Attached files

file filename
EX-32.1 - EX-32.1 - ONE LIBERTY PROPERTIES INCa14-14059_1ex32d1.htm
EX-31.1 - EX-31.1 - ONE LIBERTY PROPERTIES INCa14-14059_1ex31d1.htm
EX-31.2 - EX-31.2 - ONE LIBERTY PROPERTIES INCa14-14059_1ex31d2.htm
EXCEL - IDEA: XBRL DOCUMENT - ONE LIBERTY PROPERTIES INCFinancial_Report.xls
EX-32.2 - EX-32.2 - ONE LIBERTY PROPERTIES INCa14-14059_1ex32d2.htm

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC   20549

 

FORM 10-Q

 

x                Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2014

 

OR

 

o                    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number 001-09279

 

ONE LIBERTY PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

 

MARYLAND

 

13-3147497

(State or other jurisdiction of

 

(I.R.S. employer

incorporation or organization)

 

identification number)

 

60 Cutter Mill Road, Great Neck, New York

 

11021

(Address of principal executive offices)

 

(Zip code)

 

(516) 466-3100

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of August 1, 2014, the registrant had 16,127,360 shares of common stock outstanding.

 

 

 



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Table of Contents

 

 

 

Page No.

Part I - Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets —
June 30, 2014 and December 31, 2013

1

 

 

 

 

Consolidated Statements of Income —
Three and six months ended June 30, 2014 and 2013

2

 

 

 

 

Consolidated Statements of Comprehensive Income —
Three and six months ended June 30, 2014 and 2013

4

 

 

 

 

Consolidated Statements of Changes in Equity —
Six months ended June 30, 2014 and year ended December 31, 2013

5

 

 

 

 

Consolidated Statements of Cash Flows —
Six months ended June 30, 2014 and 2013

6

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

 

 

 

Item 4.

Controls and Procedures

34

 

 

 

Part II - Other Information

 

 

 

Item 6.

Exhibits

34

 



Table of Contents

 

Part I — FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except Par Value)

 

 

 

June 30,
2014

 

December 31,
2013

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Real estate investments, at cost

 

 

 

 

 

Land

 

$

169,242

 

$

153,529

 

Buildings and improvements

 

432,641

 

413,829

 

Total real estate investments, at cost

 

601,883

 

567,358

 

Less accumulated depreciation

 

77,213

 

71,171

 

Real estate investments, net

 

524,670

 

496,187

 

 

 

 

 

 

 

Properties held-for-sale

 

 

5,177

 

Investment in unconsolidated joint ventures

 

4,833

 

4,906

 

Cash and cash equivalents

 

18,338

 

16,631

 

Restricted cash

 

1,894

 

 

Unbilled rent receivable

 

14,352

 

13,743

 

Unamortized intangible lease assets, net

 

26,517

 

26,035

 

Escrow, deposits and other assets and receivables

 

4,268

 

5,690

 

Investment in BRT Realty Trust at market (related party)

 

 

262

 

Unamortized deferred financing costs, net

 

3,343

 

3,267

 

 

 

 

 

 

 

Total assets

 

$

598,215

 

$

571,898

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Mortgages payable

 

$

284,373

 

$

278,045

 

Line of credit

 

36,850

 

23,250

 

Dividends payable

 

5,948

 

5,806

 

Accrued expenses and other liabilities

 

10,631

 

7,790

 

Unamortized intangible lease liabilities, net

 

9,214

 

6,917

 

 

 

 

 

 

 

Total liabilities

 

347,016

 

321,808

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

One Liberty Properties, Inc. stockholders’ equity:

 

 

 

 

 

Preferred stock, $1 par value; 12,500 shares authorized; none issued

 

 

 

Common stock, $1 par value; 25,000 shares authorized; 15,594 and 15,221 shares issued and outstanding

 

15,594

 

15,221

 

Paid-in capital

 

216,474

 

210,324

 

Accumulated other comprehensive loss

 

(2,172

)

(490

)

Accumulated undistributed net income

 

19,970

 

23,877

 

Total One Liberty Properties, Inc. stockholders’ equity

 

249,866

 

248,932

 

Non-controlling interests in joint ventures

 

1,333

 

1,158

 

Total equity

 

251,199

 

250,090

 

 

 

 

 

 

 

Total liabilities and equity

 

$

598,215

 

$

571,898

 

 

See accompanying notes to consolidated financial statements.

 

1



Table of Contents

 

ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in Thousands, Except Per Share Data)

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental income, net

 

$

14,396

 

$

11,981

 

$

28,798

 

$

23,843

 

Lease termination fee

 

1,269

 

 

1,269

 

 

Total revenues

 

15,665

 

11,981

 

30,067

 

23,843

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

3,723

 

2,681

 

7,300

 

5,315

 

General and administrative (including $610, $572 $1,219 and $1,144, respectively, to related party)

 

2,134

 

1,944

 

4,344

 

3,904

 

Federal excise and state taxes

 

107

 

184

 

169

 

226

 

Real estate expenses (including $212, $150, $425 and $300 respectively, to related party)

 

877

 

751

 

1,976

 

1,523

 

Leasehold rent

 

77

 

77

 

154

 

154

 

Real estate acquisition costs

 

88

 

126

 

128

 

277

 

Total operating expenses

 

7,006

 

5,763

 

14,071

 

11,399

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

8,659

 

6,218

 

15,996

 

12,444

 

 

 

 

 

 

 

 

 

 

 

Other income and expenses:

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated joint ventures

 

130

 

57

 

263

 

391

 

Gain on disposition of real estate - unconsolidated joint venture

 

 

2,807

 

 

2,807

 

Gain on sale - unconsolidated joint venture interest

 

 

1,898

 

 

1,898

 

Gain on sale - investment in BRT Realty Trust (related party)

 

134

 

 

134

 

 

Other income

 

2

 

11

 

10

 

80

 

Interest:

 

 

 

 

 

 

 

 

 

Expense

 

(4,035

)

(3,158

)

(7,988

)

(6,261

)

Amortization of deferred financing costs

 

(228

)

(226

)

(466

)

(439

)

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

4,662

 

7,607

 

7,949

 

10,920

 

Income from discontinued operations

 

 

145

 

13

 

281

 

 

 

 

 

 

 

 

 

 

 

Net income

 

4,662

 

7,752

 

7,962

 

11,201

 

 

 

 

 

 

 

 

 

 

 

Less: net income attributable to non-controlling interests

 

(22

)

(16

)

(49

)

(15

)

 

 

 

 

 

 

 

 

 

 

Net income attributable to One Liberty Properties, Inc.

