UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2016
OR
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 001-09279
ONE LIBERTY PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
MARYLAND |
|
13-3147497 |
(State or other jurisdiction of |
|
(I.R.S. employer |
incorporation or organization) |
|
identification number) |
|
|
|
60 Cutter Mill Road, Great Neck, New York |
|
11021 |
(Address of principal executive offices) |
|
(Zip code) |
(516) 466-3100
(Registrants 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 issuers classes of common stock, as of the latest practicable date.
As of August 1, 2016, the registrant had 17,364,067 shares of common stock outstanding.
One Liberty Properties, Inc. and Subsidiaries
Part I FINANCIAL INFORMATION
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
(Amounts in Thousands, Except Par Value)
|
|
June 30, |
|
December 31, |
| ||
|
|
(Unaudited) |
|
|
| ||
Assets |
|
|
|
|
| ||
Real estate investments, at cost |
|
|
|
|
| ||
Land |
|
$ |
182,785 |
|
$ |
186,994 |
|
Buildings and improvements |
|
492,123 |
|
460,379 |
| ||
Total real estate investments, at cost |
|
674,908 |
|
647,373 |
| ||
Less accumulated depreciation |
|
89,620 |
|
85,116 |
| ||
Real estate investments, net |
|
585,288 |
|
562,257 |
| ||
|
|
|
|
|
| ||
Properties held-for-sale |
|
|
|
12,259 |
| ||
Investment in unconsolidated joint ventures |
|
11,132 |
|
11,350 |
| ||
Cash and cash equivalents |
|
35,557 |
|
12,736 |
| ||
Restricted cash |
|
|
|
1,074 |
| ||
Unbilled rent receivable (including $712 related to properties held-for-sale in 2015) |
|
12,707 |
|
13,577 |
| ||
Unamortized intangible lease assets, net |
|
30,849 |
|
28,978 |
| ||
Escrow, deposits and other assets and receivables |
|
6,257 |
|
4,268 |
| ||
Total assets |
|
$ |
681,790 |
|
$ |
646,499 |
|
|
|
|
|
|
| ||
Liabilities and Equity |
|
|
|
|
| ||
Liabilities: |
|
|
|
|
| ||
Mortgages payable, net of $3,948 and $3,373 deferred financing costs, respectively |
|
$ |
351,849 |
|
$ |
331,055 |
|
Line of credit, net of $422 and $506 deferred financing costs, respectively |
|
24,928 |
|
17,744 |
| ||
Dividends payable |
|
7,089 |
|
6,901 |
| ||
Accrued expenses and other liabilities |
|
17,628 |
|
13,852 |
| ||
Unamortized intangible lease liabilities, net |
|
14,244 |
|
14,521 |
| ||
Total liabilities |
|
415,738 |
|
384,073 |
| ||
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; 16,686 and 16,292 shares issued and outstanding |
|
16,686 |
|
16,292 |
| ||
Paid-in capital |
|
240,505 |
|
232,378 |
| ||
Accumulated other comprehensive loss |
|
(10,728 |
) |
(4,390 |
) | ||
Accumulated undistributed net income |
|
17,857 |
|
16,215 |
| ||
Total One Liberty Properties, Inc. stockholders equity |
|
264,320 |
|
260,495 |
| ||
Non-controlling interests in consolidated joint ventures |
|
1,732 |
|
1,931 |
| ||
Total equity |
|
266,052 |
|
262,426 |
| ||
Total liabilities and equity |
|
$ |
681,790 |
|
$ |
646,499 |
|
See accompanying notes to consolidated financial statements.
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
Revenues: |
|
|
|
|
|
|
|
|
| ||||
Rental income, net |
|
$ |
15,594 |
|
$ |
14,992 |
|
$ |
30,650 |
|
$ |
28,886 |
|
Tenant reimbursements |
|
1,639 |
|
790 |
|
2,927 |
|
1,572 |
| ||||
Lease termination fee |
|
|
|
|
|
|
|
650 |
| ||||
Total revenues |
|
17,233 |
|
15,782 |
|
33,577 |
|
31,108 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating expenses: |
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
|
4,398 |
|
3,921 |
|
8,583 |
|
7,655 |
| ||||
General and administrative (see Note 11 for related party information) |
|
2,671 |
|
2,390 |
|
5,280 |
|
4,782 |
| ||||
Real estate expenses (see Note 11 for related party information) |
|
2,159 |
|
1,273 |
|
4,334 |
|
2,607 |
| ||||
Real estate acquisition costs (see Note 11 for related party information) |
|
244 |
|
79 |
|
448 |
|
327 |
| ||||
Federal excise and state taxes |
|
78 |
|
124 |
|
154 |
|
198 |
| ||||
Leasehold rent |
|
77 |
|
77 |
|
154 |
|
154 |
| ||||
Total operating expenses |
|
9,627 |
|
7,864 |
|
18,953 |
|
15,723 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating income |
|
7,606 |
|
7,918 |
|
14,624 |
|
15,385 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Other income and expenses: |
|
|
|
|
|
|
|
|
| ||||
Gain on sales of real estate, net |
|
8,918 |
|
|
|
9,705 |
|
5,392 |
| ||||
Purchase price fair value adjustment |
|
|
|
|
|
|
|
960 |
| ||||
Prepayment costs on debt |
|
(154 |
) |
|
|
(577 |
) |
(568 |
) | ||||
Equity in earnings (loss) of unconsolidated joint ventures |
|
357 |
|
(183 |
) |
566 |
|
(36 |
) | ||||
Other income |
|
56 |
|
72 |
|
69 |
|
75 |
| ||||
Interest: |
|
|
|
|
|
|
|
|
| ||||
Expense |
|
(4,114 |
) |
(3,907 |
) |
(8,189 |
) |
(7,646 |
) | ||||
Amortization and write-off of deferred financing costs |
|
(210 |
) |
(186 |
) |
(455 |
) |
(641 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income |
|
12,459 |
|
3,714 |
|
15,743 |
|
12,921 |
| ||||
Net income attributable to non-controlling interests |
|
(18 |
) |
(32 |
) |
(16 |
) |
(1,383 |
) | ||||
Net income attributable to One Liberty Properties, Inc. |
|
$ |
12,441 |
|
$ |
3,682 |
|
$ |
15,727 |
|
$ |
11,538 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
16,579 |
|
15,883 |
|
16,484 |
|
15,830 |
| ||||
Diluted |
|
16,686 |
|
15,983 |
|
16,591 |
|
15,930 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Per common share attributable to common stockholders: |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
$ |
.72 |
|
$ |
.22 |
|
$ |
.92 |
|
$ |
.70 |
|
Diluted |
|
$ |
.72 |
|
$ |
.22 |
|
$ |
.91 |
|
$ |
.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions declared per share of common stock |
|
$ |
.41 |
|
$ |
.39 |
|
$ |
.82 |
|
$ |
.78 |
|
See accompanying notes to consolidated financial statements.
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
(Unaudited)
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
Net income |
|
$ |
12,459 |
|
$ |
3,714 |
|
$ |
15,743 |
|
$ |
12,921 |
|
Other comprehensive (loss) gain |
|
|
|
|
|
|
|
|
| ||||
Net unrealized (loss) gain on available-for-sale securities |
|
|
|
(2 |
) |
|
|
1 |
| ||||
Reclassification of gain on available-for-sale securities included in net income |
|
(29 |
) |
|
|
(27 |
) |
|
| ||||
Net unrealized (loss) gain on derivative instruments |
|
(2,294 |
) |
1,190 |
|
(6,195 |
) |
456 |
| ||||
One Liberty Properties Inc.s share of joint venture net unrealized (loss) gain on derivative instruments |
|
(31 |
) |
74 |
|
(136 |
) |
26 |
| ||||
Other comprehensive (loss) gain |
|
(2,354 |
) |
1,262 |
|
(6,358 |
) |
483 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive income |
|
10,105 |
|
4,976 |
|
9,385 |
|
13,404 |
| ||||
Net income attributable to non-controlling interests |
|
(18 |
) |
(32 |
) |
(16 |
) |
(1,383 |
) | ||||
Adjustment for derivative instruments attributable to non-controlling interests |
|
5 |
|
(9 |
) |
20 |
|
(34 |
) | ||||
Comprehensive income attributable to One Liberty Properties, Inc. |
|
$ |
10,092 |
|
$ |
4,935 |
|
$ |
9,389 |
|
$ |
11,987 |
|
See accompanying notes to consolidated financial statements.
