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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 September 30, 2016

 

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 November 1, 2016, the registrant had 17,730,430 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.

Unaudited Consolidated Financial Statements

 

 

 

 

 

Consolidated Balance Sheets — September 30, 2016 and December 31, 2015

1

 

 

 

 

Consolidated Statements of Income — Three and nine months ended September 30, 2016 and 2015

2

 

 

 

 

Consolidated Statements of Comprehensive Income — Three and nine months ended September 30, 2016 and 2015

3

 

 

 

 

Consolidated Statements of Changes in Equity — Nine months ended September 30, 2016 and 2015

4

 

 

 

 

Consolidated Statements of Cash Flows — Nine months ended September 30, 2016 and 2015

5

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2.

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

30

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

 

 

 

Item 4.

Controls and Procedures

43

 

 

 

Part II — Other Information

 

 

 

Item 6.

Exhibits

44

 



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)

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Real estate investments, at cost

 

 

 

 

 

Land

 

$

212,668

 

$

186,994

 

Buildings and improvements

 

537,140

 

460,379

 

Total real estate investments, at cost

 

749,808

 

647,373

 

Less accumulated depreciation

 

93,255

 

85,116

 

Real estate investments, net

 

656,553

 

562,257

 

 

 

 

 

 

 

Properties held-for-sale

 

 

12,259

 

Investment in unconsolidated joint ventures

 

10,993

 

11,350

 

Cash and cash equivalents

 

17,645

 

12,736

 

Restricted cash

 

836

 

1,074

 

Unbilled rent receivable (including $712 related to properties held-for-sale in 2015)

 

13,323

 

13,577

 

Unamortized intangible lease assets, net

 

33,931

 

28,978

 

Escrow, deposits and other assets and receivables

 

6,046

 

4,268

 

Total assets

 

$

739,327

 

$

646,499

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Mortgages payable, net of $4,118 and $3,373 deferred financing costs, respectively

 

$

396,676

 

$

331,055

 

Line of credit, net of $380 and $506 deferred financing costs, respectively

 

22,420

 

17,744

 

Dividends payable

 

7,245

 

6,901

 

Accrued expenses and other liabilities

 

18,843

 

13,852

 

Unamortized intangible lease liabilities, net

 

19,821

 

14,521

 

 

 

465,005

 

384,073

 

Total liabilities

 

 

 

 

 

 

 

 

 

 

 

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; 17,074 and 16,292 shares issued and outstanding

 

17,074

 

16,292

 

Paid-in capital

 

250,257

 

232,378

 

Accumulated other comprehensive loss

 

(9,671

)

(4,390

)

Accumulated undistributed net income

 

14,912

 

16,215

 

Total One Liberty Properties, Inc. stockholders’ equity

 

272,572

 

260,495

 

Non-controlling interests in consolidated joint ventures

 

1,750

 

1,931

 

Total equity

 

274,322

 

262,426

 

Total liabilities and equity

 

$

739,327

 

$

646,499

 

 

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental income, net

 

$

16,334

 

$

15,273

 

$

46,985

 

$

44,159

 

Tenant reimbursements

 

1,687

 

835

 

4,614

 

2,407

 

Lease termination fee

 

 

 

 

650

 

Total revenues

 

18,021

 

16,108

 

51,599

 

47,216

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

4,663

 

4,435

 

13,246

 

12,090

 

General and administrative (see Note 11 for related party information)

 

2,681

 

2,350

 

7,961

 

7,132

 

Real estate expenses (see Note 11 for related party information)

 

2,188

 

1,415

 

6,521

 

4,022

 

Real estate acquisition costs (see Note 11 for related party information)

 

162

 

90

 

610

 

417

 

Federal excise and state taxes

 

43

 

68

 

198

 

266

 

Leasehold rent

 

77

 

77

 

231

 

231

 

Total operating expenses

 

9,814

 

8,435

 

28,767

 

24,158

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

8,207

 

7,673

 

22,832

 

23,058

 

 

 

 

 

 

 

 

 

 

 

Other income and expenses:

 

 

 

 

 

 

 

 

 

Gain on sales of real estate, net

 

119

 

 

9,824

 

5,392

 

Purchase price fair value adjustment

 

 

 

 

960

 

Prepayment costs on debt

 

 

 

(577

)

(568

)

Equity in earnings of unconsolidated joint ventures

 

228

 

347

 

794

 

311

 

Other income

 

362

 

2

 

431

 

77

 

Interest:

 

 

 

 

 

 

 

 

 

Expense

 

(4,404

)

(4,044

)

(12,593

)

(11,690

)

Amortization and write-off of deferred financing costs

 

(189

)

(187

)

(644

)

(828

)

 

 

 

 

 

 

 

 

 

 

Net income

 

4,323

 

3,791

 

20,067

 

16,712

 

Net income attributable to non-controlling interests

 

(24

)

(3

)

(40

)

(1,386

)

 

 

 

 

 

 

 

 

 

 

Net income attributable to One Liberty Properties, Inc.

 

$

4,299

 

$

3,788

 

$

20,027

 

$

15,326

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

16,845

 

16,014

 

16,605

 

15,892

 

Diluted

 

16,962

 

16,114

 

16,722

 

15,992

 

 

 

 

 

 

 

 

 

 

 

Per common share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

Basic

 

$

.24

 

$

.22

 

$

1.16

 

$

.92

 

Diluted

 

$

.24

 

$

.22

 

$

1.15

 

$

.92

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash distributions declared per share of common stock

 

$

.41

 

$

.39

 

$

1.23

 

$

1.17

 

 

See accompanying notes to consolidated financial statements.

 

2



Table of Contents

 

ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in Thousands)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Net income

 

$

4,323

 

$

3,791

 

$

20,067

 

$

16,712

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive gain/loss

 

 

 

 

 

 

 

 

 

Net unrealized gain on available-for-sale securities

 

 

1

 

 

2

 

Reclassification of gain on available-for-sale securities included in net income

 

 

 

(27

)

 

Net unrealized gain (loss) on derivative instruments

 

1,018

 

(3,035

)

(5,177

)

(2,579

)

One Liberty Properties Inc.’s share of joint venture net unrealized gain (loss) on derivative instruments

 

44

 

(93

)

(92

)

(67

)

Other comprehensive gain (loss)

 

1,062

 

(3,127

)

(5,296

)

(2,644

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

5,385

 

664

 

14,771

 

14,068

 

Net income attributable to non-controlling interests

 

(24

)

(3

)

(40

)

(1,386

)

Adjustment for derivative instruments attributable to non-controlling interests

 

(5

)

13

 

15

 

(21

)

Comprehensive income attributable to One Liberty Properties, Inc.

 

$

5,356

 

$

674

 

$

14,746

 

$

12,661

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Amounts in Thousands, Except Per Share Data)

(Unaudited)

 

 

 

Common
Stock

 

Paid-in
Capital

 

Accumulated
Other
Comprehensive
Loss

 

Accumulated
Undistributed
Net Income

 

Non-
Controlling
Interests in
Consolidated
Joint
Ventures

 

Total

 

Balances, December 31, 2014

 

$

15,728

 

$

219,867

 

$

(3,195

)

$

21,876

 

$

1,628

 

$

255,904

 

Distributions - common stock
Cash - $1.17 per share

 

 

 

 

(19,277

)

 

(19,277

)

Shares issued through equity offering program – net

 

135

 

2,799

 

 

 

 

2,934

 

Restricted stock vesting

 

72

 

(72

)

 

 

 

 

Shares issued through dividend reinvestment plan

 

138

 

2,947

 

 

 

 

3,085

 

Contributions from non-controlling interests

 

 

 

 

 

713

 

713

 

Distributions to non-controlling interests

 

 

 

 

 

(1,670

)

(1,670

)

Compensation expense - restricted stock

 

 

1,742

 

 

 

 

1,742

 

Net income

 

 

 

 

15,326

 

1,386

 

16,712

 

Other comprehensive gain

 

 

 

(2,665

)

 

21

 

(2,644

)

Balances, September 30, 2015

 

$

16,073

 

$

227,283

 

$

(5,860

)

$

17,925

 

$

2,078

 

$

257,499

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2015

 

$

16,292

 

$

232,378

 

$

(4,390

)

$

16,215

 

$

1,931

 

$

262,426

 

Distributions - common stock
Cash - $1.23 per share

 

 

 

 

(21,330

)

 

(21,330

)

Shares issued through equity offering program – net

 

608

 

13,689

 

 

 

 

14,297

 

Restricted stock vesting

 

73

 

(73

)

 

 

 

 

Shares issued through dividend reinvestment plan

 

101

 

2,087

 

 

 

 

2,188

 

Contribution from non-controlling interest

 

 

 

 

 

30

 

30

 

Distributions to non-controlling interests

 

 

 

 

 

(236

)

(236

)

Compensation expense - restricted stock

 

 

2,176

 

 

 

 

2,176

 

Net income

 

 

 

 

20,027

 

40

 

20,067

 

Other comprehensive loss

 

 

 

(5,281

)

 

(15

)

(5,296

)

Balances, September 30, 2016

 

$

17,074

 

$

250,257

 

$

(9,671

)

$

14,912

 

$

1,750

 

$

274,322

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

20,067

 

$

16,712

 

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

 

 

 

 

 

Gain on sales of real estate, net

 

(9,824

)

(5,392

)

Purchase price fair value adjustment

 

 

(960

)

Gain on available-for-sale securities

 

(27

)

 

Increase in unbilled rent receivable

 

(1,757

)

(1,327

)

Write-off of unbilled rent receivable

 

7

 

315

 

Decrease in rental income and tenant reimbursements resulting from bad debt expense

 

190

 

 

Amortization of intangibles relating to leases, net

 

(465

)

(621

)

Amortization of restricted stock expense

 

2,176

 

1,742

 

Equity in earnings of unconsolidated joint ventures

 

(794

)

(311

)

Distributions of earnings from unconsolidated joint ventures

 

755

 

465

 

Depreciation and amortization

 

13,246

 

12,090

 

Amortization and write-off of deferred financing costs

 

644

 

828

 

Payment of leasing commissions

 

(1,041

)

(709

)

Increase in escrow, deposits, other assets and receivables

 

(1,153

)

(178

)

Decrease in accrued expenses and other liabilities

 

(121

)

662

 

Net cash provided by operating activities

 

21,903

 

23,316

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of real estate

 

(118,589

)

(67,548

)

Improvements to real estate

 

(3,900

)

(2,479

)

Net proceeds from sales of real estate

 

40,207

 

16,025

 

Purchase of partner’s interest in unconsolidated joint venture

 

 

(6,300

)

Investment in unconsolidated joint ventures

 

 

(12,686

)

Net proceeds from sale of available-for-sale securities

 

33

 

 

Distributions of capital from unconsolidated joint ventures

 

305

 

761

 

Net cash used in investing activities

 

(81,944

)

(72,227

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Scheduled amortization payments of mortgages payable

 

(6,621

)

(5,679

)

Repayment of mortgages payable

 

(38,115

)

(25,308

)

Proceeds from mortgage financings

 

111,102

 

66,005

 

Proceeds from sale of common stock, net

 

14,297

 

2,934

 

Proceeds from bank line of credit

 

86,000

 

45,400

 

Repayment on bank line of credit

 

(81,450

)

(22,900

)

Issuance of shares through dividend reinvestment plan

 

2,188

 

3,085

 

Payment of financing costs

 

(1,260

)

(996

)

Capital contribution from non-controlling interests

 

30

 

713

 

Distributions to non-controlling interests

 

(236

)

(1,670

)

Cash distributions to common stockholders

 

(20,985

)

(19,121

)

Net cash provided by financing activities

 

64,950

 

42,463

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

4,909

 

(6,448

)

Cash and cash equivalents at beginning of year

 

12,736

 

20,344

 

Cash and cash equivalents at end of period

 

$

17,645

 

$

13,896

 

 

Continued on next page

 

5



Table of Contents

 

ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited) (Continued)

 

 

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid during the period for interest expense

 

$

12,590

 

$

11,830

 

Cash paid during the period for Federal excise tax

 

190

 

300

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

Mortgage debt extinguished upon conveyance of the Company’s Morrow, Georgia property to mortgagee by deed-in-lieu of foreclosure

 

$

 

$

1,466

 

Consolidation of real estate investment

 

 

2,633

 

Purchase accounting allocation — intangible lease assets

 

8,194

 

5,780

 

Purchase accounting allocation — intangible lease liabilities

 

(6,288

)

(5,366

)

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016

 

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 consisting primarily of retail, industrial, flex and health and fitness properties, many of which are subject to long-term net leases.  As of  September 30, 2016, OLP owns 120 properties, including seven properties owned by consolidated joint ventures and five properties owned by unconsolidated joint ventures. The 120 properties are located in 30 states.

