuring fair value, and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements.         Fair value is defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments' complexity.                                         33

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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 No. 820-10-35 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:          º •         º Level 1-Inputs are unadjusted, quoted prices in active markets for           identical assets or liabilities at the measurement date.          º •         º 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.          º •         º Level 3-Inputs reflect management's best estimate of what market           participants would use in pricing the asset or liability at the           measurement date. These valuations are based on significant

unobservable inputs that require a considerable amount of judgment and

assumptions. Consideration is given to the risk inherent in the

valuation technique and the risk inherent in the inputs to the model.

Determining which category an asset or liability falls within the hierarchy requires significant judgment and we evaluate its hierarchy disclosures each quarter.

       At December 31, 2011, we measured certain financial assets at fair value on a recurring basis, including available-for-sale securities. In accordance with ASC No. 820-10-35, the fair value of our available-for-sale securities were approximated on current market quotes received from financial sources that trade such securities.            Income Taxes:         We are organized and conduct our operations to qualify as a REIT for federal income tax purposes. Accordingly, we will generally not be subject to federal income taxation on that portion of our income that qualifies as REIT taxable income, to the extent that we distribute at least 90% of our taxable income to our stockholders and comply with certain other requirements as defined under Section 856 through 860 of the Code.         We also participate in certain activities conducted by entities which elected to be treated as taxable subsidiaries under the Code. As such we are subject to federal, state, and local taxes on the income from these activities. We account for income taxes under the asset and liability method, as required by the provisions of ASC No. 740-10-30. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We provide a valuation allowance for deferred tax assets for which we do not consider realization of such assets to be more likely than not.  

Investment in Equity Affiliates:

         We invested in a joint venture that was formed to perform electrical contracting services. This investment is recorded under the equity method of accounting. We record our share of the net income and losses from the underlying operations and any other-than-temporary impairment on these investments as part of discontinued operations on the consolidated statements of income.  

Variable Interest Entities:

         We account for variable interest entities ("VIEs") in accordance with ASC No. 810-10-50. A VIE is defined as an entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that (i) has the power to control the activities that impact the VIE's economic performance and (ii) has the right to receive the majority of expected returns or the obligation to absorb the majority of expected losses that could be material to the VIE.         As of December 31, 2011, we have one investment which was made to a VIE entity with an aggregate carrying amount of $1.1 million. For the VIE identified, we are not the primary beneficiary and as such, the VIE is not consolidated in our financial statements. We account for this investment under the equity method.  

Stock-Based Compensation:

       We have a stock-based compensation plan, which is described in Note 10. We account for stock based compensation in accordance with ASC No. 718-30-30, which establishes accounting for stock-based awards exchanged for employee services. Under the provisions of ASC No. 718-10-35, share-based compensation cost is measured at the grant date, based on the fair value of the award, and the expense is recognized in earnings at the grant date (for the portion that vests immediately) or ratably over the respective vesting periods.                                         34

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  Table of Contents            Results of Operations 

The following results of operations pertain to GTJ REIT, Inc. for the years ended December 31, 2011, 2010, and 2009.

          Year Ended December 31, 2011 vs. Year Ended December 31, 2010

The following table sets forth our results of operations for the years indicated (in thousands):

                                                              Year Ended December 31,         Increase/(Decrease)                                                              2011             2010           Amount       Percent Revenues: Property rentals                                          $     13,960     $     13,469    $       491           4 % Other revenue                                                      318              794           (476 )       (60 )%  Total revenues                                                  14,278           14,263             15          nm  Operating expenses: General and administrative expenses                              6,913            3,979          2,934          74 % Equipment maintenance and garage expenses                          535              536             (1 )        nm Transportation expenses                                             23               61            (38 )       (62 )% Contract maintenance and station expenses                           28                1             27          nm Insurance and safety expenses                                      433              466            (33 )        (7 )% Operating and highway taxes                                        270              450           (180 )       (40 )% Other operating expenses                                           584              263            321         122 % Depreciation and amortization expense                            1,317            1,382            (65 )        (5 )%  Total operating expenses                                        10,103      

