UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

For the fiscal year ended December 31, 2017

or

For the transition period from                      to                     

Commission file number: 333-136110

 

GTJ REIT, INC.

(Exact name of registrant as specified in its charter)

 

 

(516) 693-5500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(g) of the Act: NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ☐    

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

 

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

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked priced of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: N/A. There is no established public market for the registrant’s shares of common stock.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of March 22, 2018, there were 13,589,125 shares of common stock issued and outstanding.

 

 

 

 

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GTJ REIT, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2017

TABLE OF CONTENTS

 

 

 

 

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FORWARD-LOOKING STATEMENTS

Certain information included in this Annual Report contains or may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Historical results and trends should not be taken as indicative of future operations. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “prospects,” “seek,” or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to:

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Although we believe the assumptions underlying the forward-looking statements, and the forward-looking statements themselves, are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that these forward-looking statements will prove to be accurate. In light of the significant uncertainties inherent in these forward-looking statements, the inclusion of this information should not be regarded as a representation by us or any other person that our objectives and plans, which we consider to be reasonable, will be achieved. The forward-looking statements are made as of the date of this Annual Report, and we assume no obligation to update the forward-looking statements or to update the reasons actual results could differ from those projected in such forward-looking statements, unless otherwise required by law.

PART I

 

ITEM 1. BUSINESS

Overview

GTJ REIT, Inc. (the “Company,” “we,” “us,” “our,” or “GTJ REIT”) is a self-administered and self-managed real estate investment trust (“REIT”) which, as of the date of this report, owns and operates, through GTJ Realty, LP, a limited partnership owned and controlled by the Company (the “Operating Partnership”) a total of 49 commercial properties in New York, New Jersey, Connecticut, and Delaware. We focus primarily on the acquisition, ownership, management and operation of commercial real estate. We previously provided, through our taxable REIT subsidiaries, outdoor maintenance and shelter cleaning services, as well as electrical construction services. These operations have all been disposed.

The Company was incorporated on June 26, 2006 in Maryland. On March 29, 2007, the Company completed a merger transaction with Triboro Coach Corp., Jamaica Central Railways, Inc., and Green Bus Lines, Inc., (together collectively referred to as the “Bus Companies”). The effect of the merger transaction was to complete a reorganization (the “Reorganization”) of the ownership of the Bus Companies into GTJ REIT, with the former stockholders of the Bus Companies becoming stockholders in GTJ REIT. The Company then commenced operations as a fully integrated real estate company, and elected to be treated as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended (the “Code”), effective July 1, 2007.

On January 17, 2013, the Company closed on a transaction with Wu/Lighthouse Portfolio, LLC, in which the Operating Partnership acquired all outstanding ownership interests of a portfolio consisting of 25 commercial properties (the “Acquired Properties”) located in New York, New Jersey and Connecticut, in exchange for 33.29% of the outstanding limited partnership interest

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in the Operating Partnership. The outstanding limited partnership interest in the Operating Partnership exchanged for the Acquired Properties was increased to 33.78% due to post-closing adjustments, and to 34.35% due to the redemption of certain outstanding shares of GTJ REIT, Inc. common stock. The acquisition was recorded as a business combination and accordingly the purchase price was allocated to the assets acquired and liabilities assumed at fair value. As a result of this acquisition and the acquisition of six properties in 2014, seven in 2015, two properties in 2016, and two in 2017, the Company currently beneficially owns a 65.65% interest in a total of 49 properties consisting of approximately 5.9 million square feet of primarily industrial properties on approximately 400 acres of land in New York, New Jersey, Connecticut and Delaware.

Our 2018 contractual rental income includes, after giving effect to any abatements, concessions or adjustments, rental income that is payable in 2018 under leases existing at December 31, 2017. Contractual rental income excludes straight-line rent and amortization of intangibles.

2017 Highlights

See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures” for a reconciliation of AFFO and EBITDA to net income attributable to common stockholders.

Description of Business

We intend to further expand our real estate portfolio beyond our current portfolio of 49 properties. We seek to acquire commercial real estate at favorable prices, focusing on the industrial product sector. We believe that quality tenants seek well-managed properties that offer superior and dependable services, particularly in competitive markets. We believe that a critical success factor in property acquisition lies in possessing the ability and flexibility to move quickly when an opportunity presents itself.

We intend to acquire fee ownership interests, but may also enter into joint venture arrangements. We seek to maximize current cash flows and seek long-term increases in the value of our assets. Our policy is to acquire assets where we believe opportunities exist for appropriate risk adjusted investment returns. We seek to accomplish this by investing in quality properties in geographic markets that we believe to be attractive and offer the potential of current and future demand, renovating acquired properties as appropriate, maintaining and efficiently operating our properties, and establishing good relationships with our tenants and the local communities.

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We intend to invest primarily in quality commercial real estate, specifically targeting industrial properties since they:

To the extent it is in the best interests of our stockholders, we will seek to invest in a diversified portfolio of properties 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. We anticipate that the majority of properties we acquire will have both the potential for growth in value and the ability to provide current cash distributions to stockholders.

We intend to acquire properties with financing from mortgage or other debt or may acquire properties subject to existing indebtedness. We may also acquire properties, including a portfolio of properties, in exchange for an interest in our Operating Partnership (GTJ Realty, LP). We do not intend to incur aggregate indebtedness in excess of 75% of the gross fair value of our properties. Fair value, defined as the amount at which an investment could be exchanged in a current transaction with market participants, will be determined by management, using analytical data and other available information, including independent appraisals.

Decisions relating to the purchase or sale of properties are approved by our Board of Directors (the “Board of Directors” or “Board”). Our Board is responsible for monitoring the administrative procedures, investment operations, and performance of our Company to ensure our policies are carried out. Our Board oversees our investment policies to determine that our policies are in the best interests of our stockholders.

Our Business Objective

Our business objective is to maintain and increase, over time, the cash available for distribution to our stockholders and enhance stockholder value by:

Typical Property Attributes

The properties in our portfolio typically have the following attributes:

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Considerations Related to Potential Acquisitions

The following are some of the material considerations which we evaluate in relation to potential acquisitions:

We will not acquire any property until we obtain an environmental assessment for each property and are satisfied with the environmental status of the property.

We anticipate that the purchase price of properties we acquire will vary depending on the general interest rate environment and availability of credit in addition to tenant profile, value of leases in place, property condition, size and location. We are not specifically limited in the number or size of properties we may acquire. The number and mix of properties we may acquire will depend upon existing real estate and market conditions and other relevant circumstances. Our operating costs will vary based on the amount of debt we incur in connection with financing the acquisition. It is difficult to predict the actual number or timing of properties that we will acquire because the purchase price of properties vary widely and our investment in each will vary based on the amount and cost of debt financing we use.

Acquisition Strategies

We seek to acquire properties that have locations, demographics and other investment attributes that we believe to be attractive. We believe that long-term leases provide a predictable income stream over the term of the lease, making fluctuations in market rental rates and in real estate values less significant to achieving our overall investment objectives. Our preference is to acquire single-tenant properties that are subject to long-term net or ground leases that include periodic contractual rental increases or rent increases based on increases in the consumer price index. Periodic contractual rental increases provide reliable increases in future rent payments and rent increases based on the consumer price index provide protection against inflation. Historically, long-term leases have made it easier for us to obtain longer-term, fixed-rate mortgage financing, thereby moderating the interest rate risk. We may, however, acquire a property that is subject to a short-term lease when we believe the property represents a good opportunity for recurring income, potential repositioning and residual value. Although the acquisition of single-tenant properties subject to net and ground leases is the focus of our investment strategy, we will also consider investments in, among other things, properties that can be repositioned or redeveloped and multi-tenant properties.

Generally, we hold the properties we acquire for an extended period of time. Our investment criteria are intended to identify properties from which increased asset value and overall return can be realized from an extended period of ownership. Although our investment criteria favor an extended period of ownership, we will dispose of a property if we regard the disposition of the property as an opportunity to realize the overall value of the property sooner or to avoid future risks by achieving a determinable return from the property.

Our charter documents do not limit the number of properties in which we may invest, or the amount or percentage of our assets that may be invested in any specific property or property type. We will continue to form entities to acquire interests in real properties, either alone or with other investors, and we may acquire interests in joint ventures or other entities that own real property.

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Competitive Strengths

We compete for the purchase of commercial property with a variety of investors, including domestic and foreign entities, other REITs, insurance companies, and pension funds, as well as corporate and individual developers and owners of real estate, some of which are publicly traded. We believe that our investment strategy and operating model distinguish us from other owners, operators and acquirers of industrial real estate in a number of ways, including:

Our Policies With Respect to Borrowing

We presently anticipate that we will borrow funds, secured by the acquired property, as we purchase new properties. We may later refinance or increase mortgage indebtedness by obtaining additional loans secured by selected properties. Our Board reviews our aggregate borrowings to ensure that such borrowings are reasonable in relation to our assets.

We may also seek an acquisition facility to finance the purchase of additional properties, finance capital and/or tenant improvements or major repairs and maintenance and, if necessary, for working capital needs, or to meet our distribution requirements. We anticipate that aggregate borrowings, both secured and unsecured, will not exceed 75% of the gross fair value of our properties.

When incurring secured debt, we will seek to incur nonrecourse indebtedness, which means that the lenders’ rights in the event of our default generally will be limited to foreclosure on the property(ies) that secured the obligation. However, we may have to accept limited recourse financing, where we remain liable for any shortfall between the debt and the proceeds of sale of the mortgaged property. If we incur mortgage indebtedness, we will endeavor to obtain level payment financing, meaning that the amount of debt service payable would be substantially the same each year. However, we acknowledge that some mortgages are likely to provide for one large payment, and therefore, we may incur floating or adjustable rate financing depending on market conditions.

Sale or Other Disposition of Our Properties

Management, with approval from our Board, determines whether a particular property should be sold or otherwise disposed of after consideration of the relevant factors, including performance or projected performance of the property and market conditions, with a view toward achieving our principal investment objectives including maximizing capital appreciation and the effect on our obligations under existing agreements.

The determination of whether a particular property should be sold or otherwise disposed of will be made after consideration of the relevant factors, including prevailing economic, market, property and tenant conditions, with a view to achieving maximum capital appreciation. We cannot assure you that this objective will always be realized.

If we sell any of the 25 properties we acquired in the January 2013 transaction prior to January 2020, we may be required to pay the former Wu/Lighthouse partners certain monies as set forth in the Tax Protection Agreement.

Changes in Our Investment Objectives

Subject to the limitations in our charter, our bylaws, and the Maryland General Corporation Law, our business and policies will be controlled by our Board. Our Board has the right to establish policies concerning investments and the right, power, and obligation to monitor our procedures, investment operations, and performance of our Company. Thus, stockholders must be aware that the Board, acting consistently with our organizational documents, applicable law, and their fiduciary obligations, may elect to modify our objectives and policies from time to time.

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Discontinued Outdoor Maintenance Operations

We, through our wholly owned subsidiary, Shelter Express Corp., operated a group of outdoor maintenance, shelter cleaning, and electrical contracting businesses, as well as a parking garage facility. During 2011, our Board voted to divest these operations.

Employees

As of December 31, 2017, we had a total of 13 employees, 12 of whom are full time, who were employed at GTJ REIT, Inc. We consider our relations with our employees to be good.

Our Compliance with Governmental Regulations

Many laws and government regulations are applicable to our Company and changes in these laws and regulations, or their interpretation by agencies and the courts, occur frequently.

Costs of Compliance with the Americans with Disabilities Act

Under the Americans with Disabilities Act of 1990, or ADA, all public accommodations must meet federal requirements for access and use by disabled persons. Although we believe that we are in substantial compliance with present requirements of the ADA, none of our properties have been audited, nor have investigations of our properties been conducted to determine compliance. Therefore, we may incur additional costs in connection with the ADA. There are also federal, state, and local laws which also may require modifications to our properties or restrict our ability to renovate our properties. We cannot predict the cost of compliance with the ADA or other legislation. If we incur substantial costs to comply with the ADA or any other legislation, our financial condition, results of operations, cash flow, and ability to satisfy our debt service obligations and pay dividends and distributions could be adversely affected.

Costs of Government Environmental Regulation and Private Litigation

Environmental laws and regulations hold us liable for the costs of removal or remediation of certain hazardous or toxic substances which may be on our properties. These laws could impose liability without regard to whether we are responsible for the presence or release of the hazardous materials. Government investigations and remediation actions may have substantial costs and the presence of hazardous substances on a property could result in personal injury or similar claims by private plaintiffs. Various laws also impose liability on persons who arrange for the disposal or treatment of hazardous or toxic substances for the cost of removal or remediation of hazardous substances at the disposal or treatment facility. These laws often impose liability whether or not the person arranging for the disposal ever owned or operated the disposal facility. If we incur substantial costs to comply with any governmental environmental laws and regulations or the results of private litigation, our financial condition, results of operations, cash flow, and ability to satisfy our debt obligations and pay dividends and distributions could be adversely affected.

Use of Hazardous Substances by Some of Our Tenants

Some of our tenants may handle hazardous or toxic substances and wastes on our properties as part of their routine operations. Environmental laws and regulations subject these tenants, and potentially us, to liability resulting from such activities. We require the tenants, in their respective leases, to comply with these environmental laws and regulations and to indemnify us for any related liabilities. We are unaware of any material noncompliance, liability, or claim relating to hazardous or toxic substances or petroleum products in connection with any of our properties. If we incur substantial costs in order to comply with any environmental laws and regulations, our financial condition, results of operations, cash flow, and ability to satisfy our debt obligations and pay dividends and distributions could be adversely affected.  

Other Federal, State, and Local Regulations

Our properties are subject to various federal, state, and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these various requirements, we may incur governmental fines or private damage awards. Although we believe that our properties are currently in material compliance with all of these regulatory requirements, we do not know whether existing requirements will change or whether future requirements will require us to make significant unanticipated expenditures that will adversely affect our ability to make liquidating distributions to our stockholders. We believe, based in part on engineering reports which we generally obtain at the time we acquire the properties, that all of our properties comply in all material respects with current regulations. However, if we were required to make significant expenditures under applicable regulations, our

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financial condition, results of operations, cash flow, and ability to satisfy our debt service obligations and pay dividends and distributions could be adversely affected.

Our Corporate Information

Our principal executive offices are located at 60 Hempstead Avenue, Suite 718, West Hempstead, New York 11552. Our telephone number is (516) 693-5500. Our website is www.gtjreit.com. The information found on, or otherwise accessible through, our website is not incorporated into, and does not form a part of, this report or any other report or document we file with or furnish to the Securities and Exchange Commission (“SEC”).

How to Obtain Our SEC Filings

All reports we file with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials we file with the SEC at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the public reference room can be obtained by calling the SEC at 1-800-SEC-0330. Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to any of those reports that we file with the SEC are available free of charge as soon as reasonably practicable through our website at www.gtjreit.com. The information found on, or otherwise accessible through, our website is not incorporated into, and does not form a part of, this report or any other report or document we file with or furnish to the SEC.

 

 

ITEM 1A. RISK FACTORS

You should carefully consider the specific factors listed below, together with the cautionary statement under the caption “Forward Looking-Statements” and the other information included in this Annual Report on Form 10-K. If any of the following significant risk factors set forth below actually occur, our business, financial condition, or results of operation could be materially adversely affected and the value of our common stock could decline and potentially affect our ability to pay dividends and distributions.

Risks Related to our Organization and Structure

Our failure to continue to qualify as a REIT would subject us to corporate level income tax, which would materially impact funds available for distribution.

We intend to continue to operate in a manner so as to qualify as a REIT. Qualifying as a REIT requires us to meet several tests regarding the nature of our assets and income on an ongoing basis. A number of the tests established to qualify as a REIT for tax purposes are fact specific. Therefore, while we intend to continue to qualify as a REIT, it may not be possible at this time to assess our ability to satisfy these various tests on a continuing basis. Additionally, we cannot guarantee that we will remain qualified as a REIT in the future.

If we fail to qualify as a REIT in any year, we would be required to pay federal income tax on our net income. Our payment of income tax would substantially decrease the amount of cash available to be distributed to our stockholders. In addition, we would no longer be required to distribute substantially all of our taxable income to our stockholders. Unless our failure to qualify as a REIT is excused under relief provisions of the federal income tax laws, we could not re-elect REIT status until the fifth calendar year following the year in which we failed to qualify.

We depend on key personnel and the loss of their full service could adversely affect us.

Our success depends to a significant degree upon the continued contributions of certain key personnel including, but not limited to, our management team, whose continued service is not guaranteed, and each of whom would be difficult to replace. If any of our key personnel were to cease employment with us, our operating results could suffer. Our ability to retain our management group or to attract suitable replacements should any members of the management group leave is dependent on the competitive nature of the employment market. The loss of services from key members of the management group or a limitation in their availability could adversely impact our financial condition and cash flows. Further, such a loss could be negatively perceived in the marketplace.

Our growth depends on external sources of capital which are outside of our control, which may affect our ability to seize strategic opportunities, satisfy debt obligations and make distributions to our stockholders.

In order to maintain our qualification as a REIT, we are generally required under the Code to distribute annually at least 90% of our net taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In

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addition, we will be subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our net taxable income, including any net capital gains. Because of these distribution requirements, we may not be able to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, we may rely on third‑party sources to fund our capital needs. We may not be able to obtain financing on favorable terms or at all. Any additional debt we incur will increase our leverage. Our access to third‑party sources of capital depends, in part, on general market conditions, the market’s perception of our growth potential, our current debt levels, our current and expected future earnings, our cash flow and cash dividends, among other factors. If we cannot obtain capital from third‑party sources, we may not be able to acquire properties when strategic opportunities exist, meet the capital and operating needs of our existing properties or satisfy our debt service obligations. Further, in order to meet the REIT distribution requirements and maintain our REIT status and to avoid the payment of income and excise taxes, we may need to borrow funds on a short‑term basis even if the then prevailing market conditions are not favorable for these borrowings. These short‑term borrowing needs could result from differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes or the effect of non‑deductible capital expenditures, the creation of reserves, certain restrictions on distributions under loan documents or required debt or amortization payments. To the extent that capital is not available to acquire properties, profits may not be realized or their realization may be delayed, which could result in an earnings stream that is less predictable than some of our competitors and result in us not meeting our projected earnings and distributable cash flow levels in a particular reporting period. Failure to meet our projected earnings and distributable cash flow levels in a particular reporting period could have an adverse effect on our financial condition.

To maintain our REIT status, we may be forced to forego otherwise attractive opportunities, which may delay or hinder our ability to meet our investment objectives and reduce our stockholders’ overall return.

To continue to qualify as a REIT, we must satisfy certain tests on an ongoing basis concerning, among other things, the sources of our income, nature of our assets and the amounts we distribute to our stockholders. We may be required to make distributions to stockholders at times when it would be more advantageous to reinvest cash in our business or when we do not have funds readily available for distribution. Compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits and the value of our stockholders’ investment.

Risks Related to Our Business and Properties

We depend upon our tenants to pay rent in a timely manner, and their inability or unwillingness to pay rent could impact our ability to pay our indebtedness, leading to possible defaults, and reduce cash available for distribution to our stockholders.