 

$

4,640

 

$

7,736

 

$

7,913

 

$

11,186

 

 

Continued on next page

 

2



Table of Contents

 

ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in Thousands, Except Per Share Data)

(Unaudited) (Continued)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

15,518

 

14,844

 

15,436

 

14,759

 

Diluted

 

15,618

 

14,944

 

15,536

 

14,859

 

Per common share attributable to common stockholders — basic:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

.29

 

$

.50

 

$

.49

 

$

.71

 

Income from discontinued operations

 

 

.01

 

 

.02

 

 

 

$

.29

 

$

.51

 

$

.49

 

$

.73

 

Per common share attributable to common stockholders — diluted:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

.29

 

$

.49

 

$

.49

 

$

.71

 

Income from discontinued operations

 

 

.01

 

 

.02

 

 

 

$

.29

 

$

.50

 

$

.49

 

$

.73

 

 

 

 

 

 

 

 

 

 

 

Cash distributions declared per share of common stock

 

$

.37

 

$

.35

 

$

.74

 

$

.70

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in Thousands)

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net income

 

$

4,662

 

$

7,752

 

$

7,962

 

$

11,201

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) gain

 

 

 

 

 

 

 

 

 

Net unrealized (loss) gain on available-for-sale securities

 

(130

)

(1

)

(125

)

45

 

Net unrealized (loss) gain on derivative instruments

 

(867

)

730

 

(1,585

)

908

 

One Liberty Property’s share of joint venture net unrealized gain on derivative instruments

 

7

 

51

 

4

 

61

 

Other comprehensive (loss) gain

 

(990

)

780

 

(1,706

)

1,014

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

3,672

 

8,532

 

6,256

 

12,215

 

Comprehensive income attributable to non-controlling interests

 

(22

)

(16

)

(49

)

(15

)

Unrealized loss on derivative instruments attributable to non-controlling interests

 

14

 

 

24

 

 

Comprehensive income attributable to One Liberty Properties, Inc.

 

$

3,664

 

$

8,516

 

$

6,231

 

$

12,200

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the six month period ended June 30, 2014 (Unaudited)

and the year ended December 31, 2013

(Amounts in Thousands, Except Per Share Data)

 

 

 

Common
Stock

 

Paid-in
Capital

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Accumulated
Undistributed
Net Income

 

Non-
Controlling
Interests in
Joint Ventures

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2012

 

$

14,598

 

$

196,107

 

$

(1,578

)

$

28,001

 

$

931

 

$

238,059

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions - common stock Cash - $1.42 per share

 

 

 

 

(21,999

)

 

(21,999

)

Shares issued through equity offering program — net

 

363

 

8,802

 

 

 

 

9,165

 

Restricted stock vesting

 

50

 

(50

)

 

 

 

 

Shares issued through dividend reinvestment plan

 

210

 

4,025

 

 

 

 

4,235

 

Contributions from non-controlling interests

 

 

 

 

 

480

 

480

 

Distributions to non-controlling interests

 

 

 

 

 

(298

)

(298

)

Compensation expense - restricted stock

 

 

1,440

 

 

 

 

1,440

 

Net income

 

 

 

 

17,875

 

49

 

17,924

 

Other comprehensive income (loss)

 

 

 

1,088

 

 

(4

)

1,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2013

 

15,221

 

210,324

 

(490

)

23,877

 

1,158

 

250,090

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions - common stock Cash - $.74 per share

 

 

 

 

(11,820

)

 

(11,820

)

Shares issued through equity offering program — net

 

156

 

3,148

 

 

 

 

3,304

 

Restricted stock vesting

 

101

 

(101

)

 

 

 

 

Shares issued through dividend reinvestment plan

 

116

 

2,183

 

 

 

 

2,299

 

Contribution from non-controlling interest

 

 

 

 

 

306

 

306

 

Distributions to non-controlling interests

 

 

 

 

 

(156

)

(156

)

Compensation expense - restricted stock

 

 

920

 

 

 

 

920

 

Net income

 

 

 

 

7,913

 

49

 

7,962

 

Other comprehensive loss

 

 

 

(1,682

)

 

(24

)

(1,706

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, June 30, 2014

 

$

15,594

 

$

216,474

 

$

(2,172

)

$

19,970

 

$

1,333

 

$

251,199

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited)

 

 

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

7,962

 

$

11,201

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Gain on disposition of real estate held by unconsolidated joint venture

 

 

(2,807

)

Gain on sale - unconsolidated joint venture interest

 

 

(1,898

)

Gain on sale of available-for-sale securities (to related party in 2014)

 

(134

)

(6

)

Increase in rental income from straight-lining of rent

 

(609

)

(414

)

Increase in rental income from amortization of intangibles relating to leases

 

(50

)

(66

)

Amortization of restricted stock expense

 

920

 

766

 

Equity in earnings of unconsolidated joint ventures

 

(263

)

(391

)

Distributions of earnings from unconsolidated joint ventures

 

289

 

860

 

Depreciation and amortization

 

7,300

 

5,386

 

Amortization and write-off of financing costs

 

466

 

439

 

Changes in assets and liabilities:

 

 

 

 

 

Decrease (increase) in escrow, deposits, other assets and receivables

 

1,242

 

(109

)

(Decrease) increase in accrued expenses and other liabilities

 

(539

)

112

 

Net cash provided by operating activities

 

16,584

 

13,073

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of real estate

 

(33,165

)

(6,215

)

Improvements to real estate

 

(645

)

(627

)

Distributions of return of capital from unconsolidated joint ventures

 

50

 

5,284

 

Net proceeds from sale of real estate

 

5,177

 

 

Net proceeds from disposition of unconsolidated joint venture interest

 

 

13,444

 

Payment of leasing commissions

 

(40

)

(40

)

Net proceeds from sale of available-for-sale securities (to related party in 2014)

 

266

 

19

 

Net cash (used in) provided by investing activities

 

(28,357

)

11,865

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Scheduled amortization payments of mortgages payable

 

(3,765

)

(3,169

)

Repayment of mortgages payable

 

(19,003

)

(2,816

)

Proceeds from mortgage financings

 

29,096

 

7,867

 

Proceeds from sale of common stock, net

 

3,304

 

7,771

 

Proceeds from bank line of credit

 

27,500

 

3,500

 

Repayment on bank line of credit

 

(13,900

)

(3,500

)

Issuance of shares through dividend reinvestment plan

 

2,299

 

2,278

 

Payment of financing costs

 

(523

)

(174

)

Capital contributions from non-controlling interests

 

306

 

481

 

Distribution to non-controlling interests

 

(156

)

(258

)

Cash distributions to common stockholders

 

(11,678

)

(10,564

)

Net cash provided by financing activities

 

13,480

 

1,416

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

1,707

 

26,354

 

Cash and cash equivalents at beginning of period

 

16,631

 

14,577

 

Cash and cash equivalents at end of period

 

$

18,338

 

$

40,931

 

 

Continued on next page

 

6



Table of Contents

 

ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited) (Continued)

 

 

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid during the period for interest expense

 

$

8,036

 

$

6,338

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

Purchase accounting allocation - intangible lease assets

 

1,989

 

762

 

Purchase accounting allocation - intangible lease liabilities

 

2,671

 

857

 

Restricted cash for tenant improvements and other reserve

 

1,894

 

 

 

See accompanying notes to consolidated financial statements.