7,138 2,965 42 %

  Operating income                                                 4,175            7,125         (2,950 )       (41 )% Other income (expense): Interest income                                                     83              133            (50 )       (38 )% Interest expense                                                (2,546 )         (2,175 )         (371 )        17 % Change in insurance reserves                                      (165 )           (341 )          176         (52 )% Other                                                              (22 )            842           (864 )      (103 )%  Total other income (expense):                                   (2,650 )    

(1,541 ) (1,109 ) 72 %

  Income from continuing operations before provision for income taxes                                                     1,525            5,584         (4,059 )       (73 )% Provision for income taxes                                          54               45              9          20 %  Income from continuing operations, net of income taxes           1,471            5,539         (4,068 )       (73 )% Discontinued Operations: Loss from operations of discontinued operations, net of income taxes                                                 (3,087 )         (2,446 )         (641 )        26 %  Net (loss) income                                         $     (1,616 )   $      3,093    $    (4,709 )      (152 )%   

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Property Rental Revenues

         Property rentals revenue increased $0.5 million, or 4%, to $14.0 million for the year ended December 31, 2011 from $13.5 million for the year ended December 31, 2010. This increase was primarily due to an increase in rent from the Varsity lease extension in September 2010 as well as rental revenue from new tenants in the second quarter of 2011.                                         35

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Other Revenues

       Other revenues decreased $0.5 million, or 60%, to $0.3 million for the year ended December 31, 2011 from $0.8 million for the year ended December 31, 2010. This decrease is primarily attributable to the decrease in revenue from the termination of the Metropolitan Transit Authority Bus Company contract in July 2011.  Operating Expenses 

       Operating expenses increased $3.0 million, or 42%, to $10.1 million for the year ended December 31, 2011 from $7.1 million for the year ended December 31, 2010. This increase is primarily attributable to consulting and legal fees relating to the divestiture of our taxable REIT subsidiaries, an increase in stock compensation expense associated with the grant of restricted shares and options in 2011, and severance payments.  

Other Income (Expense)

         Other income (expense) increased $1.1 million, or 72%, to ($2.6) million for the year ended December 31, 2011 from ($1.5) million for the year ended December 31, 2010. This increase was primarily due to an increase in interest rates and related interest expense as a result of the refinancing of our mortgage debt on July 1, 2010.  

Provision For Income Taxes

The provision for income taxes represents federal, state, and local taxes on income of the taxable REIT subsidiaries.

Loss from Operations of Discontinued Operations, net of income taxes

       Loss from discontinued operations reflects the operating results, accruals, allowances, and asset write offs of our Outdoor Maintenance (Outdoor Maintenance, Shelter Cleaning, Electrical Contracting, and Parking Operations), and Paratransit businesses. The Outdoor Maintenance businesses were discontinued as of July 25, 2011. The Paratransit business was discontinued as of September 30, 2008, and had no operations for the years ended December 31, 2011December 31, 2011, we had a net loss of $1.6 million compared to net income of $3.1 million for the year ended December 31, 2010. The changes in net income were primarily due to the factors discussed above.                                         36

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  Table of Contents            Year Ended December 31, 2010 vs. Year Ended December 31, 2009

The following table sets forth our results of operations for the years indicated (in thousands):

                                                             Year Ended December 31,         Increase/(Decrease)                                                             2010             2009           Amount       Percent Revenues: Property rentals                                         $     13,469     $     13,190    $       279           2 % Other revenue                                                     794            9,783         (8,989 )       (92 )%  Total revenues                                                 14,263           22,973         (8,710 )       (38 )%  Operating expenses: General and administrative expenses                             3,979            6,043         (2,064 )       (34 )% Equipment maintenance and garage expenses                         536            1,040           (504 )       (48 )% Transportation expenses                                            61              915           (854 )       (93 )% Contract maintenance and station expenses                           1            3,393         (3,392 )      (100 )% Insurance and safety expenses                                     466            1,057           (591 )       (56 )% Operating and highway taxes                                       450              774           (324 )       (42 )% Other operating expenses                                          263              350            (87 )       (25 )% Depreciation and amortization expense                           1,382            1,349             33           2 %  Total operating expenses                                        7,138       