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
|
|
Common |
|
Paid-in |
|
Accumulated |
|
Accumulated |
|
Non- |
|
Total |
| ||||||
Balances, December 31, 2014 |
|
$ |
15,728 |
|
$ |
219,867 |
|
$ |
(3,195 |
) |
$ |
21,876 |
|
$ |
1,628 |
|
$ |
255,904 |
|
Distributions - common stock |
|
|
|
|
|
|
|
(12,801 |
) |
|
|
(12,801 |
) | ||||||
Shares issued through equity offering program net |
|
51 |
|
1,043 |
|
|
|
|
|
|
|
1,094 |
| ||||||
Restricted stock vesting |
|
72 |
|
(72 |
) |
|
|
|
|
|
|
|
| ||||||
Shares issued through dividend reinvestment plan |
|
74 |
|
1,681 |
|
|
|
|
|
|
|
1,755 |
| ||||||
Contribution from non-controlling interest |
|
|
|
|
|
|
|
|
|
663 |
|
663 |
| ||||||
Distributions to non-controlling interests |
|
|
|
|
|
|
|
|
|
(1,633 |
) |
(1,633 |
) | ||||||
Compensation expense - |
|
|
|
1,162 |
|
|
|
|
|
|
|
1,162 |
| ||||||
Net income |
|
|
|
|
|
|
|
11,538 |
|
1,383 |
|
12,921 |
| ||||||
Other comprehensive income |
|
|
|
|
|
449 |
|
|
|
34 |
|
483 |
| ||||||
Balances, June 30, 2015 |
|
$ |
15,925 |
|
$ |
223,681 |
|
$ |
(2,746 |
) |
$ |
20,613 |
|
$ |
2,075 |
|
$ |
259,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balances, December 31, 2015 |
|
$ |
16,292 |
|
$ |
232,378 |
|
$ |
(4,390 |
) |
$ |
16,215 |
|
$ |
1,931 |
|
$ |
262,426 |
|
Distributions - common stock |
|
|
|
|
|
|
|
(14,085 |
) |
|
|
(14,085 |
) | ||||||
Shares issued through equity offering program net |
|
258 |
|
5,549 |
|
|
|
|
|
|
|
5,807 |
| ||||||
Restricted stock vesting |
|
73 |
|
(73 |
) |
|
|
|
|
|
|
|
| ||||||
Shares issued through dividend reinvestment plan |
|
63 |
|
1,245 |
|
|
|
|
|
|
|
1,308 |
| ||||||
Contribution from non-controlling interest |
|
|
|
|
|
|
|
|
|
30 |
|
30 |
| ||||||
Distributions to non-controlling interests |
|
|
|
|
|
|
|
|
|
(225 |
) |
(225 |
) | ||||||
Compensation expense - |
|
|
|
1,406 |
|
|
|
|
|
|
|
1,406 |
| ||||||
Net income |
|
|
|
|
|
|
|
15,727 |
|
16 |
|
15,743 |
| ||||||
Other comprehensive loss |
|
|
|
|
|
(6,338 |
) |
|
|
(20 |
) |
(6,358 |
) | ||||||
Balances, June 30, 2016 |
|
$ |
16,686 |
|
$ |
240,505 |
|
$ |
(10,728 |
) |
$ |
17,857 |
|
$ |
1,732 |
|
$ |
266,052 |
|
See accompanying notes to consolidated financial statements.
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
|
|
Six Months Ended |
| ||||
|
|
2016 |
|
2015 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
|
$ |
15,743 |
|
$ |
12,921 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Gain on sale of real estate |
|
(9,705 |
) |
(5,392 |
) | ||
Purchase price fair value adjustment |
|
|
|
(960 |
) | ||
Gain on available-for-sale securities |
|
(27 |
) |
|
| ||
Increase in unbilled rent receivable |
|
(1,141 |
) |
(879 |
) | ||
Write-off of unbilled rent receivable |
|
7 |
|
226 |
| ||
Decrease in rental income and tenant reimbursements resulting from bad debt expense |
|
190 |
|
|
| ||
Amortization of intangibles relating to leases, net |
|
(294 |
) |
(326 |
) | ||
Amortization of restricted stock expense |
|
1,406 |
|
1,162 |
| ||
Equity in (earnings) loss of unconsolidated joint ventures |
|
(566 |
) |
36 |
| ||
Distributions of earnings from unconsolidated joint ventures |
|
394 |
|
394 |
| ||
Depreciation and amortization |
|
8,583 |
|
7,655 |
| ||
Amortization and write-off of deferred financing costs |
|
455 |
|
641 |
| ||
Payment of leasing commissions |
|
(874 |
) |
(639 |
) | ||
Increase in escrow, deposits, other assets and receivables |
|
(1,015 |
) |
(36 |
) | ||
Decrease in accrued expenses and other liabilities |
|
(1,521 |
) |
(351 |
) | ||
Net cash provided by operating activities |
|
11,635 |
|
14,452 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Purchase of real estate |
|
(47,268 |
) |
(31,748 |
) | ||
Improvements to real estate |
|
(2,041 |
) |
(1,024 |
) | ||
Net proceeds from sales of real estate |
|
40,051 |
|
16,025 |
| ||
Purchase of partners interest in unconsolidated joint venture |
|
|
|
(6,300 |
) | ||
Investment in unconsolidated joint ventures |
|
|
|
(12,686 |
) | ||
Net proceeds from sale of available-for-sale securities |
|
33 |
|
|
| ||
Distributions of capital from unconsolidated joint ventures |
|
253 |
|
733 |
| ||
Net cash used in investing activities |
|
(8,972 |
) |
(35,000 |
) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Scheduled amortization payments of mortgages payable |
|
(4,216 |
) |
(3,769 |
) | ||
Repayment of mortgages payable |
|
(38,115 |
) |
(25,308 |
) | ||
Proceeds from mortgage financings |
|
63,700 |
|
40,768 |
| ||
Proceeds from sale of common stock, net |
|
5,807 |
|
1,094 |
| ||
Proceeds from bank line of credit |
|
39,500 |
|
35,900 |
| ||
Repayment on bank line of credit |
|
(32,400 |
) |
(18,900 |
) | ||
Issuance of shares through dividend reinvestment plan |
|
1,308 |
|
1,755 |
| ||
Payment of financing costs |
|
(1,334 |
) |
(523 |
) | ||
Capital contributions from non-controlling interests |
|
30 |
|
663 |
| ||
Distributions to non-controlling interests |
|
(225 |
) |
(1,633 |
) | ||
Cash distributions to common stockholders |
|
(13,897 |
) |
(12,701 |
) | ||
Net cash provided by financing activities |
|
20,158 |
|
17,346 |
| ||
|
|
|
|
|
| ||
Net increase (decrease) in cash and cash equivalents |
|
22,821 |
|
(3,202 |
) | ||
Cash and cash equivalents at beginning of year |
|
12,736 |
|
20,344 |
| ||
Cash and cash equivalents at end of period |
|
$ |
35,557 |
|
$ |
17,142 |
|
Continued on next page
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited) (Continued)
|
|
Six Months Ended |
| ||||
|
|
2016 |
|
2015 |
| ||
Supplemental disclosures of cash flow information: |
|
|
|
|
| ||
Cash paid during the period for interest expense |
|
$ |
8,207 |
|
$ |
7,773 |
|
Cash paid during the period for Federal excise tax |
|
190 |
|
300 |
| ||
|
|
|
|
|
| ||
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
| ||
Mortgage debt extinguished upon conveyance of the Companys Morrow, Georgia property to mortgagee by deed-in-lieu of foreclosure |
|
$ |
|
|
$ |
1,466 |
|
Consolidation of real estate investment |
|
|
|
2,633 |
| ||
Purchase accounting allocation intangible lease assets |
|
3,967 |
|
2,529 |
| ||
Purchase accounting allocation intangible lease liabilities |
|
(336 |
) |
(4,782 |
) |
See accompanying notes to consolidated financial statements.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016
Note 1 Organization and Background
One Liberty Properties, Inc. (OLP) was incorporated in 1982 in Maryland. OLP is a self-administered and self-managed real estate investment trust (REIT). OLP acquires, owns and manages a geographically diversified portfolio consisting primarily of retail, industrial, flex and health and fitness properties, many of which are subject to long-term net leases. As of June 30, 2016, OLP owns 116 properties, including seven properties owned by consolidated joint ventures and five properties owned by unconsolidated joint ventures. The 116 properties are located in 30 states.
Note 2 Summary Accounting Policies
Principles of Consolidation/Basis of Preparation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and include all of the information and disclosures required by U.S. Generally Accepted Accounting Principles (GAAP) for interim reporting. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statement disclosures. In the opinion of management, all adjustments necessary for fair presentation (including normal recurring accruals) have been included. The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results for the full year. These statements should be read in conjunction with the consolidated financial statements and related notes included in OLPs Annual Report on Form 10-K for the year ended December 31, 2015.
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
The consolidated financial statements include the accounts and operations of OLP, its wholly-owned subsidiaries, its joint ventures in which the Company, as defined, has a controlling interest, and variable interest entities (VIEs) of which the Company is the primary beneficiary. OLP and its consolidated subsidiaries are hereinafter referred to as the Company. Material intercompany items and transactions have been eliminated in consolidation.
Investment in Joint Ventures and Variable Interest Entities
The Financial Accounting Standards Board, or FASB, provides guidance for determining whether an entity is a VIE. VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. A VIE is required to be consolidated by its primary beneficiary, which is the party that (i) has the power to control the activities that most significantly impact the VIEs 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.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016 (Continued)
Note 2 Summary Accounting Policies (Continued)
On January 1, 2016, the Company adopted ASU 2015-02, Amendments to the Consolidation Analysis, which amends the current consolidation guidance. The ASU introduces a separate consolidation analysis specific to limited partnerships and other similar entities. Under this analysis, limited partnerships and other similar entities will be considered a VIE unless the limited partners hold substantive kick-out rights or participating rights (see Note 6).
Consistent with the adoption of ASU 2015-02, the Company assesses the accounting treatment for each of its investments, including a review of each venture or limited liability company or partnership agreement to determine the rights of each party and whether those rights are protective or participating. The agreements typically contain certain protective rights, such as the requirement of partner approval to sell, finance or refinance the property and to pay capital expenditures and operating expenditures outside of the approved budget or operating plan. In situations where the Company and its partner, among other things, (i) approve the annual budget, (ii) approve certain expenditures, (iii) prepare or review and approve the joint ventures tax return before filing, and (iv) approve each lease at a property, the Company does not consolidate the joint venture as the Company considers these to be substantive participation rights that result in shared power over the activities that most significantly impact the performance of the joint venture.
Additionally, the Company assesses the accounting treatment for any interests pursuant to which the Company may have a variable interest as a lessor. Leases may contain certain protective rights, such as the right of sale and the receipt of certain escrow deposits. In situations where the Company does not have the power over tenant activities that most significantly impact the performance of the property, the Company would not consolidate tenant operations.