 

Note 2 — Summary Accounting Policies

 

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 nine months ended September 30, 2016 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 OLP’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

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, its joint ventures in which the Company, as defined, has a controlling interest, and variable interest entities (“VIEs”) of which the Company is the primary beneficiary.  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 and Variable Interest Entities

 

The Financial Accounting Standards Board, or FASB, provides guidance for determining whether an entity is a VIE.  VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. A VIE is required to be consolidated by its primary beneficiary, which is the party that (i) has the power to control the activities that most significantly impact the VIE’s economic performance and (ii) has the obligation to absorb losses, or the right to receive benefits, of the VIE that could potentially be significant to the VIE.

 

7



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016 (Continued)

 

Note 2 — Summary Accounting Policies (Continued)

 

On January 1, 2016, the Company adopted ASU 2015-02, Amendments to the Consolidation Analysis, which amends the current consolidation guidance.  The ASU introduces a separate consolidation analysis specific to limited partnerships and other similar entities. Under this analysis, limited partnerships and other similar entities will be considered a VIE unless the limited partners hold substantive kick-out or participating rights (see Note 6).

 

Consistent with the adoption of ASU 2015-02, the Company assesses the accounting treatment for each of its investments, including  a review of each venture or limited liability company or partnership agreement to determine the rights of each party and whether those rights are protective or participating.  Additionally, the Company assesses the accounting treatment for any interests pursuant to which the Company may have a variable interest as a lessor. 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. Leases may contain certain protective rights, such as the right of sale and the receipt of certain escrow deposits. In situations where the Company jointly (i) approves the annual budget, (ii) approves certain expenditures, (iii) prepares or reviews and approves the joint venture’s tax return before filing, and (iv) approves each lease at a property, among other things, the Company does not consolidate as the Company considers these to be substantive participation rights that result in shared, joint power over the activities that most significantly impact the performance of the joint venture or property.

 

The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting.  All investments in unconsolidated 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 joint ventures are VIEs.  In addition, the Company has shared power with its co-managing members 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.

 

8



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016 (Continued)

 

Note 2 — Summary Accounting Policies (Continued)

 

The Company has elected to follow the cumulative earnings approach when assessing, for the consolidated statement of cash flows, whether the distribution from the investee is a return of the investor’s investment as compared to a return on its investment. The source of the cash generated by the investee to fund the distribution is not a factor in the analysis (that is, it does not matter whether the cash was generated through investee refinancing, sale of assets or operating results). Consequently, the investor only considers the relationship between the cash received from the investee to its equity in the undistributed earnings of the investee, on a cumulative basis, in assessing whether the distribution from the investee is a return on or return of its investment.  Cash received from the unconsolidated entity is presumed to be a return on the investment to the extent that, on a cumulative basis, distributions received by the investor are less than its share of the equity in the undistributed earnings of the entity.

 

Properties Held-for-Sale

 

Real estate investments are classified as properties held-for-sale when management determines that the investment meets the applicable criteria.  Real estate investments which are held-for-sale are not depreciated.

 

Tenant Reimbursements

 

Tenant reimbursements represent tenants’ contractual obligations for recoverable real estate taxes and operating expenses and are recognized when earned.

 

Reclassifications

 

Certain amounts previously reported in the consolidated financial statements have been reclassified in the accompanying consolidated financial statements to conform to the current period’s presentation, primarily to present debt issuance costs as a direct deduction from the carrying amount of the associated debt on the Company’s December 31, 2015 consolidated balance sheet. See Note 10.

 

Note 3 — Earnings Per Common Share

 

Basic earnings per share was determined by dividing net income allocable to common stockholders for each period by the weighted average number of shares of common stock outstanding during the applicable period. Net income is also allocated to the unvested restricted stock outstanding during each 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 are excluded from the basic earnings per share calculation, as these units are not participating securities (see Note 14).

 

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

 

9



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016  (Continued)

 

Note 3 — Earnings Per Common Share (Continued)

 

otherwise resulted in the issuance of common stock that shared in the earnings of the Company.  For the three and nine months ended September 30, 2016 and 2015, the diluted weighted average number of shares of common stock includes 117,000 and 100,000 shares, respectively (of an aggregate of 200,000 shares) of common stock underlying the restricted stock units awarded pursuant to the Pay-For-Performance program.  These amounts include 100,000 shares that would be issued pursuant to a metric based on the market price and dividends paid at the end of each quarterly period, assuming the end of that quarterly period was the end of the vesting period.  Of the remaining 100,000 shares of common stock underlying the restricted stock units awarded under the Pay-For-Performance program (the “ROC Shares”), 17,000 shares are included in the diluted weighted average in the three and nine months ended September 30, 2016 and, as the return on capital performance metric was not satisfied during the three and nine months ended September 30, 2015, none of the ROC Shares were included in such periods.

 

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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Numerator for basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

Net income

 

$

4,323

 

$

3,791

 

$

20,067

 

$

16,712

 

Less net income attributable to non-controlling interests

 

(24

)

(3

)

(40

)

(1,386

)

Less earnings allocated to unvested restricted stock (a)

 

(248

)

(210

)

(744

)

(631

)

Net income available for common stockholders, basic and diluted

 

$

4,051

 

$

3,578

 

$

19,283

 

$

14,695

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share:

 

 

 

 

 

 

 

 

 

Weighted average common shares

 

16,845

 

16,014

 

16,605

 

15,892

 

Effect of diluted securities:

 

 

 

 

 

 

 

 

 

Restricted stock units awarded under Pay-for-Performance program

 

117

 

100

 

117

 

100

 

Denominator for diluted earnings per share:

 

 

 

 

 

 

 

 

 

Weighted average shares

 

16,962

 

16,114

 

16,722

 

15,992

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share, basic

 

$

.24

 

$

.22

 

$

1.16

 

$

.92

 

Earnings per common share, diluted

 

$

.24

 

$

.22

 

$

1.15

 

$

.92

 

 

 

 

 

 

 

 

 

 

 

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

 

$

4,299

 

$

3,788

 

$

20,027

 

$

15,326

 

 


(a)         Represents an allocation of distributed earnings to unvested restricted stock which, as participating securities, are entitled to receive dividends.

 

10



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016 (Continued)

 

Note 4 — Real Estate Acquisitions

 

The following chart details the Company’s acquisitions of real estate during the nine months ended September 30, 2016 (amounts in thousands):

 

Description of Property

 

Date Acquired

 

Contract
Purchase
Price

 

Terms of Payment

 

Third Party
Real
Estate
Acquisition
Costs (a)

 

Multi-tenant industrial facility,
Greenville, South Carolina (b)

 

March 30, 2016

 

$

8,100

 

All cash

 

$

81

 

Multi-tenant industrial facility,
Greenville, South Carolina (b)

 

March 30, 2016

 

8,950

 

All cash

 

83

 

Toro distribution facility,
El Paso, Texas (c)

 

June 3, 2016

 

23,695

 

All cash

 

65

 

4 Advanced Auto retail stores,
Ohio (d)

 

June 16, 2016

 

6,523

 

Cash and $4,300 mortgage (d)

 

101

 

Land - The Briarbrook Village Apartments,
Wheaton, Illinois (e)

 

August 2, 2016

 

10,530

 

All cash

 

(f)

Burlington Coat and Micro Center retail stores,
St. Louis Park, Minnesota (g)

 

August 12, 2016

 

14,150

 

All cash

 

73

 

Land - The Vue Apartments,
Beachwood, Ohio (e)

 

August 16, 2016

 

13,896

 

All cash

 

(h)

Famous Footwear distribution facility,
Lebanon, Tennessee (i)

 

September 1, 2016

 

32,734

 

Cash and $21,288 mortgage (i)

 

193

 

Other costs (j)

 

 

 

 

 

 

14

 

Totals

 

 

 

$

118,578

 

 

 

$

610

 

 

 


 

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

(b)    These properties are adjacent to one another and are each net leased to three unrelated tenants pursuant to leases that expire between 2017 and 2021.

(c)     The property is net leased by a single tenant pursuant to two separate coterminous leases expiring in 2022.

(d)    The new mortgage debt, which was obtained simultaneously with the acquisition of these properties, bears interest at 3.24% per annum, matures July 2026, and is comprised of four individual and cross-collateralized loans. The properties are net leased by a single tenant pursuant to four separate leases, three of which expire in 2026 and one of which expires in 2025.

(e)     These properties are net leased to related entities through 2046. See Note 6.

(f)      Transaction costs aggregating $6 incurred with this asset acquisition were capitalized.

(g)     This property is net leased to two unrelated tenants pursuant to leases expiring between 2019 and 2020.

(h)    Transaction costs aggregating $5 incurred with this asset acquisition were capitalized.

(i)        The new mortgage debt, which was obtained simultaneously with the acquisition of the property, bears interest at 3.7% per annum and matures October 2031. The property is net leased by a single tenant through 2031.

(j)       Costs incurred for properties purchased in 2015 and transactions that were not consummated.