 

7


 


Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2014

 

Note 1 - Organization and Background

 

One Liberty Properties, Inc. (“OLP”) was incorporated in 1982 in Maryland.  OLP is a self-administered and self-managed real estate investment trust (“REIT”).  OLP acquires, owns and manages a geographically diversified portfolio of retail (including furniture stores, restaurants, office supply stores and supermarkets), industrial, flex, office, health and fitness and other properties, a substantial portion of which are subject to long-term net leases.  As of June 30, 2014, OLP owned 113 properties, including six properties owned by consolidated joint ventures and five properties owned by unconsolidated joint ventures. The 113 properties are located in 30 states.

 

Note 2 - Basis of Preparation

 

Principles of Consolidation/Basis of Preparation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and include all of the information and disclosures required by U.S. Generally Accepted Accounting Principles (“GAAP”) for interim reporting. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statement disclosures. In the opinion of management, all adjustments necessary for fair presentation (including normal recurring accruals) have been included. The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results for the full year. These statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

 

The consolidated financial statements include the accounts and operations of OLP, its wholly-owned subsidiaries and its investment in six joint ventures in which the Company, as defined, has a controlling interest.  OLP and its consolidated subsidiaries are hereinafter referred to as the “Company”.  Material intercompany items and transactions have been eliminated in consolidation.

 

Investment in Joint Ventures

 

The Company assesses the accounting treatment for each joint venture investment. This assessment includes a review of each joint venture or limited liability company agreement to determine the rights of each party and whether those rights are protective or participating. The agreements typically contain certain protective rights such as the requirement of partner approval to sell, finance or refinance the property and to pay capital expenditures and operating expenditures outside of the approved budget or operating plan. In situations where the Company and its partner, among other things, (i) approve the annual budget, (ii) approve

 

8



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2014 (Continued)

 

Note 2 - Basis of Preparation (continued)

 

certain expenditures, (iii) prepare or review and approve the joint venture’s tax return before filing, and (iv) approve each lease at each property, the Company does not consolidate the joint venture as the Company considers these to be substantive participation rights that result in shared power over the activities that most significantly impact the performance of the joint venture.  Additionally, the Company assesses the accounting treatment for any interests pursuant to which the Company may have a variable interest as a lessor.  Leases may contain certain protective rights such as the right of sale and the receipt of certain escrow deposits.  In situations where the Company does not have the power over tenant activities that most significantly impact the performance of the property the Company would not consolidate.

 

The Financial Accounting Standard’s Board, or FASB’s, guidance for determining whether an entity is a variable interest entity, or VIE, requires the performance of a qualitative rather than a quantitative analysis to determine the primary beneficiary of a VIE. Under this guidance, an entity would be required to consolidate a VIE if it has (i) the power to direct the activities that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE.

 

In June 2014, the Company purchased land for $6,510,000 in Sandy Springs, Georgia improved with a 196 unit apartment complex, and simultaneously entered into a long-term triple net ground lease with the owner/operator of this complex (see Note 4).  The Company determined that it has a variable interest through its ground lease and the owner/operator is a VIE because its equity investment at risk is not sufficient to finance its activities without additional subordinated financial support.  The Company’s fee interest in the land is collateral for the owner/operator’s loan on the buildings located at this property. The Company further determined that it is not the primary beneficiary because the Company does not have the power to direct the activities that most significantly impact the owner/operator’s economic performance such as management, operational budgets and other rights, including leasing of the units and therefore, will not consolidate the VIE for financial statement purposes.  Accordingly, the Company will account for its investment as land and the revenue from the ground lease as Rental Income, net.  At June 30, 2014, the Company’s maximum exposure to loss as a result of the ground lease is an aggregate of $6,540,000, representing the $6,516,000 carrying value of the land, included in Real estate investments, net, on the consolidated balance sheets and the rent receivable of $24,000.

 

In June 2014, the Company entered into a joint venture, in which the Company has a 95% equity interest, and acquired a property located in Joppa, Maryland (see Note 4).  The Company also made a senior preferred equity investment in the joint venture.  The Company has determined that this joint venture is a VIE as the Company’s voting rights are not proportional to its economic interests and substantially all of the joint venture’s activities are conducted by the Company.  The Company further determined that it is the primary beneficiary of the VIE as it has the power to direct the activities that most significantly impact the joint venture’s performance including management, approval of expenditures, and sale of the property, as well as the obligation to absorb the losses or rights to receive benefits

 

9



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2014 (Continued)

 

Note 2 - Basis of Preparation (continued)

 

from the VIE.  Accordingly, the Company consolidates the operations of this joint venture for financial statement purposes.

 

For the consolidated VIE, the carrying amounts and classification in the Company’s consolidated balance sheets were assets (none of which are restricted) consisting of land of $3,803,000 and building and improvements of $8,142,000, accrued expenses and other liabilities of $78,000 and non-controlling interest in joint ventures of $5,000. The joint venture’s creditors do not have recourse to the assets of the Company other than those held by the joint venture.

 

With respect to five consolidated joint ventures in which the Company has between an 85% to 95% interest, the Company has determined that (i) such ventures are not VIE’s and (ii) the Company exercises substantial operating control and accordingly, such ventures are consolidated for financial statement purposes.

 

The Company accounts for its investments in five unconsolidated joint ventures under the equity method of accounting.  All investments in these five joint ventures have sufficient equity at risk to permit the entity to finance its activities without additional subordinated financial support and, as a group, the holders of the equity at risk have power through voting rights to direct the activities of these ventures. As a result, none of these five joint ventures are VIE’s.  In addition, although the Company is the managing member, it does not exercise substantial operating control over these entities, and therefore the entities are not consolidated. These investments are recorded initially at cost, as investments in unconsolidated joint ventures, and subsequently adjusted for their share of equity in earnings, cash contributions and distributions.  None of the joint venture debt is recourse to the Company, subject to standard carve-outs.

 

Reclassification

 

Certain amounts previously reported in the consolidated financial statements for the three and six months ended June 30, 2013 relating to the operations of two properties that were sold in February 2014 have been reclassified to discontinued operations in the accompanying consolidated financial statements to conform to the current period’s presentation.

 

10



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2014 (Continued)

 

Note 3 - Earnings Per Common Share

 

Basic earnings per share was determined by dividing net income allocable to common stockholders for the applicable period by the weighted average number of shares of common stock outstanding during such period. Net income is also allocated to the unvested restricted stock during the applicable period, as the restricted stock is entitled to receive dividends and is therefore considered a participating security.  Unvested restricted stock is not allocated net losses and/or any excess of dividends declared over net income; such amounts are allocated entirely to the common stockholders other than the holders of unvested restricted stock.  The restricted stock units awarded under the Pay-for-Performance program described in Note 13 are excluded from the basic earnings per share calculation, as these units are not participating securities.