14,921 (7,783 ) (52 )%

  Operating income                                                7,125            8,052           (927 )       (12 )% Other income (expense): Interest income                                                   133              191            (58 )       (30 )% Interest expense                                               (2,175 )         (1,861 )         (314 )        17 % Change in insurance reserves                                     (341 )           (294 )          (47 )        16 % Litigation settlement                                               -           (2,183 )        2,183        (100 )% Other                                                             842       

(96 ) 938 nm

  Total other income (expense):                                  (1,541 )     

(4,243 ) 2,702 (64 )%

  Income from continuing operations before income taxes           5,584            3,809          1,775          47 % Provision for (benefit from) income taxes                          45       

(101 ) 146 (145 )%

  Income from continuing operations, net of income taxes                                                           5,539            3,910          1,629          42 % Discontinued Operation: (Loss) income from operations of discontinued operation, net of income taxes                                 (2,446 )            159         (2,605 )        nm  Net income                                               $      3,093     $      4,069    $      (976 )       (24 )%   

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Property Rental Revenues

         Property rentals revenue increased $0.3 million, or 2%, to $13.5 million for the year ended December 31, 2010 from $13.2 million for the year ended December 31, 2009. This increase was primarily due to an increase in rent from a lease extension on one of our properties, a full year of rental revenue from a new tenant as compared to eight months of rental revenue over the same period, and an increase in tenant reimbursements.                                         37

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Other Revenues

         Outside maintenance and cleaning operations revenues decreased $9.0 million, or 92%, to $0.8 for the year ended December 31, 2010 from $9.8 million for the year ended December 31, 2009. This decrease is primarily attributable to the decrease in revenue from the termination of the CEMUSA, Inc. contract on December 31, 2009.  

Operating Expenses

       Operating expenses decreased $7.8 million, or 52%, to $7.1 million for the year ended December 31, 2010 from $14.9 million for the year ended December 31, 2009. This decrease is primarily due to a decrease in the costs associated with the CEMUSA contract which was terminated on December 31, 2009 as well as a decrease in professional fees and insurance.  

Other Income (Expense)

         Other income (expense) decreased $2.7 million, or 64%, to $1.5 million for the year ended December 31, 2010 from $4.2 million for the year ended December 31, 2009. This decrease was primarily due to the settlement of the shareholder litigation matter in 2009 and a write off of a payable from a discontinued school bus operation, offset by an increase in our insurance reserves and an increase in interest expense as a result of the refinancing on July 1, 2010.  

Provision For (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 provision for income taxes for the 2010 period was $45,000. The income tax benefit of $101,000 for the year ended December 31, 2009 was a result of a change in our deferred tax liabilities.

(Loss) Income from Operations of Discontinued Operation, net of income taxes

       Loss from discontinued operations reflects the operating results, accruals, allowances, and asset write offs of our Outdoor Maintenance (Outdoor Maintenance, Shelter Cleaning, Electrical Contracting, and Parking Operations), and Paratransit businesses. The Outdoor Maintenance businesses were discontinued as of July 25, 2011. The Paratransit business was discontinued as of September 30, 2008, and had no operations for the years ended December 31, 2011 and 2010, respectively.  Net Income         For the year ended December 31, 2010, we had net income of $3.1 million compared to net income of $4.1 million for the year ended December 31, 2009. The changes in net income were primarily due to the factors discussed above.  

Financings

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.         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                                         38

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  described in that certain Open-End Mortgage Agreement, dated as of August 26, 2011, and that certain General Assignment of Rents, dated as of August 26, 2011, by and between M&T and us. The maturity date for the Revolver is August 26, 2014. Borrowings under the Revolver bear interest, at the Borrower's option, at either: (i) the M&T's prime rate plus 2.0% or (ii) the London Interbank Offered Rate ("LIBOR") plus 3.5% which is subject to a minimum rate of 4.0%.  

As part of the Credit agreement, we are obligated to comply with certain financial and nonfinancial covenants. As of December 31, 2011, we were in compliance with all financial and nonfinancial covenants.

