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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[ X] Annual Report Pursuant to Section l3 or l5(d)
of the Securities Exchange Act of l934
For the fiscal year ended December 31, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number 0-11083
ONE LIBERTY PROPERTIES, INC.
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(Exact name of registrant as specified in its charter)
MARYLAND 13-3147497
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
60 Cutter Mill Road, Great Neck, New York 11021
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (5l6) 466-3l00
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Securities registered pursuant to Section l2(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, par value $1.00 American Stock Exchange
per share
$16.50 Cumulative Convertible
Preferred Stock, par value $1.00 American Stock Exchange
per share
Securities registered pursuant to Section l2(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section l3 or l5(d) of the Securities Exchange
Act of l934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
Yes No X
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As of June 30, 2002 (the last business day of the registrant's most
recently completed second quarter), the aggregate market value of all common
equity (Common Stock and Preferred Stock) held by non-affiliates of the
registrant, computed by reference to the price at which common equity was last
sold on said date, was approximately $67,519,000.
As of March 24, 2003, the registrant had 5,662,816 shares of Common
Stock and 648,058 shares of $16.50 Cumulative Convertible Preferred Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The proxy statement for the registrant's Annual Meeting of
Stockholders, scheduled for June 23, 2003, will be filed with the Securities and
Exchange Commission within 120 days after the end of the registrant's fiscal
year covered by this Form 10-K. The information required by Part III (Item
10-Directors and Executive Officers of the Registrant, Item 11 -Executive
Compensation, Item 12 - Security Ownership of Certain Beneficial Owners and
Management, and Item 13 - Certain Relationships and Related Transactions) will
be incorporated by reference from the definitive proxy statement to be filed by
the registrant pursuant to Regulation 14A under the Securities Exchange Act of
1934.
Forward-Looking Statements
This Annual Report on Form 10-K, together with other statements and
information publicly disseminated by One Liberty Properties, Inc., contains
certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. We intend such forward-looking statements to be covered
by the safe harbor provision for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995 and include this statement for
purposes of complying with these safe harbor provisions. Forward-looking
statements, which are based on certain assumptions and describe our future
plans, strategies and expectations, are generally identifiable by use of the
words "may", "will", "believe", "expect", "intend", "anticipate", "estimate",
"project" or similar expressions or variations thereof. You should not rely on
forward-looking statements since they involve known and unknown risks,
uncertainties and other factors which are, in some cases, beyond our control and
which could materially affect actual results, performance or achievements.
Factors which may cause actual results to differ materially from current
expectations include, but are not limited to:
o general economic and business conditions;
o general and local real estate conditions;
o the financial condition of our tenants and the performance of their
lease obligations;
o changes in governmental laws and regulations relating to real estate
and related investments;
o the level and volatility of interest rates;
o competition in our industry;
o accessibility of debt and equity capital markets;
o the availability of and costs associated with sources of liquidity; and
o the other risks described under "Risks Related to Our Company" and
"Risks Related to the REIT Industry" in Part I of this
Annual Report.
Accordingly, there can be no assurance that our expectations will be
realized.
PART I
Item 1. Business
General
We are a self-administered and self-managed real estate investment
trust (REIT). We were incorporated under the laws of the State of Maryland on
December 20, 1982. We acquire, own and manage a geographically diversified
portfolio of retail, industrial, office, movie theater and other properties, a
substantial portion of which are under long-term leases. Substantially all of
our leases are "net leases", under which the tenant is responsible for real
estate taxes, insurance and ordinary maintenance and repairs. As of December 31,
2002, we owned 33 properties and we participated in four joint ventures that
owned a total of 11 properties. Our properties are located in 15 states and have
approximately 3.36 million square feet of rentable space (including all rentable
space for properties in which we have a joint venture participation). Under the
terms of our leases, our 2003 contractual rental income will be approximately
$21.1 million. Our 2003 contractual rental income includes rental income that is
payable to us during 2003, including our share of the rental income payable to
our joint ventures, and does not include rent that we would receive if our two
vacant properties are rented, rental income from one property acquired in
February 2003 and an increase in rental income from one property at the rate of
$216,000 per annum to be received by us commencing the date we substantially
complete renovations at the property estimated to cost us $1,750,000. The
occupancy rate of our property portfolio was 99.9% on December 31, 2002. The
weighted average remaining term of the leases in our portfolio is eleven years.
We acquired our portfolio of properties by balancing fundamental real
estate analysis with tenant credit evaluation. The main focus of our analysis is
the intrinsic value of a property, determined primarily by its location, local
demographics and potential for alternative use. We also evaluate a tenant's
financial ability to meet operational needs and lease obligations. We believe
that our emphasis on property value enables us to achieve attractive returns on
our acquired properties and enhances our ability to re-rent or dispose of a
property on favorable terms upon the expiration of early termination of a lease.
The properties in our portfolio typically have the following
attributes:
o Net leases. Substantially all of our leases are net leases in which
operating costs are typically absorbed by the tenant. We believe that
investments in net leased properties offer more predictable returns
than investments in properties that are not net leased;
o Long-term leases. We generally acquire properties that are subject to
long-term leases. Leases representing approximately 73% of our 2003
contractual rental income (considering a lease which represents 9.8% of
our 2003 contractual rental income and expires in 2009, in which the
tenant has the right to cancel effective on or after January 1, 2005,
as expiring December 31, 2004) expire after 2008, and leases
representing approximately 61% of our 2003 contractual rental income
expire after 2012; and
o Scheduled rent increases. Leases representing approximately 84% of our
2003 contractual rental income provide for either scheduled rent
increases or periodic contractual rent increases based on the consumer
price index.
In May 2002, we sold 2.5 million shares of our common stock in a public
offering at $15.25 per share. We realized net proceeds of approximately $35
million.
We share facilities, personnel and other resources with several
affiliated entities including, among others, Gould Investors L.P., a partnership
involved in the ownership and operation of a diversified portfolio of real
estate, and BRT Realty Trust, a mortgage lending REIT. It is our policy, and the
policy of our affiliated entities, that any investment opportunity presented to
us or to any of our affiliated entities that involves primarily the acquisition
of a net leased property will first be offered to us and declined by us before
any of our affiliated entities may pursue the opportunity. Jeffrey Fishman, our
president and chief executive officer, and Lawrence G. Ricketts, Jr., our vice
president, acquisitions, devote substantially all of their business time to our
company, while our other management personnel share their services on a
part-time basis with us and other affiliated entities that share our executive
offices. We believe that this sharing arrangement provides us access to a group
of senior executives with real estate knowledge and experience that a company of
our size would not otherwise have access to. For a description of the background
of our management, please see the information under the heading "Executive
Officers" in Part I of this Annual Report.
Our Strategy
Our business objectives are to maintain and increase the cash available
for distribution to our stockholders by:
o acquiring a diversified portfolio of net leased properties subject to
long-term leases;
o obtaining mortgage indebtedness on favorable terms and increased access
to capital to finance property acquisitions;
o managing assets effectively through property acquisitions, lease
extensions and opportunistic property sales.
Our growth strategy includes the following elements:
o To maintain, renew and enter into new long-term leases that contain
provisions for contractual rent increases;
o To acquire additional properties within the United States that are
subject to long-term net leases and that satisfy our other investment
criteria; and
o To acquire properties in market or industry sectors that we identify,
from time to time, as offering superior risk-adjusted returns. As an
example, through two joint ventures (one organized in late 2001 and the
other in 2002), we have invested in nine movie theater properties,
concentrating on megaplex theaters with stadium-style seating. We may,
in the future, identify other markets or industry sectors in which to
invest.
Our business strategy is to pursue properties that are subject to
long-term leases which include periodic contractual rent increases. We believe
that long-term leases provide a predictable income stream over the term of the
lease, making fluctuations in market rental rates and in real estate values less
significant to achieving our overall investment objectives. Long-term leases
also make it easier for us to obtain longer-term, fixed-rate mortgage financing
with principal amortization, thereby moderating the interest rate risk
associated with financing or refinancing our property portfolio by reducing the
outstanding principal balance over time. In addition, we believe that long-term
leases minimize the management time required and transaction costs incurred
while we own a property. Although we regard long-term leases as a central
element of our acquisition strategy, we will acquire a property that is subject
to a short-term lease where we believe the property represents an excellent
opportunity for recurring income and residual value.
Generally, we acquire properties based on their intrinsic value and
intend to hold these properties for an extended period of time. Our investment
criteria are intended to identify properties from which increased asset value
and overall return can be realized from an extended period of ownership. While
our acquisition decision is typically supported by a predictable rental stream
under a long-term lease that exists at the time a property is acquired, our
emphasis on property value generally means that upon a lease termination or
expiration, we would tend to pursue a lease renewal or a new lease in preference
to disposing of a property. Although our investment criteria favor an extended
period of ownership of our properties, we may dispose of a property following a
lease termination or expiration or even during the term of a lease if we regard
the disposition of the property as an opportunity to realize the overall value
of the property sooner or to avoid future risks by achieving a determinable
return from the property.
Our Investment Strategy
Our main focus in the evaluation of properties for acquisition is the
intrinsic value of a property, determined primarily by its location, local
demographics and potential for alternative use. We also evaluate a tenant's
financial ability to meet operational needs and lease obligations. In evaluating
potential net lease investments, we consider, among other criteria, the
following:
o an evaluation of the property and improvements, given its location and
use;
o local demographics (population and rental trends);
o the ability of the tenant to meet operational needs and lease
obligations;
o the current and projected cash flow of the property;
o the estimated return on equity to us;
o the terms of tenant leases, including the relationship between current
rents and market rents;
o the projected residual value of the property;
o potential for income and capital appreciation; and
o occupancy of and demand for similar properties in the market area.
Megaplex Theater Joint Ventures
In mid 2001, we identified the acquisition of megaplex movie theaters,
and in particular stadium-style theaters, as an investment opportunity that
offered us the potential for acquiring valuable assets with returns that satisfy
our investment criteria. Megaplex movie theaters have multiple screens with
predominantly stadium-style seating (seating with elevation between rows to
provide unobstructed viewing) and are equipped with electronics and technology
that are intended to enhance the audio and visual experience for the patron. It
was and continues to be our belief that well-located, megaplex stadium-style
theaters that conform to our investment criteria would provide us with above
average risk-adjusted returns on our investment. In identifying the megaplex
theaters that present the most attractive acquisition candidates, our review of
potential property purchases includes and will continue to include an analysis
of the financial performance of each specific theater considered for purchase.
