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KENT > SEC Filings for KENT > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for KENT FINANCIAL SERVICES INC

Form 10-Q for KENT FINANCIAL SERVICES INC


9-Nov-2012

Quarterly Report


Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended December 31, 2011, of Kent Financial Services, Inc. (the "Company", "Kent", "we" or "our") as well as the Company's financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Statements in this report relating to future plans, projections, events or conditions are forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those described. The Company expressly disclaims any obligation or undertaking to update these statements in the future.

Business Activities

Kent Financial Services, Inc.'s ("Kent" or the "Company") business is operating as a real estate corporation through its wholly owned subsidiary, Kent International Holdings, Inc. ("Kent International"). Kent was formed in 1988 as a Delaware corporation and reincorporated in Nevada in 2006 by a merger into a newly formed, wholly owned Nevada subsidiary with the same name that was the surviving corporation of the merger.

Commencing with the purchase of the land and improvements located at 4211 Cedar Springs Road in Dallas, Texas (the "Property"), Kent International began operating as a full service real estate corporation that owns and operates an income producing property. We will look to opportunistically acquire additional properties, primarily in the Dallas/Fort Worth area; however, we will not limit our search to that market. We may compete for these opportunities with small private real estate companies and investors. Alternatively, management will also continue to pursue other acquisition opportunities that offer potentially profitable uses for the Company's available capital.


The Company's general investment strategy shall be to make investments in real properties that offer attractive current yields with, in some cases, potential for capital appreciation. We may buy these properties directly, through joint ventures, or as general partner in limited partnerships utilizing funds raised from accredited investors. The current economic climate and Kent's limited cash on hand together with a restriction in credit available to would be purchasers of commercial real estate may hinder Kent International's efforts to acquire properties at favorable prices.

Additionally, the Kent International's wholly owned subsidiary, Kent Capital, Inc. ("Kent Capital"), is a securities broker-dealer. Kent Capital's membership agreement with the Financial Industry Regulatory Authority (FINRA) allows it to operate under two business lines; Private Placements and Real Estate Syndication. Kent Capital has not yet generated any revenue.

Results of Operations

The Company had a net loss of $128,061, or $.05 basic and fully diluted loss per share, for the quarter ended September 30, 2012, compared to a net loss of $130,653, or $0.05 basic and fully diluted loss per share, for the quarter ended September 30, 2011. For the nine months ended September 30, 2012 the Company had a net loss of $334,241, or $.12 basic and fully diluted loss per share, compared to a net loss of $474,033, or $0.17 basic and fully diluted loss per share, for the nine months ended September 30, 2011. The decreases in the net losses were caused by a combination of:

the reduction of general and administrative expenses,
increased gross profit from the Property, which was owned for the full nine months ended September 30, 2012 but only acquired on and owned after March 31, 2011, and
increase in other income attributable to administrative fees paid by an unaffiliated investment partnership.

Property Revenues

The Property located at 4211 Cedar Springs Road generated $202,761 in rental income and $15,494 in expense reimbursements during the three months ended September 30, 2012, compared to $202,761 in rental income and $2,157 in expense reimbursements for the three months ended September 30, 2011. For the nine months ended September 30, 2012, the Property generated $607,933 in rental income and $46,282 in expense reimbursements. During the period from March 22, 2011, when we acquired the Property, to September 30, 2011 the Property generated $426,911 in rental income and $4,803 in expense reimbursements. The initial term of the GSA lease runs until January 18, 2018 with an optional five year renewal period from January 2018 to January 2023. The base rent during the initial term is $746,464 annually and includes a provision of $123,099 annually for the reimbursement of tenant improvement allowances. The base rent during the renewal term is $623,365.

The lease rate includes an operating expense base of $187,206 annually (excluding property taxes) and a real estate tax base of $70,189. The base year operating expenses are adjusted annually via the Cost of Living Index (COLI) and the GSA is responsible for any increases over the adjusted base year expenses. The bulk of the $44,125 increase in expense reimbursements for the nine month period reflects the increase in property taxes which are subject to reimbursement. Based upon 2012 actual property taxes and the operating expense base adjustment on March 1, 2012, this calculation is expected to generate an expense reimbursement of approximately $61,000 in 2012, compared to $54,028 in 2011.


Interest on Mortgage Loan

The Company recorded $4,641 and $10,531 in interest on mortgage loans receivable in the three and nine months ended September 30, 2011, respectively. The real estate note was for a maximum term of twenty-six (26) months and was structured as an interest only, participating mortgage with no prepayment penalty. The stated interest rate was ten percent (10%) for the first fourteen (14) months and twelve percent (12%) for the final twelve (12) months of the term.

On August 19, 2011 the mortgage was repaid in full and the lien released.

Other Revenues

For the three months ended September 30, 2012, other income increased to $8,224 from $6,977 for the three months ended September 30, 2011. Other income increased to $55,145 for the nine months ended September 30, 2012, from $24,085 for the nine months ended September 30, 2011, caused primarily by the increase in administrative fees paid by an un-affiliated investment partnership. These administrative fees fluctuate based on the performance of the investment partnership and; therefore, are unpredictable

Interest and dividend income increased to $1,003 for the three months ended September 30, 2012, from $261 for the three months ended September 30, 2011. Interest and dividend income decreased to $1,003 for the nine months ended September 30, 2012, from $4,160 for the nine months ended September 30, 2011. The fluctuations for the periods were caused primarily by the decrease in cash and cash equivalents available for investment after the acquisition of the Property and to a lesser extent by the low interest rates on 90 day U.S. Treasury Bills.