 

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Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016 (Continued)

 

Note 4 — Real Estate Acquisitions (Continued)

 

The following chart provides the allocation of the purchase price for the Company’s acquisitions of real estate during the nine months ended September 30, 2016 (amounts in thousands):

 

 

 

 

 

 

 

Building

 

Intangible Lease

 

 

 

Description of Property

 

Land

 

Building

 

Improvements

 

Asset

 

Liability

 

Total

 

Multi-tenant industrial facility,
Greenville, South Carolina

 

$

693

 

$

6,718

 

$

175

 

$

514

 

$

 

$

8,100

 

Multi-tenant industrial facility,
Greenville, South Carolina

 

528

 

7,893

 

181

 

441

 

(93

)

8,950

 

Toro distribution facility,
El Paso, Texas

 

3,691

 

17,525

 

379

 

2,100

 

 

23,695

 

4 Advanced Auto retail stores,
Ohio

 

653

 

5,012

 

189

 

912

 

(243

)

6,523

 

Land - The Briarbrook Village Apartments, Wheaton, Illinois (a)

 

10,536

 

 

 

 

 

10,536

 

Burlington Coat and Micro Center retail stores,
St. Louis Park, Minnesota (b)

 

3,388

 

12,632

 

456

 

651

 

(2,977

)

14,150

 

Land - The Vue Apartments,
Beachwood, Ohio (c)

 

13,901

 

 

 

 

 

13,901

 

Famous Footwear distribution facility,
Lebanon, Tennessee (b)

 

2,094

 

29,436

 

603

 

3,576

 

(2,975

)

32,734

 

Totals

 

$

35,484

 

$

79,216

 

$

1,983

 

$

8,194

 

$

(6,288

)

$

118,589

 

 


(a)         Transaction costs aggregating $6 incurred with this asset acquisition were capitalized.

(b)         The Company is in the process of finalizing the purchase price allocation for this property; therefore, the allocation is preliminary and subject to change.

(c)          Transaction costs aggregating $5 incurred with this asset acquisition were capitalized.

 

As of September 30, 2016, the weighted average amortization period for these intangible lease assets and intangible lease liabilities is 9.6 years and 13.2 years, respectively. The Company assessed the fair value of the lease intangibles based on estimated cash flow projections that use appropriate discount rates and available market information. Such inputs are Level 3 (as defined in Note 15) in the fair value hierarchy.

 

12



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016 (Continued)

 

Note 4 — Real Estate Acquisitions (Continued)

 

On March 31, 2015, the Company purchased for $6,300,000, its partner’s 50% interest in an unconsolidated joint venture that owned a property in Lincoln, Nebraska, and as a result, the Company obtained a controlling financial interest. In consolidating the investment, the Company recorded a purchase price fair value adjustment of $960,000 on the consolidated statement of income, representing the difference between the book value of its preexisting equity investment on the March 31, 2015 purchase date and the fair value of the net assets acquired.

 

The following table summarizes, on an unaudited pro forma basis, the combined results of operations of the Company for the nine months ended September 30, 2016 and the year ended December 31, 2015 as though the purchases of the nine properties in 2016, excluding the two asset acquisitions (the Wheaton, Illinois and Beachwood, Ohio land deals), were completed on January 1, 2015. The total acquisition costs of $596,000 paid in connection with such 2016 purchases are included as a reduction of net income in the year ended December 31, 2015.  This unaudited proforma information does not purport to represent what the actual results of operations of the Company would have been had such acquisitions occurred as of January 1, 2015.  (Amounts in thousands, except per share data).

 

 

 

Nine Months Ended

 

Year Ended

 

 

 

September 30, 2016

 

December 31, 2015

 

Pro forma revenues

 

$

55,519

 

$

73,037

 

Pro forma net income attributable to One Liberty Properties, Inc.

 

21,128

 

20,560

 

 

 

 

 

 

 

Pro forma weighted average number of common shares outstanding:

 

 

 

 

 

Basic

 

16,605

 

15,971

 

Diluted

 

16,722

 

16,079

 

 

 

 

 

 

 

Pro forma per common share attributable to common stockholders:

 

 

 

 

 

Basic

 

$

1.23

 

$

1.23

 

Diluted

 

$

1.22

 

$

1.23

 

 

Revenues and net income related to these nine properties already included in the results of operations for the nine months ended September 30, 2016 amounted to $2,111,000 and $136,000, respectively.

 

Pro forma unaudited revenues and net income for the two asset acquisitions (not included in the table above) were $2,024,000 and $1,786,000, respectively, for the nine months ended September 30, 2016 and $2,700,000 and $2,344,000, respectively, for the year ended December 31, 2015. Revenues and net income related to these two properties already included in the results of operations for the nine months ended September 30, 2016 amounted to $386,000.

 

13



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016 (Continued)

 

Note 5 — Sale of Properties

 

The following chart details the Company’s sales of real estate during the nine months ended September 30, 2016 (amounts in thousands):

 

 

 

 

 

Gross

 

Gain on Sales of 

 

Description of Property

 

Date Sold

 

Sales Price

 

Real Estate, Net

 

Portfolio of eight retail properties,
Louisiana and Mississippi (a)

 

February 1, 2016

 

$

13,750

 

$

787

 

Retail property,
Killeen, Texas (b)

 

May 19, 2016

 

3,100

 

980

 

Land - River Crossing Apartments,
Sandy Springs, Georgia

 

June 15, 2016

 

8,808

 

2,281

 

Industrial property,
Tomlinson, Pennsylvania (c)

 

June 30, 2016

 

14,800

 

5,660

 

Partial condemnation of land,
Greenwood Village, Colorado (d)

 

July 5, 2016

 

153

 

116

 

Totals

 

 

 

$

40,611

 

$

9,824

 

 


(a)         In connection with the sale, the Company paid off the $7,801 mortgage balance on these properties and incurred a $380 expense for the early termination of the mortgage (included in Prepayment costs on debt) and a $26 write-off of deferred financing costs (included in Amortization and write-off of deferred financing costs).  As a result of the sale, the Company also wrote-off, as a reduction to Gain on sale of real estate, net, $706 of unbilled straight-line rent receivable, $79 of intangible lease assets and $54 of tenant origination costs.  At December 31, 2015, the Company classified the net book value of the land and buildings, intangible lease assets and tenant origination costs totaling $12,259 as Properties held-for-sale.

 

(b)         As a result of the sale, the Company wrote-off, as a reduction to Gain on sale of real estate, net, $37 of unbilled straight-line rent receivable.

 

(c)          In connection with the sale, the Company paid off the $5,272 mortgage balance on this property and incurred a $154 swap termination fee (included in Prepayment costs on debt) and a $30 write-off of deferred financing costs (included in Amortization and write-off of deferred financing costs).  As a result of the sale, the Company wrote-off, as a reduction to Gain on sale of real estate, net, $1,262 of unbilled straight-line rent  receivable, $36 of intangible lease assets and $75 of tenant origination costs.

 

(d)         Of an aggregate of $509 (of which $466 the Company has received from the Colorado Department of Transportation (“CDOT”), and $43 that CDOT has advised it will remit to the Company), $153 is attributable to the partial condemnation of land. The Company recognized a $116 Gain on sale of real estate, net, as a result of this partial condemnation. See Note 8 for information regarding the $356 balance.

 

On January 13, 2015, a consolidated joint venture of the Company sold a property located in Cherry Hill, New Jersey for $16,025,000, net of closing costs.  The sale resulted in a gain of $5,392,000, recorded as Gain on sale of real estate, net, for the nine months ended September 30, 2015. In connection with the sale, the Company paid off the $7,376,000 mortgage balance on this property and incurred a $472,000 swap termination fee (included in Prepayment costs on debt) and a $249,000 write-off of deferred financing costs (included in Amortization and write-off of deferred financing costs). The non-controlling interest’s share of income from the transaction was $1,320,000 and is included in net income attributable to non-controlling interests.

 

14



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016 (Continued)

 

Note 6 — Variable Interest Entities, Contingent Liabilities and Consolidated Joint Ventures

 

Variable Interest Entities — Ground Leases

 

The following chart details the Company’s variable interest entities through its ground leases at September 30, 2016 (dollars in thousands):

 

 

 

 

 

 

 

Improved by

 

 

 

 

 

 

 

Contract

 

# Units in

 

Owner/Operator

 

 

 

 

 

Purchase

 

Apartment

 

Mortgage from

 

Description of Property

 

Date Acquired

 

Price

 

Complex (a)

 

Third Party (b)

 

Land - The Meadows Apartments,
Lakemoor, Illinois

 

March 24, 2015

 

$

9,300

 

496

 

$

43,824

 

Land - The Briarbrook Village Apartments, Wheaton, Illinois

 

August 2, 2016

 

10,530

 

342

 

39,411

 

Land - The Vue Apartments,
Beachwood, Ohio

 

August 16, 2016

 

13,896

 

348

 

67,444

 

Totals

 

 

 

$

33,726

 

1,186

 

$

150,679

 

 


(a)         With each purchase, the Company simultaneously entered into a triple net ground lease with the owner/operator of the applicable complex.  Affiliates of Strategic Properties of North America are the owner/operators of these properties.

 

(b)         Simultaneously with the closing of each acquisition, the owner/operator obtained a mortgage from a third party which, together with the Company’s purchase of the land, provided substantially all of the aggregate funds to acquire the complex.  The Company provided its land as collateral for the respective owner/operator’s mortgage loans; accordingly, each land position is subordinated to the applicable mortgage. Other than as described above, no other financial support has been provided by the Company to the owner/operator.

 

Pursuant to the terms of the ground lease for the Wheaton, Illinois property, the owner/operator is obligated to make certain unit renovations as and when units become vacant. The cash reserve balance for the property was $836,000 at September 30, 2016 and is classified as Restricted cash on the consolidated balance sheet.  The cash reserve balance for a similarly structured transaction in Sandy Springs, Georgia was $1,074,000 at December 31, 2015 and such balance was disbursed to the owner/operator in connection with the sale of the property in June 2016. See Note 5.

 

The Company determined that it has a variable interest through its ground leases and the owner/operators are VIEs because their equity investment at risk is insufficient to finance its activities without additional subordinated financial support.  The Company further determined that for each acquisition it is not the primary beneficiary because the Company has shared power over the activities that most significantly impact the owner/operator’s economic performance (i.e., shared rights on the sale of the property) and therefore, does not consolidate the VIEs for financial statement purposes.  Accordingly, the Company accounts for these investments as land and the revenues from the ground leases as Rental income, net.  Such rental income

 

15



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016 (Continued)

 

Note 6 — Variable Interest Entities, Contingent Liabilities and Consolidated Joint Ventures (Continued)

 

amounted to $663,000 and $1,525,000 for the three and nine months ended September 30, 2016, respectively, and $454,000 and $1,166,000 for the three and nine months ended September 30, 2015, respectively. Included in these amounts is rental income from the Sandy Springs, Georgia property, amounting to $0 and $308,000 for the three and nine months ended September 30, 2016, respectively, and $232,000 and $697,000 for the three and nine months ended September 30, 2015, respectively.

 

The following is a summary of the Company’s variable interests in identified VIEs, in which it is not the primary beneficiary, and the aggregate carrying amount and maximum exposure to loss as of September 30, 2016 (amounts in thousands):

 

 

 

 

 

Carrying Amount and

 

Property

 

Type of Exposure

 

Maximum Exposure to Loss

 

The Meadows Apartments,
Lakemoor, Illinois

 

Land

 

$

9,592

 

The Briarbrook Village Apartments,
Wheaton, Illinois

 

Land

 

10,536

 

The Vue Apartments,
Beachwood, Ohio

 

Land

 

13,901

 

Total

 

 

 

$

34,029

 

 

Variable Interest Entity — Consolidated Joint Ventures

 

A joint venture in which the Company has a 95% equity interest, acquired a property located in Joppa, Maryland.  The Company also had a senior preferred equity interest until May 2016 when the joint venture obtained a mortgage on its property and a portion of such mortgage proceeds was used to repay the $6,280,000 preferred interest to the Company, including accrued interest of $455,000. The Company had historically determined that this joint venture was a VIE.  As a result of the adoption of ASU 2015-02, the Company re-assessed its evaluation and determined this venture remains a VIE as the non-controlling interest does not hold substantive kick-out or participating rights.

