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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, 2018

 

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 every Interactive Data File required to be submitted 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 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, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

Accelerated filer x

 

 

Non-accelerated filer o

Smaller reporting company x

 

 

Emerging growth company o

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Yes o     No 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, 2018, the registrant had 19,387,581 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, 2018 and December 31, 2017

1

 

 

 

 

Consolidated Statements of Income —
Three and nine months ended September 30, 2018 and 2017

2

 

 

 

 

Consolidated Statements of Comprehensive Income —
Three and nine months ended September 30, 2018 and 2017

3

 

 

 

 

Consolidated Statements of Changes in Equity —
Nine months ended September 30, 2018 and 2017

4

 

 

 

 

Consolidated Statements of Cash Flows —
Nine months ended September 30, 2018 and 2017

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

41

 

 

 

Item 4.

Controls and Procedures

42

 

 

 

Part II — Other Information

 

 

 

Item 6.

Exhibits

43

 


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,
2018

 

December 31,
2017

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Real estate investments, at cost

 

 

 

 

 

Land

 

$

199,509

 

$

209,320

 

Buildings and improvements

 

584,804

 

566,007

 

Total real estate investments, at cost

 

784,313

 

775,327

 

Less accumulated depreciation

 

120,622

 

108,953

 

Real estate investments, net

 

663,691

 

666,374

 

 

 

 

 

 

 

Investment in unconsolidated joint ventures

 

10,283

 

10,723

 

Cash and cash equivalents

 

17,173

 

13,766

 

Restricted cash

 

379

 

443

 

Unbilled rent receivable, net of allowance of $1,440 and $0, respectively

 

13,407

 

14,125

 

Unamortized intangible lease assets, net

 

26,326

 

30,525

 

Escrow, deposits and other assets and receivables

 

11,178

 

6,630

 

Total assets(1)

 

$

742,437

 

$

742,586

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Liabilities:

 

 

 

 

 

Mortgages payable, net of $4,029 and $3,789 of deferred financing costs, respectively

 

$

402,978

 

$

393,157

 

Line of credit, net of $0 and $624 of deferred financing costs, respectively

 

 

8,776

 

Dividends payable

 

8,694

 

8,493

 

Accrued expenses and other liabilities

 

7,951

 

16,107

 

Unamortized intangible lease liabilities, net

 

15,308

 

17,551

 

Total liabilities (1)

 

434,931

 

444,084

 

 

 

 

 

 

 

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;
18,669 and 18,261 shares issued and outstanding

 

18,669

 

18,261

 

Paid-in capital

 

284,772

 

275,087

 

Accumulated other comprehensive income

 

4,781

 

155

 

Accumulated (distributions in excess of net income) undistributed net income

 

(2,155

)

3,257

 

Total One Liberty Properties, Inc. stockholders’ equity

 

306,067

 

296,760

 

Non-controlling interests in consolidated joint ventures (1)

 

1,439

 

1,742

 

Total equity

 

307,506

 

298,502

 

Total liabilities and equity

 

$

742,437

 

$

742,586

 

 


(1)         The Company’s consolidated balance sheets include assets and liabilities of consolidated variable interest entities (“VIEs”).  See Note 6.  The consolidated balance sheets include the following amounts related to the Company’s consolidated VIEs: $14,722 and $17,844 of land, $27,893 and $31,789 of building and improvements, net of $3,867 and $3,811 of accumulated depreciation, $3,908 and $4,345 of other assets included in other line items, $27,143 and $32,252 of real estate debt, net, $2,459 and $2,885 of other liabilities included in other line items and $1,439 and $1,742 of non-controlling interests as of September 30, 2018 and December 31, 2017, respectively.

 

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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental income, net

 

$

17,193

 

$

17,217

 

$

52,501

 

$

50,770

 

Tenant reimbursements

 

2,005

 

1,920

 

5,983

 

5,252

 

Lease termination fee

 

372

 

 

372

 

 

Total revenues

 

19,570

 

19,137

 

58,856

 

56,022

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

5,672

 

5,115

 

16,104

 

15,858

 

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

 

3,071

 

2,701

 

8,999

 

8,409

 

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

 

2,592

 

2,689

 

7,774

 

7,765

 

Federal excise and state taxes

 

59

 

90

 

286

 

401

 

Leasehold rent

 

77

 

77

 

231

 

231

 

Impairment loss

 

 

153

 

 

153

 

Total operating expenses

 

11,471

 

10,825

 

33,394

 

32,817

 

 

 

 

 

 

 

 

 

 

 

Other operating income

 

 

 

 

 

 

 

 

 

Gain on sale of real estate, net

 

4,585

 

3,269

 

6,993

 

9,837

 

Operating income

 

12,684

 

11,581

 

32,455

 

33,042

 

 

 

 

 

 

 

 

 

 

 

Other income and expenses:

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated joint ventures

 

173

 

212

 

716

 

663

 

Equity in earnings from sale of unconsolidated joint venture properties

 

1,986

 

 

2,057

 

 

Other income

 

7

 

57

 

17

 

399

 

Interest:

 

 

 

 

 

 

 

 

 

Expense

 

(4,448

)

(4,459

)

(13,195

)

(13,380

)

Amortization and write-off of deferred financing costs

 

(220

)

(263

)

(669

)

(717

)

 

 

 

 

 

 

 

 

 

 

Net income

 

10,182

 

7,128

 

21,381

 

20,007

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to non-controlling interests

 

(35

)

(23

)

(866

)

(65

)

Net income attributable to One Liberty Properties, Inc.

 

$

10,147

 

$

7,105

 

$

20,515

 

$

19,942

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

18,646

 

18,000

 

18,521

 

17,859

 

Diluted

 

18,705

 

18,079

 

18,562

 

17,961

 

 

 

 

 

 

 

 

 

 

 

Per common share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

Basic

 

$

.53

 

$

.38

 

$

1.06

 

$

1.07

 

Diluted

 

$

.52

 

$

.38

 

$

1.06

 

$

1.07

 

 

 

 

 

 

 

 

 

 

 

Cash distributions declared per share of common stock

 

$

.45

 

$

.43

 

$

1.35

 

$

1.29

 

 

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
September 30

 

Nine Months Ended
September 30

 

 

 

2018

 

2017

 

2018

 

2017

 

Net income

 

$

10,182

 

$

7,128

 

$

21,381

 

$

20,007

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive gain

 

 

 

 

 

 

 

 

 

Net unrealized gain on derivative instruments

 

871

 

104

 

4,671

 

172

 

Reclassification of One Liberty Properties Inc.’s share of joint venture net realized gain on derivative instrument

 

 

 

(110

)

 

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

 

 

11

 

76

 

34

 

Other comprehensive gain

 

871

 

115

 

4,637

 

206

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

11,053

 

7,243

 

26,018

 

20,213

 

Net income attributable to non-controlling interests

 

(35

)

(23

)

(866

)

(65

)

Adjustment for derivative instruments attributable to non-controlling interests

 

(3

)

(1

)

(11

)

(2

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to One Liberty Properties, Inc.

