NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
1.
|
Description of business:
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The operations of Capital Properties, Inc. and its wholly-owned subsidiary, Tri-State Displays, Inc. (collectively “the Company”) consist of the long-term leasing of certain of its real estate interests in the Capital Center area in downtown Providence, Rhode Island (upon the commencement of which the tenants have been required to construct buildings thereon, with the exception of the parking garage and Parcel 20) and the leasing of locations along interstate and primary highways in Rhode Island and Massachusetts to Lamar Outdoor Advertising, LLC (“Lamar”) which has constructed outdoor advertising boards thereon. The Company anticipates that the future development of its remaining properties in and adjacent to the Capital Center area will consist primarily of long-term ground leases. Pending this development, the Company leases these parcels (other than Parcel 6C) for public parking to Metropark, Ltd.
2.
|
Principles of consolidation and basis of presentation:
|
The accompanying condensed consolidated financial statements include the accounts and transactions of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying condensed consolidated balance sheet as of December 31, 2019 has been derived from audited financial statements. The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest Form 10-K for the year ended December 31, 2019.
Historically, the Company has made financial statement footnote disclosure of the excess of straight-line rentals over contractual payments and its determination of collectability of such excess. Included in the amount of the excess were payments which under ASC 842 are deemed variable payments. As part of its ongoing review of the requirements of ASC 842, the Company has concluded that under ASC 842 variable rental payments should not be included in the straight-line rental amount. To the extent the Company determines that the excess of straight-line rentals over contractual payments is not collectible, such excess is not recognized as revenue. Consistent with prior conclusions, the Company has determined that, at this time, the excess of straight-line rentals over contractual payments is not probable of collection. Accordingly, the Company has not included any part of that amount in revenue. As a matter of information only, as of September 30, 2020 the excess of straight-line rentals (calculated by excluding variable payments) over contractual payments was $79,715,000.
In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2020 and the results of operations for the three and nine months ended September 30, 2020 and 2019, and cash flows for the nine months ended September 30, 2020 and 2019.
The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
Environmental incidents:
The Company accrues a liability when an environmental incident has occurred and the costs are estimable. The Company does not record a receivable for recoveries from third parties for environmental matters until it has determined that the amount of the collection is reasonably assured. The accrued liability is relieved when the Company pays the liability or a third party assumes the liability. Upon determination that collection is reasonably assured or a third party assumes the liability, the Company records the amount as a reduction of expense.
The preparation of consolidated 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 consolidated financial statements. Estimates also affect the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
6
4.
|
Properties and equipment:
|
Properties and equipment consist of the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Properties on lease or held for lease, land and land improvements
|
|
$
|
4,010,000
|
|
|
$
|
4,010,000
|
|
Office equipment
|
|
|
67,000
|
|
|
|
67,000
|
|
Steeple Street property (see Note 5)
|
|
|
3,011,000
|
|
|
|
3,011,000
|
|
|
|
|
7,088,000
|
|
|
|
7,088,000
|
|
Less accumulated depreciation:
|
|
|
|
|
|
|
|
|
Properties on lease or held for lease
|
|
|
90,000
|
|
|
|
87,000
|
|
Office equipment
|
|
|
67,000
|
|
|
|
66,000
|
|
Steeple Street property
|
|
|
151,000
|
|
|
|
86,000
|
|
|
|
|
308,000
|
|
|
|
239,000
|
|
|
|
$
|
6,780,000
|
|
|
$
|
6,849,000
|
|
5.
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Description of leasing arrangements:
|
|
Long-term land leases:
Through September 30, 2020, excluding the Parcel 6C lease, the Company had entered into nine long-term land leases. The lessee of Parcel 6C had the right to terminate its lease at any time during the remaining term of the lease upon thirty days’ notice. On July 30, 2020, the Company received notice that the lessee would exercise their right to terminate the ground lease effective August 29, 2020. As of September 30, 2020, eight of the nine parcels under lease (excluding Parcel 20) have completed construction of improvements thereon. The leases generally have a term of 99 years or more, are triple net, provide for periodic adjustment in rent of various types depending on the particular lease, and otherwise contain terms and conditions normal for such instruments.
With the exception of the Metropark Lease and Parcel 20 Lease, all of the Company’s tenants were current in their lease payment obligations as of November 6, 2020.