The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting. All investments in unconsolidated joint ventures have sufficient equity at risk to permit the entity to finance its activities without additional subordinated financial support and, as a group, the holders of the equity at risk have power through voting rights to direct the activities of these ventures. As a result, none of these joint ventures are VIEs. In addition, the Company has shared power with its co-managing members over these entities, and therefore the entities are not consolidated. These investments are recorded initially at cost, as investments in unconsolidated joint ventures, and subsequently adjusted for their share of equity in earnings, cash contributions and distributions. None of the joint venture debt is recourse to the Company, subject to standard carve-outs.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016 (Continued)
Note 2 Summary Accounting Policies (Continued)
The Company has elected to follow the cumulative earnings approach when assessing, for the consolidated statement of cash flows, whether the distribution from the investee is a return of the investors investment as compared to a return on its investment. The source of the cash generated by the investee to fund the distribution is not a factor in the analysis (that is, it does not matter whether the cash was generated through investee refinancing, sale of assets or operating results). Consequently, the investor only considers the relationship between the cash received from the investee to its equity in the undistributed earnings of the investee, on a cumulative basis, in assessing whether the distribution from the investee is a return on or return of its investment. Cash received from the unconsolidated entity is presumed to be a return on the investment to the extent that, on a cumulative basis, distributions received by the investor are less than its share of the equity in the undistributed earnings of the entity.
Properties Held-for-Sale
Real estate investments are classified as properties held-for-sale when management determines that the investment meets the applicable criteria. Real estate investments which are held-for-sale are not depreciated.
Tenant Reimbursements
Tenant reimbursements represent tenants contractual obligations for recoverable real estate taxes and operating expenses and are recognized when earned.
Reclassifications
Certain amounts previously reported in the consolidated financial statements have been reclassified in the accompanying consolidated financial statements to conform to the current periods presentation, primarily to present debt issuance costs as a direct deduction from the carrying amount of the associated debt on the Companys December 31, 2015 consolidated balance sheet. See Note 10.
Note 3 Earnings Per Common Share
Basic earnings per share was determined by dividing net income allocable to common stockholders for each period by the weighted average number of shares of common stock outstanding during the applicable period. Net income is also allocated to the unvested restricted stock outstanding during each period, as the restricted stock is entitled to receive dividends and is therefore considered a participating security. Unvested restricted stock is not allocated net losses and/or any excess of dividends declared over net income; such amounts are allocated entirely to the common stockholders, other than the holders of unvested restricted stock. The restricted stock units awarded under the Pay-for-Performance program are excluded from the basic earnings per share calculation, as these units are not participating securities (see Note 14).
Diluted earnings per share reflects the potential dilution that could occur if securities or other rights exercisable for, or convertible into, common stock were exercised or converted or
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016 (Continued)
Note 3 Earnings Per Common Share (Continued)
otherwise resulted in the issuance of common stock that shared in the earnings of the Company. For the three and six months ended June 30, 2016 and 2015, the diluted weighted average number of shares of common stock includes 107,000 and 100,000 shares, respectively (of an aggregate of 200,000 shares) of common stock underlying the restricted stock units awarded pursuant to the Pay-For-Performance program. These amounts include 100,000 shares that would be issued pursuant to a metric based on the market price and dividends paid at the end of each quarterly period, assuming the end of that quarterly period was the end of the vesting period. Of the remaining 100,000 shares of common stock underlying the restricted stock units awarded under the Pay-For-Performance program (the ROC Shares), 7,000 shares are included in the diluted weighted average in the three and six months ended June 30, 2016 and, as they did not meet the return on capital performance metric during the three and six months ended June 30, 2015, none of the ROC Shares were included in the corresponding periods in 2015.
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 |
|
Six Months Ended |
| ||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
Numerator for basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
| ||||
Net income |
|
$ |
12,459 |
|
$ |
3,714 |
|
$ |
15,743 |
|
$ |
12,921 |
|
Less net income attributable to non-controlling interests |
|
(18 |
) |
(32 |
) |
(16 |
) |
(1,383 |
) | ||||
Less earnings allocated to unvested restricted stock (a) |
|
(436 |
) |
(210 |
) |
(554 |
) |
(420 |
) | ||||
Net income available for common stockholders, basic and diluted |
|
$ |
12,005 |
|
$ |
3,472 |
|
$ |
15,173 |
|
$ |
11,118 |
|
|
|
|
|
|
|
|
|
|
| ||||
Denominator for basic earnings per share: |
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares |
|
16,579 |
|
15,883 |
|
16,484 |
|
15,830 |
| ||||
Effect of diluted securities: |
|
|
|
|
|
|
|
|
| ||||
Restricted stock units awarded under Pay-for-Performance program |
|
107 |
|
100 |
|
107 |
|
100 |
| ||||
Denominator for diluted earnings per share: |
|
|
|
|
|
|
|
|
| ||||
Weighted average shares |
|
16,686 |
|
15,983 |
|
16,591 |
|
15,930 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Earnings per common share, basic |
|
$ |
.72 |
|
$ |
.22 |
|
$ |
.92 |
|
$ |
. 70 |
|
Earnings per common share, diluted |
|
$ |
.72 |
|
$ |
.22 |
|
$ |
.91 |
|
$ |
. 70 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net income attributable to One Liberty Properties, Inc. |
|
$ |
12,441 |
|
$ |
3,682 |
|
$ |
15,727 |
|
$ |
11,538 |
|
(a) Represents an allocation of distributed earnings to unvested restricted stock which, as participating securities, are entitled to receive dividends.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016 (Continued)
Note 4 Real Estate Acquisitions
The following chart details the Companys acquisitions of real estate during the six months ended June 30, 2016 (amounts in thousands):
Description of Property |
|
Date Acquired |
|
Contract |
|
Terms of Payment |
|
Third Party |
| ||
Multi-tenant industrial facility, |
|
March 30, 2016 |
|
$ |
8,100 |
|
All cash |
|
$ |
95 |
|
Multi-tenant industrial facility, |
|
March 30, 2016 |
|
8,950 |
|
All cash |
|
94 |
| ||
Toro distribution facility, |
|
June 3, 2016 |
|
23,695 |
|
All cash |
|
70 |
| ||
4 Advanced Auto retail locations, |
|
June 16, 2016 |
|
6,523 |
|
Cash and $4,300 mortgage (c) |
|
115 |
| ||
Other costs (d) |
|
|
|
|
|
|
|
74 |
| ||
Totals |
|
|
|
$ |
47,268 |
|
|
|
$ |
448 |
|
(a) Included as an expense in the accompanying consolidated statement of income.
(b) These properties are adjacent to one another.
(c) The new mortgage debt, which was obtained simultaneously with the acquisition of the property, bears interest at 3.24%, matures July 1, 2026, and is comprised of four individual loans, which are cross-collateralized.
(d) Costs incurred for properties purchased in 2015, potential future acquisitions and transactions that were not consummated.
The following chart provides the allocation of the purchase price for the Companys acquisitions of real estate during the six months ended June 30, 2016 (amounts in thousands):
|
|
|
|
|
|
Building |
|
Intangible Lease |
|
|
| ||||||||
Description of Property |
|
Land |
|
Building |
|
Improvements |
|
Asset |
|
Liability |
|
Total |
| ||||||
Multi-tenant industrial facility, |
|
$ |
693 |
|
$ |
6,718 |
|
$ |
175 |
|
$ |
514 |
|
$ |
|
|
$ |
8,100 |
|
Multi-tenant industrial facility, |
|
528 |
|
7,893 |
|
181 |
|
441 |
|
(93 |
) |
8,950 |
| ||||||
Toro distribution facility, |
|
3,691 |
|
17,525 |
|
379 |
|
2,100 |
|
|
|
23,695 |
| ||||||
4 Advanced Auto retail locations, |
|
653 |
|
5,012 |
|
189 |
|
912 |
|
(243 |
) |
6,523 |
| ||||||
Totals |
|
$ |
5,565 |
|
$ |
37,148 |
|
$ |
924 |
|
$ |
3,967 |
|
$ |
(336 |
) |
$ |
47,268 |
|
(a) The Company is in the process of finalizing the purchase price allocations for the properties acquired during the three months ended June 30, 2016; therefore the allocations are preliminary and subject to change.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016 (Continued)
Note 4 Real Estate Acquisitions (Continued)
As of June 30, 2016, the weighted average amortization period is 6.3 years for these intangible lease assets and 13.5 years for these 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 15) in the fair value hierarchy.
The properties purchased by the Company during the six months ended June 30, 2016 are each 100% occupied. Each of the Greenville, South Carolina properties is net leased by three unrelated tenants pursuant to leases which expire between 2017 and 2021. The El Paso, Texas property is net leased by a single tenant pursuant to two separate coterminous leases which expire in 2022. The four Ohio properties are net leased by a single tenant pursuant to four separate leases, three of which expire in 2026 and one of which expires in 2025.
On March 31, 2015, the Company purchased for $6,300,000, its partners 50% interest in an unconsolidated joint venture that owned a property in Lincoln, Nebraska, and as a result, the Company obtained a controlling financial interest. In consolidating the investment, the Company recorded a purchase price fair value adjustment of $960,000 on the consolidated statement of income, representing the difference between the book value of its preexisting equity investment on the March 31, 2015 purchase date and the fair value of the net assets acquired.