 

$

11,015

 

$

7,219

 

$

25,141

 

$

20,146

 

 

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) Income

 

Accumulated
(distributions
in excess of
net income)
undistributed
net income

 

Non-Controlling
Interests in
Consolidated
Joint
Ventures

 

Total

 

Balances, December 31, 2016

 

$

17,600

 

$

262,511

 

$

(1,479

)

$

11,501

 

$

1,794

 

$

291,927

 

Distributions — common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash - $1.29 per share

 

 

 

 

(23,899

)

 

(23,899

)

Shares issued through equity offering program — net

 

135

 

2,932

 

 

 

 

3,067

 

Restricted stock vesting

 

232

 

(232

)

 

 

 

 

Shares issued through dividend reinvestment plan

 

147

 

3,210

 

 

 

 

3,357

 

Distributions to non-controlling interests

 

 

 

 

 

(148

)

(148

)

Compensation expense — restricted stock

 

 

2,341

 

 

 

 

2,341

 

Net income

 

 

 

 

19,942

 

65

 

20,007

 

Other comprehensive income

 

 

 

204

 

 

2

 

206

 

Balances, September 30, 2017

 

$

18,114

 

$

270,762

 

$

(1,275

)

$

7,544

 

$

1,713

 

$

296,858

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2017

 

$

18,261

 

$

275,087

 

$

155

 

$

3,257

 

$

1,742

 

$

298,502

 

Distributions — common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash - $1.35 per share

 

 

 

 

(25,927

)

 

(25,927

)

Shares issued through equity offering program — net

 

126

 

3,044

 

 

 

 

3,170

 

Restricted stock vesting

 

106

 

(106

)

 

 

 

 

Shares issued through dividend reinvestment plan

 

176

 

4,094

 

 

 

 

4,270

 

Distributions to non-controlling interests

 

 

 

 

 

(1,180

)

(1,180

)

Compensation expense — restricted stock

 

 

2,653

 

 

 

 

2,653

 

Net income

 

 

 

 

20,515

 

866

 

21,381

 

Other comprehensive income

 

 

 

4,626

 

 

11

 

4,637

 

Balances, September 30, 2018

 

$

18,669

 

$

284,772

 

$

4,781

 

$

(2,155

)

$

1,439

 

$

307,506

 

 

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,

 

 

 

2018

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

21,381

 

$

20,007

 

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

 

 

 

 

 

Gain on sale of real estate, net

 

(6,993

)

(9,837

)

Impairment loss

 

 

153

 

Increase in unbilled rent receivable

 

(841

)

(509

)

Write-off of unbilled rent receivable

 

74

 

362

 

Bad debt expense

 

 

310

 

Provision for unbilled rent receivable

 

1,440

 

 

Amortization and write-off of intangibles relating to leases, net

 

(1,605

)

(654

)

Amortization of restricted stock expense

 

2,653

 

2,341

 

Equity in earnings of unconsolidated joint ventures

 

(716

)

(663

)

Equity in earnings from sale of unconsolidated joint venture properties

 

(2,057

)

 

Distributions of earnings from unconsolidated joint ventures

 

2,328

 

584

 

Depreciation and amortization

 

16,104

 

15,858

 

Amortization and write-off of deferred financing costs

 

669

 

717

 

Payment of leasing commissions

 

(254

)

(67

)

(Increase) decrease in escrow, deposits, other assets and receivables

 

(1,154

)

273

 

(Decrease) increase in accrued expenses and other liabilities

 

(1,400

)

1,264

 

Net cash provided by operating activities

 

29,629

 

30,139

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of real estate

 

(18,452

)

(35,443

)

Improvements to real estate

 

(6,829

)

(2,321

)

Net proceeds from sale of real estate

 

17,417

 

24,093

 

Distributions of capital from unconsolidated joint ventures

 

852

 

298

 

Net cash used in investing activities

 

(7,012

)

(13,373

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Scheduled amortization payments of mortgages payable

 

(8,072

)

(7,808

)

Repayment of mortgages payable

 

(12,731

)

(11,541

)

Proceeds from mortgage financings

 

30,863

 

21,210

 

Proceeds from sale of common stock, net

 

3,170

 

3,067

 

Proceeds from bank line of credit

 

28,500

 

34,500

 

Repayment on bank line of credit

 

(37,900

)

(38,100

)

Issuance of shares through dividend reinvestment plan

 

4,270

 

3,357

 

Payment of financing costs

 

(675

)

(150

)

Distributions to non-controlling interests

 

(1,180

)

(148

)

Cash distributions to common stockholders

 

(25,726

)

(23,652

)

Net cash used in financing activities

 

(19,481

)

(19,265

)

 

 

 

 

 

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

3,136

 

(2,499

)

Cash, cash equivalents and restricted cash at beginning of year

 

14,668

 

18,450

 

Cash, cash equivalents and restricted cash at end of period

 

$

17,804

 

$

15,951

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

 

ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited) (Continued)

 

 

 

Nine Months Ended
September 30,

 

 

 

2018

 

2017

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid during the period for interest expense

 

$

13,196

 

$

13,350

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing activities:

 

 

 

 

 

Purchase accounting allocation — intangible lease assets

 

$

 

$

4,009

 

Purchase accounting allocation — intangible lease liabilities

 

 

(158

)

 

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, 2018

 

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 industrial, retail (including furniture stores and supermarkets), restaurant, health and fitness, and theater properties, many of which are subject to long-term net leases.  As of September 30, 2018, OLP owns 118 properties, including five properties owned by consolidated joint ventures and four properties owned by unconsolidated joint ventures. The 118 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 of a normal recurring nature necessary for fair presentation have been included. The results of operations for the three and nine months ended September 30, 2018 and 2017 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, 2017.

 

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 referred to herein 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, 2018 (Continued)

 

Note 2 — Summary Accounting Policies (Continued)

 

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. The agreements typically contain certain protective rights, such as the requirement of partner approval to sell, finance or refinance the property and to pay capital expenditures and operating expenditures outside of the approved budget or operating plan. In situations where, among other things, the Company and its partners jointly (i) approve the annual budget, (ii) approve certain expenditures, (iii) prepare or review and approve the joint venture’s tax return before filing, and (iv) approve each lease at a property, 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. Additionally, the Company assesses the accounting treatment for any interests pursuant to which the Company may have a variable interest as a lessor. Leases may contain certain protective rights, such as the right of sale and the receipt of certain escrow deposits.

 

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 shares 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.

 

The Company periodically reviews its investments in unconsolidated joint ventures for other-than-temporary losses in investment value. Any decline that is not expected to be recovered based on the underlying assets of the investment is considered other than temporary and an impairment charge is recorded as a reduction in the carrying value of the investment. During the three and nine months ended September 30, 2018 and 2017, there were no impairment charges related to the Company’s investments in unconsolidated joint ventures.

 

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 a 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.

 

8


Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018 (Continued)

 

Note 2 — Summary Accounting Policies (Continued)

 

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.  Such reclassifications primarily relate to the presentation of (i) Gain on sale of real estate, net, on the consolidated statement of income for the three and nine months ended September 30, 2017 and (ii) restricted cash on the consolidated statement of cash flows for the nine months ended September 30, 2017.

 

The Company has included Gain on sale of real estate, net, as a component of Operating income, to present gains and losses on sales of properties in accordance with ASC 360-10-45-5. The change was made for the prior periods as the Securities and Exchange Commission has eliminated Rule 3-15(a) of Regulation S-X as part of Release Nos. 33-10532, 34-83875 and IC-33203, which had required REITs to present gains and losses on sales of properties outside of continuing operations in the income statement.

 

As of January 1, 2018, the Company adopted ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires amounts generally described as restricted cash to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The adoption of this ASU has no impact on the Company’s previously reported consolidated balance sheets, consolidated statements of income, net income or accumulated undistributed net income for the periods presented.  As a result of the adoption of this guidance, the following table depicts the adjustments to the Company’s previously reported consolidated statement of cash flows (amounts in thousands):

 

 

 

Nine Months Ended
September 30, 2017

 

 

 

As Reported

 

As Adjusted

 

Decrease in escrow, deposits, and other assets and receivables

 

$

165

 

$

273

 

Increase in accrued expenses and other liabilities

 

1,377

 

1,264

 

Net decrease in cash, cash equivalents and restricted cash

 

(2,494

)

(2,499

)

Cash, cash equivalents and restricted cash at beginning of year

 

17,420

 

18,450

 

Cash, cash equivalents and restricted cash at end of period

 

14,926

 

15,951

 

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows (amounts in thousands):

 

 

 

September 30,

 

 

 

2018

 

2017

 

Cash and cash equivalents

 

$

17,173

 

$

14,926

 

Restricted cash

 

379

 

530

 

Restricted cash included in escrow, deposits and other assets and receivables

 

252

 

495

 

Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows

 

$

17,804

 

$

15,951

 

 

9


Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018 (Continued)

 

Note 2 — Summary Accounting Policies (Continued)

 

Amounts included in restricted cash represent the cash reserve balance received from an owner/operator at one of the Company’s ground leases to cover certain unit renovation work (see Note 6). Restricted cash included in escrow, deposits and other assets and receivables represent amounts related to real estate tax and other reserve escrows required to be held by lenders in accordance with the Company’s mortgage agreements.  The restriction on these escrow reserves will lapse when the related mortgage is repaid.

