One Liberty Properties - 10-Q quarterly report FY

UNITED STATES

Washington, DC 20549

FORM 10-Q

Securities Exchange Act of 1934

For the quarterly period ended September 30, 2008

OR

Securities Exchange Act of 1934

(Exact name of registrant as specified in its charter)

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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 “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o No x

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

As of November 3, 2008, the registrant had 10,207,509 shares of common stock outstanding.

Part I – FINANCIAL INFORMATION

    

ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except Per Share Data)

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)

See accompanying notes to consolidated financial statements.

ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the nine month period ended September 30, 2008 (Unaudited)

and the year ended December 31, 2007

(Amounts in Thousands)

See accompanying notes to consolidated financial statements.

 

ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

One Liberty Properties, Inc. (“OLP”) was incorporated in 1982 in the state of 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 retail furniture stores, industrial, office, flex, health and fitness and other properties, a substantial portion of which are under long-term net leases. As of September 30, 2008, OLP owns 77 properties and holds a 50% tenancy in common interest in one property. OLP’s joint ventures own five properties. The 83 properties are located in 29 states.

The accompanying interim unaudited consolidated financial statements as of September 30, 2008 and 2007 and for the nine and three months ended September 30, 2008 and 2007 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 nine and three months ended September 30, 2008 are not necessarily indicative of the results for the full year.

The preparation of the financial statements in conformity with U.S. 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 and its wholly-owned subsidiaries (collectively, the “Company”). Material intercompany items and transactions have been eliminated. The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting as the Company (1) is primarily the managing member, but does not exercise substantial operating control over these entities pursuant to EITF 04-05, and (2) such entities are not variable-interest entities pursuant to FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities.” These investments are recorded initially at cost, as investments in unconsolidated joint ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions.

Certain amounts reported in previous consolidated financial statements have been reclassified in the accompanying consolidated financial statements to conform to the current year’s presentation, primarily to reclassify a property that was presented as held for sale at December 31, 2007 and as a real estate investment at September 30, 2008 and to reclassify such property’s operations from discontinued operations to continuing operations.

The Company accounts for its property acquisitions in accordance with SFAS 141 and 142 and is currently in the process of analyzing the fair value of the in-place leases of its 2008 acquisitions. Therefore, the purchase price allocations are preliminary and subject to change.

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, 2007.

For the nine and three months ended September 30, 2008 and 2007, basic earnings per share were determined by dividing net income for the period by the weighted average number of shares of the Company’s common stock outstanding, which includes unvested restricted stock during each period.

Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts exercisable for, or convertible into, common stock were exercised or converted or resulted in the issuance of common stock that shared in the earnings of the Company. For the nine and three months ended September 30, 2008 and 2007, diluted earnings per share were determined by dividing net income for the period by the total of the weighted average number of shares of common stock outstanding using the treasury stock method. There were no outstanding options to purchase shares of common stock in the nine and three months ended September 30, 2008 and 2007.

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Continued)

On March 25, 2008, one of the Company’s unconsolidated joint ventures sold its only property, which was vacant, for a consideration of $1,302,000, net of closing costs. The sale resulted in a gain to the Company of $297,000 (after giving effect to the Company’s $480,000 share of a direct write down taken by the joint venture in a prior year).

On March 14, 2007, another of the Company’s unconsolidated joint ventures sold its only property, a vacant parcel of land, for a consideration of $1,250,000 to a former tenant of the joint venture. The sale resulted in a gain to the Company of $583,000 (after giving effect to the Company’s $1,581,000 share of direct write downs taken by the joint venture in prior years).

The Company’s remaining five unconsolidated joint ventures each own and operate one property. At September 30, 2008 and December 31, 2007, the Company’s equity investment in unconsolidated joint ventures totaled $5,848,000 and $6,570,000, respectively, and in addition to the gain on sale of properties of $297,000 and $583,000, respectively, contributed $446,000 and $433,000 in equity earnings for the nine months ended September 30, 2008 and 2007, respectively. For the three months ended September 30, 2008 and 2007, they contributed $149,000 and $141,000 in equity earnings, respectively.

