One Liberty Properties - 10-Q quarterly report FY2012 Q2

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One Liberty Properties, Inc. and Subsidiaries

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Part I — FINANCIAL INFORMATION

Item 1.    Financial Statements

ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except Par Value)

See accompanying notes to consolidated financial statements.

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ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in Thousands, Except Per Share Data)

(Unaudited)

See accompanying notes to consolidated financial statements.

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ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in Thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

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ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the six month period ended June 30, 2012 (Unaudited)

and the year ended December 31, 2011

(Amounts in Thousands, Except Per Share Data)

See accompanying notes to consolidated financial statements.

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ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited)

Continued on next page

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ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited) (Continued)

See accompanying notes to consolidated financial statements.

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2012

Note 1 - Organization and Background

One Liberty Properties, Inc. (“OLP”) was incorporated in 1982 in Maryland.  OLP is a self-administered and self-managed real estate investment trust (“REIT”).  OLP acquires, owns and manages a geographically diversified portfolio of retail (including furniture and office supply stores), industrial, office, flex, health and fitness and other properties, a substantial portion of which are under long-term net leases.  As of June 30, 2012, OLP owned 92 properties, two of which are owned by consolidated joint ventures and one of which is a 50% tenancy in common interest.  OLP’s unconsolidated joint ventures owned a total of six properties. The 98 properties are located in 29 states.

Note 2 - Basis of Preparation

The accompanying interim unaudited consolidated financial statements as of June 30, 2012 and for the three and six months ended June 30, 2012 and 2011 reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for such interim periods. The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results for the full year.

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

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

With respect to its two consolidated joint ventures in which the Company has a 90% and 95% interest, the Company has determined that (i) such ventures are not variable interest entities and (ii) the Company exercises substantial operating control and accordingly, such ventures are consolidated for financial statement purposes.

In February 2012, the Company entered into a joint venture (see Note 4) and contributed its property located in Plano, Texas in exchange for a 90% equity interest therein. Current accounting guidance provides a framework for determining whether an entity is a variable interest entity (“VIE”) and if consolidation of an entity in which it owns an interest is appropriate. The Company has determined that this joint venture is a VIE; however, the Company is not the primary beneficiary since it does not have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance due to shared power of the parties to the VIE. Accordingly, the Company accounts for its investment in this joint venture under the equity method from the date of contribution.

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2012 (Continued)

Note 2  Basis of Preparation (Continued)

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

Certain amounts reported in previous consolidated financial statements have been reclassified in the accompanying consolidated financial statements to conform to the current period’s presentation, primarily to reclassify the transferred assets and liabilities of two properties that were sold in June 2012 and one property deemed held for sale at June 30, 2012 to properties held for sale at December 31, 2011 and to classify the operations of these properties to discontinued operations for all periods presented. In addition, the net book value of the Plano, Texas property that was contributed to a joint venture in February 2012 was reclassified from real estate investments to property contributed to joint venture at December 31, 2011. The accounting treatment presentation on the accompanying consolidated statements of income is to reflect the results of this property’s operations prospectively following its transfer to the joint venture as “equity in earnings of unconsolidated joint ventures” with no reclassification adjustments for discontinued operations.

Property management costs of $150,000 and $300,000 incurred under the compensation and services agreement were reclassified from general and administrative expenses to real estate operating expenses for the three and six months ended June 30, 2011.

These statements should be read in conjunction with the consolidated financial statements and related notes which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Note 3 - Earnings Per Common Share

For the three and six months ended June 30, 2012 and 2011, basic earnings per share was determined by dividing net income allocable to common stockholders for the applicable period by the weighted average number of shares of common stock outstanding during such period. Net income is also allocated to the unvested restricted stock, during the applicable period as the restricted stock is entitled to receive dividends and is therefore considered a participating security.  Unvested restricted stock is not allocated net losses and/or any excess of dividends declared over net income; such amounts are allocated entirely to the common stockholders other than the holders of unvested restricted stock.  The restricted stock units awarded under the Pay-for-Performance program described in Note 11 are excluded from the

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2012 (Continued)

Note 3 - Earnings Per Common Share (Continued)

basic earnings per share calculation, as these units are not participating securities.

Diluted earnings per share reflects the potential dilution that could occur if securities or other rights exercisable for, or convertible into, common stock were exercised or converted or otherwise resulted in the issuance of common stock that shared in the earnings of the Company.  For the three and six months ended June 30, 2012 and 2011, the diluted weighted average number of common shares also includes 100,000 shares of common stock underlying the restricted stock units awarded on September 14, 2010 under the Pay-For-Performance Program.  These 100,000 shares may vest upon satisfaction of the total stockholder return threshold based on the number of shares that would be issued based on the current 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.  The remaining 100,000 shares of common stock underlying the restricted stock units awarded under the Pay-For-Performance Program are not included, as they did not meet the defined performance metric during the three and six months ended June 30, 2012 and 2011.