 

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 unvested restricted stock is entitled to receive dividends and is therefore considered a participating security. As of September 30, 2018, the shares of common stock underlying the restricted stock units awarded under the 2016 Incentive Plan are excluded from the basic earnings per share calculation, as these units are not participating securities. The restricted stock units issued pursuant to the 2009 and 2016 Incentive Plans are referred to as “RSUs”.

 

Diluted earnings per share reflects the potential dilution that could occur if securities or other rights exercisable for, or convertible into, common stock were exercised or converted or otherwise resulted in the issuance of common stock that shared in the earnings of the Company.

 

The following table identifies the number of shares of common stock underlying the RSUs awarded under the 2016 Incentive Plan that are included in the calculation of diluted weighted average number of shares of common stock:

 

 

 

Three and Nine Months Ended
September 30, 2018

 

Three and Nine Months Ended
September 30, 2017

 

Date of Award and
Total Number of
Underlying Shares

 

Return on
Capital
metric

 

Stockholder
Return
metric

 

Total

 

Return on
Capital
metric

 

Stockholder
Return
metric

 

Total

 

September 26, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

76,250 shares

(a)

33,524

 

38,125

 

71,649

 

38,125

 

 

38,125

 

July 1, 2018            

 

 

 

 

 

 

 

 

 

 

 

 

 

76,250 shares

(b)

30,929

 

 

30,929

 

n/a

 

n/a

 

n/a

 

 

 

64,453

 

38,125

 

102,578

 

38,125

 

 

38,125

 

 


(a)         Includes shares that would be issued pursuant to the respective metrics, assuming the end of the quarterly period was the June 30, 2020 vesting date. None of the remaining 4,601 shares and 38,125 shares are included at September 30, 2018 and 2017, respectively, as the applicable metrics had not been met for these shares.

 

10


Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018 (Continued)

 

Note 3 — Earnings Per Common Share (Continued)

 

(b)         Includes shares that would be issued pursuant to the respective metrics, assuming the end of the quarterly period was the June 30, 2021 vesting date. None of the remaining 45,321 shares are included at September 30, 2018, as the applicable metrics had not been met for these shares.

 

In 2010, RSUs exchangeable for up to 200,000 shares of common stock were awarded pursuant to the 2009 Incentive Plan.  In June 2017, 113,584 of these shares vested and such shares were issued in August 2017.

 

See Note 14 for information regarding the Company’s equity incentive plans.

 

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,

 

 

 

2018

 

2017

 

2018

 

2017

 

Numerator for basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

Net income

 

$

10,182

 

$

7,128

 

$

21,381

 

$

20,007

 

Less net income attributable to non-controlling interests

 

(35

)

(23

)

(866

)

(65

)

Less earnings allocated to unvested restricted stock (a)

 

(342

)

(263

)

(879

)

(796

)

Net income available for common stockholders:
basic and diluted

 

$

9,805

 

$

6,842

 

$

19,636

 

$

19,146

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share:

 

 

 

 

 

 

 

 

 

Weighted average number of common shares

 

18,646

 

18,000

 

18,521

 

17,859

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

RSUs

 

59

 

79

 

41

 

102

 

Denominator for diluted earnings per share:

 

 

 

 

 

 

 

 

 

Weighted average number of shares

 

18,705

 

18,079

 

18,562

 

17,961

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share, basic

 

$

.53

 

$

.38

 

$

1.06

 

$

1.07

 

Earnings per common share, diluted

 

$

.52

 

$

.38

 

$

1.06

 

$

1.07

 

 


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

 

11


Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018 (Continued)

 

Note 4 — Real Estate Acquisitions

 

The following chart details the Company’s acquisitions of real estate during the nine months ended September 30, 2018 (amounts in thousands):

 

Description of Property

 

Date Acquired

 

Contract
Purchase
Price

 

Terms of
Payment

 

Capitalized
Third Party
Real Estate
Acquisition
Costs

 

Campania International/U.S. Tape industrial facility,

 

 

 

 

 

 

 

 

 

Pennsburg, Pennsylvania

 

March 28, 2018

 

$

12,675

 

All cash (a)

 

$

227

 

Plymouth Industries industrial facility,

 

 

 

 

 

 

 

 

 

Plymouth, Minnesota

 

June 7, 2018

 

5,500

 

All cash (b)

 

50

 

Totals

 

 

 

$

18,175

 

 

 

$

277

 

 


(a)         In July 2018, the Company obtained new mortgage debt of $8,238.

(b)         In September 2018, the Company obtained new mortgage debt of $3,325.

 

The Company determined that with respect to each of these acquisitions, the gross assets acquired are concentrated in a single identifiable asset. Therefore, these transactions do not meet the definition of a business and are accounted for as asset acquisitions. As such, direct transaction costs associated with these asset acquisitions have been capitalized to real estate assets and depreciated over their respective useful lives.

 

The following chart details the allocation of the purchase price for the Company’s acquisitions of real estate during the nine months ended September 30, 2018 (amounts in thousands):

 

 

 

 

 

 

 

Building

 

 

 

Description of Property

 

Land

 

Building

 

Improvements

 

Total

 

Campania International/U.S. Tape industrial facility,

 

 

 

 

 

 

 

 

 

Pennsburg, Pennsylvania

 

$

1,776

 

$

10,399

 

$

727

 

$

12,902

 

Plymouth Industries industrial facility,

 

 

 

 

 

 

 

 

 

Plymouth, Minnesota

 

1,121

 

4,306

 

123

 

5,550

 

Totals

 

$

2,897

 

$

14,705

 

$

850

 

$

18,452

 

 

Property Acquisitions Subsequent to September 30, 2018

 

On October 19, 2018, the Company acquired, in a sale-leaseback transaction, an industrial/office property, located in Englewood, Colorado for $12,800,000.  The initial term of the lease is twelve years.

 

On November 1, 2018, the Company acquired an industrial property, located in Moorestown, New Jersey for $7,350,000.  The initial term of the lease is 9.5 years.

 

12


Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018 (Continued)

 

Note 5 — Sales of Properties

 

On January 1, 2018, the Company adopted ASU No. 2017-05, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, using the modified retrospective transition method. As leasing is the Company’s primary activity, the Company determined that its sales of real estate, which are nonfinancial assets, are sold to noncustomers and fall within the scope of ASC 610-20.  The Company re-assessed and determined there were no open contracts or partial sales and as such, the adoption of this ASU did not (i) result in a cumulative adjustment as of January 1, 2018, and (ii) have any impact on the Company’s consolidated financial statements.

 

The following chart details the Company’s sales of real estate during the nine months ended September 30, 2018 and 2017 (amounts in thousands):

 

Description of Property

 

Date Sold

 

Gross
Sales Price

 

Gain on Sale of
Real Estate, Net

 

Retail property,

 

 

 

 

 

 

 

Fort Bend, Texas (a)

 

January 30, 2018

 

$

9,200

 

$

2,408

 

Land,

 

 

 

 

 

 

 

Lakemoor, Illinois

 

September 14, 2018

 

8,459

 

4,585

(b)

Totals — nine months ended September 30, 2018

 

 

 

$

17,659

 

$

6,993

 

 

 

 

 

 

 

 

 

Retail property,

 

 

 

 

 

 

 

Greenwood Village, Colorado

 

May 8, 2017

 

$

9,500

 

$

6,568

 

Retail property,

 

 

 

 

 

 

 

Kansas City, Missouri (c)

 

July 14, 2017

 

10,250

 

2,180

 

Retail property,

 

 

 

 

 

 

 

Niles, Illinois

 

August 31, 2017

 

5,000

 

1,089

 

Totals — nine months ended September 30, 2017

 

 

 

$

24,750

 

$

9,837

 

 


(a)         This property was owned by a consolidated joint venture in which the Company held an 85% interest. The non-controlling interest’s share of the gain was $776.

(b)         Includes $5,717, representing the unamortized balance of a $5,906 fixed rent payment which was received and recorded as deferred income in November 2017 and was to be included in rental income over the term of the lease.

(c)          See Note 15 for information on the early termination of the interest rate swap derivative associated with the mortgage that was paid off on this property.

 

The Company determined it would recognize the full gain on the sales of the Fort Bend, Texas and Lakemoor, Illinois properties in accordance with ASC 610-20 as the Company has no (i) controlling financial interest in either of the properties and (ii) continuing interest or obligation with respect to the properties sold.

 

13


Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018 (Continued)

 

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

 

Variable Interest Entities — Ground Leases

 

The Company determined that with respect to the properties identified in the table below, it has a variable interest through its ground leases and the two owner/operators (which are affiliated with one another) are VIEs because their equity investment at risk is insufficient to finance its activities without additional subordinated financial support. The Company further determined that it is not the primary beneficiary of these VIEs because the Company has shared power over certain 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 these 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 amounted to $925,000 and $2,872,000 for the three and nine months ended September 30, 2018, respectively, and $954,000 and $2,758,000 for the three and nine months ended September 30, 2017, respectively.  Included in these amounts is rental income from a previously held VIE property in Lakemoor, Illinois, which the Company sold in September 2018 (see Note 5), amounting to $214,000 and $800,000 for the three and nine months ended September 30, 2018, respectively, and $282,000 and $862,000 for the three and nine months ended September 30, 2017, respectively.

 

The following chart details the VIEs through the Company’s ground leases and the aggregate carrying amount and maximum exposure to loss as of September 30, 2018 (dollars in thousands):

 

Description of Property(a)

 

Date Acquired

 

Land
Contract
Purchase
Price

 

# Units in
Apartment
Complex

 

Owner/
Operator
Mortgage
from
Third Party(b)

 

Type of
Exposure

 

Carrying
Amount and
Maximum
Exposure to
Loss

 

The Briarbrook Village Apartments,

 

 

 

 

 

 

 

 

 

 

 

 

 

Wheaton, Illinois

 

August 2, 2016

 

$

10,530

 

342

 

$

39,411

 

Land

 

$

10,536

 

The Vue Apartments,

 

 

 

 

 

 

 

 

 

 

 

 

 

Beachwood, Ohio

 

August 16, 2016

 

13,896

 

348

 

67,444

 

Land

 

13,901

 

Totals

 

 

 

$

24,426

 

690

 

$

106,855

 

 

 

$

24,437

 

 


(a)         Simultaneously with each purchase, the Company entered into a triple net ground lease with affiliates of Strategic Properties of North America, 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 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. 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. Cash reserves to cover such renovation work, received by the Company in conjunction with the purchase of the property, are disbursed when the unit renovations are completed. The related cash reserve balance for this property was $379,000 and $443,000 at September 30, 2018 and December 31, 2017, respectively, and is classified as Restricted cash on the consolidated balance sheets.

 

14


Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018 (Continued)

 

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

 

Variable Interest Entity — Consolidated Joint Ventures

 

With respect to the five consolidated joint ventures in which the Company holds between a 90% to 95% interest, the Company has determined such ventures are VIEs because the non-controlling interests do not hold substantive kick-out or participating rights.

 

In each of these consolidated 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 consolidates 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,
2018

 

December 31,
2017 (a)

 

Land

 

$

14,722

 

$

17,844

 

Buildings and improvements, net of accumulated depreciation of $3,867 and $3,811, respectively

 

27,893

 

31,789

 

Cash

 

902

 

1,145

 

Unbilled rent receivable

 

1,196

 

1,011

 

Unamortized intangible lease assets, net

 

932

 

1,241

 

Escrow, deposits and other assets and receivables

 

878

 

948

 

Mortgages payable, net of unamortized deferred financing costs of $407 and $442, respectively

 

27,143

 

32,252

 

Accrued expenses and other liabilities

 

689

 

870

 

Unamortized intangible lease liabilities, net

 

1,770

 

2,015

 

Accumulated other comprehensive income (loss)

 

117

 

(1

)

Non-controlling interests in consolidated joint ventures

 

1,439

 

1,742

 

 


(a)         Includes a consolidated joint venture, in which the Company held an 85% interest, located in Fort Bend, Texas which was sold in January 2018 (see Note 5).

 

At September 30, 2018 and December 31, 2017, MCB Real Estate, LLC and its affiliates (‘‘MCB’’) are the Company’s joint venture partner in four consolidated joint ventures in which the Company has aggregate equity investments of approximately $9,859,000 and $9,705,000, respectively.

 

15


Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018 (Continued)

 

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

 

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.

 

Note 7 — Investment in Unconsolidated Joint Ventures

 

On July 31, 2018, an unconsolidated joint venture sold its property located in Milwaukee, Wisconsin for $12,813,000, net of closing costs, and paid off the related $6,970,000 mortgage. The Company’s 50% share of the gain from this sale was $1,986,000, which is included in Equity in earnings from sale of unconsolidated joint venture properties on the consolidated statements of income for the three and nine months ended September 30, 2018.

 

On April 5, 2018, an unconsolidated joint venture sold its building and a portion of its land, located in Savannah, Georgia for $2,600,000, net of closing costs. The Company’s 50% share of the gain from this sale was $71,000, which is included in Equity in earnings from sale of unconsolidated joint venture properties on the consolidated statement of income for the nine months ended September 30, 2018. The unconsolidated joint venture retained approximately five acres of land at this property.

 

The Company’s remaining four unconsolidated joint ventures each own and operate one property.  At September 30, 2018 and December 31, 2017, the Company’s equity investment in unconsolidated joint ventures totaled $10,283,000 and $10,723,000, respectively.  In addition to the equity in earnings from the sale of properties of $2,057,000 in 2018, the Company recorded equity in earnings of $173,000 and $716,000 for the three and nine months ended September 30, 2018, respectively, and $212,000 and $663,000 for the three and nine months ended September 30, 2017, respectively.  Included in equity in earnings from unconsolidated joint ventures for the nine months ended September 30, 2018 is income of $110,000 related to the discontinuance of hedge accounting on a mortgage swap related to the unconsolidated joint venture property, located in Milwaukee, Wisconsin, that was sold in July 2018 (see above and Note 15).

 

At September 30, 2018, MCB is the Company’s joint venture partner in one of these unconsolidated joint ventures in which the Company has an equity investment of $8,534,000.

 

16


Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018 (Continued)

 

Note 8 — Lease Termination Fee

 

In July 2018, the Company received a $372,000 lease termination fee from a retail tenant in a lease buy-out transaction.  In addition, the Company recorded $804,000 as rental income, representing the write-off of the $878,000 balance of the unamortized intangible lease liability, offset in part by the write-off of the $74,000 balance of the unbilled rent receivable related to this tenant.  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 and other 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, 2018, due to the uncertainty with respect to the collection of the unbilled rent receivable related to a property located in Texas, the Company recorded an allowance of $1,440,000, as a reduction to rental income, representing the entire balance of such receivable. There was no balance in allowance for doubtful accounts at December 31, 2017.

 

The Company records bad debt expense as a reduction of rental income and/or tenant reimbursements. There was no bad debt expense in the three and nine months ended September 30, 2018.  During the nine months ended September 30, 2017, the Company recorded bad debt expense of $310,000, related to rental income and tenant reimbursements due from former tenants that filed for Chapter 11 bankruptcy protection.  In connection with these tenants, the Company wrote-off (i) $362,000 of unbilled rent receivable and $67,000 of unamortized intangible lease assets as a reduction to rental income and (ii) $884,000 of tenant origination costs as an increase to depreciation expense.

 

Impairment Loss

 

In November 2017, the Company sold its property formerly tenanted by Joe’s Crab Shack, located in Ann Arbor, Michigan. As the sales price was less than the net book value, the Company determined that the property was impaired and recorded an impairment loss of $153,000, representing the difference, at September 30, 2017, between the net sales price and the net book value. The impairment loss is included in the accompanying consolidated statements of income for the three and nine months ended September 30, 2017.

 

17


Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018 (Continued)

 

Note 10 — Debt Obligations

 

Mortgages Payable

 

The following table details the Mortgages payable, net, balances per the consolidated balance sheets (amounts in thousands):

 

 

 

September 30,
2018

 

December 31,
2017

 

Mortgages payable, gross

 

$

407,007

 

$

396,946

 

Unamortized deferred financing costs

 

(4,029

)

(3,789

)

Mortgages payable, net

 

$

402,978

 

$

393,157

 

 

Line of Credit

 

The Company has a credit facility with Manufacturers & Traders Trust Company, People’s United Bank, VNB New York, LLC, and Bank Leumi USA, pursuant to which the Company may borrow up to $100,000,000, subject to borrowing base requirements.  The facility, which matures December 31, 2019, 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.  At September 30, 2018 and 2017, the applicable margin was 175 basis points.  An unused facility fee of .25% per annum applies to the facility.  The average interest rate on the facility was approximately 3.62% and 2.83% for the nine months ended September 30, 2018 and 2017, respectively.  The Company was in compliance with all covenants at September 30, 2018.

 

The following table details the Line of credit, net, balances per the consolidated balance sheets (amounts in thousands):

 

 

 

September 30,
2018 (a)

 

December 31,
2017

 

Line of credit, gross

 

$

 

$

9,400

 

Unamortized deferred financing costs

 

 

(624

)

Line of credit, net

 

$

 

$

8,776

 

 


(a)         In accordance with ASU 2015-15, as there was no balance outstanding on the Line of credit, the Company reclassified the related unamortized deferred financing costs of $390 to Escrow, deposits, and other assets and receivables on the consolidated balance sheet at September 30, 2018.

 

At November  2, 2018, there was an outstanding balance of $4,000,000 (before unamortized deferred financing costs) under the facility.

 

18


Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018 (Continued)

 

Note 11 — Related Party Transactions

 

Compensation and Services Agreement

 

Pursuant to the compensation and services agreement with Majestic Property Management Corp. (“Majestic”), the Company pays fees to Majestic and Majestic provides to the Company 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 with respect to mortgage financings and construction supervisory services. Majestic is wholly-owned by the Company’s vice-chairman and certain of the Company’s executive officers are officers of, and are compensated by, Majestic. The fee the Company pays Majestic is negotiated each year by Majestic and the Compensation and/or Audit Committees of the Company’s Board of Directors, and is approved by such committees and the independent directors.

 

In consideration for the services described above, the Company paid Majestic $687,000 and $2,054,000 for the three and nine months ended September 30, 2018, respectively, and $667,000 and $1,996,000 for the three and nine months ended September 30, 2017, respectively.  Included in these fees are $307,000 and $915,000 of property management costs for the three and nine months ended September 30, 2018, respectively, and $287,000 and $857,000 for the three and nine months ended September 30, 2017, respectively.  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. Majestic credits against the fees due to it under the compensation and services agreement any management or other fees received by it from any joint venture in which the Company is a joint venture partner. The compensation and services agreement also provides for an additional payment to Majestic of $54,000 and $162,000 in each of the three and nine months ended September 30, 2018 and 2017, respectively, for the Company’s share of all direct office expenses, including rent, telephone, postage, computer services, internet usage and supplies. The Company does not pay any fees or expenses to Majestic for such services except for the fees described in this paragraph.

 

Executive officers and others providing services to the Company under the compensation and services agreement were awarded shares of restricted stock and RSUs under the Company’s stock incentive plans (described in Note 14). The related expense charged to the Company’s operations was $483,000 and $1,332,000 for the three and nine months ended September 30, 2018, respectively, and $361,000 and $1,128,000 for the three and nine months ended September 30, 2017, respectively.

 

The fees paid under the compensation and services agreement (except for the property management fees which are included in Real estate expenses) and the costs of the stock incentive plans are included in General and administrative expense on the consolidated statements of income for the three and nine months ended September 30, 2018 and 2017.

 

19


Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018 (Continued)

 

Note 11 — Related Party Transactions (Continued)

 

Joint Venture Partners and Affiliates

 

The Company paid an aggregate of $21,000 and $86,000 for the three and nine months ended September 30, 2018, respectively, and $30,000 and $112,000 for the three and nine months ended September 30, 2017, respectively, to its consolidated joint venture partners or their affiliates (none of whom are officers, directors or employees of the Company) for property management fees, which are included in Real estate expenses on the consolidated statements of income.

 

The Company’s unconsolidated joint ventures paid management fees of $39,000 and $135,000 for the three and nine months ended September 30, 2018, respectively, and $45,000 and $132,000 for the three and nine months ended September 30, 2017, respectively, to the other partner of the venture, which reduced Equity in earnings of $19,000 and $67,000 for the three and nine months ended September 30, 2018, respectively, and $22,000 and $66,000 for the three and nine months ended September 30, 2017, respectively.

 

Other

 

During 2018 and 2017, the Company paid quarterly fees of $69,000 to the Company’s chairman and $27,500 to the Company’s vice-chairman. These fees are included in General and administrative expenses on the consolidated statements of income.

 

The Company obtains its property insurance in conjunction with Gould Investors L.P. (“Gould Investors”), a related party, and reimburses Gould Investors annually for the Company’s insurance cost relating to its properties.  Amounts reimbursed to Gould Investors were $912,000 during the three and nine months ended September 30, 2018 and $782,000 during the three and nine months ended September 30, 2017.  Included in Real estate expenses on the consolidated statements of income is insurance expense of $241,000 and $646,000 for the three and nine months ended September 30, 2018, respectively, and $204,000 and $551,000 for the three and nine months ended September 30, 2017, respectively.  The balance of the amounts reimbursed to Gould Investors represents prepaid insurance at September 30, 2018 and is included in Other assets on the consolidated balance sheets.

 

20


Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018 (Continued)

 

Note 12 — Common Stock Cash Dividend

 

On September 13, 2018, the Board of Directors declared a quarterly cash dividend of $.45 per share on the Company’s common stock, totaling $8,694,000. The quarterly dividend was paid on October 4, 2018 to stockholders of record on September 25, 2018.

 

Note 13 — Shares Issued through Equity Offering Program

 

During the nine months ended September 30, 2018, the Company sold 126,300 shares for proceeds of $3,245,000, net of commissions of $33,000, and incurred offering costs of $75,000 for professional fees.

 

Note 14 — Stock Based Compensation

 

The Company’s 2016 Incentive Plan (‘‘Plan’’), approved by the Company’s stockholders in June 2016, permits the Company to grant, among other things, stock options, restricted stock,  RSUs, 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.  As of September 30, 2018, (i) restricted stock awards with respect to 284,850 shares had been issued, of which 300 shares were forfeited and 3,000 shares had vested, and (ii) as further described below, RSUs with respect to 152,500 shares had been issued and are outstanding.

 

Under the Company’s 2012 Incentive Plan, as of September 30, 2018, 500,700 shares had been issued, of which 3,550 shares were forfeited and 127,450 shares had vested. No additional awards may be granted under this plan.

 

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. The restricted stock grants are charged to General and administrative expense over the respective vesting periods based on the market value of the common stock on the grant date. Unless earlier forfeited because the participant’s relationship with the Company terminated, unvested restricted stock awards vest on the fifth anniversary of the grant date, and under certain circumstances may vest earlier.

 

In each of 2017 and 2018, the Company granted RSUs exchangeable for up to 76,250 shares of common stock upon satisfaction, through June 30, 2020 and June 30, 2021, respectively, of specified conditions.  Specifically, up to 50% of these RSUs vest upon achievement of metrics related to average annual total stockholder return (the “TSR Awards”), which metrics meet the definition of a market condition, and up to 50% vest upon achievement of metrics related to average annual return on capital (the “ROC Awards”), which metrics meet the definition of a performance condition.  The holders of the RSUs are not entitled to dividends or to vote the underlying shares until such RSUs vest and shares are issued. Accordingly, the shares underlying these RSUs are not

 

21


Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018 (Continued)

 

Note 14 — Stock Based Compensation (Continued)

 

included in the shares shown as outstanding on the balance sheet. For the TSR awards, a third party appraiser prepared a Monte Carlo simulation pricing model to determine the fair value, which is recognized ratably over the service period. The Monte Carlo valuation consisted of computing the grant date fair value of the awards using the Company’s simulated stock price. For the July 2018 TSR awards, the per unit or share fair value was estimated using the following assumptions: an expected life of three years, a dividend rate of 6.82%, a risk-free interest rate of 2.18% - 2.70% and an expected price volatility of 22.29% - 25.99%. The expected price volatility was calculated based on historical and implied volatility. For the ROC Awards, the fair value is based on the market value on the date of grant and the performance assumptions are re-evaluated quarterly. Expense is not recognized on the RSUs which the Company does not expect to vest as a result of service conditions or the Company’s performance expectations.