Our megaplex movie theater properties have been acquired by two joint
ventures, one in which we have a 25% equity interest and one in which we have a
50% equity interest. The initial joint venture organized in November 2001 (in
which we have a 25% equity interest) has purchased five megaplex theaters having
102 screens for a total consideration of $57.1 million. The venture has placed
first mortgages on four of the five theaters with an initial aggregate principal
sum of $28.9 million and an aggregate balance at December 31, 2002 of $28.7
million. The four mortgages are cross collateralized. After distribution of the
mortgage proceeds and cash flow distributions to the venturers, we have a $7.3
million investment in this joint venture at December 31, 2002. The venture has
filed an application for a $5.4 million mortgage on the unencumbered theater
property with the lender which provided mortgage financing for the four other
properties. This mortgage, when consummated, which cannot be assured, will be
cross collateralized along with the mortgages placed on the other four
properties owned by the venture.
The second joint venture organized in July 2002 (in which we have a 50%
equity interest) has acquired four megaplex theaters having 61 screens for a
total consideration of $40.4 million. We have a $12.7 million investment in this
joint venture at December 31, 2002. This venture has filed a mortgage
application with an institutional lender for mortgages aggregating $17.9 million
secured by three of the four megaplex theaters owned by this venture. If these
mortgages are consummated each property will be encumbered by a mortgage secured
specifically by such property and all mortgages will be cross collateralized.
The fourth megaplex theater property owned by this venture is encumbered by a
$9.2 million mortgage which was assumed as part of the purchase of the property.
We are designated the "Managing Member" under each joint venture
operating agreement. Each operating agreement provides that we receive an
acquisition fee from the joint venture equal to 0.5% of the purchase price of
each property acquired by the joint venture, other than the initial property
acquired in November 2001. In addition, Majestic Property Management Corp., a
company owned by our chairman of the board and in which certain of our executive
officers are officers, receives a management fee equal to 1% of all rents
received by the joint ventures from single-tenant properties and a management
fee equal to 3% of all rents received by the joint ventures from multi-tenant
properties. Majestic will receive leasing and mortgage brokerage fees for any
property acquired by either joint venture at a rate equal to 80% of the then
market cost. Majestic will also receive a construction supervisory fee equal to
8% of the cost of any capital improvements to the property and sale commissions
equal to 1% of the sales price of any properties that are sold.
Megaplex theaters of the type the joint ventures have acquired are net
leased to an experienced theater operator under a long-term net lease and are
equipped with stadium-style seating and advanced audio and visual equipment. The
following table provides certain information with respect to the 9 megaplex
stadium-style movie theaters acquired by the two joint ventures.
Expiration
No. of Purchase of Initial Date of
Location Screens Operator Price (1) Lease Term Purchase
- -------- ------- -------- --------- ---------- --------
Norwalk, CA 20 American Multi-Cinema, Inc. $12.5 2021 November 2001
Austell, GA 22 Regal Cinemas, Inc. 11.8 2019 April 2002
Beavercreek, OH 20 Regal Cinemas, Inc. 9.7 2015 May 2002
Morrow, GA 24 American Multi-Cinema, Inc. 14.1 2017 May 2002
Roanoke, VA 16 Consolidated Theaters 9.0 2020 August 2002
Holdings, G.P.
Brooklyn, NY 8 Pritchard Square Cinema LLC 9.5 2022 August 2002
Lubbock, TX 17 Cinemark USA, Inc. 7.9 2018 December 2002
Live Oak, TX 18 Regal Cinemas, Inc. 12.5 2019 December 2002
Henrietta, NY 18 Regal Cinemas, Inc. 10.5 2022 December 2002
-- ----
163 $ 97.5
=== ======
(1) Purchase price represents the total purchase price for each property
without giving effect to closing costs.
Our Tenants
The following table shows information about the diversification of our
tenants by industry sector as of December 31, 2002:
Percentage of
Type of 2003 Rental Number of 2003 Rental
Property Revenues (1) Tenants Revenues
- -------- ------------ ------- --------
Retail $ 8,335,153 26 (2) 39.6%
Flex 4,329,852 4 (3) 20.6%
Industrial 2,009,837 5 9.5%
Movie Theater 3,866,775 9 18.4%
Health & Fitness 1,069,870 3 5.1%
Office 850,000 1 4.0%
Residential 600,000 1 2.8%
------- - ---
Total $21,061,487 49 100%
=========== == ===
- -----------
(1) Reflects 2003 contractual rental income which includes rental income that
is payable to us during 2003, including our share of the rental income
payable to our joint ventures, and does not include rent that we would
receive if our two vacant properties are rented, rental income from one
property acquired in February 2003 and an increase in rental income from
our office property at the rate of $216,000 per annum to be received by
us commencing the date we substantially complete renovations at the
property estimated to cost us $1,750,000.
(2) Includes 26 tenants renting at 20 properties. Does not include two vacant
properties. (3) Includes four tenants renting at three properties.
Although we focus on property value in analyzing our acquisitions, we
also review the ability of the tenant to meet its operational needs and lease
obligations. Typically our tenants are not rated or are rated below investment
grade. Of our properties, 20 are net leased to various retail operators under
long-term leases and, except for 3 of the retail properties, are net leased to
single tenants. Of the three properties net leased to multiple retail operators,
one is net leased to four separate tenants pursuant to separate leases, one is
net leased to two separate tenants pursuant to separate leases and one is net
leased to three separate tenants pursuant to separate leases. Most of our retail
tenants operate on a national basis and include, among others, The Kroger Co.,
Barnes & Noble, Inc., The Sports Authority, Inc., Gart Bros. Sporting Goods
Company, Best Buy Co., Inc., OfficeMax Inc., Footstar, Inc., Party City
Corporation and Petco Animal Supplies, Inc. Five of our properties are
industrial-type buildings, of which two are used as frozen food warehouses.
Three of our properties are flex-type buildings (office, research and
development and warehouse) and three are health and fitness facilities. Finally,
we have one office property, one residential property and nine movie theaters.
At December 31, 2002, one of our retail properties, representing an aggregate of
3,072 square feet, is vacant. During February 2003, an additional retail
property, representing an aggregate of 43,200 square feet, became vacant. No
assurances can be given that we will find tenants for these two vacant
properties.
Our Leases
Substantially all of our leases are net leases, under which the tenant,
in addition to its rental obligation, typically is responsible for expenses
attributable to the operation of the property, such as real estate taxes and
assessments, water and sewer rents and other charges. The tenant is also
generally responsible for maintaining the property, including non-structural
repairs, and for restoration following a casualty or partial condemnation. The
tenant typically also indemnifies us for claims arising from the property and is
responsible for maintaining insurance coverage for the property it leases. Under
some net leases, we are responsible for structural repairs, including foundation
and slab, roof repair or replacement and restoration following a casualty event,
and at several properties we are responsible for certain expenses related to the
operation and maintenance of the property.
Our typical lease provides for contractual rent increases periodically
throughout the term of the lease. Some of our other leases provide for rent
increases pursuant to a formula based on the consumer price index. While several
of our leases also provide for minimum rents supplemented by additional payments
based on sales derived from the property subject to the lease, such additional
payments were not a material part of our 2002 rental revenues and are not
expected to be a material part of our 2003 rental revenues. While our typical
property is net leased to a single tenant, some of our properties are net leased
to more than one tenant.
Our policy has been to acquire properties that are subject to existing
long-term leases or to enter into long-term leases with our tenants. Our leases
generally provide the tenant with one or more renewal options. The following
table sets forth scheduled lease expirations of all leases for our properties as
of December 31, 2002 (excluding one vacant property and one property that became
vacant in February 2003 which contain an aggregate of 46,272 square feet):
2003
Approximate Rental % of 2003
Rentable Square Revenues Rental
Year of Lease Number of Expiring Feet Subject to Under Expiring Represented By
Expiration (1) Leases Expiring Leases (2) Leases (3) Expiring Leases
-------------- ------ ------------------- ---------- ---------------
2003 - - - -
2004 (4) 2 288,787 $ 2,317,236 11.01
2005 3 115,986 808,592 3.84
2006 2 87,897 457,371 2.17
2007 3 33,900 647,390 3.08
2008 2 468,921 1,411,350 6.71
2009 2 100,248 336,408 1.59
2010 3 412,000 445,619 2.12
2011 3 193,428 1,768,813 8.40
2012 and thereafter 29 1,612,885 12,857,250 61.08
-- --------- ---------- -----
Total 49 3,314,052 $21,050,029 100%
== ========= =========== ===
(1) Lease expirations assume tenants do not exercise existing renewal options.
(2) Includes all rentable square footage in properties that are owned by
our joint ventures.
(3) Reflects all 2003 contractual rental income, other than $11,458 in rental
revenue collected on a lease which, as a result of the tenant's bankruptcy,
terminated in February 2003. Contractual rental income includes rental
income that is payable to us during 2003, including our share of the rental
income payable to our joint ventures, and does not include rent that we
would receive if our two vacant properties are rented, rental income from
one property acquired in February 2003 and an increase in rental income
from one property at the rate of $216,000 per annum to be received by us
commencing the date we substantially complete renovations at the property
estimated to cost us $1,750,000.
(4) Includes one lease that expires December 31, 2009 but is cancelable by the
tenant on and after December 31, 2004 on at least one year's notice. The
property subject to this lease has 188,567 rentable square feet and
$2,074,236 of annual rental revenues is attributable to 2003.
Our Acquisition Process
We seek to acquire properties throughout the United States that have
locations, demographics and other investment attributes that we believe to be
attractive. We seek to acquire properties that we believe will provide
attractive current returns from leases with tenants that operate profitably,
even if they are typically either not rated or are rated below investment grade.
We identify properties where we believe that the quality of the underlying real
estate mitigates the risk that may be associated with any default by the tenant.
We conduct periodic property inspections and reviews of available tenant
financial information. We also seek to acquire properties in market or industry
sectors that we identify, from time to time, as offering better than average
risk-adjusted returns.
We identify properties generally through the network of contacts of our
senior management and our affiliates, which includes real estate brokers
throughout the United States, private equity firms, banks and law firms. In
addition, we attend industry conferences and engage in direct solicitations.
