Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States ("GAAP"). The following
discussion of our financial condition and results of operations excludes the
results of our discontinued operations unless otherwise noted. See Note 8,
"Discontinued operations and environmental incident" in the accompanying
Consolidated Financial Statements for further discussion of these operations.
1. Overview:
Critical accounting policies:
The Securities and Exchange Commission ("SEC") has issued guidance for the
disclosure of "critical accounting policies." The SEC defines such policies as
those that require application of management's most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain and may change in subsequent
periods.
The Company's significant accounting policies are described in Note 2 in the
accompanying Consolidated Financial Statements. Not all of these significant
accounting policies require management to make difficult, subjective or complex
judgments or estimates. Management believes that the Company's revenue
recognition policy for long-term leases with scheduled rent increases meets the
SEC definition of "critical."
The Company's long-term leases (land and billboard) have original terms of 30 to
149 years. The Company follows GAAP in accounting for its leases by recognizing
rental income on the straight-line basis over the term of the leases. Where the
straight-line income exceeds the actual contractual payments ("Excess"), the
Company evaluates the collectability of the entire stream of remaining lease
payments on a lease-by-lease basis. If the remaining lease payments are not
deemed to be probable of collection, in accordance with GAAP, lease revenue is
recorded at the lower of straight-line rental income or the contractual amount
paid.
The number of years remaining on the Company's leases range from twenty-eight
(28) years to one hundred-thirty-two (132) years with total rent yet to be
collected (without regard to CPI and appraisal adjustments) under the lease by
tenant ranging from $19.7 million to $363.8 million. Given the length of the
remaining lease term and the magnitude of the amount yet to be collected, along
with the consideration of other factors, the Company has concluded that the
remaining stream of lease payments is not probable of collection and as such,
reports lease revenue based on the contractual amount paid.
2. Liquidity and capital resources:
Historically, the Company generates adequate liquidity to fund its operations.
Cash and cash commitments:
At December 31, 2021, the Company had cash and cash equivalents of
$1,443,000. At December 31, 2021 and 2020, cash equivalents consist of a money
market account totaling $1,355,000 and $1,555,000, respectively. The Company and
its subsidiary each maintain checking account and one money market account in a
financial institution which is insured by the Federal Deposit Insurance
Corporation to a maximum of $250,000. The Company periodically evaluates the
financial stability of the financial institutions at which the Company's funds
are held.
Under the terms of each applicable long-term land lease, the contractual rent
adjustments for the last two year were:
Parcel Monthly Effective Date of Increase Type of
Number Increase Adjustment
Parcel 20 $2,800 June 1, 2020 Base ground rent increase
Parcel 9 $1,575 April 1, 2021 Base ground rent increase
On July 30, 2020, the Company received notice that the tenant of Parcel 6C
exercised its right to terminate the ground lease effective August 29, 2020. On
the termination date, the annual rent on Parcel 6C was $220,000 and the annual
real estate taxes paid by the tenant were $311,000. Upon termination, the real
estate taxes became an obligation of the Company effective with the taxes
assessed as on December 31, 2020. The Company believed that the assessed value
of Parcel 6C as agreed to by the City of Providence ("City") and the former
tenant of Parcel 6C pursuant to a Tax Stabilization Agreement ("TSA") was much
greater than similar parcels in the Capital Center area. Negotiations with the
City to reduce the
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assessment were initially unsuccessful. Accordingly, the Company filed a
complaint against the Providence Tax Assessor in Rhode Island Superior Court
asserting that the Company was not a party to the TSA and that the assessed
value should be determined based on the value of other Parcels in the Capital
Center Area. On December 20, 2021, the Company and the City entered into a
consent judgment that dissolved the TSA upon the termination of the ground lease
between the Company and the tenant and provided that the taxes assessed on
December 31, 2020 would be based on the assessed value as determined by the firm
engaged by the City, Vision Government Solutions, Inc. The adjusted assessed
value is significantly less than the assessed value provided in the TSA and
results in an annual property tax expense of $160,000.
Through February 23, 2022 all tenants have paid their monthly rent in accordance
with their lease agreements except for Metropark, the tenant that operates
public parking on the Company's undeveloped parcels other than Parcel 6C. The
coronavirus (COVID-19) pandemic has had a significant adverse impact on
Metropark. The Company does not know when or if Metropark's operations will
return to normal. Metropark has not fully paid the rent since April 2020. The
total rent arrearage as of December 31, 2021 is $766,000 and has been fully
reserved by the Company. 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. Until resumption of
regularly scheduled rent payments, the Company will continue to recognize
Metropark's rent on a cash basis.
The Company expects that revenue from Metropark will continue to be recognized
on a cash basis for a significant portion of 2022.
The Terminal Sale Agreement and related documentation provides that the Company
is required to secure an approved remediation plan and to remediate
contamination caused by a leak in 1994 from a storage tank at the Terminal. At
December 31, 2021, the Company's accrual for the remaining cost of remediation
was $358,000 of which $87,000 is expected to be incurred in 2022. The Terminal
Sale Agreement also contained a cost sharing provision for a breasting dolphin
whereby any costs incurred in connection with the construction of the breasting
dolphin in excess of the initial estimate of $1,040,000 would be borne equally
by Sprague and the Company subject to certain limitations, including, in the
Company's opinion, a 20% cap on the increase from the initial estimate subject
to the sharing arrangement. In November 2019, the Company received a demand
letter from Sprague asserting that it was owed $427,000, which amount represents
50% of the actual costs incurred ($1,894,008) in excess of $1,040,000. The
Company asserts that its obligation cannot exceed $104,000. On June 17, 2021 the
Company and Sprague met with a mediator to review Sprague's claim. Mediation was
unsuccessful and on July 15, 2021, Sprague commenced an action against the
Company in the Rhode Island Superior Court seeking monetary damages of $427,000,
interest and attorney's fees. The Company intends to vigorously defend against
the claims being asserted by Sprague. See Note 8, "Discontinued operations and
environmental incident" in the accompanying Consolidated Financial Statements.
In 2021, the Company declared and paid dividends of $1,848,000 or $0.28 per
share.
The declaration of future dividends will depend on future earnings and financial
performance.
3. Results of operations:
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020:
Revenue, leasing increased $223,000 from 2020 due to the recognition of deferred
revenue associated with the termination of the Parcel 20 lease ($293,000), rent
from the tenants of Parcel 20 effective November 1, 2021 ($28,000) and by an
increase in rent (contractual and contingent) from tenants ($95,000) offset by a
decrease in rent associated with Metropark ($46,000) and the termination of the
Parcel 6C lease ($147,000).
Operating expenses increased $279,000 due principally to: increased property tax
expense resulting from the termination of the Parcel 6C lease ($107,000) and
Parcel 20 lease ($134,000) and an increase in expenses principally related to
the on-going operations of Steeple Street Building ($38,000).
General and administrative expense increased $111,000 due principally to an
increase in legal fees associated with the Sprague breasting dolphin litigation
and other legal matters ($137,000), a net increase in various other expenses
($27,000) offset by a decrease in accounting fees ($53,000).
For the years ended December 31, 2021 and 2020, the Company's effective income
tax rate is 28% and 27%, respectively.
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