 

Diluted earnings per share reflects the potential dilution that could occur if securities or other rights exercisable for, or convertible into, common stock were exercised or converted or otherwise resulted in the issuance of common stock that shared in the earnings of the Company.  For the three and six months ended June 30, 2014 and 2013, the diluted weighted average number of common shares includes 100,000 shares (of an aggregate of 200,000 shares) of common stock underlying the restricted stock units awarded pursuant to the Pay-For-Performance program.  These 100,000 shares may vest upon satisfaction of the total stockholder return metric. The number of shares that would be issued pursuant to this metric is based on the market price and dividends paid as of the end of each quarterly period assuming the end of that quarterly period was the end of the vesting period.  The remaining 100,000 shares of common stock underlying the restricted stock units awarded under the Pay-For-Performance program are not included during the three and six months ended June 30, 2014 and 2013, as they did not meet the return on capital performance metric during such periods.

 

There were no options outstanding to purchase shares of common stock or other rights exercisable for, or convertible into, common stock during the six months ended June 30, 2014 and 2013.

 

11



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2014 (Continued)

 

Note 3 - Earnings Per Common Share (continued)

 

The following table provides a reconciliation of the numerator and denominator of earnings per share calculations (amounts in thousands, except per share amounts):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Numerator for basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

4,662

 

$

7,607

 

$

7,949

 

$

10,920

 

Less: net income attributable to non-controlling interests

 

(22

)

(16

)

(49

)

(15

)

Less: earnings allocated to unvested shares

 

(178

)

 

(356

)

 

Income from continuing operations available for common stockholders

 

4,462

 

7,591

 

7,544

 

10,905

 

Discontinued operations

 

 

145

 

13

 

281

 

Net income available for common stockholders, basic and diluted

 

$

4,462

 

$

7,736

 

$

7,557

 

$

11,186

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share:

 

 

 

 

 

 

 

 

 

- weighted average common shares

 

15,518

 

14,844

 

15,436

 

14,759

 

- weighted average unvested restricted stock shares

 

 

470

 

 

477

 

 

 

15,518

 

15,314

 

15,436

 

15,236

 

Effect of diluted securities:

 

 

 

 

 

 

 

 

 

- restricted stock units awarded under Pay-for-Performance program

 

100

 

100

 

100

 

100

 

Denominator for diluted earnings per share

 

 

 

 

 

 

 

 

 

- weighted average shares

 

15,618

 

15,414

 

15,536

 

15,336

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share, basic

 

$

.29

 

$

.51

 

$

.49

 

$

.73

 

Earnings per common share, diluted

 

$

.29

 

$

.50

 

$

.49

 

$

.73

 

 

 

 

 

 

 

 

 

 

 

Net Income attributable to One Liberty Properties, Inc. common stockholders, net of non-controlling interests:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

4,640

 

$

7,591

 

$

7,900

 

$

10,905

 

Income from discontinued operations

 

 

145

 

13

 

281

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to One Liberty Properties, Inc.

 

$

4,640

 

$

7,736

 

$

7,913

 

$

11,186

 

 

12



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2014 (Continued)

 

Note 4 - Real Estate Acquisitions and Contingent Liability

 

The following chart details the Company’s real estate acquisitions, all of which were acquired for cash, during the six months ended June 30, 2014 (amounts in thousands):

 

Description of Property

 

Date Acquired

 

Contract
Purchase
Price

 

Third Party
Real Estate
Acquisition
Costs (a)

 

Total Wine and More retail store, Greensboro, North Carolina

 

January 21, 2014

 

$

2,971

 

$

20

 

Chuck E Cheese restaurant, Indianapolis, Indiana

 

January 23, 2014

 

2,138

 

9

 

Savers Thrift Superstore, Highlands Ranch, Colorado

 

May 7, 2014

 

4,825

 

45

 

Hobby Lobby retail store, Woodbury, Minnesota

 

May 21, 2014

 

4,770

 

13

 

Land - River Crossing Apartments, Sandy Springs, Georgia (b)

 

June 4, 2014

 

6,510

 

(c)

Noxell Corporation industrial building, Joppa, Maryland (d)

 

June 26, 2014

 

11,650

 

(c)

 

 

 

 

 

 

 

 

Other (e) 

 

 

 

 

41

 

 

 

 

 

 

 

 

 

Totals

 

 

 

$

32,864

 

$

128

 

 


(a)         Included as an expense in the accompanying consolidated statement of income.

(b)         The Company’s fee interest in the land is collateral for the tenant’s mortgage loan secured by the buildings located at this property.

(c)          Transaction costs aggregating $301 incurred with these asset acquisitions were capitalized.

(d)         Owned by a joint venture in which the Company has a 95% interest.  The non-controlling interest contributed $306 for its 5% interest, which was equal to the fair value at the date of purchase.

(e)          Costs incurred for potential acquisitions and properties purchased in 2013.

 

The following chart provides the allocation of the purchase price for the Company’s real estate acquisitions during the six months ended June 30, 2014 (amounts in thousands):

 

 

 

 

 

 

 

Building

 

Intangible Lease

 

 

 

Description of Property

 

Land

 

Building

 

Improvements

 

Asset

 

Liability

 

Total

 

Total Wine and More retail store, Greensboro, North Carolina

 

$

1,046

 

$

1,468

 

$

83

 

$

374

 

$

 

$

2,971

 

Chuck E Cheese restaurant, Indianapolis, Indiana

 

853

 

1,321

 

145

 

94

 

(275

)

2,138

 

Savers Thrift Superstore, Highlands Ranch, Colorado

 

2,231

 

2,614

 

277

 

846

 

(1,143

)

4,825

 

Hobby Lobby retail store, Woodbury, Minnesota

 

1,190

 

3,667

 

335

 

734

 

(1,156

)

4,770

 

Land - River Crossing Apartments, Sandy Springs, Georgia (a)

 

6,516

 

 

 

 

 

6,516

 

Noxell Corporation industrial building, Joppa, Maryland (b)

 

3,803

 

7,991

 

151

 

 

 

11,945

 

Subtotals

 

15,639

 

17,061

 

991

 

2,048

 

(2,574

)

33,165

 

Other (c)

 

74

 

70

 

18

 

(59

)

(97

)

6

 

Totals

 

$

15,713

 

$

17,131

 

$

1,009

 

$

1,989

 

$

(2,671

)

$

33,171

 

 

13



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2014 (Continued)

 

Note 4 - Real Estate Acquisitions and Contingent Liability (continued)

 


(a)    Includes capitalized transaction costs of $6 incurred with this asset acquisition.

(b)    Includes capitalized transaction costs of $295 incurred with this asset acquisition.

(c)     Adjustments to finalize intangibles relating to properties purchased in 2013.

 

Each property purchased by the Company in 2014 is net leased by a single tenant pursuant to a lease that expires between 2015 through 2044.

 

In June 2014, the Company purchased land in Sandy Springs, Georgia improved with a 196 unit apartment complex, for a land purchase price of $6,510,000 and simultaneously entered into a long-term triple net ground lease with the owner/operator of this complex.  Pursuant to the terms of the ground lease, the owner/operator is obligated to make certain unit renovations as and when units become vacant.  A cash reserve of $1,894,000 was received by the Company to cover this renovation work and other reserve requirements, which is included in Restricted cash on the consolidated balance sheet.