On September 26, 2008, the Company acquired eight retail properties leased to Office Depot, Inc. in a sale-leaseback transaction. The properties are located in seven states and are net leased for an initial term of ten years, with options to extend. The aggregate annual rent is $3,907,000 subject to 10% increases every five years. The total purchase price including closing costs for the portfolio was approximately $48,200,000, with approximately $14,200,000 paid in cash and $34,000,000 borrowed under the Company’s line of credit.

In September 2008, the Company acquired a retail property in Florida subject to a long term net lease with a single tenant. The purchase price including closing costs was $6,200,000, which was paid in cash.

In June 2008, the Company acquired approximately two acres of land improved with an 18,500 square foot building in Massachusetts, subject to a long term ground net lease with a single retail tenant. The purchase price was $2,100,000, which was paid in cash. In September 2008, a $1,400,000 first mortgage financing was completed encumbering this property.

In May 2008, the Company sold a five acre parcel of excess, unimproved land to an unrelated third party for a sales price of $3,150,000 and realized a gain of $1,830,000. This land, adjacent to a flex property owned by the Company, had been acquired by the Company as part of the purchase of the flex property in 2000.

In January and February 2008, the Company acquired two retail properties in Massachusetts subject to long term net leases, each leased by a single tenant. The aggregate purchase price including closing costs for both properties was $5,500,000, of which approximately $1,934,000 and $837,000 represented the assumption of first mortgages encumbering each property (to two separate financial institutions) and the balance was paid in cash.

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Continued)

 

At June 30, 2008, a property which had been classified as “held for sale” since August 2007 was taken off the market and was reclassified as a real estate investment. For the three months ended March 31, 2008 and nine and three months ended September 30, 2007, the operations of the property were reclassified from discontinued to continuing operations. In connection with management’s decision not to sell the property, the Company recorded, during the three months ended June 30, 2008, $157,000 of “catch-up” depreciation that would have been recorded had the property been continuously classified as “held and used” for the period of August 2007 through March 2008.

On September 9, 2008, the Board of Directors declared a quarterly cash distribution of $.36 per share totaling $3,661,000 on the Company's common stock, which was paid on October 2, 2008 to stockholders of record on September 23, 2008.

Comprehensive income for the nine and three months ended September 30, 2008 and 2007 are as follows (amounts in thousands):

Accumulated other comprehensive income, which is solely comprised of the net unrealized gain on available-for-sale securities was $83,000 and $344,000 at September 30, 2008 and December 31, 2007, respectively.

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Continued)

The Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payments,” effective January 1, 2006. SFAS No. 123R established financial accounting and reporting standards for stock-based employee compensation plans, including all arrangements by which employees receive shares of stock or other equity instruments of the employer, or the employer incurs liabilities to employees in amounts based on the price of the employer’s stock. The statement also defined a fair value based method of accounting for an employee stock option or similar equity instrument whereby the fair-value is recorded based on the market value of the common stock on the grant date and is amortized to general and administrative expense over the respective vesting periods.

Through September 30, 2008, a total of 243,075 shares were issued and 31,925 shares remain available for grant pursuant to the Incentive Plan, and approximately $2,394,000 remains as deferred compensation and will be charged to expense over the remaining respective vesting periods. The weighted average vesting period is approximately 2.7 years.

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Continued)

 

 

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Continued)

With the exception of historical information, 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. 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," "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 cautioned not to place undue reliance on any forward-looking statements.

We are a self-administered and self-managed real estate investment trust, or REIT, and we primarily own real estate that we net lease to tenants. As of September 30, 2008, we own 77 properties, hold a 50% tenancy in common interest in one property and participate in five joint ventures which own a total of five properties. These 83 properties are located in 29 states.

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 principal business strategy is to acquire improved, commercial properties subject to long-term net leases. We acquire properties for their value as long-term investments and for their ability to generate income over an extended period of time.

During 2008, we acquired 12 single tenant retail properties for an aggregate purchase price of approximately $62 million. To finance these purchases, we utilized $34 million from our credit facility and $4.2 million of mortgage debt and the remaining balance of the purchase prices was funded with our available cash. Beginning in 2007 and continuing to date, there has been a well publicized and dramatic contraction of the U.S. credit and capital markets, whereby banks and other lending institutions have tightened their lending standards and have severely restricted credit. We have typically replaced our outstanding credit facility debt with a mortgage loan secured by our recently acquired property. To the extent that third party financing is not available to replace funds borrowed under our credit facility, or not available on terms acceptable to us, this could limit or curtail our ability to acquire additional properties.

Our rental properties are generally leased to corporate tenants under operating leases, substantially all of which are noncancellable. Substantially all of our lease agreements are net lease arrangements that require the tenant to pay not only rent, but also substantially all of the operating expenses of the leased property, including maintenance, taxes, utilities and insurance. A majority of our lease agreements provide for periodic rental increases and certain of our other leases provide for increases based on the consumer price index.

We recognize the stress being placed on the value of real estate and our tenants as a result of the tightening of available credit and the weakening of the U.S. economy. Although we have not recently experienced any material defaults by tenants under our leases, we have been affected by the current economic crisis. A significant number of our tenants are in the retail sales business and are experiencing downturns in their businesses as a result of lower levels of consumer spending and could experience declining availability of credit if the economic environment continues to deteriorate. At least one of our retail tenants, Circuit City, which leases six properties from us, has announced that it has a deteriorating liquidity position and will be closing stores. Two of the stores to be closed are properties owned by us. Defaults by this tenant or any of our other tenants could result in a reduction in rental revenue, an increase in property operating costs and expenses and a reduction in the value of our assets. Although we closely monitor each property in our portfolio, we cannot predict how the continuing economic crisis will affect any of our tenants or our results of operations.

 

Rental income increased by $585,000, or 2%, to $29.4 million for the nine months ended September 30, 2008 from $28.8 million for the nine months ended September 30, 2007. For the three months ended September 30, 2008, rental income increased by $381,000, or 4%, to $10 million from $9.6 million for the three months ended September 30, 2007. The increase in rental income is primarily due to rental revenues of $428,000 and $235,000 earned on twelve properties acquired by us in the current nine and three month periods. The increase in rental income also resulted from rent increases based on the consumer price index and from the exercise of lease renewal options at several of our properties which extended the terms of such leases at a higher rent. These increases in rental income were offset in part in the nine months ended September 30, 2008 by a $178,000 write off of the entire balance of the unbilled rent receivable of a property where the tenant has vacated the premises.

Depreciation and amortization expense increased by $256,000, or 4.1%, and $103,000, or 5%, to $6.5 million and $2.1 million for the nine and three months ended September 30, 2008, respectively. The increase in depreciation and amortization expense was primarily due to “catch-up” depreciation of $157,000 recorded during the three months ended June 30, 2008 on the property which had been classified as “held for sale” from August 2007 through March 2008. Normal depreciation on such property was effective April 1, 2008. In addition, the increase was due to depreciation taken on properties acquired in the current nine month period.

 