The Restated Lease for Parcel 20 (“Parcel 20 Lease”), as it relates specifically to the Steeple Street Building, was accounted for as a sales-type lease due to the transfer of the Steeple Street Building to the lessee. The land directly under the Steeple Street Building was allocated in the determination of the value of the property transferred in accordance with ASC 360-20, Property, Plant and Equipment - Real Estate Sales. Since the initial investment by the lessee is insufficient to recognize the transaction as a sale, in accordance with ASC 360-20, the Company will report the acquisition period rent and an allocable portion of the ground rent collected as deferred revenue, which is included in other liabilities on its condensed consolidated balance sheets, and will continue to include the property transferred in properties and equipment until the transaction can be reported as a sale in accordance with GAAP. The long-term ground lease of the land on Parcel 20 (exclusive of the Steeple Street Building) is accounted for as an operating lease, consistent with the Company’s other long-term ground leases.
Under the nine land leases, the tenants may negotiate tax stabilization treaties or other arrangements, appeal any changes in real property assessments, and must pay real property taxes assessed on land and improvements. Accordingly, real property taxes payable by the tenants are excluded from both leasing revenues and leasing expenses on the accompanying condensed consolidated statements of income and shareholders’ equity. Real property taxes attributable to the Company’s land under these leases totaled $315,000 and $997,000 for the three and nine months ended September 30, 2020 and $341,000 and $1,023,000 for the three and nine months ended September 30, 2019.
Under two of the long-term land leases, the Company receives contingent rentals (based on a fixed percentage of gross revenue received by the tenants) which totaled $18,000 and $76,000 for the three and nine months ended September 30, 2020 and $24,000 and $87,000 for the three and nine months ended September 30, 2019, respectively.
On the termination date, the annual rent on Parcel 6C was $220,000 and annual real estate taxes paid by the lessee equaled $311,000.
7
Lamar lease:
The Company, through a wholly-owned subsidiary, leases 23 outdoor advertising locations containing 44 billboard faces along interstate and primary highways in Rhode Island and Massachusetts to Lamar under a lease which expires in 2045. The Lamar lease provides, among other things, for the following: (1) the base rent will increase annually at the rate of 2.75% for each leased billboard location on June 1 of each year, and (2) in addition to base rent, for each 12-month period commencing each June 1 (each 12-month period a “Lease Year”), Lamar must pay to the Company within thirty days after the close of the Lease Year the positive difference, if any, between (a) 30% of the gross revenues from each standard billboard and 20% of the gross revenues from each electronic billboard for such 12-month period reduced by commissions paid to unrelated third parties but in no event more than 15% as to each billboard face; and (b) base location rent paid for each leased billboard for each 12-month period (“percentage rent”). For the lease years ended May 31, 2020 and 2019, the percentage rent totaled $139,000 and $133,000, respectively, which amounts are included in leasing revenue on the accompanying condensed consolidated statements of income and shareholders’ equity.
Parking lease:
The Company leases the undeveloped parcels of land in the Capital Center area (other than Parcel 6C) for public parking purposes to Metropark under a ten-year lease (the “Parking Lease”). The lease is cancellable as to all or any portion of the leased premises at any time on thirty days’ written notice in order for the Company or any new tenant of the Company to develop all or any portion of the leased premises. The Parking Lease provides for contingent rentals (based on a fixed percentage of gross revenue in excess of the base rent). There was no contingent rent for the three months ended September 30, 2020 and revenue for the nine months ended September 30, 2020 includes a $34,000 reduction due to the revision of the estimate of 2019’s contingent rent. Revenue for the three and nine months ended September 30, 2019 includes contingent rent which totaled $24,000 and $95,000, respectively.
The COVID-19 pandemic and stay-at-home orders have had a significant adverse impact on Metropark’s parking operations. On July 31, 2020, Metropark and the Company entered into an agreement for revenue sharing at various percentages until parking revenues received by Metropark equal or exceed $70,000 per month whereupon Metropark would be obligated to resume regularly scheduled rental payments under its lease. Upon resumption of regularly scheduled rent payments, Metropark and the Company will share fifty (50) percent of the revenue in excess of $70,000 until the arrearage has been paid in full. If prior to payment in full of the arrearage one or more of the lots is removed from the Metropark lease for development, the amount of the then unpaid arrearage in the ratio of the number of parking spaces on the removed lot to the total parking spaces on all lots prior to such lot’s removal shall be deemed paid in full.
For the three months ended September 30, 2020, Metropark paid $11,000 towards the rent due for this period resulting in a receivable of $227,000 which the Company has fully reserved. The Company will continue to report as revenue only the amount collected from Metropark until their operations return to approximately 80% of pre-pandemic levels.
6.
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Income taxes, continuing operations:
|
Deferred income taxes are recorded based upon differences between financial statement and tax basis amounts of assets and liabilities. The tax effects of temporary differences for continuing operations which give rise to deferred tax assets and liabilities are as follows:
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|
September 30,
2020
|
|
|
December 31,
2019
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property having a financial statement basis in excess of tax basis
|
|
$
|
361,000
|
|
|
$
|
364,000
|
|
Insurance premiums and accrued leasing revenues
|
|
|
16,000
|
|
|
|
29,000
|
|
|
|
|
377,000
|
|
|
|
393,000
|
|
Deferred tax assets
|
|
|
(142,000
|
)
|
|
|
(83,000
|
)
|
|
|
$
|
235,000
|
|
|
$
|
310,000
|
|
8
7.