Hartford Loan Agreement:

         On July 1, 2010, two of our indirect subsidiaries, 165-25 147th Avenue, LLC and 85-01 24th Avenue, LLC (collectively, the "Borrower") entered into a Fixed Rate Term Loan Agreement (the "Hartford Loan Agreement") with Hartford Life Insurance Company, Hartford Life and Accident Insurance Company and Hartford Life and Annuity Insurance Company (collectively, the "Lenders") pursuant to which the Lenders made a term loan to Borrower in the aggregate principal amount of $45,500,000 (the "Loan"). The Loan was evidenced by certain promissory notes, executed simultaneously therewith, payable to the order of (i) Hartford Life Insurance Company in the stated amount of $25,000,000; (b) Hartford Life and Accident Insurance Company in the stated principal amount of $10,500,000; and (c) Hartford Life and Annuity Insurance Company in the stated principal amount of $10,000,000 (collectively, the "Notes"). The proceeds from the Loan were used to satisfy in full our obligations under the previous ING Loan Agreement discussed below 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.  

ING Loan Agreement:

       On July 2, 2007, we entered into a three year loan agreement, dated as of June 30, 2007</chron> (the "ING Loan Agreement"), among certain of our direct and indirect subsidiaries, namely, Green Acquisition, Inc., Triboro Acquisition, Inc., Jamaica Acquisition, Inc., 165-25 147th Avenue, LLC, 49-19 Rockaway Beach Boulevard, LLC, 85-01 24th Avenue, LLC, 114-15 Guy Brewer Boulevard, LLC, (collectively, the "Borrowers"); and ING USA Annuity and Life Insurance Company; ING Life Insurance and Annuity Company; Reliastar Life Insurance Company; and Security Life of Denver Insurance Company (collectively, the "Lenders"). Pursuant to the terms of the ING Loan Agreement, the Lenders provided multiple loan facilities in the amounts and on the terms and conditions set forth in the ING Loan Agreement. The aggregate of all loan facilities under the ING Loan Agreement could not exceed $72.5 million. On July 2, 2007, the Borrowers made an initial term loan draw down of $17.0 million on the facility. In addition to the initial term loan, in October 2007, the Lenders collectively made a mortgage loan of $1.0 million and advanced an additional $2.0 million to the Borrowers. In February 2008, there was an additional draw under the facility of approximately $23.2 million. Interest on the loans was paid monthly. The interest rate on both the initial draw-down and mortgage loan was fixed at 6.59% per annum and the interest rate on the additional draw floated at a spread over one month LIBOR, 1.75% at June 30, 2010. In addition, there was a one-tenth of one percent non-use fee on the unused portion of the facility.         The loan facilities were collateralized by: (1) an Assignment of Leases and Rents on four bus depot properties (the "Depots") owned by certain of the Borrowers and leased to the City of New York, namely (a) 49-19 Rockaway Beach Boulevard; (b) 165-25 147th Avenue; (c) 85-01 24th Avenue and (d) 114-15 Guy Brewer Boulevard; (2) Pledge Agreements under which (i) GTJ REIT pledged its 100% stock ownership in each of: (a) Green Acquisition; (b) Triboro Acquisition, and (c) Jamaica Acquisition, (ii) Green Acquisition pledged its 100% membership interest in each of (a) 49-19 Rockaway Beach Boulevard, LLC and (b) 165-25 147th Avenue, LLC, (iii) Triboro Acquisition pledged its 100% membership interest                                         39

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  in 85-01 24th Avenue, LLC, and (d) Jamaica Acquisition pledged its 100% membership interest in 114-15 Guy Brewer Boulevard, LLC, and (3) a LIBOR Cap Security Agreement under which GTJ Rate Cap LLC, a wholly owned subsidiary of our Company, pledged its interest in an interest rate cap transaction evidenced by the Confirmation and ISDA Master Agreement, dated as of December 13, 2006, with SMBC Derivative Products Limited. We had assigned its interest in the interest rate cap to GTJ Rate Cap LLC prior to entering into the ING Loan Agreement. The $1.0 million mortgage loan was secured by a mortgage in the amount of $250,000 on each of the Depots collectively. On July 1, 2010, the outstanding balance of approximately $43.2 million under the ING Loan Agreement was repaid in full.  