Acquisition Subsequent to June 30, 2016
On August 2, 2016, the Company purchased for $10,500,000 land located in Wheaton, Illinois improved by a 342 unit apartment complex. Simultaneous with the purchase, (i) the Company leased the land to the owner/operator of the complex pursuant to a triple net ground lease (expiring in 2046) and (ii) the owner/operator obtained a $39,400,000 mortgage from a third party, which, together with the Companys purchase of the land, provided substantially all of the aggregate funds to acquire the complex. The Company provided the land as collateral for the owner/operators mortgage loan; accordingly the Companys land position is subordinate to the mortgage. The owner/operator is an affiliate of the owner/operator of the Lakemoor, Illinois property discussed in Note 6.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016 (Continued)
Note 5 Sale of Properties
The following chart details the Companys sales of real estate during the six months ended June 30, 2016 (amounts in thousands):
Description of Property |
|
Date Sold |
|
Sales Price |
|
Gain on Sale of |
| ||
Portfolio of eight retail properties, |
|
February 1, 2016 |
|
$ |
13,750 |
|
$ |
787 |
|
Retail property, |
|
May 19, 2016 |
|
3,100 |
|
980 |
| ||
Land, |
|
June 15, 2016 |
|
8,806 |
|
2,278 |
| ||
Industrial property, |
|
June 30, 2016 |
|
14,800 |
|
5,660 |
| ||
Totals |
|
|
|
$ |
40,456 |
|
$ |
9,705 |
|
(a) In connection with the sale, the Company paid off the $7,801 mortgage balance on these properties and incurred a $380 expense for the early termination of the mortgage (included in Prepayment costs on debt) and a $26 write-off of deferred financing costs (included in Amortization and write-off of deferred financing costs). As a result of the sale, the Company also wrote-off, as a reduction to Gain on sale of real estate, net, $706 of unbilled straight-line rent receivable, $79 of intangible lease assets and $54 of tenant origination costs. At December 31, 2015, the Company classified the net book value of the land and buildings, intangible lease assets and tenant origination costs totaling $12,259 as Properties held-for-sale.
(b) As a result of the sale, the Company wrote-off, as a reduction to Gain on sale of real estate, net, $37 of unbilled straight-line rent receivable.
(c) In connection with the sale, the Company paid off the $5,272 mortgage balance on this property and incurred a $154 swap termination fee (included in Prepayment costs on debt) and a $30 write-off of deferred financing costs (included in Amortization and write-off of deferred financing costs). As a result of the sale, the Company wrote-off, as a reduction to Gain on sale of real estate, net, $1,262 of unbilled straight-line rent receivable, $36 of intangible lease assets and $75 of tenant origination costs.
On January 13, 2015, a consolidated joint venture of the Company sold a property located in Cherry Hill, New Jersey for $16,025,000, net of closing costs. The sale resulted in a gain of $5,392,000, recorded as Gain on sale of real estate, net, for the six months ended June 30, 2015. In connection with the sale, the Company paid off the $7,376,000 mortgage balance on this property and incurred a $472,000 swap termination fee (included in Prepayment costs on debt) and a $249,000 write-off of deferred financing costs (included in Amortization and write-off of deferred financing costs). The non-controlling interests share of income from the transaction was $1,320,000 and is included in net income attributable to non-controlling interests.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016 (Continued)
Note 6 Variable Interest Entities, Contingent Liabilities and Consolidated Joint Ventures
Variable Interest Entities Ground Leases
In June 2014, the Company purchased land for $6,510,000 in Sandy Springs, Georgia, improved with a 196 unit apartment complex, and in March 2015, the Company purchased land for $9,300,000 in Lakemoor, Illinois, improved with a 496 unit apartment complex. With each purchase, the Company simultaneously entered into a triple net ground lease with the owner/operator of the applicable complex. The Company sold the Sandy Springs, Georgia land on June 15, 2016 (see Note 5) to an unrelated third party.
The Company determined that it has a variable interest through its ground leases and the owner/operators are VIEs because their equity investment at risk is insufficient to finance its activities without additional subordinated financial support; this assessment did not change as a result of the adoption of ASU 2015-02 (see Note 2). Simultaneously with the closing of each acquisition, the owner/operator obtained a mortgage from a third party ($16,230,000 for Sandy Springs and $43,824,000 for Lakemoor) which, together with the Companys purchase of the land, provided substantially all of the aggregate funds to acquire the complex. The Company provided its land as collateral for the respective owner/operators mortgage loans; accordingly, each land position is subordinated to the applicable mortgage. Other than as described above, no other financial support has been provided by the Company.
The Company further determined that for each acquisition it is not the primary beneficiary because the Company does not have the power to direct the activities that most significantly impact the owner/operators economic performance, such as management, operational budgets and other rights, including leasing of the units, and therefore, does not consolidate the VIEs for financial statement purposes. Accordingly, the Company accounts for these investments as land and the revenues from the ground leases as Rental income, net. Such rental income amounted to $434,000 and $862,000 for the three and six months ended June 30, 2016, respectively and $460,000 and $711,000 for the three and six months ended June 30, 2015.
The carrying amount and maximum exposure to loss at June 30, 2016 of the Companys variable interest in the Lakemoor, Illinois is $9,606,000, consisting of land of $9,592,000 and unbilled rent receivable of $14,000.
Pursuant to the terms of the ground lease for the property in Sandy Springs, Georgia, the owner/operator was obligated to make certain unit renovations as and when units became vacant. The cash reserve balance was $1,074,000 at December 31, 2015, and was classified as Restricted cash on the consolidated balance sheet. In connection with the sale of the property on June 15, 2016, the entire restricted cash balance was disbursed to the owner/operator.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016 (Continued)
Note 6 Variable Interest Entities, Contingent Liabilities and Consolidated Joint Ventures (Continued)
Variable Interest Entity Consolidated Joint Ventures
A joint venture in which the Company has a 95% equity interest, acquired a property located in Joppa, Maryland. (The Company also had a senior preferred equity interest until May 2016 when the joint venture obtained a mortgage on its property and a portion of such mortgage proceeds was used to repay the $6,280,000 preferred interest to the Company, including accrued interest of $455,000.) The Company had historically determined that this joint venture was a VIE. As a result of the adoption of ASU 2015-02, the Company re-assessed its evaluation and determined this venture is still a VIE as the non-controlling interests do not have substantive kick-out or participating rights.
With respect to the six other consolidated joint ventures in which the Company has between an 85% to 95% interest, the Company had historically determined that such ventures were not VIEs. As a result of the adoption of ASU 2015-02, the Company re-assessed its evaluation of these investments and determined such ventures are VIEs because the non-controlling interests do not have substantive kick-out or participating rights.
In each of these seven joint ventures, the Company has determined it is the primary beneficiary of the VIE as it has the power to direct the activities that most significantly impact each joint ventures performance including management, approval of expenditures, and the obligation to absorb the losses or rights to receive benefits. Accordingly, the Company has continued to consolidate the operations of these joint ventures for financial statement purposes. The joint ventures creditors do not have recourse to the assets of the Company other than those held by these joint ventures.
The following is a summary of the consolidated VIEs carrying amounts and classification in the Companys consolidated balance sheets, none of which are restricted (amounts in thousands):
|
|
June 30, |
|
December 31, |
| ||
Land |
|
$ |
18,400 |
|
$ |
18,400 |
|
Buildings and improvements, net of depreciation of $2,621 and $2,076, respectively |
|
34,134 |
|
34,287 |
| ||
Cash |
|
2,426 |
|
1,960 |
| ||
Unbilled rent receivable |
|
640 |
|
330 |
| ||
Unamortized intangible lease assets, net |
|
1,793 |
|
1,996 |
| ||
Escrow, deposits and other assets and receivables |
|
1,411 |
|
752 |
| ||
Mortgages payable, net of deferred financing costs of $666 and $438, respectively |
|
36,285 |
|
25,926 |
| ||
Accrued expenses and other liabilities |
|
1,154 |
|
793 |
| ||
Unamortized intangible lease liabilities, net |
|
2,294 |
|
2,392 |
| ||
Accumulated other comprehensive loss |
|
(333 |
) |
(126 |
) | ||
Non-controlling interests in consolidated joint ventures |
|
1,732 |
|
1,931 |
| ||
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016 (Continued)
Note 6 Variable Interest Entities, Contingent Liabilities and Consolidated Joint Ventures (Continued)
MCB Real Estate, LLC and its affiliates (MCB) are the Companys joint venture partner in five consolidated joint ventures. At June 30, 2016, the Company has aggregate equity investments of approximately $10,358,000 in such ventures.
A joint venture with MCB, in which the Company has a net equity investment of $2,895,000, owns a property formerly operated as a Pathmark supermarket in Philadelphia, Pennsylvania. In July 2015, this tenant filed for Chapter 11 bankruptcy protection, rejected the lease, and in late September 2015, vacated the property. This tenant accounted for approximately 1.2% of the Companys rental income for each of the three and six months ended June 30, 2015. At June 30, 2016, the mortgage debt on, and the net book value of, such property is $4,455,000 and $7,246,000, respectively. The Company has determined that no impairment charge is required currently with respect to this property.
Distributions by Consolidated Joint Ventures
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
At June 30, 2016 and December 31, 2015, the Companys five unconsolidated joint ventures each own and operate one property. Such ventures are not considered VIEs (see Note 2). The Companys equity investment in such unconsolidated joint ventures at such dates totaled $11,132,000 and $11,350,000, respectively. The Company recorded equity in earnings of $357,000 and $566,000 for the three and six months ended June 30, 2016 and equity in loss of $183,000 and $36,000 for the three and six months ended June 30, 2015. The loss in the three and six months ended June 30, 2015 resulted from the Companys share of the acquisition expenses associated with the June 2015 purchase of a property located in Manahawkin, New Jersey.
Note 8 Lease Termination Fee Income
In March 2015, the Company received a $650,000 lease termination fee from an industrial tenant in a lease buy-out transaction. In connection with the receipt of this fee, the Company wrote-off $226,000 as an offset to rental income, representing the entire balance of the unbilled rent receivable related to the sole tenant at this property. The Company re-leased this property simultaneously with the termination of the lease.
Note 9 Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of a tenant to make required rent payments. If the financial condition of a specific tenant were to deteriorate adversely impacting its ability to make payments,
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016 (Continued)
Note 9 Allowance for Doubtful Accounts (Continued)
additional allowances may be required. At June 30, 2016 and December 31, 2015, there was no balance in allowance for doubtful accounts.