There were no options outstanding to purchase shares of common stock or other rights exercisable for, or convertible into, common stock during the three and six months ended June 30, 2012 and 2011.

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2012 (Continued)

Note 4 - Investment in Unconsolidated Joint Ventures

In February 2012, the Company entered into a joint venture with an affiliate of Trammell Crow Company pursuant to which the venture contemplates re-developing a 6.2 acre site located in Plano, Texas into up to two Class A office buildings. The Company contributed this property to the joint venture in exchange for a 90% equity interest therein and Trammell Crow contributed $1,500,000 in exchange for a 10% equity interest therein which resulted in a $319,000 gain to the Company.  At June 30, 2012, the Company’s investment in this VIE, which includes the original basis of the property it contributed to the joint venture adjusted for the Company’s share of net income for the six months ended June 30, 2012, was $12,115,000, which represents its maximum exposure to loss.

The Company’s six unconsolidated joint ventures each own and operate one property.  At June 30, 2012 and December 31, 2011, the Company’s equity investment in unconsolidated joint ventures totaled $17,334,000 and $5,093,000, respectively. The Company recorded equity in earnings of $453,000 and $135,000 for the six months ended June 30, 2012 and 2011, respectively, and $384,000 and $105,000 for the three months ended June 30, 2012 and 2011, respectively. Equity in earnings for the three and six months ended June 30, 2012 includes the Company’s $233,000 equity share of income pertaining to the net settlement entered into with a former tenant.

Note 5 - Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its tenants to make required rent payments.  If the financial condition of a specific tenant were to deteriorate, resulting in an impairment of its ability to make payments, additional allowances may be required.  At June 30, 2012 and December 31, 2011, the balance in allowance for doubtful accounts was $318,000 and $335,000, respectively, recorded as a reduction to accounts receivable. The Company records bad debt expense as a reduction of rental income. For the three and six months ended June 30, 2012, the Company recorded bad debt expense of $(34,000) and $(17,000), respectively, which reflects collections of amounts previously recorded as bad debt expense from one tenant.  For the three and six months ended June 30, 2011, the Company recorded bad debt expense of $197,000 and $508,000, respectively.

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2012 (Continued)

Note 7 - Discontinued Operations and Properties Held for Sale

During 2012, the Company sold to unrelated parties, a property located in Florida and leased to Office Depot and a vacant property located in New York. The total sales price aggregated $7,048,000, net of closing costs, and the Company realized an aggregate gain of $2,205,000.

On July 12, 2012, the Company agreed to sell a property in New York City for $18,250,000 and anticipates that this sale will be completed by September 30, 2012. The Company estimates that the gain for financial statement purposes will be approximately $15 million. At June 30, 2012, this property had a net book value of $2,732,000, including related assets of $88,000, and was deemed held for sale.

The net gain from the two sold properties and the operations of the three properties are included in discontinued operations. The net book value of the three properties, including related assets of $378,000, was $7,718,000 at December 31, 2011 and is included in properties held for sale on the accompanying consolidated balance sheet.

During 2011, the Company sold one property, leased to Office Depot and located in California, to an unrelated party for $11,544,000, net of closing costs, and realized a gain of $932,000. This gain and the operations of this property are included in discontinued operations.

The following summarizes the components of income from discontinued operations (dollars in thousands):

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2012 (Continued)

Note 8 - Line of Credit

Effective as of July 31, 2012, the Company entered into an amendment of its credit facility with VNB New York Corp., Bank Leumi USA, Israel Discount Bank of New York and Manufacturer’s & Trader’s Trust Company, which, among other things, reduced the interest rate floor from 5.5% to 4.75%, increased permitted borrowings from $55,000,000 to $75,000,000, subject to compliance with the borrowing base, and extended the expiration date by two years to March 31, 2015. The Company pays interest at the greater of (i) 90 day LIBOR plus 3% (3.46% at June 29, 2012 and 3.44% at July 31, 2012) and (ii) 4.75% per annum, effective July 31, 2012 (5.5% per annum through July 31,2012) and there is an unused facility fee of .25% per annum. The Company incurred an aggregate of $800,000 in commitment and extension fees in connection with the amendment which will be amortized over the remaining term of the facility. At June 30, 2012 and July 31, 2012, $19,600,000 and $15,350,000, respectively, was outstanding under the facility. The Company is in compliance with all covenants at June 30, 2012.

Note 9 - Common Stock Cash Dividend

On June 12, 2012, the Board of Directors declared a quarterly cash dividend of $.33 per share on the Company’s common stock, totaling $4,880,000. The quarterly dividend was paid on July 6, 2012 to stockholders of record as of June 26, 2012.