 

With respect to the six other consolidated joint ventures in which the Company holds between an 85% to 95% interest, the Company had historically determined that such ventures were not VIEs.  As a result of the adoption of ASU 2015-02, the Company re-assessed its evaluation of these investments and determined such ventures are VIEs because the non-controlling interests do not hold substantive kick-out or participating rights.

 

16



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016 (Continued)

 

Note 6 — Variable Interest Entities, Contingent Liabilities and Consolidated Joint Ventures (Continued)

 

In each of these seven joint ventures, the Company has determined it is the primary beneficiary of the VIE as it has the power to direct the activities that most significantly impact each joint venture’s performance including management, approval of expenditures, and the obligation to absorb the losses or rights to receive benefits.  Accordingly, the Company has continued to consolidate the operations of these joint ventures for financial statement purposes.  The joint ventures’ creditors do not have recourse to the assets of the Company other than those held by these joint ventures.

 

The following is a summary of the consolidated VIEs’ carrying amounts and classification in the Company’s consolidated balance sheets, none of which are restricted (amounts in thousands):

 

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

Land

 

$

18,400

 

$

18,400

 

Buildings and improvements, net of depreciation of $2,907 and $2,076, respectively

 

34,349

 

34,287

 

Cash

 

1,869

 

1,960

 

Unbilled rent receivable

 

935

 

330

 

Unamortized intangible lease assets, net

 

1,694

 

1,996

 

Escrow, deposits and other assets and receivables

 

1,596

 

752

 

Mortgages payable, net of deferred financing costs of $640 and $438, respectively

 

36,062

 

25,926

 

Accrued expenses and other liabilities

 

1,274

 

793

 

Unamortized intangible lease liabilities, net

 

2,247

 

2,392

 

Accumulated other comprehensive loss

 

(282

)

(126

)

Non-controlling interests in consolidated joint ventures

 

1,750

 

1,931

 

 

MCB Real Estate, LLC and its affiliates (“MCB”) are the Company’s joint venture partner in five consolidated joint ventures. At September 30, 2016, the Company has aggregate equity investments of approximately $10,313,000 in such ventures.

 

A joint venture with MCB, in which the Company has a net equity investment of $2,768,000, owns a property formerly operated as a Pathmark supermarket in Philadelphia, Pennsylvania. In July 2015, this tenant filed for Chapter 11 bankruptcy protection, rejected the lease, and in late September 2015, vacated the property. This tenant accounted for approximately 1.3% of the Company’s rental income for each of the three and nine months ended September 30, 2015.  At September 30, 2016, the mortgage debt on, and the net book value of, such property is $4,426,000 and $7,205,000, respectively. The Company has determined that no impairment charge is required currently with respect to this property.

 

Distributions to each joint venture partner are determined pursuant to the applicable operating agreement and may not be pro rata to the equity interest each partner has in the applicable venture.

 

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Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016 (Continued)

 

Note 7 — Investment in Unconsolidated Joint Ventures

 

At September 30, 2016 and December 31, 2015, the Company’s equity investments in its five unconsolidated joint ventures (each of which owns and operates one property) and which are not considered VIEs (see Note 2), totaled $10,993,000 and $11,350,000, respectively. The Company recorded equity in earnings of $228,000 and $794,000 for the three and nine months ended September 30, 2016, respectively, and equity in earnings of $347,000 and $311,000 for the three and nine months ended September 30, 2015, respectively. Earnings for the nine months ended September 30, 2015 are net of the Company’s $400,000 share of the acquisition expenses associated with the June 2015 purchase of a property located in Manahawkin, New Jersey.

 

Note 8 - Other Income Items

 

Other income

 

Since July 2016, the Company received $466,000 from CDOT, and has been advised by CDOT that it will remit to the Company an additional $43,000 as a result of a partial condemnation of land and easements obtained by CDOT at the Company’s Greenwood Village, Colorado property. Of this aggregate of $509,000, $356,000 is attributable to easements and is included in Other income on the Consolidated statements of income for the three and nine months ended September 30, 2016. See Note 5 regarding the $153,000 balance which is attributable to the related partial condemnation of land.

 

Lease termination fee

 

In March 2015, the Company received a $650,000 lease termination fee from an industrial tenant in a lease buy-out transaction.  In connection with the receipt of this fee, the Company wrote-off $226,000 as an offset to rental income, representing the entire balance of the unbilled rent receivable related to the sole tenant at this property.  The Company re-leased this property simultaneously with the termination of the lease.

 

Note 9 — Allowance for Doubtful Accounts

 

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of a tenant to make required rent payments.  If the financial condition of a specific tenant were to deteriorate, adversely impacting its ability to make payments, allowances may be required.  At September 30, 2016 and December 31, 2015, there was no balance in allowance for doubtful accounts.

 

The Company records bad debt expense as a reduction of rental income and/or tenant reimbursements. On March 2, 2016, Sports Authority Inc., the tenant at the Company’s Greenwood Village, Colorado property, filed for Chapter 11 bankruptcy protection and on June 30, 2016, such tenant vacated the property. This tenant accounted for less than 1% of the Company’s rental income for the nine months ended September 30, 2016, and for the three and

 

18



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016 (Continued)

 

Note 9 — Allowance for Doubtful Accounts (Continued)

 

nine months ended September 30, 2015.  For the nine months ended September 30, 2016, the Company recorded an aggregate bad debt expense of $190,000, relating to rental income and tenant reimbursements due from this tenant.  There was no bad debt expense in the three months ended September 30, 2016. The Company has determined that no impairment charge is required with respect to this property, which at September 30, 2016, had a net book value of $2,651,000.

 

Note 10 — Debt Obligations

 

Mortgages Payable

 

On January 1, 2016, the Company adopted ASU 2015-03, Interest — Imputation of Interest — Simplifying the Presentation of Debt Issuance Costs, which amends the balance sheet presentation for debt issuance costs.  Under the amended guidance, a company will present unamortized debt issuance costs as a direct deduction from the carrying amount of that debt liability with retrospective application for all prior periods presented.

 

As a result of the adoption of this guidance, the following table depicts the adjustments to the Company’s previously reported consolidated balance sheet amounts at December 31, 2015 (amounts in thousands):

 

 

 

As Previously

 

 

 

 

 

Reported

 

As Adjusted

 

Unamortized deferred financing costs, net

 

$

3,914

 

$

 

Escrow, deposits and other assets and receivables

 

4,233

 

4,268

 

Total assets

 

650,378

 

646,499

 

Mortgages payable

 

334,428

 

331,055

 

Line of credit

 

18,250

 

17,744

 

Total liabilities

 

387,952

 

384,073

 

Total liabilities and equity

 

650,378

 

646,499

 

 

The following table details the Mortgages payable, net, balances per the consolidated balance sheets at September 30, 2016 and December 31, 2015 (amounts in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

Mortgages payable, gross

 

$

400,794

 

$

334,428

 

Unamortized deferred financing costs

 

(4,118

)

(3,373

)

Mortgages payable, net

 

$

396,676

 

$

331,055

 

 

At September 30, 2016 and December 31, 2015, $13,000 and $35,000, respectively, is included in other assets on the consolidated balance sheets representing unamortized deferred financing costs incurred for which the related mortgage debt has not yet been incurred.

 

19



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016 (Continued)

 

Note 10 — Debt Obligations (Continued)

 

Line of Credit

 

The Company has a $75,000,000 credit facility with Manufacturers & Traders Trust Company, VNB New York, LLC, Bank Leumi USA and Israel Discount Bank of New York which matures December 31, 2018.  The facility provides that the Company pay an interest rate equal to the one month LIBOR rate plus an applicable margin ranging from 175 basis points to 300 basis points depending on the ratio of the Company’s total debt to total value, as determined pursuant to the facility.   The applicable margin was 175 basis points at September 30, 2016 and 2015.   An unused facility fee of .25% per annum applies to the facility.  The average interest rate on the facility was approximately 2.20% and 1.93% for the nine months ended September 30, 2016 and 2015, respectively, and 2.24% and 1.94% for the three months ended September 30, 2016 and 2015, respectively.  The Company was in compliance with all covenants at September 30, 2016.

 

The following table details the Line of credit, net, balances per the consolidated balance sheets at September 30, 2016 and December 31, 2015 (amounts in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

Line of credit, gross

 

$

22,800

 

$

18,250

 

Unamortized deferred financing costs

 

(380

)

(506

)

Line of credit, net

 

$

22,420

 

$

17,744

 

 

At November 3, 2016, there was an outstanding balance of $22,800,000 (before unamortized deferred financing costs) under the facility.

 

Note 11 — Related Party Transactions

 

In 2007, the Company entered into a compensation and services agreement with Majestic Property Management Corp. (“Majestic”), a company wholly-owned by the Company’s Vice Chairman and in which certain of the Company’s executive officers are officers and receive compensation.  Pursuant to the agreement, the Company pays an annual fee to Majestic and Majestic provides the Company with the services of all affiliated executive, administrative, legal, accounting, clerical and property management personnel, as well as property acquisition, sale and lease consulting and brokerage services, consulting services in respect to mortgage financings and construction supervisory services.

 

20



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016 (Continued)

 

Note 11 — Related Party Transactions (Continued)

 

In consideration for providing the Company the services described above, the Company paid Majestic $678,000 and $2,002,000 (including property management fees of $267,000 and $770,000) for the three and nine months ended September 30, 2016, respectively.  For the three and nine months ended September 30, 2015, such fees were $634,000 and $1,901,000 (including property management fees of $223,000 and $669,000, respectively).  The three and nine months ended September 30, 2016 and 2015 includes overhead fees of $49,000 and $147,000, respectively.

 

Effective January 1, 2016, the property management fee portion of the compensation and services agreement is paid based on 1.5% and 2.0% of the rental payments (including tenant reimbursements) actually received by the Company from net lease tenants and operating lease tenants, respectively.  The Company does not pay Majestic property management fees with respect to properties managed by third parties.

 

For 2016 and 2015, the Company agreed to pay quarterly fees of $65,625 to the Company’s chairman and $26,250 to the Company’s vice-chairman.

 

Executive officers and others providing services under the compensation and services agreement were awarded shares of restricted stock and restricted stock units under the Company’s stock incentive plans (described in Note 14).  The costs of the plans charged to the Company’s operations applicable to the executive officers and others providing services under the compensation and services agreement amounted to $399,000 and $1,125,000 for the three and nine months ended September 30, 2016, respectively, and $307,000 and $930,000 for the three and nine months ended September 30, 2015, respectively.

 

The fees paid under the compensation and services agreement (except for the property management fees which are included in Real estate expenses), the chairman and vice-chairman fees and the costs of the stock incentive plans are included in General and administrative expense on the consolidated statements of income.

 

The Company obtains its property insurance in conjunction with Gould Investors L.P (“Gould”), a related party and reimburses Gould annually for the Company’s insurance cost relating to its properties. Amounts reimbursed to Gould were $699,000 during the three and nine months ended September 30, 2016 and $513,000 during the three and nine months ended September 30, 2015. Included in Real estate expenses on the consolidated statements of income is insurance expense of $169,000 and $371,000 for the three and nine months ended September 30, 2016, respectively, and $121,000 and $235,000 for the three and nine months ended September 30, 2015, respectively. The balance of the amounts reimbursed to Gould represents prepaid insurance and is included in Other assets on the consolidated balance sheets.