General and administrative expenses increased by $26,000, or .5%, and $112,000, or 7.1%, to $4.9 million and $1.7 million for the nine and three months ended September 30, 2008, respectively, substantially due to increases of $126,000 and $45,000, respectively, in professional fees incurred in connection with civil litigations, in which we are the plaintiff, arising out of the activities of our former president and chief executive officer. The increase in general and administrative expenses for the nine and three months ended September 30, 2008 also includes increases of $100,000 and $38,000, respectively, in payroll and payroll related expenses for full time personnel, primarily resulting from annual salary increases, increases of $51,000 and $29,000 in compensation expense related to our restricted stock program and increases of $35,000 and $68,000 in various other categories including public company expenses, travel and insurance. These increases were offset by decreases of (i) $100,000 in the 2008 annual amount, resulting in decreases of $75,000 and $25,000, respectively, for the nine and three months ended September 30, 2008, paid under the Compensation and Services Agreement, (ii) $83,000 and $27,000, respectively, of accounting and legal fees for the nine and three months ended September 30, 2008, (iii) $19,000 and $4,000, respectively, of director fees for the nine and three months ended September 30, 2008, (iv) $26,000 and $12,000, respectively, of state tax expense for the nine and three months ended September 30, 2008 and (v) $83,000 paid in the nine months ended September 30, 2007 to an independent compensation consultant retained by the Compensation Committee of our Board of Directors.

At June 30, 2008, we determined that the estimated fair value of a retail property was lower than its carrying value and we recorded a $752,000 impairment charge. There were no impairment charges recorded in the nine and three months ended September 30, 2007.

Real estate expenses decreased by $22,000, or 11.9% and $14,000, or 25%, for the nine and three months ended September 30, 2008, respectively, resulting primarily from a reimbursement from a tenant of real estate taxes that we had expensed at December 31, 2007 due to that tenant’s bankruptcy filing.

We recognized a gain of $297,000 on the sale by a joint venture of a vacant property in the nine months ended September 30, 2008.  We recognized a gain of $583,000 on the sale by a different joint venture of a vacant property in the nine months ended September 30, 2007.

 

During the nine months ended September 30, 2008, we sold five acres of excess land that we acquired as part of the purchase of a flex building in 2000 and recognized a gain of $1.8 million.

Interest and other income decreased by $990,000, or 67%, and $275,000, or 63.7%, to $487,000 and $157,000 for the nine and three months ended September 30, 2008, respectively. Due to the current credit crisis, interest rates have been steadily declining over the past several quarters.  This decline in interest rates resulted in a decrease in the income we earn on our investment in short-term cash equivalents, causing a decrease in interest and other income for the nine and three months ended September 30, 2008. There was also less cash available for investment after we paid a special distribution of $6.7 million to our stockholders in October 2007. Also contributing to the decrease in interest and other income was the inclusion of a $118,000 gain on sale of available-for-sale securities in the nine months ended September 30, 2007. There was no such sale of securities in 2008.

Interest expense decreased by $249,000, or 2.2%, and $83,000, or 2.2%, to $11 million and $3.7 million for the nine and three months ended September 30, 2008, respectively. The decrease results from the payoff in full of two mortgage loans, one of which matured in December 2007 (repaid November 2007) and the other which matured in July 2008 (repaid April 2008), as well as from the monthly principal amortization of other mortgages. These decreases were offset in part by interest expense on a fixed rate mortgage placed on a property in August 2007 and the assumption of two fixed rate mortgages in connection with the purchase of two properties in January and February 2008.

At September 30, 2008, we had cash and cash equivalents of approximately $6.4 million. On October 2, 2008, $3.7 million was used to pay our quarterly distribution of $.36 per share. Our primary sources of liquidity are cash and cash equivalents, cash generated from operating activities, including mortgage financings and property dispositions, and our revolving credit facility. We have a $62.5 million revolving credit facility with VNB New York Corp., Bank Leumi USA, Manufacturers and Traders Trust Company and Israel Discount Bank of New York. The facility is available to us to pay down existing and maturing mortgages, to fund the acquisition of additional properties or to invest in joint ventures. The facility matures on March 31, 2010. Borrowings under the facility bear interest at the lower of LIBOR plus 2.15% or the bank's prime rate, and there is an unused facility fee of one-quarter of 1% per annum. At September 30, 2008, there was $34 million outstanding under the Facility.

On November 6, 2008, we announced that our Board of Directors authorized a twelve month stock buy-back program, which allows for the repurchase of up to 500,000 shares of our common stock. Share repurchases may be made from time to time in the open market, depending upon market conditions. The repurchase program does not obligate us to acquire any specific number of shares and may be discontinued at any time.

