TRINITY PLACE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(In thousands)
|
|
Nine Months
Ended
September 30,
2018
|
|
|
Nine Months
Ended
September 30,
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(5,703
|
)
|
|
$
|
(3,909
|
)
|
Adjustments to reconcile net loss attributable to common stockholders to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,837
|
|
|
|
394
|
|
Amortization of deferred finance costs
|
|
|
238
|
|
|
|
345
|
|
Write-off of costs relating to demolished asset
|
|
|
-
|
|
|
|
1,585
|
|
Stock-based compensation expense
|
|
|
970
|
|
|
|
922
|
|
Gain on sale of real estate
|
|
|
-
|
|
|
|
(3,853
|
)
|
Deferred rents receivable
|
|
|
(18
|
)
|
|
|
(34
|
)
|
Equity in net loss from unconsolidated joint venture
|
|
|
492
|
|
|
|
804
|
|
Distribution from unconsolidated joint venture
|
|
|
260
|
|
|
|
344
|
|
Decrease (Increase) in operating assets:
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
|
46
|
|
|
|
75
|
|
Prepaid expenses and other assets, net
|
|
|
(1,253
|
)
|
|
|
(1,057
|
)
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
917
|
|
|
|
(886
|
)
|
Pension liabilities
|
|
|
(1,080
|
)
|
|
|
(1,069
|
)
|
Net cash used in operating activities
|
|
|
(3,294
|
)
|
|
|
(6,339
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Additions to real estate
|
|
|
(116,328
|
)
|
|
|
(7,080
|
)
|
Deferred real estate deposits
|
|
|
37,255
|
|
|
|
-
|
|
Net proceeds from the sale of real estate
|
|
|
-
|
|
|
|
15,232
|
|
Investment in unconsolidated joint venture
|
|
|
-
|
|
|
|
(69
|
)
|
Net cash (used in) provided by investing activities
|
|
|
(79,073
|
)
|
|
|
8,083
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from loans payable
|
|
|
78,263
|
|
|
|
-
|
|
Payment of finance costs
|
|
|
(1,804
|
)
|
|
|
(702
|
)
|
Settlement of stock awards
|
|
|
(1,076
|
)
|
|
|
(2,574
|
)
|
Proceeds from sale of common stock, net
|
|
|
-
|
|
|
|
40,561
|
|
Net cash provided by financing activities
|
|
|
75,383
|
|
|
|
37,285
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
(6,984
|
)
|
|
|
39,029
|
|
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD
|
|
|
24,189
|
|
|
|
8,366
|
|
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
|
|
$
|
17,205
|
|
|
$
|
47,395
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING PERIOD
|
|
$
|
15,273
|
|
|
$
|
4,678
|
|
RESTRICTED CASH, BEGINNING OF PERIOD
|
|
|
8,916
|
|
|
|
3,688
|
|
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD
|
|
$
|
24,189
|
|
|
$
|
8,366
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
14,620
|
|
|
$
|
34,876
|
|
RESTRICTED CASH, END OF PERIOD
|
|
|
2,585
|
|
|
|
12,519
|
|
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
|
|
$
|
17,205
|
|
|
$
|
47,395
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
3,921
|
|
|
$
|
1,810
|
|
Taxes
|
|
$
|
2
|
|
|
$
|
37
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Accrued development costs included in accounts payable and accrued expenses
|
|
$
|
9,546
|
|
|
$
|
2,943
|
|
Capitalized amortization of deferred financing costs and lease commissions
|
|
$
|
1,251
|
|
|
$
|
178
|
|
Capitalized stock-based compensation expense
|
|
$
|
511
|
|
|
$
|
1,326
|
|
See Notes to Condensed Consolidated Financial Statements
Trinity
Place Holdings Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2018
Note 1 – Business
Overview
Trinity Place Holdings Inc. (“Trinity,”
“we,” “our,” or “us”) is a real estate holding, investment and asset management company. Our
business is primarily to acquire, invest in, own, manage, develop or redevelop and sell real estate assets and/or real estate related
securities. Our largest asset is currently a property located at 77 Greenwich Street (“77 Greenwich”) in Lower Manhattan.
77 Greenwich was a vacant building that was demolished and is under development as a residential condominium tower that also includes
plans for retail space and a New York City elementary school. We also own a retail strip center located in West Palm Beach, Florida,
a property formerly occupied by a retail tenant in Paramus, New Jersey, a newly built 105-unit, 12-story apartment building located
at 237 11
th
Street, Brooklyn, New York (“237 11
th
”) acquired on May 24, 2018, and, through a
joint venture, a 50% interest in a newly constructed 95-unit multi-family property, known as The Berkley, located in Brooklyn,
New York (see Properties under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
for a more detailed description of our properties). We continue to evaluate new investment opportunities.
We also control a variety of intellectual
property assets focused on the consumer sector, a legacy of our predecessor, Syms Corp. (“Syms”), including our on-line
marketplace at FilenesBasement.com, our rights to the Stanley Blacker® brand, as well as the intellectual property associated
with the Running of the Brides® event and An Educated Consumer is Our Best Customer® slogan. We also had approximately
$218.8 million of federal net operating loss carryforwards (“NOLs”) at September 30, 2018, which can be used to reduce
our future taxable income.
Trinity is the successor to Syms, which
also owned Filene’s Basement. Syms and its subsidiaries filed for relief under the United States Bankruptcy Code in 2011.
In September 2012, the Syms Plan of Reorganization (the “Plan”) became effective and Syms and its subsidiaries consummated
their reorganization under Chapter 11 through a series of transactions contemplated by the Plan and emerged from bankruptcy. As
part of those transactions, reorganized Syms merged with and into Trinity, with Trinity as the surviving corporation and successor
issuer pursuant to Rule 12g-3 under the Exchange Act.
On January 18, 2018, Syms and certain of
its subsidiaries (together, the “Reorganized Debtors”) filed with the United States Bankruptcy Court for the District
of Delaware (the “Bankruptcy Court”) a motion (the “Motion”) for entry of a final decree (the “Final
Decree”) (i) closing the chapter 11 cases of the Reorganized Debtors; (ii) terminating the services of the claims and noticing
agent; and (iii) retaining the Bankruptcy Court’s jurisdiction as provided for in the Plan, including to enforce or interpret
its own orders pertaining to the chapter 11 cases including, but not limited to, the Plan and Final Decree. On the same date, the
Reorganized Debtors filed a Final Report in support of the Motion. On February 6, 2018, the Bankruptcy Court entered the Final
Decree pursuant to which the chapter 11 cases of the Reorganized Debtors were closed.
Note 2 – Summary of Significant
Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements were prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”) and include our financial statements and the financial statements of our wholly-owned subsidiaries.