There is no limit on the number of properties in which we may invest, the
amount or percentage of our assets that may be invested in any specific property
or property type, or on the concentration of investments in any geographic area
in the United States. We do not intend to acquire properties located outside of
the United States. Although we have not acquired undeveloped property in the
past, we may purchase an undeveloped property if the purchase is in connection
with the development of a facility to be net leased to a retail operation or
business upon completion of development, and we may develop for net lease
surplus acreage that is part of our existing properties. We may continue to form
entities to acquire interests in real properties, either alone or with other
investors, and we may acquire interests in joint ventures or other entities that
own real property.
Financing, Re-Renting and Disposition of Our Properties
There is no limit on the level of debt that we may incur. We borrow funds
on a secured and unsecured basis and intend to continue to do so in the future.
We mortgage specific properties on a non-recourse basis (subject to standard
carve-outs) to enhance the return on our investment in a specific property. On
March 21, 2003 we concluded a $30 million credit line that is a recourse
obligation. The new credit line replaced a $15 million credit line that would
have expired on March 24, 2003. The proceeds of mortgage loans and amounts drawn
on our credit line may be used for property acquisitions, investments in joint
ventures, to reduce bank debt and for working capital purposes.
We typically seek long-term fixed-rate mortgage financing soon after the
acquisition of a property to avoid the risk of movement of interest rates and
fluctuating supply and demand in the mortgage capital markets. Substantially all
of our mortgages provide for amortization of part of the principal balance
during the term, thereby reducing the refinancing risk at maturity. Some of our
properties may be financed on a cross-defaulted or cross-collateralized basis,
and we may collateralize a single financing with more than one property.
After termination or expiration of any lease relating to any of our
properties (either at lease expiration or early termination), we will seek to
re-rent or sell such property in a manner that will maximize the return to us,
considering, among other factors, the income potential and sale value of such
property. We acquire properties for long-term investment for income purposes and
do not typically engage in the turnover of investments. We will consider the
sale of a property prior to termination or expiration of the relevant lease if a
sale appears advantageous in view of our investment objectives. We may take a
purchase money mortgage as partial payment in lieu of cash in connection with
any sale and may consider local custom and prevailing market conditions in
negotiating the terms of repayment. It is our policy to use any cash realized
from the sale of properties, net of any distributions to stockholders to
maintain our REIT status, to pay down amounts due under loan agreements
(excluding real estate mortgage loans), if any, and for the acquisition of
additional properties.
Other Types of Investments
From time to time we have invested, on a limited basis, in publicly
traded shares of other REITs and may make such investments on a limited basis in
the future. We also may invest, on a limited basis, in the shares of entities
not involved in real estate investments, provided that no such investment
adversely affects our ability to qualify as a REIT under the Internal Revenue
Code. We do not have any plans to invest in or to originate loans to other
persons whether or not secured by real property. Although we have not done so in
the past, we may issue securities in exchange for properties that fit our
investment criteria. We have not, in the past, invested in the securities of
another entity for the purpose of exercising control, and we do not have any
present plans to invest in the securities of another entity for such purpose.
Competition
We face competition for the acquisition of net leased properties from a
variety of investors including domestic and foreign corporations and real estate
companies, financial institutions, insurance companies, pension funds,
investment funds, other REITs and individuals, some of which have significant
advantages over us including a larger, more diverse group of properties and
greater financial and other resources than we have. We believe that our
management's experience in real estate, mortgage lending, credit underwriting
and transaction structuring allows us to compete effectively for properties.
Risks Related to Our Company
The financial failure of our tenants would be likely to cause significant
reductions in our revenues and equity in earnings of unconsolidated joint
ventures and in the value of our portfolio.
Substantially all of our revenues are derived from rental income
generated by our properties, and 91% of our properties, based on 2002 revenues,
are leased to single tenants. Accordingly, the financial failure or other
default of a tenant in non-payment of rent or property-related expenses or the
termination of a lease could cause a significant reduction in our revenues.
Additionally, approximately 51.8% and 53.2% of our total revenues for the years
ended December 31, 2002 and December 31, 2001, respectively, were derived from
retail tenants. In addition, we anticipate that significant revenues will be
realized in 2003 by our two movie theater joint ventures. Weakening of economic
conditions in the retail or theater industries could result in the financial
failure, or other default, of a significant number of our tenants. Two of our
retail tenants have filed for protection under the federal bankruptcy laws, one
of which ceased operating at the property it leased from us in February 2003.
The other tenant represents approximately 1.7% of our 2003 contractual rental
income and has continued to pay its monthly rent. It is possible that other
tenants could file for protection under federal bankruptcy laws or state
insolvency proceedings or could face similar difficulties in the future. In the
event of a default by a tenant, we may experience delays in enforcing our rights
as landlord and sustain loss of revenues and substantial costs in protecting our
investment. We may also face liabilities arising from the tenant's actions or
omissions that would reduce our revenues and the value of our portfolio. Also,
if we are unable to re-rent any property when the existing lease terminates, for
an extended period of time, we would receive no revenues from such property and
could experience a decline in the value of the property.
A significant portion of our revenues is derived from four tenants. The default,
financial distress or failure of any of these tenants could significantly reduce
our revenues.
L-3 Communications Corp. and Barnes & Noble, Inc. (a tenant at three
separate properties) accounted for approximately 11.1% and 9.3%, respectively,
of our total revenues for the year ended December 31, 2002 and account for 7.4%
and 6.6%, respectively, of our 2003 contractual rental income. GE Medical
Systems Information Technologies, Inc., a tenant at one of our properties,
accounts for 9.8% of our 2003 contractual rental income and Regal Cinemas, Inc.,
a tenant at four theaters owned by our movie theater joint ventures, accounts
for 8.7% of the 2003 contractual rental income. The default, financial distress
or bankruptcy of any of these tenants could cause interruptions in the receipt
or the loss of a significant amount of revenues and result in the vacancy of the
property occupied by the defaulting tenant, which would significantly reduce our
revenues and net income until the property is re-rented, and could decrease the
ultimate sale value of the property.
The inability to repay our indebtedness could reduce cash available for
distributions and cause losses.
As of December 31, 2002, we had outstanding approximately $77.4 million
in long-term mortgage indebtedness, all of which is non-recourse (subject to
standard carve-outs). Our ratio of debt (including the $10 million outstanding
under our line of credit) to total assets was approximately 49% as of December
31, 2002. In addition, our movie theater joint ventures have outstanding
approximately $44.2 million in long-term mortgage indebtedness secured by six
megaplex theaters and we expect that mortgages will be placed on the other three
megaplex movie theaters owned by the movie theater joint ventures. The mortgage
on the Brooklyn, NY movie theater presently held by us is in the process of
being refinanced. The risks associated with our debt include the risk that our
cash flow will be insufficient to meet required payments of principal and
interest. Further, if a property or properties are mortgaged to collateralize
payment of indebtedness and we are unable to make mortgage payments on the
secured indebtedness, the lender could foreclose upon the property or properties
resulting in a loss of revenues to us and a decline in the value of our
portfolio. Even with respect to non-recourse indebtedness, the lender may have
the right to recover deficiencies from us under certain circumstances that could
result in a reduction in the amount of cash available to meet expenses and to
make distributions and in a deterioration of our financial condition.
If we are unable to refinance our borrowings at favorable rates or otherwise
raise funds, our net income may decline or we may be forced to sell properties
on disadvantageous terms, which would result in the loss of revenues and in a
decline in the value of our portfolio.
Only a small portion of the principal of our mortgage indebtedness will
be repaid prior to maturity and we do not plan to retain sufficient cash to
repay such indebtedness at maturity. Accordingly, in order to meet these
obligations, we will have to refinance debt or seek to raise funds through the
financing of unencumbered properties, sale of properties or sale of additional
equity. Between 2003 and 2007, we will have to refinance an aggregate of
approximately $31.48 million of maturing debt, of which approximately $8.81
million and $2.91 million will have to be refinanced in 2003 and 2004,
respectively. We can give no assurance that we will be able to refinance this
debt or arrange additional debt financing on unencumbered properties on terms as
favorable as the terms of existing indebtedness, or at all. If prevailing
interest rates or other factors at the time of refinancing result in higher
interest rates, our interest expense would increase, which would adversely
affect our net income, financial condition and the amount of cash available to
make distributions to stockholders. If we are not successful in refinancing our
existing indebtedness or financing our unencumbered properties, selling
properties on favorable terms or selling additional equity, our cash flow will
not be sufficient to repay all maturing debt when payments become due, and we
may be forced to dispose of properties on disadvantageous terms, which would
result in the loss of revenues and in a decline in the value of our portfolio.
Increased borrowings could result in increased risk of default on our repayment
obligations and increased debt service requirements.
Our governing instruments do not contain any limitation on the amount of
indebtedness we may incur. Accordingly, increased leverage could result in
increased risk of default on our payment obligations related to borrowings and
in an increase in debt service requirements which would reduce our net income
and the amount of cash available to meet expenses and to make distributions to
holders of our common stock.
If we are unable to re-rent properties upon the expiration of our leases, it
could adversely affect our revenues and ability to make distributions and could
reduce the value of our portfolio.
Substantially all of our revenues are derived from rental income paid by
tenants at our properties. We cannot predict whether current tenants will renew
their leases upon the expiration of their terms. In addition, we cannot predict
whether current tenants will attempt to terminate their leases, or whether
defaults by tenants may result in termination of their leases prior to the
expiration of their current terms. If tenants terminate or fail to renew their
leases, or if leases terminate due to defaults, we may not be able to locate
qualified replacement tenants and, as a result, we would lose a source of
revenues while remaining responsible for the payment of our mortgage obligations
and the expenses related to the properties, including real estate taxes. Even if
tenants decide to renew their leases or we find replacement tenants, the terms
of renewals or new leases, including the cost of required renovations or
concessions to tenants, may be less favorable than current lease terms and could
reduce the amount of cash available to meet expenses and to make distributions
to holders of our common stock.
Uninsured and underinsured losses may affect the revenues generated by, the
value of, and the return from, a property affected by a casualty or other claim.
Substantially all of our tenants obtain, for our benefit, comprehensive
insurance covering our properties in amounts that are intended to be sufficient
to provide for the replacement of the improvements at each property. However,
the amount of insurance coverage maintained for any property may not be
sufficient to pay the full replacement cost of the improvements at the property
following a casualty event. In addition, the rent loss coverage under the policy
may not extend for the full period of time that a tenant may be entitled to a
rent abatement as a result of, or that may be required to complete restoration
following, a casualty event. In addition, there are certain types of losses,
such as those arising from earthquakes, floods, hurricanes and terrorist
attacks, that may be uninsurable or that may not be economically insurable.