 

At the time of the closing, the owner/operator obtained a $16,230,000 mortgage which, together with the Company’s purchase of the land, provided substantially all of the aggregate costs to acquire the complex.  The Company was required to provide its land as collateral for the mortgage loan; accordingly the land position is subordinated to the mortgage.

 

As a result of the 2014 acquisitions, the Company recorded intangible lease assets of $2,048,000 and intangible lease liabilities of $2,574,000, representing the value of the origination costs and acquired leases.  As of June 30, 2014, the weighted average amortization period for these acquisitions is 7.7 years for the intangible lease assets and 8.4 years for the intangible lease liabilities. The Company assessed the fair value of the lease intangibles based on estimated cash flow projections that utilize appropriate discount rates and available market information. Such inputs are Level 3 (as defined in Note 14) in the fair value hierarchy. The Company is currently in the process of finalizing the purchase price allocations for four properties that were acquired during the three months ended June 30, 2014; therefore, these allocations are preliminary and subject to change.

 

Note 5 — Lease Termination Fee Income

 

In June 2014, the Company received a $1,269,000 lease termination fee from a retail tenant in a lease buy-out transaction.  In connection with the receipt of this fee, the Company wrote-off $150,000 as an offset to rental income, representing the entire balance of the unbilled rent receivable and the intangible lease asset related to this property.  The Company re-leased this property simultaneously with the termination of the existing tenant’s lease.

 

14



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2014 (Continued)

 

Note 6 - Investment in Unconsolidated Joint Ventures

 

At June 30, 2014 and December 31, 2013, the Company had investments in five unconsolidated joint ventures, each of which owned and operated one property. The Company’s equity investment in such unconsolidated joint ventures at such dates totaled $4,833,000 and $4,906,000, respectively. In addition to the $2,807,000 gain on the sale of a tenant-in-common property in the three and six months ended June 30, 2013, the Company recorded equity in earnings of $263,000 and $391,000 for the six months ended June 30, 2014 and 2013, respectively, and $130,000 and $57,000 for the three months ended June 30, 2014 and 2013, respectively.

 

Additionally, in April 2013, the Company sold its 90% equity interest in a joint venture to its partner and recorded a gain of $1,898,000.

 

Note 7 - Allowance for Doubtful Accounts

 

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its tenants to make required rent payments.  If the financial condition of a specific tenant were to deteriorate resulting in an impairment of its ability to make payments, additional allowances may be required.  At June 30, 2014 and December 31, 2013, there was no balance in allowance for doubtful accounts.

 

The Company records bad debt expense as a reduction of rental income. For the three and six months ended June 30, 2014 and 2013, the Company did not incur any bad debt expense.

 

Note 8 - Discontinued Operations and Sale of Properties

 

On February 3, 2014, the Company sold two properties located in Michigan for a total sales price of $5,177,000, net of closing costs.  At December 31, 2013, the Company recorded a $61,700 impairment charge representing the loss on the sale of these properties.  The following table summarizes the components of income from discontinued operations applicable to these properties (amounts in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Rental income

 

$

 

$

246

 

$

141

 

$

486

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

36

 

 

72

 

Real estate expenses

 

 

 

17

 

1

 

Interest expense

 

 

65

 

111

 

132

 

Total expenses

 

 

101

 

128

 

205

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

$

 

$

145

 

$

13

 

$

281

 

 

15



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2014 (Continued)

 

Note 9 - Line of Credit

 

The Company has a $75,000,000 revolving credit facility with Manufacturer’s & Trader’s Trust Company, VNB New York Corp., Bank Leumi USA and Israel Discount Bank of New York.  This facility matures March 31, 2015 and provides that the Company pay interest at the greater of (i) 90 day LIBOR plus 3% (3.23% at June 30, 2014) and (ii) 4.75% per annum, and there is an unused facility fee of .25% per annum.  At June 30, 2014 and August 1, 2014, there were outstanding balances of $36,850,000 and $35,450,000, respectively, under the facility. The Company was in compliance with all covenants at June 30, 2014.

 

Note 10 - Compensation and Services Agreement

 

The Company agreed to pay fees of $3,300,000 and $3,465,000 in 2014 and 2015, respectively (including overhead expenses of $186,375 and $195,694 and property management fees, included in real estate expenses on the income statement, of $850,000 and $892,500 in 2014 and 2015, respectively) pursuant to the compensation and services agreement, as amended, with Majestic Property Management Corp.  Majestic Property Management Corp is wholly-owned by the Vice Chairman of the Company’s Board of Directors.   The 2014 fee represents an increase of $400,000 over the 2013 fee and the 2015 fee represents a $165,000 increase over the 2014 fee. The results of a report prepared by an independent compensation consultant were used to evaluate and support these increases.

 

Note 11 - Common Stock Cash Dividend

 

On June 11, 2014, the Board of Directors declared a quarterly cash dividend of $.37 per share on the Company’s common stock, totaling $5,948,000. The quarterly dividend was paid on July 2, 2014 to stockholders of record on June 25, 2014.

 

Note 12 - Shares Issued through Equity Offering Program

 

On March 20, 2014, the Company entered into an amended and restated equity offering sales agreement to sell shares of the Company’s common stock from time to time with an aggregate sales price of up to approximately $38,360,000, through an “at the market” equity offering program.  During the six months ended June 30, 2014, the Company sold 156,172 shares for proceeds of $3,402,000, net of commissions of $34,000, and incurred offering costs, primarily professional fees, of $98,000.  The Company has not sold any additional shares subsequent to June 30, 2014.

 

16



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2014 (Continued)

 

Note 13 - Stock Based Compensation

 

The Company’s 2012 Incentive Plan, approved by the Company’s stockholders in June 2012, permits the Company to grant, among other things, stock options, restricted stock, restricted stock units and performance share awards and any one or more of the foregoing to its employees, officers, directors and consultants.  A maximum of 600,000 shares of the Company’s common stock is authorized for issuance pursuant to this Plan, of which 229,000 shares of restricted stock are outstanding as of June 30, 2014.  An aggregate of 452,000 shares of restricted stock and restricted stock units are outstanding under the Company’s 2003 and 2009 equity incentive plans (collectively, the “Prior Plans”) and have not yet vested.  No additional awards may be granted under the Prior Plans.

 

The restricted stock grants are charged to general and administrative expense over the respective vesting periods based on the market value of the common stock on the grant date. Substantially all the outstanding restricted stock awards provide for vesting upon the fifth anniversary of the date of grant and under certain circumstances may vest earlier.  For accounting purposes, the restricted stock is not included in the shares shown as outstanding on the balance sheet until they vest; however dividends are paid on the unvested shares.