The Company records bad debt expense as a reduction of rental income and/or tenant reimbursements. On March 2, 2016, Sports Authority Inc., the tenant at the Companys Greenwood Village, Colorado property, filed for Chapter 11 bankruptcy protection and on June 30, 2016, such tenant vacated the property. This tenant accounted for less than 1% of the Companys rental income for the three and six months ended June 30, 2016 and 2015. For the three and six months ended June 30, 2016, the Company recorded an aggregate bad debt expense of $37,000 and $190,000, respectively, relating to rental income and tenant reimbursements due from this tenant. The Company is marketing the property, which at June 30, 2016 has a net book value of $2,711,000, for sale or lease and has determined that no impairment charge is required currently with respect to this property. In July 2016, the Company received a $466,000 payment from the Colorado Department of Transportation as a deposit against any eventual settlement for the taking of approximately 5% of the land associated with this property, which includes approximately 20 parking spaces.
Note 10 Debt Obligations
Mortgages Payable
On January 1, 2016, the Company adopted ASU 2015-03, Interest Imputation of Interest Simplifying the Presentation of Debt Issuance Costs, which amends the balance sheet presentation for debt issuance costs. Under the amended guidance, a company will present unamortized debt issuance costs as a direct deduction from the carrying amount of that debt liability with retrospective application for all prior periods presented. The adoption of this ASU had no impact on the Companys previously reported consolidated financial statements.
As a result of the adoption of this guidance, the following table depicts the adjustments to the Companys previously reported consolidated balance sheet amounts at December 31, 2015 (amounts in thousands):
|
|
As Previously |
|
As Adjusted |
| ||
Unamortized deferred financing costs, net |
|
$ |
3,914 |
|
$ |
|
|
Escrow, deposits and other assets and receivables |
|
4,233 |
|
4,268 |
| ||
Total assets |
|
650,378 |
|
646,499 |
| ||
Mortgages payable |
|
334,428 |
|
331,055 |
| ||
Line of credit |
|
18,250 |
|
17,744 |
| ||
Total liabilities |
|
387,952 |
|
384,073 |
| ||
Total liabilities and equity |
|
650,378 |
|
646,499 |
| ||
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016 (Continued)
Note 10 Debt Obligations (Continued)
The following table details the Mortgages payable, net, balances per the consolidated balance sheets at June 30, 2016 and December 31, 2015 (amounts in thousands):
|
|
June 30, |
|
December 31, |
| ||
Mortgages payable, gross |
|
$ |
355,797 |
|
$ |
334,428 |
|
Unamortized deferred financing costs |
|
(3,948 |
) |
(3,373 |
) | ||
Mortgages payable, net |
|
$ |
351,849 |
|
$ |
331,055 |
|
At June 30, 2016 and December 31, 2015, $399,000 and $35,000, respectively, is included in other assets on the consolidated balance sheets representing unamortized deferred financing costs incurred for which the related mortgage debt has not yet been incurred.
Line of Credit
The Company has a $75,000,000 credit facility with Manufacturers & Traders Trust Company, VNB New York, LLC, Bank Leumi USA and Israel Discount Bank of New York which matures December 31, 2018. The facility provides that the Company pay an interest rate equal to the one month LIBOR rate plus an applicable margin ranging from 175 basis points to 300 basis points depending on the ratio of the Companys total debt to total value, as determined pursuant to the facility. The applicable margin was 175 basis points at June 30, 2016 and 2015. An unused facility fee of .25% per annum applies to the facility. The average interest rate on the facility was approximately 2.19% and 1.93% for the six months ended June 30, 2016 and 2015, respectively. The Company was in compliance with all covenants at June 30, 2016.
The following table details the Line of credit, net, balances per the consolidated balance sheets at June 30, 2016 and December 31, 2015 (amounts in thousands):
|
|
June 30, |
|
December 31, |
| ||
Line of credit, gross |
|
$ |
25,350 |
|
$ |
18,250 |
|
Unamortized deferred financing costs |
|
(422 |
) |
(506 |
) | ||
Line of credit, net |
|
$ |
24,928 |
|
$ |
17,744 |
|
At August 2, 2016, there was an outstanding balance of $2,000,000 (before unamortized deferred financing costs) under the facility.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016 (Continued)
Note 11 Related Party Transactions
Effective January 1, 2016, pursuant to the compensation and services agreement, as amended, with Majestic Property Management Corp., a company wholly-owned by the Companys vice-chairman, property management fees are 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. Pursuant to the compensation and services agreement, the Company paid $672,000 and $1,324,000 (including property management fees of $261,000 and $503,000) for the three and six months ended June 30, 2016, respectively. For the three and six months ended June 30, 2015, such fees were $634,000 and $1,264,000 (including property management fees of $223,000 and $446,000, respectively). The three and six months ended June 30, 2016 and 2015 includes overhead fees of $49,000 and $98,000, respectively. Included in Other assets on the consolidated balance sheet at June 30, 2016, is a $21,000 prepayment of management fees to Majestic; such amount was deducted from a fee for a subsequent month.
For 2016 and 2015, the Company agreed to pay quarterly fees of $65,625 to the Companys chairman and $26,250 to the Companys vice-chairman.
Executive officers and others providing services under the compensation and services agreement were awarded shares of restricted stock and restricted stock units under the Companys stock incentive plans (described in Note 14). The costs of the plans charged to the Companys operations applicable to the executive officers and others providing services under the compensation and services agreement amounted to $382,000 and $726,000 for the three and six months ended June 30, 2016, and $312,000 and $622,000 for the three and six months ended June 30, 2015.
The fees paid under the compensation and services agreement (except for the property management fees which are included in Real estate expenses), the chairman and vice-chairman fees, the costs of the stock incentive plans, and the rent expense are included in General and administrative expense on the consolidated statements of income.
The Company obtains its property insurance in conjunction with Gould and reimburses Gould annually for the Companys insurance cost relating to its properties. Included in Real estate expenses on the consolidated statements of income is insurance expense of $101,000 and $202,000 for the three and six months ended June 30, 2016, and $57,000 and $114,000 for the three and six months ended June 30, 2015.
During the three and six months ended June 30, 2016 and the three and six months ended June 30, 2015, the Company paid an aggregate of $36,000, $88,000, $33,000 and $138,000, respectively, to its joint venture partners or their affiliates for property management and acquisition fees, which are included in Real estate expenses and Real estate acquisition costs on the consolidated statements of income. Additionally, in the three and six months
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016 (Continued)
Note 11 Related Party Transactions (Continued)
ended June 30, 2016 and the three and six months ended June 30, 2015, an unconsolidated joint venture of the Company paid fees of $37,000, $72,000, $326,000 and $326,000 to the other partner of the venture, of which $19,000, $36,000, $163,000 and $163,000, respectively, reduced Equity in earnings of unconsolidated joint ventures on the consolidated statements of income.
Note 12 Common Stock Cash Dividend
On June 10, 2016, the Board of Directors declared a quarterly cash dividend of $.41 per share on the Companys common stock, totaling $7,089,000. The quarterly dividend was paid on July 7, 2016 to stockholders of record on June 24, 2016.
Note 13 Shares Issued through Equity Offering Program
On March 20, 2014, the Company entered into an amended and restated equity offering sales agreement to sell shares of the Companys common stock from time to time with an aggregate sales price of up to approximately $38,360,000, through an at the market equity offering program. During the six months ended June 30, 2016, the Company sold 258,629 shares for proceeds of $5,890,000, net of commissions of $59,000, and incurred offering costs of $83,000 for professional fees. Subsequent to June 30, 2016 and through July 8, 2016, the Company sold 34,144 shares for proceeds of $813,000, net of commissions of $8,000.
Note 14 Stock Based Compensation
The Companys 2016 Incentive Plan, approved by the Companys stockholders in June 2016, permits the Company to grant, among other things, stock options, restricted stock units, performance share awards and dividend equivalent rights and any one or more of the foregoing to its employees, officers, directors and consultants. A maximum of 750,000 shares of the Companys common stock is authorized for issuance pursuant to this Plan. An aggregate of 805,000 shares of restricted stock and restricted stock units are outstanding under the Companys 2012 and 2009 equity incentive plans (collectively, the Prior Plans) and have not yet vested. No additional awards may be granted under the Prior Plans. For accounting purposes, the restricted stock is not included in the shares shown as outstanding on the balance sheet until they vest; however, dividends are paid on the unvested shares.