The accompanying unaudited condensed consolidated
interim financial information has been prepared according to the rules and regulations of the Securities and Exchange Commission
(the “SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared
in accordance with GAAP have been condensed or omitted in accordance with such rules and regulations. Management believes that
the disclosures presented in these unaudited condensed consolidated financial statements are adequate to make the information presented
not misleading. In management’s opinion, all adjustments and eliminations, consisting only of normal recurring adjustments,
necessary to present fairly the financial position and results of operations for the reported periods have been included. The results
of operations for such interim periods are not necessarily indicative of the results for the full year. The accompanying unaudited
condensed consolidated interim financial information should be read in conjunction with our December 31, 2017 audited consolidated
financial statements, as previously filed with the SEC in our 2017 Annual Report on Form 10-K (the “2017 Annual Report”),
and other public information.
|
a.
|
Principles of Consolidation -
The condensed consolidated financial statements include our
accounts and those of our subsidiaries which are wholly-owned or controlled by us. Entities which we do not control through our
voting interest and entities which are variable interest entities, but where we are not the primary beneficiary, are accounted
for under the equity method. Accordingly, our share of the earnings (losses) of these unconsolidated joint ventures is included
in our condensed consolidated statements of operations. All significant intercompany balances and transactions have been eliminated.
|
We consolidate a variable interest
entity (the “VIE”) in which we are considered the primary beneficiary. The primary beneficiary is the entity that has
(i) the power to direct the activities that most significantly impact the entity's economic performance and (ii) the obligation
to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. We did not have
any interests in VIEs at September 30, 2018 or December 31, 2017.
We assess the accounting
treatment for joint venture investments, which includes a review of the joint venture or limited liability company agreement
to determine which party has what rights and whether those rights are protective or participating. For potential VIEs, we
review such agreements in order to determine which party has the power to direct the activities that most significantly
impact the entity's economic performance. In situations where we and our partner equally share authority, we do not
consolidate the joint venture as we consider these to be substantive participation rights that result in shared power of the
activities that most significantly impact the performance of the joint venture. Our joint venture agreements may
contain certain protective rights such as requiring partner approval to sell, finance or refinance the property and the
payment of capital expenditures and operating expenditures outside of the approved budget or operating plan.
|
b.
|
Investment in Unconsolidated Joint Venture -
We account for our investment in our unconsolidated joint venture, the
Berkley, under the equity method of accounting (see Note 12 - Investment in Our Unconsolidated Joint Venture). We also assess
our investment in our unconsolidated joint venture for recoverability, and if it is determined that a loss in value of the investment
is other than temporary, we write down the investment to its fair value. We evaluate our equity investment for impairment based
on the joint ventures' projected cash flows. We do not believe that the value of our equity investment was impaired at either
September 30, 2018 or December 31, 2017.
|
|
c.
|
Use of Estimates
- The preparation of financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly,
actual results could differ from those estimates.
|
|
d.
|
Reportable Segments
- We operate in one reportable segment, commercial real estate.
|
|
e.
|
Concentrations of Credit Risk
- Our financial instruments that are exposed to concentrations of credit risk consist
primarily of cash and cash equivalents. We hold substantially all of our cash and cash equivalents in banks. Such cash balances
at times exceed federally insured limits. We have not experienced any losses in such accounts.
|
|
f.
|
Real Estate
- Real estate assets are stated at historical 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. Depreciation
and amortization are determined using the straight-line method over the estimated useful lives described in the table below:
|
Category
|
|
Terms
|
|
|
|
Buildings and improvements
|
|
10 - 39 years
|
Tenant improvements
|
|
Shorter of remaining term of the lease or useful life
|
Furniture and fixtures
|
|
5 - 8 years
|
Tax abatement
|
|
15 - 25 years
|
|
g.
|
Real Estate Under Development
- We capitalize certain costs related to the development and redevelopment of real estate
including initial project acquisition costs, pre-construction costs and construction costs for each specific property. Additionally,
we capitalize operating costs, interest, real estate taxes, insurance and compensation and related costs of personnel directly
involved with the specific project related to real estate under development. Capitalization of these costs begin when the activities
and related expenditures commence, and cease when the property is held available for occupancy upon substantial completion of tenant
improvements, but no later than one year from the completion of major construction activity at which time the project is placed
in service and depreciation commences. Revenue earned under short-term license agreements at properties under development is offset
against these capitalized costs.
|
|
h.
|
Valuation of Long-Lived Assets
- We periodically review long-lived assets for impairment whenever changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable. We consider relevant cash flow, management’s
strategic plans and significant decreases in the market value of the asset and other available information in assessing whether
the carrying value of the assets can be recovered. When such events occur, we compare the carrying amount of the asset to the undiscounted
expected future cash flows, excluding interest charges, from the use and eventual disposition of the asset. If this comparison
indicates an impairment, the carrying amount would then be compared to the estimated fair value of the long-lived asset. An impairment
loss would be measured as the amount by which the carrying value of the long-lived asset exceeds its estimated fair value. No provision
for impairment was recorded during the nine months ended September 30, 2018 or September 30, 2017.
|
|
i.
|
Trademarks and Customer Lists
- Trademarks and customer lists are stated at cost, less accumulated amortization. Amortization
is determined using the straight-line method over useful lives of 10 years.
|
|
j.
|
Fair Value Measurements
- We determine fair value in accordance with Accounting Standards Codification (“ASC”)
820, “Fair Value Measurement,” 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 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 value 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 we evaluate our hierarchy disclosures each quarter.
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.
|
k.
|
Cash and Cash Equivalents
- Cash and cash equivalents include securities with original maturities
of three months or less when purchased.
|
|
l.
|
Restricted Cash -
Restricted cash represents amounts required to be restricted under our
loan agreements and secured line of credit (see Note 5 - Loans Payable and Secured Line of Credit), tenant related security deposits
and deposits on property acquisitions.
|
|
m.
|
Revenue Recognition
- Leases with tenants are accounted for as operating leases. Minimum
rents are recognized on a straight-line basis over the term of the respective leases, beginning when the tenant takes possession
of the space. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in deferred
rents receivable. In addition, leases typically provide for the reimbursement of real estate taxes, insurance and other property
operating expenses. These reimbursements are recognized as revenue in the period the expenses are incurred. We make estimates of
the collectability of our accounts receivable related to tenant revenues. An allowance for doubtful accounts has been provided
against certain tenant accounts receivable that are estimated to be uncollectible. Once the amount is ultimately deemed to be uncollectible,
it is written off.
|
|
n.
|
Stock-Based Compensation
– We have granted stock-based compensation, which is described
in Note 11 – Stock-Based Compensation. We account for stock-based compensation in accordance with ASC 718, “Compensation-Stock
Compensation,” which establishes accounting for stock-based awards exchanged for employee services. Under the provisions
of ASC 718-10-35, stock-based compensation cost is measured at the grant date, based on the fair value of the award on that date,
and is expensed at the grant date (for the portion that vests immediately) or ratably over the respective vesting periods.
|
|
o.
|
Income Taxes
- We account for income taxes under the asset and liability method as required
by the provisions of ASC 740, “Income Taxes.” 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.
|
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, we 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
both September 30, 2018 and December 31, 2017, we had determined that no liabilities are required in connection with unrecognized
tax positions. As of September 30, 2018, our tax returns for the prior three years are subject to review by the Internal Revenue
Service.
On December 22, 2017, the President
of the United States signed into law P.L. 115-97, commonly referred to as the U.S. Tax Cuts and Jobs Act (the “TCJA”).
The TCJA modifies several provisions of the Internal Revenue Code related to corporations, including a permanent corporate income
tax rate reduction from 35% to 21%, effective January 1, 2018. The impact of the adoption of the TCJA is disclosed in Note 9 –
Income Taxes.