Earnings and Profit Distribution

         As of December 31, 2011, cash of approximately $19.9 million and 3,775,400 shares of our common stock have been distributed to the holders in connection with a one-time special distribution of accumulated earnings and profits which was declared by our Board of Directors on August 7, 2007. The remaining payable balance of $0.1 million is included in other liabilities in the accompanying consolidated balance sheet at December 31, 2011. Cash payments were funded from borrowings under our credit facility which was repaid in full on July 1, 2010.  Contractual Obligations         We, through our subsidiaries, lease certain operating facilities and certain equipment under operating leases, expiring at various dates through fiscal 2015. In addition, we, through our subsidiaries, have a mortgage payable as described in detail above. The table below summarizes the principal balances of our obligations for indebtedness and lease obligations as of December 31, 2011 in accordance with their required payment terms (in thousands):                                                           Payments due by 

calendar year period

                                               Total        2012      2013-2014     2015-2016     Thereafter Contractual Obligations-Mortgage Payable    $   45,500     $    -     $       -     $       -    $    45,500 Operating Lease Obligations                        869        228           477           164              -                                              $   46,369     $  228     $     477     $     164    $    45,500    Net Cash Flows            Year Ended December 31, 2011 vs. Year Ended December 31, 2010            Operating Activities         Net cash provided by operating activities was $2.7 million for 2011 compared to net cash provided by operating activities of $5.1 million in 2010. For the 2011 period, cash provided by operating activities was primarily related to (i) income from continuing operations of approximately $1.6 million (ii) a decrease in accounts payable and other liabilities of $0.2 million (iii) an increase in accounts receivable of $0.1 million (iv) depreciation and amortization expense of $2.4 million (v) a decrease in insurance reserves of $0.3 million$0.3 million, (vii) an increase in other assets of $0.6 million, and (viii) an increase in deferred charges of $0.3 million. For the 2010 period, cash provided by operating activities was primarily related to (i) income from continuing operations of approximately $5.5 million (ii) a decrease in accounts payable and other liabilities of $1.2 million (iii) an increase in accounts receivable of $1.1 million (iv) depreciation and amortization expense of $2.4 million (v) a decrease in insurance reserves of $0.1 million (vi) stock compensation expense of approximately $0.4 million, (vii) a decrease in other assets of $1.3 million, and (viii) an increase in deferred charges of $1.7 million.  

Investing Activities

       Net cash provided by investing activities was $0.1 million for the year ended December 31, 2011 compared to cash provided by investing activities of $0.3 million for the year ended December 31, 2010. For the 2011 period, cash provided by investing activities primarily related to purchases of machinery, equipment, and investments of approximately $0.7 million, proceeds from the sale of investments of approximately $0.6 million, and restricted cash of approximately $0.2 million. For the 2010 period, cash provided by investing activities primarily related to purchases of machinery, equipment, and investments, of approximately $0.8 million, proceeds from the sale of investments of approximately $0.9 million, and restricted cash of approximately $0.2 million.                                         40 

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  Table of Contents            Financing Activities         Net cash used in financing activities was approximately $5.7 million for the year ended December 31, 2011 and was related to the payment of the Company's quarterly and supplemental dividends. Net cash used in financing activities for the year ended December 31, 2010 was approximately $3.3 million and was related to (i) the payment of the Company's quarterly and supplemental dividends of approximately $5.4 million, (ii) net proceeds from debt refinancing of approximately $2.3 million, and (iii) payments for earnings and profits of $0.2 million.  

Net Cash Flows

           Year Ended December 31, 2010 vs. Year Ended December 31, 2009            Operating Activities         Net cash provided by operating activities was $5.1 million for 2010 compared to net cash provided by operating activities of $5.4 million in 2009. For the 2010 period, cash provided by operating activities was primarily related to (i) income from continuing operations of approximately $5.5 million (ii) a decrease in accounts payable and other liabilities of $1.2 million (iii) an increase in accounts receivable of $1.1 million (iv) depreciation and amortization expense of $2.4 million (v) a decrease in insurance reserves of $0.1 million (vi) stock compensation expense of approximately $0.4 million, (vii) a decrease in other assets of $1.3 million, and (viii) an increase in deferred charges of $1.7 million. For the 2009 period, cash provided by operating activities was primarily related to (i) income from continuing operations of approximately $3.9 million (ii) a decrease in accounts payable and other liabilities of $1.2 million (iii) an increase in accounts receivable of $0.5 million (iv) depreciation and amortization expense of $2.6 million (v) an increase in insurance reserves of $0.2 million (vi) stock compensation expense of approximately $0.1 million, (vii) a decrease in other assets of $0.6 million, and (viii) an increase in deferred charges of $0.1 million.  