Pursuant to the Pay-for-Performance program, there are 200,000 performance share awards in the form of restricted stock units (the Units) outstanding under the Companys 2009 Incentive Plan. The holders of Units are not entitled to dividends or to vote the underlying shares until the Units vest and shares are issued. Accordingly, for accounting purposes, the shares underlying the Units are not included in the shares shown as outstanding on the balance sheet. No Units were forfeited or vested during the six months ended June 30, 2016.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016 (Continued)
Note 14 Stock Based Compensation (Continued)
The following is a summary of the activity of the equity incentive plans excluding, except as otherwise noted, the 200,000 Units:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||
Restricted share grants |
|
|
|
|
|
139,225 |
|
129,975 |
| ||
Per share grant price |
|
|
|
|
|
$ |
21.74 |
|
$ |
24.60 |
|
Deferred compensation to be recognized over vesting period |
|
|
|
|
|
$ |
3,027,000 |
|
$ |
3,197,000 |
|
Number of non-vested shares: |
|
|
|
|
|
|
|
|
| ||
Non-vested beginning of period |
|
605,000 |
|
540,285 |
|
538,755 |
|
480,995 |
| ||
Grants |
|
|
|
|
|
139,225 |
|
129,975 |
| ||
Vested during period |
|
|
|
(1,295 |
) |
(72,730 |
) |
(71,980 |
) | ||
Forfeitures |
|
|
|
|
|
(250 |
) |
|
| ||
Non-vested end of period |
|
605,000 |
|
538,990 |
|
605,000 |
|
538,990 |
|
The following information includes the 200,000 Units:
Average per share value of non-vested shares (based on grant price) |
|
$ |
18.00 |
|
$ |
17.12 |
|
$ |
18.00 |
|
$ |
17.12 |
|
|
|
|
|
|
|
|
|
|
| ||||
Value of shares vested during the period (based on grant price) |
|
$ |
|
|
$ |
21,000 |
|
$ |
1,177,000 |
|
$ |
607,000 |
|
|
|
|
|
|
|
|
|
|
| ||||
Average value of shares forfeited during the period (based on grant price) |
|
$ |
|
|
$ |
|
|
$ |
21.05 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
| ||||
The total charge to operations for all incentive plans is as follows: |
|
|
|
|
|
|
|
|
| ||||
Outstanding restricted stock grants |
|
$ |
641,000 |
|
$ |
555,000 |
|
$ |
1,291,000 |
|
$ |
1,103,000 |
|
Outstanding restricted stock units |
|
99,000 |
|
30,000 |
|
115,000 |
|
59,000 |
| ||||
Total charge to operations |
|
$ |
740,000 |
|
$ |
585,000 |
|
$ |
1,406,000 |
|
$ |
1,162,000 |
|
As of June 30, 2016, there were approximately $7,417,000 of total compensation costs related to non-vested awards that have not yet been recognized, including $130,000 related to the Units (net of forfeiture and performance assumptions which are re-evaluated quarterly). These compensation costs will be charged to general and administrative expense over the remaining respective vesting periods. The weighted average vesting period is approximately 2.3 years.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016 (Continued)
Note 15 Fair Value Measurements
The Company measures the fair value of financial instruments based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entitys own assumptions about market participant assumptions. In accordance with the fair value hierarchy, Level 1 assets/liabilities are valued based on quoted prices for identical instruments in active markets, Level 2 assets/liabilities are valued based on quoted prices in active markets for similar instruments, on quoted prices in less active or inactive markets, or on other observable market inputs and Level 3 assets/liabilities are valued based significantly on unobservable market inputs.
The carrying amounts of cash and cash equivalents, restricted cash, escrow, deposits and other assets and receivables (excluding available-for-sale securities), dividends payable, and accrued expenses and other liabilities (excluding interest rate swaps), are not measured at fair value on a recurring basis, but are considered to be recorded at amounts that approximate fair value.
At June 30, 2016, the $371,766,000 estimated fair value of the Companys mortgages payable is more than their $355,797,000 carrying value (before unamortized deferred financing costs) by approximately $15,969,000 assuming a blended market interest rate of 3.73% based on the 9.8 year weighted average remaining term of the mortgages. At December 31, 2015, the $346,614,000 estimated fair value of the Companys mortgages payable is more than their $334,428,000 carrying value (before unamortized deferred financing costs) by approximately $12,186,000 assuming a blended market interest rate of 4.07% based on the 8.9 year weighted average remaining term of the mortgages.
At June 30, 2016 and December 31, 2015, the carrying amount of the Companys line of credit (before unamortized deferred financing costs) of $25,350,000 and $18,250,000, respectively, approximates its fair value.
The fair value of the Companys 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.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016 (Continued)
Note 15 Fair Value Measurements (Continued)
Fair Value on a Recurring Basis
The fair value of the Companys available-for-sale securities and derivative financial instruments was determined using the following inputs (amounts in thousands):
|
|
|
|
|
|
Fair Value Measurements |
| |||||
|
|
|
|
Carrying and |
|
on a Recurring Basis |
| |||||
|
|
As of |
|
Fair Value |
|
Level 1 |
|
Level 2 |
| |||
Financial assets: |
|
|
|
|
|
|
|
|
| |||
Available-for-sale securities: |
|
|
|
|
|
|
|
|
| |||
Equity securities |
|
June 30, 2016 |
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
December 31, 2015 |
|
32 |
|
32 |
|
|
| |||
Financial liabilities: |
|
|
|
|
|
|
|
|
| |||
Derivative financial instruments: |
|
|
|
|
|
|
|
|
| |||
Interest rate swaps |
|
June 30, 2016 |
|
$ |
10,502 |
|
$ |
|
|
$ |
10,502 |
|
|
|
December 31, 2015 |
|
4,299 |
|
|
|
4,299 |
|
The Company does not own any financial instruments that are classified as Level 3.
Available-for-sale securities
At December 31, 2015, the Companys available-for-sale securities was a $32,000 investment in equity securities (included in other assets on the consolidated balance sheet). The aggregate cost of these securities was $5,300 and at December 31, 2015, the unrealized gain of $27,000 was included in accumulated other comprehensive loss on the consolidated balance sheet. Fair value was approximated based on current market quotes from financial sources that track such securities. During the three and six months ended June 30, 2016, the Company sold such equity securities for gross proceeds of $33,000 and recognized a gain of $27,000 (included in other income on the consolidated statement of income).
Derivative financial instruments
The Companys objective in using interest rate swaps is to add stability to interest expense and to manage its exposure to interest rate movements. The Company does not use derivatives for trading or speculative purposes.
Fair values are approximated using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivatives. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with it use Level 3 inputs, such as estimates of current credit spreads, to evaluate
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016 (Continued)
Note 15 Fair Value Measurements (Continued)
the likelihood of default by the Company and its counterparty. As of June 30, 2016, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuation is classified in Level 2 of the fair value hierarchy.
As of June 30, 2016, the Company had entered into 30 interest rate derivatives, all of which were interest rate swaps, related to 30 outstanding mortgage loans with an aggregate $143,656,000 notional amount and mature between 2018 and 2028 (weighted average remaining maturity of 8.4 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 5.75% and a weighted average interest rate of 4.15% at June 30, 2016). The fair value of the Companys derivatives designated as hedging instruments in asset and liability positions reflected as other assets or other liabilities on the consolidated balance sheets were $0 and $10,502,000, respectively, at June 30, 2016, and $0 and $4,299,000, respectively, at December 31, 2015.
Three of the Companys unconsolidated joint ventures, in which wholly-owned subsidiaries of the Company are 50% partners, had two interest rate derivatives outstanding at June 30, 2016 with an aggregate $10,870,000 notional amount. These interest rate swaps, which were designated as cash flow hedges, have interest rates of 3.49% and 5.81% and mature in 2022 and 2018, respectively.
The following table presents the effect of the Companys derivative financial instruments on the consolidated statements of income for the periods presented (amounts in thousands):
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
One Liberty Properties, Inc. and Consolidated Subsidiaries |
|
|
|
|
|
|
|
|
| ||||
Amount of (loss) gain recognized on derivatives in Other comprehensive loss |
|
$ |
(3,079 |
) |
$ |
732 |
|
$ |
(7,582 |
) |
$ |
(891 |
) |
Amount of loss reclassification from Accumulated other comprehensive loss into Interest expense |
|
(785 |
) |
(458 |
) |
(1,387 |
) |
(1,347 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Unconsolidated Joint Ventures (Companys share) |
|
|
|
|
|
|
|
|
| ||||
Amount of (loss) gain recognized on derivatives in Other comprehensive loss |
|
$ |
(55 |
) |
$ |
46 |
|
$ |
(185 |
) |
$ |
(25 |
) |
Amount of loss reclassification from Accumulated other comprehensive loss into Equity in earnings of unconsolidated joint ventures |
|
(24 |
) |
(29 |
) |
(49 |
) |
(51 |
) |
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016 (Continued)
Note 15 Fair Value Measurements (Continued)
No gain or loss was recognized with respect to hedge ineffectiveness or to amounts excluded from effectiveness testing on the Companys cash flow hedges for the three and six months ended June 30, 2016 and 2015. During the twelve months ending June 30, 2017, the Company estimates an additional $2,458,000 will be reclassified from other Accumulated comprehensive loss as an increase to Interest expense and $92,000 will be reclassified from Accumulated other comprehensive loss as a decrease to Equity in earnings of unconsolidated joint ventures.
The derivative agreements in effect at June 30, 2016 provide that if the wholly-owned subsidiary of the Company which is a party to the agreement defaults or is capable of being declared in default on any of its indebtedness, then a default can be declared on such subsidiarys derivative obligation. In addition, the Company is a party to one of the derivative agreements and if there is a default by the subsidiary on the loan subject to the derivative agreement to which the Company is a party and if there are swap breakage losses on account of the derivative being terminated early, then the Company could be held liable for such swap breakage losses, if any. During the six months ended June 30, 2016, the Company terminated three interest rate swaps in connection with the early payoff of the related mortgages, and during the six months ended June 30, 2015, the Company terminated one interest rate swap in connection with the sale of its Cherry Hill, New Jersey property. The Company accelerated the reclassification of amounts in other comprehensive loss to earnings as a result of these hedged forecasted transactions being terminated. During the three and six months ended June 30, 2016, the accelerated amounts were losses of $154,000 and $178,000, respectively, and during the six months ended June 30, 2015, the accelerated amount was a loss of $472,000, all of which are included in Prepayment costs on debt on the consolidated statements of income.
As of June 30, 2016, the fair value of the derivatives in the liability position, including accrued interest and excluding any adjustments for nonperformance risk, was approximately $11,277,000. In the event that the Company breaches any of the contractual provisions of the derivative contracts, it would be required to settle its obligations thereunder at their termination liability value of $11,277,000. This termination liability value, net of $775,000 adjustments for accrued interest and nonperformance risk, or $10,502,000, is included in Accrued expenses and other liabilities on the consolidated balance sheet at June 30, 2016.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016 (Continued)
Note 16 New Accounting Pronouncements
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The effective date of the standard will be fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, and early adoption is permitted. The Company is currently evaluating the new guidance to determine the impact, if any, it may have on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Consideration (Reporting Revenue Gross versus Net), which outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The effective date of the standard will be fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted but not before annual periods beginning after December 15, 2016. The Company is currently evaluating the new guidance to determine the impact, if any, it may have on its consolidated financial statements.