Our real property, particularly those we may purchase in the future, will be subject to varying degrees of risk that generally arise from such ownership. The underlying value of our properties and the ability to make distributions to our stockholders depend upon the ability of the tenants of our properties to generate enough income to pay their rents in a timely manner. Their inability or unwillingness to do so may be impacted by the profitability of our tenants’ businesses or other constraints on their finances. Changes beyond our control may adversely affect our tenants’ ability to make lease payments and consequently would substantially reduce our income from operations and our ability to meet our debt service requirements and make distributions to our stockholders.

A default by a tenant, the failure of a tenant’s guarantor to fulfill its obligations, or other premature termination of a lease could, depending upon the size of the leased premises and our ability to successfully find a substitute tenant, have a materially adverse effect on our revenues, the value of our common stock or our cash available for distribution to our stockholders.

If we are unable to find tenants for our properties, particularly those we may purchase in the future, or find replacement tenants when leases expire and are not renewed by the tenants, our revenues, cash available for distribution to our stockholders and our ability to serve our debt obligations will be reduced.

Approximately 37% of our 2018 contractual rental income and 35% of our 2017 contractual rental income is derived from leases with the City of New York for five locations, three leases with Federal Express, and one lease with Avis Rent-A-Car Systems, Inc. A tenant default or financial distress could significantly reduce our revenues.

Virtually all of our leases with the City of New York, Federal Express and Avis Rent-A-Car Systems, Inc. are triple net leases and provide for escalations. Any disruption or delay in these tenants’ ability to perform under the leases could cause interruptions in the receipt of, or loss of, a significant amount of rental revenues and could result in requiring us to pay operating expenses currently paid by the tenants which could substantially reduce our income from operations and our ability to meet our debt service requirements and make distributions to our stockholders.

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We may not be able to diversify our real property portfolio due to the number and size of our competitors.

Competition may adversely affect acquisition of properties and leasing operations. We compete for the purchase of commercial property with a variety of investors, including domestic and foreign entities, other REITs, insurance companies and pension funds, as well as corporate and individual developers and owners of real estate, some of which are publicly traded. Many of our competitors have substantially greater financial resources than ours. In addition, our competitors may be willing to accept lower returns on their investments. If our competitors prevent us from buying the properties that we have targeted for acquisition, we may not be able to meet our property acquisition goals. We may also incur costs on unsuccessful acquisitions that we will not be able to recover.

All of our properties are located in New York, New Jersey, Connecticut and Delaware making us vulnerable to changes in economic, regulatory or other conditions in the Northeast that could have a material adverse effect on our results of operations.

All of our properties are located in New York, New Jersey, Connecticut and Delaware. This geographic concentration exposes us to greater risks than if we owned properties in multiple geographic regions. General economic conditions in the Northeast may significantly affect the occupancy and rental rates of our properties. Further, the economic condition of the region may also depend on a few industries and, therefore, an economic downturn in one of these industry sectors may adversely affect our performance. In addition to economic conditions, we may also be subject to changes in the region’s regulatory environment (such as increases in real estate and other taxes, costs of complying with government regulations or increased regulation and other factors) or other adverse conditions or events (such as natural disasters). Thus, adverse developments and/or conditions in the Northeast region could reduce demand for space, impact the credit-worthiness of our tenants or force our tenants to curtail operations, which could impair their ability to meet their rent obligations to us and, accordingly, could have a material adverse effect on our results of operations, and our ability to meet our debt service requirements and make distributions to our stockholders.

Lack of liquidity of real estate could make it difficult for us to sell properties within our desired time frame.

Our business is subject to risks normally associated with investment primarily in real estate. Real estate investments are relatively illiquid. Our ability to vary our portfolio in response to changes in economic and other conditions will be limited. We cannot assure you that we will be able to dispose of a property when we want or need to. Consequently, the sale price for any property we may purchase in the future may not recoup or exceed the amount of our investment.

Our revenues and the value of our portfolio are affected by a number of factors that affect investments in leased real estate generally.

We are subject to the general risks of investing in leased real estate. These include the non-performance of lease obligations by tenants, leasehold improvements that will be costly or difficult to remove or certain upgrades that may be needed should it become necessary to re-rent the leased space for other uses, rights of termination of leases due to events of casualty or condemnation affecting the leased space or the property or due to interruption of the tenant’s quiet enjoyment of the leased premises, and obligations of a landlord to restore the leased premises or the property following events of casualty or condemnation. The occurrence of any of these events could adversely impact our results of operations, liquidity and financial condition.

In addition, if our competitors offer space at rental rates below our current rates or the market rates, we may lose current or potential tenants to other properties in our markets. Additionally, we may need to reduce rental rates below our current rates in order to retain tenants upon expiration of their leases or to attract new tenants. As a result, our results of operations, cash flow and distributions to our stockholders may be adversely affected.

A number of risks to which our properties may be exposed may not be covered by insurance, which could result in losses which are uninsured.

We could suffer a loss due to the cost to repair any damage to properties that are not insured or are underinsured. There are types of losses, generally of a catastrophic nature, such as losses due to terrorism, wars, earthquakes, or acts of God that are either uninsurable or not economically insurable. Generally, we will not obtain insurance for hurricanes, earthquakes, floods, or other acts of God unless required by a lender or we determine that such insurance is necessary and may be obtained on a cost-effective basis. If such a catastrophic event were to occur, or cause the destruction of one or more of our properties, we could lose both our invested capital and anticipated profits from such property.

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We may be unable to renew our current leases, lease vacant space, including vacant space resulting from tenant defaults, or re-lease space as our current leases expire.

We cannot assure you that leases at our properties will be renewed or that such properties will be re-leased at favorable rental rates. If the rental rates for our properties decrease, our tenants do not renew their leases or we do not re-lease a significant portion of our available space, including vacant space resulting from tenant defaults, and space for which leases are scheduled to expire, our financial condition, results of operations, cash flows, cash available for distribution to stockholders and our ability to satisfy our debt service obligations could be materially adversely affected. In addition, if we are unable to renew leases or re-lease a property, the resale value of that property could be diminished because the market value of a particular property will depend in part upon the value of the leases of such property.

Declining real estate valuations and impairment charges could adversely affect our earnings and financial condition.

We review the carrying value of our properties when circumstances, such as adverse market conditions indicate potential impairment may exist. We base our review on an estimate of the future cash flows (excluding interest charges) expected to result from the real estate investment’s use and eventual disposition. We consider factors such as future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If our evaluation indicates that we may be unable to recover the carrying value of a real estate investment, an impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property. These losses would have a direct impact on our net income because recording an impairment loss results in an immediate negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. A worsening real estate market may cause us to reevaluate the assumptions used in our impairment analysis. Impairment charges could adversely affect our financial condition.

Stockholders may not receive any distributions from the sale of one of our properties, or not receive such distributions in a timely manner, because we may have to provide financing to the purchaser of such property, resulting in an inability or delay of distributions to stockholders.

When appropriate, we may structure the sale of a real property as a “like-kind exchange” under the federal income tax laws so that we may acquire qualifying like-kind replacement property meeting our investment objectives without recognizing taxable gain on the sale. Furthermore, we may reinvest in additional properties proceeds from the sale, financing, refinancing, or other disposition or, secondarily, to use such proceeds for capital improvements or maintenance and repair of existing properties or to increase our reserves for such purposes. The objective of reinvesting such portion of the sale, financing, and refinancing proceeds is to increase the total value of real estate assets that we own, and the future cash flow derived from such assets to pay distributions to our stockholders.

Despite this policy, our Board of Directors may distribute to our stockholders all or a portion of the proceeds from the sale, financing, refinancing, or other disposition of a property. In determining whether any of such proceeds should be distributed to our stockholders, our Board of Directors considers, among other factors, the desirability of properties available for purchase, real estate market conditions, and compliance with the REIT distribution requirements.

In connection with a sale of a property, our preference will be to obtain an all-cash sale price. However, we may accept a purchase money obligation secured by a mortgage on the property as partial payment. The terms of payment upon sale will be affected by the salient economic and market conditions. To the extent we receive notes, securities, or other property instead of cash from sales, such proceeds, other than any interest payable on such proceeds, will not be included in net sale proceeds available for distribution until and to the extent the notes or other property are actually paid, sold, refinanced, or otherwise disposed of. Thus, the distribution of the proceeds of a sale to stockholders may need to be paid from other sources.  

 

Disruptions in the financial markets could affect our ability to obtain financing and may negatively impact our liquidity, financial condition and operating results.

 

From time to time, the capital and credit markets in the United States and other countries experience significant price volatility, dislocations and liquidity disruptions, which can cause the market prices of many securities and the spreads on prospective debt financings to fluctuate substantially. These circumstances can materially impact liquidity in the financial markets, making terms for certain financings less attractive, and in some cases, result in the unavailability of financing. A significant amount of our existing indebtedness was issued through capital markets transactions. We anticipate that the capital markets could be a source of refinancing of our existing indebtedness in the future. This source of refinancing may not be available if volatility in or disruption of the capital markets occurs. If our ability to issue additional debt or equity securities or to borrow money were to be impaired by volatility in or disruption of the capital markets, it could have a material adverse effect on our liquidity and financial condition.

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Many real estate costs are fixed, even if income from properties decreases.

 

Our financial results depend on leasing space to tenants on terms favorable to us. Our income and funds available for distribution to our stockholders will decrease if a significant number of our tenants cannot pay their rent or we are unable to lease properties on favorable terms. In addition, if a tenant does not pay its rent, we may not be able to enforce our rights as landlord without delays and we may incur substantial legal costs. Costs associated with real property, such as real estate taxes and maintenance costs, generally are not reduced when circumstances cause a reduction in income from the property.

 

We may be unable to acquire properties on advantageous terms or acquisitions may not perform as we expect.

 

The acquisition of properties entails various risks, including risks that our investments may not perform as expected and that our cost estimates for bringing an acquired property up to market standards may prove inaccurate. Further, we face significant competition for attractive investment opportunities from other well-capitalized real estate investors, including publicly-traded REITs and private investors. This competition increases as investments in real estate become attractive relative to other forms of investment. As a result of competition, we may be unable to acquire additional properties and purchase prices may increase. Any of the above risks could adversely affect our financial condition, results of operations, cash flow and ability to make distributions to our stockholders and the value of our securities.

 

We may be unable to complete development and re-development projects on advantageous terms.

 

As part of our business, we develop new properties and re-develop existing properties as conditions warrant. This part of our business involves significant risks, including the following:

 

 

To the extent these risks result in increased debt service expense, construction costs and delays in budgeted leasing, they could adversely affect our financial condition, results of operations, cash flow and ability to make distributions to our stockholders.

 

Debt financing, the degree of leverage and rising interest rates could reduce our cash flow.

 

We use debt to allow us to make more investments than we otherwise could. Our use of leverage presents an additional element of risk in the event that the cash flow from our properties is insufficient to meet both debt payment obligations and the distribution requirements of the REIT provisions of the Code. In addition, rising interest rates would reduce our cash flow by increasing the amount of interest due on our floating rate debt and on our fixed rate debt as it matures and is refinanced.

Our performance and our ability to make distributions to our stockholders and the value of our securities are subject to general economic conditions and risks associated with our real estate assets.

The investment returns available from equity investments in real estate depend on the amount of income earned and capital appreciation generated by the properties, as well as the expenses incurred in connection with the properties. If our properties do not generate income sufficient to meet operating expenses, including debt service and capital expenditures, then our ability to pay distributions to our stockholders could be adversely affected. In addition, there are significant expenditures associated with an investment in real estate (such as mortgage payments, real estate taxes and maintenance costs) that generally do not decline when circumstances reduce the income from the property. Income from and the value of our properties may be adversely affected by:

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In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or public perception that any of these events may occur, could result in a general decrease in rents or an increased occurrence of defaults under existing leases, which would adversely affect our financial condition and results of operations. For these and other reasons, we cannot assure you that we will be profitable or that we will realize growth in the value of our real estate properties.

 

We may become subject to litigation, which could have a material and adverse effect on our financial condition, results of operations and cash flow.

 

We may become subject to litigation, including claims relating to our operations, offerings, and otherwise in the ordinary course of business. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. Resolution of these types of matters could adversely impact our financial condition, results of operations and cash flow. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flows, expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and directors.

 

Terrorist attacks and other acts of violence or war may affect the value of the Company's common stock, the industry in which we conduct our operations and our profitability.

 

Terrorist attacks may harm our results of operations and financial condition. We cannot assure you that there will not be terrorist attacks in the localities in which we conduct business. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the worldwide financial markets and economy. These attacks or armed conflicts may adversely impact our operations or financial condition. In addition, losses resulting from these types of events may be uninsurable.

 

We face risks relating to cybersecurity attacks that could cause loss of confidential information and other business disruptions.

 

We rely extensively on computer systems to manage our business, and our business is at risk from and may be impacted by cybersecurity attacks. These could include attempts to gain unauthorized access to our data and computer systems. Attacks can be prepared and conducted by individuals as well as by sophisticated groups/organizations. We employ a number of measures to prevent, detect and mitigate these threats, which include password protection, frequent password change events, firewall detection systems, frequent backups, a redundant data system for core applications and annual penetration testing; however, there is no guarantee such efforts will be successful in preventing a cybersecurity attack. A cybersecurity attack could compromise the confidential information of our employees, tenants and vendors. A successful attack could have a material adverse effect on our business, financial condition and results of operations.

 

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Political and economic uncertainty could have an adverse effect on our business.

 

We cannot predict how current political and economic uncertainty, including uncertainty related to taxation, will affect our critical tenants, joint venture partners, lenders, financial institutions and general economic conditions, including the health and confidence of the consumer and the volatility of the stock market.

 

Political and economic uncertainty poses a risk to us in that it may cause consumers to postpone discretionary spending in response to tighter credit, reduced consumer confidence and other macroeconomic factors affecting consumer spending behavior, resulting in a downturn in the business of our tenants. In the event current political and economic uncertainty results in financial turmoil affecting the banking system and financial markets generally or significant financial service institution failures, there could be a new or incremental tightening in the credit markets, low liquidity, and extreme volatility in fixed income, credit, currency and equity markets. Each of these could have an adverse effect on our business, financial condition and operating results.

Actions by our competitors may decrease or prevent increases in the occupancy and rental rates of our properties.

We compete with other owners, operators and developers of real estate, some of which own properties similar to ours in the same markets and submarkets in which our properties are located. If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose potential tenants, and we may be pressured to reduce our rental rates below those we currently charge in order to retain tenants when our tenants’ leases expire. As a result, our financial condition, cash flows, cash available for distribution, value of our securities and ability to satisfy our debt service obligations could be materially adversely affected.

A property that incurs a vacancy could be difficult to sell or re‑lease, which could adversely affect our results of operations, cash flows, cash available for distribution, and the value of our securities.

A property may incur a vacancy either by the continued default of a tenant under its lease or the expiration of one of our leases. In addition, certain of the properties we acquire may have some level of vacancy at the time of closing. Certain of our properties may be specifically suited to the particular needs of a tenant. We may have difficulty obtaining a new tenant for any vacant space we have in our properties. If the vacancy continues for a long period of time, we may suffer reduced revenue resulting in less cash available to be distributed to stockholders. In addition, the resale value of a property could be diminished because the market value of a particular property will depend principally upon the value of the leases of such property.

We may not have funding for future tenant improvements, which could adversely affect our results of operations, cash flows, cash available for distribution, and the value of our securities.

When a tenant at one of our properties does not renew its lease or otherwise vacates its space in one of our buildings, it is likely that, in order to attract one or more new tenants, we will be required to expend funds to construct new tenant improvements in the vacated space. Except with respect to our current reserves for capital expenditures, tenant improvements and leasing commissions, we cannot assure you that we will have adequate sources of funding available to us for such purposes in the future.

Bankruptcy laws will limit our remedies if a tenant becomes bankrupt and rejects its lease, resulting in an inability to collect balances due on our leases.

If a tenant becomes bankrupt or insolvent, that could diminish the income we receive from that tenant’s leases. Our tenants may experience downturns in their operating results due to adverse changes to their business or economic conditions, and those tenants that are highly leveraged may have a higher possibility of filing for bankruptcy or insolvency. We may not be able to evict a tenant solely because of its bankruptcy. On the other hand, a bankruptcy court might authorize the tenant to terminate its leases with us. If that happens, our claim against the bankrupt tenant for unpaid future rent would be an unsecured prepetition claim subject to statutory limitations, and therefore such amounts received in bankruptcy are likely to be substantially less than the remaining rent we otherwise were owed under the leases. In addition, any claim we have for unpaid past rent could be substantially less than the amount owed. If the lease for such a property is rejected in bankruptcy, our revenue would be reduced and could adversely impact our ability to pay distributions to stockholders.

Environmentally hazardous conditions may adversely affect our operating results.

Under various federal, state and local environmental laws, a current or previous owner or operator of real property may be liable for the cost of removing or remediating hazardous or toxic substances on such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Even if more than one person may have been responsible for the contamination, each person covered by the environmental laws may be held

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responsible for all of the clean‑up costs incurred. In addition, third parties may sue the owner or operator of a site for damages based on personal injury, natural resources or property damage or other costs, including investigation and clean‑up costs, resulting from the environmental contamination. The presence of hazardous or toxic substances on one of our properties, or the failure to properly remediate a contaminated property, could give rise to a lien in favor of the government for costs it may incur to address the contamination, or otherwise adversely affect our ability to sell or lease the property or borrow using the property as collateral. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated. A property owner who violates environmental laws may be subject to sanctions which may be enforced by governmental agencies or, in certain circumstances, private parties. In connection with the acquisition and ownership of our properties, we may be exposed to such costs. The cost of defending against environmental claims, of compliance with environmental regulatory requirements or of remediating any contaminated property could materially adversely affect our business, assets or results of operations and, consequently, amounts available for distribution to our stockholders.

Our costs associated with complying with the Americans with Disabilities Act may affect cash available for distribution.

Our properties will be subject to the Americans with Disabilities Act of 1990 (“ADA”). Under the ADA, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to people with disabilities. The ADA’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties, or, in some cases, an award of damages. We will attempt to acquire properties that comply with the ADA or place the burden on the seller or other third party to ensure compliance with the ADA. However, we cannot assure stockholders that we will be able to acquire properties or allocate responsibilities in this manner. If we cannot, our funds used for ADA compliance may affect cash available for distribution and the amount of distributions to stockholders.

We may be unable to sell a property if or when we decide to do so, including as a result of uncertain market conditions, which could adversely affect the return on your investment.

We expect to hold the various real properties in which we invest until such time as we decide that a sale or other disposition is appropriate given our investment objectives. Our ability to dispose of properties on advantageous terms depends on factors beyond our control, including competition from other sellers and the availability of attractive financing for potential buyers of our properties. We cannot predict the various market conditions affecting real estate investments which will exist at any particular time in the future. Due to the uncertainty of market conditions which may affect the future disposition of our properties, we cannot assure you that we will be able to sell our properties at a profit in the future. Accordingly, the extent to which you will receive cash distributions and realize potential appreciation on our real estate investments will be dependent upon fluctuating market conditions. Furthermore, we may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure you that we will have funds available to correct such defects or to make such improvements.