 

During the three and nine months ended September 30, 2016 and 2015, the Company paid an aggregate of $35,000, $123,000, $29,000 and $167,000, respectively, to its joint

 

21



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016 (Continued)

 

Note 11 — Related Party Transactions (Continued)

 

venture partners or their affiliates (none of whom are officers, directors or employees of the Company) for property management and acquisition fees, which are included in Real estate expenses and Real estate acquisition costs on the consolidated statements of income.  Additionally, in the three and nine months ended September 30, 2016 and 2015, unconsolidated joint ventures of the Company paid fees of $55,000, $127,000, $35,000 and $361,000 to the other partner of the venture, which reduced Equity in earnings of unconsolidated joint ventures on the consolidated statements of income by $27,000, $63,000, $18,000 and $181,000, respectively.

 

Note 12 — Common Stock Cash Dividend

 

On September 12, 2016, the Board of Directors declared a quarterly cash dividend of $.41 per share on the Company’s common stock, totaling $7,245,000. The quarterly dividend was paid on October 6, 2016 to stockholders of record on September 27, 2016.

 

Note 13 — 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 nine months ended September 30, 2016, the Company sold 607,701 shares for proceeds of $14,408,000, net of commissions of $146,000, and incurred offering costs of $111,000 for professional fees.  Subsequent to September 30, 2016 and through October 5, 2016, the Company sold 11,057 shares for proceeds of $268,000, net of commissions of $3,000.

 

Note 14 — Stock Based Compensation

 

The Company’s 2016 Incentive Plan, approved by the Company’s stockholders in June 2016, permits the Company to grant, among other things, stock options, restricted stock units, performance share awards and dividend equivalent rights and any one or more of the foregoing to its employees, officers, directors and consultants. A maximum of 750,000 shares of the Company’s common stock is authorized for issuance pursuant to this Plan, none of which have been issued. An aggregate of 804,750 shares of restricted stock and restricted stock units are outstanding under the Company’s 2012 and 2009 equity incentive plans (collectively, the “Prior Plans”) and have not yet vested.  No additional awards may be granted under the Prior Plans. 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.

 

Pursuant to the Pay-for-Performance program, there are 200,000 performance share awards in the form of restricted stock units (the “Units”) outstanding under the Company’s 2009 Incentive Plan. 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

 

22



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016 (Continued)

 

Note 14 — Stock Based Compensation (Continued)

 

shares underlying the Units are not included in the shares shown as outstanding on the balance sheet.  No Units were forfeited or vested during the nine months ended September 30, 2016.

 

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Restricted share grants

 

 

 

139,225

 

129,975

 

Per share grant price

 

 

 

$

21.74

 

$

24.60

 

Deferred compensation to be recognized over vesting period

 

 

 

$

3,027,000

 

$

3,197,000

 

Number of non-vested shares:

 

 

 

 

 

 

 

 

 

Non-vested beginning of period

 

605,000

 

538,990

 

538,755

 

480,995

 

Grants

 

 

 

139,225

 

129,975

 

Vested during period

 

 

 

(72,730

)

(71,980

)

Forfeitures

 

(250

)

 

(500

)

 

Non-vested end of period

 

604,750

 

538,990

 

604,750

 

$

538,990

 

 

The following information includes the 200,000 Units:

 

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

 

$

18.00

 

$

17.12

 

$

18.00

 

$

17.12

 

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

 

$

 

$

 

$

1,177,000

 

$

607,000

 

Average value of shares forfeited during the period (based on grant price)

 

$

21.05

 

$

 

$

21.05

 

$

 

The total charge to operations for all incentive plans is as follows:

 

 

 

 

 

 

 

 

 

Outstanding restricted stock grants

 

$

639,000

 

$

550,000

 

$

1,930,000

 

$

1,653,000

 

Outstanding restricted stock units

 

131,000

 

30,000

 

246,000

 

89,000

 

Total charge to general and administrative expense on the income statement

 

$

770,000

 

$

580,000

 

$

2,176,000

 

$

1,742,000

 

 

As of September 30, 2016, there were approximately $6,758,000 of total compensation costs related to non-vested awards that have not yet been recognized, including $110,000 related to the Units (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 2.0 years.

 

23



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016 (Continued)

 

Note 15 — 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 (excluding available-for-sale securities), dividends payable, and accrued expenses and other liabilities (excluding interest rate swaps), are not measured at fair value on a recurring basis, but are considered to be recorded at amounts that approximate fair value.

 

At September 30, 2016, the $419,854,000 estimated fair value of the Company’s mortgages payable is greater than their $400,794,000 carrying value (before unamortized deferred financing costs) by approximately $19,060,000 assuming a blended market interest rate of 3.6% based on the 9.7 year weighted average remaining term to maturity of the mortgages.  At December 31, 2015, the $346,614,000 estimated fair value of the Company’s mortgages payable is greater than their $334,428,000 carrying value (before unamortized deferred financing costs) by approximately $12,186,000 assuming a blended market interest rate of 4.07% based on the 8.9 year weighted average remaining term to maturity of the mortgages.

 

At September 30, 2016 and December 31, 2015, the carrying amount of the Company’s line of credit (before unamortized deferred financing costs) of $22,800,000 and $18,250,000, respectively, 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.

 

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Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016 (Continued)

 

Note 15 — Fair Value Measurements (Continued)

 

Fair Value on a Recurring Basis

 

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

 

 

 

 

 

 

 

Fair Value Measurements

 

 

 

 

 

Carrying and

 

on a Recurring Basis

 

 

 

As of

 

Fair Value

 

Level 1

 

Level 2

 

Financial assets:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Equity securities

 

September 30, 2016

 

$

 

$

 

$

 

 

 

December 31, 2015

 

32

 

32

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

September 30, 2016

 

$

9,489

 

$

 

$

9,489

 

 

 

December 31, 2015

 

4,299

 

 

4,299

 

 

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

 

Available-for-sale securities

 

At December 31, 2015, the Company’s available-for-sale securities was a $32,000 investment in equity securities (included in other assets on the consolidated balance sheet). The aggregate cost of these securities was $5,300 and at December 31, 2015, the unrealized gain of $27,000 was included in accumulated other comprehensive loss on the consolidated balance sheet.  Fair value was approximated based on current market quotes from financial sources that track such securities. During the nine months ended September 30, 2016, the Company sold such equity securities for gross proceeds of $33,000 and recognized a gain of $27,000 (included in other income on the consolidated statement of income).

 

Derivative financial instruments

 

The Company’s objective in using interest rate swaps is to add stability to interest expense and to manage its exposure to interest rate movements. The Company does not use derivatives for trading or speculative purposes.

 

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

 

25



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016 (Continued)

 

Note 15 — Fair Value Measurements (Continued)

 

the likelihood of default by the Company and its counterparty.  As of September 30, 2016, the Company has assessed and determined the impact of the credit valuation adjustments on the overall valuation of its derivative positions are not significant.  As a result, the Company determined that its derivative valuation is classified in Level 2 of the fair value hierarchy.

 

As of September 30, 2016, the Company had entered into 30 interest rate derivatives, all of which were interest rate swaps, related to 30 outstanding mortgage loans with an aggregate $142,780,000 notional amount and mature between 2018 and 2028 (weighted average remaining term to maturity of 8.1 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 3.02% to 5.75% and a weighted average interest rate of 4.13% at September 30, 2016).  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 $0 and $9,489,000, respectively, at September 30, 2016, and $0 and $4,299,000, respectively, at December 31, 2015.

 

Three of the Company’s unconsolidated joint ventures, in which wholly-owned subsidiaries of the Company are 50% partners, had two interest rate derivatives outstanding at September 30, 2016 with an aggregate $10,810,000 notional amount.  These interest rate swaps, which were designated as cash flow hedges, have interest rates of 3.49% and 5.81% and mature in 2022 and 2018, respectively.

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

One Liberty Properties, Inc. and Consolidated Subsidiaries

 

 

 

 

 

 

 

 

 

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

 

$

385

 

$

(3,609

)

$

(7,197

)

$

(4,500

)

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

 

(633

)

(574

)

(2,020

)

(1,921

)

 

 

 

 

 

 

 

 

 

 

Unconsolidated Joint Ventures (Company’s share)

 

 

 

 

 

 

 

 

 

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

 

$

21

 

$

(122

)

$

(164

)

(147

)

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

 

(23

)

(29

)

(72

)

(80

)

 

26



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016 (Continued)

 

Note 15 — Fair Value Measurements (Continued)

 

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 nine months ended September 30, 2016 and 2015.  During the twelve months ending September 30, 2017, the Company estimates an additional $2,168,000 will be reclassified from other Accumulated other comprehensive loss as an increase to Interest expense and $81,600 will be reclassified from Accumulated other comprehensive loss as a decrease to Equity in earnings of unconsolidated joint ventures.

 

The derivative agreements in effect at September 30, 2016 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 there is a default by the subsidiary on the loan subject to the derivative agreement to which the Company is a party and if there are swap breakage losses on account of the derivative being terminated early, then the Company could be held liable for such swap breakage losses, if any.  During the nine months ended September 30, 2016, the Company terminated three interest rate swaps in connection with the early payoff of the related mortgages, and during the nine months ended September 30, 2015, the Company terminated one interest rate swap in connection with the sale of its Cherry Hill, New Jersey property. The Company accelerated the reclassification of amounts in other comprehensive loss to earnings as a result of these hedged forecasted transactions being terminated.  The accelerated amounts were losses of $178,000 and $472,000 during the nine months ended September 30, 2016 and 2015, respectively, all of which are included in Prepayment costs on debt on the consolidated statements of income.  There were no such accelerated amounts in the three months ended September 30, 2016 and 2015.

 

As of September 30, 2016, the fair value of the derivatives in the liability position, including accrued interest but excluding any adjustments for nonperformance risk, was approximately $10,257,000.  In the 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 $10,257,000.  This termination liability value, net of $601,000 adjustments for nonperformance risk, or $9,656,000, is included in Accrued expenses and other liabilities on the consolidated balance sheet at September 30, 2016.

 

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Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016 (Continued)

 

Note 16 — New Accounting Pronouncements

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), which provides specific guidance on eight cash flow classification issues and how to reduce diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The effective date of the standard will be fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the new guidance to determine the impact, if any, it may have on its consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The effective date of the standard will be fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the new guidance to determine the impact, if any, it may have on its consolidated financial statements.

 

Also in March 2016, the FASB issued ASU No. 2016-05, Derivatives and Hedging (Topic 815), Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, which states the novation of a derivative contract (i.e., a change in the counterparty) in a hedge accounting relationship does not, in and of itself, require dedesignation of that hedge accounting relationship. The hedge accounting relationship could continue uninterrupted if all of the other hedge accounting criteria are met, including the expectation that the hedge will be highly effective when the creditworthiness of the new counterparty to the derivative contract is considered. The effective date of the standard will be fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, and early adoption is permitted. The Company is currently evaluating the new guidance to determine the impact, if any, it may have on its consolidated financial statements.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016 (Continued)

 

Note 16 — New Accounting Pronouncements (Continued)

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The effective date of the standard will be fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and early adoption is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the new guidance to determine the impact it may have on its consolidated financial statements.