Also in March 2016, the FASB issued ASU No. 2016-05, Derivatives and Hedging (Topic 815), Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, which states the novation of a derivative contract (i.e., a change in the counterparty) in a hedge accounting relationship does not, in and of itself, require dedesignation of that hedge accounting relationship. The hedge accounting relationship could continue uninterrupted if all of the other hedge accounting criteria are met, including the expectation that the hedge will be highly effective when the creditworthiness of the new counterparty to the derivative contract is considered. The effective date of the standard will be fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, and early adoption is permitted. The Company is currently evaluating the new guidance to determine the impact, if any, it may have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The effective date of the standard will be fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and early adoption is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the new guidance to determine the impact it may have on its consolidated financial statements.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016 (Continued)
Note 16 New Accounting Pronouncements (Continued)
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations: Simplifying the Accounting for Measurement Period Adjustments, which eliminates the requirement for an acquirer in a business combination to account for measurement period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The effective date of the standard is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company adopted this guidance on January 1, 2016 and its adoption did not have any impact on its consolidated financial statements.
Note 17 Subsequent Events
Subsequent events have been evaluated and except as disclosed in Note 4 (Real Estate Acquisitions), Note 9 (Allowance for Doubtful Accounts), Note 10 (Debt Obligations), Note 12 (Common Stock Cash Dividend) and Note 13 (Shares Issued Through Equity Offering Program), there were no other events relative to the Companys consolidated financial statements that require additional disclosure.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words may, will, could, believe, expect, intend, anticipate, estimate, project, or similar expressions or variations thereof. Forward-looking statements should not be relied on since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, performance or achievements. Investors are encouraged to review the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2015 under the caption Item 1A. Risk Factors for a discussion of certain factors which may cause actual results to differ materially from current expectations and are cautioned not to place undue reliance on any forward-looking statements.
Acquisitions, Sales, Financings and Other Developments During the Six Months Ended June 30, 2016
We acquired seven properties for an aggregate purchase price of $47.3 million. These acquisitions contributed $462,000 and $468,000 of rental income and $203,000 and $222,000 of depreciation expense during the three and six months ended June 30, 2016, respectively. We estimate that commencing July 1, 2016, the rental income from these seven properties will be $829,000 per quarter and depreciation expense will be $370,000 per quarter.
We sold 11 properties (the Sold Properties), including a portfolio of eight convenience stores (the Pantry Portfolio), for an aggregate sales price of $40.5 million and an aggregate net gain of $9.7 million, before giving effect to prepayment costs on debt of $534,000. For the six months ended June 30, 2016 and 2015, the Sold Properties accounted for approximately (i) $927,000, or 3.0%, and $1.8 million, or 6.1%,respectively, of our rental income, and (ii) an aggregate of $329,000 and $655,000, respectively, of depreciation and amortization expense, mortgage interest expense and amortization of deferred financing costs.
We obtained $63.7 million of gross proceeds from mortgage financings and refinancings, including $14.1 million of proceeds derived from refinancings. The weighted average interest rate on the $63.7 million of mortgage debt is 3.6% and the weighted average remaining term is 11.57 years.
We raised $5.8 million from the issuance of 258,000 shares of common stock pursuant to our at-the-market equity offering program and issued 63,000 shares of common stock through our dividend reinvestment program in lieu of paying dividends of approximately $1.3 million.
On March 2, 2016, the tenant that leased a property operated as a Sports Authority retail store located in Greenwood Village, Colorado filed for Chapter 11 bankruptcy protection and on June 30, 2016, such tenant vacated the property. This tenant accounted for $178,000 and $224,000, or less than 1% of our rental income, for the six months ended June 30, 2016 and 2015, respectively. We are in the process of marketing the property for sale or lease and have determined that no impairment charge is required currently with respect to this property. In July 2016, the Company received a $466,000 payment from the Colorado Department of Transportation (the CDOT) as a deposit against any eventual settlement for the taking of approximately 5% of the land associated with this property, which includes approximately 20 parking spaces. We are negotiating with the CDOT regarding additional compensation for this taking, although no assurance can be given that we will be successful in this regard. We may be required to expend all or a portion of the proceeds we have already received from the CDOT to repurpose the property for a replacement tenant.
Acquisitions Subsequent to June 30, 2016
On August 2, 2016, we purchased for $10.5 million land located in Wheaton, Illinois improved by a 342 unit apartment complex. Our annual rental income from this property is approximately $1.1 million. See Off Balance Sheet Arrangements for further information.
We anticipate acquiring for $14.2 million, a 131,710 square foot shopping center located on 9.7 acres in St. Louis Park, Minnesota and leased to two tenants. The weighted average remaining term of the leases is approximately 3.2 years. We expect this acquisition, subject to satisfaction of customary closing conditions, will be completed in August 2016. The base rent from this property during the twelve months ending August 31, 2017 will be approximately $1.1 million.
Overview
We are a self-administered and self-managed real estate investment trust, incorporated in Maryland in 1982. We acquire, own and manage a geographically diversified portfolio of retail, (including furniture stores, restaurants, office supply stores and supermarkets), industrial, flex, and health and fitness properties, many of which are leased under long-term leases. As of June 30, 2016, we own 116 properties (including seven properties owned by consolidated joint ventures and five properties owned by unconsolidated joint ventures) located in 30 states. Based on square footage, our occupancy rate at June 30, 2016 is approximately 98.1%.
We face a variety of risks and challenges in our business. We, among other things, face the possibility we will not be able to acquire accretive properties on acceptable terms, lease our properties on favorable terms or at all, our tenants may not be able to pay their rental and other obligations, and we may not be able to renew or relet, on acceptable terms, leases that are expiring.
We seek to manage the risk of our real property portfolio and the related financing arrangements by diversifying among types of properties, industries, locations, tenants, scheduled lease expirations and lenders. We also use interest rate swaps to limit interest rate risk. All of our mortgage debt, after giving effect to interest rate swap agreements, bears interest at fixed rates, eliminating our exposure to interest rate fluctuations on our outstanding mortgage debt.
We monitor the risk of tenant non-payments through a variety of approaches tailored to the applicable situation. Generally, based on our assessment of the credit risk posed by our tenants, we monitor a tenants financial condition through one or more of the following actions: reviewing tenant financial statements, obtaining other tenant related financial information, regular contact with tenants representatives, tenant credit checks and regular management reviews of our tenants.
In acquiring properties, we balance an evaluation of the terms of the leases and the credit of the existing tenants with a fundamental analysis of the real estate to be acquired, which analysis takes into account, among other things, the estimated value of the property, local demographics and the ability to re-rent or dispose of the property on favorable terms upon lease expiration or early termination.
We are sensitive to the risks facing the retail industry as a result of the growth of e-commerce. We are addressing our exposure to the retail industry by seeking to acquire properties that we believe capitalize on e-commerce activities, such as e-commerce distribution and warehousing facilities - however, we intend to continue to acquire retail properties as we deem appropriate. Approximately 52.9% of our 2016 contractual rental income (as described below) is derived from retail tenants, including 10.1% and 4.2% from tenants engaged in retail furniture and office supply activities, respectively.
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute currently at least 90% of ordinary taxable income to our stockholders. We intend to comply with these requirements and to maintain our REIT status.
Our 2016 contractual rental income is approximately $57.8 million and represents, after giving effect to any abatements, concessions or adjustments, the base rent payable to us in calendar year 2016 under leases in effect at June 30, 2016. Contractual rental income for 2016 excludes (i) approximately $2.0 million of straight-line rent and $506,000 of amortization of intangibles; and (ii) our share of the rental income payable to our unconsolidated joint ventures, which in 2016 is approximately $2.8 million.
The following table sets forth scheduled lease expirations at our properties as of June 30, 2016 for the calendar years indicated below:
Year of Lease |
|
Number of |
|
Approximate Square |
|
2016 Contractual |
|
Percent of 2016 |
| |
2016 |
|
2 |
|
120,307 |
|
$ |
883,678 |
|
1.5 |
% |
2017 |
|
18 |
|
116,479 |
|
1,589,066 |
|
2.7 |
| |
2018 |
|
21 |
|
404,767 |
|
3,290,724 |
|
5.7 |
| |
2019 |
|
12 |
|
228,648 |
|
2,037,344 |
|
3.5 |
| |
2020 |
|
10 |
|
142,008 |
|
2,913,573 |
|
5.0 |
| |
2021 |
|
20 |
|
568,985 |
|
4,399,177 |
|
7.6 |
| |
2022 |
|
16 |
|
2,344,608 |
|
15,078,724 |
|
26.1 |
| |
2023 |
|
8 |
|
609,001 |
|
4,366,740 |
|
7.6 |
| |
2024 |
|
5 |
|
377,222 |
|
1,909,589 |
|
3.3 |
| |
2025 |
|
11 |
|
400,728 |
|
5,605,695 |
|
9.7 |
| |
2026 and thereafter |
|
32 |
|
2,064,059 |
|
15,768,958 |
|
27.3 |
| |
|
|
155 |
|
7,376,812 |
|
$ |
57,843,268 |
|
100.0 |
% |
(1) Lease expirations assume tenants do not exercise existing renewal options.