 

As of September 30, 2018, based on performance and market assumptions, the fair value of the RSUs granted in 2017 and 2018 is $1,066,000 and $1,136,000, respectively. Recognition of such deferred compensation expense will be charged to General and administrative expense over the respective three year performance cycle.  None of these RSUs were forfeited or vested during the nine months ended September 30, 2018.

 

In 2010, RSUs exchangeable for up to 200,000 shares of common stock were awarded pursuant to the Company’s 2009 Incentive Plan. The holders of RSUs were not entitled to dividends or to vote the underlying shares until the RSUs vested and the underlying shares were issued. During 2017, 113,584 shares of common stock underlying the RSUs were deemed to have vested and were issued.  RSUs with respect to the balance of 86,416 shares were forfeited.

 

22


Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018 (Continued)

 

Note 14 — Stock Based Compensation (Continued)

 

The following is a summary of the activity of the equity incentive plans:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Restricted stock grants:

 

 

 

 

 

 

 

 

 

Number of shares

 

 

 

144,750

 

140,100

 

Average per share grant price

 

 

 

$

25.31

 

$

24.75

 

Deferred compensation to be recognized over vesting period

 

 

 

$

3,664,000

 

$

3,467,000

 

 

 

 

 

 

 

 

 

 

 

Number of non-vested shares:

 

 

 

 

 

 

 

 

 

Non-vested beginning of period

 

651,500

 

612,900

 

612,900

 

591,750

 

Grants

 

 

 

144,750

 

140,100

 

Vested during period

 

 

 

(106,000

)

(118,450

)

Forfeitures

 

(250

)

 

(400

)

(500

)

Non-vested end of period

 

651,250

 

612,900

 

651,250

 

612,900

 

 

 

 

 

 

 

 

 

 

 

RSU grants:

 

 

 

 

 

 

 

 

 

Number of underlying shares

 

76,250

 

76,250

 

76,250

 

76,250

 

Average per share grant price

 

$

26.41

 

$

24.03

 

$

26.41

 

$

24.03

 

Deferred compensation to be recognized over vesting period

 

$

1,136,000

 

$

919,000

 

$

1,136,000

 

$

919,000

 

 

 

 

 

 

 

 

 

 

 

Number of non-vested shares:

 

 

 

 

 

 

 

 

 

Non-vested beginning of period

 

76,250

 

 

76,250

 

200,000

 

Grants

 

76,250

 

76,250

 

76,250

 

76,250

 

Vested during period

 

 

 

 

(113,584

)

Forfeitures

 

 

 

 

(86,416

)

Non-vested end of period

 

152,500

 

76,250

 

152,500

 

76,250

 

 

 

 

 

 

 

 

 

 

 

Restricted stock and RSU grants:

 

 

 

 

 

 

 

 

 

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

 

$

23.83

 

$

22.89

 

$

23.83

 

$

22.89

 

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

 

$

 

$

 

$

2,289,000

 

$

3,008,000

 

Weighted average per share value of shares forfeited during the period (based on grant price)

 

$

23.39

 

$

 

$

23.59

 

$

8.37

 

 

 

 

 

 

 

 

 

 

 

The total charge to operations:

 

 

 

 

 

 

 

 

 

Outstanding restricted stock grants

 

$

763,000

 

$

684,000

 

$

2,263,000

 

$

2,255,000

 

Outstanding RSUs

 

208,000

 

 

390,000

 

86,000

 

Total charge to operations

 

$

971,000

 

$

684,000

 

$

2,653,000

 

$

2,341,000

 

 

As of September 30, 2018, total compensation costs of $7,581,000 and $1,717,000 related to non-vested restricted stock awards and RSUs, respectively, have not yet been recognized.  These compensation costs will be charged to General and administrative expense over the remaining respective vesting periods. The weighted average vesting period is 2.4 years for the restricted stock and 2.3 years for the RSUs.

 

23


Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018 (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 interest rate swaps), 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, 2018, the $392,836,000 estimated fair value of the Company’s mortgages payable is less than their $407,007,000 carrying value (before unamortized deferred financing costs) by approximately $14,171,000 assuming a blended market interest rate of 4.90% based on the 8.5 year weighted average remaining term to maturity of the mortgages.  At December 31, 2017, the $397,103,000 estimated fair value of the Company’s mortgages payable is greater than their $396,946,000 carrying value (before unamortized deferred financing costs) by approximately $157,000 assuming a blended market interest rate of 4.25% based on the 8.7 year weighted average remaining term to maturity of the mortgages.

 

At September 30, 2018 and December 31, 2017, the carrying amount of the Company’s line of credit (before unamortized deferred financing costs) of $0 and $9,400,000, 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.

 

24


Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018 (Continued)

 

Note 15 — Fair Value Measurements (Continued)

 

Fair Value on a Recurring Basis

 

The fair value of the Company’s derivative financial instruments, using Level 2 inputs, was determined to be the following (amounts in thousands):

 

 

 

As of

 

Carrying and Fair Value

 

Financial assets:

 

 

 

 

 

Interest rate swaps

 

September 30, 2018

 

$

4,793

 

 

 

December 31, 2017

 

1,615

 

Financial liabilities:

 

 

 

 

 

Interest rate swaps

 

September 30, 2018

 

$

 

 

 

December 31, 2017

 

1,492

 

 

The Company does not own any financial instruments that are measured on a recurring basis and that are classified as Level 1 or 3.

 

The Company’s objective in using interest rate swaps is to add stability to interest expense. 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 the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with it use Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparty. As of September 30, 2018, the Company has assessed and determined the impact of the credit valuation adjustments on the overall valuation of its derivative positions is not significant. As a result, the Company determined its derivative valuation is classified in Level 2 of the fair value hierarchy.

 

As of September 30, 2018, the Company had entered into 28 interest rate derivatives, all of which were interest rate swaps, related to 28 outstanding mortgage loans with an aggregate $130,100,000 notional amount and mature between 2019 and 2028 (weighted average remaining term to maturity of 6.4 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 5.38% and a weighted average interest rate of 4.13% at September 30, 2018).  The fair values of the Company’s derivatives in asset and liability positions are reflected as other assets or other liabilities on the consolidated balance sheets.

 

In connection with the sale of two unconsolidated joint venture properties located in Savannah, Georgia and Milwaukee, Wisconsin, the Company terminated two interest rate swaps when the related mortgages were paid off in April 2018 and July 2018, respectively (see Note 7). See discussion below for the discontinuation of hedge accounting on one of these interest rate swaps during the nine months ended September 30, 2018.

 

25


Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018 (Continued)

 

Note 15 — Fair Value Measurements (Continued)

 

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,

 

 

 

2018

 

2017

 

2018

 

2017

 

One Liberty Properties, Inc. and Consolidated subsidiaries

 

 

 

 

 

 

 

 

 

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

 

$

827

 

$

(248

)

$

4,336

 

$

(1,234

)

Amount of reclassification from Accumulated other comprehensive income into Interest expense

 

(44

)

(352

)

(335

)

(1,406

)

 

 

 

 

 

 

 

 

 

 

Unconsolidated Joint Ventures (Company’s share)

 

 

 

 

 

 

 

 

 

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

 

$

 

$

(2

)

$

69

 

$

(14

)

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

 

 

(13

)

103

 

(48

)

 

During the nine months ended September 30, 2018 and 2017, the Company (including one of its unconsolidated joint ventures) discontinued hedge accounting on two interest rate swaps as the forecasted hedged transactions were no longer probable of occurring. As a result, during the nine months ended September 30, 2018 and 2017, the Company reclassified $110,000 and $118,000 of realized gain and loss, respectively, from Accumulated other comprehensive income to earnings.  No gain or loss was recognized with respect to amounts excluded from effectiveness testing on the Company’s cash flow hedges for the three and nine months ended September 30, 2018 and 2017.