Note 10 - Accumulated Other Comprehensive Loss

The following table presents the components of accumulated other comprehensive loss reported on the balance sheet (dollars in thousands):

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2012 (Continued)

Note 11 - Stock Based Compensation

The Company’s 2012 Incentive Plan, approved by the Company’s stockholders in June 2012, permits the Company to grant, among other things, stock options, restricted stock units and performance share awards and any one or more of the foregoing to its employees, officers, directors and consultants.  A maximum of 600,000 shares of the Company’s common stock is authorized for issuance pursuant to this Plan. An aggregate of 408,510 shares of restricted stock and restricted stock units are outstanding under the Company’s 2003 and 2009 equity incentive plans (collectively, the “Prior Plans”) and have not yet vested.  No additional awards may be granted under the Prior Plans.

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

On September 14, 2010, the Board of Directors approved a Pay-for-Performance Program under the Company’s 2009 Incentive Plan, and awarded 200,000 performance share awards in the form of restricted stock units (the “Units”). The holders of Units are not entitled to dividends or to vote the underlying shares until the Units vest and shares are issued. Accordingly, for financial statement purposes, the shares underlying the Units are not included in the shares shown as outstanding on the balance sheet.  If the defined performance criteria are satisfied in full at June 30, 2017, one share of the Company’s common stock will vest and be issued for each Unit outstanding and a pro-rata portion of the Units will vest and be issued if the performance criteria fall between defined ranges.  In the event that the performance criteria are not satisfied in whole or in part at June 30, 2017, the unvested Units will be forfeited and no shares of the Company’s common stock will be issued for those Units.  No Units were granted, vested or forfeited in the six months ended June 30, 2012.

As of June 30, 2012, there were approximately $3,639,000 of total compensation costs related to nonvested awards that have not yet been recognized, including $404,000 related to the Pay-for-Performance Program (net of forfeiture and performance assumptions which are re-evaluated quarterly). These compensation costs will be charged to general and administrative expense over the remaining respective vesting periods. The weighted average vesting period is approximately 3.5 years.

As of June 30, 2012, there were no options outstanding under our Incentive Plans.

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2012 (Continued)

Note 11 - Stock Based Compensation (Continued)

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

Note 12 - Fair Value of Financial Instruments

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

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2012 (Continued)

Note 12 - Fair Value of Financial Instruments (Continued)

Financial Instruments Measured at Fair Value

The following table presents the fair values of the Company’s financial instruments as of June 30, 2012 (dollars in thousands):

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

Available-for-sale securities

The Company’s available-for-sale securities have a total cost of $153,000 and are included in other assets on the balance sheet.  At June 30, 2012, unrealized gains on such securities were $128,000 and unrealized losses were $1,000. The aggregate net unrealized gain of $127,000 is included in accumulated other comprehensive loss on the balance sheet.  Fair values are approximated based on current market quotes from financial sources that track such securities. All of the available-for-sale securities in an unrealized loss position are equity securities and amounts are not considered to be other than temporary impairments because the Company expects the value of these securities to recover and plans on holding them until at least such recovery occurs.

During the six months ended June 30, 2012, the Company sold certain available-for-sale securities for a net gain of $9,000, which is included in other income on the consolidated statement of income. At December 31, 2011, the Company recorded an impairment charge of $126,000 on such securities.

Derivative financial instruments

Fair values are approximated using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivatives. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.  At June 30, 2012 and December 31, 2011, these derivatives are included in other liabilities on the consolidated balance sheet.

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2012 (Continued)

Note 12 - Fair Value of Financial Instruments (Continued)

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with it utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparty.  As of June 30, 2012, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.  As a result, the Company has determined that its derivative valuation is classified in Level 2 of the fair value hierarchy.

Note 13 - Derivative Financial Instruments

As of June 30, 2012, the Company had the following outstanding interest rate derivatives, all of which were designated as cash flow hedges of interest rate risk (dollars in thousands):

The following table presents the fair value of the Company’s derivatives designated as hedging instruments as of June 30, 2012 and December 31, 2011 (dollars in thousands):

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Item 2.  Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions.  Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “could,” “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions or variations thereof.  Forward-looking statements should not be relied on since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, performance or achievements.  Investors are encouraged to review the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2011 under the caption “Item 1A. Risk Factors” for a discussion of certain factors which may cause actual results to differ materially from current expectations and are cautioned not to place undue reliance on any forward-looking statements.

Overview

We are a self-administered and self-managed real estate investment trust, organized in Maryland in 1982.  We acquire, own and manage a geographically diversified portfolio of retail (including furniture and office supply stores), industrial, office, flex, health and fitness and other properties, a substantial portion of which are under long-term net leases.  As of June 30, 2012, we owned 92 properties, one of which is held for sale, and one of which is a 50% tenancy in common interest.  Our joint ventures owned a total of six properties.  The 98 properties are located in 29 states.

We face a variety of risks and challenges in our business. We, among other things, face the possibility we will not be able to lease our properties on terms favorable to us or at all and that our tenants may not be able to pay their rental and other obligations owing under their leases.

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

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

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