Results of Operations
Revenues
The following table compares revenues for the periods indicated:
|
|
Three Months Ended |
|
Increase |
|
% |
|
Six Months Ended |
|
Increase |
|
% |
| ||||||||||
(Dollars in thousands) |
|
2016 |
|
2015 |
|
(Decrease) |
|
Change |
|
2016 |
|
2015 |
|
(Decrease) |
|
Change |
| ||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Rental income, net |
|
$ |
15,594 |
|
$ |
14,992 |
|
$ |
602 |
|
4.0 |
% |
$ |
30,650 |
|
$ |
28,886 |
|
$ |
1,764 |
|
6.1 |
% |
Tenant reimbursements |
|
1,639 |
|
790 |
|
849 |
|
107.5 |
|
2,927 |
|
1,572 |
|
1,355 |
|
86.2 |
| ||||||
Lease termination fee |
|
|
|
|
|
|
|
|
|
|
|
650 |
|
(650 |
) |
(100.0 |
) | ||||||
Total revenues |
|
$ |
17,233 |
|
$ |
15,782 |
|
$ |
1,451 |
|
9.2 |
|
$ |
33,577 |
|
$ |
31,108 |
|
$ |
2,469 |
|
7.9 |
|
Rental income, net. The increases are due primarily to (i) $1.2 million and $2.8 million in the three and six months ended June 30, 2016, respectively, generated by 14 properties acquired in 2016 and 2015; (ii) $115,000 and $221,000, respectively, from three replacement tenants that leased vacant space at our El Paso, Texas property; and (iii) the write-off in the six months ended June 30, 2015 of straight-line rent of $226,000 related to the lease termination fee described below. Partially offsetting these increases are decreases in the three and six months ended June 30, 2016 of $539,000 and $848,000, respectively, due to the 2016 sale of the Sold Properties. Additionally, there was a decrease of $186,000 in the six months ended June 30, 2016 as we did not commence recognizing rental income from a new tenant until April 1, 2016 at a property at which the prior tenants lease expired on December 31, 2015. Rental income for the three and six months ended June 30, 2015 included $179,000 and $357,000, respectively, from a property which is now vacant, that was formerly leased to Pathmark, which filed for Chapter 11 bankruptcy protection in September 2015.
Tenant reimbursements. Real estate tax and operating expense reimbursements in the three and six months ended June 30, 2016 increased by (i) $335,000 and $596,000, respectively, from seven properties acquired in 2016 and 2015 and (ii) $514,000 and $759,000, respectively, from other properties in our portfolio. We recognized an equivalent amount of real estate expense for these tenant reimbursements.
Lease termination fee. In March 2015, we received a lease termination fee of $650,000 in a lease buy-out transaction. We re-leased the property simultaneously with the lease termination.
Operating Expenses
The following table compares operating expenses for the periods indicated:
|
|
Three Months Ended |
|
Increase |
|
% |
|
Six Months Ended |
|
Increase |
|
% |
| ||||||||||
(Dollars in thousands) |
|
2016 |
|
2015 |
|
(Decrease) |
|
Change |
|
2016 |
|
2015 |
|
(Decrease) |
|
Change |
| ||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Depreciation and amortization |
|
$ |
4,398 |
|
$ |
3,921 |
|
$ |
477 |
|
12.2 |
% |
$ |
8,583 |
|
$ |
7,655 |
|
$ |
928 |
|
12.1 |
% |
General and administrative |
|
2,671 |
|
2,390 |
|
281 |
|
11.8 |
|
5,280 |
|
4,782 |
|
498 |
|
10.4 |
| ||||||
Real estate expenses |
|
2,159 |
|
1,273 |
|
886 |
|
69.6 |
|
4,334 |
|
2,607 |
|
1,727 |
|
66.2 |
| ||||||
Real estate acquisition costs |
|
244 |
|
79 |
|
165 |
|
208.9 |
|
448 |
|
327 |
|
121 |
|
37.0 |
| ||||||
Federal excise and state taxes |
|
78 |
|
124 |
|
(46 |
) |
(37.1 |
) |
154 |
|
198 |
|
(44 |
) |
(22.2 |
) | ||||||
Leasehold rent |
|
77 |
|
77 |
|
|
|
|
|
154 |
|
154 |
|
|
|
|
| ||||||
Total operating expenses |
|
9,627 |
|
7,864 |
|
1,763 |
|
22.4 |
|
18,953 |
|
15,723 |
|
3,230 |
|
20.5 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Operating income |
|
$ |
7,606 |
|
$ |
7,918 |
|
$ |
(312 |
) |
(3.9 |
) |
$ |
14,624 |
|
$ |
15,385 |
|
$ |
(761 |
) |
(4.9 |
) |
Depreciation and amortization. Approximately $475,000 and $982,000, respectively, of the increases for the three and six months ended June 30, 2016 are due to depreciation expense on the properties we acquired in 2016 and 2015, and approximately $111,000 and $187,000, respectively, from amortization of property improvements placed in service during 2016 and 2015. Partially offsetting these increases are decreases in the three and six months ended June 30, 2016 of (i) $89,000 and $165,000, respectively, of expenses related to the Sold Properties and (ii) $20,000 and $76,000, respectively, of amortization and write-offs of intangibles and lease commissions that were non-recurring.
General and administrative. Contributing to the increases in the three and six months ended June 30, 2016 were increases of: (i) $155,000 and $244,000, respectively, in non-cash compensation expense primarily related to the increase in the number of shares of restricted stock granted in 2016 and the higher fair value of the awards granted in 2016 in comparison to the awards granted in 2011 that vested in January 2016; (ii) $75,000 and $147,000, respectively, for third party audit services; and (iii) $42,000 and $82,000, respectively, in compensation expense primarily due to higher compensation levels.
Real estate expenses. The increases in the three and six months ended June 30, 2016 are due primarily to increases of $362,000 and $651,000, respectively, from properties acquired in 2015 and 2016 and $390,000 and $696,000 from other properties in our portfolio. Substantially all of these increases are rebilled to tenants. Also contributing to the increase in the three and six months ended June 30, 2016 were $58,000 and $172,000 of expenses related to the vacant former Pathmark property and $76,000 and $208,000, respectively, of expenses related to the vacant former Sports Authority property.
Real estate acquisition costs. The increases in the three and six months ended June 30, 2016 are due to increased acquisition activity.
Other Income and Expenses
The following table compares other income and expenses for the periods indicated:
|
|
Three Months Ended |
|
Increase |
|
% |
|
Six Months Ended |
|
Increase |
|
% |
| ||||||||||
(Dollars in thousands) |
|
2016 |
|
2015 |
|
(Decrease) |
|
Change |
|
2016 |
|
2015 |
|
(Decrease) |
|
Change |
| ||||||
Other income and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Gain on sales of real estate, net |
|
$ |
8,918 |
|
$ |
|
|
$ |
8,918 |
|
n/a |
|
$ |
9,705 |
|
$ |
5,392 |
|
$ |
4,313 |
|
80.0 |
% |
Purchase price fair value adjustment |
|
|
|
|
|
|
|
|
|
|
|
960 |
|
(960 |
) |
(100.0 |
) | ||||||
Prepayment costs on debt |
|
(154 |
) |
|
|
(154 |
) |
n/a |
|
(577 |
) |
(568 |
) |
9 |
|
1.6 |
| ||||||
Equity in earnings (loss) of unconsolidated joint ventures |
|
357 |
|
(183 |
) |
540 |
|
295.1 |
% |
566 |
|
(36 |
) |
602 |
|
1,672.2 |
| ||||||
Other income |
|
56 |
|
72 |
|
(16 |
) |
(22.2 |
) |
69 |
|
75 |
|
(6 |
) |
(8.0 |
) | ||||||
Interest: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Expense |
|
(4,114 |
) |
(3,907 |
) |
207 |
|
5.3 |
|
(8,189 |
) |
(7,646 |
) |
543 |
|
7.1 |
| ||||||
Amortization and write-off of deferred financing costs |
|
(210 |
) |
(186 |
) |
24 |
|
12.9 |
|
(455 |
) |
(641 |
) |
(186 |
) |
(29.0 |
) | ||||||
Gain on sales of real estate, net. The gains in the current year were realized from the sales of three properties in the three months ended June 30, 2016 and the February 2016 sale of the Pantry Portfolio. The 2015 gain was realized from the January 2015 sale of the Cherry Hill, New Jersey property. The minority partners share of the gain on the Cherry Hill, New Jersey property was $1.3 million, which is the primary reason for the $1.4 million decrease in net income attributable to non-controlling interests for the six months ended June 30, 2016 as compared to June 30, 2015.
Purchase price fair value adjustment. In connection with the acquisition of our joint venture partners 50% interest in a property located in Lincoln, Nebraska, we recorded this adjustment, representing the difference between the book value of the preexisting equity investment on the March 31, 2015 purchase date and the fair value of the investment.
Prepayment costs on debt. These costs were incurred primarily in connection with property sales and the payoff, prior to the stated maturity, of the related mortgage debt. In 2016, these costs related primarily from the sales of the Tomlinson, Pennsylvania property and the Pantry Portfolio and in 2015, these costs related primarily to the sale of the Cherry Hill, New Jersey property.
Equity in earnings (loss) of unconsolidated joint ventures. The increases in the 2016 three and six month periods are due primarily to increases of $516,000 and $642,000, respectively, in our share of income from the Manahawkin, New Jersey retail center which was acquired June 15, 2015. The three and six months ended June 30, 2015 included our $400,000 share of acquisition expenses associated with the purchase of this center.
Interest expense. The following table details the components of interest expense for the periods indicated:
|
|
Three Months Ended |
|
Increase |
|
% |
|
Six Months Ended |
|
Increase |
|
% |
| ||||||||||
(Dollars in thousands) |
|
2016 |
|
2015 |
|
(Decrease) |
|
Change |
|
2016 |
|
2015 |
|
(Decrease) |
|
Change |
| ||||||
Interest expense: |
|
|
|
|
|
|
|
|