We are subject to certain federal,
state, local and franchise taxes.
|
p.
|
Earnings (loss) Per Share
- We present both basic and diluted earnings (loss) per share. Basic earnings (loss) per share
is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of common
stock outstanding for the period. Diluted earnings (loss) 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. Shares issuable under restricted stock units that have vested but not yet settled were excluded
from the computation of diluted earnings (loss) per share because the awards would have been antidilutive for the periods presented.
|
|
q.
|
Deferred Finance Costs
– Deferred finance costs represent commitment fees, legal,
title and other third party costs associated with obtaining commitments for mortgage financing which result in a closing of such
financing. These costs are being offset against loans payable in the condensed consolidated balance sheets for mortgage financings
and are included in other assets for our secured line of credit. These costs are amortized over the terms of the related financing
arrangements. Unamortized deferred finance costs are expensed when the associated debt is refinanced or repaid before maturity.
Costs incurred in seeking financing transactions which do not close are expensed in the period in which it is determined that the
financing will not close.
|
|
r.
|
Deferred Lease Costs
– Deferred lease costs consist of fees and direct costs incurred
to initiate and renew operating leases and are amortized to depreciation and amortization on a straight-line basis over the related
lease term.
|
|
s.
|
Underwriting Commissions and Costs
– Underwriting commissions and costs incurred
in connection with our stock offerings are reflected as a reduction of additional paid-in capital in stockholders’
equity.
|
|
t.
|
Reclassifications -
Certain prior year financial statement amounts have been reclassified
to conform to the current year presentation.
|
Recent
Accounting Pronouncements
In August 2018, the SEC adopted a final
rule that eliminated or amended disclosure requirements that were redundant or outdated in light of changes in its requirements,
generally accepted accounting principles, or changes in the business environment. The SEC also referred certain disclosure requirements
to the Financial Accounting Standards Board for potential incorporation into generally accepted accounting principles. The rule
is effective for filings after November 5, 2018. We assessed the impact of this rule and determined that the changes resulted in
clarification or expansion of existing requirements. We have not yet adopted the rule and do not expect a material impact on our
financial position, results of operations or cash flows when the new rule is implemented.
In August 2018, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement
(Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This amendment removed,
modified and added the disclosure requirements under Topic 820. The changes are effective for fiscal years beginning after December
15, 2019. Early adoption is permitted for the removed or modified disclosures with adoption of the additional disclosures upon
the effective date. We have not yet adopted this new guidance and do not expect a material impact on our financial position, results
of operations or cash flows when the new standard is implemented.
In June 2018, the FASB issued ASU No. 2018-07,
Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This amendment provides
additional guidance related to share-based payment transactions for acquiring goods or services from nonemployees. The guidance
will be effective for fiscal years beginning after December 15, 2018, including the interim periods within that fiscal year. We
have not yet adopted this new guidance and do not expect a material impact on our financial position, results of operations or
cash flows when the new standard is implemented.
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and
Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities.” The amendments in the new standard will
permit more flexibility in hedging interest rate risk for both variable rate and fixed rate financial instruments and better align
a company’s financial reporting for hedging activities with the economic objectives of those activities. The standard will
also enhance the presentation of hedge results in the financial statements. The guidance is effective for fiscal years beginning
after December 15, 2018 and early adoption is permitted. We have not yet adopted the guidance and do not expect a material impact
on our financial position, results of operations or cash flows when the new standard is implemented.
In May 2017, the FASB issued ASU No. 2017-09,
“Compensation - Stock Compensation (Topic 718), Scope of Modification Accounting.” The guidance clarifies the changes
to the terms or conditions of a share-based payment award that require an entity to apply modification accounting in ASC 718. The
adoption of this guidance, effective January 1, 2018, did not have a material impact on our financial position, results of operations
or cash flows.
In February 2017, the FASB issued ASU No.
2017-05, “Other Income-Gains and Losses from the De-recognition of Nonfinancial Assets (Subtopic 610-20),” to add guidance
for partial sales of nonfinancial assets, including partial sales of real estate, eliminate rules specifically addressing sales
of real estate, remove exceptions to the financial asset derecognition model, and clarifies the accounting for contributions of
non-financial assets to joint ventures. Historically, GAAP contained several different accounting models to evaluate whether the
transfer of certain assets qualified for sale treatment. ASU 2017-05 reduces the number of potential accounting models that might
apply and clarifies which model does apply in various circumstances. The adoption of this guidance, effective January 1, 2018,
did not have a material impact on our financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU No.
2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The guidance clarifies the definition
of a business and provides guidance to assist with determining whether transactions should be accounted for as acquisitions of
assets or businesses. The main provision is that an acquiree is not a business if substantially all of the fair value of the gross
assets acquired is concentrated in a single identifiable asset or group of assets. Upon the adoption of ASU No. 2017-01, we evaluated
each acquisition of real estate or in-substance real estate to determine if the integrated set of assets and activities acquired
meet the definition of a business and need to be accounted as a business combination. Generally, we expect that acquisitions of
real estate or in-substance real estate will not meet the revised definition of a business because substantially all of the fair
value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings, and related
intangible assets) or because the acquisition does not include a substantive process in the form of an acquired workforce or an
acquired contract that cannot be replaced without significant cost, effort or delay. The adoption of this guidance, effective January
1, 2018, did not have a material impact on our financial position, results of operations or cash flows.
In November 2016, the FASB issued ASU No.
2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” The guidance requires entities to show the changes
on the total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result,
entities will no longer present transfers between these items on the statement of cash flows. The adoption of this guidance, effective
January 1, 2018, resulted in a restatement of our statement of cash flows for the nine months ended September 30, 2017, for comparative
purposes. This resulted in a reduction of approximately $0.7 million in net cash used in operating activities from $7.1 million
to $6.3 million.
In August 2016, the FASB issued ASU No.
2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (A Consensus
of the FASB Emerging Issues Task Force).” ASU 2016-15 provides final guidance on eight cash flow issues, including debt prepayment
or debt extinguishment costs, contingent consideration payments made after a business combination, distributions received from
equity method investees, separately identifiable cash flows and application of the predominance principle, and others. The adoption
of this guidance, effective January 1, 2018, did not have a material effect on our financial position, results of operations or
cash flows.
In February 2016, the FASB issued ASU No.
2016-02, “Leases.” ASU 2016-02 outlines a new model for accounting by lessees, whereby their rights and obligations
under substantially all leases, existing and new, would be capitalized and recorded on the balance sheet. For lessors, however,
the accounting remains largely unchanged from the current model, with the distinction between operating and financing leases retained,
but updated to align with certain changes to the lessee model and the new revenue recognition standard discussed above. As lessee,
we are party to an office lease with future payment obligations aggregating approximately $3.0 million at September 30, 2018 (see
Note 8 - Commitments) for which we expect to record right of use assets and corresponding lease liabilities upon adoption of ASU
2016-02. The new guidance also requires that internal leasing costs be expensed as incurred, as opposed to capitalized and deferred.
We do not capitalize internal leasing costs. ASU 2016-02 will also require extensive quantitative and qualitative disclosures and
is effective for periods beginning after December 15, 2018, but early adoption is permitted. In July 2018, the FASB issued ASU
2018-11, “Leases (Topic 842) – Targeted Improvements,” which provides an optional transition method of applying
the new leases standard at the adoption date by recognizing a cumulative-effect adjustment to the opening balance of retained earnings
in the period of adoption. It also provides lessors with a practical expedient to not separate non-lease revenue components from
the associated lease component if certain conditions are met. We are currently evaluating the extent of the impact of adopting
this new standard on our consolidated financial statements and related disclosures.