 

During the twelve months ending September 30, 2019, the Company estimates an additional $503,000 will be reclassified from other Accumulated other comprehensive income as a decrease to Interest expense.

 

The derivative agreements in effect at September 30, 2018 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 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.

 

As of December 31, 2017, the fair value of the derivatives in a liability position, including accrued interest of $53,000, but excluding any adjustments for nonperformance risk, was approximately $1,638,000.  In the event the Company had breached any of the contractual provisions of the derivative contracts, it would have been required to settle its obligations thereunder at their termination liability value of $1,638,000.  This termination liability value, net of adjustments for nonperformance risk of $93,000, is included in Accrued expenses and other liabilities on the consolidated balance sheet at December 31, 2017.  At September 30, 2018, there were no derivatives in a liability position.

 

26


Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018 (Continued)

 

Note 16 — Commitments

 

As of September 30, 2018, the remaining amount the Company is contractually required to expend for building expansion and improvements at its property tenanted by L-3 Technologies, located in Hauppauge, New York, is approximately $960,000.

 

Note 17 — New Accounting Pronouncements

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. An entity is permitted to early adopt either the entire standard or only the provisions that eliminate or modify requirements.  The Company is evaluating the new guidance to determine if, and to the extent, it will impact the Company’s consolidated financial statements.

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments made to non-employees so that the accounting for such payments is substantially the same as those made to employees, with certain exceptions. Under this ASU, equity-classified share-based awards to non-employees will be measured at fair value on the grant date of the awards and entities will assess the probability of satisfying performance conditions if any are present.  Awards will continue to be classified according to ASC 718 upon vesting which eliminates the need to reassess classification upon vesting, consistent with awards granted to employees, unless the award is modified after the service has been rendered, any other conditions necessary to earn the right to benefit from the instruments have been satisfied, and the nonemployee is no longer providing services. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. The Company early adopted this guidance on July 1, 2018 using the modified retrospective transition method. The adoption of ASU 2018-07 did not have an impact on the Company’s consolidated financial statements.

 

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends the presentation and disclosure requirements for hedge accounting and changes how companies assess hedge effectiveness. This ASU is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs.  The Company early adopted this guidance on January 1, 2018 using the modified retrospective transition method and its adoption did not have any impact on the Company’s previously reported income from operations, net income or accumulated undistributed net income for the periods presented.

 

27


Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018 (Continued)

 

Note 17 — New Accounting Pronouncements (Continued)

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes how  entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance replaces the current “incurred loss” model with an “expected loss” approach. The guidance is effective for fiscal years, and interim periods within those fiscal years,  beginning after December 15, 2019. Early adoption is permitted after December 2018. The Company is evaluating the new guidance to determine if, and to the extent, it will impact the consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, and in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, and 2018-10, Codification Improvements to Topic 842, Leases.  These standards require lessees to recognize (i) lease assets and lease liabilities for those leases which were previously classified as operating leases under ASC 840, Leases, and (ii) expense based on the effective interest method for finance leases or on a straight-line basis for operating leases.  Lessor accounting, inclusive of the effect of a practical expedient offered in ASU No. 2018-11 (which the Company expects to adopt and apply to most of its leases), which allows lessors to not separate non-lease components from the related lease components under certain conditions, will remain largely unchanged as under the previous standard, ASC 840. The Company is currently evaluating these new standards but does not expect them to have a significant effect on its consolidated financial statements. The effective date of these standards will be fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and early adoption is permitted. The Company will adopt these standards effective as of January 1, 2019 using the modified retrospective approach and anticipates electing the package of practical expedients that allows an entity to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases and (iii) initial direct costs for any expired or existing leases.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The new model requires 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. In July 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU No. 2014-09 by one year. In March 2016, the FASB issued ASU No. 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.  ASU No. 2014-09, ASU No. 2015-14 and ASU No. 2016-08 are herein collectively referred to as the “New Revenue Recognition Standards”. The Company adopted the New Revenue Recognition Standards on January 1, 2018 using the modified retrospective transition method.  The Company’s main

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018 (Continued)

 

Note 17 — New Accounting Pronouncements (Continued)

 

revenue streams are rental revenues and tenant reimbursements.  Such revenues are related to lease contracts with tenants which currently fall within the scope of ASC Topic 840, and will fall within the scope of ASC Topic 842 upon the adoption of ASU No. 2016-02 on January 1, 2019 (the Company’s sales of real estate are within the scope of ASU No. 2017-05, see Note 5).  Accordingly, the adoption of the New Revenue Recognition Standards did not (i) result in a cumulative adjustment as of January 1, 2018, and (ii) have any impact on the Company’s consolidated financial statements.

 

Note 18 — Subsequent Events

 

Subsequent events have been evaluated and except as disclosed herein, there were no other events relative to the 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, 2017 under the caption “Item 1A. Risk Factors” for a discussion of certain factors which may cause actual results to differ materially from current expectations and are cautioned not to place undue reliance on any forward-looking statements.

 

Overview

 

We are a self-administered and self-managed real estate investment trust, or REIT, incorporated in Maryland in 1982.  To qualify as a REIT, under the Internal Revenue Code of 1986, as amended, 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.

 

We acquire, own and manage a geographically diversified portfolio consisting primarily of industrial, retail (including furniture stores and supermarkets), restaurant, health and fitness and theater properties, many of which are subject to long-term net leases.  As of September 30, 2018, we own 118 properties (including five properties owned by consolidated joint ventures and four properties owned by unconsolidated joint ventures) located in 30 states.  Based on square footage, our occupancy rate at September 30, 2018 is approximately 98.9%.

 

We face a variety of risks and challenges in our business. Among other things, we face the possibility that we will not be able to acquire accretive properties on acceptable terms, lease our properties on terms favorable to us or at all, our tenants may not be able to pay their rental and other obligations and we may not be able to renew or relet, on acceptable terms, leases that are expiring or otherwise terminating.

 

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, mortgage maturities and lenders, and by seeking to minimize our exposure to interest rate fluctuations.  Substantially all of our mortgage debt either bears interest at fixed rates or is subject to interest rate swaps, limiting our exposure to fluctuating interest rates on our outstanding mortgage debt.

 

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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 or other financial information, obtaining other tenant related information, regular contact with tenant’s representatives, tenant credit checks and regular management reviews of our tenants. We may sell a property if the tenant’s financial condition is unsatisfactory.

 

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 industrial properties that we believe capitalize on e-commerce activities, such as e-commerce distribution and warehousing facilities, and by being especially selective in acquiring retail properties.  Approximately 38.6% of our contractual rental income (as described below) is derived from retail tenants (including 8.9%, 4.2% and 3.2% from tenants engaged in retail furniture, supermarkets and office supply activities, respectively) and 39.7%, 4.9%, 4.5%, 4.3%, 3.2% and 4.8% from industrial (e.g., distribution and warehouse facilities), restaurant, health and fitness, residential ground leases, theaters and other properties, respectively.

 

Our 2018 contractual rental income is approximately $69.0 million and represents, after giving effect to any abatements, concessions or adjustments, the base rent payable to us during the twelve months ending September 30, 2019 under leases in effect at September 30, 2018. Contractual rental income includes approximately $1.7 million relating to a property at which we and the tenant are negotiating a lease amendment to effect, among other things, a rent reduction, $2.1 million relating to a property at which we took a $1.4 million allowance against the unbilled rent receivable, and $522,000 relating to our Kmart, Clemmons, North Carolina property.  See “…Challenges Facing Certain Tenants”.  Contractual rental income excludes: (i) approximately $486,000 of straight-line rent and $1.0 million of amortization of intangibles; and (ii) our share of the rental income payable to our unconsolidated joint ventures, which is approximately $1.6 million.

 

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The following table sets forth scheduled expirations of leases for our properties as of September 30, 2018 for the periods indicated below:

 

Lease Expiration (1)
12 Months Ending
September 30,

 

Number
of
Expiring
Leases

 

Approximate
Square
Footage Subject to
Expiring Leases (2)

 

Contractual
Rental Income Under
Expiring Leases

 

Percentage of
Contractual Rental
Income
Represented by
Expiring Leases

 

2019

 

13

 

321,206

 

$

1,304,006

 

1.9

 

2020

 

8

 

109,134

 

1,606,021

 

2.3

 

2021

 

17

 

454,522

 

3,589,325

 

5.2

 

2022

 

22

 

2,141,919

 

13,923,753

 

20.2

 

2023

 

17

 

680,871

 

4,524,633

 

6.6

 

2024

 

13

 

602,282

 

5,569,107

 

8.1

 

2025

 

8

 

438,032

 

4,661,941

 

6.8

 

2026

 

8

 

230,189

 

3,523,673

 

5.1

 

2027

 

11

 

885,096

 

7,492,009

 

10.8

 

2028

 

9

 

677,871

 

4,290,618

 

6.2

 

2029 and thereafter

 

25

 

2,763,527

 

18,539,791

 

26.8

 

 

 

151

 

9,304,649

 

$

69,024,877

 

100.0

 

 


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

(2)         Excludes an aggregate of 67,891 square feet of vacant space.

 

Challenges Facing Certain Tenants

 

Three tenants at properties located in Texas, Ohio and North Carolina advised us that they are experiencing financial difficulties.

 

The property in Texas accounted for $2.2 million, or 3.2%, of rental income for the year ended December 31, 2017 and accounts for $2.1 million or 3.0% of 2018 contractual rental income. Although this tenant (i) paid all the rent due to us through October 31 and (ii) advised that it and its affiliates are taking various actions to improve their operations, liquidity and capital resource position, during the three and nine months ended September 30, 2018, we recorded a $1.4 million allowance against rental income, representing the entire balance of this tenant’s unbilled rent receivable.  At September 30, 2018, the net book value, tenant origination costs and mortgage debt associated with this property was $16.2 million, $2.8 million and $ 13.6 million, respectively.

 

The owner/operator of a multi-family complex which ground leases from us the underlying land located in Beachwood, Ohio, has not made any rent payments subsequent to its September 2018 rent payment. We and the owner/operator are discussing a lease amendment, among other things, to effect a rent reduction and provide for the payment of a certain amount of rent into an escrow as additional security.  This property accounted for $1.5 million, or 2.2%, of rental income for the year ended December 31, 2017 and $1.7 million, or 2.5% of 2018 contractual rental income; there are no unbilled rent receivables, intangibles or tenant origination costs associated with this property.  At September 30, 2018, the net book value of our land subject to this ground lease is $13.9 million and is subordinate to $67.4 million of mortgage debt incurred by this tenant.

 

Kmart Corp has filed for bankruptcy protection. Our Kmart property located in Clemmons, North Carolina, accounted for $601,000, or 0.9% of rental income for the year ended December 31, 2017, $522,000 or 0.8% of 2018 contractual rental income and at September 30, 2018, the net book value, intangible lease liability and mortgage debt associated with this property was $5.2 million, $1.1 million and $1.9 million, respectively. There are no tenant origination costs or unbilled rent receivables associated with this property. Though Kmart has sought through bankruptcy proceedings to reject a significant number of its leases, several months prior to its bankruptcy filing, it renewed this lease through 2023 and has not taken action to reject this lease.

 

We may be adversely affected if, among other things, (i) any of these tenants reduce, defer, or do not pay the rent payments due us, (ii) if  the owner/operator of the multi-family complex fails to pay required mortgage payments when due, (iii) we sell our interest in any of these properties, (iv) our interests in these properties are foreclosed upon, or (v) we are required to take write—offs or impairment charges with respect to these properties.

 

Property Transactions During the Three Months Ended September 30, 2018

 

On September 14, 2018, we sold a land parcel located in Lakemoor, Illinois, which was ground leased to the owner/operators of the multi-family complex located on this parcel. Our gain from this sale was $4.6 million.  See Note 5 to the Consolidated Financial Statements. Rental income from this property was $585,000 for the six months ended June 30, 2018. There were no expenses related to this property.

 

On July 31, 2018, an unconsolidated joint venture sold its property located in Milwaukee, Wisconsin for $12.8 million, net of closing costs.  Our 50% share of the gain from this sale was $2.0 million.  In connection with the sale of this property, the joint venture repaid its $7.0 million mortgage. This joint venture accounted for $291,000 of our Equity in earnings of unconsolidated joint ventures during the six months ended June 30, 2018, which includes swap termination income of $110,000 related to the discontinuance of hedge accounting on a mortgage swap that was paid off in connection with the property sale.

 

Property Transactions Subsequent to September 30, 2018

 

On October 19, 2018, we acquired, in a sale-leaseback transaction, an industrial/office property, located in Englewood, Colorado for $12.8 million.  The initial term of the lease is twelve years and our annual rental income from this property will be approximately $1.1 million.

 

On November 1, 2018, we acquired an industrial property, located in Moorestown, New Jersey for $7.4 million.  The initial term of the lease is 9.5 years and our annual base rent from this property will be approximately $531,000 in 2019, increasing annually, beginning in 2020, by $16,000.

 

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Results of Operations

 

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)

 

2018

 

2017

 

(Decrease)

 

Change

 

2018

 

2017

 

(Decrease)

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income, net

 

$

17,193

 

$

17,217

 

$

(24

)

(0.1

)

$

52,501

 

$

50,770

 

$

1,731

 

3.4

 

Tenant reimbursements

 

2,005

 

1,920

 

85

 

4.4

 

5,983

 

5,252

 

731

 

13.9

 

Lease termination fee

 

372

 

 

372

 

n/a

 

372

 

 

372

 

n/a

 

Total revenues

 

$

19,570

 

$

19,137

 

$

433

 

2.3

 

$

58,856

 

$

56,022

 

$

2,834

 

5.1

 

 

Rental income, net.   The variances for the three and nine months are due to changes in rental income at same store properties (i.e., properties that were owned for the entirety of the periods being presented) and the net increase in rental income from properties acquired and disposed of in 2017 and 2018.

 

During the three months ended September 30, 2018, same store properties decreased $220,000, primarily due to the $1.4 million non-cash allowance against rental income of the entire unbilled rent receivable balance related to our Texas property.  See “…Challenges Facing Certain Tenants”.  This decrease was offset by increases of (i) $804,000 due to the non-cash write-off to rental income of a lease intangible liability related to the Savers’ Buyout described below and (ii) $217,000 due to the tenanting of two properties that were vacant in the corresponding prior year period.

 

During the nine months ended September 30, 2018, same store properties contributed $353,000 to the increase, including net increases of (i) $804,000 due to the Savers’ Buyout write-off and (ii) $683,000 due to the tenanting of two vacant properties. These increases were offset by the $1.4 million non-cash allowance related to our Texas property.

 

The three and nine months ended September 30, 2018 reflect increases of $356,000 and $636,000, respectively, generated by two properties acquired in 2018, and $157,000 and $1.6 million, respectively, generated by four properties acquired in 2017.  Offsetting the increases from acquisitions were decreases of $317,000 and $887,000, respectively, for the three and nine months ending September 30, 2018, representing the 2017 rental income from properties sold during 2018 and 2017.

 

Tenant reimbursements.  Real estate tax and operating expense reimbursements increased during the three and nine months ended September 30, 2018 due primarily to reimbursements of (i) $122,000 and $516,000, respectively, from several same store properties and (ii) $38,000 and $433,000, respectively, from properties acquired in 2018 and 2017. Offsetting the increases during the three and nine months ended September 30, 2018 are decreases of $76,000 and $219,000, respectively, representing tenant reimbursements in 2017 from the Fort Bend, Texas property sold in January 2018.  Tenant reimbursements generally relate to real estate expenses incurred in the same period.

 

Lease termination fee.  In the three and nine months ended September 30, 2018, we received a lease termination fee of $372,000 in connection with the buyout of the lease with Savers for a retail property located in Colorado, which we refer to as the “Savers’ Buyout”, and re-leased the property simultaneously with the lease termination. There was no such fee in 2017.

 

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Operating Expenses

 

The following table compares operating expenses for the periods indicated: