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, 2013

 

OR

 

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

 

Commission File Number 001-09279

 

ONE LIBERTY PROPERTIES, INC.

 (Exact name of registrant as specified in its charter)

 

MARYLAND

 

13-3147497

(State or other jurisdiction of

 

(I.R.S. employer

incorporation or organization)

 

identification number)

 

 

 

60 Cutter Mill Road, Great Neck, New York

 

11021

(Address of principal executive offices)

 

(Zip code)

 

(516) 466-3100

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x No  o

 

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

 

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

 

Large accelerated filer  o

 

Accelerated filer  x

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  o

 

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

 

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

 

As of November 4, 2013, the registrant had 15,645,646 shares of common stock outstanding.

 

 

 



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Table of Contents

 

 

 

Page No.

 

 

 

Part I - Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets — September 30, 2013 and December 31, 2012

1

 

 

 

 

Consolidated Statements of Income — Three and nine months ended September 30, 2013 and 2012

2

 

 

 

 

Consolidated Statements of Comprehensive Income — Three and nine months ended September 30, 2013 and 2012

4

 

 

 

 

Consolidated Statements of Changes in Equity — Nine months ended September 30, 2013 and year ended December 31, 2012

5

 

 

 

 

Consolidated Statements of Cash Flows — Nine months ended September 30, 2013 and 2012

6

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

Item 2.

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

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

Item 4.

Controls and Procedures

29

 

 

 

 

 

 

Part II - Other Information

 

 

 

Item 6.

Exhibits

29

 



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,
2013

 

December 31,
2012

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Real estate investments, at cost

 

 

 

 

 

Land

 

$

153,513

 

$

138,152

 

Buildings and improvements

 

414,901

 

335,189

 

Total real estate investments, at cost

 

568,414

 

473,341

 

Less accumulated depreciation

 

70,059

 

62,816

 

Real estate investments, net

 

498,355

 

410,525

 

 

 

 

 

 

 

Investment in unconsolidated joint ventures

 

4,984

 

19,485

 

Cash and cash equivalents

 

18,903

 

14,577

 

Unbilled rent receivable

 

13,380

 

12,629

 

Unamortized intangible lease assets

 

25,432

 

16,491

 

Escrow, deposits and other assets and receivables

 

5,015

 

3,741

 

Investment in BRT Realty Trust at market (related party)

 

266

 

241

 

Unamortized deferred financing costs

 

3,294

 

3,477

 

 

 

 

 

 

 

Total assets

 

$

569,629

 

$

481,166

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Mortgages payable

 

$

276,805

 

$

225,971

 

Line of credit

 

23,500

 

 

Dividends payable

 

5,447

 

5,252

 

Accrued expenses and other liabilities

 

8,554

 

6,584

 

Unamortized intangible lease liabilities

 

6,416

 

5,300

 

 

 

 

 

 

 

Total liabilities

 

320,722

 

243,107

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

One Liberty Properties, Inc. stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock, $1 par value; 25,000 shares authorized; 15,102 and 14,598 shares issued and outstanding

 

15,102

 

14,598

 

Paid-in capital

 

207,703

 

196,107

 

Accumulated other comprehensive loss

 

(1,246

)

(1,578

)

Accumulated undistributed net income

 

26,203

 

28,001

 

Total One Liberty Properties, Inc. stockholders’ equity

 

247,762

 

237,128

 

Non-controlling interests in joint ventures

 

1,145

 

931

 

 

 

 

 

 

 

Total equity

 

248,907

 

238,059

 

 

 

 

 

 

 

Total liabilities and equity

 

$

569,629

 

$

481,166

 

 

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,

 

 

 

2013

 

2012

 

2013

 

2012

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental income, net

 

$

13,214

 

$

11,333

 

$

37,542

 

$

33,193

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

3,019

 

2,426

 

8,406

 

7,179

 

General and administrative (including $572, $572, $1,716 and $1,716, respectively, to related party)

 

1,938

 

1,873

 

5,841

 

5,463

 

Federal excise and state taxes

 

(7

)

38

 

218

 

135

 

Real estate expenses (including $150, $150, $450 and $450, respectively, to related party)

 

851

 

640

 

2,375

 

1,939

 

Leasehold rent

 

77

 

77

 

231

 

231

 

Real estate acquisition costs

 

544

 

93

 

822

 

259

 

Total operating expenses

 

6,422

 

5,147

 

17,893

 

15,206

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

6,792

 

6,186

 

19,649

 

17,987

 

Other income and expenses:

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated joint ventures

 

122

 

268

 

513

 

1,015

 

Gain on disposition of real estate - unconsolidated joint venture

 

 

 

2,807

 

 

Gain on sale - unconsolidated joint venture interest

 

 

 

1,898

 

 

Other income

 

10

 

6

 

89

 

230

 

Interest:

 

 

 

 

 

 

 

 

 

Expense

 

(3,473

)

(3,261

)

(9,865

)

(9,753

)

Amortization of deferred financing costs

 

(223

)

(198

)

(662

)

(570

)

Gain on sale of real estate

 

 

 

 

319

 

Income from continuing operations

 

3,228

 

3,001

 

14,429

 

9,228

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income from operations

 

 

369

 

 

917

 

Net gain on sales

 

 

15,050

 

 

17,254

 

Income from discontinued operations

 

 

15,419

 

 

18,171

 

 

 

 

 

 

 

 

 

 

 

Net income

 

3,228

 

18,420

 

14,429

 

27,399

 

Less net income attributable to non-controlling interests

 

(17

)

(6

)

(32

)

(13

)

 

 

 

 

 

 

 

 

 

 

Net income attributable to One Liberty Properties, Inc.

 

$

3,211

 

$

18,414

 

$

14,397

 

$

27,386

 

 

Continued on next page

 

2



Table of Contents

 

ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in Thousands, Except Per Share Data)

(Unaudited) (Continued)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

15,093

 

14,443

 

14,871

 

14,370

 

Diluted

 

15,193

 

14,543

 

 14,971

 

14,470

 

 

 

 

 

 

 

 

 

 

 

Per common share attributable to common stockholders — basic:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

.20

 

$

.20

 

$

.93

 

$

.62

 

Income from discontinued operations

 

 

1.04

 

 

1.23

 

 

 

$

.20

 

$

1.24

 

$

.93

 

$

1.85

 

Per common share attributable to common stockholders — diluted:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

.20

 

$

.20

 

$

.93

 

$

.62

 

Income from discontinued operations

 

 

1.03

 

 

1.22

 

 

 

$

.20

 

$

1.23

 

$

.93

 

$

1.84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash distributions declared per share of common stock

 

$

.35

 

$

.33

 

$

1.05

 

$

.99

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in Thousands)

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,228

 

$

18,420

 

$

14,429

 

$

27,399

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive gain

 

 

 

 

 

 

 

 

 

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

 

7

 

(1

)

52

 

10

 

Net unrealized (loss) gain on derivative instruments

 

(688

)

(118

)

220

 

(530

)

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

 

(1

)

(11

)

60

 

(36

)

Other comprehensive (loss) gain

 

(682

)

(130

)

332

 

(556

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

2,546

 

18,290

 

14,761

 

26,843

 

Less: comprehensive income attributable to non-controlling interests

 

(17

)

(6

)

(32

)

(13

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to One Liberty Properties, Inc.

 

$

2,529

 

$

18,284

 

$

14,729

 

$

26,830

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the nine month period ended September 30, 2013 (Unaudited)

and the year ended December 31, 2012

(Amounts in Thousands, Except Per Share Data)

 

 

 

Common
Stock

 

Paid-in
Capital

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Accumulated
Undistributed
Net Income

 

Non-
Controlling
Interests in
Joint Ventures

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, January 1, 2012

 

$

14,213

 

$

189,486

 

$

(1,019

)

$

15,605

 

$

662

 

$

218,947

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions - common stock
Cash - $1.34 per share

 

 

 

 

(19,924

)

 

(19,924

)

Shares issued through equity offering program — net

 

121

 

2,010

 

 

 

 

2,131

 

Shares issued through dividend reinvestment plan

 

215

 

3,437

 

 

 

 

3,652

 

Contribution from non-controlling interest

 

 

 

 

 

571

 

571

 

Distributions to non-controlling interest

 

 

 

 

 

(290

)

(290

)

Restricted stock vesting

 

49

 

(49

)

 

 

 

 

Compensation expense - restricted stock

 

 

1,223

 

 

 

 

1,223

 

Net income (loss)

 

 

 

 

32,320

 

(12

)

32,308

 

Other comprehensive (loss)

 

 

 

(559

)

 

 

(559

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2012

 

14,598

 

196,107

 

(1,578

)

28,001

 

931

 

238,059

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions - common stock
Cash - $1.05 per share

 

 

 

 

(16,195

)

 

(16,195

)

Shares issued through equity offering program — net

 

308

 

7,654

 

 

 

 

7,962

 

Shares issued through dividend reinvestment plan

 

146

 

2,860

 

 

 

 

3,006

 

Contribution from non-controlling interest

 

 

 

 

 

481

 

481

 

Distributions to non-controlling interest

 

 

 

 

 

(299

)

(299

)

Restricted stock vesting

 

50

 

(50

)

 

 

 

 

Compensation expense - restricted stock

 

 

1,132

 

 

 

 

1,132

 

Net income

 

 

 

 

14,397

 

32

 

14,429

 

Other comprehensive income

 

 

 

332

 

 

 

332

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, September 30, 2013

 

$

15,102

 

$

207,703

 

$

(1,246

)

$

26,203

 

$

1,145

 

$

248,907

 

 

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)

 

 

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

14,429

 

$

27,399

 

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

 

 

 

 

 

Gain on disposition-real estate held by unconsolidated joint venture

 

(2,807

)

 

Gain on sale-unconsolidated joint venture interest

 

(1,898

)

 

Gain on sales of real estate

 

 

(17,573

)

Gain on sale of available-for-sale securities

 

(6

)

(9

)

Increase in rental income from straight-lining of rent

 

(751

)

(1,046

)

Increase in rental income resulting from bad debt recovery, net

 

 

(116

)

Increase in rental income from amortization of intangibles relating to leases

 

(99

)

3

 

Amortization of restricted stock expense

 

1,132

 

909

 

Equity in earnings of unconsolidated joint ventures

 

(513

)

(1,015

)

Distributions of earnings from unconsolidated joint ventures

 

968

 

730

 

Depreciation and amortization

 

8,406

 

7,429

 

Amortization and write off of financing costs

 

662

 

594

 

Changes in assets and liabilities:

 

 

 

 

 

Increase in escrow, deposits, other assets and receivables

 

(1,104

)

(1,604

)

Increase (decrease) in accrued expenses and other liabilities

 

1,111

 

(611

)

Net cash provided by operating activities

 

19,530

 

15,090

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of real estate

 

(101,314

)

(14,181

)

Improvements to real estate

 

(1,680

)

(2,800

)

Distributions of return of capital from unconsolidated joint ventures

 

5,397

 

95

 

Net proceeds from sale of real estate

 

 

24,823

 

Net proceeds from disposition of unconsolidated joint venture interest

 

13,444

 

 

Payment of leasing commissions

 

(122

)

(322

)

Net proceeds from sale of available-for-sale securities

 

19

 

369

 

Net cash (used in) provided by investing activities

 

(84,256

)

7,984

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Scheduled amortization payments of mortgages payable

 

(4,859

)

(4,088

)

Repayment of mortgages payable

 

(4,708

)

(29,758

)

Proceeds from mortgage financings

 

60,401

 

38,818

 

Proceeds from sale of common stock, net

 

7,962

 

2,153

 

Proceeds from bank line of credit

 

27,000

 

9,300

 

Repayment on bank line of credit

 

(3,500

)

(22,950

)

Issuance of shares through dividend reinvestment plan

 

3,006

 

2,520

 

Payment of financing costs

 

(434

)

(1,560

)

Capital contributions from non-controlling interests

 

481

 

93

 

Distribution to non-controlling interests

 

(299

)

(290

)

Cash distributions to common stockholders

 

(15,998

)

(14,546

)

Net cash provided by (used in) financing activities

 

69,052

 

(20,308

)

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

4,326

 

2,766

 

Cash and cash equivalents at beginning of period

 

14,577

 

12,668

 

Cash and cash equivalents at end of period

 

$

18,903

 

$

15,434

 

 

Continued on next page

 

6



Table of Contents

 

ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited) (Continued)

 

 

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid during the period for interest expense

 

$

9,738

 

$

10,018

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

Contribution of property to unconsolidated joint venture

 

 

11,734

 

Purchase accounting allocation - intangible lease assets

 

10,333

 

3,487

 

Purchase accounting allocation - intangible lease liabilities

 

1,544

 

11

 

 

See accompanying notes to consolidated financial statements.

 

7



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2013

 

Note 1 - Organization and Background

 

One Liberty Properties, Inc. (“OLP”) was incorporated in 1982 in Maryland.  OLP is a self-administered and self-managed real estate investment trust (“REIT”).  OLP acquires, owns and manages a geographically diversified portfolio of retail, industrial, flex, office, health and fitness and other properties, a substantial portion of which are subject to long-term net leases.  As of September 30, 2013, OLP owned 107 properties, including five properties owned by consolidated joint ventures and five properties owned by unconsolidated joint ventures. The 107 properties are located in 29 states.

 

Note 2 - Basis of Preparation

 

Principles of Consolidation/Basis of Preparation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and include all of the information and disclosures required by U.S. Generally Accepted Accounting Principles (“GAAP”) for interim reporting. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statement disclosures. In the opinion of management, all adjustments necessary for fair presentation (including normal recurring accruals) have been included. The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the results for the full year. These statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

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

 

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

 

Investment in Joint Ventures

 

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

 

8



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2013 (Continued)

 

Note 2 - Basis of Preparation (Continued)

 

The Company assesses the accounting treatment for each joint venture investment. This assessment includes a review of each joint venture or limited liability company agreement to determine the rights of each party and whether those rights are protective or participating. The agreements typically contain certain protective rights such as the requirement of partner approval to sell, finance or refinance the property and the payment of capital expenditures and operating expenditures outside of the approved budget or operating plan. In situations where the Company and its partner (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 each property, the Company does not consolidate the joint venture as the Company considers these to be substantive participation rights that result in shared power over the activities that most significantly impact the performance of the joint venture.

 

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

 

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

 

Reclassification

 

Certain amounts reported in previous consolidated financial statements for the three and nine months ended September 30, 2012 have been reclassified in the accompanying consolidated financial statements to conform to the current period’s presentation, primarily to reclassify the operations of a property that was sold in December 2012 to discontinued operations. In addition, the operations of the Company’s tenant-in-common interest were reclassified for the three and nine months ended September 30, 2012.  The reclassification transfers the tenant-in-common interest related amounts recorded in certain line items on the income statement (rental income, depreciation and amortization, real estate expenses, mortgage interest expense and amortization of deferred financing costs) to equity in earnings of unconsolidated joint ventures. This tenant-in-common interest was sold in May 2013.

 

9



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2013 (Continued)

 

Note 2 - Basis of Preparation (Continued)

 

Additionally, the accompanying income statements include the reclassification of state tax expense in the three and nine months ended September 30, 2012 from general and administrative expense to federal excise and state taxes to conform to the current year’s presentation.

 

None of the reclassifications had an effect on net income or stockholders’ equity.

 

Note 3 - Earnings Per Common Share

 

Basic earnings per share was determined by dividing net income allocable to common stockholders for the applicable period by the weighted average number of shares of common stock outstanding during such period. Net income is also allocated to the unvested restricted stock during the applicable period, as the restricted stock is entitled to receive dividends and is therefore considered a participating security.  Unvested restricted stock is not allocated net losses and/or any excess of dividends declared over net income; such amounts are allocated entirely to the common stockholders other than the holders of unvested restricted stock.  The restricted stock units awarded under the Pay-for-Performance program described in Note 11 are excluded from the basic earnings per share calculation as these units are not participating securities.

 

Diluted earnings per share reflects the potential dilution that could occur if securities or other rights exercisable for, or convertible into, common stock were exercised or converted or otherwise resulted in the issuance of common stock that shared in the earnings of the Company.  For the three and nine months ended September 30, 2013 and 2012, the diluted weighted average number of common shares includes 100,000 shares (of an aggregate of 200,000 shares) of common stock underlying the restricted stock units awarded pursuant to the Pay-For-Performance Program.  These 100,000 shares may vest upon satisfaction of the total stockholder return metric. The number of shares that would be issued pursuant to this metric is based on the market price and dividends paid as of the end of each quarterly period assuming the end of that quarterly period was the end of the vesting period.  The remaining 100,000 shares of common stock underlying the restricted stock units awarded under the Pay-For-Performance Program are not included during the three and nine months ended September 30, 2013 and 2012, as they did not meet the return on capital performance metric during such periods.

 

There were no options outstanding to purchase shares of common stock or other rights exercisable for, or convertible into, common stock during the nine months ended September 30, 2013 and 2012.