Our officers and directors may have other interests which may conflict with their duties to us and our stockholders, and which may have adverse effects on the interests of us and our stockholders.

Our officers and directors may have other interests which could conflict with their duties to us and our stockholders, and which may have adverse effects on the interests of us and our stockholders. For example, certain of such persons may have interests in other real estate related ventures and may have to determine how to allocate an opportunity between us and such other ventures. Also, such persons may have to decide whether we should purchase or dispose of real property from or to an entity with which they are related, or conduct other transactions, and if so, the terms thereof. Our officers and directors are expected to disclose, in a timely and fair manner, such instances, and we require that potential conflicts be brought to the attention of our Board of Directors and that determinations will be made by a majority of directors who have no interest in the transaction. As of this time, only two officers and directors conduct a real property business apart from their activities with us. These individuals are Paul Cooper, our Chairman, Chief Executive Officer, and Director, and Louis Sheinker, our President, Chief Operating Officer, Secretary, and Director.

We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and furnish a report on our internal control over financial reporting.

We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 which requires us to assess and attest to the effectiveness of our internal control over financial reporting. Since we are defined as a smaller reporting company pursuant to Rule 12b-2 of the Exchange Act, our independent registered public accounting firm is not required to opine as to the adequacy of our assessment and effectiveness of our internal control over financial reporting. If any deficiencies or material weaknesses exist as a

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result of our assessment of our internal controls over financial reporting, our financial statements may be materially adversely affected.

Risks Related to our Common Stock

The absence of a public market for our common stock will make it difficult for a stockholder to sell shares, which may have to be held for an indefinite period.

Current and prospective stockholders should understand that our common stock is illiquid, as there is currently no public market, and they must be prepared to hold their shares of common stock for an indefinite length of time. We have no current plans to cause our common stock to be listed on any securities exchange or quoted on any market system or in any established market either immediately or at any definite time in the future. While our Board of Directors may attempt to cause our common stock to be listed or quoted in the future, there can be no assurance that this event will occur. Accordingly, stockholders will find it difficult to resell their shares of common stock. Thus, our common stock should be considered a long-term investment. In addition, there are restrictions on the transfer of our common stock. In order to qualify as a REIT, our shares must be beneficially owned by 100 or more persons at all times and no more than 50% of the value of our issued and outstanding shares may be owned directly or indirectly by five or fewer individuals and certain entities at all times. Our charter provides that no person may own more than 9.9% of the issued and outstanding shares of our common stock. Any attempted ownership of our shares that would result in a violation of one or more of these limits will result in such shares being transferred to an “excess share trust” so that such shares will be disposed of in a manner consistent with the REIT ownership requirements. In addition, any attempted transfer of our shares that would cause us to be beneficially owned by less than 100 persons will be disallowed.

Our stockholders’ interests may be diluted by issuances under our 2007 Incentive Award Plan and 2017 Incentive Award Plan and other common stock or preferred stock issuances, which could result in lower returns to our stockholders.

We had a 2007 Incentive Award Plan that provided for awards in the form of restricted shares, incentive stock options, non-qualified stock options and stock appreciation rights.  The aggregate number of shares of common stock which may have been awarded under the 2007 Incentive Award Plan was 1,000,000 shares.  The 2007 Incentive Award Plan expired by its terms on June 11, 2017, and there are non-vested shares and unexercised options outstanding that were granted under the 2007 Incentive Award Plan.

We have adopted the 2017 Incentive Award Plan, under which 2,000,000 shares of common stock are reserved for issuance, and under which we may grant stock, stock units, incentive stock options, non-qualified stock options, and stock appreciation rights to our officers, employees, consultants, and directors. The effect of these grants, including the subsequent exercise of stock options, could be to dilute the value of the stockholders’ investments.

In addition, our Board of Directors is authorized, without stockholder approval, to cause us to issue additional shares of our common stock, or shares of preferred stock on which it can set the terms, and to raise capital through the issuance of options, warrants and other rights, on terms and for consideration as the Board of Directors in its sole discretion may determine, subject to certain restrictions in our charter. Any such issuance could result in dilution to stockholders. The Board of Directors may, in its sole discretion, authorize us to issue common stock or other interests or our securities to persons from whom we purchase real property or other assets, as part or all of the purchase price. The Board of Directors, in its sole discretion, may determine the value of any common stock or other equity or debt securities issued in consideration of property or services provided, or to be provided, to us.

Real estate investments are not as liquid as other types of assets, which may reduce the economic returns we are able to provide to our stockholders.

Real estate investments are not as liquid as other types of investments, and this lack of liquidity may limit our ability to react promptly to changes in economic, financial, investment or other conditions. In addition, significant expenditures associated with real estate investments, such as mortgage payments, real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investments. In addition, we intend to comply with the safe harbor rules relating to the number of properties that can be disposed of in a year, the tax basis and the costs of improvements made to these properties, and meet other tests which enable a REIT to avoid punitive taxation on the sale of assets. Thus, our ability at any time to sell assets may be restricted. This lack of liquidity may limit our ability to vary our portfolio promptly in response to changes in economic, financial, investment or other conditions and, as a result, could adversely affect our financial condition, results of operations, cash flows and our ability to pay distributions on our common stock.

Our stockholders are limited in their ability to sell shares of common stock pursuant to our share redemption program. Stockholders may not be able to sell any shares of our common stock back to us, and if they do sell their shares, they may not receive the price they paid.

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Our share redemption program, which commenced its first semi-annual redemption period on June 1, 2017, may provide our stockholders with a limited opportunity to have their shares of our common stock redeemed by us at a discount to the net asset value (“NAV”) per share.  Our share redemption program contains certain restrictions and limitations, including those relating to the dollar amount of shares of our common stock that we can redeem at any given time.  Specifically, we presently intend to limit the number of shares to be redeemed to no more than $1.0 million of shares in any calendar year and such repurchase is subject to funds being available.  In addition, our Board of Directors reserves the right to amend, suspend or terminate the share redemption program at any time upon 30 days’ notice to our stockholders. Therefore, our stockholders may not have the opportunity to make a redemption request prior to a potential termination of the share redemption program and our stockholders may not be able to sell any of their shares of our common stock back to us pursuant to our share redemption program. Moreover, if our stockholders do sell their shares of common stock back to us pursuant to the share redemption program, they may not receive the same price they paid for any shares of our common stock being redeemed.

On May 10, 2017, our Board of Directors approved an estimated per share NAV of our common stock of $13.94 based on the estimated value of our assets less the estimated value of our liabilities divided by the number of shares outstanding (on an as adjusted fully diluted basis), calculated as of December 31, 2016.  On December 5, 2017, we redeemed 79,681 shares of our common stock pursuant to our share redemption program, at a redemption price of $12.55 per share (90% of the NAV per share), for aggregate consideration of $999,996.55.  The Company received redemption requests during the most recent semi-annual period (June 1, 2017 to November 30, 2017) exceeding the share redemption program’s $1 million per year limit.  As a result, we were unable to purchase all shares presented for redemption.  We honored the requests we received on a pro rata basis in accordance with the policy on priority of redemptions set forth in the share redemption program, subject to giving certain priorities in accordance with the share redemption program.  The Company will treat any unsatisfied portions of redemption requests as requests for redemption in the next semi-annual period.  The next redemption period will be December 1, 2017 to May 31, 2018.  On March 22, 2018, the Company received its annual valuation as of December 31, 2017. Our Board of Directors approved an estimated per share NAV of our common stock of $14.36 based on the estimated value of our assets less the estimated value of our liabilities divided by the number of shares outstanding (on an as adjusted fully diluted basis), calculated as of December 31, 2017. The annual valuation resulted in an adjustment to the redemption price under the share redemption program from $12.55 to $12.92 per share (90% of the NAV per share). The Company has filed a Current Report on Form 8-K with the SEC on March 27, 2018, and mailed to its stockholders an announcement of the redemption price adjustment. The redemption price of $12.92 per share will be effective with respect to share redemption requests submitted from December 1, 2017 until such time as the Board determines a new estimated per share NAV. Our stockholders are permitted to withdraw any redemption requests upon written notice to us at any time prior to ten (10) days before the end of the applicable semi-annual period.

Because of the restrictions of our share redemption program, our stockholders may not be able to sell their shares under the program, and if stockholders are able to sell their shares, they may not recover the amount of their investment in us.

The actual value of shares that we repurchase under our share redemption program may be substantially less than what we pay.

The terms of our share redemption program generally require us to repurchase shares at a price equal to 90% of our most recently disclosed estimated NAV per share. The estimated NAV per share of our common stock is calculated as of a specific date and is expected to fluctuate over time in response to future events. However, we anticipate only determining an estimated NAV per share annually. In the event that the value of our shares decreases due to market or other conditions, the price at which we repurchase our shares pursuant to our share redemption program might reflect a premium to our NAV. If the actual NAV of our shares is less than the price paid for the shares to be repurchased, any repurchases made would be immediately dilutive to our remaining stockholders.

In determining NAV per share, we relied upon a valuation of our properties as of December 31, 2017. Valuations and appraisals of our properties are estimates of fair value and may not necessarily correspond to realizable value upon the sale of such properties, therefore our new NAV per share may not reflect the amount that would be realized upon a sale of each of our properties.

For the purposes of calculating our NAV per share, an independent third-party appraiser valued our properties as of December 31, 2017. The valuation methodologies used to value our properties involved certain subjective judgments. Ultimate realization of the value of an asset depends to a great extent on economic and other conditions beyond our control and the control of the independent appraiser. Further, valuations do not necessarily represent the price at which an asset would sell, since market prices of assets can only be determined by negotiation between a willing buyer and seller. Therefore, the valuations of our properties and other assets may not correspond to the timely realizable value upon a sale of those assets.

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Our NAV per share is somewhat based upon subjective judgments, assumptions and opinions, which may or may not turn out to be correct. Therefore, our NAV per share may not reflect the precise amount that might be paid to stockholders for their shares in a transaction.

Our NAV per share was based on an estimate of the value of our properties – consisting principally of illiquid commercial real estate – as of December 31, 2017. The valuation methodologies used by the independent appraiser retained by our Board of Directors to estimate the value of our properties as of December 31, 2017 involved subjective judgments, assumptions and opinions, which may or may not turn out to be correct. As a result, our NAV per share may not reflect the precise amount that might be paid to stockholders for their shares in a transaction.

Tax Risks Related to our Business and Structure

The requirement to distribute at least 90% of our taxable REIT income may require us to incur debt, sell assets, or issue additional securities for cash, which would increase the risks associated with your investment.

In order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our taxable REIT income, other than any capital gains. To the extent that we distribute at least 90% but less than 100% of our taxable income in a calendar year, we will incur no federal corporate income tax on our distributed net income, but will incur a federal corporate income tax on any undistributed amounts. In addition, we will incur a 4% nondeductible excise tax if the actual amount we distribute to our stockholders in a calendar year is less than a minimum amount required. We intend to distribute at least 90% of our taxable income to our stockholders each year so that we will satisfy the distribution requirement and avoid the 4% excise tax. However, we could be required to include earnings in our taxable income before we actually receive the related cash. In the event that we do not distribute 100% of our taxable income, we will be subject to taxation at the REIT level on the amount of undistributed taxable income and to the extent we distribute such amount, you will be subject to taxation on it at the stockholder level.

We cannot assure you that we will make distributions. Our policy is to make such distributions on a quarterly basis. We will seek to minimize, to the extent possible, the fluctuations in distributions that might result if distribution payments were based solely on actual cash received during the distribution period. To implement this policy, we may use cash received during prior periods or cash received subsequent to the distribution period and prior to the payment date for such distribution payment, to pay annualized distributions consistent with the distribution level established from time to time by our Board of Directors. Our ability to maintain this policy will depend upon, among other things, the availability of cash and applicable requirements for qualification as a REIT under the Code. Therefore, we cannot guarantee that there will be cash available to pay distributions or that distributions will not fluctuate. If cash available for distribution is insufficient to pay distributions to our stockholders, we may distribute payment in the form of shares of our common stock or obtain the necessary funds by borrowing, issuing new securities, or selling assets. These methods of obtaining funds could affect future distributions by increasing operating costs.

To the extent that distributions to our stockholders are made out of our current or accumulated earnings and profits, such distributions would be taxable as ordinary income. To the extent that our distributions exceed our current and accumulated earnings and profits, such amounts will constitute a return of capital to our stockholders for federal income tax purposes, to the extent of their basis in their stock, and any amount in excess of their stock basis would constitute capital gains.

If we fail to remain qualified as a REIT for federal income tax purposes, we will not be able to deduct our distributions, and our income will be subject to taxation, which would reduce the cash available for distribution to our stockholders.

The requirements for qualification as a REIT are complex and interpretations of the federal income tax laws governing REITs are limited. Our continued qualification as a REIT will depend on our ability to meet various requirements concerning, among other things, the ownership of our outstanding shares of beneficial interest, the nature of our assets, the sources of our income and the amount of our distributions to our stockholders. If we fail to meet these requirements and do not qualify for certain statutory relief provisions, our distributions to our stockholders will not be deductible by us and we will be subject to a corporate level tax, including any applicable alternative minimum tax (which, for corporations, was repealed for tax years beginning after December 31, 2017 under the Tax Cuts and Jobs Act), on our taxable income at regular corporate rates, substantially reducing our cash available to make distributions to our stockholders. In addition, if we failed to maintain our qualification as a REIT, we would no longer be required to make distributions for federal income tax purposes. Incurring corporate income tax liability might cause us to borrow funds, liquidate some of our investments or take other steps that could negatively affect our operating results. Moreover, if our REIT status is terminated because of our failure to meet a REIT qualification requirement or if we voluntarily revoke our election, unless relief provisions applicable to certain REIT qualification failures apply, we would be disqualified from electing treatment as a REIT for the four taxable years following the year in which REIT status is lost. We may not qualify for relief provisions for REIT qualification failures and even if we can qualify for such relief, we may be required to make penalty payments, which could be significant in amount.

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

The Act signed into law by the President on December 22, 2017, makes significant changes to the Code, including changes that impact REITs and their shareholders, among others. In particular, the Act reduces the maximum corporate tax rate from 35% to 21%. In addition, for tax years beginning before January 1, 2026, the Act permits up to a 20% deduction for individuals, trusts, and estates with respect to their receipt of “qualified REIT dividends”, which are dividends from a REIT that are not capital gain dividends and are not qualified dividend income. These changes generally result in an effective maximum U.S. federal income tax rate on such dividends of 29.6%, if the deduction is allowed in full. However, by reducing the corporate tax rate, it is possible that the Act will nevertheless reduce the relative attractiveness to investors (as compared with potential alternative investments) of the generally single level of taxation on REIT distributions. Although certain changes to the Code are generally advantageous to REITs and their shareholders, the full ramifications of the Act remain unclear and will likely remain unclear for an indeterminate period of time. Key provisions of the Act that could impact us and the value of our shares include the following:

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

Income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates are generally subject to tax at preferential rates. Dividends payable by REITs, however, generally are not eligible for the preferential tax rates applicable to qualified dividend income. Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, to the extent that the preferential rates continue to apply to regular corporate qualified dividends, investors who are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could materially and adversely affect the value of the shares of REITs, including the value of our common stock.

The Act provides a deduction to non-corporate taxpayers (e.g., individuals, trusts and estates) of 20% on dividends paid by a REIT that are not classified as capital gains. This provides closer parity between the treatment under the new law of ordinary REIT dividends and qualified dividends. The new law also provides for a maximum individual marginal tax rate on ordinary income, without regard to the effect of this deduction, of 37%. For non-corporate taxpayers, this would reduce the maximum marginal tax rate on ordinary REIT dividends to 33.4% (including the 3.8% Medicare tax that is applied before the 20% deduction.). The new tax law’s 20% deduction

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on dividends paid by a REIT to non-corporate taxpayers and the reduced individual tax rates are scheduled to sunset for tax years beginning after 2025, absent further legislation.

We may be subject to adverse legislative or regulatory tax changes affecting REITs that could have a negative effect on us.

The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could adversely affect our stockholders or us. We cannot predict how changes in the tax laws might affect our stockholders or us. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the federal income tax consequences of such qualification.

Acquisition Risks

Our inability to identify or find funding for acquisitions could prevent us from diversification or growth and could adversely impact the value of an investment in us.

We may not be able to identify or obtain financing to acquire additional real properties. We are required to distribute at least 90% of our taxable income, excluding net capital gains, to our stockholders each year, and thus our ability to retain internally generated cash is very limited. Accordingly, our ability to acquire properties or to make capital improvements or renovate properties will depend on our available cash flow and our ability to obtain financing from third parties or the sellers of properties.

Investing in properties through joint ventures creates a risk of loss to us as a result of the possible inaction or misconduct of a joint venture partner.

We may decide to acquire certain properties using a joint venture structure. Joint venture investments may involve risks not present in a direct acquisition, including, for example:

Actions by such a co-venturer or partner might have the result of subjecting the applicable property to liabilities in excess of those otherwise contemplated and may have the effect of reducing our cash available for distribution. It also may be difficult for us to sell our interest in any such joint venture or partnership in such property.

Risks Related to Our Use of Borrowed Funds

We have incurred and plan to incur mortgage and other indebtedness, which could result in material risk to our business if there is a default, including the loss of the real property.

Borrowings by us may increase the risks of owning shares of our company. If there is a shortfall between the cash flow generated by our properties and the cash flow needed to service our indebtedness, then the amount available for distributions to our stockholders will be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, thus reducing the value of your investment. If any mortgages or other indebtedness contain cross-collateralization or cross-default provisions, a default on a single loan could affect multiple properties.

Additionally, when providing financing, a lender may impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may also contain covenants that limit our ability to further leverage a property. Our credit facility with Key Bank contains various affirmative and negative covenants, including, among others, with respect to liquidity, minimum occupancy, total indebtedness and minimum net worth. These or other limitations may limit our flexibility and our ability to achieve our operating plans. Our failure to meet such restrictions and covenants may result in an event of default under our line of credit and result in the foreclosure of some or all of our properties.

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As we incur indebtedness which may be needed for operations, we increase expenses which could result in a decrease in cash available for distribution to our stockholders.

Debt service payments decreases cash available for distribution. In the event the fair market value of our properties was to increase, we could incur more debt without a commensurate increase in cash flow to service the debt.

Prolonged disruptions in the financial markets could affect our ability to obtain financing on reasonable terms and have other adverse effects on us and the value of our common stock.

Global stock and credit markets experience price volatility, dislocations, and liquidity disruptions, which cause market prices of many stocks to fluctuate, availability of debt to be curtailed and the spreads on prospective debt financings to widen considerably. These circumstances materially impact liquidity in the financial markets, making terms for certain financings less attractive, and, in certain cases, result in the unavailability of certain types of financing. Our profitability will be adversely affected if we are unable to obtain cost-effective financing for our investments. A prolonged downturn in the stock or credit markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly. These events in the stock and credit markets may also make it more difficult for us to raise capital.

We have incurred and will incur indebtedness secured by our properties, which may subject our properties to foreclosure in the event of a default.