In
May 2014, the FASB issued ASU 2014-09 establishing ASC Topic 606, “Revenue from Contracts with
Customers” (“ASC 606”). ASU 2014-09, as amended by subsequent ASUs on the topic, establishes a single
comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most
of the existing revenue recognition guidance. This standard requires an entity to recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services and also requires certain additional disclosures. We adopted this standard
effective January 1, 2018 using the modified retrospective method approach, however, there was no cumulative-effect required
to be recognized in our accumulated deficit at the date of adoption. Our revenue contracts are primarily leases that are not
within the scope of this standard, as a result, the adoption of ASC 606 did not have a material impact on our financial
position, results of operations or cash flows.
Note 3 – Real Estate, Net
As of September 30, 2018 and December 31,
2017, real estate, net, includes the following (in thousands):
|
|
September
30, 2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Real estate under development
|
|
$
|
106,016
|
|
|
$
|
69,783
|
|
Building and building improvements
|
|
|
47,187
|
|
|
|
5,817
|
|
Tenant improvements
|
|
|
731
|
|
|
|
606
|
|
Furniture and fixtures
|
|
|
694
|
|
|
|
-
|
|
Land and land improvements
|
|
|
30,391
|
|
|
|
2,452
|
|
|
|
|
185,019
|
|
|
|
78,658
|
|
Less: accumulated depreciation
|
|
|
3,135
|
|
|
|
2,389
|
|
|
|
$
|
181,884
|
|
|
$
|
76,269
|
|
Real estate under development as of September
30, 2018 and December 31, 2017 included 77 Greenwich and the Paramus, New Jersey property. Building and building improvements,
tenant improvements and land and land improvements included the West Palm Beach, Florida property and, as of May 24, 2018, the
237 11
th
property and furniture and fixtures included the 237 11
th
property (see Properties under Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a more detailed description
of our properties).
Depreciation expense amounted to approximately
$402,000 and $61,000 for the three months ended September 30, 2018 and September 30, 2017, respectively, and $724,000 and $184,000
for the nine months ended September 30, 2018 and September 30, 2017, respectively. The increase in depreciation expense for the
three and nine months ended September 30, 2018 primarily relates to the 237 11
th
property acquisition.
On May 24, 2018, we closed on the
acquisition of the 237 11
th
property, a newly built 105-unit, 12-story apartment building located at 237
11
th
Street, Brooklyn, New York for a purchase price of $81.0 million, excluding transaction costs. The
acquisition was funded through acquisition financing and cash on hand.
We allocate the purchase price of real
estate to land and land improvements and building and building improvements (inclusive of tenant improvements) and, if determined
to be material, intangibles, such as the value of above-market and below-market leases, real estate tax abatement and origination
costs associated with the in-place leases. We depreciate the amount allocated to building and building improvements (inclusive
of tenant improvements) over their estimated useful lives, which generally range from one year to 27.5 years. We amortize
the amount allocated to values associated with real estate tax abatement over the estimated period of benefit which is 15 years
for 237 11
th
. We amortize the amount allocated to the above-market and below-market leases over the remaining term
of the associated lease, which generally range from one to two years, and record it as either an increase
(in the case of below-market leases) or a decrease (in the case of above-market leases) to rental income. We amortize the amount
allocated to the values associated with in-place leases over the expected term of the associated lease, which generally range
from one to two years. If a tenant vacates its space prior to the contractual termination of the lease and no rental
payments are being made on the lease, any unamortized balance of the related intangible will be written off. The tenant improvements
and origination costs are amortized as an expense over the remaining life of the lease (or charged against earnings if the lease
is terminated prior to its contractual expiration date). We assess fair value of the leases based on estimated cash flow projections
that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are
based on a number of factors including the historical operating results, known trends, and market/economic conditions that may
affect the property. The following table presents our purchase price allocation, including transaction costs, for 237 11
th
(in thousands):
Purchase Price Allocation:
|
|
|
|
|
|
|
|
Land and land improvements
|
|
$
|
27,939
|
|
Building and building improvements
|
|
|
41,297
|
|
Tenant improvements
|
|
|
125
|
|
Furniture and fixtures
|
|
|
694
|
|
Real estate tax abatement
|
|
|
11,100
|
|
Acquired in-place leases
|
|
|
1,090
|
|
Assets acquired
|
|
|
82,245
|
|
|
|
|
|
|
Below-market lease value
|
|
|
(285
|
)
|
Liabilities assumed
|
|
|
(285
|
)
|
|
|
|
|
|
Purchase price
|
|
$
|
81,960
|
|
Through a wholly-owned subsidiary,
we entered into an agreement with the New York City School Construction Authority (the "SCA"), whereby we
will construct a school that will be sold to the SCA as part of our condominium development at the 77 Greenwich property.
Pursuant to the agreement, the SCA will pay us $41.5 million for the purchase of their condominium unit, and reimburse us for
the costs associated with constructing the school (including a construction supervision fee of approximately $5.0 million
payable to us). Payments for construction will be made by the SCA to the general contractor in installments as construction
on their condominium progresses. Payments to us for the land and construction supervision fee commenced in January 2018 and
will continue through September 2019. As of September 30, 2018, we have received an aggregate of $20.2 million of payments
from the SCA, including the construction supervision fee. We have also received an aggregate of $17.1 million in reimbursable
construction costs from the SCA through September 30, 2018. Upon Substantial Completion, as defined in our agreement with the
SCA, the SCA will close on the purchase of the school condominium unit from us, at which point title will transfer to the
SCA. Under the agreement, we are required to substantially complete construction of the school by September 6, 2023. To
secure our obligations, the 77 Greenwich property has been ground leased to the SCA and leased back to us until title to the
school is transferred to the SCA. We have also guaranteed certain obligations with respect to the construction of the school.
The condominium apartments and construction of a new handicapped accessible subway entrance are currently scheduled to be
completed by the end of 2020.
Revenue relating to the ultimate sale of
the condominium unit will not be recognized until control of the asset is transferred to the buyer. This generally will include
transfer of title to the property. As payments from the SCA are received, the amounts will be recorded on the balance sheet as
deferred real estate deposits until sales criteria are satisfied.