 

10



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2013 (Continued)

 

Note 3 - Earnings Per Common Share (Continued)

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Numerator for basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

3,228

 

$

3,001

 

$

14,429

 

$

9,228

 

Less net income attributable to noncontrolling interests

 

(17

)

(6

)

(32

)

(13

)

Less earnings allocated to unvested shares

 

(165

)

 

(494

)

 

Income from continuing operations available for common stockholders

 

3,046

 

2,995

 

13,903

 

9,215

 

Discontinued operations

 

 

15,419

 

 

18,171

 

Net income available for common stockholders, basic and diluted

 

$

3,046

 

$

18,414

 

$

13,903

 

$

27,386

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share:

 

 

 

 

 

 

 

 

 

- weighted average common shares

 

15,093

 

14,443

 

14,871

 

14,370

 

- weighted average unvested restricted stock shares

 

 

408

 

 

412

 

 

 

15,093

 

14,851

 

14,871

 

14,782

 

Effect of diluted securities:

 

 

 

 

 

 

 

 

 

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

 

100

 

100

 

100

 

100

 

Denominator for diluted earnings per share

 

 

 

 

 

 

 

 

 

- weighted average shares

 

15,193

 

14,951

 

14,971

 

14,882

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share, basic

 

$

.20

 

$

1.24

 

$

.93

 

$

1.85

 

Earnings per common share, diluted

 

$

.20

 

$

1.23

 

$

.93

 

$

1.84

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to One Liberty Properties, Inc. common stockholders, net of noncontrolling interests:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

3,211

 

$

2,995

 

$

14,397

 

$

9,215

 

Income from discontinued operations

 

 

15,419

 

 

18,171

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to One Liberty Properties, Inc.

 

$

3,211

 

$

18,414

 

$

14,397

 

$

27,386

 

 

11



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2013 (Continued)

 

Note 4 - Real Estate Acquisitions

 

The following chart details the Company’s real estate acquisitions during the nine months ended September 30, 2013 (amounts in thousands):

 

Description of Property

 

Date Acquired

 

Contract
Purchase
Price

 

Terms of
 Payment

 

Third Party
Real Estate
Acquisition
Costs (a)

 

Kmart retail store,

 

 

 

 

 

 

 

 

 

Clemmons, North Carolina (b) 

 

March 22, 2013

 

$

4,640

 

All cash

 

$

119

 

 

 

 

 

 

 

 

 

 

 

Shutterfly flex facility

 

 

 

 

 

 

 

 

 

Fort Mill, South Carolina

 

July 1, 2013

 

15,500

 

Cash and $9,300 mortgage (c)

 

118

 

 

 

 

 

 

 

 

 

 

 

Texas Land & Cattle restaurant

 

 

 

 

 

 

 

 

 

Killeen, Texas

 

July 30, 2013

 

2,020

 

All cash

 

43

 

 

 

 

 

 

 

 

 

 

 

Hooters restaurant

 

 

 

 

 

 

 

 

 

Concord, North Carolina

 

August 1, 2013

 

2,469

 

All cash

 

13

 

 

 

 

 

 

 

 

 

 

 

TRISUN Health Care - assisted living facility

 

 

 

 

 

 

 

 

 

Round Rock, Texas

 

August 6, 2013

 

22,800

 

Cash and $15,275 mortgage (d)

 

288

 

 

 

 

 

 

 

 

 

 

 

Hooters restaurant

 

 

 

 

 

 

 

 

 

Myrtle Beach, South Carolina

 

September 3, 2013

 

2,635

 

All cash

 

31

 

 

 

 

 

 

 

 

 

 

 

Joe’s Crab Shack restaurant

 

 

 

 

 

 

 

 

 

Ann Arbor, Michigan

 

September 12, 2013

 

2,980

 

All cash

 

28

 

 

 

 

 

 

 

 

 

 

 

FedEx Express facility

 

 

 

 

 

 

 

 

 

Indianapolis, Indiana

 

September 13, 2013

 

9,270

 

All cash

 

31

 

 

 

 

 

 

 

 

 

 

 

Northern Tool & Equipment distribution facility

 

 

 

 

 

 

 

 

 

Fort Mill, South Carolina

 

September 18, 2013

 

39,195

 

Cash and $27,300 mortgage (e)

 

84

 

 

 

 

 

 

 

 

 

 

 

Other (f) 

 

 

 

 

 

 

67

 

Totals

 

 

 

$

101,509

 

 

 

$

822

 

 


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

(b)   Owned by a consolidated joint venture in which the Company has a 90% interest.

(c)    The mortgage bears interest at 4.562% per annum and matures July 1, 2023.

(d)   The mortgage bears interest at 5.375% per annum and matures August 6, 2023.

(e)    The mortgage bears interest at 4.875% per annum and matures April 1, 2029.

(f)     Costs incurred for potential acquisitions and properties purchased in 2012.

 

All the properties purchased by the Company in 2013 are 100% occupied and, except for the Northern Tool property which is jointly leased by two companies under common ownership, are each leased by a single tenant pursuant to a long term net lease.

 

12



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2013 (Continued)

 

Note 4 - Real Estate Acquisitions (Continued)

 

As a result of these acquisitions, the Company recorded intangible lease assets of $11,307,000 and intangible lease liabilities of $1,510,000, representing the value of the origination costs and acquired leases.  As of September 30, 2013, the weighted average amortization period for these acquisitions is 13.6 years for the intangible lease assets and 8.0 years for the intangible lease liabilities. The Company assessed the fair value of the lease intangibles based on estimated cash flow projections that utilize appropriate discount rates and available market information. Such inputs are Level 3 (as defined in Note 12) in the fair value hierarchy. The Company is currently in the process of finalizing the purchase price allocations for these properties; therefore, these allocations are preliminary and subject to change.

 

Note 5 - Investment in Unconsolidated Joint Ventures

 

At September 30, 2013 and December 31, 2012, the Company had investments in five and seven unconsolidated joint ventures, respectively, each of which owned and operated one property. The Company’s equity investment in such unconsolidated joint ventures totaled $4,984,000 and $19,485,000, respectively. In addition to the $4,705,000 gain on sale of the two properties in 2013 described below, the Company recorded equity in earnings of $513,000 and $1,015,000 for the nine months ended September 30, 2013 and 2012, respectively, and $122,000 and $268,000 for the three months ended September 30, 2013 and 2012, respectively.

 

In February 2012, the Company entered into a joint venture with an affiliate of Trammell Crow Company pursuant to which the Company contributed a property located in Plano, Texas to the joint venture in exchange for a 90% equity interest therein, and Trammell Crow contributed $1,500,000 in exchange for a 10% equity interest therein which resulted in a $319,000 gain to the Company.  In February 2013, Trammell Crow exercised its right to purchase the Company’s 90% equity interest in the unconsolidated joint venture for $13,500,000. The sale was completed on April 16, 2013 and the Company recorded a gain of $1,898,000.