Incurring mortgage indebtedness increases the risk of possible loss. Most of our borrowings to acquire properties would be secured by mortgages on our properties. In February 2015, we refinanced a substantial portion of our real estate portfolio in the amount of approximately $233.1 million. If we default on our secured indebtedness, the lender may foreclose and we could lose our entire investment in the properties securing such loan, which would adversely affect distributions to stockholders. For federal tax purposes, any such foreclosure would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage and, if the outstanding balance of the debt secured by the mortgage exceeds the basis of the property to our company, there could be taxable income upon a foreclosure. To the extent lenders require our company to cross-collateralize our properties, or our loan agreements contain cross-default provisions, a default under a single loan agreement could subject multiple properties to foreclosure. In addition, the foreclosure of certain of our properties may trigger additional liabilities for us, such as payments which may be required pursuant to the Tax Protection Agreement.

Possible Adverse Consequences of Limits on Ownership and Transfer of our Shares

The limitation on ownership of our stock in our charter will prevent you from acquiring more than 9.9% of our common stock and may force you to sell common stock back to us.

Our charter limits the beneficial and constructive ownership of our capital stock by any single stockholder to 9.9% of the number of outstanding shares of each class or series of our stock including our common stock. We refer to these limitations as the ownership limits. Our charter also prohibits the beneficial or constructive ownership of our capital stock by any stockholder that would result in (1) our capital stock being beneficially owned by fewer than 100 persons, (2) five or fewer individuals, including natural persons, private foundations, specified employee benefit plans and trusts, and charitable trusts, owning more than 50% of our capital stock, applying broad attribution rules imposed by the federal tax laws, (3) our company otherwise failing to qualify as a REIT for federal tax purposes. In addition, any attempted transfer of our capital stock that would result in the Company being beneficially owned by less than 100 persons will be disallowed.

Anti-takeover Provisions Related to Us

Limitations on share ownership and transfer may deter a sale of our company in which you could profit.

The limits on ownership and transfer of our equity securities in our charter may have the effect of delaying, deferring, or preventing a transaction or a change in control of our company that might involve a premium price for your common stock. The ownership limits and restrictions on transferability will continue to apply until our Board of Directors determines that it is no longer in our best interest to continue to qualify as a REIT.

Our ability to issue preferred stock with terms fixed by the Board of Directors may include a preference in distributions superior to our common stock and also may deter or prevent a sale of our company in which a stockholder could otherwise profit.

Our ability to issue preferred stock and other securities without your approval also could deter or prevent someone from acquiring our company. Our Board of Directors may establish the preferences and rights, including a preference in distributions

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superior to our common stockholders, of any issued preferred stock designed to prevent, or with the effect of preventing, someone from acquiring control of our company.

Maryland anti-takeover statute restrictions may deter others from seeking to acquire our company in a transaction in which a stockholder could profit.

Maryland law contains many provisions, such as the business combination statute and the control share acquisition statute, that are designed to prevent, or have the effect of preventing, someone from acquiring control of our company without approval of our Board of Directors. Our bylaws exempt our company from the control share acquisition statute (which eliminates voting rights for certain levels of shares that could exercise control over us) and our Board of Directors has adopted a resolution opting out of the business combination statute (which prohibits a merger or consolidation of us and a 10% stockholder for a period of time) with respect to affiliates of our company. However, if the bylaw provisions exempting our company from the control share acquisition statute or the board resolution opting out of the business combination statute were repealed by the Board of Directors, in its sole discretion, these provisions of Maryland Law could delay or prevent offers to acquire our company and increase the difficulty of consummating any such offers.

Because of our staggered Board of Directors, opposition candidates would have to be elected in two separate years to constitute a majority of the Board of Directors, which may deter a change of control from which a stockholder could profit.

We presently have seven members of our Board of Directors. Each director has or will have a three-year term. Accordingly, in order to change a majority of our Board of Directors, a third party would have to wage a successful proxy contest in two successive years, which is a situation that may deter proxy contests.

Certain provisions of our charter make stockholder action more difficult, which could deter changes beneficial to our stockholders.

We have certain provisions in our charter and bylaws that require super-majority voting and regulate the opportunity to nominate directors and to bring proposals to a vote by the stockholders.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

 

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ITEM 2. PROPERTIES

The Company’s 49 properties as of December 31, 2017 are as follows:

 

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Our Leases

Substantially all of our leases are net or ground leases under which the tenant, in addition to its rental obligation, typically is responsible for expenses attributable to the operation of the property, such as real estate taxes and operating costs. The tenant is also generally responsible for maintaining the property and for restoration following a casualty or partial condemnation. The tenant is typically obligated to indemnify us for claims arising from the property and is responsible for maintaining insurance coverage for the property it leases and naming us an additional insured. The Company typically evaluates a tenant’s credit quality by reviewing the tenant’s financial information, rating agency reports and credit reports, when available, and other sources of information that can be useful in determining a tenant’s credit worthiness and financial condition. The Company monitors the tenants’ credit worthiness and financial condition throughout the term of their leases by requiring them to provide financial and other information necessary as per the terms of their respective leases, by reviewing rating agency reports and credit reports, when available and reviewing other available sources of information.

Our typical lease provides for contractual rent increases periodically throughout the term of the lease or for rent increases pursuant to a formula based on the consumer price index. Our policy has been to acquire properties that are subject to existing long-term leases or to enter into long-term leases with our tenants. Our leases generally provide the tenant with one or more renewal options.

 

The following table sets forth scheduled lease expirations of leases for our properties as of December 31, 2017:

 

(1)Lease expirations assume tenants do not exercise existing renewal options.

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Portfolio of Real Estate Investments

The following represents information about our portfolio as of December 31, 2017:

 

 

Financing, Re-Renting and Disposition of Our Properties

We may borrow funds on a secured and unsecured basis and intend to do so in the future. We also mortgage specific properties on a non-recourse basis subject to industry standard carve-outs, to enhance the return on our investment. The proceeds of mortgage loans may be used for property acquisitions, investments in joint ventures or other entities that own real property, to reduce bank debt and for working capital purposes. Net proceeds received from the sale of a property are generally required to be used to repay amounts outstanding under debt secured by the property sold. See Note 4. “Mortgage Notes Payable” and Note 5. “Secured Revolving Credit Facility” to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

With respect to properties we acquire on a free and clear basis, we usually seek to obtain long-term fixed-rate mortgage financing, when available at acceptable terms, shortly after the acquisition of such property to avoid the risk of movement of interest rates and fluctuating supply and demand in the mortgage markets. We also will acquire a property that is subject to (and will assume) a fixed-rate mortgage. Some of our properties may be financed on a cross-defaulted or cross-collateralized basis.

After termination or expiration of any lease relating to any of our properties, we will seek to re-rent or sell such property in a manner that will maximize the return to us, considering, among other factors, the income potential and market value of such property. We acquire properties for long-term investment for income purposes and do not typically engage in the turnover of investments. We will consider the sale of a property if a sale appears advantageous in view of our investment objectives. We may take back a purchase money mortgage as partial payment in lieu of cash in connection with any sale and may consider local customary and prevailing market conditions in negotiating the terms of repayment. If there is a substantial tax gain, we may seek to enter into a tax deferred transaction and reinvest the proceeds in another property. It is our policy to use any cash realized from the sale of properties, net of any distributions to stockholders, to pay down amounts due under our credit facility, if any, and for the acquisition of additional properties.

Real Property Used By Us in Our Businesses

The real property used by us as of December 31, 2017, for the day to day conduct of our businesses is as follows (this property is leased):

 

 

 

ITEM 3. LEGAL PROCEEDINGS

We are involved in lawsuits and other disputes which, from time to time, arise in the ordinary course of business. However, management believes that these matters will not have a material adverse effect, individually or in the aggregate, on our financial position or results of operations.

 

 

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ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

 

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Common Equity

Currently, there is no public market for our common stock, and we do not expect a market to develop in the near future. We have no current plans to list our common stock on any securities exchange or quoted on any market system.

Outstanding Common Stock and Holders

As of March 22, 2018, we had 13,589,125 shares issued and outstanding, held by approximately 557 stockholders of record (of which less than 500 are non-accredited investors for the purposes of Section 12(g) of the Exchange Act).

Distributions

Our Board of Directors has declared and paid cash dividends on a quarterly basis. On March 22, 2018, our Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock, payable with respect to the first quarter ended March 31, 2018, to common stockholders of record as of the close of business on March 31, 2018, payable on April 13, 2018. On March 22, 2018, our Board of Directors declared a supplemental cash dividend of $0.08 per share of common stock, payable with respect to the year ended December 31, 2017, to stockholders of record as of the close of business on March 31, 2018, payable on April 16, 2018. The following table shows the declaration dates and the amounts distributed per share for the years ended December 31, 2017 and 2016:

 

 

We have determined for income tax purposes that the 2017 regular dividends were considered ordinary dividends. The total distributions paid in 2017 were the result of cash flow from operations.

 

Although we intend to continue to declare and pay quarterly dividends, no assurances can be made as to the amounts of any future payments. The declaration of any future dividends is within the discretion of the Board of Directors and will be dependent upon, among other things, our earnings, financial condition and capital requirements, as well as any other factors deemed relevant by the Board. Two principal factors in determining the amounts of distributions are (i) the Code requirement that a REIT distribute to stockholders at least 90% of its REIT taxable income, and (ii) the amount of available cash.

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Purchase of Equity Securities by the Issuer and Affiliated Purchasers

On February 8, 2016, the Company purchased 227,043 shares of GTJ REIT, Inc. for approximately $1.2 million in connection with a settlement agreement with certain parties involving litigation. These shares, along with 35,974 shares of GTJ REIT, Inc. stock acquired by the Company at various times, were subsequently retired.  

 

Our common stock is currently not registered under Section 12 of the Exchange Act and there is no established public market for shares of our common stock. In order to provide our stockholders with interim liquidity, on November 8, 2016, the Board of Directors approved a share redemption program (the “Program”) authorizing redemption of the Company’s shares of common stock (the “Shares”), subject to certain conditions and limitations. The following is a summary of terms and provisions of the Program:

 

 

Pursuant to the Program, on December 5, 2017, the Company redeemed 79,681 Shares at a redemption price of $12.55 per Share, for aggregate consideration of $999,997.  The Company received redemption requests during the most recent semi-annual period (June 1, 2017 to November 30, 2017) exceeding the Program’s $1 million per year limit.  As a result, the Company was unable to purchase all Shares presented for redemption.  The Company honored the requests it received on a pro rata basis in accordance with the policy on priority of redemptions set forth in the Program, subject to giving certain priorities in accordance with the Program.  The Company will treat any unsatisfied portions of redemption requests as requests for redemption in the next semi-annual period.

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

On November 13, 2017, the Company purchased 3,005 shares of GTJ REIT, Inc. common stock for $37,713 from a former employee in connection with a separation agreement. These shares, along with the 79,681 purchased pursuant to the Program, were subsequently retired.

ITEM 6. SELECTED FINANCIAL DATA

 

Not Applicable.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 our consolidated financial statements and notes appearing elsewhere in this filing. Past performance is not a guarantee of future results. Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, those discussed in “Risk Factors” and elsewhere in this report and the risks discussed in our other filings with the SEC.  Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date hereof.  Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof, unless otherwise required by law.

Executive Summary

We are a fully integrated, self-administered and self-managed REIT, engaged in the acquisition, ownership, and management of commercial real estate. As of December 31, 2017, we owned 49 properties, which are predominately industrial/warehouse locations leased on a net lease basis.  The Company typically evaluates a tenant’s credit quality by reviewing its financial information, rating agency reports and credit reports, when available, and other sources of information that can be useful in determining a tenant’s creditworthiness and financial condition.

We formerly owned a group of outdoor maintenance businesses, an electrical contracting business, and a parking garage business, which are presented as part of our consolidated financial statements. These businesses were all disposed in 2012 and 2013.

On January 17, 2013, we acquired all outstanding ownership interests of a portfolio consisting of 25 commercial properties located in New York, New Jersey, and Connecticut in exchange for 33.29% of the outstanding limited partnership interest in the Operating Partnership. The outstanding limited partnership interest in the Operating Partnership was increased to 33.78% due to post-closing adjustments, and to 34.35% due to the redemption of certain shares of GTJ REIT, Inc. common stock.  As a result of the transaction, as well as the six properties acquired in 2014, seven properties in 2015, two properties in 2016, and two properties in 2017, we currently beneficially own a 65.65% interest in the 49 property portfolio, consisting of approximately 5.9 million square feet of industrial, warehouse, office, retail and other properties on approximately 400 acres of land in New York, New Jersey, Connecticut and Delaware.

We continue to seek opportunities to acquire properties. We will seek to acquire 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.

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 2 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.

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Revenue Recognition:

We recognize our rental revenue 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.  

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

Real Estate:

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 (generally consisting of land, buildings and building improvements, and tenant improvements) and identified intangible assets and liabilities (generally consisting of above-market and below-market leases and the origination value of in-place leases) in accordance with GAAP. We utilize methods similar to those used by independent appraisers in estimating the fair value of acquired assets and liabilities. The fair value of the tangible assets of an acquired property considers the value of the property “as-if-vacant.” In allocating the purchase price to identified intangible assets and liabilities of an acquired property, the value of above-market and below-market leases is estimated based on the differences between contractual rentals and 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. Fixed-rate renewal options have been included in the calculation of the fair value of acquired leases where applicable. The aggregate value of in-place leases is measured based on the avoided costs associated with lack of revenue over a market oriented lease-up period, the avoided leasing commissions, and other avoided costs common in similar leasing transactions.

Mortgage notes payable assumed in connection with acquisitions are recorded at their fair value using current market interest rates for similar debt at the time of acquisitions. Acquisition related costs are expensed as incurred.

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 is 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 assets or liabilities is recorded as income or expense in the period.

The Company capitalizes all direct costs of real estate under development until the end of the development period.  In addition, the Company capitalizes indirect cost of insurance and real estate taxes allocable to real estate under development during the development period. The Company also capitalizes interest using the avoided cost method for real estate under development during the development period.

Asset Impairment:

Management reviews each real estate investment for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability is based on an estimate of the undiscounted future cash flows that are expected to result from the real estate investment’s use and eventual disposition. Such cash flow analyses consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If an impairment event exists due to the projected inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair value. Management is required to make subjective assessments as to whether there are impairments in the value of its real estate properties. These assessments could have a direct impact on net income, because an impairment loss is recognized in the period that the assessment is made. Management has determined that there were no indicators of impairment relating to our long-lived assets at December 31, 2017.

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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 distributable income that qualifies as REIT taxable income, to the extent that we distribute at least 90% of our REIT taxable income to our stockholders and comply with certain other requirements as defined under 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 Accounting Standards Codification (“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.

Stock-Based Compensation:

We account for stock based compensation in accordance with ASC 718, which establishes accounting for stock-based awards exchanged for employee services. Under the provisions of ASC 718, share-based compensation cost is measured at the grant date, 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.

Summary of Operations

Results of Operations:

Year Ended December 31, 2017 as compared with Year Ended December 31, 2016

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

 

 

 

 

Property Rental Revenues

Property rental revenue increased $2.7 million, or 7%, to $44.7 million for the year ended December 31, 2017 from $42.0 million for the year ended December 31, 2016. This increase is primarily attributable to the acquisition of two income producing properties during 2017, and the full year ownership in 2017 of two income producing properties acquired in 2016.  

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Tenant Reimbursements

Tenant reimbursements increased $0.7 million, or 9%, to $8.4 million for the year ended December 31, 2017 from $7.7 million for the year ended December 31, 2016. This increase is primarily attributable to the acquisition of two income producing properties during 2017, and the full year ownership in 2017 of two income producing properties acquired in 2016.

Operating Expenses

Operating expenses increased $3.0 million, or 10%, to $32.7 million for the year ended December 31, 2017 from $29.7 million for the year ended December 31, 2016. The increase is mainly attributable to an increase to depreciation expense of $0.9 million and increases to general and administrative expenses of $1.6 million, which includes professional fees in connection with the Company’s Share Redemption Program and $0.8 million of deal pursuit costs in connection with a potential financing.      

Interest Expense

Interest expense increased $1.1 million, or 7%, to $16.4 million for the year ended December 31, 2017 from $15.3 million for the year ended December 31, 2016. The increase is primarily due to the debt service associated with the financing of two property acquisitions in 2016 and two property acquisitions in 2017 from the Company’s secured revolving credit facility with Key Bank.

Liquidity and Capital Resources

We derive substantially all of our revenues from rents received from tenants under existing leases on each of our properties. These revenues include fixed base rents and recoveries of certain property operating expenses that we have incurred and that we pass through to the individual tenants.

Our primary cash expenses consist of our property operating expenses, which include: real estate taxes, repairs and maintenance, insurance, utilities, general and administrative expenses, which include compensation costs, office expenses, professional fees and other administrative expenses, leasing and acquisition costs, which include third-party costs paid to brokers and consultants, and interest expense on our mortgage loans.

On December 2, 2015, the Operating Partnership entered into a credit agreement with Key Bank for a $50.0 million secured revolving credit facility with an initial term of two years, with a one-year extension option. The secured revolving credit facility was subsequently increased to $55.0 million and the Operating Partnership exercised its option to extend the term to June 30, 2019.  Our available liquidity at December 31, 2017 was approximately $23.0 million, consisting of cash and cash equivalents of $8.4 million and $14.6 million from our Key Bank secured revolving credit facility. As of December 31, 2017, the Company had $35.9 million of outstanding borrowings on its secured revolving credit facility.  

We expect to meet substantially all of our operating cash requirements (including dividend payments required to maintain our REIT status and an estimated $0.8 million of 2018 principal mortgage debt amortization) from cash flow from operations. To the extent that cash flow from operations is not adequate to cover all of our operating needs, we will be required to use our available cash and cash equivalents to satisfy operating requirements. We expect to satisfy maturities of mortgage principal in 2018 of $41.3 million through our secured revolving credit facility and refinancing some of our real estate assets. Additionally, in the normal course of our business, we may sell properties when we determine that it is in our best interests, which also generates additional liquidity.

Net Cash Flows

Year Ended December 31, 2017 vs. Year Ended December 31, 2016

Operating Activities

Net cash provided by operating activities was $17.5 million for 2017 compared to $16.9 million for 2016. For the 2017 period, cash provided by operating activities included (i) net income before depreciation, amortization, stock compensation, rental income in excess of amounts billed, and a loss from the Company’s investment in a limited liability partnership of $18.3 million, (ii) an increase in other liabilities of $0.9 million, and (iii) an increase to accounts payable and accrued expenses of $0.8 million offset by (iv) an increase in other assets of $1.3 million and (v) an increase in restricted cash of $1.2 million. 2016 net cash provided by operating activities of $16.9 million included (i) net income before depreciation, amortization, and stock compensation, rental income in excess of amounts billed and a loss from the Company’s investment in a limited partnership of $17.4 million, (ii) an increase in other liabilities of $0.5 million, and (iii) an increase to accounts payable and accrued expenses of $0.3 million, partially offset by (iv) an increase in other assets of $1.3 million.