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Discontinued operations:
|
Pursuant to an agreement (the “Sale Agreement”), on February 10, 2017, the Company sold its petroleum storage facility and related assets (the “Terminal”) owned or controlled by the Company’s former subsidiaries, Capital Terminal Company and Dunellen, LLC to Sprague Operating Resources, LLC (“Sprague”) for $23 Million subject to certain adjustments. In accordance with ASC 205-20, Presentation of Financial Statements – Discontinued Operations, the sale of the Terminal is accounted for as a discontinued operation. The liabilities associated with the discontinued operations are separately identified on the Company’s condensed consolidated balance sheets. These liabilities were not assumed by Sprague and remain obligations of the Company until settled. The Terminal’s discontinued operations is reported after income from continuing operations.
In accordance with the Sale Agreement, the Company has agreed to retain and pay for the environmental remediation costs associated with a 1994 storage tank fuel oil leak which allowed the escape of a small amount of fuel oil. Since 1994, the Company and its consultants have continued to work with the Rhode Island Department of Environmental Management (“RIDEM”) through the various phases of remediation and are now working to complete the final remediation. In February 2020, the Company submitted its revised Remedial Action Work Plan (“RAWP”) to RIDEM and obtained final approval to proceed in April 2020. Based on remediation cost estimates associated with the revised RAWP submitted in February 2020, which incorporates design changes necessary to meet the requirements of applicable life safety codes, the remediation accrual was increased by $846,000 resulting in an accrual of $1,043,000 at December 31, 2019. Through September 30, 2020, the Company incurred costs of $187,000 which decreased the amount accrued to $856,000. The Company anticipates that costs of approximately $480,000 of the amount accrued will be paid in 2021 and beyond. Any subsequent increases or decreases to the expected cost of remediation will be recorded in gain (loss) on sale of discontinued operations, net of taxes.
Pursuant to the Sale Agreement, at the closing the Company and Sprague entered into a letter agreement (the “Letter Agreement”) providing that if the cost of construction of a new breasting dolphin exceeded the initial estimate of $1,040,000, such excess would be borne equally by Sprague and the Company subject to certain limitations. In May 2018 the Company received notice from Sprague that Sprague had received bids for the breasting dolphin and that the cost of the construction was estimated at $1,923,284. Sprague requested that the Company acknowledge that it was obligated to pay 50% of the cost in excess of $1,040,000, or $441,642. The Company replied that pursuant to the Letter Agreement, the Company’s obligation cannot exceed $104,000 assuming, among other things, that Sprague had been timely in securing bids for the breasting dolphin and the scope of the work as bid was consistent with the Letter Agreement. In November 2019, the Company received a demand letter from Sprague asserting that Sprague was owed $427,000, which amount according to the letter represents 50% of the actual costs incurred ($1,894,000) in excess of $1,040,000. The Company continues to assert that its obligation cannot exceed $104,000. Subsequently, representatives from the Company and Sprague met to discuss the claim but no agreement was reached.
Gain on sale of discontinued operations for the three and nine months ended September 30, 2020 and 2019 are as follows:
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|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Indemnification escrow proceeds
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
862,000
|
|
Environmental remediation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
359,000
|
|
Gain from discontinued operations before income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
503,000
|
|
Income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(24,000
|
)
|
|
|
(49,000
|
)
|
|
|
(52,000
|
)
|
|
|
137,000
|
|
Deferred
|
|
|
24,000
|
|
|
|
49,000
|
|
|
|
52,000
|
|
|
|
(37,000
|
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from discontinued operations, net of taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
403,000
|
|
9
8.
|
Fair value of financial instruments:
|
The Company believes that the fair values of its financial instruments, including cash and cash equivalents, receivables and payables, approximate their respective book values because of their short-term nature. The fair values described herein were determined using significant other observable inputs (Level 2) as defined by GAAP.
At its October 28, 2020 regularly scheduled quarterly Board meeting, the Board of Directors voted to declare a quarterly dividend of $.07 per share for shareholders of record on November 13, 2020, payable November 24, 2020.
As of November 6, 2020, with the exception of the Metropark Lease and Parcel 20 Lease, all of the Company’s tenants are current in terms of required monthly lease payments. The total rent arrearage at November 6, 2020 is $309,000 and $13,000, respectively, for Metropark and Parcel 20.
10