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-seven
(27) years to one hundred-thirty-one (131) years with total rents yet to be
collected from tenants (without regard to CPI and appraisal adjustments) under
the lease ranging from $19.5 million to $363.4 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:
The Company had cash and cash equivalents of $1,476,000 and $1,443,000 at
December 31, 2022 and 2021, respectively, inclusive of a money market account
totaling $1,273,000 and $1,355,000 in each of the aforementioned years. The
Company and its subsidiary each maintain checking accounts 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
adjustments for the last two years were:
Parcel Monthly Effective Date of Increase Type of
Number Increase Adjustment
Parcel 9 $1,575 April 1, 2021 Base ground rent increase
Parcel 7A $2,539 April 1, 2022 Base ground rent increase
The City of Providence ("City") conducted a City-wide property revaluation for
2022. This revaluation increased the assessed value of the Company's parcels
that are available for lease by 26.5%, resulting in an annual property tax
increase of $139,000 that was to be borne entirely by the Company. The Company's
appeal of the assessed values for certain of its parcels was successful and
resulted in a reduction of the assessed value to an amount less than the 2021
assessed value and in an annual property tax reduction in 2022 taxes as
originally assessed of $165,000, which amount was recorded in the fourth quarter
of 2022.
Through February 17, 2023 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
Company continues to report revenue from Metropark on a cash basis as the move
by many companies to a hybrid workplace model has reduced demand for parking
spaces. Metropark has not fully paid the rent per the original lease agreement
executed in 2017 since April 2020. On July 31, 2020, Metropark and the Company
entered into an agreement for
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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 the 2017 lease.
Upon resumption of regularly scheduled rent payments, Metropark and the Company
will share fifty (50) percent of the monthly 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. At December 31, 2022
the total rent arrearage is $1,031,000 and has been fully reserved. The Company
does not know when or if Metropark's operations will return to pre-pandemic
levels.
The Company expects that revenue from Metropark will continue to be recognized
on a cash basis for a significant portion of 2023.
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, 2022, the Company's accrual for the remaining cost of remediation
was $406,000 of which $132,000 is expected to be expended in 2023. The Terminal
Sale Agreement also contained a cost sharing provision for a breasting dolphin
whereby any construction costs in excess of the contract cost of construction
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,
Sprague asserted that it was owed $427,000 and the Company asserted that its
obligation under the Agreement could not exceed $104,000. Mediation efforts were
unsuccessful and in July 2021, Sprague commenced an action against the Company
in the Rhode Island Superior Court (Superior Court) seeking monetary damages of
$427,000, plus interest and attorney's fees. In December 2022, the Superior
Court denied Sprague's Motion for Summary Judgment filed in September 2022 and
granted in part and denied in part the Company's Cross Motion for Summary
Judgment also filed in September 2022. The Company anticipates that the matter
will go to trial late in 2023 or early in 2024. 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 2022, 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, 2022 Compared to Year Ended December 31, 2021:
Leasing revenue increased $265,000 from 2021 due to a full year of operations
associated with Parcel 20 ($273,000), an increase in cash collections from
Metropark ($161,000) and an increase in rent (contractual and contingent) from
tenants ($168,000) offset by a decrease in revenue associated with the
termination of the Parcel 20 lease ($337,000).
Operating expenses increased $76,000 due principally to costs associated with
the operations of Steeple Street Building ($91,000) and offset by a decrease in
property taxes resulting from the appeal ($15,000).
General and administrative expense decreased $83,000 due principally to a
decrease in professional fees ($74,000) and a net decrease in various other
expenses ($9,000).
For the years ended December 31, 2022 and 2021, the Company's effective income
tax rate from continuing operations is 27% and 28%, respectively.
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