Investing Activities

       Net cash provided by investing activities was $0.3 million for the year ended December 31, 2010 compared to cash provided by investing activities of $1.3 million for the year ended December 31, 2009. For the 2010 period, cash provided by investing activities primarily related to purchases of machinery, equipment, and investments, of approximately $0.8 million, proceeds from the sale of investments of approximately $0.9 million, and restricted cash of approximately $0.2 million. For the 2009 period, cash provided by investing activities primarily related to purchases of machinery, equipment, and investments, of approximately $0.9 million, proceeds from the sale of investments of approximately $1.3 million, and restricted cash of approximately $0.9 million.  

Financing Activities

       Net cash used in financing activities for the year ended December 31, 2010 was approximately $3.3 million and was related to (i) the payment of the Company's quarterly and supplemental dividends of approximately $5.4 million, (ii) net proceeds from debt refinancing of approximately $2.3 million, and (iii) payments for earnings and profits of $0.2 million. Net cash used in financing activities for the year ended December 31, 2009 was approximately $4.4 million and was related to the payment of the Company's quarterly and supplemental dividends of approximately $4.3 million and payments for earnings and profits of $0.1 million.  

Funds from Operations

       We consider Funds from Operations ("FFO") and Adjusted Funds from Operations ("AFFO"), each of which are non-GAAP measures, to be additional measures of an equity REIT's operating performance. We report FFO in addition to our net income (loss) 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 income (loss) computed in accordance with GAAP excluding gains or losses from sales of property, plus real estate-related depreciation and amortization and after adjustments for unconsolidated joint ventures.         Management considers FFO a meaningful, additional measure of operating performance because it primarily excludes the assumption that the value of our real estate assets diminishes predictably over time and industry analysts have                                         41

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  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 (loss) that are not indicative of our operating performance, such as gains or losses from sales of property and depreciation and amortization.         However, FFO:          º •

º 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

º •

º should not be considered an alternative to net income as an indication

of our performance.

         In determining AFFO we do not consider the operations of our taxable REIT subsidiaries (outside maintenance, shelter cleaning, electrical contracting, and parking operations) as part of our real estate operations and therefore exclude the net income or net loss when arriving at AFFO. This is the one difference between our definition of AFFO and the NAREIT definition of FFO, which includes net income or net loss from taxable REIT subsidiaries.         FFO and AFFO as defined by us may not be comparable to similarly titled items reported by other real estate investment trusts due to possible differences in the application of the NAREIT definition used by such REITs. The table below provides a reconciliation of net income (loss) in accordance with GAAP to FFO and AFFO for each of the three years ended December 31, 2011 (amounts in thousands, except per share data).                                                        Year Ended December 31,                                                  2011           2010           2009 Net (loss) income                            $     (1,616 ) $      3,093   $      4,069 Plus: Real property depreciation                    1,231          1,298    

1,117

 Amortization of intangible assets                     818            818    

818

 Amortization of deferred leasing costs                113            104    

102

  Funds from operations (FFO)                           546          5,313    

6,106

 Loss from taxable-REIT subsidiaries                 3,483            900    

262

 Loss on sale of discontinued operations             2,546              -    

-

 Loss (income) from discontinued operations            172          2,109           (665 ) Discontinued operations-depreciation                  369            337    

506

Adjusted funds from operations (AFFO) $ 7,116 $ 8,659 $ 6,209

FFO per common share-basic and diluted $ 0.04 $ 0.39 $ 0.45

AFFO per common share-basic and diluted $ 0.52 $ 0.64 $ 0.46

  Weighted average common shares outstanding-basic and diluted                  13,561,661     13,503,120    