Changes in zoning, building codes and ordinances, environmental considerations
and other factors also may make it impossible or impracticable for us to use
insurance proceeds to replace damaged or destroyed improvements at a property.
If restoration is not or cannot be completed to the extent, or within a period
of time, specified in certain of our leases, the tenant may have the right to
terminate the lease. If any of these or similar events occur, it may reduce our
revenues, or the value of, or our return from, an affected property.
Our revenues and the value of our portfolio are affected by a number of factors
that affect investments in real estate generally.
We are subject to the general risks of investing in real estate. These
include adverse changes in economic conditions and local conditions such as
changing demographics, retailing trends and traffic patterns, declines in the
rental rates we are able to obtain, changes in the supply and price of quality
properties and the market supply and demand of competing properties, the impact
of environmental laws, security concerns, prepayment penalties applicable under
mortgage financing, changes in tax, zoning, building code, fire safety and other
laws, the type of insurance coverages available in the market, and changes in
the type, capacity and sophistication of building systems. Any of these
conditions could have an adverse effect on our results of operations, liquidity
and financial condition.
Our revenues and the value of our portfolio are affected by a number of factors
that affect investments in leased real estate generally.
We are subject to the general risks of investing in leased real estate.
These include the non-performance of lease obligations by tenants, improvements
that will be costly or difficult to remove should it become necessary to re-rent
the leased space for other uses, covenants in certain retail leases that limit
the types of tenants to which available space can be rented (which may limit
demand or reduce the rents realized on re-renting), rights of termination of
leases due to events of casualty or condemnation affecting the leased space or
the property or due to interruption of the tenant's quiet enjoyment of the
leased premises, and obligations of a landlord to restore the leased premises or
the property following events of casualty or condemnation. Any of these
conditions could have an adverse impact on our results of operations, liquidity
and financial condition.
Our real estate investments are relatively illiquid and their values may
decline.
Real estate investments are relatively illiquid. Therefore, we will be
limited in our ability to reconfigure our real estate portfolio in response to
economic changes. We may encounter difficulty in disposing of properties when
tenants vacate either at the expiration of the applicable lease or otherwise. If
we decide to sell any of our properties, our ability to sell these properties
and the prices we receive on their sale will be affected by the number of
potential buyers, the number of competing properties on the market and other
market conditions, as well as whether the property is leased and if it is
leased, the terms of the lease. As a result, we may be unable to sell our
properties for an extended period of time without incurring a loss, which would
adversely affect our results of operations, liquidity and financial condition.
The concentration of our properties in certain geographic areas may make our
revenues and the value of our portfolio vulnerable to adverse changes in local
economic conditions.
We do not have specific limitations on the total percentage of our real
estate properties that may be located in any one area. Consequently, properties
that we own may be located in the same or a limited number of geographic
regions. Approximately 55.1% of our total revenues for the year ended December
31, 2002 and approximately 56.6% of our total revenues for the year ended
December 31, 2001 were derived from properties located in New York and Texas. As
a result, a decline in the economic conditions in these geographic regions, or
in geographic regions where our properties may be concentrated in the future,
may have an adverse effect on the rental and occupancy rates for, and the
property values of, these properties, which could lead to a reduction in our
revenues and in the value of these properties.
Our inability to control our joint ventures could result in diversion of time
and effort by our management and the inability to achieve the goals of the joint
venture agreement.
We presently are a venturer in four joint ventures which own 11
properties and represent an equity investment of $23.5 million by us. Our joint
venture investments may involve risks not otherwise present in investments made
solely by us, including that our co-venturers may have different interests or
goals than we do, or that our co-venturers may not be able or willing to take an
action that is desired by us. Because neither we nor any of our co-venturers
have full control over the joint venture, disagreements with or among our
co-venturers could result in substantial diversion of time and effort by our
management team and the inability to successfully acquire, operate, finance,
lease or sell properties as intended by our joint venture agreements. In
addition, since there is no limitation under our organizational documents as to
the amount of funds that may be invested in joint ventures, we may invest a
significant amount of our funds into joint ventures which ultimately may not be
profitable as a result of disagreements with or among our co-venturers.
Our joint venture agreements contain provisions related to the transfer of our
interest, disputes between venturers and future capital contributions that could
limit our ability to liquidate our interest or adversely affect the value of our
investment.
The joint venture agreements entered into for each of our joint ventures provide
that we cannot finance or transfer our interest in the venture without the
consent of the other venturers. If we are unable to obtain the consent of our
co-venturers to a proposed financing or transfer of our joint venture interest,
we may be unable to dispose of such interest on favorable terms. The joint
venture agreements also contain provisions governing disputes between the
venturers that could obligate us to acquire the interest of other venturers on
unfavorable terms or without adequate time to obtain satisfactory financing or
force us to sell our interest on terms that may be disadvantageous. In addition,
if we fail to contribute any additional capital that we are required to
contribute to the joint venture in the future, our interest in the joint venture
may be reduced disproportionately, or another venturer may elect to fund our
portion of the capital contribution, which would result in that venturer
acquiring a preferred rate of return and a right to receive interest on the
amount of such contribution. The occurrence of any of these events would
adversely affect the value of our investment in the joint venture.
Competition in the real estate business is intense and could reduce our revenues
and harm our business.
We compete for real estate investments with all types of investors,
including domestic and foreign corporations and real estate companies, financial
institutions, insurance companies, pension funds, investment funds, other REITs
and individuals. Many of these competitors have significant advantages over us,
including a larger, more diverse group of properties and greater financial and
other resources. Our failure to compete successfully with these competitors
could result in our inability to identify and acquire valuable properties and to
achieve our growth objectives.
Compliance with environmental regulations and associated costs could adversely
affect our liquidity.
Under various federal, state and local laws, ordinances and regulations,
an owner or operator of real property may be required to investigate and clean
up hazardous or toxic substances or petroleum product releases at the property
and may be held liable to a governmental entity or to third parties for property
damage and for investigation and cleanup costs incurred in connection with
contamination. The cost of investigation, remediation or removal of hazardous or
toxic substances may be substantial, and the presence of such substances, or the
failure to properly remediate a property, may adversely affect our ability to
sell or rent the property or to borrow money using the property as collateral.
In connection with our ownership, operation and management of real properties,
we may be considered an owner or operator of the properties and, therefore,
potentially liable for removal or remediation costs, as well as certain other
related costs, including governmental fines and liability for injuries to
persons and property, not only with respect to properties we own now or may
acquire, but also with respect to properties we have owned in the past.
We cannot provide any assurance that existing environmental studies with
respect to any of our properties reveal all potential environmental liabilities,
that any prior owner of a property did not create any material environmental
condition not known to us, or that a material environmental condition does not
otherwise exist, or may not exist in the future, as to any one or more of our
properties. If a material environmental condition does in fact exist, or exists
in the future, it could have a material adverse impact upon our results of
operations, liquidity and financial condition.
Our senior management and other key personnel are critical to our business and
our future success depends on our ability to retain them.
We depend on the services of Fredric H. Gould, chairman of our board of
directors, Jeffrey Fishman, our president and chief executive officer, and other
members of our senior management to carry out our business and investment
strategies. Only two officers, Mr. Fishman and Lawrence G. Ricketts, Jr., our
vice president, acquisitions, devote substantially all of their business time to
our company. The remainder of our management personnel share their services on a
part-time basis with entities affiliated with us and located in the same
executive offices. In addition, Messrs. Fishman and Ricketts devote a limited
amount of their business time to entities affiliated with us. As we expand, we
will continue to need to attract and retain qualified senior management and
other key personnel, both on a full-time, as well as on a part-time basis. The
loss of the services of any of our senior management or other key personnel, or
our inability to recruit and retain qualified personnel in the future, could
impair our ability to carry out our business and investment strategies.
Our transactions with affiliated entities involve conflicts of interest.
We have entered into a number of transactions with persons and entities
affiliated with us and with certain of our officers and directors and we intend
to enter into transactions with such persons in the future. For a description of
our current transactions with affiliates, please see the information under the
heading "Certain Relationships and Allocated Expenses." Although our policy is
to insure that we receive terms in transactions with affiliates that are at
least as favorable to us as similar transactions we would enter into with
unaffiliated persons, these transactions raise the potential that we may not
receive terms as favorable as those that we would receive if the transactions
were entered into with unaffiliated entities. In addition, although policies are
in place to insure that all potential acquisitions of "net leased" properties
are first offered to us, we and our affiliated entities may have opportunities,
from time to time, to make investments in the same properties and if our
officers and directors fail to provide us with the opportunity to acquire a
valuable property that meets our investment criteria, we could be deprived of a
valuable investment property.
We are required by certain of our net lease agreements to pay property related
expenses that are not the obligations of our tenants.
Under the terms of substantially all of our net lease agreements, in
addition to satisfying their rent obligations, our tenants are responsible for
the payment of real estate taxes, insurance and ordinary maintenance and
repairs. However, in the case of certain leases, we may pay some expenses, such
as the costs of environmental liabilities, structural repairs, insurance and
certain non-structural repairs and repairs and maintenance. If our properties
incur significant expenses that must be paid by us under the terms of our lease
agreements, our business, financial condition and results of operations will be
adversely affected and the amount of cash available to meet expenses and to make
distributions to holders of our common stock may be reduced.
Compliance with the Americans with Disabilities Act could be costly.
Under the Americans with Disabilities Act of 1990, all public
accommodations must meet federal requirements for access and use by disabled
persons. A determination that our properties do not comply with the Americans
with Disabilities Act could result in liability for both governmental fines and
damages. If we are required to make unanticipated major modifications to any of
our properties to comply with the Americans with Disabilities Act, which are
determined not to be the responsibility of our tenants, we could incur
unanticipated expenses that could have an adverse impact upon our results of
operations, liquidity and financial condition.
We cannot assure you of our ability to pay dividends in the future.
We intend to pay quarterly dividends and to make distributions to our
stockholders in amounts such that all or substantially all of our taxable income
in each year, subject to certain adjustments, is distributed. This, along with
other factors, should enable us to quality for the tax benefits accorded to a
REIT under the Internal Revenue Code. We have not established a minimum dividend
payment level and our ability to pay dividends may be adversely affected by the
risk factors described in this Annual Report. All distributions will be made at
the discretion of our board of directors and will depend on our earnings, our
financial condition, maintenance of our REIT status and such other factors as
our board of directors may deem relevant from time to time. We cannot assure you
that we will be able to pay dividends in the future.
Risks Related to the REIT Industry
Failure to qualify as a REIT would result in a material adverse tax consequences
and would significantly reduce cash available for distributions.
We believe that we operate so as to qualify as a REIT under the Internal
Revenue Code. Qualification as a REIT involves the application of technical and
complex legal provisions for which there are limited judicial and administrative
interpretations. The determination of various factual matters and circumstances
not entirely within our control may affect our ability to qualify as a REIT. In
addition, no assurance can be given that legislation, new regulations,
administrative interpretations or court decisions will not significantly change
the tax laws with respect to qualification as a REIT or the federal income tax
consequences of such qualification. If we fail to quality as a REIT, we will be
subject to federal, state and local income tax (including any applicable
alternative minimum tax) on our taxable income at regular corporate rates and
would not be allowed a deduction in computing our taxable income for amounts
distributed to stockholders. In addition, unless entitled to relief under
certain statutory provisions, we would be disqualified from treatment as a REIT
for the four taxable years following the year during which qualification is
lost. The additional tax would reduce significantly our net income and the cash
available for distributions to stockholders.
We are subject to certain distribution requirements that may result in our
having to borrow funds at unfavorable rates.
To obtain the favorable tax treatment associated with being a REIT, we
generally will be required, among other things, to distribute to our
stockholders at least 90% of our ordinary taxable income (excluding capital
gains) each year. In addition, we will be subject to a 4% nondeductible excise
tax on the amount, if any, by which certain distributions paid by us with
respect to any calendar year are less than the sum of 85% of our ordinary
income, 95% of our capital gain net income and 100% of our undistributed income
from prior years.
As a result of differences in timing between the receipt of income and
the payment of expenses, and the inclusion of such income and the deduction of
such expenses in arriving at taxable income, and the effect of nondeductible
capital expenditures, the creation of reserves and the timing of required debt
service (including amortization) payments, we may need to borrow funds on a
short-term basis in order to make the distributions necessary to retain the tax
benefits associated with qualifying as a REIT, even if we believe that then
prevailing market conditions are not generally favorable for such borrowings.
Such borrowings could reduce our net income and the cash available for
distributions to holders of our common stock.
Compliance with REIT requirements may hinder our ability to maximize profits.
In order to qualify as a REIT for federal income tax purposes, we must
continually satisfy tests concerning among other things, our sources of income,
the amounts we distribute to our stockholders and the ownership of our stock. We
may also be required to make distributions to stockholders at disadvantageous
times or when we do not have funds readily available for distribution.
Accordingly, compliance with REIT requirements may hinder our ability to operate
solely on the basis of maximizing profits.
In order to qualify as a REIT, we must also ensure that at the end of
each calendar quarter, at least 75% of the value of our assets consists of cash,
cash items, government securities and qualified REIT real estate assets. The
remainder of our investment in securities cannot include more than 10% of the
outstanding voting securities of any one issuer or more than 10% of the total
value of the outstanding securities of any one issuer. In addition, no more than
5% of the value of our assets can consist of the securities of any one issuer,
other than a qualified REIT security. If we fail to comply with these
requirements, we must dispose of a portion of our assets within 30 days after
the end of the calendar quarter in order to avoid losing our REIT status and
suffering adverse tax consequences. This requirement could cause us to dispose
of assets for consideration of less than their true value and could lead to a
material adverse impact on our results of operations and financial condition.
Executive Officers
The following sets forth information with respect to our executive officers:
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Fredric H. Gould 67 Chairman of the Board *
Jeffrey Fishman 44 President and Chief Executive
Officer
Jeffrey A. Gould 37 Senior Vice President *
Matthew J. Gould 43 Senior Vice President*
Israel Rosenzweig 55 Senior Vice President
Simeon Brinberg 69 Senior Vice President **
David W. Kalish 56 Senior Vice President and
Chief Financial Officer
Mark H. Lundy 41 Secretary **
Seth D. Kobay 48 Vice President and Treasurer
Karen Dunleavy 44 Vice President, Financial
Lawrence G. Ricketts 26 Vice President, Acquisitions
* Matthew Gould and Jeffrey Gould are Fredric H. Gould's sons.
** Mark H. Lundy is Simeon Brinberg's son-in-law.
Each of the above listed executive officers will hold office until the
next annual meeting of the Board of Directors, scheduled for June 23, 2003, or
until their respective successors are elected and shall qualify. The information
below sets forth the business experience of our officers for at least the past
five years.
Fredric H. Gould. Mr. Gould has served as Chairman of the Board of One Liberty
Properties since 1989 and as Chief Executive Officer from December, 1999 to
December, 2001. Mr. Gould has served as Chairman of the Board of Trustees of BRT
Realty Trust, a real estate investment trust, since 1984 and Chief Executive
Officer of BRT Realty Trust from 1996 to December 31, 2001. Since 1985 Mr. Gould
has been an executive officer (currently Chairman of the Board) of the managing
general partner of Gould Investors L.P., a limited partnership primarily engaged
in the ownership and operation of real properties and he serves as sole member
of a limited liability company which is the other general partner of Gould
Investors L.P. He is President of the advisor to BRT Realty Trust and a director
of EastGroup Properties, Inc. EastGroup Properties, Inc. is a real estate
investment trust that focuses on ownership of industrial properties in major
sunbelt markets throughout the United States.
Jeffrey Fishman. Mr. Fishman has been President and Chief Operating Officer of
One Liberty Properties from December, 1999 until December, 2001 and Chief
Executive Officer since January 1, 2002. From 1996 to December 1999, Mr. Fishman
was a Senior Managing Director of Cogswell Properties, LLC, a real estate
property owner and manager. For more than five years prior to 1996, he was
President of Britannia Management Services, Inc., a real estate property owner
and manager.
Jeffrey A. Gould. Mr. Gould has been President and Chief Operating Officer of
BRT Realty Trust from March 1996 to December 2001 and President and Chief
Executive Officer of BRT Realty Trust since January 1, 2002. Mr. Gould has
served as a Trustee of BRT Realty Trust since March 1997. Mr. Gould has been a
Vice President of One Liberty Properties since 1989 and a Senior Vice President
and Director since December, 1999. He is also a Senior Vice President of the
managing general partner of Gould Investors L.P. since 1996.
Matthew J. Gould. Mr. Gould has served as President of the managing general
partner of Gould Investors L.P. since 1996. He served as President and Chief
Executive Officer of One Liberty Properties from 1989 to December, 1999 and
became a Senior Vice President and Director of One Liberty Properties in
December 1999. He has been a Vice President of BRT Realty Trust since 1986, a
Trustee of BRT Realty Trust since March 2001 and he also serves as a Vice
President of the advisor to BRT Realty Trust.
Israel Rosenzweig. Mr. Rosenzweig is a Vice President of the managing general
partner of Gould Investors L.P.. He has been a Senior Vice President of One
Liberty Properties since June, 1997 and a Senior Vice President of BRT Realty
Trust since March 1998. From November 1994 to April 1997 he was a Senior Vice
President and Chief Lending Officer of Bankers Federal Savings and Loan
Association.
Mr. Rosenzweig is a Director of Nautica Enterprises, Inc., a company which
designs, sources, markets and distributes apparel.
Simeon Brinberg. Mr. Brinberg has served as Vice President of One Liberty
Properties since 1989. He has been Secretary of BRT Realty Trust since 1983, a
Senior Vice President of BRT Realty Trust since 1988 and a Vice President of the
managing general partner of Gould Investors L.P. since 1988. Mr. Brinberg is an
attorney-at-law and a member of the New York Bar.
David W. Kalish. Mr. Kalish has served as Vice President and Chief Financial
Officer of One Liberty Properties since June 1990. Mr. Kalish is also Senior
Vice President, Finance of BRT Realty Trust and Vice President and Chief
Financial Officer of the managing general partner of Gould Investors L.P. Mr.
Kalish is a certified public accountant.
Mark H. Lundy. In addition to being Secretary of One Liberty Properties since
June 1993 and a Vice President since June 2000, Mr. Lundy has been a Vice
President of BRT Realty Trust since April 1993 and a Vice President of the
managing general partner of Gould Investors L.P. since July 1990. He is an
attorney-at-law and a member of the New York and District of Columbia Bars.
Seth D. Kobay. Mr. Kobay has been Vice President and Treasurer of One Liberty
Properties since August 1994. He has been Vice President and Treasurer of BRT
Realty Trust since March 1994 and Vice President of Operations of the managing
general partner of Gould Investors L.P. since 1986. Mr. Kobay is a certified
public accountant.
Karen Dunleavy. Ms. Dunleavy has been Vice President, Financial of One Liberty
Properties since August 1994. She has served as Treasurer of the managing
general partner of Gould Investors L.P. since 1986. Ms. Dunleavy is a certified
public accountant.
Lawrence G. Ricketts. Mr. Ricketts has been Vice President, Acquisitions of One
Liberty Properties since December 1999 and has been employed by us since January
1999. From May 1998 to January 1999, he was employed as an analyst by BRT
Funding Corp., a subsidiary of BRT Realty Trust. He graduated from Fairfield
University in May 1998.
Item 2. Properties
As of December 31, 2002, we owned 33 properties and participated in 4
joint ventures that owned a total of 11 properties. The following table sets
forth information as of December 31, 2002 concerning each property in which we
currently own an equity interest and the operator of the business occupying the
property (which is not necessarily the same enterprise as the actual tenant).
Except as otherwise noted, we own 100% of each property:
Approx.
Type of % of 2003 Rentable
Location Property Operator Rental Revenues (1) Sq. Ft.
- -------- -------- -------- ------------------- -------
Jupiter, FL Flex GE Medical Systems 9.85% 188,567
Information Technologies, Inc.
Hauppauge, NY Flex L-3 Communications Corporation 7.38% 149,870
El Paso, TX Retail Barnes & Noble, Inc.; Best Buy 7.02% 110,179
Co., Inc.; CompUSA, Inc.;
Mattress Firm
Hanover, PA Industrial The ESAB Group, Inc. 6.23% 458,560
Columbus, OH Retail Kittle's Home Furnishing 4.19% 96,924
Center, Inc.
Brooklyn, NY Office The City of New York 4.04% 66,000
Plano, TX Retail Golfsmith International, L.P., 3.81% 51,018
BDP, L.C. - franchise of
Bassett Furniture Industries, Inc.
Ronkonkoma, NY Flex Cedar Graphics, Inc.; Gavin Mfg. Corp. 3.33% 89,500
Live Oak, TX (2) Theater Regal Cinemas, Inc. 3.11% 81,836
Lake Charles, LA Retail Party City Corporation; Office Max, Inc.; 3.01% 54,229
Pet Smart, Inc.
Manhattan, NY Residential Stanford Realty Associates, Inc. 2.85% 125,000
Brooklyn, NY (2) Theater Pritchard Square Cinema LLC 2.71% 33,120
Henrietta, NY (2) Theater Regal Cinemas, Inc. 2.61% 76,315
Ft. Myers, FL Retail Barnes & Noble, Inc 2.44% 29,993
Grand Rapids, MI Health & Fitness Trinity Health- Michigan 2.33% 130,000
Greenwood Village, CO Retail Gart Bros. Sporting Goods Company 2.01% 45,000
Atlanta, GA Retail The Sports Authority, Inc. 2.09% 50,400
Lubbock, TX (2) Theater Cinemark USA, Inc. 1.96% 60,732
Approx.
Type of % of 2003 Rentable
Location Property Operator Rental Revenues (1) Sq. Ft.
- -------- -------- -------- ------------------- -------
Champaign, IL Retail Barnes & Noble, Inc. 1.91% 50,530
Norwalk, CA (2) Theater American Multi-Cinema, Inc. 1.88% 80,000
Morrow, GA (2) Theater American Multi-Cinema, Inc. 1.87% 88,000
Lewisville, TX Retail Footstar, Inc. 1.86% 21,043
Mesquite, TX Retail BDP, L.C. - franchise of 1.77% 22,900
Bassett Furniture Industries, Inc.
Chattanooga, TN Retail Rhodes, Inc. - subtenant of Kmart Corp. 1.71% 72,897
Austell, GA (2) Theater Regal Cinemas, Inc. 1.68% 88,660
Selden, NY Retail Petco Animal Supplies, Inc. 1.47% 14,550
Tucker, GA Health & Fitness LA Fitness International, LLC 1.44% 58,800
Beavercreek, OH (2) Theater Regal Cinemas, Inc. 1.34% 75,149
Grand Rapids, MI Health & Fitness Trinity Health - Michigan 1.31% 72,000
Roanoke, VA (2) Theater Consolidated Theaters Holdings, G.P. 1.19% 51,222
Batavia, NY Retail OfficeMax, Inc. 1.19% 23,483
Columbus, OH Industrial The Kroger Co. 1.15% 100,220
Houston, TX Retail Party City Corporation 1.03% 12,000
New Hyde Park, NY Industrial Lawson Mardon USA Inc. .95% 89,000
Cedar Rapids, IA Retail Ultimate Electronics, Inc. .86% 15,400
Shreveport, LA (2) Retail Footstar, Inc. .82% 17,108
Killeen, TX Retail Hollywood Entertainment Corp. .77% 8,000
Miami, FL (2) Industrial United States Cold .73% 396,000
Storage Inc.
Houston, TX Retail The Kroger Co. .71% 38,448
Rosenberg, TX Retail Hollywood Entertainment Corp. .61% 8,000
Approx.
Type of % of 2003 Rentable
Location Property Operator Rental Revenues (1) Sq. Ft.
- -------- -------- -------- ------------------- -------
West Palm Beach, FL Industrial BellSouth Telecommunications Inc. .47% 10,361
Seattle, WA Retail Payless Shoe Source, Inc. .26% 3,038
Hamilton, NY Retail Ames Department Stores, Inc. (3) .05% 43,200
Ottumwa, IA Retail Vacant 0% 3,072
- -----
TOTAL 100% 3,360,324
=== =========
(1) Reflects percentage of 2003 contractual rental income which
includes rental income that is payable to us during 2003, including our share of
the rental income payable to our joint ventures, and does not include rent that
we would receive if our two vacant properties are rented, rental income from one
property acquired in February 2003 and an increase in rental income from one
property at the rate of $216,000 per annum to be received by us commencing the
date we substantially complete renovations at the property estimated to cost us
$1,750,000.
(2) Owned by a joint venture in which we are a venturer. Percentage of
revenues indicated represents our share of the revenues of the venture.
Approximate rentable square footage indicated represents the total rentable
square footage of the property owned by the venture.
(3) Tenant, which filed for bankruptcy protection and then liquidated,
terminated the lease in February 2003.
The occupancy rate for our properties, based on total rentable square
footage was in excess of 99% for each of 2001 and 2002.
Our properties are located in fifteen states. The following table sets
forth certain information, presented by state, related to our properties as of
December 31, 2002, including the properties owned by joint ventures in which we
are a venturer.
Number Approximate
Of Net Book 2003 Rental Rentable
State Properties Value(1) Revenues (2) Square Feet
- ----- ---------- -------- ------------ -----------
New York 10 $38,948,906 $5,598,317 710,038
Texas 10 42,191,241 4,768,934 414,156
Florida 4 22,383,695 2,841,356 624,921
Georgia 4 10,299,619 1,495,142 285,860
Ohio 3 9,190,065 1,406,931 272,293
Pennsylvania 1 11,130,264 1,311,717 458,560
Other 12 29,746,939 3,639,090 594,496
-- ---------- --------- -------
Total 44 $163,890,729 $21,061,487 3,360,324
== ============ =========== =========
- -----------
(1) Historical book value is not necessarily indicative of current market value.
(2) Reflects 2003 contractual rental income which includes rental income that is
payable to us during 2003, including our share of the rental income payable to
our joint ventures, and does not include rent that we would receive if our two
vacant properties are rented, rental income from one property acquired in
February 2003 and an increase in rental income from one property at the rate of
$216,000 per annum to be received by us commencing the date we substantially
complete renovations at the property estimated to cost us $1,750,000.
At December 31, 2002, we had first mortgages on 22 of the 33 properties
we owned as of that date (excluding properties owned by our joint ventures). At
December 31, 2002, we had $77,367,000 principal amount of mortgages outstanding,
bearing interest at rates ranging from 6.25% to 8.8%. Substantially all
mortgages contain prepayment penalties. The following table sets forth scheduled
principal mortgage payments due for our properties as of December 31, 2002
(assuming no payment is made on principal on any outstanding mortgage in advance
of its due date):
PRINCIPAL PAYMENTS DUE
YEAR IN YEAR INDICATED
---- (Amounts in Thousands)
---------------------
2003 $9,969 (1)
2004 4,148
2005 9,428
2006 8,806
2007 4,949
2008 and thereafter 40,067
---- ------
Total $77,367
=======
(1) Amount indicated is comprised of two mortgages, one of which is being
refinanced and we have filed a mortgage application for such refinancing; the
other has been extended on a month to month basis and we have filed a mortgage
application with respect to a refinancing. Although we can give no assurances,
we expect that the mortgages coming due in 2003, listed in the above table, will
be refinanced for at least the principal balances due and owing.
Significant Properties
As of December 31, 2002, no property owned by us had a book value equal
to or greater than 10% of our total assets. Only the Hauppauge, NY property had
annual revenues in the year ending December 31, 2002 which accounted for more
than 10% of our aggregate annual gross revenues. The following sets forth the
information concerning this property.
Hauppauge, NY Property
Description of Hauppauge, NY Property
The Hauppauge, NY Property, owned in fee, was constructed in 1981 and
acquired by us in December, 2000. It is located in an industrial park,
approximately one mile north of the Long Island Expressway, in Suffolk County,
New York. The Hauppauge Property, a 17.4 acre parcel, is improved with a 149,870
square foot flex building. The lease gives us the right to subdivide five acres
delineated in the lease and sell, lease or develop said five acre parcel. We
have completed a subdivision of four of the delineated five acres and have
submitted a proposal to a governmental agency to build a one story, 43,000
square foot office building for the agency which will enter into a 20 year net
lease for 100% of the space at the property. There are no assurances that this
project will be completed or completed based on current negotiations. We will
not commence construction unless and until a lease is signed with such
governmental agency or another suitable tenant.
The property is adequate for its current use and, except for the
development of the four acre subdivided plot, there are no plans in place for
renovations or improvements to the property.
Description of Lease
The existing building on the property is occupied by L-3 Communications
Corporation, a wholly owned subsidiary of L-3 Communications Holdings, Inc.,
under a lease which expires December 31, 2014, with three 5-year tenant renewal
options and provides for a current base rent of $1,554,925 per annum ($10.37 per
square foot) increasing each calendar year during the term and any extended
term. The tenant is responsible for maintenance and repairs to the premises. The
tenant utilizes the facility for offices, research and development and light
manufacturing. The current tenant and its predecessor have occupied the property
for more than the past five years.
The realty tax rate for this property is $1.2318 per $1,000 of assessed
value and the annual real estate taxes are $329,135.
Mortgage
On April 25, 2001, we obtained a $9,900,000 non-recourse first mortgage
loan secured by the Hauppauge, NY property. The mortgage loan bears interest at
7.9% per annum, matures on January 1, 2015 and is being amortized based on a
25-year amortization schedule. Assuming no additional payments are made on the
principal in advance of the maturity date, the principal balance due at maturity
will be approximately $6,869,000. We have the right to prepay this mortgage
provided we pay a yield maintenance penalty. The mortgagee released the mortgage
lien from the subdivided four acres without a principal payment.
Item 3. Legal Proceedings
Neither we nor our properties are presently subject to any material
litigation in which we are defendant nor, to our knowledge, is any material
litigation threatened against us or our properties, other than routine
litigation arising in the ordinary course of business, which collectively are
not expected to have a material adverse effect on our business, financial
condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Form 10-K.
Part II
Item 5.Market for the Registrant's Common Equity and Related Stockholder Matters
The following table sets forth the high and low prices for our Common
Stock and our Convertible Preferred Stock as reported by the American Stock
Exchange and the per share cash distributions paid on the Common Stock and
Preferred Stock during each quarter of the years ended December 31, 2002 and
2001.
COMMON STOCK PREFERRED STOCK
------------ ---------------
DISTRIBUTIONS DISTRIBUTIONS
2002 HIGH LOW PER SHARE HIGH LOW PER SHARE
- ---- ---- --- --------- ---- --- ---------
First Quarter $17.00 $14.60 $.33 $17.75 $16.80 $.40
Second Quarter $17.50 $14.90 $.33 $17.50 $16.60 $.40
Third Quarter $15.30 $13.50 $.33 $18.00 $16.50 $.40
Fourth Quarter $15.47 $14.30 $.33* $18.25 $17.55 $.40 *
2001
- ----
First Quarter $12.25 $11.00 $.30 $15.28 $13.50 $.40
Second Quarter $13.98 $11.75 $.30 $17.10 $14.60 $.40
Third Quarter $14.41 $13.58 $.30 $18.00 $16.10 $.40
Fourth Quarter $15.00 $13.50 $.30 * $17.80 $16.75 $.40 *
* A cash distribution of $.33 and $.40 was paid on the Common Stock and
Preferred Stock, respectively, on January 2, 2003 and a cash distribution of
$.30 and $.40 was paid on the Common and Preferred Stock, respectively, on
January 3, 2002. The cash distributions paid in January 2003 and January 2002
are considered as being paid in the fourth quarter of 2002 and 2001,
respectively.
The Common Stock and Convertible Preferred Stock trade on the American
Stock Exchange, under the symbols OLP and OLP Pr, respectively. As of March 6,
2003 there were 377 common and 126 preferred stockholders of record and we
estimate that at such date there were approximately 1,400 and 925 beneficial
owners of the Common and Preferred Stock, respectively.
We qualify as a real estate investment trust for Federal income tax
purposes. In order to maintain that status, we are required to distribute to our
shareholders at least 90% of our annual ordinary taxable income. The amount and
timing of future distributions will be at the discretion of the Board of
Directors and will depend upon our financial condition, earnings, business plan,
cash flow and other factors. We intend to pay cash distributions in an amount at
least equal to that necessary for us to maintain our status as a real estate
investment trust for federal income tax purposes.
Item 6. Selected Financial Data
The following table sets forth the selected consolidated statement of operations
data for each of the periods indicated, all of which are derived from our
audited consolidated financial statements and related notes. The selected
financial data for each of the three years in the period ended December 31, 2002
and as of December 31, 2001 and 2002 should be read together with our
consolidated financial statements and related notes appearing elsewhere in this
Annual Report on Form 10-K and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
As of and for the Year Ended
December 31
(Amounts in Thousands, Except Per Share Data)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
OPERATING DATA
- --------------
Revenues $15,705 $15,237 $12,669 $10,180 $10,133
Earnings before equity in earnings of unconsolidated
joint ventures and gain on sale 4,813 4,671 4,142 4,753 5,286
Equity in earnings of unconsolidated joint ventures 1,078 83 - - -
Net (loss) gain on sale of real estate and gain on
sale of available-for-sale securities (11) 112 3,790 126 1,132
Net income 5,880 4,866 7,932 4,879 6,418
Calculation of net income
applicable to common stockholders:
Net income 5,880 4,866 7,932 4,879 6,418
Less: dividends and accretion on preferred stock 1,037 1,037 1,044 1,247 1,452
Net income applicable to common stockholders $4,843 $3,829 $6,888 $ 3,632 $4,966
Weighted average number of common
shares outstanding:
Basic 4,614 3,019 2,993 2,960 2,297
Diluted 4,644 3,036 3,528 2,963 2,298
Net income per common share:
Basic $1.05 $1.27 $2.30 $1.23 $2.16
Diluted $1.04 $1.26 $2.25 $1.23 $2.16
Cash distributions per share of:
Common Stock $1.32 $1.20 $1.20 $1.20 $1.20
Preferred Stock $1.60 $1.60 $1.60 $1.60 $1.60
BALANCE SHEET DATA
- ------------------
Real estate investments, net $140,437 $118,564 $121,620 $70,770 $59,831
Investment in unconsolidated joint ventures 23,453 6,345 - - -
Cash and cash equivalents 2,624 2,285 2,069 11,247 19,089
Total assets 179,609 132,939 128,219 85,949 82,678
Mortgages payable 77,367 76,587 64,123 35,735 29,422
Line of credit 10,000 - 10,000 - -
Total liabilities 90,915 78,591 74,843 36,147 30,960
Total stockholders' equity 88,694 54,348 53,376 49,802 38,495
OTHER DATA
- ----------
Funds from operations applicable to
common stockholders (Note a) $7,757 $6,303 $5,324 $5,127 $5,363
Funds from operations per common share:
Basic $1.68 $2.09 $1.78 $1.46 $1.43
Diluted $1.67 $2.08 $1.78 $1.46 $1.43
Cash flow provided by (used in):
Operating activities $8,344 $6,764 $5,840 $5,826 $5,810
Investing activities (48,056) (5,702) (39,324) (10,743) (6,705)
Financing activities 40,051 (846) 24,306 (2,926) 18,378
Note a: We consider funds from operations ("FFO") as defined by the
National Association of Real Estate Investment Trusts ("NAREIT") to be an
appropriate supplemental disclosure of operating performance for an equity REIT
due to its widespread acceptance and use within the REIT and analyst
communities. FFO is presented to assist investors in analyzing our performance.
However, our method of calculating FFO may be different from methods used by
other REITs and, accordingly, may not be comparable to such other REITs. FFO
does not represent cash generated from operations as defined by GAAP and is not
indicative of cash available to fund all cash needs, including distributions. It
should not be considered as an alternative to net income for the purpose of
evaluating our performance or to cash flows as a measure of liquidity.
NAREIT defines FFO as net income (computed in accordance with GAAP),
excluding gains (or losses) from sales of property, plus real estate related
depreciation and amortization (excluding amortization of financing costs) and
after adjustments for unconsolidated partnerships and joint ventures. Effective
January 1, 2000, NAREIT clarified the definition of FFO to include non-recurring
events except those that are defined as "extraordinary items" under GAAP.
Funds from operations is calculated in the following table (amounts in
thousands):
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net income $5,880 $ 4,866 $ 7,932 $ 4,879 $ 6,418
Add: depreciation of properties 2,617 2,584 2,113 1,478 1,184
Add: our share of depreciation in unconsolidated
joint ventures 268 16 - - -
Add: provision for valuation adjustment of real estate - - 125 - 157
Deduct: loss (gain) on sale of real estate 29 (126) (3,802) (62) (1,102)
Deduct: preferred distributions (1,037) (1,037) (1,044) (1,168) (1,294)
------ ------ ------ ------ ------
Funds from operations applicable to common stockholders $7,757 $ 6,303 $ 5,324 $ 5,127 $ 5,363
====== ======= ======= ======= =======
Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations.
General
We are a self-administered REIT and we primarily own real estate that we
net lease to tenants. As of December 31, 2002 we owned 33 properties and we are
a member of four joint ventures that owned a total of 11 properties. Our 44
properties are located in 15 states.
We have elected to be taxed as a REIT under the Internal Revenue Code. To
qualify as a REIT, we must meet a number of organizational and operational
requirements, including a requirement that we currently distribute at least 90%
of ordinary taxable income to our shareholders. We intend to adhere to these
requirements and to maintain our REIT status.
Our principal business strategy is to acquire improved, commercial
properties subject to long-term net leases. We acquire properties for their
value as long-term investments and for their ability to generate income over an
extended period of time. We borrow funds on a secured and unsecured basis to
finance the purchase of real estate and we intend to continue to do so in the
future.
Our rental properties are generally leased to corporate tenants under
operating leases substantially all of which are noncancellable. Substantially
all of our lease agreements are net lease arrangements that require the tenant
to pay not only rent, but also substantially all of the operating expenses of
the leased property including maintenance, taxes, utilities and insurance. A
majority of our lease agreements provide for periodic rental increases and
certain of our other leases provide for increases based on the consumer price
index.
In the latter part of 2001 and in 2002, we entered into two joint
ventures organized for the purpose of acquiring and owning megaplex
stadium-style movie theaters. We own a 25% equity interest in the first joint
venture organized for this purpose and a 50% equity interest in the second joint
venture organized for this purpose. These joint ventures have acquired one
partial stadium-style movie theater and eight megaplex stadium-style movie
theaters for a total consideration of $97.7 million. Our equity investment in
these ventures at December 31, 2002 was $20 million, net of distributions from
the joint ventures.
Venturers holding at least 75% of the aggregate membership interests in
both these joint ventures must approve all material decisions, except for
property acquisitions which require unanimous approval. Under the joint venture
operating agreements, we receive an acquisition fee from each venture equal to
0.5% of the purchase price of each property acquired by the joint venture, other
than the initial property acquired in 2001. In addition, Majestic Property
Management Corp., a company owned by our chairman of the board and in which
certain of our executive officers are officers, will receive a management fee
equal to 1% of all rents received by the joint ventures from single-tenant
properties and a management fee equal to 3% of all rents received by the joint
ventures from multi-tenant properties. Majestic will receive leasing and
mortgage brokerage fees at any property owned by the joint ventures at a rate
equal to 80% of the then market cost. Majestic will also receive a construction
supervision fee equal to 8% of the cost of any capital improvements to a joint
venture owned property and a sales commission equal to 1% of the sales price of
any properties that are sold.
In February 2002, we contributed our leasehold interest in an industrial
property in Miami, Florida to a joint venture with the owners of the fee estate
in that property in exchange for an approximately 36% interest in the joint
venture. In December 2002, we invested $2.4 million for a 50% interest in a
joint venture which owns a free standing retail property located in Shreveport,
Louisiana.
At December 31, 2002, excluding mortgages payable of our unconsolidated
joint ventures, we had 22 outstanding mortgages payable, aggregating $77.4
million in principal amount, all of which are secured by first liens on
individual real estate investments with an aggregate carrying value of
approximately $119.9 million before accumulated depreciation. The mortgages bear
interest at fixed rates ranging from 6.25% to 8.8%, and mature between 2003 and
2017.
Results of Operations
Comparison of Years Ended December 31, 2002 and December 31, 2001.
Revenues
Our revenues consist primarily of rental income from tenants in our
rental properties. In the latter part of 2001 we identified megaplex movie
theaters, particularly stadium-style movie theaters, as an attractive investment
opportunity and made a business judgment to invest in this class of assets with
joint venture partners. Our equity investment in movie theater joint ventures
was $20 million at December 31, 2002, net of distributions from the joint
ventures. In February 2002 we contributed our leasehold position in an
industrial building to a joint venture organized by us with the owners of the
fee estate of the property and in December 2002, we invested $2.4 million in a
joint venture which owns one free standing retail property.