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Investing Activities

Net cash used in investing activities was $52.6 million for the year ended December 31, 2017 compared to $32.0 million for the year ended December 31, 2016. For the 2017 period, cash used in investing activities resulted from (i) the acquisition of two properties totaling $43.8 million, (ii) property improvements of $8.4 million, and (iii) contract deposit of $0.7 million for the potential acquisition of a property, offset by (iv) a decrease in restricted cash of $0.3 million.  For the 2016 period, net cash used in investing activities resulted from (i) the acquisition of two properties totaling $27.0 million, and (ii) property improvements of $6.5 million, offset by (iii) the release of a $1.0 million certificate of deposit in connection with the completion of certain site improvements at 20 East Halsey Road in Parsippany, New Jersey, (iv) the net release of leasing and capital reserves in connection with the AIG Loan of $0.3 million, and (v) the application of contract deposit of $0.2 million for a property acquired in 2016.  

Financing Activities

Net cash provided by financing activities was $27.7 million for the year ended December 31, 2017 compared to $16.0 million for the year ended December 31, 2016. For the 2017 period, net cash provided by financing activities included (i) proceeds from the Company’s revolving credit facility with Key Bank of $45.5 million, and (ii) proceeds of $39.0 million from mortgage notes payable, offset by (iii) financing costs of $1.4 million from mortgage notes payable, (iv) the pay down of $37.5 million of the Company’s revolving credit facility, (v) the payment of the Company’s quarterly and 2016 supplemental dividends totaling $6.8 million, (vi) distributions to non-controlling interests of $6.2 million, (vii) the repurchase of shares of GTJ REIT, Inc. common stock of $1.0 million and (viii) the payment of mortgage principal of $3.9 million. For the 2016 period, net cash provided by financing activities included (i) proceeds from the Company’s revolving credit facility with Key Bank of $27.8 million, partially offset by (ii) the payment of the Company’s quarterly and 2015 supplemental dividends totaling $6.2 million, (iii) distributions to non-controlling interests of $3.4 million, (iv) the repurchase of shares of GTJ REIT, Inc. common stock of $1.2 million and (v) the payment of mortgage principal of $0.9 million.  

Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization)

EBITDA and Adjusted EBITDA are non-GAAP financial measures. Our EBITDA and Adjusted EBITDA computations may not be comparable to EBITDA and Adjusted EBITDA reported by other companies that interpret the definitions of EBITDA and Adjusted EBITDA differently than we do. Management believes EBITDA and Adjusted EBITDA to be meaningful measures of a REIT’s performance because they are widely followed by industry analysts, lenders and investors and are used by management as measures of performance. EBITDA and Adjusted EBITDA should be considered along with, but not as alternatives to, net income as measures of our operating performance.

Adjusted EBITDA allows investors to measure our operating performance independent of our capital structure and indebtedness. Additionally, acquisition costs and the write off of deal pursuit costs have been excluded from Adjusted EBITDA in order to assist with measuring core real estate operating performance.

Reconciliation of Net Income to EBITDA and Adjusted EBITDA attributable to our common stockholders is as follows (in thousands) (All amounts are net of noncontrolling interest):

 

 

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 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 equal net income (loss) computed in accordance with GAAP;

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excluding gains or losses from sales of property, excluding asset impairments, plus real estate-related depreciation and amortization and loss from discontinued operations. We believe these measurements provide a more complete understanding of our performance when compared year over year and better reflect the impact on our operations from trends in occupancy rates, rental rates, operating costs and general and administrative expenses which may not be immediately apparent from net income.

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 because 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. Management believes Core FFO to be a meaningful, additional measure of operating performance because it provides information consistent with the Company’s analysis of the operating performance of its portfolio by excluding items such as acquisition costs which affect the comparability of the Company’s period over period performance and are not indicative of the results provided by our operating portfolio. Management believes AFFO to be a meaningful, additional measure of operating performance because it provides information consistent with the Company’s analysis of its operating performance by excluding non-cash income and expense items such as straight lined rent, amortization of lease intangibles, mark to market debt adjustments, financing costs, our unrealized loss from an investment in a limited partnership, amortization of stock compensation, and the write of off deal pursuit costs, which are not indicative of the results of our operating portfolio.

However, FFO, Core FFO and AFFO:

FFO, Core 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 years ended December 31, 2017 and 2016 (All amounts are net of noncontrolling interest).

Reconciliation of Net Income to FFO, Core FFO and AFFO attributable to our common stockholders (in thousands, except share data):

 

 

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Acquisitions, Dispositions, and Investments

East New York, Brooklyn, New York

On May 10, 2016, the Company acquired a 57,786 square foot warehouse/garage building in East New York, Brooklyn, New York for $10.0 million. The property is currently leased to The City of New York (DCAS) for the benefit of the Department of Sanitation for a term that expires December 31, 2025.  The purchase was financed from the Company’s secured revolving credit facility with Key Bank.

Newark, Delaware

On June 1, 2016, the Company acquired a 208,656 square foot warehouse/distribution facility in Newark, Delaware for $17.0 million.  The property is currently leased to Valassis Communications, Inc. for a term that expires April 30, 2025. The purchase was financed from the Company’s secured revolving credit facility with Key Bank.

Cherry Hill, New Jersey

On July 27, 2017, the Company acquired a 109,771 square-foot distribution and installation training building in Cherry Hill, New Jersey for $7.6 million.  The property is leased to Sovereign Distributors, Inc. (d/b/a Avalon Flooring) for a term that expires September 30, 2031.  The purchase was financed from the Company’s secured revolving credit facility with Key Bank.

Montgomery, New York

On August 31, 2017, the Company acquired a 248,370 square-foot warehouse/distribution facility in Montgomery, New York for $36.2 million.  The property is leased to FedEx Ground Package System, Inc. for a term that expires February 28, 2027.  The purchase was financed from the Company’s secured revolving credit facility with Key Bank.

Cash Payments for Financing

Payment of interest under our mortgage notes payable will consume a portion of our cash flow, reducing taxable income and consequently, 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

As of December 31, 2017, three of the Company’s six former bus depot sites received final regulatory closure, satisfying outstanding clean-up obligations related to legacy site contamination issues.  Three sites continue with on-going cleanup, monitoring and reporting activities.  We believe each of the six sites remain in compliance with existing local, state and federal obligations.

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.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks that arise from changes in interest rates, foreign currency exchange rates and other market changes affect market sensitive instruments. In pursuing our business strategies, the primary market risk which we are exposed to is interest rate risk. As of December 31, 2017, the Company (through its Operating Partnership) had a variable rate line of credit facility with Key Bank for $50.5 million that bears interest at (i) LIBOR plus 300 basis points to 350 basis points, depending upon the Company’s leverage ratio as defined in the Credit Agreement or, (ii) a base rate plus an applicable margin as defined in the Credit Agreement. As of

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December 31, 2017, interest expense on our variable rate line of credit facility would increase by as much as $505,000 annually if LIBOR increased by 100 basis points.

 

 

 

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

GTJ REIT, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Stockholders and Board of Directors

GTJ REIT, Inc. and Subsidiaries

West Hempstead, New York

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of GTJ REIT, Inc. and Subsidiaries (the “Company”), as of December 31, 2017 and 2016, the related consolidated statements of operations, equity, and cash flows for each of the two years in the period ended December 31, 2017, and the related notes and financial statement schedule listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

 

/s/BDO USA, LLP

We have served as the Company's auditor since 2009.

 

New York, New York

March 29, 2018

 

 

 

 

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GTJ REIT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2017 and 2016

(amounts in thousands, except share data)

 

 

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

 

 

 

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GTJ REIT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2017 and 2016

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

 

 

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

 

 

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GTJ REIT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

For the Years Ended December 31, 2017 and 2016

(amounts in thousands, except share data)

 

 

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

 

 

 

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GTJ REIT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2017 and 2016

(amounts in thousands)

 

 

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

 

 

 

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GTJ REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

1. ORGANIZATION AND DESCRIPTION OF BUSINESS:

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

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

On January 17, 2013, the Company closed on a transaction with Wu/Lighthouse Portfolio, LLC, in which a limited partnership (the “Operating Partnership”) owned and controlled by the Company, acquired all outstanding ownership interests of a portfolio consisting of 25 commercial properties (the “Acquired Properties”) located in New York, New Jersey and Connecticut, in exchange for 33.29% of the outstanding limited partnership interest in the Operating Partnership.  The outstanding limited partnership interest in the Operating Partnership exchanged for the Acquired Properties was increased to 33.78% due to post-closing adjustments, and to 34.35% due to the redemption of certain shares of GTJ REIT, Inc. common stock.  The acquisition was recorded as a business combination and accordingly the purchase price was allocated to the assets acquired and liabilities assumed at fair value. As a result of this acquisition, the six properties acquired in 2014, the seven properties acquired in 2015, two properties acquired in 2016, and the two properties acquired in 2017, the Company currently beneficially owns a 65.65% interest in a total of 49 properties consisting of approximately 5.9 million square feet of industrial, office and other properties on approximately 400 acres of land in New York, New Jersey, Connecticut and Delaware. At December 31, 2017, subject to certain anti-dilutive and other provisions contained in the governing agreements, the limited partnership interest in the Operating Partnership may be converted in the aggregate, into approximately 1.9 million shares of the Company’s common stock and approximately 5.2 million shares of Series B preferred stock.

Prior to 2013, the Company had operated a group of outdoor maintenance, shelter cleaning, and electrical contracting businesses, as well as a parking garage facility. During 2011, the Board voted to divest these operations which were sold in 2012 and 2013. The operations of these entities are reported in the consolidated financial statements.

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation:

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

During the twelve months ended December 31, 2016, the Company determined that certain transactions involving the issuance of limited partnership interests of the Operating Partnership, should have resulted in a reallocation between the Operating Partnership’s non-controlling interest (“OP NCI”) and Additional Paid-in-Capital (“APIC”) to reflect the difference between the fair value of the consideration received and the book value of the OP NCI attributable to limited partnership interests at the time of the issuance (the “Reallocation”). During the twelve months ended December 31, 2016, the Company increased its APIC with an offsetting reduction to OP NCI of approximately $23.7 million. During the twelve months ended December 31, 2017, the Company decreased its APIC with an offsetting increase to OP NCI of approximately $0.2 million. The Company concluded that these Reallocation adjustments are not meaningful to the Company’s financial position for any of the prior years, and as such these cumulative changes were recorded in the Consolidated Balance Sheets and Statement of Stockholders’ Equity in 2016 and 2017. These Reallocations have no impact on the previously reported Statement of Operations or Cash Flows.

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

 

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Use of Estimates:

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

Real Estate:

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

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

Mortgage notes payable assumed in connection with acquisitions are recorded at their fair value using current market interest rates for similar debt at the time of acquisitions. Acquisition-related costs are expensed as incurred. The capitalized above-market lease values are amortized as a reduction of rental revenue over the remaining term of the respective leases and the capitalized below-market lease values are amortized as an increase to rental revenue over the remaining term of the respective leases. The value of in-place leases is based on the Company’s evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during expected lease-up periods, current market conditions, and costs to execute similar leases. The values of in-place leases are amortized over the remaining term of the respective leases. If a tenant vacates its space prior to its contractual expiration date, any unamortized balance of the related intangible assets or liabilities is recorded as income or expense in the period. The total net impact to rental revenues due to the amortization of above-market and below-market leases was a net increase in rental revenue of approximately $0.4 million and $0.5 million for the years ended December 31, 2017 and December 31, 2016, respectively.

As of December 31, 2017, approximately $1.5 million and $13.1 million (net of accumulated amortization) relating to above-market and in-place leases, respectively, are included in acquired lease intangible assets, net in the accompanying consolidated balance sheets. As of December 31, 2016, approximately $1.9 million and $12.5 million (net of accumulated amortization) relating to above-market and in-place leases, respectively, are included in acquired lease intangible assets, net in the accompanying consolidated balance sheets. As of December 31, 2017 and 2016, approximately $5.9 million and $6.7 million (net of accumulated amortization), respectively, relating to below-market leases is included in acquired lease intangible liabilities, net in the accompanying consolidated balance sheets.

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The following table presents the projected increase to rental revenue from the amortization of the acquired above-market and below-market lease intangibles and the increase to amortization expense of the in-place lease intangibles for properties owned at December 31, 2017, over the next five years and thereafter (in thousands):

 

 

Depreciation and Amortization:

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

Deferred Charges:

Deferred charges consist principally of leasing commissions, which are amortized over the life of the related tenant leases, and financing costs, which are amortized over the terms of the respective debt agreements. These deferred charges are included in other assets on the consolidated balance sheets.  If leases are terminated, the unamortized charges are expensed.

Asset Impairment:

Management reviews each real estate investment for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability is based on an estimate of the undiscounted future cash flows that are expected to result from the real estate investment’s use and eventual disposition. Such cash flow analyses consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If an impairment event exists due to the projected inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair value. Management is required to make subjective assessments as to whether there are impairments in the value of the Company’s real estate holdings. These assessments could have a direct impact on net income, because an impairment loss is recognized in the period that the assessment is made. Management has determined that there were no indicators of impairment relating to its long-lived assets at December 31, 2017.

Reportable Segments:

As of December 31, 2017, the Company primarily operated in one reportable segment, commercial real estate.

Revenue Recognition:

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

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

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

Earnings Per Share Information:

The Company presents both basic and diluted earnings per share. Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower per share amount. Restricted stock was included in the computation of diluted earnings per share.  Stock option awards were included in the computation of earnings per share in 2017 and 2016 because the option awards were dilutive.  

Cash and Cash Equivalents:

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

Restricted Cash:

Restricted cash represents reserves used to pay real estate taxes, insurance, repairs, leasing costs and capital improvements. At December 31, 2017 and 2016, the Company had restricted cash of $3.5 million and $2.6 million, respectively, which is included in other assets on the consolidated balance sheets.

Fair Value Measurement:

The Company determines fair value in accordance with Accounting Standards Codification (“ASC”) 820-10-05 for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures.

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

Assets and liabilities disclosed at fair values are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, which are defined by ASC 820-10-35, are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities. Determining which category an asset or liability falls within the hierarchy requires significant judgment, and the Company evaluates its hierarchy disclosures each quarter. The three-tier fair value hierarchy is as follows:

Level 1 — Valuations based on quoted prices for identical assets and liabilities in active markets.

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

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

Income Taxes:

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

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

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

ASC 740-10-65 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10-65, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740-10-65 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of December, 2017 and 2016, the Company had determined that no liabilities are required in connection with unrecognized tax positions. As of December 31, 2017, the Company’s tax returns for the prior three years are subject to review by the Internal Revenue Service. Any interest and penalties would be expensed as incurred.

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

Concentrations of Credit Risk:

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

Contractual rent of $9.7 million, derived from five leases with the City of New York, for the year ended December 31, 2017, represented 22% of the Company’s total contractual rental income.

Stock-Based Compensation:

The Company has a stock-based compensation plan, which is described below in Note 6. The Company accounts for stock-based compensation in accordance with ASC 718, which establishes accounting for stock-based awards. Under the provisions of ASC 718, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is expensed at the grant date (for the portion that vests immediately) or ratably over the respective vesting periods.

New Accounting Pronouncements:

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

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

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business.” ASU 2017-01 provides new guidance that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets is not a business. ASU 2017-01 also requires a business to include at least one substantive process.  ASU 2017-01 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years.  Early adoption was permitted.  The Company evaluated the impact ASU 2017-01 will have on its consolidated financial statements as the new standard will reduce the number of future real estate acquisitions accounted for as a business combination and therefore, reduce the amount of acquisition costs that will be expensed. The adoption of ASU 2017-01 will result in a reduction of expensed acquisition costs and a corresponding increase to net income.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash.” ASU 2016-18 updates Topic 230 to require cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts on the statement of cash flows. Consequently, transfers between cash and restricted cash will not be presented as a separate line item in the operating, investing or financing sections of the cash flow statement. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years and should be applied retrospectively. Early adoption was permitted.  The adoption of ASU 2016-18 is not expected to have a material impact on the Company’s consolidated financial position or cash flows.

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

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

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

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic No. 842).” ASU 2016-02 requires lessees to recognize at the commencement date, a lease liability, which is the lessee’s obligation to make lease payments arising from a lease and measure it on a discounted basis. A lessee must recognize an asset when it represents a lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged.  ASU 2016-02 is effective for fiscal periods and interim periods within those fiscal periods beginning after December 15, 2018.  Early adoption is permitted. The adoption of ASU 2016-02 is not expected to have a material impact on the Company’s consolidated financial statements. As a lessee, the Company is a party to an office lease with future lease obligations aggregating to $838,694, as of December 31, 2017, for which the Company expects to record right-of-use assets upon the adoption of ASU 2016-02.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 is intended to improve the recognition and measurement of financial instruments. The new guidance requires equity investments, except for those accounted for under the equity method of accounting, or those that result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net income. ASU 2016-01 requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or accompanying notes to the financial statements. The new guidance eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.  Under ASU 2016-01, a reporting company will be required to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. ASU 2016-01 is effective for public business entities for fiscal periods and interim periods within those fiscal periods beginning after December 15, 2017. The adoption of ASU 2016-01 is not expected to have a material impact on the Company’s consolidated financial statements.  

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration an entity expects to receive for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. ASU 2014-09 does not apply to the Company’s lease revenues but will apply to reimbursed tenant costs.  Additionally, this guidance modifies disclosures regarding the nature, timing, amount and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU 2015-14 which defers the effective date of ASU 2014-09 for all entities by one year, until fiscal years beginning after December 15, 2017, with early adoption permitted but not before fiscal years beginning after December 15, 2016.  Entities may adopt ASU 2014-09 using either a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients or a modified retrospective approach with the cumulative effect recognized at the date of adoption.  The Company believes the majority of its revenue falls outside the scope of this guidance and does not anticipate any significant changes to the timing of the Company’s revenue recognition. The Company intends to implement the standard retrospectively, with the cumulative effect recognized in retained earnings at the date of application.

 

 

3. REAL ESTATE:

The changes in real estate for the years ended December 31, 2017 and 2016 are as follows (in thousands):

 

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The changes in accumulated depreciation, exclusive of amounts relating to equipment, transportation equipment, and furniture and fixtures, for the years ended December 31, 2017 and 2016 are as follows (in thousands):

 

 

Cherry Hill, New Jersey

On July 27, 2017, the Company acquired a 109,771 square-foot distribution and installation training building in Cherry Hill, New Jersey for $7.6 million.  The property is leased to Sovereign Distributors, Inc. (d/b/a Avalon Flooring) for a term that expires on September 30, 2031.  The purchase was financed through the Company’s secured revolving credit facility with Key Bank.

Montgomery, New York

On August 31, 2017, the Company acquired a 248,370 square-foot warehouse/distribution facility in Montgomery, New York for $36.2 million.  The property is leased to FedEx Ground Package System, Inc. for a term that expires on February 28, 2027.  The purchase was financed through the Company’s secured revolving credit facility with Key Bank.

 

East New York, Brooklyn, New York:

 

On May 10, 2016, the Company acquired a 57,786 square foot warehouse/garage building in East New York, Brooklyn, New York for $10.0 million.  The property is currently leased to the City of New York (DCAS) for the benefit of the Department of Sanitation for a term that expires on December 31, 2025. The purchase was financed through the Company’s secured revolving credit facility with Key Bank.