 

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations: Simplifying the Accounting for Measurement Period Adjustments, which eliminates the requirement for an acquirer in a business combination to account for measurement period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The effective date of the standard is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  The Company adopted this guidance on January 1, 2016 and its adoption did not have any impact on its consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The standard can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption.  In July 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. In accordance with the agreed upon delay, the new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted but not before annual periods beginning after December 15, 2016. The Company is currently assessing the impact that this updated standard will have on its consolidated financial statements.  In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The effective date for ASU 2016-08 is the same as the effective date for ASU 2014-09. The Company is currently evaluating these new standards to determine the impact, if any, it may have on its consolidated financial statements.

 

Note 17 — Subsequent Events

 

Subsequent events have been evaluated and except as disclosed in Note 8 (Other Income Items), Note 10 (Debt Obligations), Note 12 (Common Stock Cash Dividend) and Note 13 (Shares Issued Through Equity Offering Program), there were no other events relative to the Company’s consolidated financial statements that require additional disclosure.

 

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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, 2015 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.

 

Acquisitions, Financings and Other Developments During the Three Months ended September 30, 2016

 

We acquired four properties for an aggregate purchase price of $71.3 million. These acquisitions contributed $785,000 of rental income, $125,000 of depreciation expense and $66,000 of mortgage interest expense during the three months ended September 30, 2016. We estimate that commencing October 1, 2016, the rental income from these four properties will be $1.6 million per quarter, depreciation expense will be $393,000 per quarter and mortgage interest expense will be $197,000 per quarter.

 

We obtained $47.4 million of gross proceeds from mortgage financings with a weighted average interest rate of 3.7% and a weighted average remaining term to maturity of 10.9 years.

 

We raised $8.5 million from the issuance of 349,000 shares of common stock pursuant to our at-the-market equity offering program and issued 38,000 shares of common stock through our dividend reinvestment program in lieu of paying dividends of approximately $880,000.

 

Since July 2016, we received $466,000 from the Colorado Department of Transportation (“CDOT”), and have been advised by CDOT that it will remit to us an additional $43,000 as a result of a partial condemnation of land and easements obtained by CDOT at our Greenwood Village, Colorado property. Of this aggregate of $509,000, $356,000 is attributable to easements and is included in Other income on the Consolidated statements of income for the three and nine months ended September 30, 2016 and $153,000 of the balance is attributable to the related partial condemnation of land, resulting in a $116,000 gain. We may seek additional compensation from CDOT for this condemnation, although no assurance can be given that such additional compensation will be obtained.

 

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Overview

 

We are a self-administered and self-managed real estate investment trust, incorporated 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, and health and fitness properties, many of which are leased under long-term leases.  As of September 30, 2016, we own 120 properties (including seven properties owned by consolidated joint ventures and five properties owned by unconsolidated joint ventures) located in 30 states.  Based on square footage, our occupancy rate at September 30, 2016 is approximately 98.4%.

 

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 favorable terms 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.

 

We seek to manage the risk of our real property portfolio and the related financing arrangements by diversifying among types of properties, industries, locations, tenants, scheduled lease expirations and lenders.  We also use interest rate swaps to limit interest rate risk.  All of our mortgage debt, after giving effect to interest rate swap agreements, bears interest at fixed rates, eliminating our exposure to interest rate fluctuations on our outstanding mortgage debt.

 

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.

 

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 are sensitive to the risks facing the retail industry as a result of the growth of e-commerce.  We are addressing our exposure to the retail industry by seeking to acquire properties that we believe capitalize on e-commerce activities, such as e-commerce distribution and warehousing facilities - however, we intend to continue to acquire retail properties as we deem appropriate. Approximately 49.4% of our contractual rental income (as described below) is derived from retail tenants, including 8.9%, 5.8%, 3.7% and 3.7% from tenants engaged in

 

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retail furniture, restaurants, office supply activities and supermarkets, respectively.

 

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 contractual rental income is approximately $65.9 million and represents, after giving effect to any abatements, concessions or adjustments, the base rent payable to us during the 12 months ended September 30, 2017 under leases in effect at September 30, 2016. Contractual rental income excludes (i) approximately $1.0 million of straight-line rent and $998,000 of amortization of intangibles; and (ii) our share of the rental income payable to our unconsolidated joint ventures, which is approximately $2.7 million.

 

The following table sets forth scheduled lease expirations at our properties as of September 30, 2016 for the periods indicated below:

 

Lease Expiration (1)
12 Months Ending 
September 30,

 

Number of
Expiring 
Leases

 

Approximate Square
Footage Subject to
Expiring Leases

 

Contractual
Rental Income Under
Expiring Leases

 

Percent of 
Contractual Rental 
Income
Represented by
Expiring Leases

 

2017

 

10

 

135,996

 

$

436,683

 

0.7

%

2018

 

22

 

248,464

 

2,690,413

 

4.1

 

2019

 

18

 

434,757

 

3,734,416

 

5.7

 

2020

 

11

 

175,547

 

3,246,984

 

4.9

 

2021

 

21

 

569,413

 

4,604,064

 

7.0

 

2022

 

19

 

2,336,683

 

15,989,511

 

24.3

 

2023

 

5

 

516,260

 

2,568,863

 

3.9

 

2024

 

8

 

360,248

 

3,663,015

 

5.5

 

2025

 

8

 

448,520

 

5,067,451

 

7.7

 

2026

 

11

 

325,116

 

5,014,141

 

7.6

 

2027 and thereafter

 

29

 

3,169,793

 

18,889,226

 

28.6

 

 

 

162

 

8,720,797

 

$

65,904,767

 

100.0

%

 


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

 

Revenues

 

The following table compares revenues for the periods indicated:

 

 

 

Three Months Ended
September 30,

 

Increase

 

%

 

Nine Months Ended
September 30,

 

Increase

 

%

 

(Dollars in thousands)

 

2016

 

2015

 

(Decrease)

 

Change

 

2016

 

2015

 

(Decrease)

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income, net

 

$

16,334

 

$

15,273

 

$

1,061

 

6.9

%

$

46,985

 

$

44,159

 

$

2,826

 

6.4

%

Tenant reimbursements

 

1,687

 

835

 

852

 

102.0

 

4,614

 

2,407

 

2,207

 

91.7

 

Lease termination fee

 

 

 

 

 

 

650

 

(650

)

(100.0

)

Total revenues

 

$

18,021

 

$

16,108

 

$

1,913

 

11.9

 

$

51,599

 

$

47,216

 

$

4,383

 

9.3

 

 

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Rental income, net.  The increases are due primarily to (i) $2.1 million and $4.9 million in the three and nine months ended September 30, 2016, respectively, generated by properties acquired in 2016 and 2015; (ii) $68,000 and $289,000 in the three and nine months ended September 30, 2016, respectively, from three replacement tenants that leased vacant space at one of our El Paso, Texas properties; and (iii) the write-off in the nine months ended September 30, 2015 of straight-line rent of $226,000 related to the lease termination fee described below.

 

Offsetting these increases are decreases of (i) $887,000 and $1.7 million in the three and nine months ended September 30, 2016, respectively, due to the 2016 sale of 11 properties (the “Sold Properties”), including a portfolio of eight convenience stores (the “Pantry Portfolio”); (ii) $145,000 in the nine months ended September 30, 2016, as we did not commence recognizing rental income from a new tenant until April 1, 2016 at our Joppa, Maryland property at which the prior tenant’s lease expired on December 31, 2015 and (iii) $311,000 and $713,000 in the three and nine months ended September 30, 2016, respectively, from two vacant properties that in the corresponding prior year periods, were leased to Pathmark and Sports Authority. Pathmark filed for Chapter 11 bankruptcy protection, vacated the property and ceased paying rent in September 2015 and Sports Authority filed for Chapter 11 bankruptcy protection in January 2016 and vacated the property and stopped paying rent June 30, 2016.

 

Tenant reimbursements.  Real estate tax and operating expense reimbursements in the three and nine months ended September 30, 2016 increased by (i) $469,000 and $1.1 million, respectively, from 12 properties acquired in 2016 and 2015 and (ii) $383,000 and $1.1 million, respectively, from other properties in our portfolio.  We recognized an equivalent amount of real estate expense for these tenant reimbursements.

 

Lease termination fee.   In March 2015, we received a lease termination fee of $650,000 from an industrial tenant in a lease buy-out transaction.  We re-leased the property simultaneously with the lease termination.

 

Operating Expenses

 

The following table compares operating expenses for the periods indicated:

 

 

 

Three Months Ended
September 30,

 

Increase

 

%

 

Nine Months Ended
September 30,

 

Increase

 

%

 

(Dollars in thousands)

 

2016

 

2015

 

(Decrease)

 

Change

 

2016

 

2015

 

(Decrease)

 

Change

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

4,663

 

$

4,435

 

$

228

 

5.1

%

$

13,246

 

$

12,090

 

$

1,156

 

9.6

%

General and administrative

 

2,681

 

2,350

 

331

 

14.1

 

7,961

 

7,132

 

829

 

11.6

 

Real estate expenses

 

2,188

 

1,415

 

773

 

54.6

 

6,521

 

4,022

 

2,499

 

62.1

 

Real estate acquisition costs

 

162

 

90

 

72

 

80.0

 

610

 

417

 

193

 

46.3

 

Federal excise and state taxes

 

43

 

68

 

(25

)

(36.8

)

198

 

266

 

(68

)

(25.6

)

Leasehold rent

 

77

 

77

 

 

 

231

 

231

 

 

 

Total operating expenses

 

9,814

 

8,435

 

1,379

 

16.3

 

28,767

 

24,158

 

4,609

 

19.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

8,207

 

$

7,673

 

$

534

 

7.0

 

$

22,832

 

$

23,058

 

$

(226

)

(1.0

)

 

Depreciation and amortization.  Approximately $654,000 and $1.6 million, respectively, of the increases for the three and nine months ended September 30, 2016 are due to depreciation expense on 15 of the 18 properties acquired in 2016 and 2015, and approximately $122,000 and $309,000, respectively, from amortization of property improvements placed in

 

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service during 2016 and 2015. Offsetting these increases are decreases in the three and nine months ended September 30, 2016 of (i) $135,000 and $300,000, respectively, of expenses related to the Sold Properties and (ii) $440,000 and $558,000, respectively, of amortization and write-offs of intangibles and lease commissions, including a $380,000 write-off of tenant origination costs in the three and nine months ended September 30, 2015 related to the Pathmark property.

 

General and administrative.  Contributing to the increases in the three and nine months ended September 30, 2016 were increases of: (i) $191,000 and $434,000, respectively, in non-cash compensation expense primarily related to the increase in the number of shares of restricted stock granted in 2016 and the higher fair value of the awards granted in 2016 in comparison to the awards granted in 2011 that vested in January 2016; (ii) $127,000 and $274,000, respectively, for third party audit and audit related services; and (iii) $20,000 and $102,000, respectively, in compensation expense primarily due to higher compensation levels.