 

In May 2013, a property located in Los Angeles, California and owned by the Company and another entity as tenants-in-common, accounted for as an unconsolidated joint venture, was sold for $25,000,000, of which our share was $12,500,000. The Company recorded a $2,807,000 gain on this sale in the nine months ended September 30, 2013 and incurred its $148,000 share of the related mortgage prepayment penalty. The Company received net proceeds of $4,630,000 from the sale transaction.

 

13



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2013 (Continued)

 

Note 6 - Allowance for Doubtful Accounts

 

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its tenants to make required rent payments.  If the financial condition of a specific tenant were to deteriorate resulting in an impairment of its ability to make payments, additional allowances may be required.  At December 31, 2012, the balance in allowance for doubtful accounts was $132,000, recorded as a reduction to accounts receivable. At September 30, 2013, there was no balance in allowance for doubtful accounts.  The Company records bad debt expense as a reduction of rental income. For the three and nine months ended September 30, 2012, the Company recorded bad debt expense of $16,000 and $56,000, respectively, in income from continuing operations and net recoveries of previously recognized bad debt expense of $116,000 and $173,000, respectively, in discontinued operations as a result of collections in the nine months ended September 30, 2012 from one tenant.  For the three and nine months ended September 30, 2013, the Company did not incur any bad debt expense.

 

Note 7 - Discontinued Operations

 

The following summarizes the components of income from discontinued operations applicable to five properties sold during 2012 (dollars in thousands):

 

 

 

Three Months Ended
September 30, 2012

 

Nine Months Ended
September 30, 2012

 

 

 

 

 

 

 

Rental income

 

$

507

 

$

1,600

 

 

 

 

 

 

 

Depreciation and amortization

 

38

 

249

 

Real estate expenses

 

 

102

 

Interest expense

 

100

 

332

 

Total expenses

 

138

 

683

 

 

 

 

 

 

 

Income from operations

 

369

 

917

 

Net gain on sales

 

15,050

 

17,254

 

 

 

 

 

 

 

Income from discontinued operations

 

$

15,419

 

$

18,171

 

 

Note 8 - Line of Credit

 

The Company has a $75,000,000 revolving credit facility with Manufacturer’s & Trader’s Trust Company, VNB New York Corp., Bank Leumi USA and Israel Discount Bank of New York.  This facility matures March 31, 2015 and provides that the Company pay interest at the greater of (i) 90 day LIBOR plus 3% (3.25% at September 30, 2013) and (ii) 4.75% per annum, and there is an unused facility fee of .25% per annum. At September 30, 2013 and November 4, 2013, there were outstanding balances of $23,500,000 and $20,500,000, respectively, under the facility. The Company was in compliance with all covenants at September 30, 2013.

 

14



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2013 (Continued)

 

Note 9 - Common Stock Cash Dividend

 

On September 10, 2013, the Board of Directors declared a quarterly cash dividend of $.35 per share on the Company’s common stock, totaling $5,447,000. The quarterly dividend was paid on October 4, 2013 to stockholders of record on September 25, 2013.

 

Note 10 — Shares Issued Through Equity Offering Program

 

On August 9, 2012, the Company entered into an equity offering sales agreement to sell shares of the Company’s common stock from time to time with an aggregate sales price of up to $50,000,000, through an “at the market” equity offering program.  During the nine months ended September 30, 2013, the Company sold 307,727 shares for proceeds of $8,037,000, net of commissions of $81,000, and incurred offering costs of $75,000. Subsequent to September 30, 2013 and through November 4, 2013, the Company sold 10,203 shares for proceeds of $219,000, net of commissions of $2,000.

 

Note 11 - Stock Based Compensation

 

The Company’s 2012 Incentive Plan, approved by the Company’s stockholders in June 2012, permits the Company to grant, among other things, stock options, restricted stock, restricted stock units and performance share awards and any one or more of the foregoing to its employees, officers, directors and consultants.  A maximum of 600,000 shares of the Company’s common stock is authorized for issuance pursuant to this Plan, of which 112,650 have been issued and 50 have vested. An aggregate of 557,415 shares of restricted stock and restricted stock units are outstanding under the Company’s 2003 and 2009 equity incentive plans (collectively, the “Prior Plans”) and have not yet vested.  No additional awards may be granted under the Prior Plans.

 

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

 

On September 14, 2010, the Board of Directors approved a Pay-for-Performance Program under the Company’s 2009 Incentive Plan and awarded 200,000 performance share awards in the form of restricted stock units (the “Units”). The holders of Units are not entitled to dividends or to vote the underlying shares until the Units vest and shares are issued. Accordingly, for financial statement purposes, the shares underlying the Units are not included in the shares shown as outstanding on the balance sheet.  If the defined performance criteria are satisfied in full at June 30, 2017, one share of the Company’s common stock will vest and be issued for each Unit outstanding and a pro-rata portion of the Units will vest and be issued if the performance criteria fall between defined ranges.  In the event that the performance criteria are not satisfied in whole or in part at June 30, 2017, the unvested Units will be forfeited and no shares of the Company’s common stock will be issued for those Units.  No Units were forfeited or vested in the nine months ended September 30, 2013.

 

15



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2013 (Continued)

 

Note 11 - Stock Based Compensation (Continued)

 

As of September 30, 2013 and December 31, 2012, there were no options outstanding under the Company’s equity incentive plans.