 

We will use our available cash and cash equivalents, cash provided from operations, cash provided from mortgage financings and property dispositions and funds available under our credit facility to fund acquisitions, distributions to stockholders and repurchases of outstanding stock.

We had no outstanding contingent commitments, such as guarantees of indebtedness, or any other contractual cash obligations, other than mortgage and loan payable debt and the amount outstanding under our line of credit, at September 30, 2008.

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 our ordinary taxable income to our stockholders. It is our current intention to comply with these requirements and maintain our REIT status. As a REIT, we generally will not be subject to corporate federal, state or local income taxes on taxable income we distribute currently (in accordance with the Internal Revenue Code and applicable regulations) to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal, state and local income taxes at regular corporate rates and may not be able to qualify as a REIT for four subsequent tax years. Even if we qualify as a REIT for federal taxation purposes, we may be subject to certain state and local taxes on our income and to federal income and/or excise taxes on our undistributed taxable income (i.e., taxable income not distributed in the amounts and in the time frames prescribed by the Internal Revenue Code and applicable regulations thereunder).

All of our long-term mortgage debt bears interest at fixed rates and accordingly, the effect of changes in interest rates would not impact the amount of interest expense that we incur under these mortgages. Our credit line is a variable rate facility which is sensitive to interest rates. Although we had a low average balance outstanding on the credit line for the nine and three months ended September 30, 2008, we currently have $34 million outstanding on the credit line; therefore the effect of changes in interest rates could impact the amount of interest expense incurred.

As required under Rules 13a-15 (e) and 15d-15 (e) under the Securities Exchange Act of 1934, as amended, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of September 30, 2008 are effective.

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the nine and three months ended September 30, 2008 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

 

As previously reported, Jeffrey Fishman, our former president and chief executive officer and a member of our Board of Directors, resigned in July 2005 following the discovery of inappropriate financial dealings by him with a former tenant of a property owned by a joint venture in which we were a 50% venture partner and managing member.

On August 27, 2008, the Securities and Exchange Commission (the “SEC”) filed a civil complaint against Mr. Fishman in the United States District Court in which it alleges, among other things, that between August 2002 and August 2003, Mr. Fishman extracted almost $1 million in the aggregate of undisclosed “kick backs” from a commercial partner and a commercial tenant and he never disclosed to us, our Audit Committee or our auditors his receipt of these payments or their relation to our business transactions. The SEC complaint against Mr. Fishman also alleges that Mr. Fishman participated in a second set of frauds, which did not involve us but in which four of our officers, along with other investors made an investment in a private company Mr. Fishman created purportedly to invest in foreign currency options. With respect to the currency trading fund, the SEC complaint alleges, among other things, that Mr. Fishman made illegal withdrawals from the account of this fund and that all investor funds were dissipated as a result of Mr. Fishman’s misappropriations and through trading losses.

At the time the SEC filed its complaint against Mr. Fishman, it had reached a settlement with him. Without admitting or denying the allegations in the complaint, Mr. Fishman, among other things, consented to the entry of a final judgment in Federal District Court that would enjoin him from violating or aiding and abetting future violations of various provisions of the securities laws, permanently barring him from serving as an officer or director of a public company, ordering him to pay restitution to investors in the currency trading fund, including our four officers, and ordering him to pay a civil penalty.

In addition, Mr. Fishman pled guilty to one count of a conspiracy to commit mail fraud relating to one of the “kick back” payments made to him. Mr. Fishman has not yet been sentenced.

In August 2005, we filed a complaint against Mr. Fishman and others in the Supreme Court of the State of New York, County of Nassau, alleging commercial bribery, fraud, breach of fiduciary duty, tortious interference, intentional tort, unjust enrichment and violation of the New York Enterprise Corruption Act. Thereafter, we filed suit against an insurer under a commercial crime insurance policy. These actions are pending.

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