 

On September 14, 2010, the Board of Directors approved a Pay-for-Performance program under the Company’s 2009 Incentive Plan and awarded 200,000 performance share awards in the form of restricted stock units (the “Units”). The holders of Units are not entitled to dividends or to vote the underlying shares until the Units vest and shares are issued. Accordingly, for accounting purposes, the shares underlying the Units are not included in the shares shown as outstanding on the balance sheet.  If the defined performance criteria are satisfied in full at June 30, 2017, one share of the Company’s common stock will vest and be issued for each Unit outstanding and a pro-rata portion of the Units will vest and be issued if the performance criteria fall between defined ranges.  In the event that the performance criteria are not satisfied in whole or in part at June 30, 2017, the unvested Units will be forfeited and no shares of the Company’s common stock will be issued for those Units.  No Units were forfeited or vested in the six months ended June 30, 2014.

 

As of June 30, 2014 and December 31, 2013, there were no options outstanding under the Company’s equity incentive plans.

 

17



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2014 (Continued)

 

Note 13 - Stock Based Compensation (continued)

 

The following is a summary of the activity of the equity incentive plans (excluding, except as otherwise noted, the 200,000 Units):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Restricted share grants

 

 

 

118,850

 

112,650

 

Per share grant price

 

 

 

$

20.54

 

$

21.59

 

Deferred compensation to be recognized over vesting period

 

 

 

$

2,441,000

 

$

2,432,000

 

 

 

 

 

 

 

 

 

 

 

Non-vested shares:

 

 

 

 

 

 

 

 

 

Non-vested beginning of period

 

481,045

 

470,015

 

470,015

 

407,460

 

Grants

 

 

 

118,850

 

112,650

 

Vested during period

 

 

 

(101,300

)

(50,095

)

Forfeitures

 

 

 

(6,520

)

 

Non-vested end of period

 

481,045

 

470,015

 

481,045

 

470,015

 

 

 

 

 

 

 

 

 

 

 

Average per share value of non-vested shares (based on grant price)

 

$

14.55

 

$

14.22

 

$

14.55

 

$

14.22

 

 

 

 

 

 

 

 

 

 

 

Value of shares vested during the period (based on grant price)

 

$

 

$

 

$

621,000

 

$

876,000

 

 

 

 

 

 

 

 

 

 

 

The total charge to operations for all incentive plans, including the 200,000 Units, is as follows:

 

 

 

 

 

 

 

 

 

Outstanding restricted stock grants

 

$

419,000

 

$

335,000

 

$

862,000

 

$

702,000

 

Outstanding restricted stock units

 

29,000

 

34,000

 

58,000

 

64,000

 

Total charge to operations

 

$

448,000

 

$

369,000

 

$

920,000

 

$

766,000

 

 

As of June 30, 2014, there were approximately $5,741,000 of total compensation costs related to non-vested awards that have not yet been recognized, including $344,000 related to the Pay-for-Performance program (net of forfeiture and performance assumptions which are re-evaluated quarterly). These compensation costs will be charged to general and administrative expense over the remaining respective vesting periods. The weighted average vesting period is approximately 2.9 years.

 

18



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2014 (Continued)

 

Note 14 - Fair Value Measurements

 

The Company measures the fair value of financial instruments based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions.  In accordance with the fair value hierarchy, Level 1 assets/liabilities are valued based on quoted prices for identical instruments in active markets, Level 2 assets/liabilities are valued based on quoted prices in active markets for similar instruments, on quoted prices in less active or inactive markets, or on other “observable” market inputs and Level 3 assets/liabilities are valued based significantly on “unobservable” market inputs.

 

The carrying amounts of cash and cash equivalents, restricted cash, escrow, deposits and other assets and receivables, and accrued expenses and other liabilities are not measured at fair value on a recurring basis, but are considered to be recorded at amounts that approximate fair value.

 

At June 30, 2014, the $289,447,000 estimated fair value of the Company’s mortgages payable is more than their carrying value by approximately $5,074,000 assuming a blended market interest rate of 4.8% based on the 9.2 year weighted average remaining term of the mortgages.  At December 31, 2013, the $283,142,000 estimated fair value of the Company’s mortgages payable is more than their carrying value by approximately $5,097,000 assuming a blended market interest rate of 5% based on the 9.0 year weighted average remaining term of the mortgages.

 

At June 30, 2014 and December 31, 2013, the $36,850,000 and $23,250,000, respectively, carrying amount of the Company’s line of credit approximates its fair value.

 

The fair value of the Company’s mortgages payable and line of credit are estimated using unobservable inputs such as available market information and discounted cash flow analysis based on borrowing rates the Company believes it could obtain with similar terms and maturities. These fair value measurements fall within Level 3 of the fair value hierarchy.

 

Considerable judgment is necessary to interpret market data and develop estimated fair value.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

19



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2014 (Continued)

 

Note 14 - Fair Value Measurements (continued)

 

Financial Instruments Measured at Fair Value

 

The fair value of the Company’s available-for-sale securities and derivative financial instruments was determined using the following inputs (amounts in thousands):

 

 

 

 

 

Carrying and

 

Fair Value Measurements
Using Fair Value Hierarchy
on a Recurring Basis

 

 

 

As of

 

Fair Value

 

Level 1

 

Level 2

 

Financial assets:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Equity securities

 

June 30, 2014

 

$

25

 

$

25

 

$

 

 

 

December 31, 2013

 

282

 

282

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

June 30, 2014

 

112

 

 

112

 

 

 

December 31, 2013

 

265

 

 

265

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

June 30, 2014

 

2,206

 

 

2,206

 

 

 

December 31, 2013

 

774

 

 

774

 

 

The Company does not own any financial instruments that are classified as Level 3.

 

Available-for-sale securities

 

At June 30, 2014, the Company’s available-for-sale securities included a $25,200 investment in other equity securities (included in other assets on the consolidated balance sheet). The aggregate cost of these securities was $5,300 and at June 30, 2014, the unrealized gain was $19,900. Such unrealized gains were included in accumulated other comprehensive loss on the consolidated balance sheet.  Fair values are approximated based on current market quotes from financial sources that track such securities.

 

In May 2014, the Company sold to Gould Investors L.P., a related party, 37,081 shares of BRT Realty Trust, a related party, for proceeds of $266,000 (based on the average of the closing prices for the 30 days preceding the sale).  The cost of these shares was $132,000 and the Company realized a gain on sale of $134,000, of which $132,000 was reclassified from accumulated other comprehensive loss on the consolidated balance sheet into earnings.

 

20



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2014 (Continued)

 

Note 14 - Fair Value Measurements (continued)

 

Derivative financial instruments

 

Fair values are approximated using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivatives. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.

 

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with it use Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparty.  As of June 30, 2014, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.  As a result, the Company determined that its derivative valuation is classified in Level 2 of the fair value hierarchy.

 

As of June 30, 2014, the Company had 15 interest rate derivatives outstanding, all of which were interest rate swaps, related to 15 outstanding mortgage loans with an aggregate $77,623,000 notional amount and mature between 2014 and 2024 (weighted average maturity of 6.55 years).  Such interest rate swaps, all of which were designated as cash flow hedges, converted Libor based variable rate mortgages to fixed annual rate mortgages (with interest rates ranging from 3.55% to 6.50% and a weighted average interest rate of 4.97% at June 30, 2014).  The fair value of the Company’s derivatives designated as hedging instruments in asset and liability positions reflected as other assets or other liabilities on the consolidated balance sheets were $112,000 and $2,206,000, respectively, at June 30, 2014, and $265,000 and $774,000, respectively, at December 31, 2013.

 

Two of the Company’s unconsolidated joint ventures, in which a wholly owned subsidiary of the Company is a 50% partner, had an interest rate derivative outstanding at June 30, 2014 with a notional amount of $3,756,000. This interest rate derivative has an interest rate of 5.81% and matures in April 2018.

 

21



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2014 (Continued)

 

Note 14 - Fair Value Measurements (continued)

 

The following table presents the effect of the Company’s derivative financial instruments on the consolidated statement of income for the periods presented (amounts in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

One Liberty Properties and Consolidated Subsidiaries

 

 

 

 

 

 

 

 

 

Amount of (loss) gain recognized on derivatives in Other comprehensive loss

 

$

(1,227

)

$

574

 

$

(2,408

)

$

600

 

Amount of loss reclassification from Accumulated other comprehensive loss into Interest expense

 

(1,302

)

(156

)

(824

)

(308

)

 

 

 

 

 

 

 

 

 

 

Unconsolidated Joint Ventures (Company’s share)

 

 

 

 

 

 

 

 

 

Amount of (loss) gain recognized on derivative in Other comprehensive loss

 

$

(245

)

$

37

 

$

(48

)

$

33

 

Amount of (loss) gain reclassification from Accumulated other comprehensive loss into Equity in earnings of unconsolidated joint ventures

 

(34

)

(14

)

55

 

(28

)

 

No gain or loss was recognized with respect to hedge ineffectiveness or to amounts excluded from effectiveness testing on the Company’s cash flow hedges for the three and six months ended June 30, 2014 and 2013.  During the twelve months ending June 30, 2015, the Company estimates an additional $1,572,000 will be reclassified from other comprehensive income (loss) as an increase to interest expense.

 

The derivative agreements in effect at June 30, 2014 provide that if the wholly owned subsidiary of the Company which is a party to the agreement defaults or is capable of being declared in default on any of its indebtedness, then a default can be declared on such subsidiary’s derivative obligation. In addition, the Company is a party to one of the derivative agreements and if the subsidiary defaults on the loan subject to such agreement and if there are swap breakage losses on account of the derivative being terminated early, the Company could be held liable for interest rate swap breakage losses, if any.

 

As of June 30, 2014, the fair value of the derivatives in a liability position, including accrued interest, and excluding any adjustments for nonperformance risk, was approximately $2,379,000.  In the unlikely event that the Company breaches any of the contractual provisions of the derivative contracts, it would be required to settle its obligations thereunder at their termination liability value of $2,379,000.  Such amount is included in accrued expenses and other liabilities at June 30, 2014.

 

22



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2014 (Continued)

 

Note 15 - New Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. This update is effective for interim and annual reporting periods beginning after December 15, 2016.  The Company is currently in the process of evaluating the impact, if any, the adoption of this ASU will have on its consolidated financial statements.

 

In April 2014, the FASB issued updated guidance that changes the criteria for determining which future disposals can be presented as discontinued operations and modifies related disclosure requirements.  Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.  The guidance is effective prospectively as of the first quarter of 2015, with early adoption permitted for new disposals or new classifications as held-for-sale. The Company early adopted this new guidance in the first quarter of 2014 which had no effect on the Company’s Consolidated Financial Statements.  It is expected that most of the Company’s future dispositions will not meet the new criteria for being treated as a discontinued operation.

 

Note 16 - Subsequent Events

 

Subsequent events have been evaluated and there are no events relative to the Company’s consolidated financial statements that require additional disclosure.

 

23



Table of Contents

 

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

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q 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,” “could,” “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions or variations thereof.  Forward-looking statements should not be relied on 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.  Investors are encouraged to review the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2013 under the caption “Item 1A. Risk Factors” for a discussion of certain factors which may cause actual results to differ materially from current expectations and are cautioned not to place undue reliance on any forward-looking statements.

 

Overview

 

We are a self-administered and self-managed real estate investment trust, organized in Maryland in 1982.  We acquire, own and manage a geographically diversified portfolio of retail (including furniture stores, restaurants, office supply stores and supermarkets), industrial, flex, office, health and fitness and other properties, a substantial portion of which are leased under long-term net leases.  As of June 30, 2014, we own 113 properties (including five properties owned by our unconsolidated joint ventures) located in 30 states. Based on square footage, our occupancy rate at June 30, 2014 is approximately 99.3%.

 

We face a variety of risks and challenges in our business. We, among other things, face the possibility we will not be able to acquire accretive properties on acceptable terms, lease our properties on terms favorable to us or at all, our tenants may not be able to pay their rental and other obligations and we may not be able to renew or relet, on acceptable terms, leases that are expiring.  In that regard, a tenant with a lease expiring in October 2014 that accounted for 1.1% of our 2013 rental income, has advised that it does not intend to renew its lease.  At June 30, 2014, the net book value and principal amount of mortgage debt on this property was $2.6 million and $1.5 million, respectively.  The mortgage matures in November 2014.  If we are unable to relet or satisfactorily dispose of this property within a reasonable period after lease expiration, we may elect to surrender the property to the mortgagee, and may incur an impairment charge.

 

We seek to manage the risk of our real property portfolio by diversifying among types of properties and industries, locations, tenants and scheduled lease expirations. We monitor the risk of tenant non-payments through a variety of approaches tailored to the applicable situation. Generally, based on our assessment of the credit risk posed by our tenants, we monitor a tenant’s financial condition through one or more of the following actions: reviewing tenant financial statements, obtaining other tenant related financial information, regular contact with tenant’s representatives, tenant credit checks and regular management reviews of our tenants.

 

24



Table of Contents

 

Further, we are sensitive to the risks facing the retail industry as a result of the growth of e-commerce.  We are addressing this exposure by seeking to acquire properties that we believe capitalize on e-commerce activities, such as e-commerce distribution and warehousing facilities.

 

In acquiring properties, we balance an evaluation of the terms of the leases and the credit of the existing tenants with a fundamental analysis of the real estate to be acquired, which analysis takes into account, among other things, the estimated value of the property, local demographics and the ability to re-rent or dispose of the property on favorable terms upon lease expiration or early termination.

 

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute currently at least 90% of ordinary taxable income to our stockholders.  We intend to comply with these requirements and to maintain our REIT status.

 

Our 2014 contractual rental income is approximately $54.7 million and represents, after giving effect to any abatements, concessions or adjustments, the base rent payable to us in calendar year 2014 under leases in effect at June 30, 2014. The 2014 contractual rental income excludes approximately $1.4 million of straight-line rent, amortization of approximately $235,000 of intangibles and our share of the rental income payable to our unconsolidated joint ventures, which in 2014 will be approximately $1.5 million.