Note 4 – Prepaid Expenses and
Other Assets, Net
As of September 30, 2018 and December 31,
2017, prepaid expenses and other assets, net, include the following (in thousands):
|
|
September 30,
2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Trademarks and customer lists
|
|
$
|
2,090
|
|
|
$
|
2,090
|
|
Prepaid expenses
|
|
|
2,127
|
|
|
|
1,673
|
|
Lease commissions
|
|
|
1,309
|
|
|
|
1,297
|
|
Other
|
|
|
1,990
|
|
|
|
1,203
|
|
|
|
|
7,516
|
|
|
|
6,263
|
|
Less: accumulated amortization
|
|
|
3,150
|
|
|
|
2,204
|
|
|
|
$
|
4,366
|
|
|
$
|
4,059
|
|
Note 5 – Loans Payable and Secured
Line of Credit
Loans Payable
237 11
th
Loans
On May 24, 2018, in connection with the
acquisition of the 237 11
th
property, wholly owned subsidiaries of ours entered into two-year interest-only financings
with an aggregate principal amount of $67.8 million, comprised of a $52.4 million mortgage loan with Canadian Imperial Bank of
Commerce and a $15.4 million mezzanine loan with RCG LV Debt VI REIT, LLC (the “237 11
th
Loans”), bearing
interest at a blended average rate of 3.72% over the 30-day LIBOR, each with a one year extension option upon satisfaction of certain
conditions. The 237 11
th
Loans are non-recourse to us except for certain non-recourse carve-out and carry guaranties
covering among other things interest and operating expenses, and in the case of the mortgage loan, a guaranty of 25% of the principal
amount, decreasing to 10% of the principal balance upon the debt yield ratio becoming equal to or greater than 7.0%. The effective
rate at September 30, 2018 was approximately 5.98%. The 237 11
th
Loans are prepayable at any time in whole, provided
that prepayment of the mortgage loan must be accompanied by prepayment of the mezzanine loan, and under certain circumstances in
part, upon payment, in the case of the mortgage loan, of a 0.50% deferred commitment fee (unless the loan is refinanced with the
mortgage lender in which case no such fee is payable), and, in the case of the mezzanine loan, with no fee if prepaid after 12
months, and if prepaid prior to such date, subject to a make-whole fee equal to the interest that would have been paid through
the balance of the 12-month period.
The collateral for the 237 11
th
mortgage loan is the fee interest of our subsidiary in the 237 11
th
property and the collateral for the 237 11
th
mezzanine loan is our equity interests in the mortgage loan borrower. The 237 11
th
Loans require us to comply with various
customary affirmative and negative covenants and provide for certain events of default, the occurrence of which would permit the
lenders to declare the 237 11
th
Loans due and payable, among other remedies. As of September 30, 2018, we were in compliance
with all covenants in the 237 11
th
Loans.
77 Greenwich Construction Facility
On December 22, 2017, a wholly-owned subsidiary
of ours closed on a $189.5 million construction facility (the “77 Greenwich Construction Facility”) with Massachusetts
Mutual Life Insurance Company, as lender and administrative agent (the “Lender”). We will draw down proceeds as costs
related to the construction are incurred for 77 Greenwich over the next few years for the construction of the new mixed-use building
containing approximately 300,000 square feet of gross floor area. The plans call for the development of 90 luxury residential condominium
apartments, 7,500 square feet of street level retail space, a 476-seat elementary school serving New York City District 2, including
the adaptive reuse of the landmarked Robert and Anne Dickey House, and construction of a new handicapped accessible subway entrance
on Trinity Place. There was an outstanding balance of approximately $42.8 million and $32.7 million on the 77 Greenwich Construction
Facility at September 30, 2018 and December 31, 2017, respectively. As of September 30, 2018, we were in compliance with all covenants
of the 77 Greenwich Construction Facility.
The 77 Greenwich
Construction Facility has a four-year term with one extension option for an additional year under certain circumstances. The
collateral for the 77 Greenwich Construction Facility is the borrower’s fee interest in 77 Greenwich, which is the
subject of a mortgage in favor of the lender. The 77 Greenwich Construction Facility will bear interest on amounts drawn at a
rate per annum equal to the greater of (i) LIBOR plus 8.25% and (ii) 9.25%. The effective interest rate on the 77
Greenwich Construction Facility was 10.51% as of September 30, 2018 and 9.81% at December 31, 2017. The 77 Greenwich
Construction Facility provides for certain interest payments to be advanced as an interest holdback and to the extent that
the cash flow from 77 Greenwich is insufficient to pay the interest payments then due and payable, funds in the interest
holdback will be applied by the lender as a disbursement to the borrower to make the monthly interest payments on the 77
Greenwich Construction Facility, subject to certain conditions. The 77 Greenwich Construction Facility may be prepaid in part
in certain circumstances such as in the event of the sale of residential and retail condominium units. Pursuant to the
77 Greenwich Construction Facility, we are required to achieve completion of the construction work and the improvements for
the project on or before a completion date that is forty-two (42) months following the closing of the 77 Greenwich
Construction Facility, subject to certain exceptions. The 77 Greenwich Construction Facility also includes a requirement that
the Company maintain liquidity of at least $15.0 million, consisting of cash and qualified lines of credit, and additional
customary affirmative and negative covenants for loans of this type and our agreements with the SCA. We also entered into
certain completion and other guarantees with the Lender and the SCA in connection with the 77 Greenwich Construction
Facility.
On December 22, 2017, we entered into an
interest rate cap agreement as required under the 77 Greenwich Construction Facility. The interest rate cap agreement provides
the right to receive cash if the reference interest rate rises above a contractual rate. We paid a premium of approximately $393,000
for the 2.5% interest rate cap on the 30-day LIBOR rate on a notional amount of $189.5 million. The fair value of the interest
rate cap as of September 30, 2018 and December 31, 2017 was approximately $1.2 million and $344,000, respectively, and is recorded
in prepaid expenses and other assets, net in our condensed consolidated balance sheets. We did not designate this interest rate
cap as a hedge and are recognizing the change in estimated fair value in interest expense. During the nine months ended September
30, 2018, the approximate $839,000 change in value of this instrument had been recorded as interest income and subsequently capitalized
to real estate, net.
Prior 77 Greenwich Loan
On February 9, 2015, our wholly-owned subsidiary
that owns 77 Greenwich and related assets entered into a loan agreement with Sterling National Bank, as lender and administrative
agent, and Israel Discount Bank of New York, as lender, pursuant to which we borrowed $40.0 million (the “Prior 77 Greenwich
Loan”). The Prior 77 Greenwich Loan, which was scheduled to mature on November 8, 2017, was extended to February 8, 2018
and repaid in full on December 22, 2017 in conjunction with the closing of the 77 Greenwich Construction Facility. The effective
interest rate on the Prior 77 Greenwich Loan was 5.5% as of September 30, 2017.
West Palm Beach, Florida Loan
On May 11, 2016, our subsidiary that owns
our West Palm Beach, Florida property, commonly known as The Shoppes at Forest Hill, entered into a loan agreement with Citizens
Bank, National Association, as lender (the “WPB Lender”), pursuant to which the WPB Lender agreed to provide a loan
in the amount of up to $12.6 million, subject to the terms and conditions as set forth in the loan agreement (the “WPB Loan”).
$9.1 million was borrowed at closing. The WPB Loan requires interest-only payments and bears interest at 30-day LIBOR plus 230
basis points. The effective interest rate was 4.56% as of September 30, 2018 and 3.86% as of December 31, 2017. The WPB Loan matures
on May 11, 2019, subject to extension until May 11, 2021, under certain circumstances, and can be prepaid at any time, in whole
or in part, without premium or penalty.
The collateral for the WPB Loan is the
borrower’s fee interest in the West Palm Beach, Florida property. The WPB Loan requires the borrower to comply with various
customary affirmative and negative covenants and provides for certain events of default, the occurrence of which would permit the
WPB Lender to declare the WPB Loan due and payable, among other remedies. As of September 30, 2018, we were in compliance with
all covenants in the WPB Loan.
