As a result of the developments with Marketing, the Company concluded in 2011 that it was probable that it would not receive a greater portion of the contractual lease payments when due from Marketing for the entire initial term of the Master Lease than the amount it had previously reserved. Therefore, during the quarter ended September 30, 2011, the Company increased its reserve by recording an additional non-cash allowance for deferred rent receivable of $11.0 million.
Earnings from discontinued operations decreased by $7.5 million to a loss of $5.0 million for the quarter ended September 30, 2012, as compared to earnings of $2.5 million for the quarter ended September 30, 2011. Earnings from discontinued operations decreased by $9.4 million to a loss of $3.6 million for the nine months ended September 30, 2012, as compared to earnings of $5.8 million for the nine months ended September 30, 2011. The decrease in earnings from discontinued operations was primarily due to higher impairment charges and lower rental revenue partially offset by an increase in gains on dispositions of real estate. Gains on disposition of real estate and impairment charges vary from period to period and accordingly, undue reliance should not be placed on the magnitude or the directions of change in reported gains and impairment charges for one period as compared to prior periods.
As previously disclosed, the Master Lease with Marketing was rejected effective April 30, 2012, pursuant to an order of the Bankruptcy Court. The Company previously leased approximately 760 properties to Marketing under the Master Lease. The Company continues to reposition this portfolio of properties.As a continuation of the repositioning process and the bankruptcy and ongoing liquidation of Marketing, the Company:
- Entered into a unitary triple-net lease, during October 2012, covering 24 operating properties with an affiliate of Capital Petroleum Group. The properties subject to the lease are predominantly located in Brooklyn and Staten Island. The lease has a 15 year initial term with provisions for renewal terms and annual rent escalations. The Company anticipates entering into several additional long-term triple-net leases in the fourth quarter of 2012 covering approximately 150 properties in the New York City metropolitan area and New Jersey, which are currently subject to month-to-month license agreements and interim fuel supply arrangements.
- Sold 14 properties for $3.1 million in the aggregate during the third quarter that had been leased to Marketing and previously had their underground storage tanks removed bringing the total number of properties sold through the nine months ended September 30, 2012 to 29 for $8.1 million in the aggregate.
- Received $0.7 million as part of the initial distribution from the liquidation of Marketing bankruptcy estate, which was applied against the Company’s priority administrative claim. The Company is entitled to receive all funds available for distribution from the Marketing bankruptcy estate, if any, until the Company’s priority administrative claim is satisfied in full.
- Entered into an agreement with the Marketing bankruptcy estate, in October 2012, to make certain loans (up to an aggregate amount of $6.4 million) to fund certain expenses incurred in connection with the wind-down of the Marketing bankruptcy estate and the prosecution of a lawsuit against Lukoil Americas Corporation and its wholly-owned subsidiary Lukoil North America LLC (collectively, “Lukoil Americas”) asserting, among other claims, that Lukoil fraudulently transferred substantially all of Marketing’s assets with value and positive cash flow from Marketing to Lukoil Americas (the “Lukoil Complaint”). Under the terms of the agreement, the Company is entitled to receive from the proceeds of the Lukoil Complaint, if any, the sum of (i) all funds advanced for wind-down costs and expert witness and consultant fees plus interest accruing at 15% per annum; and (ii) the greater of all funds advanced for legal fees and expenses relating to the Lukoil Complaint plus interest accruing at 15% per annum, or 24% of the gross proceeds from any settlement or favorable judgment from the Lukoil Complaint.
- Continued to enforce the Company’s rights through eviction proceedings involving certain of its properties in various jurisdictions against Marketing’s former subtenants (or sub-subtenants) who have not vacated properties and who have not accepted license agreements with the Company or have not entered into new agreements with the Company’s distributor tenants and therefore occupy properties without right. The Company is incurring substantial costs, primarily legal expenses, in connection with such proceedings.