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Restricted share grants

 

 

 

112,650

 

109,450

 

Average per share grant price

 

 

 

$

21.59

 

$

16.77

 

Deferred compensation to be recognized over vesting period

 

 

 

$

2,432,000

 

$

1,835,000

 

Non-vested shares:

 

 

 

 

 

 

 

 

 

Non-vested beginning of period

 

470,015

 

408,510

 

407,460

 

348,385

 

Grants

 

 

 

112,650

 

109,450

 

Vested during period

 

 

 

(50,095

)

(49,325

)

Forfeitures

 

 

(1,050

)

 

(1,050

)

Non-vested end of period

 

470,015

 

407,460

 

470,015

 

407,460

 

 

 

 

 

 

 

 

 

 

 

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

 

$

14.22

 

$

12.59

 

$

14.22

 

$

12.59

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 

$

 

$

876,000

 

$

1,208,000

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Outstanding restricted stock grants

 

$

335,000

 

$

250,000

 

$

1,037,000

 

$

792,000

 

Outstanding restricted stock units

 

31,000

 

73,000

 

95,000

 

117,000

 

Total charge to operations

 

$

366,000

 

$

323,000

 

$

1,132,000

 

$

909,000

 

 

As of September 30, 2013, there were approximately $4,580,000 of total compensation costs related to nonvested awards that have not yet been recognized, including $459,000 related to the Pay-for-Performance Program (net of forfeiture and performance assumptions which are re-evaluated quarterly). These compensation costs will be charged to general and administrative expense over the remaining respective vesting periods. The weighted average vesting period is approximately 2.8 years.

 

16



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2013 (Continued)

 

Note 12 - 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, escrow, deposits and other assets and receivables, and accrued expenses and other liabilities are not measured at fair value on a recurring basis, but are considered to be recorded at amounts that approximate fair value.

 

At September 30, 2013, the $279,852,000 estimated fair value of the Company’s mortgages payable is more than their carrying value by approximately $3,047,000 assuming a blended market interest rate of 5.0% based on the 9.3 year weighted average remaining term of the mortgages.  At December 31, 2012, the $233,170,000 estimated fair value of the Company’s mortgages payable is more than their carrying value by approximately $7,199,000 assuming a blended market interest rate of 4.8% based on the 9.2 year weighted average remaining term of the mortgages.

 

The fair value of the Company’s mortgages payable was 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.

 

17



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2013 (Continued)

 

Note 12 - Fair Value Measurements (Continued)

 

Financial Instruments Measured at Fair Value

 

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

 

 

 

 

 

 

 

Fair Value Measurements

 

 

 

 

 

 

 

Using Fair Value Hierarchy

 

 

 

 

 

Carrying and

 

on a Recurring Basis

 

 

 

As of

 

Fair Value

 

Level 1

 

Level 2

 

Financial assets:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

September 30, 2013

 

$

286

 

$

286

 

$

 

Equity securities

 

December 31, 2012

 

278

 

278

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

September 30, 2013

 

166

 

 

166

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

September 30, 2013

 

1,416

 

 

1,416

 

 

 

December 31, 2012

 

1,470

 

 

1,470

 

 

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

 

Available-for-sale securities

 

At September 30, 2013, the Company’s available-for-sale securities were as follows: (i) a $266,000 investment in BRT Realty Trust and (ii) a $20,000 investment in other equity securities (included in other assets on the balance sheet). The aggregate cost of these securities was $138,000 and unrealized gains on such securities were $148,000. Such unrealized gains were included in accumulated other comprehensive loss on the balance sheet.  Fair values are approximated on current market quotes from financial sources that track such securities.

 

Derivative financial instruments

 

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

 

18



Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2013 (Continued)

 

Note 12 - Fair Value Measurements (Continued)

 

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with it use Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparty.  As of September 30, 2013, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.  As a result, the Company has determined that its derivative valuation is classified in Level 2 of the fair value hierarchy.

 

As of September 30, 2013, the Company had entered into ten interest rate derivatives related to ten outstanding mortgage loans, all interest rate swaps, with an approximate aggregate $60,509,000 notional amount and a weighted average maturity of 6.6 years.  Such interest rate swaps, all of which were designated as cash flow hedges, converted Libor based variable rate mortgages to fixed annual rate mortgages with interest rates ranging from 3.55% to 6.50% (weighted average interest rate of 5.01%). The fair value of the Company’s derivatives designated as hedging instruments in asset and liability positions reflected as other assets or other liabilities on the consolidated balance sheets were $166,000 and $1,416,000, respectively, at September 30, 2013 and $0 and $1,470,000, respectively, at December 31, 2012.

 

Two of the Company’s unconsolidated joint ventures, in which a wholly owned subsidiary of the Company is a 50% partner, had an interest rate derivative outstanding at September 30, 2013 with a notional amount of $3,818,000. The interest rate derivative, which was entered into in March 2011, has an interest rate of 5.81% and matures in April 2018.

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September  30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Consolidated

 

 

 

 

 

 

 

 

 

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

 

$

(972

)

$

(251

)

$

(372

)

$

(901

)

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

 

(284

)

(133

)

(592

)

(371

)

 

 

 

 

 

 

 

 

 

 

Joint Ventures (Company’s share)

 

 

 

 

 

 

 

 

 

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

 

$

(15

)

$

(25

)

$

18

 

$

(78

)

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

 

(14

)

(14

)

(42

)

(42

)

 

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Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2013 (Continued)

 

Note 12 - Fair Value Measurements (Continued)

 

No gain or loss was recognized with respect to hedge ineffectiveness or to amounts excluded from effectiveness testing on the Company’s cash flow hedges for the three and nine months ended September 30, 2013 and 2012.  During the twelve months ending September 30, 2014, the Company estimates an additional $1,248,000 will be reclassified from other comprehensive income as an increase to interest expense.

 

As of September 30, 2013, the Company believes it has no significant risk associated with non-performance of the financial institutions which are the counterparties to its derivatives contracts.  Additionally, based on the rates in effect as of September 30, 2013, if a counterparty were to default, the Company would receive a net interest benefit.

 

The derivative agreements in effect at September 30, 2013 provide that if the wholly owned subsidiary of the Company which is a party to the agreement defaults or is capable of being declared in default on any of its indebtedness, then a default can be declared on such subsidiary’s derivative obligation. In addition, the Company is a party to one of the derivative agreements and if the subsidiary defaults on the loan subject to such agreement and if there are swap breakage losses on account of the derivative being terminated early, the Company could be held liable for interest rate swap breakage losses, if any.