On May 11, 2016, we entered into an interest
rate cap agreement as required under the WPB Loan. The interest rate cap agreement provides the right to receive cash if the reference
interest rate rises above a contractual rate. We paid a premium of $14,000 for the 3.0% interest rate cap on the 30-day LIBOR rate
on a notional amount of $9.1 million. The fair value of the interest rate cap was approximately $2,000 and $5,000 as of September
30, 2018 and December 31, 2017, respectively, and is recorded in prepaid expenses and other assets, net in our condensed consolidated
balance sheets. We did not designate this interest rate cap as a hedge and are recognizing the change in estimated fair value in
interest expense. For both the nine months ended September 30, 2018 and September 30, 2017, we recognized the change in value of
approximately $3,000 in interest expense.
Secured Line of Credit
On February 22, 2017, we entered into two
secured lines of credit for an aggregate of $12.0 million, with Sterling National Bank as the lender, which were secured by our
properties located in Paramus, New Jersey, and Westbury, New York, respectively, and had an original maturity date of February
22, 2018. On August 4, 2017, in connection with the sale of the Westbury, New York property, the $2.9 million line of credit secured
by this property, which was undrawn, matured. The remaining $9.1 million line of credit, secured by the Paramus, New Jersey property,
was increased to $11.0 million in September 2017, and the maturity date extended to February 22, 2019. The line of credit bears
interest, for drawn amounts only, at 100 basis points over Prime, as defined in the underlying credit agreement, with a floor of
3.75%, and is pre-payable at any time without penalty. This secured line of credit was undrawn at both September 30, 2018 and December
31, 2017.
Interest
Consolidated interest (income) expense,
net includes the following (in thousands):
|
|
Three Months
Ended
September
30,
2018
|
|
|
Three Months
Ended
September
30,
2017
|
|
|
Nine Months
Ended
September 30,
2018
|
|
|
Nine Months
Ended
September 30,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
2,064
|
|
|
$
|
644
|
|
|
$
|
3,912
|
|
|
$
|
1,832
|
|
Interest capitalized
|
|
|
(2,064
|
)
|
|
|
(562
|
)
|
|
|
(3,912
|
)
|
|
|
(1,602
|
)
|
Interest income
|
|
|
(36
|
)
|
|
|
(102
|
)
|
|
|
(182
|
)
|
|
|
(141
|
)
|
Interest (income) expense, net
|
|
$
|
(36
|
)
|
|
$
|
(20
|
)
|
|
$
|
(182
|
)
|
|
$
|
89
|
|
Note 6 – Fair Value Measurements
The fair value of our 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 process in active markets for identical assets or liabilities (Level 1), quoted process for similar instruments in
active markets or quoted process 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,
receivables, prepaid expenses and other assets, accounts payable and accrued expenses, and other liabilities approximated their
carrying value because of the short-term nature of these instruments. The fair value of each of the loans payable approximated
their carrying value as all our loans are variable-rate instruments.
Note 7 – Pension Plans
Defined Benefit Pension Plan
Our predecessor, Syms, sponsored a defined
benefit pension plan for certain eligible employees not covered under a collective bargaining agreement. The pension plan was frozen
effective December 31, 2006. As of September 30, 2018 and December 31, 2017, we had a recorded liability of $2.0 million and $2.5
million respectively, which is included in pension liabilities on the accompanying condensed consolidated balance sheets. This
liability represents the estimated cost to us of terminating the plan in a standard termination, which would require us to make
additional contributions to the plan so that the assets of the plan are sufficient to satisfy all benefit liabilities.
We had contemplated other courses of action,
including a distress termination, whereby the Pension Benefits Guaranty Corporation (“PBGC”) would take over the plan.
On February 27, 2012, Syms notified the PBGC and other affected parties of its consideration to terminate the plan in a distress
termination. However, the estimated total cost associated with a distress termination was approximately $15 million. As a result
of the cost savings associated with the standard termination approach, Syms elected not to terminate the plan in a distress termination
and formally notified the PBGC of this decision. We will maintain the Syms pension plan and make all contributions required under
applicable minimum funding rules; provided, however, that we may terminate the Syms pension plan at any time. In the event that
we terminate the Syms pension plan, we intend that any such termination shall be a standard termination. Although we have accrued
the liability associated with a standard termination, we have not taken any steps to commence such a termination and have made
no commitment to do so by a certain date. In accordance with minimum funding requirements and court ordered allowed claims distributions,
we paid approximately $4.5 million to the Syms sponsored plan from September 17, 2012 through September 30, 2018. We funded $470,000
to the Syms sponsored plan during the nine months ended September 30, 2018 and $460,000 during the nine months ended September
30, 2017. Historically, we have funded this plan in the third quarter of the calendar year.
Multiemployer Pension Plans
Certain employees covered
by collective bargaining agreements participate in multiemployer pension plans. Syms ceased to have an obligation to
contribute to these plans in 2012, thereby triggering a complete withdrawal from the plans within the meaning of section 4203
of the Employee Retirement Income Security Act of 1974. Consequently, we are subject to the payment of a withdrawal liability
to these pension funds. We have a liability of $1.1 million and $1.7 million which is included in pension liabilities on
the accompanying condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017, respectively, related
to these plans. We are required to make quarterly distributions in the amount of approximately $203,000 until this liability
is completely paid to the multiemployer plan by the beginning of 2020. In accordance with minimum funding requirements and
court ordered allowed claims distributions, we paid approximately $5.8 million to the multiemployer plans from September 17,
2012 through September 30, 2018. Approximately $610,000 was funded to the multiemployer plan during each of the nine month
periods ended September 30, 2018 and September 30, 2017.
Note 8 – Commitments
|
a.
|
Leases
–
As of September 30, 2018, our corporate office located at 340 Madison
Avenue, New York, New York has a lease obligation of approximately $3.0 million payable through March 31, 2025. The rent paid for
this operating lease for the three and nine months ended September 30, 2018 was approximately $110,000 and $238,000, respectively.
|
|
b.
|
Legal Proceedings -
In the normal course of business, we may
become a party to routine legal proceedings. Based on available information and taking into account accruals where they have
been established, management currently believes that any liabilities ultimately resulting from this routine litigation will not,
individually or in the aggregate, have a material adverse effect on our consolidated financial position. Additionally, as discussed
in Note 1 to our condensed consolidated financial statements, as of February 6, 2018, we no longer operate under the Plan that
was approved in connection with the resolution of the Chapter 11 cases involving Syms and its subsidiaries.
|
Note 9 – Income Taxes
Effects of the Tax Cuts and Jobs Act
On December 22, 2017, the TCJA was signed
into U.S. law. ASC 740 requires companies to recognize the effect of tax law changes in the period of enactment even though
the effective date for most provisions is for tax years beginning after December 31, 2017, or in the case of certain other provisions
of the law, January 1, 2018.
Given the significance of the legislation,
the SEC staff issued Staff Accounting Bulletin ("SAB") No. 118 (“SAB 118”), which allows registrants to record
provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations.
However, the measurement period is deemed to have ended prior to the one year term when the registrant has obtained, prepared,
and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected
to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be
recognized and adjusted as information becomes available, prepared, or analyzed.
SAB 118 summarizes a three-step process
to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for
which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where
accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made
and therefore taxes are reflected in accordance with law prior to the enactment of the TCJA.