Newark, Delaware:

On June 1, 2016, the Company acquired a 208,656 square foot warehouse distribution facility in Newark, Delaware for $17.0 million.  The property is currently leased to Valassis Communications, Inc. for a term that expires on April 30, 2025. The purchase was financed through the Company’s secured revolving credit facility with Key Bank.

Purchase Price Allocations:

The purchase prices of the above acquisitions were allocated to the acquired assets and assumed liabilities based on their estimated fair values at the date of acquisition.

The following table summarizes the Company’s allocation of the purchase prices of assets acquired and liabilities assumed during 2017 and 2016 (in thousands):

 

 

 

 

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4. MORTGAGE NOTES PAYABLE:

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

 

American International Group Loan Agreement:

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

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

Allstate Loan Agreement:

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

Athene (formerly Aviva) Loan Agreement:

On February 22, 2013, a wholly owned subsidiary of the Operating Partnership, entered into a $15.0 million mortgage note with Aviva Life and Annuity Company. The loan bore interest at a rate of 3% per annum and required monthly payments of interest. The principal was payable when the loan matured on March 1, 2018. The principal payment at maturity was financed through the Operating Partnership’s secured revolving credit facility with Key Bank.

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Genworth Loan Agreement:

On April 3, 2013, four wholly owned subsidiaries of the Operating Partnership (collectively, the “Genworth Borrower”) entered into mortgage loan agreements with Genworth Life Insurance Company (the “Genworth Lender”), in the aggregate principal amount of $29.5 million. The loan bears interest at a rate of 3.20% and matures on April 30, 2018. The loan is evidenced by promissory notes of $14.4 million (the “New York Note”) and $15.1 million (the “New Jersey Note”), hereinafter referred to as the (“Notes”).

The New York Note required 12 monthly payments of interest only starting June 1, 2013. Beginning June 1, 2014, monthly payments of principal and interest in the amount of approximately $70,000 are required until the New York Note becomes due and payable.

The New Jersey Note required 12 monthly payments of interest starting June 1, 2013. Beginning June 1, 2014, monthly payments of principal and interest in the amount of approximately $73,000 are required until such New Jersey Note becomes due and payable.

The Notes are secured by, among other things, property owned by the Genworth Borrower. The proceeds from the loans were used to satisfy in full obligations to John Hancock Life Insurance Company under a prior mortgage agreement.

The Genworth Borrower and the Operating Partnership agreed to indemnify the Genworth Lender against certain claims and guaranty certain obligations of the Genworth Borrower pursuant to certain Environmental Indemnity Agreements. Certain obligations under the loan agreements are also guaranteed by the Operating Partnership.

People’s United Bank Loan Agreement:

In connection with the acquisition of an 84,000 square foot parking lot in Long Island City, Queens, NY, a wholly owned subsidiary of the Operating Partnership entered into a mortgage loan agreement with People’s United Bank in the aggregate amount of $15.5 million.  The loan has a ten-year term and bears interest at 4.18%. Payments for the first seven years are interest only. Payments over the remaining three years of the term are based on a 25 year amortization schedule, with a balloon payment of $14.4 million due at maturity.

United States Life Insurance Company Loan Agreement:

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

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

Loan Assumptions:

Certain of the properties acquired discussed above were encumbered by certain mortgage indebtedness. Concurrent with the acquisition of these properties, the Company, the Operating Partnership and the entity owners of the properties acquired entered into certain loan assumption and modification documents to facilitate the acquisition of the properties acquired. Below is a summary of the material terms of the arrangement with each lender.

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People’s United Bank Loan:

Wu/LH 15 Progress Drive L.L.C., a wholly owned subsidiary of the Operating Partnership, entered into a $2.7 million mortgage loan with the bank, on September 30, 2010. The loan is secured by the properties located at 15 Progress Road and 30 Commerce Drive, Shelton, Connecticut and bears interest at a rate of 5.23%. The Operating Partnership is required to make monthly payments of principal and interest until the loan matures on October 1, 2020. The obligations under this loan agreement are also guaranteed by GTJ REIT.

Hartford Accident & Indemnity Loan:

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

In connection with the loan agreements, the Company is required to comply with certain covenants. As of December 31, 2017, the Company was in compliance with all covenants.

 

Principal Repayments:

Scheduled principal repayments during the next five years and thereafter are as follows (in thousands):

 

 

 

5. SECURED REVOLVING CREDIT FACILITY:

Key Bank Loan Agreement:

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

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

Due to the revolving nature of the facility, amounts prepaid under the facility may be borrowed again. The Credit Agreement contemplates (i) mandatory prepayments by the Operating Partnership of any borrowings under the facility in excess of the

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total allowable commitment, among other events, and (ii) optional prepayments, without any penalty or premium, in whole or in part, subject to payments of any amounts due associated with the prepayment of LIBOR rate contracts.

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

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

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

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

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

The contemplated uses of proceeds under the Credit Agreement include, among others, repayment of indebtedness, funding of acquisitions, development and capital improvements, as well as working capital expenditures. Outstanding borrowings under the secured revolving credit facility with Key Bank as of December 31, 2017 and December 31, 2016 were $35.9 million and $27.8 million, respectively, which are considered LIBOR Rate loans.

In connection with the Credit Agreement, the Operating Partnership is required to comply with certain covenants. As of December 31, 2017, the Operating Partnership was in compliance with all covenants.

 

 

6. STOCKHOLDERS’ EQUITY:

Preferred Stock:

The Company is authorized to issue 10,000,000 shares of preferred stock, $.0001 par value per share. Voting and other rights and preferences may be determined from time to time by the Board of Directors (the “Board of Directors” or “Board”) of the Company. The Company has designated 500,000 shares of preferred stock as Series A preferred stock, $.0001 par value per share. In addition, the Company has designated 6,500,000 shares of preferred stock as Series B preferred stock, $.0001 par value per share. There are no voting rights associated with the Series B preferred stock. There was no Series A preferred stock or Series B preferred stock outstanding as of December 31, 2017, or December 31, 2016.

 

Common Stock:

The Company is authorized to issue 100,000,000 shares of common stock, $.0001 par value per share. As of December 31, 2017, and 2016, the Company had a total of 13,594,125 and 13,618,884 shares issued and outstanding, respectively.

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Dividend Distributions:

The following table presents dividends declared by the Company on its common stock during 2017 and 2016:

 

 

 

In order to qualify as a REIT, the Company must distribute at least 90% of its taxable income and must distribute 100% of its taxable income in order not to be subject to corporate federal income taxes on retained income. The Company anticipates it will distribute all of its taxable income to its stockholders. Because taxable income differs from cash flow from operations due to non-cash revenues or expenses (such as depreciation), in certain circumstances, the Company may generate operating cash flow in excess of its distributions or, alternatively, may be required to borrow to make sufficient distribution payments.

Stock Based Compensation:

On June 11, 2007, the Board of Directors approved the Company’s 2007 Incentive Award Plan (the “2007 Plan”). The 2007 Plan covered directors, officers, key employees and consultants of the Company. The purposes of the 2007 Plan was to further the growth, development, and financial success of the Company and to obtain and retain the services of the individuals considered essential to the long-term success of the Company. The 2007 Plan provided for awards in the form of restricted shares, incentive stock options, non-qualified stock options and stock appreciation rights. The aggregate number of shares of common stock which may have been awarded under the 2007 Plan was 1,000,000 shares. The 2007 Plan expired by its terms on June 11, 2017.

The 2017 Incentive Award Plan (the “2017 Plan”) was adopted by the Board and became effective on April 24, 2017, subject to the approval of the Company’s stockholders which was obtained on June 8, 2017.  The 2017 Plan has intended purposes to further the growth, development, and financial success of the Company and to obtain and retain the services of those individuals considered essential to the long-term success of the Company. The 2017 Plan provides for awards in the form of stock, stock units, incentive stock options, non-qualified stock options and stock appreciation rights. The aggregate number of shares of common stock which may be awarded under the 2017 Plan is 2,000,000 shares. As of December 31, 2017, the Company had 2,000,000 shares available for future issuance under the 2017 Plan. Dividends paid on restricted shares are recorded as dividends on shares of the Company’s common stock whether or not they are vested. In accordance with ASC 718-10-35, the Company measures the compensation costs for these shares as of the date of the grant and the expense is recognized in earnings, at the grant date (for the portion that vest immediately) and then ratably over the respective vesting periods.

On February 7, 2008, 55,000 options were granted to non-employee directors and vested immediately and 200,000 options were granted to key officers of the Company and had a three year vesting period. On June 9, 2011, the Company granted 10,000 options to a non-employee director which vested immediately. On November 8, 2016, 200,000 options were granted to key officers of the company and had a three-year vesting period. No options were exercised during 2016.  In 2017, 200,000 options were exercised. All options expire ten years from the date of grant. For the year ended December 31, 2017, the stock compensation expense relating to these stock options was approximately $126,000.

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

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On March 21, 2013, the Company issued an aggregate of 50,002 restricted shares of common stock, with a value of approximately $320,000, under the 2007 Plan. A total of 3,126 of these shares, with a value of approximately $20,000 (based upon an estimated value of $6.40 per share), were granted to non-management members of the Board of Directors, and vested immediately. The remaining 46,876 shares, with a value of approximately $300,000 (based upon an estimated value of $6.40 per share), were granted to certain executives of the Company, and vested ratably over a four year period. One fourth of the shares granted to the executives vested on the grant date and one fourth vested each year on the following dates: March 21, 2014, March 21, 2015, and March 21, 2016.

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

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

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

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

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

On March 24, 2016, the Company issued 47,043 restricted shares of common stock with a value of approximately $489,250 (based upon an estimated value of $10.40 per share) under the 2007 Plan to certain executives of the Company.  One sixth of the shares vested immediately upon issuance and the remaining shares vest in equal installments on the next five anniversary dates of the grant.

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

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

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

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

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

For the years ended December 31, 2017 and 2016, the Company’s total stock compensation expense was approximately $718,000 and $539,000, respectively. As of December 31, 2017, there was approximately $433,000 of unamortized stock compensation related to restricted stock.  The cost is expected to be recognized over a weighted average period of 1.9 years.

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At December 31, 2017, 220,000 stock options were outstanding, 40,000 of which were exercisable, and 442,787  shares of restricted stock were outstanding, 402,406 of which were vested.

The following is a summary of restricted stock activity:

 

The following is an amortization schedule of the total unamortized shares of restricted stock outstanding as of December 31, 2017:

 

 

7. EARNINGS (LOSS) PER SHARE:

In accordance with ASC 260-10-45, basic earnings per common share (“Basic EPS”) is computed by dividing the net income by the weighted-average number of common shares outstanding. Diluted earnings per common share (“Diluted EPS”) is computed by dividing net income by the weighted-average number of common shares and dilutive common share equivalents then outstanding. There were 22,335 and 31,199 common share equivalents in 2017 and 2016, respectively, presented in diluted earnings per share.

The following table sets forth the computation of basic and diluted earnings per share information for the years ended December 31, 2017 and 2016 (in thousands, except share and per share data):

 

 

 

8. RELATED PARTY TRANSACTIONS:

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

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The Company’s executive and administrative offices, located at 60 Hempstead Avenue, West Hempstead, New York, are being leased from Lighthouse Sixty, L.P., a partnership of which Paul Cooper and Louis Sheinker are managing members of the general partner.  The lease agreement expires in 2020 and has a current annual base rent of approximately $298,000 with aggregate lease payments totaling $1.8 million.

On December 11, 2013, the Company and Jerome Cooper, the former Chairman Emeritus, entered into a separation agreement. The agreement provides for the payment to Mr. Cooper of an aggregate of $360,000; payable in three equal annual installments of $120,000, commencing January 1, 2014. Mr. Cooper passed away on May 20, 2015. Under the terms of the separation agreement, Mr. Cooper’s heirs received the balance of the payments on January 1, 2016.

On November 4, 2014, the Company invested $1.8 million for a limited partnership interest in Garden 1101 Stewart, L.P. (“Garden 1101”). Garden 1101 was formed for the purposes of acquiring a 90,000 square foot office building in Garden City, NY that was converted to a medical office building. The general partners of Garden 1101 include the members of Green Holland Ventures, Paul Cooper and Louis Sheinker. The investment is included in other assets on the consolidated balance sheets. A loss of approximately $198,000 and $399,000 is included in other expenses on the consolidated statement of operations for the years ended December 31, 2017 and December 31, 2016, respectively. On February 9, 2018, the property acquired by Garden 1101 was sold and the Company received an initial distribution from the partnership of $3.7 million.  A final distribution is expected to be received in 2018 upon liquidation of the partnership.

 

 

9. COMMITMENTS AND CONTINGENCIES:

Legal Matters:

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

Letter of Credit:

On November 4, 2015, the Company posted a $957,708 Letter of Credit with Bank of America, N.A., in connection with a performance guarantee to complete certain site improvements at 20 East Halsey Road in Parsippany, New Jersey.  The Township of Parsippany-Troy Hills was the beneficiary. The term was for one year plus applicable extensions. On October 18, 2016, the beneficiary issued a resolution releasing the Letter of Credit as the site improvements were satisfactorily completed. The Letter of Credit was cancelled on October 31, 2016.

Divestiture:

On February 16, 2012, the Company 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 of Shelter Electric. The Company determined the liability was probable and the Company agreed to pay the obligation in monthly installments of approximately $8,000 over a twenty-year term. As of December 31, 2017 and 2016, the present value of this obligation was approximately $1.1 million and $1.2 million, respectively, and is included in other liabilities on the accompanying consolidated balance sheets.

Environmental Matters:

As of December 31, 2017, three of the Company’s six former bus depot sites have received final regulatory closure, satisfying outstanding clean-up obligations related to legacy site contamination issues.  Three sites continue with on-going cleanup, monitoring and reporting activities.  We believe each of the six sites remain in compliance with existing local, state and federal obligations.

 

 

10. FAIR VALUE:

Fair Value of Financial Instruments:

The fair value of the Company’s financial instruments are determined based upon applicable accounting guidance. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance requires disclosure of the level within the fair value hierarchy in which the fair value measurements fall, including measurements using quoted prices in active markets for identical assets or liabilities (Level 1),

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quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active (Level 2), and significant valuation assumptions that are not readily observable in the market (Level 3).

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

 

 

 

11. OTHER RETIREMENT BENEFITS:

Other Retirement Benefits:

The Company sponsors retirement benefits under a defined contribution 401(k) plan which covers all employees who have completed one year of service and are at least 21 years of age. Contributions to this plan and charged to benefit costs for the years ended December 31, 2017 and 2016 were approximately $49,000 and $42,000, respectively.

In November 2016, the Board of Directors of the Company approved the implementation of a profit sharing contribution component to its existing 401(k) plan. Contributions to this component of the plan and charged to benefits costs for the year ended December 31, 2017 were approximately $184,000, consisting of approximately $90,000 and $94,000 attributable to the plan years ended December 31, 2017 and December 31, 2016, respectively.

 

 

12. INCOME TAXES:

The Company elected to be taxed as a REIT under the Code. A REIT will generally not be subject to federal income taxation on that portion of its income that qualifies as REIT taxable income, to the extent that it distributes at least 90% of its taxable income to its stockholders and complies with certain other requirements. It is management’s intention to adhere to these requirements and maintain the Company’s REIT status. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable minimum tax and may not be able to qualify as a REIT for four subsequent taxable years). Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and federal income and excise taxes on its undistributed taxable income. In addition, taxable income from non-REIT activities managed through taxable REIT subsidiaries are subject to federal, state, and local income taxes.

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

Income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates are generally subject to tax at preferential rates. Dividends payable by REITs, however, generally are not eligible for the preferential tax rates applicable to qualified dividend income. Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, to the extent that the preferential rates continue to apply to regular corporate qualified dividends, investors who are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could materially and adversely affect the value of the shares of REITs, including the value of our common stock.

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The Act signed into law by the President on December 22, 2017 makes significant changes to the Code, including changes that impact REITs and their shareholders, among others. In particular, the Act reduces the maximum corporate tax rate from 35% to 21%. In addition, for tax years beginning before January 1, 2026, the Act permits up to a 20% deduction for individuals, trusts, and estates with respect to their receipt of “qualified REIT dividends”, which are dividends from a REIT that are not capital gain dividends and are not qualified dividend income. This provides closer parity between the treatment under the new law of ordinary REIT dividends and qualified dividends. These changes generally result in an effective maximum U.S. federal income tax rate on such dividends of 29.6%, if the deduction is allowed in full. However, by reducing the corporate tax rate, it is possible that the Act will nevertheless reduce the relative attractiveness to investors (as compared with potential alternative investments) of the generally single level of taxation on REIT distributions. Although certain changes to the Code are generally advantageous to REITs and their shareholders, the full ramifications of the Act remain unclear and will likely remain unclear for an indeterminate period of time. Key provisions of the Act that could impact us and the value of our shares include the following:

The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could adversely affect our stockholders or us. We cannot predict how changes in the tax laws might affect our stockholders or us. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the federal income tax consequences of such qualification.

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Reconciliation between GAAP Income From Continuing Operations and Federal Taxable Income:

The following table reconciles GAAP income from continuing operations to taxable income for the years ended December 31, 2017 and 2016 (in thousands):

 

 

We have determined for income tax purposes that the 2017 and 2016 regular dividends were considered ordinary dividends.  

Taxable REIT Subsidiaries:

The Company is subject to federal, state, and local income taxes on the income from its Taxable REIT subsidiaries (“TRS”) activities, which include all the discontinued operations of Shelter Express, Inc. and subsidiaries. There were no provisions for (benefit from) income taxes from discontinued operations for the years ended December 31, 2017 and 2016. The TRS entities have approximately $20.0 million of net operating loss carry-forwards and $9.0 million of capital loss carryforwards at December 31, 2017. The Company has recorded a full valuation allowable against the deferred income tax assets as it does not consider realization of such assets to be likely than not. The Company has determined that any changes in the value of the deferred income tax assets would have no impact on the Company’s consolidated financial statements inasmuch as it would be offset by a full valuation allowance.

 

 

13. FUTURE MINIMUM RENT SCHEDULE:

Future minimum contractual lease payments to be received by the Company (without taking into account straight-line rent or amortization of intangibles) as of December 31, 2017, under operating leases for the next five years and thereafter are as follows (in thousands):

 

 

The lease agreements generally contain provisions for the reimbursement of real estate taxes and operating expenses, as well as fixed increases in rent.

 

 

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14. SELECTED QUARTERLY DATA (Unaudited):

The summarized selected quarterly data for the years ended December 31, 2017 and 2016 are as follows (in thousands except per share data).

 

 

 

 

 

15. SUBSEQUENT EVENTS:

 

Purchase of Securities

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

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

Financings

 

On February 27, 2018, the Company increased its secured revolving credit facility with Key Bank from $50,524,986 to $55,000,000. In addition, the Company exercised its option to extend the maturity date of the credit facility to June 30, 2019.

 

On February 27, 2018, the Company paid its mortgage note payable with Athene Annuity & Life Company in the amount of $15,000,000 from funds available from its secured revolving credit facility.

 

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

 

Acquisition

 

On March 6, 2018, the Company purchased a 50% interest in Two CPS Developers LLC (the “Joint Venture”) for $5,250,000. The joint venture owns a 132,650 square foot vacant office building located at 2 Corporate Place South, Piscataway, New Jersey, which is being demolished and will be replaced with a 150,325 square foot state of the art 36-foot clear industrial building. The Company financed the acquisition from funds available from its secured revolving credit facility with Key Bank.

 

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Related Parties

 

On February 9, 2018, the Company received a distribution of $3.7 million from Garden 1101 Stewart, LP, representing its initial share of the proceeds from the sale of the partnership assets.

 

 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

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ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures:

We maintain a system of disclosure controls and procedures (as defined in Rule 15d-15(e) under the Exchange Act). As required by Rule 15d-15(b) under the Exchange Act, management, under the direction of our Company’s Chief Executive Officer and Chief Financial Officer, reviewed and performed an evaluation of the effectiveness of design and operation of our disclosure controls and procedures (as defined in Rule 15d-15(e) under the Exchange Act) as of December 31, 2017, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that (i) information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (ii) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting:

Our management is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rule 15d-15(f) of the Exchange Act). There are inherent limitations to the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal controls may vary over time.

We have assessed the effectiveness of our internal control over financial reporting (as defined in Rule 15d -15(f) of the Exchange Act) as of December 31, 2017. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 Internal Control—Integrated Framework. Management concluded that, as of December 31, 2017, our internal control over financial reporting was effective based on the criteria established in the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC that require the Company to include only management’s report in this annual report.

Internal Control Over Financial Reporting:

There were no changes in our internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

 

 

 

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The following table sets forth the names and ages of our directors and executive officers and the positions they held with us as of March 22, 2018:

 

The principal occupation and business experience of each of the directors and executive officers are as follows:

Paul Cooper has been Chief Executive Officer of the Company since June 2012 and Chairman of the Board of Directors (“Board”) since January 1, 2014. Mr. Cooper has been a director of the Company since June 2006 and previously served as Executive Vice President. Prior to joining the Company, for more than 12 years, Mr. Cooper was a principal of Lighthouse Real Estate Ventures and its affiliates (collectively “Lighthouse”). Lighthouse owned, managed, and leased its own portfolio of more than 2 million square feet of commercial buildings in the Greater New York metropolitan area. Mr. Cooper brings his extensive experience in the commercial real estate industry to the Board. Mr. Cooper holds a Bachelor of Science degree from the University of Pennsylvania and a Juris Doctor degree from Fordham University. Paul Cooper is the cousin of Douglas Cooper.

Louis Sheinker has been President and Chief Operating Officer and a director of the Company since January 2013. Mr. Sheinker brings nearly 27 years of real estate experience to the Company. Prior to joining the Company, Mr. Sheinker was a co-founding partner in Lighthouse Real Estate Ventures. He has participated in restructuring and repositioning of over 4 million square feet of office space and industrial properties. Prior to founding Lighthouse, he was the President of Sheinker Wasserstein Realty Services, Inc., which performed management and asset management services on behalf of financial institutions throughout the New York Metropolitan Area. Mr. Sheinker brings his extensive experience in the commercial real estate industry to the Board. He holds a Bachelor of Science degree from Ithaca College, and is currently a licensed Real Estate Broker in New York State. Effective as of January 15, 2015, Mr. Sheinker was appointed Secretary of the Company.

Stuart Blau has been Chief Financial Officer and Treasurer of the Company since November 2017.  Prior to joining the Company, Mr. Blau served as Managing Partner at Kimmel Blau & Goldman LLP, a diversified certified public accounting firm, since 1983.  He has also served as Partner at Berlin & Blau, attorneys at law, since 1985.  Mr. Blau is a Certified Public Accountant and admitted to practice law in the State of New York. Mr. Blau received a Bachelor of Science degree from the State University of New York at Buffalo and a Juris Doctor degree from St. John’s University School of Law.

Douglas Cooper has been a director since June 2006. Mr. Cooper has been practicing law for over 40 years and is now of counsel to the firm of Ruskin Moscou Faltischek, P.C. Mr. Cooper brings his legal expertise to his long service to the Board. Mr. Cooper graduated from Hamilton College, and received his Juris Doctor degree from Fordham Law School. Mr. Cooper also earned a Master’s degree in Corporate Law from NYU Law School. Douglas Cooper is the cousin of Paul Cooper. Mr. Cooper resigned as the Company’s Treasurer and Secretary effective as of January 15, 2015.

John Leahy has been a director of the Company since June 2006. Mr. Leahy is presently President of JJL Consulting. From 1998 to 2006, Mr. Leahy was Managing Director of Citibank Private Bank operations in Long Island. Prior to that, Mr. Leahy was a Senior Vice President of Chase Manhattan Bank, N.A. Mr. Leahy brings his expertise as a private and commercial banker to the Board. Mr. Leahy holds a Bachelor’s degree in Mechanical Engineering from the University of Dayton, and a Master’s degree in Business Management from Long Island University. Mr. Leahy is deemed an independent director.

Stanley Perla has been a director of the Company since January, 2013. Mr. Perla was a partner with Ernst & Young LLP, a public accounting firm, from September 1978 to June 2003, and Managing Partner of Cornerstone Accounting Group LLP, from June 2008 to May 2011. He served as Ernst & Young’s National Director of Real Estate Accounting, as well as on Ernst & Young’s National Accounting and Auditing Committee. He is an active member of the National Association of Real Estate Investment Trusts and the National Association of Real Estate Companies. He is currently chair and/or a member of the American Finance Trust and the

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Hospitality Investors Trust audit committees. He has also served as a director and/or member of the audit committees of Madison Harbor Balanced Strategies, Inc., American Realty Capital Daily Net Asset Value Fund, American Capital Global Trust II, American Real Estate Income Fund American Mortgage Acceptance Company and Lexington Realty Trust, and Vice President/Director of Internal Audit for Vornado Realty Trust (July 2003 to May 2008). Mr. Perla brings his accounting experience within our industry as well as his real estate and financial industry experience to the Board. He graduated from Baruch College, where he obtained his BBA in accounting in 1965, and his MBA in taxation in 1970. He is a licensed Certified Public Accountant in the State of New Jersey and New York. Mr. Perla is deemed an independent director.

Donald Schaeffer has been a director of the Company since June 2006. Mr. Schaeffer has extensive accounting and legal experience in real estate and tax. In 1982, he joined the accounting firm, Kandel Schaeffer, in which he eventually became an officer and owner. Through successor accounting firms, he became co-owner and President of Schaeffer & Sam, P.C., which he has practiced with for the past seventeen years. Mr. Schaeffer brings his legal and accounting experience to the Board. He graduated from the Wharton School, University of Pennsylvania, in 1972 and Columbia University School of Law in 1975. He is a licensed Certified Public Accountant in the State of New York. Mr. Schaeffer is deemed an independent director.

Harvey Schneider has been a director of the Company since June 2007. Mr. Schneider is currently of counsel at the law firm of Putney, Twombly, Hall & Hirson LLP. Mr. Schneider is admitted to practice law in New York and Florida. For approximately fifty years he has practiced in the field of trusts and estates for individuals, and employee benefits and succession planning for business entities. Mr. Schneider brings his legal, employee benefits and business succession planning expertise to the Board. Mr. Schneider is a 1955 graduate of Pennsylvania State University with a Bachelors’ degree in Business Administration and a 1958 graduate of the New York University School of Law. Mr. Schneider is deemed an independent director.

Except as noted above and elsewhere in this filing, there are no family relationships between any of the Company’s executive officers or directors and there are no arrangements or understandings between a director and any other person pursuant to which such person was elected as director.

No director or officer of the Company has, during the last 10 years, been subject to or involved in any legal proceedings described under Item 401(f) of Regulation S-K, been convicted of any criminal proceeding (excluding traffic violations or similar misdemeanors), or been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, United States federal or state securities laws or finding any violations with respect to such laws.

Board Membership, Meetings and Attendance

The Board oversees the business affairs of our Company and monitors the performance of management. Each director holds office for the term for which he is elected or until his successor is duly elected and qualified, his resignation, or he is removed in the manner provided by our Bylaws. All of our officers devote their full-time attention to our business.

Our Board currently consists of seven directors:  Paul Cooper, Louis Sheinker, Douglas Cooper, John Leahy, Stanley Perla, Donald Schaeffer and Harvey Schneider.  Directors are elected at each annual meeting of stockholders. We have a staggered Board. Class I directors, which are Messrs. D. Cooper and Schneider, have a term expiring at the annual stockholders meeting in 2019 or until their successors are elected and qualified. Class II directors, which are Messrs. P. Cooper, Sheinker and Perla, have a term expiring at the annual meeting in 2020 or until their successors are elected and qualified. Class III directors, which are Messrs. Schaeffer and Leahy, have a term expiring at the annual stockholders meeting in 2018 or until their successors are elected and qualified. Directors reelected at such time shall be reelected to three year terms. Officers are appointed by the Board and serve at the pleasure of the Board, subject to any contract rights.

Our Board held six meetings during 2017.  Each director attended at least 75% of the aggregate number of all Board meetings held during the period for which he was a director and committee meetings held during the period for which he was a committee member.  

We encourage all members of the Board to attend annual meetings of stockholders, but there is no formal policy as to their attendance. At the 2017 annual meeting of stockholders, all members of the Board attended the meeting. Our directors regularly meet in executive session without management present. Generally, the meetings follow after each quarterly meeting of the Board.

The membership and responsibilities of our committees are summarized below. Additional information regarding the responsibilities of each committee is found in, and is governed by, our Bylaws, each committee’s charter, specific directions of the Board, and certain mandated regulatory requirements. A copy of the charters of the Audit and Compensation Committees, as well as

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the Amended and Restated Code of Business Conduct and Ethics are available to any person without charge upon written request to our corporate address to the attention of the Secretary.

Committees of the Board of Directors

Audit Committee

We have an Audit Committee comprised of three members, Messrs. Perla, Leahy, and Schaeffer, all of whom are independent directors under NASDAQ stock market standards. Mr. Perla is designated as Chairman; he also serves as the “Audit Committee financial expert” as defined by Item 407(d)(5) of Regulation S-K. The purpose of the Audit Committee is to assist the Board in its general oversight of our financial reporting, internal controls and audit functions. The Audit Committee has adopted a charter, which details the principal functions of the Audit Committee. In general, the Audit Committee selects and appoints the Company’s independent registered public accounting firm and the Audit Committee’s responsibilities include overseeing:

During the year ended December 31, 2017, the Audit Committee held four meetings.

Compensation Committee

 

We have a Compensation Committee comprised of three members: Messrs. Leahy, Schneider, and Schaeffer.  All members of the committee are deemed independent directors under NASDAQ stock market standards. Mr. Schaeffer is designated as Chairman. The Compensation Committee establishes compensation policies and programs for our directors, executive officers and other senior employees. The Compensation Committee and the Board use data, showing current and historic elements of compensation, when reviewing executive and director compensation. The Committee is empowered to review all components of executive officer and director compensation for consistency with the overall policies and philosophies of the Company relating to compensation issues. The Committee may from time to time delegate, to the extent permitted by applicable law, duties and responsibilities to subcommittees or an executive officer. The Committee may retain and receive advice, in its sole discretion, from compensation consultants.  None of the members of our Compensation Committee is one of our officers or employees. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our Board or Compensation Committee. The Compensation Committee has adopted a charter, which details the principal functions of the Compensation Committee.

Pursuant to its charter, the Compensation Committee is authorized to retain and terminate, without Board or management approval, the services of an independent compensation consultant to provide advice and assistance. The Compensation Committee has the sole authority to approve the consultant’s fees and other retention terms, and reviews the independence of the consultant and any other services that the consultant or the consultant’s firm may provide to the Company. The Chairman of the Compensation Committee reviews, negotiates and executes an engagement letter with the compensation consultants. The compensation consultant must directly report to the Compensation Committee.  

In January 2016, the Compensation Committee, following an independence and conflict of interest review, engaged Gressle & McGinley LLC (“G&M”) as its independent compensation consultant to assist the Committee in its work on negotiating and finalizing new employment agreements for the Company’s executive officers (CEO and President/COO), and to serve as the Committee’s independent advisors on various 2015 related compensation matters, including, among others, annual performance reviews, market pay levels, grants under the Company’s equity compensation plans, etc. Prior to this engagement, G&M was employed as compensation consultants by the Company’s CEO and President/COO with respect to the review of the CEO, President/COO and CFO executive 2014 and 2015 market compensation, with the compensation paid for such services not exceeding $16,000 and $45,000, respectively. The total paid to G&M for the years ended December 31, 2017 and December 31, 2016, was approximately $46,000 and $113,000, respectively.

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At a meeting of the Board held on January 31, 2017, the Chairman of the Compensation Committee presented a review on independent director compensation in conjunction with work by G&M.  At this meeting, the Board, accepting the recommendation of the Compensation Committee, approved an increase in Board compensation from a cash retainer of $24,000 per year to $25,000 and an increase in equity compensation, in the form of restricted stock, from $25,000 per year to $30,000 per year.  These changes applied to Board compensation for fiscal year 2017.  All committee and board of directors meeting fees would remain the same at $1,000 per meeting.

At the annual stockholders meeting held in June 2017, the stockholders approved the 2017 Equity Compensation Plan under which awards to directors and officers would be made going forward, including the equity compensation awarded to the independent directors.

On October 5, 2017 the Compensation Committee held a meeting at which G&M gave an updated report regarding Board and committee compensation.  Based upon this presentation, the Compensation Committee approved increasing the Board compensation from a cash retainer of $25,000 per year to $30,000, effective as of January 1, 2018, and an increase in equity compensation from $30,000 per year to $35,000, effective as of the date of the 2018 annual meeting of the Company’s stockholders.  All committee and Board meeting fees would remain the same at $1,000 per meeting.  At a Board meeting held on November 7, 2017, the Board accepted the recommendation of the Compensation Committee and approved the revisions to the compensation of the independent directors.

During the year ended December 31, 2017, the Compensation Committee held three meetings.

As part of its ongoing services to the Compensation Committee, the compensation consultant will support the Compensation Committee in executing its duties and responsibilities with respect to the Company’s compensation programs by providing information regarding market trends and competitive compensation programs and strategies, including, among other things, preparing market data for executive positions, assessing management recommendations for changes in the compensation structure, working with management to ensure that the Company’s executive compensation programs are designed and administered consistent with the Committee’s requirements, and providing ad hoc support to the Committee, including discussing executive compensation and related corporate governance trends. The Company’s Board, executive management and personnel use the data provided by the consultant to prepare documents for use by the Compensation Committee in preparing their recommendations to the full Board.  

Our Board does not have a stand-alone Nominating Committee. Instead, the full Board carries out duties of a nominating committee. The Board has not adopted written guidelines regarding nominees for director.

Corporate Governance Matters; Risk Oversight and Management

When considering whether directors and nominees have the experience, qualifications, attributes or skills, taken as a whole, to enable the Board to satisfy its oversight responsibilities effectively in light of the Company’s business and structure, the Board focuses primarily on each person’s background and experience as reflected in the information discussed in each of the directors’ individual biographies set forth above. Our directors possess relevant and industry-specific experience and knowledge relevant to the size and nature of our business, which we believe enhances the Board’s ability to oversee, evaluate and direct our overall corporate strategy. The Board annually reviews and makes recommendations regarding the composition and size of the Board so that the Board consists of members with the proper expertise, skills, attributes, and personal and professional backgrounds needed by the Board, consistent with applicable regulatory requirements.

Our Board believes that all of its members should possess the highest personal and professional ethics, integrity, and values, and be committed to representing the long-term interests of our stockholders. In considering a director nominee, the Board will consider criteria including the nominee’s current or recent experience as a senior executive officer, whether the nominee is independent, as that term is defined under the independence requirements applicable to the Company, the business, scientific or engineering experience currently desired on the Board, geography, the nominee’s industry experience, and the nominee’s general ability to enhance the overall composition of the Board. The Board does not have a formal policy on diversity; however, in recommending directors, the Board considers the specific background and experience of the Board members and other personal attributes in an effort to provide a diverse mix of capabilities, contributions, and viewpoints to facilitate the Board’s discharge of its responsibilities.

The Board has no formal policy with respect to separation of the positions of Chairman and Chief Executive Officer or with respect to whether the Chairman should be a member of management or an independent director, and believes that these are matters that should be discussed and determined by the Board from time to time. Currently, Paul Cooper serves as our Chairman and our Chief Executive Officer. We believe he is well suited to manage the responsibility of implementing our corporate strategy and

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leading discussions, at the Board level, regarding performance relative to our corporate strategy, which accounts for a significant portion of the time devoted at our Board meetings. We believe this arrangement serves the best interests of the Company and its stockholders.

The Board believes that risk management is an important component of the Company’s corporate strategy. While we assess specific risks at our committee levels, the Board, as a whole, oversees our risk management process and discusses and reviews with management major policies with respect to risk assessment and risk management. The Board is regularly informed through its interactions with management and committee reports about risks we face in the course of our business.

In particular, the Audit Committee has the responsibility to consider and discuss our major financial risk exposures and the steps our management has taken to monitor and control these exposures, including guidelines and policies to govern the process by which risk assessment and management is undertaken.  The Audit Committee also monitors compliance with legal and regulatory requirements and has oversight of the performance of our internal audit function.  Our Compensation Committee assesses and monitors the effectiveness of our corporate governance guidelines, including whether they are successful in preventing illegal or improper liability-creating conduct.

Each committee meets regularly with management to assist it in identifying all of the risks within such committee’s areas of responsibility and in monitoring and, where necessary, taking appropriate action to mitigate the applicable risks.  At each Board meeting, the committee chairman provides a report to the full board of directors on issues related to such committee’s risk oversight duties.  To the extent that any risks reported to the full Board need to be discussed outside the presence of management, the Board will call an executive session to discuss these issues.

Code of Business Conduct and Ethics

Our Board has adopted an Amended and Restated Code of Business Conduct and Ethics, which applies to all directors, officers, and employees, including our principal executive officer and principal financial officer. A copy of the Amended and Restated Code of Business Conduct and Ethics is filed as Exhibit 14.1 to this Annual Report on Form 10-K.

 

 

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth the compensation of each named executive officer of the Company and/or their subsidiaries for the two years ended December 31, 2017 (“named executive officers”):

 

 

 

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Grants of Plan-Based Awards and Outstanding Equity Awards at Fiscal Year End:

Options granted to our named executive officers in 2008 were incentive stock options and those granted in 2016 were non-qualified stock options. The exercise price per share of each option granted to our named executive officers was determined by our Board on the date of the grant. All of the stock options granted to our named executive officers in 2008 and 2016 were granted under our 2007 Plan. 200,000 options were granted to the named executive officers in 2016.

The following table sets forth certain information regarding grants of plan-based awards to our named executive officers for the fiscal year ended December 31, 2017:

 

Outstanding Equity Awards

The following table sets forth certain information with respect to restricted stock awards held by each named executive officer as of December 31, 2017:

 

 

 

The following table sets forth certain information with respect to outstanding stock option awards granted to our named executive officers outstanding as of December 31, 2017:

 

 

 

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Option Exercises and Stock Vested:

Options issued pursuant to the 2007 Incentive Award Plan and the related Stock Option Agreement were exercised by Paul Cooper and 50,000 shares were purchased on May 31, 2017. No options were exercised by our named executive officers in 2016.

Pension Benefits:

We do not currently maintain qualified or non-qualified defined benefit plans.

Non-qualified Deferred Compensation:

We do not currently maintain non-qualified defined contribution plans or other deferred compensation plans.

Employee Agreements and Potential Payments upon Termination or Change in Control:

Except as set forth below, there are no employment agreements or agreements providing for potential payments upon termination or a change in control at December 31, 2017.

 

Paul Cooper Employment Agreement

On November 8, 2016, the Board following review and recommendation of the Board’s Compensation Committee, approved the Company’s execution of the amended and restated Employment Agreement by and between the Company and Paul Cooper, the Company’s Chief Executive Officer, which agreement was executed by the parties on the same date (the “CEO Employment Agreement”). The CEO Employment Agreement provides for an initial term of five years, from January 1, 2016 through and including December 31, 2020, and two successive automatic one year renewal terms, unless either party gives written notice to the other party of its desire to terminate the agreement. It also provides for the payment of an annual base salary to Mr. Cooper at the rate of $650,000, subject to annual increases at the discretion of the Company. Additionally, Mr. Cooper may earn a cash bonus of $450,000 per year and an equity bonus payable in shares of the Company’s restricted common stock valued at $200,000 per year, upon the achievement of certain benchmarks set forth in an annual budget approved by the Board, which amounts are subject to adjustments in the Board’s review and discretion, as set forth in the agreement; such equity bonus vesting at a rate equal to 10% on each of the first ten anniversaries of the date of grant while Mr. Cooper is employed by the Company. Upon execution of the CEO Employment Agreement, the Company agreed to grant Mr. Cooper a stock option under the Company’s 2007 Incentive Stock Option Plan or a successor plan (the “Equity Plan”), to acquire 100,000 shares of the Company’s common stock at an exercise price equal to the fair market value of the Company’s common stock as defined in the Equity Plan and will vest in its entirety on the 3^rd anniversary of the grant date. Mr. Cooper will also be entitled to receive, for each fiscal year of his employment period with the Company, long term equity incentive awards in the form of restricted stock under the Equity Plan (provided that each such award is conditioned on the determination by the Compensation Committee in its sole discretion that the attainment of the particular Adjusted Funds From Operations target is sustainable) which award value will be equal to $2 million for each Adjusted Funds From Operations value of $1.50, $2.00, $2.50, $3.00 and $3.50 per share, respectively. In addition, the CEO Employment Agreement provides that the Company will provide Mr. Cooper with certain usual and customary benefits commensurate with his position including without limitation, medical insurance, $5 million term life insurance, disability insurance, and participation in the Company’s 401(k) plan. The CEO Employment Agreement also contains the following termination terms and provisions:

•In the event that (i) Mr. Cooper terminates his employment with the Company without good reason or (ii) the Company terminates Mr. Cooper’s employment for cause, the Company’s obligations under the agreement will be reduced to paying his unpaid salary and reimbursable expenses owing to him prior to such termination (the “Accrued Obligations”), and

•In the event that (i) Mr. Cooper terminates his employment with the Company for good reason, or (ii) Mr. Cooper terminates his employment with the Company during the 90-day period following a change of control of the Company, or (iii) the Company elects not to renew the CEO Employment Agreement after the expiration of the initial or renewal term and Mr. Cooper’s employment is terminated by the Company without cause, then in each case the Company’s termination obligations will include the payment of the Accrued Obligations, severance payments the amount of which depends on the circumstances of his departure, accelerated vesting of unvested equity bonus and COBRA payments the lesser of the remainder of the term or three (3) years.

The severance payments referenced above will be calculated as follows: (a) if Mr. Cooper terminates his employment for good reason, the Company will pay him the lesser of (x) the salary he would have earned during the remainder of this term or three years of his then current salary, plus the lesser of (y) his bonus that he would have earned during the remainder of the term, assuming he met the bonus criteria. Further, if Mr. Cooper’s employment was terminated pursuant to clause (iii) above at the end of his initial employment term and provided the Company achieves the Bonus Criteria, on an annual basis for each specified criterion during the Initial Term, as of the end of the 2020 Fiscal Year, then his severance payment would be equal to his then base salary and bonus

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(assuming achievement of the bonus criteria for such renewal term) he could have earned during the remainder of such renewal term. To the extent his employment was terminated pursuant to clause (iii) above at the end of his renewal employment term, then his severance payment would be equal to his then base salary he would have earned during the renewal term and bonus (assuming achievement of the bonus criteria for such renewal term) he could have earned during the remainder of such renewal term. The CEO Employment Agreement also contains certain confidentiality, non-solicitation/non-competition and other provisions customary for agreements of this nature.

 

Louis Sheinker Employment Agreement

On November 8, 2016, the Board also, following review and recommendation of the Board’s Compensation Committee, approved the Company’s execution of the amended and restated Employment Agreement with Louis Sheinker, the Company’s President and Chief Operating Officer, also effective as of the same date (the “COO Employment Agreement”). This COO Employment Agreement provides for an initial term of five years, from January 1, 2016 through and including December 31, 2020, and two successive automatic one year renewal terms, unless either party gives written notice to the other party of its desire to terminate the agreement. It also provides for the payment to Mr. Sheinker of a base salary at the annual rate of $600,000, subject to annual increases at the discretion of the Company. Additionally, Mr. Sheinker may earn a cash bonus of $450,000 per year and an equity bonus payable in shares of the Company’s restricted common stock valued at $200,000 per year, upon the achievement of certain benchmarks set forth in an annual budget approved by the Board, which amounts are subject to adjustments in the Board’s review and discretion, as set forth in the agreement; such equity bonus vesting at a rate equal to 10% on each of the first ten anniversaries of the date of grant while Mr. Sheinker is employed by the Company. Upon execution of the employment agreement, the Company agreed to grant Mr. Sheinker a stock option under the Equity Plan to acquire 100,000 shares of the Company’s common stock at an exercise price equal to the fair market value of the Company’s common stock as defined in the Equity Plan and will vest in its entirety on the 3^rd anniversary of the grant date. Mr. Sheinker will also be entitled to receive, for each fiscal year of his employment period with the Company, long term equity incentive awards in the form of restricted stock under the Equity Plan (provided that each such award is conditioned on the determination by the Compensation Committee in its sole discretion that the attainment of the particular Adjusted Funds From Operations target is sustainable) which award value will be equal to $2 million for each Adjusted Funds From Operations value of $1.50, $2.00, $2.50, $3.00 and $3.50 per share, respectively. In addition, the COO Employment Agreement provides that the Company will provide Mr. Sheinker with certain usual and customary benefits commensurate with his position including without limitation, medical insurance, $5 million term life insurance, disability insurance, and participation in the Company’s 401(k) plan. The COO Employment Agreement also contains the following termination terms and provisions:

•In the event that (i) Mr. Sheinker terminates his employment with the Company without good reason or (ii) the Company terminates Mr. Sheinker’s employment for cause, the Company’s obligations under the agreement will be reduced to paying his unpaid salary and reimbursable expenses owing to him prior to such termination (the “Accrued Obligations”),

•In the event that (i) Mr. Sheinker terminates his employment with the Company for good reason, or (ii) Mr. Sheinker terminates his employment with the Company during the 90-day period following a change of control of the Company, or (iii) the Company elects not to renew his employment agreement after the expiration of the initial or renewal term and Mr. Sheinker’s employment is terminated by the Company without cause, then in each case the Company’s termination obligations will include the payment of the Accrued Obligations, severance payments the amount of which depends on the circumstances of his departure, accelerated vesting of unvested equity bonus and COBRA payments the lesser of the remainder of the term or three (3) years.

The severance payments referenced above will be calculated as follows: (a) if Mr. Sheinker’s terminates his employment for good reason, the Company will pay him the lesser of (x) the salary he would have earned during the remainder of this term or three years of his then current salary, plus the lesser of (y) his bonus that he would have earned during the remainder of the term, assuming he met the bonus criteria. Further, if Mr. Sheinker’s employment was terminated pursuant to clause (iii) above at the end of his initial employment term and provided the Company achieves the Bonus Criteria, on an annual basis for each specified criteria during the Initial Term, as of the end of the 2020 Fiscal Year, then his severance payment would be equal to his then base salary and bonus (assuming achievement of the bonus criteria for such renewal term) he could have earned during the remainder of such renewal term. To the extent his employment was terminated pursuant to clause (iii) above at the end of his renewal employment term, then his severance payment would be equal to his then base salary he would have earned during the renewal term and bonus (assuming achievement of the bonus criteria for such renewal term) he could have earned during the remainder of such renewal term. The COO Employment Agreement also contains certain confidentiality, non-solicitation/non-competition and other provisions customary for agreements of this nature.

2017 Bonuses Paid Under the P. Cooper and L. Sheinker Employment Agreements

On May 10, 2017, the Compensation Committee discussed that the Adjusted Funds From Operations benchmarks for 2016 were met, as set forth in the respective employment agreements of Messrs. P. Cooper and L. Sheinker, entitling each executive to a $450,000 cash bonus and a $200,000 restricted stock bonus under the 2007 Plan.  The Compensation Committee reviewed a report

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prepared by G&M regarding market compensation and the Company’s 2016 performance and utilized its discretion to increase the size of Messrs. P. Cooper and L. Sheinker’s bonuses since the performance benchmarks were exceeded.  The Compensation Committee approved increasing the cash bonus award by $50,000 each, for a total cash bonus of $500,000 to each of Messrs. Cooper and Sheinker and an equity bonus of $200,000 to each in restricted stock.

Stuart Blau Employment Letter

On November 14, 2017, Stuart M. Blau was appointed as the Company’s Chief Financial Officer and Treasurer. In connection with Mr. Blau’s appointment, the Company and Mr. Blau entered into an employment letter (the “Employment Letter”) setting forth the terms and conditions of Mr. Blau’s employment with the Company. The Employment Letter provides that Mr. Blau will, among other things, (i) receive a base salary of $300,000 per annum, subject to annual review, (ii) be eligible to receive an annual discretionary performance bonus, and (iii) be entitled to participate in the Company’s benefit programs. In addition, the Employment Letter contains confidentiality and non-disclosure covenants customary for agreements of this nature.

Ben Zimmerman Separation Agreement

The Company and Ben Zimmerman, the former Chief Financial Officer and Treasurer of the Company, executed a Severance Agreement and General Release, effective as of November 13, 2017 (the “Severance Agreement”). The Severance Agreement provides for a separation payment to Mr. Zimmerman in the amount of $112,287.25 and an additional payment to Mr. Zimmerman in the amount of $37,712.75 for the repurchase of 3,005 shares of the Company’s restricted common stock beneficially owned by Mr. Zimmerman. The Severance Agreement also contained a general release of claims, confidentiality and non-disparagement provisions, and certain other provisions that are customary in agreements of this nature.

Director Compensation:

The following table sets forth a summary of the compensation to our directors for 2017 services:

 

Our non-officer Directors received the following forms of compensation for 2017:

 

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth, as of December 31, 2017, information regarding the beneficial ownership of the Company’s common stock by (1) each person who is known to the Company to be the owner of more than five (5%) percent of the Company’s common stock (2) each of the Company’s directors and named executive officers and (3) all directors and executive officers as a group. For purposes of this table, a person or group of persons is deemed to have beneficial ownership of any shares that such person has the right to acquire within 60 days of December 31, 2017.

 

 

 

Equity Compensation Plan Information

On June 11, 2007, the Board approved the Company’s 2007 Incentive Award Plan (the “2007 Plan”) with the effective date of the Plan of June 11, 2007, which was then approved by our stockholders on February 7, 2008. The aggregate number of shares of common stock which may have been awarded under the 2007 Plan was 1,000,000 shares. These shares were registered on the Registration Statement on Form S-8 filed with the SEC on September 23, 2010. The 2007 Plan expired by its terms on June 11, 2017. The 2017 Incentive Award Plan (the “2017 Plan”) was adopted by the Board and became effective on April 24, 2017, subject to the approval of the Company’s stockholders which was obtained on June 8, 2017. The aggregate number of shares of common stock which may be awarded under the 2017 Plan is 2,000,000 shares. These shares were registered on the Registration Statement on Form S-8 filed with the SEC on June 12, 2017. See Part III, Item 11 and Note 6. “Stockholders Equity” of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information regarding the 2007 Plan and the 2017 Plan.

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The following information is provided as of December 31, 2017, with respect to compensation plans, including individual compensation arrangements, under which our equity securities are authorized for issuance:

 

 

 

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Our directors and executive officers and their affiliates and associates have engaged in the following transactions with the Company.

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

Additionally, Lighthouse Sixty, LP, owner of the building at 60 Hempstead Avenue, West Hempstead, NY, and of which Paul Cooper and Louis Sheinker are managing members of the general partner, have a lease agreement with the Company expiring in 2020 for office and storage space at an initial base rent of approximately $298,000 with aggregate lease payments totaling approximately $1.8 million.

On November 4, 2014, the Company invested approximately $1.8 million for a limited partnership interest in Garden 1101 Stewart L.P. (“Garden 1101”). Garden 1101 was formed for the purpose of acquiring a 90,000 square foot office building in Garden City, NY that was converted to a medical office building. The general partners of Garden 1101 include the members of Green Holland Ventures, Paul Cooper and Louis Sheinker.  There are several limited partners, including a wholly owned subsidiary of GTJ Realty LP. On February 9, 2018, the property acquired by Garden 1101 was sold and the Company received an initial distribution from the partnership of $3.7 million.  A final distribution is expected to be received in 2018 upon liquidation of the partnership.

Policy Concerning Related Party Transactions:

In January 2018, our Board adopted an amended and restated policy (the “Policy”) concerning the identification, review and approval of Related Party Transactions (as such term is defined in the Policy).

Identification of Potential Related Party Transactions:

Related Party Transactions will be brought to management’s and the board of director’s attention in a number of ways. Each director, nominee for director and executive officer is responsible for providing prompt written notice to the Secretary of any potential Related Party Transaction involving him or her or his or her immediate family member, including any additional information

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about the transaction that the Secretary may reasonably request. The Secretary should receive notice of any potential Related Party Transaction well in advance of consummation of the transaction so that he or she has adequate time to obtain and review information about the proposed transaction. In addition, each such director, nominee for director and executive officer completes a questionnaire on an annual basis designed to elicit information about any potential Related Party Transactions.

Any potential Related Party Transactions that are brought to our attention will be reviewed and analyzed by our outside securities counsel in consultation with management, as appropriate, to determine whether the transaction or relationship does, in fact, constitute a Related Party Transaction requiring approval or ratification by the Board in accordance with the Policy.

Review and Approval of Related Party Transactions:

At each of its meetings, the Board will be provided with the details of each new, existing, or proposed Related Party Transaction, including the terms of the transaction, the business purpose of the transaction, and the effects on the Company and the relevant Related Party. In determining whether to approve a Related Party Transaction, the Board will consider, among other factors, the following factors to the extent relevant to the Related Party Transaction:

Any member of the Board who has an interest in the transaction under discussion will abstain from voting on the approval of the Related Party Transaction, but may, if so requested by the Chairperson of the Board, participate in some or all of the Board’s discussions of the Related Party Transaction. Upon completion of its review of the transaction, the Board may determine to permit or to prohibit the Related Party Transaction in its good faith judgement.

The Policy provides that the Board has reviewed certain types of Related Party Transactions identified in the Instructions to Item 404(a) of Regulation S-K as transactions that do not require disclosure under Item 404(a), and determined that such types of Related Party Transactions shall be deemed to be pre-approved or ratified, as applicable, by the Board, even if the aggregate amount involved will exceed $120,000, unless specifically determined otherwise by the Board. In connection with each regularly scheduled meeting of the Board, a summary of each new Related Party Transaction deemed pre-approved shall be provided to the Board for its review.

Director Independence

Our Board of Directors currently consists of seven members. As of January 1, 2018, four of the members are deemed independent. The Board elects to apply the NASDAQ stock market corporate governance requirements and standards in its determination of the independence status of each Board and committee member. The members of the Audit Committee are also “independent” as defined under the Exchange Act and applicable rules and regulations of the NASDAQ stock market. The members of the Compensation Committee are “independent” as defined under the applicable rules and regulations of the NASDAQ stock market.

The Board based its independence determinations primarily on a review of the responses of the directors and executive officers to questions regarding employment and transaction history, affiliations and family and other relationships and on discussions with the directors. Except as otherwise disclosed in this Annual Report on Form 10-K, none of our directors engages in any transaction, relationship, or arrangement contemplated under section 404(a) of Regulation S-K.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

On April 8, 2009, the Audit Committee appointed BDO USA, LLP as our independent registered public accounting firm and have reported on the financial statements in this 2017 Annual Report.

The following table presents aggregate fees billed for each of the years ended December 31, 2017 and 2016 for professional services rendered by BDO USA, LLP in the following categories:

 

Audit fees. These are fees for professional services performed for the audit of our annual financial statements and the required review of quarterly financial statements, and other procedures performed by BDO USA, LLP in order for them to be able to form an opinion on our consolidated financial statements. These fees also cover services that are normally provided by independent auditors in connection with statutory and regulatory filings or engagements.

Audit related fees. These are fees for assurance and related services that traditionally are performed by independent auditors that are reasonably related to the performance of the audit or review of the financial statements, such as due diligence related to acquisitions and dispositions, attestation services that are not required by statute or regulation, internal control reviews, and consultation concerning financial accounting and reporting standards.

Tax fees. These are fees for all professional services performed by professional staff in BDO USA, LLP’s tax division, except those services related to the audit of our financial statements. These include fees for tax planning and tax advice.  In 2015, the Company engaged Kimmel, Blau & Goldman LLP to provide tax related services including tax planning and tax advice. Fees paid to Kimmel, Blau & Goldman LLP for the year ended December 31, 2017 and December 31, 2016 were each $56,000.

All other fees. These are fees for any services not included in the above-described categories, including assistance with internal audit plans, risk assessments, and other regulatory filings.

The Audit Committee pre-approves all anticipated annual audit and non-audit services provided by our independent registered public accounting firm prior to the engagement of the independent registered public accounting firm with respect to such permissible services. With respect to audit services and permissible non-audit services not previously approved, the Audit Committee has authorized the Chairman of the Audit Committee to approve such audit services and permissible non-audit services, provided the Chairman informs the Audit Committee of such approval at its next regularly scheduled meeting. All “Audit Fees,” “Audit-Related Fees,” and “Tax Fees” set forth above were pre-approved by the Audit Committee. In accordance with Section 10A(i) of the Exchange Act, before BDO USA, LLP was engaged by us to render audit or non-audit services, the engagement was approved by our Audit Committee.

 

 

 

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PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

78

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79

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80

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81

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82

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GTJ REIT, Inc

Schedule III- Consolidated Real Estate and Accumulated Depreciation (in thousands)

 

83

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84

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85

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ITEM 16. FORM 10-K SUMMARY

 

None.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

86

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

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