13,472,281

             Acquisitions, Dispositions, and Investments         On June 30, 2009, we through our wholly-owned subsidiaries, Shelter Electric Maintenance Corp. and Shelter Electric Acquisition Subsidiary LLC, (collectively, "Shelter Electric") entered into an asset purchase agreement (the "Asset Purchase Agreement") with Morales Electrical Contracting, Inc. ("Morales"), a Valley Stream, New York based electrical construction company, pursuant to which Morales sold certain of its assets and assigned certain contracts and employees to Shelter Electric for approximately $1.0 million. The acquisition was funded using our cash.         Pursuant to the Asset Purchase Agreement, Shelter Electric purchased these assets, free and clear of all liens and other encumbrances, in consideration for the payment of approximately $1.0 million, consisting primarily of the satisfaction and payment of certain liabilities of Morales. The $1.0 million purchase price was allocated to identifiable intangible assets with approximately $0.3 million allocated to the contracts assumed, $0.4 million allocated to the non-compete agreement, $0.2 million allocated to customer relationships and $0.1 million allocated to goodwill. Shelter Electric also provided a line of credit of up to approximately $0.6 million, through a Credit and Security Agreement to finance the completion of two                                         42

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  contracts. In addition, the former Vice President of Morales had been employed by Shelter Electric to manage and expand the electrical construction operations. The employment was subject to usual and customary conditions and restrictive covenants.         On March 29, 2010, we invested approximately four hundred dollars in exchange for a 40% interest in a joint venture with Morales, a Minority Women Owned Business Enterprise ("MWBE"). The joint venture was formed to secure MWBE contracts for the purpose of providing electrical construction services.         On August 13, 2010, we formed Shelter Parking Corp., a New York corporation, to operate and manage parking facilities in the New York tri-state area. On September 30, 2010, Shelter Parking Corp., through its wholly owned subsidiary, Shelter Parking Brevard, LLC, entered into a fifteen year lease agreement to operate a garage facility at 245 East 54th Street. At December 31, 2011, this was the only parking garage facility we operated.         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 and Shelter Clean Inc. entered into an asset purchase agreement with Triangle Services, Inc. (the "Purchaser") for the sale of substantially all of the assets and business of MetroClean and Shelter Clean Inc. 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 lease early, and on February 1, 2012, we exited the parking business.

Cash Payments for Financing

Payment of interest under the Hartford Loan Agreement and borrowings under the Secured Revolving Credit Facility will consume a portion of our cash flow, reducing net income and the resulting distributions to be made to our stockholders.

Trend in Financial Resources

         We expect to receive additional rent payments over time due to scheduled increases in rent set forth in the leases on our real properties. It should be noted, however, that the additional rent payments are expected to result in an approximately equal obligation to make additional distributions to stockholders, and will therefore not result in a material increase in working capital.  

Environmental Matters

         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 obligations. In May 2008, we received an                                         43

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  updated draft of the remedial and investigation feasibility study and recorded an additional accrual of approximately $0.8 million for additional remediation costs. As of December 31, 2011 and December 31, 2010, we have recorded a liability for remediation costs of approximately $0.2 million and $0.6 million, respectively. Presently, we are not aware of any claims or remediation requirements from any local, state, or federal government agencies. Each of the properties is in a commercial zone and is still used as transit depots, including maintenance of vehicles.  

Insurance Regulations

       The provisions of the Insurance Law of the Cayman Islands require our insurance operations to maintain a minimum net worth of $120,000. At December 31, 2011 and 2010, we were not in compliance with this minimum net worth requirement. A meeting was held with the Cayman Islands Monetary Authority ("CIMA") on March 23, 2011, at which time we informed CIMA of our intention to transfer the insurance balances into a New York based liquidating trust and dissolve our Cayman Islands based insurance operations once the transfer is complete. As of December 31, 2011, we are in the process of transferring the insurance balances in a liquidating trust.  

Divestiture:

         In connection with the completion of the divestiture, 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. We are not in agreement with the assertion of severance or the amount of the liability. We have elected to proceed with arbitration to settle the claim. 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.            Inflation 

       Low to moderate levels of inflation during the past several years have favorably impacted our operations by stabilizing operating expenses. At the same time, low inflation has had the indirect effect of reducing our ability to increase tenant rents. However, our properties have tenants whose leases include expense reimbursements and other provisions to minimize the effect of inflation.  

Off Balance Sheet Arrangements

         As part of our electrical contracting operations, we may put up performance bonds to guarantee completion of services to be performed. As of December 31, 2011, we have three performance bonds outstanding in the amount of $10.2 million. 

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