 

Real estate expenses.  The increases in the three and nine months ended September 30, 2016 are due primarily to increases of $434,000 and $1.1 million, respectively, from properties acquired in 2015 and 2016 and $244,000 and $937,000 from other properties in our portfolio. Most of these increases are rebilled to tenants and are included in Tenant reimbursement revenues. Also contributing to the increase in the three and nine months ended September 30, 2016 were $54,000 and $227,000, respectively, of expenses related to the vacant former Pathmark property and $41,000 and $249,000, respectively, of expenses related to the vacant former Sports Authority property.

 

Real estate acquisition costs.  The increases in the three and nine months ended September 30, 2016 are due to increased acquisition activity.

 

Other Income and Expenses

 

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

 

 

 

Three Months Ended
September 30,

 

Increase

 

%

 

Nine Months Ended
September 30,

 

Increase

 

%

 

(Dollars in thousands)

 

2016

 

2015

 

(Decrease)

 

Change

 

2016

 

2015

 

(Decrease)

 

Change

 

Other income and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sales of real estate, net

 

$

119

 

$

 

$

119

 

100.0

%

$

9,824

 

$

5,392

 

$

4,432

 

82.2

%

Purchase price fair value adjustment

 

 

 

 

 

 

960

 

(960

)

(100.0

)

Prepayment costs on debt

 

 

 

 

 

(577

)

(568

)

9

 

1.6

 

Equity in earnings of unconsolidated joint ventures

 

228

 

347

 

(119

)

(34.3

)

794

 

311

 

483

 

155.3

 

Other income

 

362

 

2

 

360

 

18,000.0

 

431

 

77

 

354

 

459.7

 

Interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expense

 

(4,404

)

(4,044

)

360

 

8.9

 

(12,593

)

(11,690

)

903

 

7.7

 

Amortization and write-off of deferred financing costs

 

(189

)

(187

)

2

 

1.1

 

(644

)

(828

)

(184

)

(22.2

)

 

Gain on sales of real estate, net.  The gain in the nine months ended September 30, 2016 was realized from the sales of three properties in the three months ended June 30, 2016 and the February 2016 sale of the Pantry Portfolio. Additionally, the three and nine months ended September 30, 2016 include a $116,000 gain on the partial condemnation of land at our former Sports Authority property in Greenwood Village, Colorado. (See “-Other income”.) The 2015 gain was realized from the January 2015 sale of the Cherry Hill, New Jersey property. The

 

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minority partner’s share of the gain on the Cherry Hill, New Jersey property was $1.3 million, which is the primary reason for the decrease in net income attributable to non-controlling interests for the nine months ended September 30, 2016 as compared to September 30, 2015.

 

Purchase price fair value adjustment.  In connection with the acquisition of our joint venture partner’s 50% interest in a property located in Lincoln, Nebraska, we recorded this adjustment, representing the difference between the book value of the preexisting equity investment on the March 31, 2015 purchase date and the fair value of the investment.

 

Prepayment costs on debt. These costs were incurred primarily in connection with property sales and the payoff, prior to the stated maturity, of the related mortgage debt. In 2016, these costs related primarily to the sales of the Tomlinson, Pennsylvania property and the Pantry Portfolio and in 2015, primarily to the sale of the Cherry Hill, New Jersey property.

 

Equity in earnings of unconsolidated joint ventures.  The increase in the nine months ended September 30, 2016 is due primarily to an increase of $525,000 in our share of income from the Manahawkin, New Jersey retail center which was acquired in June 2015. The nine months ended September 30, 2015 included our $400,000 share of acquisition expenses associated with the purchase of this center. The decrease in the three months ended September 30, 2016 from the corresponding prior year period is due to non-recurring closing adjustments associated with the purchase of this center in the corresponding prior year period.

 

Other income. Since July 2016, we received $466,000 from CDOT, and have been advised by CDOT that it will remit to us an additional $43,000 as a result of a partial condemnation of land and easements obtained by CDOT at our Greenwood Village, Colorado property. Of this aggregate of $509,000, $356,000 is attributable to easements and is included in Other income. See “Gain on sales of real estate, net” above for the gain resulting from the $153,000 balance.

 

Interest expense.  The following table details the components of interest expense for the periods indicated:

 

 

 

Three Months Ended
September 30,

 

Increase

 

%

 

Nine Months Ended
September 30,

 

Increase

 

%

 

(Dollars in thousands)

 

2016

 

2015

 

(Decrease)

 

Change

 

2016

 

2015

 

(Decrease)

 

Change

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit line interest

 

$

121

 

$

179

 

$

(58

)

(32.4

)%

$

439

 

$

434

 

$

5

 

1.2

%

Mortgage interest

 

4,283

 

3,865

 

418

 

10.8

 

12,154

 

11,256

 

898

 

8.0

 

Total

 

$

4,404

 

$

4,044

 

$

360

 

8.9

 

$

12,593

 

$

11,690

 

$

903

 

7.7

 

 

Credit line interest

 

The decrease in the three months ended September 30, 2016 is due to the $16.0 million decrease in the weighted average balance outstanding under our line of credit, offset in part by a 30 basis point increase in the average interest rate from 1.94% to 2.24%. The weighted average balance decreased primarily due to repayments with proceeds from financings and property sales, offset by borrowings for property acquisitions.

 

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Mortgage interest

 

The following table reflects the average interest rate on the average principal amount of outstanding mortgage debt for the periods indicated:

 

 

 

Three Months Ended
September 30,

 

Increase

 

%

 

Nine Months Ended
September 30,

 

Increase

 

%

 

(Dollars in thousands)

 

2016

 

2015

 

(Decrease)

 

Change

 

2016

 

2015

 

(Decrease)

 

Change

 

Average interest rate on mortgage debt

 

4.56

%

4.92

%

(.36

)%

(7.3

)%

4.65

%

4.95

%

(.30

)%

(6.1

)%

Average principal amount of mortgage debt

 

$

375,770

 

$

314,067

 

$

61,703

 

19.6

%

350,287

 

$

303,483

 

$

46,804

 

15.4

%

 

The increase in mortgage interest expense is due to the increase in the average principal amount of mortgage debt outstanding, partially offset by a decrease in the average interest rate on outstanding mortgage debt. The increase in the average balance outstanding is substantially due to the incurrence of mortgage debt of $89.5 million in connection with properties acquired in 2015 and 2016 and the financing or refinancing of $79.0 million of mortgage debt, net of refinanced amounts, in connection with properties acquired prior to 2015. The decrease in the average interest rate is due to the financing (including financings effectuated in connection with acquisitions) or refinancing in 2016 and 2015 of $190.7 million of gross mortgage debt (including $22.2 million of refinanced amounts) with an average interest rate of approximately 3.8%.

 

Amortization and write-off of deferred financing costs.  The decrease in the nine months ended September 30, 2016 is primarily due to the write-off in 2015 of $249,000 relating to the sale of the Cherry Hill, New Jersey property.

 

Liquidity and Capital Resources

 

Our sources of liquidity and capital are cash flow from operations, cash and cash equivalents, borrowings under our revolving credit facility, refinancing existing mortgage loans, obtaining mortgage loans secured by our unencumbered properties, issuance of equity securities and property sales.  Our available liquidity at November 3, 2016, was approximately $56.1 million, including approximately $3.9 million of cash and cash equivalents (net of the credit facility’s required $3.0 million deposit maintenance balance) and $52.2 million available under our revolving credit facility.

 

Liquidity and Financing

 

We expect to meet substantially all of our operating cash requirements (including dividend and mortgage amortization payments) from cash flow from operations.  To the extent that this cash flow is inadequate to cover all of our operating needs, we will be required to use our available cash and cash equivalents, or draw on our credit line (to the extent permitted).

 

At September 30, 2016, excluding mortgage indebtedness of our unconsolidated joint ventures, we had 73 outstanding mortgages payable secured by 90 properties, in the aggregate principal amount of $400.8 million (before netting unamortized deferred financing costs).  These

 

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mortgages represent first liens on individual real estate investments with an aggregate carrying value of $614.1 million, before accumulated depreciation of $72.4 million.  After giving effect to interest rate swap agreements, the mortgage payments bear interest at fixed rates ranging from 3.02% to 7.81% (a 4.36% weighted average interest rate) and mature between 2017 and 2041 (a 9.7 year weighted average remaining term to maturity).

 

The following table sets forth as of September 30, 2016, information with respect to our mortgage debt that is payable from October 1, 2016 through December 31, 2019 (excluding mortgage debt of our unconsolidated joint ventures):

 

(Dollars in thousands)

 

2016

 

2017

 

2018

 

2019

 

Total

 

Amortization payments

 

$

2,265

 

$

11,158

 

$

10,986

 

$

11,533

 

$

35,942

 

Principal due at maturity

 

 

14,282

 

10,260

 

3,485

 

28,027

 

Total

 

$

2,265

 

$

25,440

 

$

21,246

 

$

15,018

 

$

63,969

 

 

At September 30, 2016, our unconsolidated joint ventures had first mortgages on four properties with outstanding balances aggregating $36.2 million, bearing interest at rates ranging from 3.49% to 5.81% (i.e., a 3.98% weighted average interest rate) and maturing between 2018 and 2025.

 

We intend to make debt amortization payments from operating cash flow and, though no assurance can be given that we will be successful in this regard, generally intend to refinance, extend or payoff the mortgage loans which mature from 2017 through 2019.  We intend to repay the amounts not refinanced or extended from our existing funds and sources of funds, including our available cash and our credit line (to the extent available).

 

We continually seek to refinance existing mortgage loans on terms we deem acceptable to obtain better terms and to generate additional liquidity.  Additionally, in the ordinary course of our business, we sell properties when we determine that it is in our best interests, which also generates additional liquidity.  Further, since each of our encumbered properties is subject to a non-recourse mortgage (with standard carve-outs), if our in-house evaluation of the market value of such property is less than the principal balance outstanding on the mortgage loan, we may determine to convey, in certain circumstances, such property to the mortgagee in order to terminate our mortgage obligations, including payment of interest, principal and real estate taxes, with respect to such property.

 

Typically, we utilize funds from our credit facility to acquire a property and, thereafter secure long-term, fixed rate mortgage debt on such property. We apply the proceeds from the mortgage loan to repay borrowings under the credit facility, thus providing us with the ability to re-borrow under the credit facility for the acquisition of additional properties.

 

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Credit Facility

 

We can borrow up to $75 million pursuant to our revolving credit facility which is available to us for the acquisition of commercial real estate, repayment of mortgage debt, property improvements and general working capital purposes; provided, that if used for property improvements and working capital purposes, the amount outstanding for such purposes will not exceed the lesser of $15 million and 15% of the borrowing base and if used for working capital purposes, will not exceed $10 million. The facility matures December 31, 2018 and bears interest equal to the one month LIBOR rate plus the applicable margin. The applicable margin ranges from 175 basis points if our ratio of total debt to total value (as calculated pursuant to the facility) is equal to or less than 50%, increasing to a maximum of 300 basis points if such ratio is greater than 65%. The applicable margin was 175 basis points at September 30, 2016 and 2015.  There is an unused facility fee of 0.25% per annum on the difference between the outstanding loan balance and $75 million. The credit facility requires the maintenance of $3 million in average deposit balances.

 

The terms of our revolving credit facility include restrictions and covenants which limit, among other things, the incurrence of liens, and which require compliance with financial ratios relating to, among other things, the minimum amount of tangible net worth, the minimum amount of debt service coverage, the minimum amount of fixed charge coverage, the maximum amount of debt to value, the minimum level of net income, certain investment limitations and the minimum value of unencumbered properties and the number of such properties. Net proceeds received from the sale, financing or refinancing of properties are generally required to be used to repay amounts outstanding under our credit facility. At September 30, 2016, we were in compliance with the covenants under this facility.