As part of the TCJA, the U.S. corporate
income tax rate applicable to us decreased from 35% to 21%. This rate change resulted in the remeasurement of our net deferred
tax asset (“DTA”) as of December 31, 2017. The effect was a reduction of the DTA of approximately $33.7 million, which
was completely offset by a change in our valuation allowance.
Pursuant to the TCJA, alternative
minimum tax (“AMT”) credit carryforwards will be eligible for a 50% refund through tax years 2018 through 2020.
Beginning in tax year 2021, any remaining AMT credit carryforwards would be 100% refundable. As a result of these new
regulations, as of December 31, 2017, we had released the valuation allowance of $3.1 million formerly reserved against our
AMT credit carryforwards and we had recorded a tax benefit and refund receivable of $3.1 million in connection with this
valuation allowance release, which is included in receivables, net on the condensed consolidated balance sheets.
Our accounting for the above elements of
the TCJA is complete.
Other significant provisions that are not
yet effective but may impact income taxes in future years include, but are not limited to: an exemption from U.S. tax on dividends
of future foreign earnings, limitation on the current deductibility of net interest expense in excess of 30% of adjusted taxable
income and a limitation of net operating losses generated after fiscal 2018 to 80% of taxable income.
Other
At September 30, 2018, we had federal NOLs
of approximately $218.8 million. These NOLs will expire in years through fiscal 2034. At September 30, 2018, we also had state
NOLs of approximately $100.2 million. These NOLs expire between 2029 and 2037. We also had the New York State and New York City
prior NOL conversion (“PNOLC”) subtraction pools of approximately $31.1 million and $25.5 million, respectively. The
conversion to the PNOLC under the New York State and New York City corporate tax reforms does not have any material tax impact.
Based on management’s assessment,
we believe it is more likely than not that the entire deferred tax assets will not be realized by future taxable income or tax
planning strategy. In recognition of this risk, we have provided a valuation allowance of $60.9 million and $59.5 million as of
September 30, 2018 and December 31, 2017, respectively. If our assumptions change and we determine we will be able to realize these
NOLs, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets would be recognized as a reduction
of income tax expense and an increase in equity.
Note 10 – Stockholders’
Equity
Capital Stock
Our authorized capital stock consists of
120,000,000 shares consisting of 79,999,997 shares of common stock, $0.01 par value per share, two (2) shares of preferred stock,
$0.01 par value per share (which have been redeemed in accordance with their terms and may not be reissued), one (1) share of special
stock, $0.01 par value per share, and 40,000,000 shares of a new class of blank-check preferred stock, $0.01 par value per share.
As of September 30, 2018 and December 31, 2017, there were 37,156,068 shares and 36,803,218 shares of common stock issued, respectively,
and 31,644,345 shares and 31,451,796 shares of common stock outstanding, respectively, with the difference being held in treasury
stock.
At-The-Market Equity Offering Program
In December 2016, we entered into
an "at-the-market" equity offering program (the “ATM Program”), to sell up to an aggregate
of $12.0 million of our common stock. During 2016 and 2017, we issued 120,299 shares and 2,492 shares, respectively,
of our common stock for aggregate gross proceeds of approximately $1.2 million and $23,000, respectively, at a weighted average
price of $9.76 and $9.32 per share, respectively. We issued no stock through the ATM Program during the nine months ended
September 30, 2018. As of September 30, 2018, $10.8 million of common stock remained available for issuance under
the ATM Program. The sale agreement with our broker, which expired in accordance with its term on December 31, 2017, was
extended by an amendment on June 20, 2018, pursuant to which it will remain in effect until June 30, 2019, subject to
extension upon mutual agreement, unless earlier terminated by the parties thereto.
Preferred Stock
We are authorized to issue two shares of
preferred stock, (one share each of Series A and Series B preferred stock), one share of special stock and 40,000,000 shares of
blank-check preferred stock. Upon the occurrence of the General Unsecured Claim Satisfaction, as defined in the Plan, in March
2016, the share of Series A preferred stock that was issued to a trustee acting for the benefit of our creditors was automatically
redeemed in accordance with its terms and may not be reissued. In addition, upon the final payment to the former Majority Shareholder
in March 2016, the share of Series B preferred stock that was issued to the former Majority Shareholder was automatically redeemed
in accordance with its terms and may not be reissued.
The share of special stock was issued and
sold to Third Avenue Trust, and enables Third Avenue or its affiliated designee to elect one member of the Board of Directors.
Note 11 – Stock-Based Compensation
Stock Incentive Plan
We adopted the Trinity Place Holdings Inc.
2015 Stock Incentive Plan (the “SIP”), effective September 9, 2015. Prior to the adoption of the SIP, we granted restricted
stock units (“RSUs”) to our executive officers and employees pursuant to individual agreements. The SIP, which has
a ten year term, authorizes (i) stock options that do not qualify as incentive stock options under Section 422 of the Code, or
NQSOs, (ii) stock appreciation rights, (iii) shares of restricted and unrestricted common stock, and (iv) RSUs. The exercise price
of stock options will be determined by the compensation committee, but may not be less than 100% of the fair market value of the
shares of common stock on the date of grant. The SIP authorizes the issuance of up to 800,000 shares of our common stock. Our SIP
activity was as follows:
|
|
Nine Months Ended
September 30, 2018
|
|
|
Year Ended
December 31, 2017
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average Fair
Value at
Grant
Date
|
|
|
Number of
Shares
|
|
|
Weighted
Average Fair
Value at
Grant Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance available, beginning of period
|
|
|
541,319
|
|
|
|
-
|
|
|
|
614,500
|
|
|
|
-
|
|
Granted to employees
|
|
|
(146,000
|
)
|
|
$
|
6.95
|
|
|
|
(48,600
|
)
|
|
$
|
7.34
|
|
Granted to non-employee directors
|
|
|
(10,223
|
)
|
|
$
|
6.78
|
|
|
|
(18,938
|
)
|
|
$
|
6.88
|
|
Deferred under non-employee director's deferral program
|
|
|
(14,336
|
)
|
|
$
|
6.73
|
|
|
|
(5,643
|
)
|
|
$
|
6.88
|
|
Balance available, end of period
|
|
|
370,760
|
|
|
|
-
|
|
|
|
541,319
|
|
|
|
-
|
|
Restricted Stock Units
We grant RSUs to certain employees and
executive officers as part of compensation. These grants generally have vesting dates ranging from immediate vest at grant date
to three years, with a distribution of shares at various dates ranging from the time of vesting up to seven years after vesting.
During the nine months ended September
30, 2018, we granted 146,000 RSUs to certain employees. These RSUs vest and settle at various times over a two year period, subject
to each employee’s continued employment. Approximately $190,000 and $571,000 in compensation expense related to these shares
was amortized during the three and nine months ended September 30, 2018, respectively, of which approximately $76,000 and $227,000
was capitalized into real estate under development.
Total stock-based compensation
expense recognized during the three months ended September 30, 2018 and September 30, 2017 totaled $285,000 and $277,000,
respectively, which is net of $161,000 and $311,000 capitalized as part of real estate under development, respectively. Total
stock-based compensation expense recognized during the nine months ended September 30, 2018 and September 30, 2017 totaled
$921,000 and $831,000, respectively, which is net of $511,000 and $1.3 million capitalized as part of real estate under
development, respectively.