 

The following table sets forth scheduled lease expirations of leases for our properties (excluding unconsolidated joint ventures) as of June 30, 2014 for the calendar years indicated below:

 

Year of Lease
Expiration (1)

 

Number 
of
Expiring
Leases

 

Approximate
Square
Footage Subject to
Expiring Leases

 

2014 Contractual
Rental Income
Under
Expiring Leases

 

Percent of 2014
Contractual
Rental Income
Represented by
Expiring Leases

 

2014

 

2

 

114,319

 

$

882,953

 

1.6

%

2015

 

11

 

616,796

 

4,308,485

 

7.9

 

2016

 

15

 

458,262

 

3,801,822

 

6.9

 

2017

 

11

 

107,008

 

2,110,640

 

3.9

 

2018

 

18

 

394,055

 

5,554,161

 

10.2

 

2019

 

7

 

147,503

 

1,726,227

 

3.2

 

2020

 

7

 

181,108

 

4,305,178

 

7.9

 

2021

 

6

 

119,260

 

1,121,779

 

2.0

 

2022

 

9

 

1,198,204

 

8,988,514

 

16.4

 

2023

 

7

 

655,592

 

5,178,902

 

9.5

 

2024 and thereafter

 

25

 

1,739,764

 

16,703,954

 

30.5

 

 

 

118

 

5,731,871

 

$

54,682,615

 

100.0

%

 


(1)         Lease expirations assume tenants do not exercise existing renewal options.

 

25



Table of Contents

 

Results of Operations

 

The following table compares revenues and operating expenses of continuing operations for the periods indicated:

 

 

 

Three Months Ended
June 30,

 

 

 

 

 

Six Months Ended
June 30,

 

 

 

 

 

(Dollars in thousands)

 

2014

 

2013

 

Increase
(Decrease)

 

%
Change

 

2014

 

2013

 

Increase
(Decrease)

 

%
Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

14,396

 

$

11,981

 

$

2,415

 

20.2

%

$

28,798

 

$

23,843

 

$

4,955

 

20.8

%

Lease termination fee

 

1,269

 

 

1,269

 

n/a

 

1,269

 

 

1,269

 

n/a

 

Total revenues

 

15,665

 

11,981

 

3,684

 

30.7

 

30,067

 

23,843

 

6,224

 

26.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

3,723

 

2,681

 

1,042

 

38.9

 

7,300

 

5,315

 

1,985

 

37.3

 

General and administrative

 

2,134

 

1,944

 

190

 

9.8

 

4,344

 

3,904

 

440

 

11.3

 

Federal excise and state taxes

 

107

 

184

 

(77

)

(41.8

)

169

 

226

 

(57

)

(25.2

)

Real estate expenses

 

877

 

751

 

126

 

16.8

 

1,976

 

1,523

 

453

 

29.7

 

Leasehold rent

 

77

 

77

 

 

 

154

 

154

 

 

 

Real estate acquisition costs

 

88

 

126

 

(38

)

(30.2

)

128

 

277

 

(149

)

(53.8

)

Total operating expenses

 

7,006

 

5,763

 

1,243

 

21.6

 

14,071

 

11,399

 

2,672

 

23.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

8,659

 

$

6,218

 

$

2,441

 

39.3

 

$

15,996

 

$

12,444

 

$

3,552

 

28.5

 

 

Revenues

 

Rental income.  The increase is primarily due to rental income of $2.4 million and $4.7 million earned during the three and six months ended June 30, 2014, respectively, from 17 properties acquired in 2013 and 2014 ($2.1 million and $4.3 million, respectively, from the eleven properties acquired in 2013), and to a lesser extent, increases of $82,000 and $300,000 in real estate tax and expense reimbursements from tenants and $94,000 and $189,000, respectively, from a lease of vacant space at a property. These increases were partially offset during the three and six months ended June 30, 2014 by (i) the $150,000 write-off against rental income of the entire balance of the unbilled rent receivable and the intangible lease asset related to a lease for which we received a $1.269 million lease termination fee, and (ii) decreases of $111,000 and $247,000, respectively, resulting from lease expirations in January 2014. In May 2014, one of these properties was leased to a new tenant.

 

Lease termination fee.  In connection with a lease buy-out of a retail tenant in June 2014, we received a lease termination fee of $1,269,000.  We re-leased this property simultaneously with the termination of the existing tenant’s lease.

 

Operating Expenses

 

Depreciation and amortization.  Approximately $947,000 and $1.8 million of the increase for the three and six months ended June 30, 2014, respectively, is due to depreciation and amortization expense on the properties we acquired in 2013 and 2014 ($839,000 and $1.7 million, respectively, from the eleven properties acquired in 2013).

 

26



Table of Contents

 

General and administrative expenses.  Contributing to the increase in the three and six months ended June 30, 2014 were increases of (i) $79,000 and $153,000, respectively, in non-cash compensation expense primarily related to the increase in the number of restricted stock awards granted in 2014 and the higher fair value of such awards at the time of grant; (ii) a $150,000 annual increase ($37,500 per quarter) in the amount payable pursuant to the compensation and services agreement, and (iii) increases of $74,000 and $212,000, respectively, in various general and administrative expenses.

 

Federal excise and state taxes.  During the three and six months ended June 30, 2013, we recorded a $126,000 accrual of Federal excise tax which is based on taxable income generated but not yet distributed. There was no comparable expense in the corresponding 2014 year periods. The decrease in federal excise tax is offset in the three and six months ended June 30, 2014 by an increase in state tax expense.

 

Real estate expenses.  The increases in the three and six months ended June 30, 2014 are due to several factors including (i) an annual increase of $250,000 ($62,500 per quarter) in the amount for property management services pursuant to the compensation and services agreement due to the increase in the number and nature of properties in our portfolio; (ii) expenses totaling $65,000 and $127,000 for two properties purchased in 2013 and 2014, all of which is rebilled to tenants; and (iii) $52,000 and $138,000 of expenses related to two properties vacated by its tenants at their lease expiration in January 2014. In addition, an increase of $167,000 (a significant portion of which is rebilled to tenants) in snow removal expense at several of our properties due to the harsh 2014 winter contributed to the increase in the six months ended June 30, 2014.

 

Real estate acquisition costs.  These costs, which include acquisition fees, legal and other transactional costs and expenses, decreased during the six months ended June 30, 2014 primarily due to the inclusion in the six months ended June 30, 2013, of fees paid to our joint venture partner in connection with an acquisition. These costs also decreased in the three and six months ended June 30, 2014 due to reduced costs associated with closing transactions.

 

Other Income and Expenses

 

The following table compares other income and expenses for the periods indicated:

 

 

 

Three Months Ended
June 30,

 

Increase

 

%

 

Six Months Ended
June 30,

 

Increase

 

%

 

(Dollars in thousands)

 

2014

 

2013

 

(Decrease)

 

Change

 

2014

 

2013

 

(Decrease)

 

Change

 

Other income and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated joint ventures

 

$

130

 

$

57

 

$

73

 

128.1

%

$

263

 

$

391

 

$

(128

)

(32.7

)%

Gain on disposition of real estate — unconsolidated joint venture

 

 

2,807

 

(2,807

)

(100.0