Investments by us in 2002 in joint venture activities, particularly in
the movie theater joint ventures, rather than solely in properties owned by us,
and the contribution of our leasehold position in an industrial property to a
joint venture, were the major reasons for a decrease in rental income of
$174,000, or 1%, to $14.9 million for the year ended December 31, 2002 from
$15.1 million for the year ended December 31, 2001. Rental income also decreased
as a result of the sale of three retail properties and the vacancy of two retail
properties in 2002. Rental income was positively impacted by rent increases at
five of our properties and from rental income earned on three properties
acquired by us between September 2002 and December 2002.
Interest and other income increased by $642,000, or 349%, from $184,000
for the year ended December 31, 2001 to $826,000 for the year ended December 31,
2002. Approximately $268,000 of this increase was due to net acquisition fees
received by us from the movie theater joint ventures. The net acquisition fees,
calculated pursuant to our joint venture agreements at 0.5% of the purchase
price of eight properties acquired during 2002, reflects a reduction based on
our proportionate share of ownership in the joint ventures. Interest earned on
three mortgages, totaling approximately $6.3 million, acquired by us during
August 2002 in connection with the acquisition by one of our joint ventures of
an eight screen partial stadium-style theater accounted for $231,000 of the
increase in interest and other income. To a lesser extent, this increase is due
to the investment in cash equivalents and treasury bills of the balance of the
net proceeds received from our May 2002 public offering.
Our equity in the earnings of unconsolidated joint ventures, totaling
$1,078,000 in 2002 ($83,000 in 2001), more than exceeded the $174,000 decrease
in rental revenues in 2002. Our equity in earnings of unconsolidated joint
ventures consists of $980,000 in 2002 from the nine movie theater properties
owned by our two movie theater joint ventures. In 2002 our movie theater joint
ventures owned one movie theater for the entire year, with the other eight
theaters being acquired at various times between April 2002 and December 2002
(see "Business-Megaplex Theater Joint Ventures" in Part I of this Annual Report
on Form 10-K). In 2001 our movie theater joint ventures owned one theater for
less than two full months. In 2002 we also recognized $133,000 as our equity
share in the earnings of the joint venture organized in February 2002 that owns
an industrial building in Miami, Florida. The other joint venture we participate
in was organized in December 2002 and recorded a loss of $35,000 in 2002 due to
costs incurred in organizing the venture.
We will continue to acquire, solely for our own account, improved
commercial properties in accordance with our business and investment strategies
as outlined in Part 1 of this Annual Report. We anticipate that the acquisition
of megaplex movie theaters will be made through the existing or newly organized
joint ventures, and we may from time to time acquire properties with joint
venture partners.
Expenses
Interest-mortgages payable increased by $154,000, or 2.7%, to $6 million
for the year ended December 31, 2002 from $5.8 million for the year ended
December 31, 2001. This increase resulted from mortgages placed on two
properties during March and April 2001, and was offset in part by the payoff of
two mortgage loans (totaling $1.3 million) during June 2002.
Interest-line of credit decreased by $196,000, or 78.4%, to $54,000 for
the year ended December 31, 2002 from $250,000 for the year ended December 31,
2001. This decrease resulted from our repayment of all of the outstanding
indebtedness under our line of credit during 2001. We subsequently borrowed $6
million under our line of credit during May 2002, which was used for our
contribution to one of our joint ventures for the purchase of two movie
theaters. The borrowing was repaid with a portion of the proceeds received from
our public offering completed in May 2002. We subsequently borrowed $10 million
under our line of credit during December 2002, which was used to purchase a
property.
Leasehold rent expense decreased by $265,000, or 91.7% to $24,000 for the
year ended December 31, 2002 from $289,000 for the year ended December 31, 2001.
This rent expense was payable on the leasehold interest position that we
contributed during February 2002 to a joint venture in which we hold an
approximately 36% interest. Therefore, effective February 2002, we no longer
paid leasehold rent.
General and administrative expenses increased $539,000, or 47.4%, to
$1.68 million for the year ended December 31, 2002 from $1.14 million for the
year ended December 31, 2001. This increase was primarily due to a $368,000
increase in payroll and payroll expenses, including approximately $242,000 for
executive and support personnel, primarily for legal and accounting services,
allocated to us pursuant to a Shared Services Agreement between us and related
entities. The increase in the allocated payroll expenses resulted from an
increase in our level of business activity, primarily property acquisition
activity. The increase in payroll expenses is also due to compensation and fees
approved by our compensation committee and board of directors and recorded
during the year ended December 31, 2002 as follows: an increase of $50,000 in
the base salary and a bonus of $50,000 to our president and chief executive
officer and a fee of $50,000 per annum to the chairman of our board of
directors. The balance of the increase in general and administrative expenses is
due to a number of items including public company expenses, professional fees,
travel, franchise taxes and minor increases in several other categories of
general and administrative expenses. These increases were offset in part by the
receipt by us of $75,000 from one of our movie theater joint ventures as partial
reimbursement of legal services allocated to us under the Shared Services
Agreement, for movie theater acquisitions and mortgage financing.
On May 30, 2002, we sold 2.5 million shares of Common Stock in a
follow-on public offering. Allocated payroll and payroll related expenses,
primarily for legal and accounting services resulting from time expended by
various executive and administrative personnel in connection with the
preparation and filing of a Registration Statement on Form S-2, declared
effective by the SEC on May 24, 2002, have been included in the line item
"Public Offering Expenses" for the year ended December 31, 2002, all of which
are nonrecurring.
Real estate expenses decreased by $7,000, or 3.9%, to $174,000 for the
year ended December 31, 2002 from $181,000 for the year ended December 31, 2001.
This decrease was primarily due to the write off of a leasing commission and
non-recurring landlord repairs during 2001.
Comparison of Years Ended December 31, 2001 and 2000.
Revenues
Revenue consists primarily of rental income from tenants in our rental
properties. Rental income increased by $2.8 million, or 22.8%, to $15.1 million
for the year ended December 31, 2001 from $12.3 million for the year ended
December 31, 2000. Rental income increased for 2001 as a result of the addition
of rental income for the full year from eight properties which were acquired at
various times during 2000. The increase in rental income for 2001 was partially
offset by an $878,000 reduction in rental income as a result of the sale of 13
properties in October 2000.
Interest and other income decreased by $152,000, or 45.2%, to $184,000
for the year ended December 31, 2001 from $336,000 for the year ended December
31, 2000. This decrease was due to a reduction in interest earned on cash and
cash equivalents available for investment because cash and cash equivalents were
used during 2000 to fund property acquisitions.
In November 2001 we entered into a joint venture which acquired a
stadium-style movie theater in Norwalk, California. In 2001 we recognized
$83,000 as our 50% equity share in the earnings of this unconsolidated joint
venture.
Expenses
Depreciation and amortization expense increased by $544,000, or 22.7%, to
$2.9 million for the year ended December 31, 2001 from $2.4 million for the year
ended December 31, 2000. This increase resulted primarily from depreciation
recorded on the eight properties acquired during 2000. The increase was
partially offset by a decrease in depreciation resulting from the sale of 15
properties during 2000.
Interest-mortgages payable increased by $1.5 million, or 34.9%, to $5.8
million for the year ended December 31, 2001 from $4.3 million for the year
ended December 31, 2000. This increase resulted from mortgages placed on seven
properties acquired during 2000.
Interest-line of credit decreased by $90,000, or 26.5%, to $250,000 for
the year ended December 31, 2001 from $340,000 for the year ended December 31,
2000. This decrease resulted from reduced borrowings under our credit facility
as a result of our repayment of all of the indebtedness under our line of credit
during 2001. This indebtedness was incurred to facilitate the purchase of
several properties during 2000 and was repaid using the proceeds from mortgage
financings on two properties purchased in December 2000.
General and administrative expenses increased by $47,000 for the year
ended December 31, 2001 from $1.1million for the year ended December 31, 2000.
This increase was primarily due to an increase in payroll and payroll related
expenses and advertising and promotional expenses resulting from an increase in
our level of business activity.
Real estate expenses increased by $114,000, or 170.1%, to $181,000 for
the year ended December 31, 2001 from $67,000 for the year ended December 31,
2000. This increase was primarily due to the write-off of leasing commissions,
non-recurring landlord repairs and certain real estate expenses and taxes not
rebilled to tenants. The results of operations for 2000 included a refund of
real estate taxes received during that period.
During the year ended December 31, 2000, we determined that the estimated
fair value of two properties was lower than their carrying amounts and
therefore, we recorded a provision for valuation adjustment of real estate for
the differences of $125,000. This fair value was determined using projected
undiscounted cash flows based on our determination and analysis of market
conditions in the geographic areas in which these properties are located,
including current rental rates, the location of the properties and occupancy
levels of similar properties in the surrounding area. Both properties are single
tenant locations where an indication was given that neither tenant would renew
its lease on its expiration date at the end of 2001 and 2002, respectively. The
$125,000 provision was recorded as a direct write-down of the respective
investments on the balance sheet and depreciation was calculated using the new
basis. There was no comparable adjustment during 2001.
Gain On Sale Of Real Estate
Gain on sale of real estate decreased by $3.6 million, or 96.7%, to
$126,000 for the year ended December 31, 2001 from $3.8 million for the year
ended December 31, 2000. This decrease was due to fewer sales of real estate in
2001. In 2001 we sold two properties, in which the gain of $172,000 from our
August 2001 sale was offset in part by a $46,000 loss from our May 2001 sale. In
2000, we sold 15 properties, including 13 Total Petroleum Properties, Inc.
locations which resulted in a gain of $3.6 million for financial statement
purposes, as well as a gain of $43,000 on the sale of a property in May 2000 and
a gain of $156,000 on the sale of a property in February 2000.
Liquidity and Capital Resources
We had cash and cash equivalents of $2.6 million at December 31, 2002.
Our primary sources of liquidity are cash and cash equivalents, our revolving
credit facility and cash generated from operating activities. On March 21, 2003
we entered into a new credit agreement with Valley National Bank, Merchants Bank
Division and Bank Leumi, USA for a $30 million revolving credit facility. This
facility, which replaced a $15 million revolving credit facility, is available
to us to pay down existing mortgages, to fund the acquisition of additional
properties or to invest in joint ventures. The facility matures on March 21,
2005. Borrowings under the facility bear interest at the bank's prime rate,
currently 4.25%, and there is an unu