 

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Statement of Cash Flows

 

The following discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be a comprehensive discussion of the changes in our cash flows for the periods presented.

 

 

 

Nine Months Ended
September 30,

 

(Amounts in thousands)

 

2016

 

2015

 

Cash flow provided by operating activities

 

$

21,903

 

$

23,316

 

Cash flow used in investing activities

 

(81,944

)

(72,227

)

Cash flow provided by financing activities

 

64,950

 

42,463

 

Net increase (decrease) in cash and cash equivalents

 

4,909

 

(6,448

)

Cash and cash equivalents at beginning of year

 

12,736

 

20,344

 

Cash and cash equivalents at end of period

 

$

17,645

 

$

13,896

 

 

Our principal source of cash flows is from the operation of our properties. Our properties provide a relatively consistent stream of cash flows that provide us with the resources to fund operating expenses, debt service and quarterly dividends.

 

The decrease in cash flow provided by operating activities during the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 is due to a number of factors including a $650,000 lease termination fee received in the nine months ended September 30, 2015 and the timing of cash receipts and cash expenditures in the normal course of operations.

 

The increase in cash used in investing activities during the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 is due primarily to the increased purchases of real estate in the current nine month period offset in part by (i) the increase in net proceeds from sales of real estate in the current nine month period and (ii) the investment in unconsolidated joint ventures in the nine months ended September 30, 2015, while there was no such investment in the nine months ended September 30, 2016.

 

The increase in cash flow provided by financing activities during the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 is due primarily to an increase in proceeds from mortgage financings and the sale of our common stock, offset by an increase in repayment of mortgages payable and an increase in repayment (net of proceeds from drawdowns) on the credit facility.

 

Off-Balance Sheet Arrangements

 

At September 30, 2016, we are not a party to any off-balance sheet arrangements other than with respect to our properties located in Lakemoor, Illinois, Wheaton, Illinois and Beachwood, Ohio. These properties are ground leases improved by multi-family properties and generated $1,217,000 and $469,000 of rental income during the nine months ended September 30, 2016 and 2015, respectively. At September 30, 2016, our maximum exposure to loss with respect to these properties is $34.0 million, representing the carrying value of the land; such leasehold positions are subordinate to an aggregate of $150.7 million of mortgage debt incurred by our tenants, the owner/operators of the multi-family properties. We do not believe that this type of off-balance sheet arrangement has been or will be material to our liquidity and capital resource positions.  See Note 6 to our consolidated financial statements for additional

 

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information regarding these arrangements.

 

Funds from Operations and Adjusted Funds from Operations

 

We compute funds from operations, or FFO, in accordance with the “White Paper on Funds From Operations” issued by the National Association of Real Estate Investment Trusts (“NAREIT”) and NAREIT’s related guidance. FFO is defined in the White Paper as net income (computed in accordance with generally accepting accounting principles), excluding gains (or losses) from sales of property, plus real estate depreciation and amortization, plus impairment write-downs of depreciable real estate and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis. In computing FFO, we do not add back to net income the amortization of costs in connection with our financing activities or depreciation of non-real estate assets. We compute adjusted funds from operations, or AFFO, by adjusting from FFO for our straight-line rent accruals and amortization of lease intangibles, deducting lease termination fees and gain on extinguishment of debt and adding back amortization of restricted stock compensation, amortization of costs in connection with our financing activities (including our share of our unconsolidated joint ventures) and debt prepayment costs.  Since the NAREIT White Paper does not provide guidelines for computing AFFO, the computation of AFFO may vary from one REIT to another.

 

We believe that FFO and AFFO are useful and standard supplemental measures of the operating performance for equity REITs and are used frequently by securities analysts, investors and other interested parties in evaluating equity REITs, many of which present FFO and AFFO when reporting their operating results. FFO and AFFO are intended to exclude GAAP historical cost depreciation and amortization of real estate assets, which assures that the value of real estate assets diminish predictability over time. In fact, real estate values have historically risen and fallen with market conditions. As a result, we believe that FFO and AFFO provide a performance measure that when compared year over year, should reflect the impact to operations from trends in occupancy rates, rental rates, operating costs, interest costs and other matters without the inclusion of depreciation and amortization, providing a perspective that may not be necessarily apparent from net income. We also consider FFO and AFFO to be useful to us in evaluating potential property acquisitions.

 

FFO and AFFO do not represent net income or cash flows from operations as defined by GAAP. FFO and AFFO should not be considered to be an alternative to net income as a reliable measure of our operating performance; nor should FFO and AFFO be considered an alternative to cash flows from operating, investing or financing activities (as defined by GAAP) as measures of liquidity. FFO and AFFO do not measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization, capital improvements and distributions to stockholders.

 

Management recognizes that there are limitations in the use of FFO and AFFO. In evaluating our performance, management is careful to examine GAAP measures such as net income and cash flows from operating, investing and financing activities.

 

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The table below provides a reconciliation of net income in accordance with GAAP to FFO and AFFO for the periods indicated (dollars in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

GAAP net income attributable to One Liberty Properties, Inc.

 

$

4,299

 

$

3,788

 

$

20,027

 

$

15,326

 

Add: depreciation of properties

 

4,583

 

4,384

 

13,026

 

11,906

 

Add: our share of depreciation of unconsolidated joint ventures

 

223

 

229

 

670

 

410

 

Add: amortization of deferred leasing costs

 

80

 

51

 

220

 

184

 

Add: Federal excise tax relating to gain on sales

 

 

25

 

6

 

109

 

Deduct: gain on sales of real estate

 

(119

)

 

(9,824

)

(5,392

)

Deduct: purchase price fair value adjustment

 

 

 

 

(960

)

Adjustments for non-controlling interests

 

(36

)

(75

)

(108

)

1,394

 

NAREIT funds from operations applicable to common stock

 

9,030

 

8,402

 

24,017

 

22,977

 

Deduct: straight-line rent accruals and amortization of lease intangibles

 

(788

)

(654

)

(2,215

)

(1,633

)

Deduct: lease termination fee income

 

 

 

 

(650

)

Add/Deduct: our share of straight-line rent accruals and amortization of lease intangibles of unconsolidated joint ventures

 

13

 

(9

)

36

 

(9

)

Add: amortization of restricted stock compensation

 

770

 

580

 

2,176

 

1,742

 

Add: prepayment costs on debt

 

 

 

577

 

568

 

Add: amortization and write-off of deferred financing costs

 

189

 

187

 

644

 

828

 

Add: our share of amortization of deferred financing costs of unconsolidated joint ventures

 

7

 

7

 

19

 

18

 

Adjustments for non-controlling interests

 

17

 

11

 

37

 

(187

)

Adjusted funds from operations applicable to common stock

 

$

9,238

 

$

8,524

 

$

25,291

 

$

23,654

 

 

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Table of Contents

 

The table below provides a reconciliation of net income per common share (on a diluted basis) in accordance with GAAP to FFO and AFFO:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

GAAP net income attributable to One Liberty Properties, Inc.

 

$

.24

 

$

.22

 

$

1.15

 

$

.92

 

Add: depreciation of properties

 

.26

 

.26

 

.76

 

.72

 

Add: our share of depreciation of unconsolidated joint ventures

 

.01

 

.02

 

.04

 

.03

 

Add: amortization of deferred leasing costs

 

 

 

.01

 

.01

 

Add: Federal excise tax relating to gain on sales

 

 

 

 

.01

 

Deduct: gain on sales of real estate

 

 

 

(.57

)

(.33

)

Deduct: purchase price fair value adjustment

 

 

 

 

(.06

)

Adjustments for non-controlling interests

 

 

 

 

.09

 

NAREIT funds from operations per share of common stock

 

.51

 

.50

 

1.39

 

1.39

 

Deduct: straight-line rent accruals and amortization of lease intangibles

 

(.03

)

(.04

)

(.13

)

(.10

)

Deduct: lease termination fee income

 

 

 

 

(.04

)

Add: amortization of restricted stock compensation

 

.04

 

.04

 

.13

 

.11

 

Add: prepayment costs on debt

 

 

 

.03

 

.03

 

Add: amortization and write-off of deferred financing costs

 

.01

 

.01

 

.04

 

.05

 

Adjustments for non-controlling interests

 

 

 

 

(.01

)

Adjusted funds from operations per share of common stock

 

$

.53

 

$

.51

 

$

1.46

 

$

1.43

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Our primary market risk exposure is the effect of changes in interest rates on the interest cost of draws on our revolving variable rate credit facility and the effect of changes in the fair value of our interest rate swap agreements.  Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.

 

We utilize interest rate swaps to limit interest rate risk. These swaps are used for hedging purposes-not for speculation. We do not enter into interest rate swaps for trading purposes.  At September 30, 2016, our aggregate liability in the event of the early termination of our swaps was $10.3 million.

 

At September 30, 2016, we had 32 interest rate swap agreements outstanding (including two held by three of our unconsolidated joint ventures). The fair market value of the interest rate swaps is dependent upon existing market interest rates and swap spreads, which change over time. As of September 30, 2016, if there had been an increase of 100 basis points in forward interest rates, the fair market value of the interest rate swaps would have increased by approximately $10.1 million and the net unrealized loss on derivative instruments would have decreased by $10.1 million.  If there were a decrease of 100 basis points in forward interest rates, the fair market value of the interest rate swaps would have decreased by approximately

 

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$10.3 million and the net unrealized loss on derivative instruments would have increased by $10.3 million. These changes would not have any impact on our net income or cash.

 

Our mortgage debt, after giving effect to interest rate swap agreements, bears interest at fixed rates and accordingly, the effect of changes in interest rates would not impact the amount of interest expense that we incur under these mortgages.

 

Our variable rate credit facility is sensitive to interest rate changes. At September 30, 2016, a 100 basis point increase of the interest rate on this facility would increase our related interest costs over the next twelve months by approximately $228,000 and a 100 basis point decrease of the interest rate would decrease our related interest costs over the next twelve months by approximately $103,000.

 

The fair market value of our long-term debt is estimated based on discounting future cash flows at interest rates that our management believes reflect the risks associated with long term debt of similar risk and duration.

 

Item 4.  Controls and Procedures

 

Based on their evaluation as of the end of the period covered by this report, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are effective.

 

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) promulgated under the Exchange Act) during the nine months ended September 30, 2016 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II - OTHER INFORMATION

 

Item 6.  Exhibits

 

Exhibit No.

 

Title of Exhibit

31.1

 

Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certification of Senior Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

 

Certification of President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

 

Certification of Senior Vice President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Definition Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

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ONE LIBERTY PROPERTIES, INC.

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

ONE LIBERTY PROPERTIES, INC.

 

(Registrant)

 

 

 

 

Date: November 8, 2016

/s/ Patrick J. Callan, Jr.

 

Patrick J. Callan, Jr.

 

President and Chief Executive Officer

 

(principal executive officer)

 

 

 

 

Date: November 8, 2016

/s/ David W. Kalish

 

David W. Kalish

 

Senior Vice President and

 

Chief Financial Officer

 

(principal financial officer)

 

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