General and Administrative Expenses

General and administrative expenses were $142,817 and $439,715 in the three and nine months ended September 30, 2012, respectively, compared to $226,483 and $735,407 in the three and nine months ended September 30, 2011, respectively. The amounts represented decreases of $83,666 and $295,692 or 37% and 40%, respectively for the three and nine month periods. Significant decreases included $50,873 in salaries and related payroll expenses, $28,000 in combined directors' fees for both Kent and Kent International, $10,000 in audit and review fees, $20,625 in amortized NASDAQ listing fees, and $43,200 related to the 2011 increase in the accrual for post-employment obligations. The Company also incurred approximately $13,329 in travel, consulting and due diligence expenses related to the exploration of other potential transactions during the current year to date, as compared to the approximately $77,552 in consulting, due diligence and closing expenses related to the acquisition of the Property and the exploration of other potential transactions incurred in the nine months ended September 30, 2011.

Property Expenses

Kent International incurred $196,164 in expenses related to the operations of the Property during the quarter ended September 30, 2012. These expenses included $31,231 in property taxes and insurance and $102,850 in depreciation and amortization expense. During the nine months ended September 30, 2012, Kent International incurred $597,980 in expenses related to the operations of the Property including $93,717 in property taxes and insurance and $306,312 in depreciation and amortization expense. Other major expense categories include utilities (electricity, water, sewer, trash removal, and telephone), building maintenance (HVAC, plumbing, window washing, elevator and janitorial), and grounds maintenance (landscaping and irrigation). We cannot be certain that the expenses we incur in operating the Property will not increase. Kent International incurred $188,141 in expenses related to the operations of the Property during the quarter ended September 30, 2011 including $18,776 in property taxes and insurance and $102,850 in depreciation and amortization expense. During the period from March 22, 2011, when we acquired the Property, to September 30, 2011, Kent International incurred $389,182 in expenses related to the operations of the Property including $39,613 in property taxes and insurance and $215,760 in depreciation and amortization expense.


The GSA lease includes provisions for expense reimbursements of baseline expenses as adjusted by the COLI. Significant expenses that are not explicitly subject to reimbursement by the GSA are property insurance, alarm monitoring, telephone, and management fees. As the provision of all of these services is subject to intense competition, we do not anticipate meaningful increases.

Expenses such as electricity, water, cleaning, trash removal and landscaping are subject to GSA reimbursement to the extent that they increase, in the aggregate, above the baseline of $187,206 fixed in the GSA lease. Although most of these expenses have not materially increased in recent years, electricity billing rates are very volatile and may increase well in excess of the COLI in any given year. This base is subject to annual adjustment on March 1st of each year based on the Cost of Living Index (COLI). The operating expense base was adjusted on March 1, 2012 resulting in an annual increase to the provision for reimbursement in the amount of $6,281.

Kent International has entered into various service contracts in conjunction with the acquisition of the Property including a temporary management contract, elevator, landscaping and HVAC maintenance, janitorial services, alarm monitoring, and waste removal. These contracts include termination provisions and are not considered long term obligations.

Liquidity and Capital Resources

At September 30, 2012, the Company had cash and cash equivalents of $1,414,010. Cash and cash equivalents consist of cash held in banks and brokerage firms and U.S. Treasury bills with a maturity of 3 months or less. Working capital at September 30, 2012 was approximately $1.326 million. Although the Company does not have any established banking relationships or other sources of liquidity, management believes its cash and cash equivalents are sufficient for its business activities for at least the next 12 months.

Net cash of $90,752 was used in operations for the nine months ended September 30, 2012, a decrease of $367,988 from the $458,740 used in operations for the nine months ended September 30, 2011. Net cash used in operations for the periods was the result of the net losses for the periods coupled with the changes in operating assets and liabilities. The decrease in net cash used in operations was largely the result of the decrease in our net loss together with cash flow generated by the operation of the Property.

$10,438 was generated by the net purchases and sales of marketable securities during the nine months ended September 30, 2012. The Company utilized $4,325,000 during the nine months ending September 30, 2011 for the acquisition of the Property (exclusive of due diligence and closing costs) located at 4211 Cedar Springs Road, Dallas, Texas. Additionally, the Company utilized $321,290 during the nine months ending September 30, 2011 to provide a first mortgage loan to a non-affiliated real estate investor secured by residential real estate. The Company received $321,290 during the nine months ended September 30, 2011 representing the repayment of the first mortgage loan. As of September 30, 2012, the Company had no commitments for capital expenditures.


$65,697 was utilized for the repurchase of 56,759 shares of common stock during the nine months ended September 30, 2012. There were no cash flows from financing activities reported during the nine month period ending September 30, 2011.

Other Disclosures

On August 4, 2012, Kent Capital, Inc. entered into an amended membership agreement with the Financial Industry Regulatory Authority (FINRA). The amendment removed "Trading Securities for Our Own Account" from the authorized lines of business and reduced the Company's net capital requirement from $100,000 to $5,000.

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