 

As of September 30, 2013, the fair value of the derivatives in a liability position, including accrued interest, and excluding any adjustments for nonperformance risk, was approximately $1,465,000.  In the unlikely event that the Company breaches any of the contractual provisions of the derivative contracts, it would be required to settle its obligations thereunder at their termination liability value of $1,465,000. Such amount is included in accrued expenses and other liabilities at September 30, 2013.

 

Note 13 - New Accounting Pronouncement

 

Effective January 1, 2013, the Company adopted ASU No. 2013-02, Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income which the FASB issued in February 2013. The standard requires an entity to present information about significant items reclassified out of accumulated other comprehensive income by component either on the face of the statement where net income is presented or as a separate disclosure in the notes to financial statements. The guidance was effective for calendar year-end public companies beginning in the first quarter of 2013 with application on a prospective basis. The adoption of this guidance did not have a material impact on the Company’s financial condition, results of operations or disclosures.

 

Note 14 - Subsequent Event

 

Subsequent to September 30, 2013, we entered into a contract to sell two properties located in Michigan for an aggregate purchase price of $5.5 million.  There were no other events relative to the Company’s consolidated financial statements that require additional disclosure.

 

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Table of Contents

 

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

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions.  Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “could,” “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions or variations thereof.  Forward-looking statements should not be relied on since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, performance or achievements.  Investors are encouraged to review the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2012 under the caption “Item 1A. Risk Factors” for a discussion of certain factors which may cause actual results to differ materially from current expectations and are cautioned not to place undue reliance on any forward-looking statements.

 

Overview

 

We are a self-administered and self-managed real estate investment trust, organized in Maryland in 1982.  We acquire, own and manage a geographically diversified portfolio of retail industrial, flex, office, health and fitness and other properties, a substantial portion of which are under long-term net leases.  As of September 30, 2013, we owned 107 properties (including five properties owned by our unconsolidated joint ventures) located in 29 states. Our occupancy rate at September 30, 2013, based on square footage, was approximately 99.6%.

 

We face a variety of risks and challenges in our business. We, among other things, face the possibility we will not be able to acquire accretive properties on acceptable terms, lease our properties on terms favorable to us or at all and that our tenants may not be able to pay their rental and other obligations or may choose not to renew expiring leases.  Tenants with respect to four properties with an aggregate of 299,325 square feet and that accounted for an aggregate of approximately $1.3 million of rental income in the nine months ended September 30, 2013,have advised us that they will, at the expiration of the applicable lease in December 2013 or January 2014, be vacating their respective property. We are negotiating leases with new tenants for two of such properties and subsequent to September 30, 2013, we entered into a contract to sell the other two properties which are located in Michigan, for an aggregate purchase price of $5.5 million. We cannot give any assurance that these lease or sale transactions will be completed or that if completed, will be on terms favorable to us.

 

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

 

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Table of Contents

 

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, our estimated value of the property, local demographics and the ability to re-rent or dispose of the property on favorable terms upon lease expiration or early termination.

 

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

 

During the three months ended September 30, 2013, we acquired eight properties for an aggregate contract purchase price of $96.9 million. (We obtained mortgage financing aggregating $51.9 million contemporaneously with the acquisition of three of these properties with an aggregate purchase price of $77.5 million.)  As a result of these eight acquisitions and the acquisition of a property for $4.6 million in March 2013, our 2014 contractual rental income (as described below) is $52.4 million, an increase of $6.6 million, or 14.4%, from our 2013 contractual rental income of $45.8 million. The 2014 contractual rental income takes into account the expiration of leases with respect to the tenants vacating four properties effective December 31, 2013 and January 31, 2014.

 

The 2014 contractual rental income and 2013 contractual rental income  include, after giving effect to any abatements, concessions or adjustments, rental income that is payable to us in 2014 and 2013, respectively, under leases existing at September 30, 2013 and December 31, 2012, respectively. The 2014 contractual rental income excludes approximately $1.1 million of straight-line rent income, estimated amortization of $70,000 of intangibles and our $1.4 million share of the rental income payable to our unconsolidated joint ventures. The 2013 contractual rental income excludes approximately $679,000 of straight-line rent income, amortization of approximately $6,000 of intangibles and our $3.1 million share of the rental income payable to our unconsolidated joint ventures.

 

The following table sets forth, after giving effect to the nine properties purchased in 2013, scheduled lease expirations for our properties (excluding unconsolidated joint ventures) as of September 30, 2013 for the calendar years indicated below:

 

Year of Lease
Expiration (1)

 

Number
of
Expiring
Leases

 

Approximate
Square
Footage Subject to
Expiring Leases

 

2014 Contractual
Rental Income
Under
Expiring Leases

 

Percent of 2014 Contractual
Rental Income
Represented by
Expiring Leases

 

2013

 

2

 

52,756

 

$

0

 

.0

%

2014

 

11

 

639,203

 

3,672,715

 

7.01

 

2015

 

9

 

204,601

 

1,997,342

 

3.81

 

2016

 

13

 

356,731

 

3,137,832

 

5.99

 

2017

 

8

 

89,718

 

1,781,737

 

3.40

 

2018

 

18

 

387,319

 

5,687,804

 

10.85

 

2019

 

4

 

73,672

 

1,145,631

 

2.19

 

2020

 

6

 

167,606

 

4,106,523

 

7.83

 

2021

 

6

 

119,260

 

1,121,779

 

2.14

 

2022 and Thereafter

 

37

 

3,265,670

 

29,771,103

 

56.78

 

 

 

114

 

5,356,536

 

$

52,422,466

 

100.0

%

 


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

 

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Table of Contents

 

Results of Operations

 

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

 

 

 

Three Months
Ended
September 30,

 

Increase

 

%

 

Nine Months
Ended
September 30,

 

Increase

 

%

 

(Dollars in thousands)

 

2013

 

2012

 

(Decrease)

 

Change

 

2013

 

2012

 

(Decrease)

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

13,214

 

$

11,333

 

$

1,881

 

16.6

%

$

37,542

 

$

33,193

 

$

4,349

 