Our RSU activity was as follows:
|
|
Nine Months Ended
September 30, 2018
|
|
|
Year Ended December 31,
2017
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average Fair
Value
at
Grant Date
|
|
|
Number of
Shares
|
|
|
Weighted
Average Fair
Value at
Grant Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at beginning of period
|
|
|
677,734
|
|
|
$
|
6.44
|
|
|
|
1,621,235
|
|
|
$
|
6.38
|
|
Granted RSUs
|
|
|
146,000
|
|
|
$
|
6.95
|
|
|
|
48,600
|
|
|
$
|
7.46
|
|
Vested
|
|
|
(203,142
|
)
|
|
$
|
6.59
|
|
|
|
(992,101
|
)
|
|
$
|
6.45
|
|
Non-vested at end of period
|
|
|
620,592
|
|
|
$
|
6.40
|
|
|
|
677,734
|
|
|
$
|
6.44
|
|
As of September 30, 2018, there was approximately
$1.1 million of total unrecognized compensation expense related to unvested RSUs, which is expected to be recognized through December
2020.
During the nine months ended September
30, 2018, we issued 343,000 shares of common stock to employees and executive officers to settle vested RSUs from previous RSU
grants. In connection with those transactions, we repurchased 160,000 shares to provide for the employees’ withholding tax
liabilities.
Director Deferred Compensation Program
We adopted our Non-Employee Director’s
Deferral Program (the “Deferral Program”) on November 2, 2016. Under the Deferral Program, our non-employee directors
may elect to defer receipt of their annual equity compensation. The non-employee directors’ annual equity compensation, and
any deferred amounts, are paid under the SIP. Compensation deferred under the Deferral Program is reflected by the grant of stock
units under the SIP equal to the number of shares that would have been received absent a deferral election. The stock units, which
are fully vested at grant, generally will be settled for an equal number of shares of common stock within 10 days after the participant
ceases to be a director. In the event that we distribute dividends, each participant shall receive a number of additional stock
units (including fractional stock units) equal to the quotient of (i) the aggregate amount of the dividend that the participant
would have received had all outstanding stock units been shares of common stock divided by (ii) the closing price of a share of
common stock on the date the dividend was issued.
As of September 30, 2018, 19,979 stock
units were deferred under the Deferral Program.
Note 12 – Investment in Our
Unconsolidated Joint Venture
Through a wholly-owned
subsidiary, we own a 50% interest in a joint venture formed to acquire and operate 223 North 8th Street, Brooklyn, New York, a
newly constructed 95-unit multi-family property, known as The Berkley, encompassing approximately 99,000 gross square feet.
On December 5, 2016, the joint venture closed on the acquisition of The Berkley through a wholly-owned special purpose entity
for a purchase price of $68.885 million, of which $42.5 million was financed through a 10-year loan (the “Loan”) secured
by The Berkley and the balance was paid in cash (half of which was funded by us). The non-recourse Loan bears interest at
the 30-day LIBOR rate plus 216 basis points, is interest only for five years, is pre-payable after two years with a 1% prepayment
premium and has covenants and defaults customary for a Freddie Mac financing. We and our joint venture partner are joint
and several recourse carve-out guarantors under the Loan pursuant to Freddie Mac’s standard form of guaranty. The effective
interest rate was 4.42% at September 30, 2018 and 3.72% at December 31, 2017.
This joint venture
is a voting interest entity. As we do not control this joint venture, we account for it under the equity method of accounting.
The balance sheets
for the unconsolidated joint venture at September 30, 2018 and December 31, 2017 are as follows (in thousands):
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate, net
|
|
$
|
52,131
|
|
|
$
|
53,137
|
|
Cash and cash equivalents
|
|
|
180
|
|
|
|
218
|
|
Restricted cash
|
|
|
390
|
|
|
|
361
|
|
Tenant and other receivables, net
|
|
|
35
|
|
|
|
21
|
|
Prepaid expenses and other assets, net
|
|
|
85
|
|
|
|
71
|
|
Intangible assets, net
|
|
|
12,427
|
|
|
|
12,829
|
|
Total assets
|
|
$
|
65,248
|
|
|
$
|
66,637
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage payable, net
|
|
$
|
41,092
|
|
|
$
|
40,963
|
|
Accounts payable and accrued expenses
|
|
|
593
|
|
|
|
608
|
|
Total liabilities
|
|
|
41,685
|
|
|
|
41,571
|
|
|
|
|
|
|
|
|
|
|
MEMBERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members' equity
|
|
|
27,276
|
|
|
|
27,795
|
|
Accumulated deficit
|
|
|
(3,713
|
)
|
|
|
(2,729
|
)
|
Total members' equity
|
|
|
23,563
|
|
|
|
25,066
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members' equity
|
|
$
|
65,248
|
|
|
$
|
66,637
|
|
|
|
|
|
|
|
|
|
|
Our investment in unconsolidated joint venture
|
|
$
|
11,781
|
|
|
$
|
12,533
|
|
The statements
of operations for the unconsolidated joint venture for the three and nine months ended September 30, 2018 and September 30, 2017
are as follows (in thousands):
|
|
Three
Months
Ended
September
30, 2018
|
|
|
Three
Months
Ended
September
30, 2017
|
|
|
Nine
Months
Ended
September
30, 2018
|
|
|
Nine
Months
Ended
September
30, 2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenues
|
|
$
|
829
|
|
|
$
|
827
|
|
|
$
|
2,644
|
|
|
$
|
2,504
|
|
Other income
|
|
|
1
|
|
|
|
2
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
830
|
|
|
|
829
|
|
|
|
2,648
|
|
|
|
2,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses
|
|
|
319
|
|
|
|
256
|
|
|
|
773
|
|
|
|
665
|
|
Real estate taxes
|
|
|
11
|
|
|
|
12
|
|
|
|
34
|
|
|
|
35
|
|
General and administrative
|
|
|
3
|
|
|
|
3
|
|
|
|
5
|
|
|
|
19
|
|
Amortization
|
|
|
134
|
|
|
|
403
|
|
|
|
402
|
|
|
|
1,208
|
|
Depreciation
|
|
|
330
|
|
|
|
328
|
|
|
|
987
|
|
|
|
983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
797
|
|
|
|
1,002
|
|
|
|
2,201
|
|
|
|
2,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
33
|
|
|
|
(173
|
)
|
|
|
447
|
|
|
|
(402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
463
|
|
|
|
375
|
|
|
|
1,302
|
|
|
|
1,076
|
|
Interest expense -amortization of deferred finance costs
|
|
|
43
|
|
|
|
43
|
|
|
|
129
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(473
|
)
|
|
$
|
(591
|
)
|
|
$
|
(984
|
)
|
|
$
|
(1,608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our equity in net loss from unconsolidated joint venture
|
|
$
|
(236
|
)
|
|
$
|
(296
|
)
|
|
$
|
(492
|
)
|
|
$
|
(804
|
)
|
Note 13 – Subsequent Events
We have performed
subsequent event procedures through the date the condensed consolidated financial statements were available
to be issued, and there were no subsequent events requiring adjustment to, or disclosure in, the condensed consolidated financial
statements.