13.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

3,019

 

2,426

 

593

 

24.4

 

8,406

 

7,179

 

1,227

 

17.1

 

General and administrative

 

1,938

 

1,873

 

65

 

3.5

 

5,841

 

5,463

 

378

 

6.9

 

Federal excise and state taxes

 

(7

)

38

 

(45

)

(118.4

)

218

 

135

 

83

 

61.5

 

Real estate expenses

 

851

 

640

 

211

 

33.0

 

2,375

 

1,939

 

436

 

22.5

 

Leasehold rent

 

77

 

77

 

 

 

231

 

231

 

 

 

Real estate acquisition costs

 

544

 

93

 

451

 

484.9

 

822

 

259

 

563

 

217.4

 

Total operating expenses

 

6,422

 

5,147

 

1,275

 

24.8

 

17,893

 

15,206

 

2,687

 

17.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

6,792

 

$

6,186

 

$

606

 

9.8

 

$

19,649

 

$

17,987

 

$

1,662

 

9.2

 

 

Revenues

 

Rental income.  The increase in the three months ended September 30, 2013 is primarily due to rental income of $1.7 million earned from 14 properties acquired since October 2012, and the increase in the nine months ended September 30, 2013 is primarily due to rental income of $3.6 million earned from 20 properties acquired since February 2012. Real estate tax and expense reimbursements from tenants (primarily from seven properties acquired since February 2012) of $232,000 and $545,000, in the three and nine months ended September 30, 2013, respectively, also  contributed to the increases.

 

We estimate that the rental income (calculated on a straight line basis, but excluding rebill income and adjustments related to intangible assets and liabilities, which income and adjustments have not been definitively determined) from the nine properties we acquired in the nine months ended September 30, 2013, will be approximately $8.3 million in 2014. These nine properties contributed $998,000 and $1,157,000 in rental income in the three and nine months ended September 30, 2013, respectively. The increase to our 2014 rental income may be partially offset by the loss of rental revenue from the four properties at which the tenants indicated they intend to vacate at the expiration of their leases.

 

Operating Expenses

 

Depreciation and amortization.  Approximately $551,000 and $1.1 million of the increase for the three and nine months ended September 30, 2013, is due to depreciation expense on the properties we acquired in 2012 and 2013, as described above. The balance of the increase is primarily due to depreciation on improvements to properties. This expense will increase in 2014 due to the nine properties acquired in the nine months ended September 30, 2013.

 

General and administrative expenses.  Contributing to the increase in the three and nine months ended September 30, 2013 were increases of (i) $43,000 and $223,000, respectively, in non-cash compensation expense primarily related to the increase in the number of restricted

 

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Table of Contents

 

stock awards granted and the higher fair value of such awards at the time of grant and (ii) $43,000 and $149,000, respectively, in payroll and payroll related expenses due to additional employees and higher compensation levels.

 

Real estate expenses.  The increases are related primarily to properties we acquired in 2012 and 2013.

 

Real estate acquisition costs.  These costs, which include acquisition fees, legal and other transactional costs and expenses, increased in the three and nine months ended September 30, 2013 due to expenses related to the acquisitions in these periods.

 

Other Income and Expenses

 

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

 

 

 

Three Months
Ended
September 30,

 

Increase

 

%

 

Nine Months
Ended
September 30,

 

Increase

 

%

 

(Dollars in thousands)

 

2013

 

2012

 

(Decrease)

 

Change

 

2013

 

2012

 

(Decrease)

 

Change

 

Other income and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated joint ventures

 

$

122

 

$

268

 

$

(146

)

(54.5

)%

$

513

 

$

1,015

 

$

(502

)

(49.5

)%

Gain on disposition of real estate — unconsolidated joint venture

 

 

 

 

n/a

 

2,807

 

 

2,807

 

n/a

 

Gain on sale — unconsolidated joint venture interest

 

 

 

 

n/a

 

1,898

 

 

1,898

 

n/a

 

Other income

 

10

 

6

 

4

 

66.7

 

89

 

230

 

(141

)

(61.3

)

Interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expense

 

(3,473

)

(3,261

)

212

 

6.5

 

(9,865

)

(9,753

)

112

 

1.1

 

Amortization of deferred financing costs

 

(223

)

(198

)

25

 

12.6

 

(662

)

(570

)

92

 

16.1

 

Gain on sale of real estate

 

 

 

 

n/a

 

 

319

 

(319

)

100

 

 

Equity in earnings of unconsolidated joint ventures. The decreases are attributable substantially to the following factors: (i) the sale on May 31, 2013 of a property owned by us and another entity as tenants-in-common resulting in decreases of $146,000 and $367,000 in the three and nine months ended September 30, 2013, respectively, including a $148,000 mortgage prepayment penalty in the nine months ended September 30, 2013 incurred as a result of the sale, and (ii) the inclusion in the corresponding 2012 periods of our share of the net settlement entered into in May 2012 with a former tenant which accounted for $230,000 of the decrease for the nine months ended September 30, 2013. These decreases were partially offset in the nine months ended September 30, 2013 by an increase of $111,000 in the net operating income derived from our Plano, Texas joint venture resulting from an increase in overage rental income received in 2013 and the inclusion in 2012 of real estate acquisition costs.

 

Gain on disposition of real estate — unconsolidated joint venture. In May 2013, the property in which we held a tenant-in-common interest was sold and we recorded a gain of $2,807,000.

 

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Table of Contents

 

Gain on sale — unconsolidated joint venture interest. In April 2013, we sold our 90% equity interest in our Plano, Texas unconsolidated joint venture and recorded a gain of $1,898,000.

 

Other income. The nine months ended September 30, 2012 includes a $199,000 recovery from an insurance claim.

 

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

 

 

 

Three Months
Ended
September 30,

 

Increase

 

%

 

Nine Months
Ended
September 30,

 

Increase

 

%

 

(Dollars in thousands)

 

2013

 

2012

 

(Decrease)

 

Change

 

2013

 

2012

 

(Decrease)

 

Change

 

Interest expense: