Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2020
OR
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 001-09279
ONE LIBERTY PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
MARYLAND
13-3147497
(State or other jurisdiction of
(I.R.S. employer
incorporation or organization)
identification number)
60 Cutter Mill Road, Great Neck, New York
11021
(Address of principal executive offices)
(Zip code)
(516) 466-3100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange onwhich registered
Common Stock
OLP
New York Stock Exchange
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 ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻
Accelerated filer ⌧
Non-accelerated filer ◻
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes ◻ No ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
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 2, 2020, the registrant had 20,580,853 shares of common stock outstanding.
One Liberty Properties, Inc. and Subsidiaries
Part I — Financial Information
Page No.
Item 1.
Unaudited Consolidated Financial Statements
Consolidated Balance Sheets —September 30, 2020 and December 31, 2019
1
Consolidated Statements of Income — Three and nine months ended September 30, 2020 and 2019
2
Consolidated Statements of Comprehensive Income — Three and nine months ended September 30, 2020 and 2019
3
Consolidated Statements of Changes in Equity — Three and nine months ended September 30, 2020 and 2019
4
Consolidated Statements of Cash Flows — Nine months ended September 30, 2020 and 2019
6
Notes to Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
38
Item 4.
Controls and Procedures
39
Part II — Other Information
Item 1A.
Risk Factors
40
Item 6.
Exhibits
41
Part I — FINANCIAL INFORMATION
Item 1. Financial Statements
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Par Value)
September 30,
December 31,
2020
2019
ASSETS
(Unaudited)
Real estate investments, at cost
Land
$
194,356
195,320
Buildings and improvements
651,501
640,517
Total real estate investments, at cost
845,857
835,837
Less accumulated depreciation
143,656
135,302
Real estate investments, net
702,201
700,535
Investment in unconsolidated joint ventures
10,982
11,061
Cash and cash equivalents
14,193
11,034
Unbilled rent receivable
16,518
15,037
Unamortized intangible lease assets, net
26,082
26,068
Escrow, deposits and other assets and receivables
16,754
10,894
Total assets(1)
786,730
774,629
LIABILITIES AND EQUITY
Liabilities:
Mortgages payable, net of $4,007 and $4,438 of deferred financing costs, respectively
433,088
435,840
Line of credit, net of $478 and $619 of deferred financing costs, respectively
16,672
10,831
Dividends payable
9,198
8,966
Accrued expenses and other liabilities
22,311
14,587
Unamortized intangible lease liabilities, net
11,943
12,421
Total liabilities(1)
493,212
482,645
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; 50,000 and 25,000 shares authorized; 19,737 and 19,251 shares issued and outstanding
19,737
19,251
Paid-in capital
310,029
301,517
Accumulated other comprehensive loss
(5,612)
(1,623)
Distributions in excess of net income
(31,850)
(28,382)
Total One Liberty Properties, Inc. stockholders’ equity
292,304
290,763
Non-controlling interests in consolidated joint ventures(1)
1,214
1,221
Total equity
293,518
291,984
Total liabilities and equity
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except Per Share Data)
Three Months Ended
Nine Months Ended
Revenues:
Rental income, net
21,071
20,414
63,171
62,288
Operating expenses:
Depreciation and amortization
5,723
5,566
17,201
16,353
General and administrative (see Note 9 for related party information)
3,456
3,143
10,244
9,319
Real estate expenses (see Note 9 for related party information)
3,451
3,692
10,098
10,544
State taxes
75
68
227
255
Impairment due to casualty loss
430
Total operating expenses
13,135
12,469
38,200
36,471
Other operating income
Gain on sale of real estate, net
10,316
2,544
14,568
3,643
Operating income
18,252
10,489
39,539
29,460
Other income and expenses:
Equity in earnings (loss) of unconsolidated joint ventures
132
50
186
(32)
Equity in earnings from sale of unconsolidated joint venture property
121
Prepayment costs on debt
(58)
(161)
(1,123)
(201)
Other income (including $430 of insurance recoveries in 2020, see Note 4)
453
462
18
Interest:
Expense
(4,752)
(5,037)
(14,583)
(14,840)
Amortization and write-off of deferred financing costs
(301)
(252)
(760)
(739)
Net income
13,726
5,097
23,842
13,666
Net (income) loss attributable to non-controlling interests
(1)
21
(7)
(465)
Net income attributable to One Liberty Properties, Inc.
13,725
5,118
23,835
13,201
Weighted average number of common shares outstanding:
Basic
19,640
19,191
19,483
19,037
Diluted
19,686
19,239
19,511
19,076
Per common share attributable to common stockholders:
Basic and Diluted
.67
.25
1.17
.64
Cash distributions per share of common stock
.338
.45
1.013
1.35
Stock distributions per share of common stock
.112
.337
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
Other comprehensive income
Net unrealized gain (loss) on derivative instruments
394
(1,180)
(3,995)
(5,275)
Comprehensive income
14,120
3,917
19,847
8,391
Adjustment for derivative instruments attributable to non-controlling interests
(2)
11
Comprehensive income attributable to One Liberty Properties, Inc.
14,117
3,940
19,846
7,937
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Accumulated
Non-Controlling
Other
Distributions
Interests in
Common
Paid-in
Comprehensive
in Excess of
Consolidated
Stock
Capital
(Loss)
Net Income
Joint Ventures
Total
Balances, December 31, 2019
Distributions – common stock
Cash – $.45 per share
(9,036)
Restricted stock vesting
122
(122)
Shares issued through dividend reinvestment plan
7
159
166
Distributions to non-controlling interests
(8)
Compensation expense – restricted stock
976
7,826
5
7,831
Other comprehensive loss
(4,809)
(9)
(4,818)
Balances, March 31, 2020
19,380
302,530
(6,432)
(29,592)
1,209
287,095
Cash – $.225 per share
(4,535)
Stock – $.225 per share
(4,534)
70
790
860
(5)
1,329
2,284
2,285
428
429
Balances, June 30, 2020
19,450
304,649
(6,004)
(36,377)
1,206
282,924
Cash – $.338 per share
(6,898)
Stock – $.112 per share
(2,300)
Shares issued through stock dividend
263
4,268
4,531
24
(24)
Contribution from non-controlling interest
10
1,136
392
Balances, September 30, 2020
(Unaudited) (Continued)
Joint
Income (Loss)
Ventures
Balances, December 31, 2018
18,736
287,250
1,890
(10,730)
1,449
298,595
(8,832)
112
(112)
Shares issued through equity offering program - net
37
1,002
1,039
52
1,147
1,199
954
3,971
4,011
(1,572)
(1,577)
Balances, March 31, 2019
18,937
290,241
318
(15,591)
1,479
295,384
(8,922)
143
4,132
4,275
59
1,529
1,588
(692)
938
4,112
446
4,558
(2,514)
(4)
(2,518)
Balances, June 30, 2019
19,139
296,840
(2,196)
(20,401)
1,229
294,611
(8,942)
(3)
55
1,477
1,532
(34)
942
Net income (loss)
(21)
(1,178)
Balances, September 30, 2019
19,197
299,198
(3,374)
(24,225)
1,172
291,968
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
(14,568)
(3,643)
Increase in unbilled rent receivable
(1,670)
(1,171)
Write-off of unbilled rent receivable
382
Amortization and write-off of intangibles relating to leases, net
(556)
(709)
Amortization of restricted stock expense
3,441
2,834
Equity in (earnings) loss of unconsolidated joint ventures
(186)
32
(121)
Distributions of earnings from unconsolidated joint ventures
116
760
739
Payment of leasing commissions
(189)
(266)
(Increase) decrease in escrow, deposits, other assets and receivables
(3,962)
163
Increase (decrease) in accrued expenses and other liabilities
1,141
(571)
Net cash provided by operating activities
25,679
27,850
Cash flows from investing activities:
Purchase of real estate
(28,504)
(40,306)
Improvements to real estate
(632)
(2,979)
Net proceeds from sale of real estate
25,070
23,167
Insurance recovery proceeds due to casualty loss
150
Contributions of capital to unconsolidated joint venture
(296)
Distributions of capital from unconsolidated joint venture
270
Net cash used in investing activities
(3,646)
(20,403)
Cash flows from financing activities:
Scheduled amortization payments of mortgages payable
(9,568)
(9,687)
Repayment of mortgages payable
(11,815)
(6,812)
Proceeds from mortgage financings
18,200
32,820
Proceeds from sale of common stock, net
5,256
Proceeds from bank line of credit
41,500
48,150
Repayment on bank line of credit
(35,800)
(58,700)
Issuance of shares through dividend reinvestment plan
1,026
4,319
Payment of financing costs
(1,094)
Capital contribution from non-controlling interest
(18)
(731)
Cash distributions to common stockholders
(22,540)
(26,478)
Net cash used in financing activities
(19,194)
(12,957)
Net increase (decrease) in cash, cash equivalents and restricted cash
2,839
(5,510)
Cash, cash equivalents and restricted cash at beginning of year
11,968
16,733
Cash, cash equivalents and restricted cash at end of period
14,807
11,223
Supplemental disclosure of cash flow information:
Cash paid during the period for interest expense
15,563
15,137
Supplemental disclosure of non-cash investing activity:
Lease liabilities arising from the recognition of right of use assets
2,858
Purchase accounting allocation - intangible lease assets
3,905
3,324
Purchase accounting allocation - intangible lease liabilities
(568)
(677)
Supplemental disclosure of non-cash financing activity:
Common stock dividend - portion paid in shares of common stock
(Continued on next page)
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows (amounts in thousands):
10,941
Restricted cash included in escrow, deposits and other assets and receivables
614
282
Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows
Restricted cash included in escrow, deposits and other assets and receivables represent amounts related to real estate tax and other reserve escrows required to be held by lenders in accordance with the Company’s mortgage agreements. The restriction on these escrow reserves will lapse when the related mortgage is repaid.
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
Note 1 – Organization and Background
One Liberty Properties, Inc. (“OLP”) was incorporated in 1982 in Maryland. OLP is a self-administered and self-managed real estate investment trust (“REIT”). OLP acquires, owns and manages a geographically diversified portfolio consisting primarily of industrial, retail, restaurant, health and fitness, and theater properties, many of which are subject to long-term net leases. As of September 30, 2020, OLP owns 125 properties, including four properties owned by consolidated joint ventures and three properties owned by unconsolidated joint ventures. The 125 properties are located in 31 states.
Note 2 – Summary Accounting Policies
Principles of Consolidation/Basis of Preparation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and include all of the information and disclosures required by U.S. Generally Accepted Accounting Principles (“GAAP”) for interim reporting. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statement disclosures. In the opinion of management, all adjustments of a normal recurring nature necessary for fair presentation have been included. The results of operations for the three and nine months ended September 30, 2020 and 2019 are not necessarily indicative of the results for the full year. These statements should be read in conjunction with the consolidated financial statements and related notes included in OLP’s Annual Report on Form 10-K for the year ended December 31, 2019.
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
The consolidated financial statements include the accounts and operations of OLP, its wholly-owned subsidiaries, its joint ventures in which the Company, as defined, has a controlling interest, and variable interest entities (“VIEs”) of which the Company is the primary beneficiary. OLP and its consolidated subsidiaries are referred to herein as the “Company”. Material intercompany items and transactions have been eliminated in consolidation.
Investment in Joint Ventures and Variable Interest Entities
The Financial Accounting Standards Board, or FASB, provides guidance for determining whether an entity is a VIE. VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. A VIE is required to be consolidated by its primary beneficiary, which is the party that (i) has the power to control the activities that most significantly impact the VIE’s economic performance and (ii) has the obligation to absorb losses, or the right to receive benefits, of the VIE that could potentially be significant to the VIE.
The Company assesses the accounting treatment for each of its investments, including a review of each venture or limited liability company or partnership agreement, to determine the rights of each party and whether those rights are protective or participating. The agreements typically contain certain protective rights, such as the requirement of partner approval to sell, finance or refinance the property and to pay capital expenditures and operating expenditures outside of the approved budget or operating plan. In situations where, among other things, the Company and its partners jointly (i) approve the annual budget, (ii) approve certain expenditures, (iii) prepare or review and approve the joint venture’s tax return before filing, or (iv) approve each lease at a property, the Company does not consolidate as the Company considers these to be substantive participation rights that result in shared, joint power over the activities that most significantly impact the performance of the joint venture or property. Additionally, the Company assesses the accounting treatment for any interests pursuant to which the Company may have a variable interest as a lessor. Leases may contain certain protective rights, such as the right of sale and the receipt of certain escrow deposits.
September 30, 2020 (Continued)
Note 2 – Summary Accounting Policies (Continued)
The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting. All investments in unconsolidated joint ventures have sufficient equity at risk to permit the entity to finance its activities without additional subordinated financial support and, as a group, the holders of the equity at risk have power through voting rights to direct the activities of these ventures. As a result, none of these joint ventures are VIEs. In addition, the Company shares power with its co-managing members over these entities, and therefore the entities are not consolidated. These investments are recorded initially at cost, as investments in unconsolidated joint ventures, and subsequently adjusted for their share of equity in earnings, cash contributions and distributions. None of the joint venture debt is recourse to the Company, subject to standard carve-outs.
The Company reviews on a quarterly basis its investments in unconsolidated joint ventures for other-than-temporary losses in investment value. Any decline that is not expected to be recovered based on the underlying assets of the investment is considered other than temporary and an impairment charge is recorded as a reduction in the carrying value of the investment. During the three and nine months ended September 30, 2020 and 2019, there were no impairment charges related to the Company’s investments in unconsolidated joint ventures.
The Company has elected to follow the cumulative earnings approach when assessing, for the consolidated statement of cash flows, whether the distribution from the investee is a return of the investor’s investment as compared to a return on its investment. The source of the cash generated by the investee to fund the distribution is not a factor in the analysis (that is, it does not matter whether the cash was generated through investee refinancing, sale of assets or operating results). Consequently, the investor only considers the relationship between the cash received from the investee to its equity in the undistributed earnings of the investee, on a cumulative basis, in assessing whether the distribution from the investee is a return on or a return of its investment. Cash received from the unconsolidated entity is presumed to be a return on the investment to the extent that, on a cumulative basis, distributions received by the investor are less than its share of the equity in the undistributed earnings of the entity.
Reclassifications
Certain amounts previously reported in the consolidated financial statements have been reclassified in the accompanying consolidated financial statements to conform to the current year’s presentation. The Company reclassified certain amounts in the consolidated statements of income for the three and nine months ended September 30, 2019 so that it presents, as it does for the three and nine months ended September 30, 2020, prepayment costs on debt separately from mortgage interest expense.
Note 3 – Leases
Lessor Accounting
The Company owns rental properties which are leased to tenants under operating leases with current expirations ranging from 2020 to 2055, with options to extend or terminate the lease. Revenues from such leases are reported as Rental income, net, and are comprised of (i) lease components, which includes fixed and variable lease payments and (ii) non-lease components which includes reimbursements of property level operating expenses. The Company does not separate non-lease components from the related lease components, as the timing and pattern of transfer are the same, and account for the combined component in accordance with ASC 842.
Fixed lease revenues represent the base rent that each tenant is required to pay in accordance with the terms of their respective leases reported on a straight-line basis over the non-cancelable term of the lease. Variable lease revenues include payments based on (i) tenant reimbursements, (ii) changes in the index or market-based indices after the inception of the lease, (iii) percentage rents or (iv) the operating performance of the property. Variable lease revenues are not recognized until the specific events that trigger the variable payments have occurred.
9
Note 3 – Leases (Continued)
The components of lease revenues are as follows (amounts in thousands):
Fixed lease revenues
17,953
17,361
53,935
52,441
Variable lease revenues
2,935
2,853
8,680
9,138
Lease revenues (a)
20,888
20,214
62,615
61,579
On a quarterly basis, the Company assesses the collectability of substantially all lease payments due under its leases, including unbilled rent receivable balances, by reviewing the tenant’s payment history and financial condition. Changes to such collectability is recognized as a current period adjustment to rental revenue.
Due to the impact of the COVID-19 pandemic, several rent concession agreements have been executed and others are being negotiated with certain of the Company’s tenants. In accordance with the FASB Staff Q&A, Topic 842 and 840 – Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic, a lessor may make an accounting policy election to (i) not evaluate whether such COVID-19 pandemic related rent-relief is a lease modification under ASC 842 and (ii) treat each tenant rent deferral or forgiveness as if it were contemplated as part of the existing lease contract. The Company has elected to apply this accounting policy to those lease agreements, based on the type of concession provided to the tenant, where the revised cash flows are substantially the same or less than the original lease agreement. As a result, during the three and nine months ended September 30, 2020, the Company deferred and accrued $358,000 and $3,503,000, respectively, of rent and forgave $93,000 and $174,000, respectively, of lease payments. For lease concessions that have been accounted for as lease modifications in accordance with ASC 842, the Company forgave $596,000 and $1,178,000 of lease payments during the three and nine months ended September 30, 2020, respectively. The Company has assessed the collectability of all other lease payments as probable as of September 30, 2020.
In many of the Company’s leases, the tenant is obligated to pay the real estate taxes, insurance, and certain other expenses directly to the vendor. These obligations, which have been assumed by the tenants, are not reflected in our consolidated financial statements. To the extent any such tenant defaults on its lease or if it is deemed probable that the tenant will fail to pay for such obligations, a liability for such obligations would be recorded.
Minimum Future Rents
As of September 30, 2020, the minimum future contractual base rents to be received on non-cancellable operating leases are included in the table below (amounts in thousands). The minimum future contractual base rents do not include (i) straight-line rent or amortization of intangibles, and (ii) variable lease revenues as described above.
From October 1 – December 31, 2020
18,076
For the year ended December 31,
2021
73,743
2022
62,824
2023
53,894
2024
45,251
2025
40,901
Thereafter
165,218
459,907
Lessee Accounting
Ground Lease
The Company is a lessee under a ground lease in Greensboro, North Carolina, which is classified as an operating lease. The ground lease expires March 3, 2025 and provides for up to four, 5-year renewal options and one seven-month renewal option. As of September 30, 2020, the remaining lease term, including renewal options deemed exercised, is 14.4 years. The Company recognized lease expense related to this ground lease of $121,000 and $383,000 for the three and nine months ended September 30, 2020, respectively, and $131,000 and $394,000 for the three and nine months ended September 30, 2019, respectively, which is included in Real estate expenses on the consolidated statements of income.
Office Lease
The Company is a lessee under a corporate office lease in Great Neck, New York, which is classified as an operating lease. The lease expires on December 31, 2031 and provides a 5-year renewal option. As of September 30, 2020, the remaining lease term, including the renewal option deemed exercised, is 16.3 years. The Company recognized lease expense related to this office lease of $14,000 and $42,000 for the three and nine months ended September 30, 2020, respectively, and $14,000 and $40,000 for the three and nine months ended September 30, 2019, respectively, which is included in General and administrative expenses on the consolidated statements of income.
Minimum Future Lease Payments
As of September 30, 2020, the minimum future lease payments related to the operating ground and office leases are as follows (amounts in thousands):
127
606
554
507
557
626
6,847
Total undiscounted cash flows
9,824
Present value discount
(2,317)
Lease liability
7,507
Note 4 – Real Estate Investments
Acquisitions
The following tables detail the Company’s real estate acquisitions and allocations of the purchase price during the nine months ended September 30, 2020 (amounts in thousands). The Company determined that with respect to each of these acquisitions, the gross assets acquired are concentrated in a single identifiable asset. Therefore, these transactions do not meet the definition of a business and are accounted for as asset acquisitions. As such, direct transaction costs associated with these asset acquisitions have been capitalized to real estate assets and depreciated over the respective useful lives.
Date
Contract
Terms of
Capitalized
Description of Property
Acquired
Purchase Price
Payment
Transaction Costs
Creative Office Environments industrial facility,
Ashland, Virginia
February 20, 2020
9,100
All cash (a)
119
Fed Ex industrial facility,
Lowell, Arkansas
February 24, 2020
19,150
135
Totals
28,250
254
Building &
Intangible Lease
Improvements
Asset
Liability
391
7,901
927
9,219
1,687
15,188
2,978
19,285
2,078
23,089
28,504
Impairment due to Casualty Loss
In August 2020, a portion of a multi-tenanted building at the Company’s Lake Charles, Louisiana property was damaged due to Hurricane Laura. During the three months ended September 30, 2020, the Company recognized an impairment loss of $430,000 representing the carrying value of the damaged portion of the building (net of accumulated depreciation of $352,000), based on its replacement cost.
The Company submitted a claim to its insurance carrier to cover, subject to a $250,000 deductible, the (i) estimated $1,130,000 cost to rebuild the damaged portion of the building and (ii) losses in rental income. As a result, the Company recognized a $430,000 receivable for insurance recoveries which is recorded as Other income in the consolidated statements of income for the three and nine months ended September 30, 2020. The Company received a $150,000 advance from the insurance carrier for this claim during the three months ended September 30, 2020.
12
Note 5 – Sales of Properties
The following chart details the Company’s sales of real estate during the nine months ended September 30, 2020 and 2019 (amounts in thousands):
Gross
Gain on Sale of
Mortgage
Prepayment
Date Sold
Sales Price
Real Estate, Net
Prepaid on Sale
Costs on Debt
Hobby Lobby retail property,
Onalaska, Wisconsin
February 11, 2020
7,115
4,252
3,332
290
CarMax retail property,
Knoxville, Tennessee
July 1, 2020
18,000
8,483
833
(a)
Totals - nine months ended September 30, 2020
25,115
11,815
1,123
Kmart retail property,
Clemmons, North Carolina (b)
June 20, 2019
5,500
1,099
1,705
Multi-tenant retail property,
Athens, Georgia
August 23, 2019
6,050
1,045
2,645
161
Land - The Briarbrook Village Apartments,
Wheaton, Illinois
August 29, 2019
12,035
1,499
n/a
Totals - nine months ended September 30, 2019
23,585
4,350
201
Note 6 – Variable Interest Entities, Contingent Liability and Consolidated Joint Ventures
Variable Interest Entity – Ground Lease
The Company determined it has a variable interest through its ground lease at its Beachwood, Ohio property (the Vue Apartments), and the owner/operator is a VIE because its equity investment at risk is insufficient to finance its activities without additional subordinated financial support. The Company further determined that it is not the primary beneficiary of this VIE because the Company does not have power over the activities that most significantly impact the owner/operator’s economic performance and therefore, does not consolidate this VIE for financial statement purposes.
Accordingly, the Company accounts for this investment as land and the revenues from the ground lease as Rental income, net. Ground lease rental income amounted to $243,000 and $729,000 for the three and nine months ended September 30, 2020, respectively, and $383,000 and $1,354,000 for the three and nine months ended September 30, 2019, respectively. Included in the rental income for the three and nine months ended September 30, 2019 is $203,000 and $814,000, respectively, from a previously held VIE property in Wheaton, Illinois, which the Company sold in August 2019.
As of September 30, 2020, the VIE’s maximum exposure to loss was $13,901,000 which represented the carrying amount of the land. Simultaneously with the closing of the acquisition, the owner/operator obtained a mortgage for $67,444,000 from a third party which, together with the Company’s purchase of the land, provided substantially all of the funds to acquire the complex. The Company provided its land as collateral for the owner/operator’s mortgage loan; accordingly, the land position is subordinated to the mortgage. No other financial support has been provided by the Company to the owner/operator.
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Note 6 – Variable Interest Entities, Contingent Liability and Consolidated Joint Ventures (Continued)
Variable Interest Entities – Consolidated Joint Ventures
The Company has determined that the four consolidated joint ventures in which it holds between a 90% to 95% interest are VIEs because the non-controlling interests do not hold substantive kick-out or participating rights. The Company has determined it is the primary beneficiary of these VIEs as it has the power to direct the activities that most significantly impact each joint venture’s performance including management, approval of expenditures, and the obligation to absorb the losses or rights to receive benefits. Accordingly, the Company consolidates the operations of these VIEs for financial statement purposes. The VIEs’ creditors do not have recourse to the assets of the Company other than those held by these joint ventures.
The following is a summary of the consolidated VIEs’ carrying amounts and classification in the Company’s consolidated balance sheets, none of which are restricted (amounts in thousands):
12,158
Buildings and improvements, net of accumulated depreciation of $5,008 and $4,334, respectively
23,574
24,223
Cash
997
888
873
859
657
745
1,208
1,204
Mortgages payable, net of unamortized deferred financing costs of $268 and $313, respectively
23,687
24,199
608
562
541
591
(151)
(65)
Non-controlling interests in consolidated joint ventures
As of September 30, 2020 and December 31, 2019, MCB Real Estate, LLC and its affiliates (‘‘MCB’’) are the Company’s joint venture partner in three consolidated joint ventures in which the Company has aggregate equity investments of approximately $7,666,000 and $7,941,000, respectively.
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
As of September 30, 2020 and December 31, 2019, the Company participated in three and four unconsolidated joint ventures, respectively, each of which owns and operates one property; the Company’s equity investment in these ventures totaled $10,982,000 and $11,061,000, respectively. The Company recorded equity in earnings of $132,000 and $186,000 for the three and nine months ended September 30, 2020, respectively, and equity in earnings of $50,000 and equity in loss of $32,000 for the three and nine months ended September 30, 2019, respectively.
In March 2020, an unconsolidated joint venture sold its property located in Savannah, Georgia for $819,000, net of closing costs. The Company’s 50% share of the gain from this sale was $121,000, which is included in Equity in earnings from sale of unconsolidated joint venture property on the consolidated statement of income for the nine months ended September 30, 2020.
As of September 30, 2020 and December 31, 2019, MCB and the Company are partners in an unconsolidated joint venture in which the Company’s equity investment is approximately $8,954,000 and $8,834,000, respectively.
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Note 8 – Debt Obligations
Mortgages Payable
The following table details the Mortgages payable, net, balances per the consolidated balance sheets (amounts in thousands):
Mortgages payable, gross
437,095
440,278
Unamortized deferred financing costs
(4,007)
(4,438)
Mortgages payable, net
Line of Credit
The Company has a credit facility, as amended on July 8, 2020, with Manufacturers & Traders Trust Company, People’s United Bank, VNB New York, LLC, and Bank Leumi USA, pursuant to which it may borrow up to $100,000,000, subject to borrowing base requirements. The facility is available for the acquisition of commercial real estate, repayment of mortgage debt, and renovation and operating expense purposes; provided, that if used for renovation and operating expense purposes, the amount outstanding for such purposes will not exceed the lesser of $30,000,000 and 30% of the borrowing base subject to a cap of (i) $20,000,000 for operating expense purposes and (ii) $10,000,000 for renovation expenses. Pursuant to the July 8th amendment, on February 28, 2021, the amount the Company can borrow will revert to the pre-amendment caps of $10,000,000 for operating expense purposes and $20,000,000 for renovation expenses. To the extent that as of March 1, 2021 more than $10,000,000 is outstanding for operating expense purposes, such excess must be repaid immediately.
The facility, which matures December 31, 2022, provides for an interest rate equal to the one month LIBOR rate plus an applicable margin ranging from 175 basis points to 300 basis points depending on the ratio of the Company’s total debt to total value, as determined pursuant to the facility. The applicable margin was 200 basis points at September 30, 2020 and 2019. An unused facility fee of .25% per annum applies to the facility. The average interest rate on the facility was approximately 2.64% and 4.14% for the nine months ended September 30, 2020 and 2019, respectively. The Company was in compliance with all covenants under this facility at September 30, 2020.
The following table details the Line of credit, net, balances per the consolidated balance sheets (amounts in thousands):
Line of credit, gross
17,150
11,450
(478)
(619)
Line of credit, net
At November 2, 2020, there was an outstanding balance of $17,150,000 (before unamortized deferred financing costs) under the facility. The entire $20,000,000 is available for operating expense purposes.
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Note 9 – Related Party Transactions
Compensation and Services Agreement
Pursuant to the compensation and services agreement with Majestic Property Management Corp. (“Majestic”), Majestic provides the Company with the services of executive, administrative, legal, accounting, clerical and property management personnel, as well as property acquisition, sale and lease consulting and brokerage services, consulting services with respect to mortgage financings and construction supervisory services (collectively, the “Services”). Majestic is wholly-owned by the Company’s vice-chairman and certain of the Company’s executive officers are officers of, and are compensated by, Majestic. The amount the Company pays Majestic for the Services is approved each year by the Company’s Compensation and/or Audit Committees and the independent directors.
In consideration for the Services, the Company paid Majestic $758,000 and $2,239,000 for the three and nine months ended September 30, 2020, respectively, and $705,000 and $2,110,000 for the three and nine months ended September 30, 2019, respectively. Included in these fees are $321,000 and $930,000 of property management costs for the three and nine months ended September 30, 2020, respectively, and $325,000 and $971,000 for the three and nine months ended September 30, 2019, respectively. The amounts paid for property management services are 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 with respect to properties managed by third parties. The Company also paid Majestic, pursuant to the compensation and services agreement, $69,000 and $206,000 in the three and nine months ended September 30, 2020, respectively, and $54,000 and $162,000 in the three and nine months ended September 30, 2019, respectively, for the Company’s share of all direct office expenses, including rent, telephone, postage, computer services, internet usage and supplies. The Company does not pay Majestic for any services except as described in this and the immediately preceding paragraph.
Executive officers and others providing services to the Company under the compensation and services agreement were awarded shares of restricted stock and restricted stock units (“RSUs”) under the Company’s stock incentive plans (described in Note 14). The related expense charged to the Company’s operations was $453,000 and $1,356,000 for the three and nine months ended September 30, 2020, respectively, and $521,000 and $1,453,000 for the three and nine months ended September 30, 2019, respectively.
The amounts paid under the compensation and services agreement (except for the property management costs which are included in Real estate expenses) and the costs of the stock incentive plans are included in General and administrative expense on the consolidated statements of income.
Joint Venture Partners and Affiliates
The Company paid an aggregate of $20,000 and $56,000 for the three and nine months ended September 30, 2020, respectively, and $21,000 and $62,000 for the three and nine months ended September 30, 2019, respectively, to its consolidated joint venture partners or their affiliates (none of whom are officers, directors or employees of the Company) for property management services, which are included in Real estate expenses on the consolidated statements of income.
The Company’s unconsolidated joint ventures paid management fees of $27,000 and $68,000 for the three and nine months ended September 30, 2020, respectively, and $29,000 and $85,000 for the three and nine months ended September 30, 2019, respectively, to the other partner of the venture, which reduced Equity in earnings on the consolidated statements of income by $14,000 and $34,000 for the three and nine months ended September 30, 2020, respectively, and $15,000 and $42,000 for the three and nine months ended September 30, 2019, respectively. Additionally, during the nine months ended September 30, 2020, an unconsolidated joint venture of the Company paid a leasing commission and development fee totaling $75,000 to the other partner of the venture, which was included in Investment in unconsolidated joint ventures on the consolidated balance sheet as of September 30, 2020.
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Note 9 – Related Party Transactions (Continued)
During 2020 and 2019, the Company paid quarterly fees of $74,500 and $72,400, respectively, to the Company’s chairman, and $29,800 and $28,900, respectively, to the Company’s vice-chairman. These fees are included in General and administrative expenses on the consolidated statements of income.
The Company obtains its property insurance in conjunction with Gould Investors L.P. (“Gould Investors”), a related party, and reimburses Gould Investors annually for the Company’s insurance cost relating to its properties. Amounts reimbursed to Gould Investors were $1,162,000 during the three and nine months ended September 30, 2020. Included in Real estate expenses on the consolidated statements of income is insurance expense of $307,000 and $797,000 for the three and nine months ended September 30, 2020, respectively, and $249,000 and $696,000 for the three and nine months ended September 30, 2019, respectively. The balance of amounts reimbursed to Gould Investors represents prepaid insurance and is included in Other assets on the consolidated balance sheets.
Note 10 – Common Stock
Dividend
The following chart details the Company’s dividend activity for the nine months ended September 30, 2020 (amounts in thousands, except per share data):
Dividend Paid
Declaration Date
per Share
Payable Date
Record Date
Cash %
Stock %
Issued
March 13, 2020
0.45
9,036
April 7, 2020
March 24, 2020
100.0
June 10, 2020 (a)(b)
9,068
July 31, 2020
June 22, 2020
50.0
4,537
September 9, 2020 (a)(c)(d)
October 29, 2020
September 21, 2020
75.0
25.0
6,898
141
Change in Authorized Capital
On July 8, 2020, the Company filed an amended and restated charter with the Maryland State Department of Assessments and Taxation, which, among other things, increased the number of shares of common stock the Company is authorized to issue from 25,000,000 shares to 50,000,000 shares.
Note 11 – Shares Issued through the At-the-Market Equity Offering Program
The Company did not sell any shares during the three and nine months ended September 30, 2020. During the nine months ended September 30, 2019, the Company sold 180,120 shares for proceeds of $5,392,000, net of commissions of $54,000, and incurred offering costs of $136,000 for professional fees. No shares were sold by the Company during the three months ended September 30, 2019.
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Note 12 – Dividend Reinvestment Plan
On June 10, 2020, the Company temporarily suspended the dividend reinvestment feature of its Dividend Reinvestment Plan (the “DRP”). The DRP, among other things, had provided stockholders with the opportunity to reinvest all, or a portion of, their cash dividends paid on the Company’s common stock in additional shares of its common stock, at a discount of up to 5% from the market price. The discount was determined at the Company’s sole discretion and had been offered at a 5% discount from market. Under the DRP, the Company issued 77,000 shares of common stock during the nine months ended September 30, 2020, and 55,000 and 166,000 shares of common stock during the three and nine months ended September 30, 2019, respectively.
Note 13 – Earnings Per Common Share
Basic earnings per share was determined by dividing net income allocable to common stockholders for the applicable period by the weighted average number of shares of common stock outstanding during such period. Net income is also allocated to the unvested restricted stock outstanding during each year, as the restricted stock is entitled to receive dividends and is therefore considered a participating security. As of September 30, 2020, the shares of common stock underlying the RSUs awarded between 2018 and 2020 under the 2019 and 2016 Incentive Plans (see Note 14) are excluded from the basic earnings per share calculation, as these units are not participating securities.
Diluted earnings per share reflects the potential dilution that could occur if securities or other rights exercisable for, or convertible into, common stock were exercised or converted or otherwise resulted in the issuance of common stock that shared in the earnings of the Company.
The following table identifies the number of shares of common stock underlying the RSUs that are included in determining the diluted weighted average number of shares of common stock:
Three and Nine Months Ended September 30, 2020 (a):
Total Number of
Return on
Stockholder
Shares
Date of Award
Underlying Shares (b)(c)
Capital Metric
Return Metric
Excluded (d)
July 1, 2018
73,750
26,456
47,294
July 1, 2019
75,026
25,724
49,302
August 3, 2020
37,513
223,802
89,693
134,109
Three and Nine Months Ended September 30, 2019 (e):
September 26, 2017 (f)
76,250
26,840
27,224
54,064
22,186
22,321
53,929
77,776
15,168
62,608
230,276
64,329
91,553
138,723
Note 13 – Earnings Per Common Share (Continued)
The following table provides a reconciliation of the numerator and denominator of earnings per share calculations (amounts in thousands, except per share amounts):
Numerator for basic and diluted earnings per share:
Deduct/add net (income) loss attributable to non-controlling interests
Less earnings allocated to unvested restricted stock (a)
(472)
(303)
(947)
(924)
Net income available for common stockholders: basic and diluted
13,253
4,815
22,888
12,277
Denominator for basic earnings per share:
Weighted average number of common shares outstanding
Weighted average number of common shares issued through stock dividend
34
Effect of dilutive securities:
RSUs
48
Denominator for diluted earnings per share:
Weighted average number of shares
Earnings per common share, basic and diluted
Note 14 – Stock Based Compensation
The Company’s 2019 Incentive Plan (‘‘Plan’’), approved by the Company’s stockholders in June 2019, permits the Company to grant, among other things, stock options, restricted stock, RSUs, performance share awards and dividend equivalent rights and any one or more of the foregoing to its employees, officers, directors and consultants. A maximum of 750,000 shares of the Company’s common stock is authorized for issuance pursuant to this Plan. As of September 30, 2020, an aggregate of 299,602 shares subject to awards in the form of restricted stock (149,550 shares) and RSUs (150,052 shares) are outstanding under the Plan.
Under the Company’s 2016 and 2012 equity incentive plans (collectively, the “Prior Plans”), as of September 30, 2020, (i) an aggregate of 625,875 shares in the form of restricted stock (552,125 shares) and RSUs (73,750 shares) are outstanding and have not yet vested, and (ii) with respect to 76,250 shares of common stock underlying RSUs that had been granted in 2017, 24,343 shares were deemed to have vested as of June 30, 2020, and in August 2020 such shares were issued after the Compensation Committee determined that the performance metrics with respect to such shares had been satisfied. RSUs with respect to the 51,907 share balance were forfeited. 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. The restricted stock grants are charged to General and administrative expense over the respective vesting periods based on the market value of the common stock on the grant date. Unless earlier forfeited because the participant’s relationship with the Company terminated, unvested restricted stock awards vest on the fifth anniversary of the grant date, and under certain circumstances may vest earlier.
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Note 14 – Stock Based Compensation (Continued)
During the third quarter of each of 2020, 2019 and 2018, the Company granted RSUs exchangeable for up to 75,026, 77,776, and 76,250 shares, respectively, of common stock upon satisfaction, through June 30, 2023, June 30, 2022 and June 30, 2021, respectively, of specified conditions. Specifically, up to 50% of these RSUs vest upon achievement of metrics related to average annual total stockholder return (the “TSR Awards”), which metrics meet the definition of a market condition, and up to 50% vest upon achievement of metrics related to average annual return on capital (the “ROC Awards”), which metrics meet the definition of a
performance condition. The holders of the RSUs are not entitled to dividends or to vote the underlying shares until such RSUs vest and shares are issued. Accordingly, the shares underlying these RSUs are not included in the shares shown as outstanding on the balance sheet. For the TSR Awards, a third party appraiser prepared a Monte Carlo simulation pricing model to determine the fair value, which is recognized ratably over the service period. The Monte Carlo valuation consisted of computing the grant date fair value of the awards using the Company’s simulated stock price. For the 2020 TSR awards, the per unit or share fair value was estimated using the following assumptions: an expected life of three years, a dividend rate of 10.40%, a risk-free interest rate of 0.10% - 0.18% and an expected price volatility of 51.24% - 77.92%. For the ROC Awards, the fair value is based on the market value on the date of grant and the performance assumptions are re-evaluated quarterly. The Company does not recognize expense on ROC Awards which it does not expect to vest. During 2019, RSUs exchangeable in 2021 and 2022 for an aggregate of 5,250 shares were forfeited.
As of September 30, 2020, based on performance and market assumptions, the fair value of the RSUs granted in 2020, 2019 and 2018 is $861,000, $1,014,000 and $945,000, respectively. Recognition of such deferred compensation expense will be charged to General and administrative expense over the respective three-year performance cycle. None of these RSUs were forfeited or vested during the nine months ended September 30, 2020.
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The following is a summary of the activity of the equity incentive plans:
Restricted stock grants:
Number of shares
149,550
150,050
Average per share grant price
28.10
25.70
Deferred compensation to be recognized over vesting period
4,202,000
3,856,000
Number of non-vested shares:
Non-vested beginning of period
701,675
689,150
674,250
651,250
Grants
Vested during period
(2,500)
(122,125)
(114,650)
Forfeitures
(12,400)
Non-vested end of period
RSU grants:
Number of underlying shares
17.31
28.96
861,000
923,000
148,776
152,500
225,026
(24,343)
(51,907)
Restricted stock and RSU grants:
Weighted average per share value of non-vested shares (based on grant price)
24.98
Value of stock vested during the period (based on grant price)
61,500
3,589,000
2,365,000
Weighted average per share value of shares forfeited during the period (based on grant price)
24.41
24.03
The total charge to operations:
Outstanding restricted stock grants
885,000
717,000
2,644,000
2,403,000
Outstanding RSUs
251,000
225,000
797,000
431,000
Total charge to operations
1,136,000
942,000
3,441,000
2,834,000
As of September 30, 2020, total compensation costs of $8,698,000 and $1,643,000 related to non-vested restricted stock awards and RSUs, respectively, have not yet been recognized. These compensation costs will be charged to General and administrative expense over the remaining respective vesting periods. The weighted average remaining vesting period is 2.4 years for the restricted stock and 1.8 years for the RSUs.
Note 15 – Fair Value Measurements
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The Company adopted this guidance on January 1, 2020 and its adoption did not have any impact on the Company’s previously reported consolidated financial statements.
The Company measures the fair value of financial instruments based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. In accordance with the fair value hierarchy, Level 1 assets/liabilities are valued based on quoted prices for identical instruments in active markets, Level 2 assets/liabilities are valued based on quoted prices in active markets for similar instruments, on quoted prices in less active or inactive markets, or on other “observable” market inputs and Level 3 assets/liabilities are valued based significantly on “unobservable” market inputs.
The carrying amounts of cash and cash equivalents, escrow, deposits and other assets and receivables (excluding interest rate swaps), dividends payable, and accrued expenses and other liabilities (excluding interest rate swaps), are not measured at fair value on a recurring basis, but are considered to be recorded at amounts that approximate fair value.
At September 30, 2020, the $465,923,000 estimated fair value of the Company’s mortgages payable is greater than their $437,095,000 carrying value (before unamortized deferred financing costs) by approximately $28,828,000 assuming a blended market interest rate of 3.00% based on 7.4 year weighted average remaining term to maturity of the mortgages.
At December 31, 2019, the $454,039,000 estimated fair value of the Company’s mortgages payable is greater than their $440,278,000 carrying value (before unamortized deferred financing costs) by approximately $13,761,000 assuming a blended market interest rate of 3.72% based on the 8.1 year weighted average remaining term to maturity of the mortgages.
At September 30, 2020 and December 31, 2019, the carrying amount of the Company’s line of credit (before unamortized deferred financing costs) of $17,150,000 and $11,450,000, respectively, approximates its fair value.
The fair value of the Company’s mortgages payable and line of credit are estimated using unobservable inputs such as available market information and discounted cash flow analysis based on borrowing rates the Company believes it could obtain with similar terms and maturities. These fair value measurements fall within Level 3 of the fair value hierarchy.
Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Fair Value on a Recurring Basis
As of September 30, 2020, the Company had in effect 23 interest rate derivatives, all of which were interest rate swaps, related to 23 outstanding mortgage loans with an aggregate $85,416,000 notional amount maturing between 2021 and 2028 (weighted average remaining term to maturity of 4.1 years). The Company’s objective in using interest rate swaps is to add stability to interest expense. These 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 5.16% and a weighted average interest rate of 3.95% at September 30, 2020). The Company does not use derivatives for trading or speculative purposes.
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Note 15 – Fair Value Measurements (Continued)
The fair value of the Company’s derivative financial instruments, was determined to be the following (amounts in thousands):
Carrying and
Balance Sheet
Interest rate swaps
As of
Fair Value
Classification
Financial assets
Other assets
December 31, 2019
87
Financial liabilities
5,624
Other liabilities
1,715
Fair values are approximated using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivatives. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.
Although the Company has determined the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with it use Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparty. As of September 30, 2020, the Company has assessed and determined the impact of the credit valuation adjustments on the overall valuation of its derivative positions is not significant. As a result, the Company determined its derivative valuation is classified in Level 2 of the fair value hierarchy. The Company does not own any financial instruments that are classified as Level 1 or 3.
The following table presents the effect of the Company’s derivative financial instruments on the consolidated statements of income for the periods presented (amounts in thousands):
Amount of loss recognized on derivatives in other comprehensive loss
(31)
(1,319)
(5,672)
(5,281)
Amount of reclassification from Accumulated other comprehensive loss into Interest expense
(425)
(139)
(1,677)
(6)
During the nine months ended September 30, 2020 and 2019, in connection with the sale of several properties, the Company paid off the related mortgages and terminated the related interest rate swaps (see Note 5). In terminating these interest rate swaps early, the Company discontinued hedge accounting as the hedged forecasted transactions were no longer probable to occur. As a result, the Company accelerated the reclassification of amounts from accumulated other comprehensive loss to interest expense which is recorded as Prepayment costs on debt in the consolidated statements of income. Such reclassifications amounted to $58,000 and $1,123,000 for the three and nine months ended September 30, 2020, respectively, and $161,000 and $201,000 for the three and nine months ended September 30, 2019, respectively.
No gain or loss was recognized with respect to amounts excluded from effectiveness testing on the Company’s cash flow hedges for the three and nine months ended September 30, 2020 and 2019. During the twelve months ending September 30, 2021, the Company estimates an additional $1,612,000 will be reclassified from Accumulated other comprehensive loss as an increase to Interest expense.
The derivative agreements in effect at September 30, 2020 provide that if the wholly-owned subsidiary of the Company which is a party to such agreement defaults or is capable of being declared in default on any of its indebtedness, then a default can be declared on such subsidiary’s derivative obligation. In addition, if the subsidiary defaults, the Company could be held liable for swap breakage losses, if any, resulting from the early termination of the derivative.
23
As of September 30, 2020 and December 31, 2019, the fair value of the derivatives in a liability position, including accrued interest of $115,000 and $27,000, respectively, but excluding any adjustments for non-performance risk, was approximately $5,961,000 and $1,832,000, respectively. In the event the Company had breached the contractual provisions of the derivative contracts, it would be required to settle its obligations thereunder at their termination liability value of $5,961,000 and $1,832,000 as of September 30, 2020 and December 31, 2019, respectively. This termination liability value, net of adjustments for non-performance risk of $223,000 and $90,000, is included in Accrued expenses and other liabilities on the consolidated balance sheet at September 30, 2020 and December 31, 2019, respectively.
Note 16 – New Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), which contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the nine months ended September 30, 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company may apply other elections, as applicable, as additional changes in the market occur. The Company continues to evaluate the new guidance, to determine if, and to the extent, it will impact the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance replaces the current “incurred loss” model with an “expected loss” approach. The Company adopted this guidance on January 1, 2020 using the modified retrospective transition method and its adoption did not have any impact on the Company’s previously reported income from operations, net income or accumulated undistributed net income for the periods presented.
Note 17 – Subsequent Events
Subsequent events have been evaluated and except as disclosed herein, there were no other events relative to the consolidated financial statements that require additional disclosure.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q, together with other statements and information publicly disseminated by us, contain 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 and include, without limitations, statements regarding our future estimated rental income, funds from operations, adjusted funds from operations and our dividend. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect our results of operations, financial condition, cash flows, performance or achievements.
Currently, one of the most significant risks, uncertainties and factors that we face is the adverse effect of the current pandemic of the novel coronavirus, or COVID-19, and the various governmental responses thereto, on our and our tenants’ financial condition, results of operations, cash flows and performance, and the pandemic’s impact on the real estate market, global economy and financial markets. The extent to which COVID-19 impacts us, our tenants and the economy generally will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. Moreover, you should interpret many of the risks and challenges identified in this report, as well as the risks and challenges set forth in the other reports we file with the Securities and Exchange Commission (the “SEC”), as being heightened as a result of the numerous adverse impacts of the COVID-19 pandemic, which risks and challenges are magnified due to the ongoing nature of the pandemic. Additional uncertainties, risks and factors which may cause actual results to differ materially from current expectations include, but are not limited to:
In light of the factors referred to above, the future events discussed or incorporated by reference in this report and other documents we file with the SEC may not occur, and actual results, performance or achievements could differ materially from those anticipated or implied in the forward-looking statements. Given these uncertainties, you should not rely on any forward-looking statements.
We undertake no obligation to publicly update our forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make in our reports that are filed with or furnished to the SEC.
Challenges and Uncertainties Resulting from the COVID-19 Pandemic
The COVID-19 pandemic and the various governmental responses thereto have had, and continue to have, a significant impact on the global economy, the U.S. economy, the economies of the local markets in which our properties are located, and the broader financial markets. Most industries have been negatively impacted, directly or indirectly, among other things, by preventative measures taken by governmental authorities to address the public health crisis such as mandatory business closures, quarantines, restrictions on travel and "shelter-in-place" or "stay-at-home" orders. These containment measures and the related economic consequences, are affecting our tenants to varying degrees depending on, among other things, the location of the subject property (i.e., whether it is located in an area that is or has been the subject of quarantine orders) and the nature of the tenant and use of the property (i.e., industrial or non-industrial), with retail (both general and specialized), theater, health and fitness, and restaurant properties being significantly adversely affected. Although several jurisdictions have lifted or relaxed some of these restrictions, we cannot predict, and there is significant uncertainty with respect to, whether and to what extent the restrictions in various jurisdictions will be relaxed or lifted, whether and when such restrictions will be reinstated, whether and when businesses of tenants that have closed, either voluntarily or by governmental mandate, will reopen, the extent to which clients and customers will re-engage with such tenants, and whether such re-engagement will be at levels that will allow such tenants to return to profitability.
The following is intended to provide certain information regarding the impact of the pandemic and governmental responses on our business and management's efforts to respond to those impacts. As a result of the rapid development, fluidity and uncertainty surrounding this situation, we expect that the statistical and other information will change, perhaps significantly, going forward and may not be indicative of the actual impact of the pandemic on our business, operations, cash flows and financial condition for the third quarter of 2020 and the future. See Note 3 to our consolidated financial statements for information regarding the accounting treatment afforded to abatements and deferral of rental payments.
As of November 2, 2020 (unless otherwise indicated):
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Of this aggregate $3.6 million of deferred rent, $1.6 million, or 46.4%, is payable by four tenants. Approximately $430,000, $2.9 million and $193,000 of the deferred payments are to be paid in 2020, 2021 and 2022, respectively. These deferrals do not (i) modify or defer tenants’ obligations to reimburse us for property level operating expenses and (ii) affect our net income, funds from operations (“FFO”) or adjusted funds from operations (“AFFO”); however, they result in a reduction of cash available for, among other things, acquisitions, operations and dividends. We may grant, as circumstances require, rent deferrals in addition to those described in this report.
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We anticipate that over the next several months, if not longer, the pandemic and the responses thereto will have a negative impact on our results of operations and cash flows and may have a negative impact on our financial condition. In the longer term, the COVID-19 pandemic, or any future pandemic, and such responses could present further challenges due, among other things, to:
We have taken various measures to maintain the strength of our business and manage the impact of the pandemic on our operations and liquidity and capital resource position, including the following:
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We are carefully monitoring and managing our mortgage maturities. No mortgage debt is scheduled to mature in 2020, and $8.5 million of mortgage debt is scheduled to mature in 2021. Generally, we and our mortgage lenders have modified our debt service obligations so that these obligations do not exceed the amounts we are contractually entitled to receive from tenants pursuant to our leases, after giving effect to rent abatements or deferrals. Through November 2, 2020, mortgage lenders have agreed to defer payment of an estimated $1.8 million of debt service otherwise due in 2020 (including the debt service at an unconsolidated joint venture property of which our 50% share is $248,000), of which approximately 12% will be payable in 2021 and 78% is deferred until the maturity of such debt.
We continue to monitor carefully compliance with the terms and conditions of our credit facility and are in continual contact with our lenders. While we currently believe we will continue to be in compliance with the facility’s financial covenants, if, among other things, tenants contributing certain levels of base rent terminate their leases, seek bankruptcy protection or obtain rent concessions, we may not continue to comply with the terms thereof. See “ – Liquidity and Capital Resources – Credit Facility.”
Challenges and Uncertainties Facing our Beachwood, Ohio Property
A multi-family complex, which we refer to as The Vue, ground leases from us the underlying land located in Beachwood, Ohio. The tenant, which is responsible for the mortgage payments on this property, paid the mortgage payment of $325,000 for October and the rent of $81,000 for September 2020; however, it did not pay the $81,000 rent owed for October and we do not anticipate that the tenant will resume making rental payments. During the nine months ended September 30, 2020, 2019 and 2018, the tenant paid us $729,000, $540,000 and $1.2 million, respectively, of rental income, all of which is variable rent. For at least the past several months, the property’s operating income has been less than its mortgage interest and operating expense and effective as of October 1, 2020, the tenant is obligated to include payments of principal in its mortgage payments. Accordingly, it is anticipated that for the foreseeable future, the property, after giving effect to mortgage payments, will operate on a negative cash flow basis. We expect that the cash flow shortfall, which may be significant, will be funded by us and the tenant (though the extent of the tenant’s contributions are uncertain), over an extended period. At September 30, 2020, (i) there are no unbilled rent receivables, intangibles or tenant origination costs associated with this property and (ii) the net book value of our land subject to this ground lease is $13.9 million and is subordinate to $67.4 million of mortgage debt incurred by the owner/operator. If the tenant does not resume making monthly rental payments, ceases paying its mortgage obligations, or we fund cash flow shortfalls at the property, our cash flow will be adversely impacted. See "- Off Balance Sheet Arrangements" and Note 6 to our consolidated financial statements.
Overview
We are a self-administered and self-managed real estate investment trust, or REIT, incorporated in Maryland in 1982. To qualify as a REIT, under the Internal Revenue Code of 1986, as amended, we must meet a number of organizational and operational requirements, including a requirement that we distribute currently at least 90% of ordinary taxable income to our stockholders. We intend to comply with these requirements and to maintain our REIT status.
We acquire, own and manage a geographically diversified portfolio consisting primarily of industrial, retail (including furniture stores and supermarkets), restaurant, health and fitness and theater properties, many of which are subject to long-term net leases. As of September 30, 2020, we own 125 properties (including four properties owned by consolidated joint ventures and three properties owned by unconsolidated joint ventures) located in 31 states. Based on square footage, our occupancy rate at September 30, 2020 is approximately 96.9%.
In addition to the challenges presented by the COVID-19 pandemic, we face a variety of risks and challenges in our business. Among other things, we face the possibility that we will not be able to acquire accretive properties on acceptable terms, lease our properties on terms favorable to us or at all, our tenants may be unable to pay their rental and other obligations and we may be unable to renew or relet, on acceptable terms, leases that are expiring or otherwise terminating. See “- Challenges and Uncertainties Resulting from the COVID-19 Pandemic”.
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We seek to manage the risk of our real property portfolio and the related financing arrangements by diversifying among types of properties, industries, locations, tenants, scheduled lease expirations, mortgage maturities and lenders, and by seeking to minimize our exposure to interest rate fluctuations. Substantially all of our mortgage debt either bears interest at fixed rates or is subject to interest rate swaps, limiting our exposure to fluctuating interest rates on our outstanding mortgage debt.
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, (which includes an evaluation as to whether the tenant is open and operating), we monitor a tenant’s financial condition through one or more of the following actions: reviewing tenant financial statements or other financial information, obtaining other tenant related information, regular contact with tenant’s representatives, tenant credit checks and regular management reviews of our tenants. We may sell a property if the tenant’s financial condition is unsatisfactory.
Historically, in acquiring properties, we balanced 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 took 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 do not anticipate acquiring any properties in the near-term and when we pursue an acquisition, we will reevaluate the factors to be considered in analyzing such acquisition opportunity, as well as the weighting of such factors, in assessing such opportunity.
We are sensitive to the risks facing the retail, restaurant, health and fitness and theater industries as a result of the growth of e-commerce. Over the past several years, we have been addressing our exposure to the retail industry by acquiring industrial properties, including industrial properties that we believe capitalize on e-commerce activities, such as e-commerce distribution and warehousing facilities, and disposing of retail properties which we did not think advantageous to hold for the long-term. Approximately 52.0% of our contractual base rent (as described below) is derived from industrial properties and 32.9%, 5.1%, 4.5%, 3.3%, and 2.2% from retail, restaurant, health and fitness, theaters and other properties, respectively.
Our 2020 contractual base rent is approximately $74.2 million and represents, after giving effect to any abatements, concessions, deferrals or adjustments in effect as of September 30, 2020, the base rent payable to us during the twelve months ending September 30, 2021 under leases in effect at September 30, 2020, including approximately, (i) $2.4 million from Regal Cinemas at two properties which have closed for an unspecified period and (ii) $2.3 million from the four tenants that have sought bankruptcy protection. Excluded from contractual base rent is an aggregate of $3.5 million comprised of: (i) our share of the rental income payable to our unconsolidated joint ventures, which is approximately $1.8 million, (ii) $1.1 million of estimated variable lease payments from The Vue, (iii) approximately $705,000 of amortization of intangibles and (iv) the reversal of approximately $145,000 of straight-line rent.
The following table sets forth scheduled expirations of leases for our properties as of September 30, 2020 for the periods indicated below:
Percentage of
Number
Approximate
Contractual
Lease Expiration (1)
of
Square
Base Rent
12 Months Ending
Expiring
Footage Subject to
Base Rent Under
Represented by
Leases
Expiring Leases (2)
Expiring Leases
171,836
688,067
0.9
2,111,837
14,577,580
19.6
850,598
5,654,220
7.6
1,228,072
9,560,326
12.9
528,789
4,858,422
6.6
2026
290,272
4,155,143
5.6
2027
1,242,319
7,736,366
10.4
2028
663,408
3,589,357
4.8
2029
1,043,545
5,192,318
7.0
2030
175,447
3,408,940
4.6
2031 and thereafter
1,856,091
14,802,107
20.0
158
10,162,214
74,222,846
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Sale of Property during the Three Months ended September 30, 2020
On July 1, 2020, we sold a retail property located in Knoxville, Tennessee, for a sales price of $18.0 million, of which $8.5 million was used to repay the mortgage debt associated with the property, $8.7 million was used to pay down a portion of our credit facility operating expense loan of $10.0 million, and $833,000 was used to pay the expense associated with the termination of the related interest rate swap. In the three and nine months ended September 30, 2020, we recognized a $10.3 million gain from this sale, before giving effect to the swap termination fee, of which $775,000 and $58,000 were recognized, in the second and third quarter of 2020, respectively.
Results of Operations
The following table compares Rental income, net, for the periods indicated:
Increase
(Dollars in thousands)
(Decrease)
% Change
3.2
883
1.4
The following table details the components of rental income, net, for the periods indicated:
Acquisitions (a)
1,755
712
1,043
146.5
4,707
848
3,859
455.1
Dispositions (b)
749
(749)
(100.0)
628
3,298
(2,670)
(81.0)
Same store (c)
19,316
18,953
363
1.9
57,836
58,142
(306)
(0.5)
no properties were acquired during the three months ended March 31, 2019.
the 2019 column represents rental income from properties sold since January 1, 2019.
Changes due to acquisitions and dispositions
The three and nine months ended September 30, 2020 reflect increases of (i) $456,000 and $2.6 million, respectively, generated by eight properties acquired in 2019, and (ii) $587,000 and $1.3 million, respectively, generated by two properties acquired in 2020. Offsetting these increases were decreases of $749,000 and $2.7 million, respectively, for the three and nine months ended September 30, 2020, primarily due to the inclusion, in the 2019 periods, of rental income from properties sold during 2020 and 2019.
Changes at same store properties
The changes in same store rental income during the three and nine months ended September 30, 2020 are due primarily to increases of (i) 359,000 and $920,000, respectively, due to increased straight-line rental income resulting from lease extensions at several properties at which tenants were provided rent abatements, (ii) $63,000 and $189,000, respectively, in variable rent at The Vue, and (iii) $270,000 and $34,000, respectively, from our Philadelphia, Pennsylvania property due to the inclusion, during the corresponding 2019 periods, of a $380,000 non-cash allowance against rental income of the entire unbilled rent receivable balance related to this property. This non-cash allowance was offset by decreases of $110,000 and $346,000, respectively, of rental income from this property for the three and nine months ended September 30, 2019. This property has been vacant since December 2019.
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These increases were offset during the three and nine months ended September 30, 2020 by decreases of $385,000 and $1.4 million, respectively, due to COVID-19 rent abatements and a net decrease of $259,000 during the nine months ended September 30, 2020 of tenant reimbursements which generally relate to real estate taxes and operating expenses incurred in the same period.
Operating Expenses
The following table compares operating expenses for the periods indicated:
157
2.8
5.2
General and administrative
313
10.0
925
9.9
Real estate expenses
(241)
(6.5)
(446)
(4.2)
10.3
(28)
(11.0)
666
5.3
1,729
4.7
Depreciation and amortization. The increases in the three and nine months ended September 30, 2020 are due primarily to the inclusion of $412,000 and $1.6 million, respectively, of such expense from the properties acquired in 2020 and 2019, including $272,000 and $670,000 respectively, from properties acquired in 2020. The increases for the three and nine months ended September 30, 2020 were offset by the inclusion, in the corresponding periods in 2019 of (i) $201,000 and $563,000, respectively, from the properties sold since January 1, 2019, and (ii) amortization of $43,000 and $204,000, respectively, of tenant origination costs at several properties that prior to September 30, 2020, were fully amortized in connection with lease expirations.
General and administrative. Contributing to the increases in the three and nine months ended September 30, 2020 are (i) $27,000 and $367,000, respectively, in non-cash compensation expense related to RSUs (due to updated projections of the achievability of performance metrics and the inclusion of the units awarded in 2019), (ii) $167,000 and $240,000, respectively, in non-cash compensation expense related to restricted stock (primarily related to the increase in the number, and higher fair value of the shares granted in 2020 in comparison to the awards granted in 2015, as well as the $126,000 expense reversal in 2019 for the cancellation of restricted stock related to the resignation of a director), and (iii) $127,000 and $369,000, respectively, in compensation expense due to higher levels of compensation (including increases of $72,000 and $215,000, respectively, in payments pursuant to our compensation and services agreement).
Real estate expenses. The decreases in the three and nine months ended September 30, 2020 are due to decreases of $447,000 and $856,000, respectively, related to properties sold since January 1, 2019 and the nine months ended September 30, 2020 includes a decrease of $131,000 at same store properties primarily due to decreased snow removal expense and repairs. These decreases were offset by increases of $146,000 and $541,000 from properties acquired since January 2019.
Impairment due to casualty loss. During August 2020, a building at our Lake Charles, Louisiana property was damaged due to a hurricane and we wrote off $430,000, representing the carrying value of the damaged portion of the building.
Gain on sale of real estate, net.
The following table compares gain on sale of real estate, net for the periods indicated:
7,772
305.5
10,925
299.9
The gain in the three and nine months ended September 30, 2020 was realized from the sale of our Knoxville, Tennessee property, a $10.3 million gain; the nine months ended September 30, 2020 also includes a $4.3 million gain from the sale of our Onalaska, Wisconsin property. The gain in the three and nine months ended September 30, 2019 was realized from the sales of our Athens, Georgia property, a $1.0 million gain and our Wheaton, Illinois property, a $1.5 million gain; the nine months ended
September 30, 2019 also includes a $1.1 million gain from the sale of our Clemmons, North Carolina property, before giving effect to the non-controlling interest’s $422,000 share of the gain.
Other Income and Expenses
The following table compares our other income and expenses for the periods indicated:
%
Change
82
164.0
218
(681.3)
(103)
(64.0)
922
458.7
445
5,562.5
444
2,466.7
(285)
(5.7)
(257)
(1.7)
Amortization and write‑off of deferred financing costs
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19.4
Equity in earnings (loss) of unconsolidated joint ventures. The three and nine months ended September 30, 2019 include, with respect to a multi-tenant retail property in Manahawkin, New Jersey (the “Manahawkin Property”), receivable write-offs of $116,000.
Equity in earnings from sale of unconsolidated joint venture property. The nine months ended September 30, 2020 include a $121,000 gain from the sale of the Savannah, Georgia property. There was no corresponding gain during the nine months ended September 30, 2019.
Prepayment costs on debt. The three and nine months ended September 30, 2020 include costs incurred in connection with the sale of the Knoxville, Tennessee property and the nine months ended September 30, 2020 include costs incurred in connection with the sale of the Onalaska, Wisconsin property. The three and nine months ended September 30, 2019 include costs incurred in connection with the sale of the Athens, Georgia property and the nine months ended September 30, 2019 include costs incurred in connection with the sale of the Clemmons, North Carolina property.
Other income. The three and nine months ended September 30, 2020 include $430,000 of property insurance recoveries to be used towards repairs at our Lake Charles, Louisiana property that was damaged by a hurricane in August 2020. We estimate that we may recognize an additional $450,000 as other income from insurance recoveries over the next several months.
Interest expense. The following table details the components of interest expense for the periods indicated:
Interest expense:
Credit line interest
144
298
(154)
(51.7)
601
777
(176)
(22.7)
Mortgage interest
4,608
4,739
(131)
(2.8)
13,982
14,063
(81)
(0.6)
4,752
5,037
14,583
14,840
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The following table reflects the average interest rate on the average principal amount of outstanding credit line debt for the periods indicated:
Average interest rate on credit line debt
1.92
4.04
(2.12)
(52.5)
2.64
4.14
(1.50)
(36.2)
Average principal amount outstanding on credit line debt
18,766
24,426
(5,660)
(23.2)
24,563
20,043
4,520
22.6
The decreases in credit line interest in the three and nine months ended September 30, 2020 are substantially due to decreases of 212 and 150 basis points (i.e., from 4.04% to 1.92% and 4.14% to 2.64%), respectively, in the weighted average interest rate due to decreases in the one month LIBOR rate. The decrease in the three month period is also due, to a lesser extent, to a decrease of $5.7 million (i.e., from $24.4 million to $18.8 million) in the weighted average balance outstanding under our line of credit. The decrease in the nine month period was offset in part by an increase of $4.5 million (i.e., from $20.0 million to $24.5 million) in the weighted average balance outstanding under our line of credit.
The following table reflects the average interest rate on the average principal amount of outstanding mortgage debt for the periods indicated:
Average interest rate on mortgage debt
4.18
4.32
(0.14)
(3.2)
4.19
4.30
(0.11)
(2.6)
Average principal amount of mortgage debt
440,767
438,626
2,141
0.5
443,566
435,672
7,894
1.8
Liquidity and Capital Resources
Our sources of liquidity and capital include cash flow from operations, cash and cash equivalents, borrowings under our credit facility, refinancing existing mortgage loans, obtaining mortgage loans secured by our unencumbered properties, issuances of our equity securities and property sales. Our available liquidity at November 2, 2020, was $72.2 million, including $8.6 million of cash and cash equivalents (including the credit facility’s required $3.0 million average deposit maintenance balance) and $63.6 million available under our credit facility. The facility is currently available for the acquisition of commercial real estate, repayment of mortgage debt, and $10.0 million for renovation expenses and $20.0 million for operating expenses.
Liquidity and Financing
We expect to meet our operating cash requirements (including debt service) principally from cash flow from operations, our available cash and cash equivalents and, to the extent permitted, our credit facility. We and our joint venture partner were also re-developing the Manahawkin Property - we have delayed this redevelopment as we, our joint venture partner, our tenants and prospective tenants evaluate the impact of the pandemic and changing economic conditions on this project.
At September 30, 2020, excluding the mortgage debt of our unconsolidated joint venture, we had 74 outstanding mortgages payable secured by 91 properties in the aggregate principal amount of $437.1 million (before netting unamortized deferred financing costs of $4.0 million). These mortgages represent first liens on individual real estate investments with an aggregate carrying value of $708.3 million, before accumulated depreciation of $112.8 million. After giving effect to interest rate swap agreements, the mortgage
payments bear interest at fixed rates ranging from 3.02% to 5.87% (a 4.19% weighted average interest rate) and mature between 2021 and 2042 (a 7.4 year weighted average remaining term to maturity).
The following table sets forth, as of September 30, 2020, information with respect to our mortgage debt that is payable during the three months ending December 31, 2020 and for each of the subsequent twelve months through December 31, 2023 (excluding an unconsolidated joint venture):
Amortization payments
3,189
14,599
13,576
45,951
Principal due at maturity
8,542
31,584
16,709
56,835
23,141
46,171
30,285
102,786
At September 30, 2020, an unconsolidated joint venture had a first mortgage on its property with an outstanding balance of $22.9 million, bearing an interest rate at 4.0% and maturing in 2025.
We intend to make debt amortization payments from operating cash flow and, though no assurance can be given that we will be successful in this regard, generally intend to refinance, extend or payoff the mortgage loans which mature in 2021 through 2023. We intend to repay the amounts not refinanced or extended from our existing funds and sources of funds, including our available cash, proceeds from the sale of our common stock and our credit facility (to the extent available).
We continually seek to refinance existing mortgage loans on terms we deem acceptable to generate additional liquidity. Additionally, in the normal course of our business, we sell properties when we determine that it is in our best interests, which also generates additional liquidity. Further, since each of our encumbered properties is subject to a non-recourse mortgage (with standard carve-outs), if our in-house evaluation of the market value of such property is less than the principal balance outstanding on the mortgage loan, we may determine to convey, in certain circumstances, such property to the mortgagee in order to terminate our mortgage obligations, including payment of interest, principal and real estate taxes, with respect to such property.
Typically, we utilize funds from our credit facility to acquire a property and, thereafter secure long-term, fixed rate mortgage debt on such property. We apply the proceeds from the mortgage loan to repay borrowings under the credit facility, thus providing us with the ability to re-borrow under the credit facility for the acquisition of additional properties.
Credit Facility
Our credit facility, as amended on July 8, 2020, provides that subject to borrowing base requirements, we can borrow up to $100.0 million for the acquisition of commercial real estate, repayment of mortgage debt, and renovation and operating expense purposes; provided, that if used for renovation and operating expense purposes, the amount outstanding for such purposes will not exceed the lesser of $30.0 million and 30% of the borrowing base subject to a cap of (i) $10.0 million for renovation expenses and (ii) $20.0 million for operating expense purposes. Pursuant to the July 8th amendment, on February 28, 2021, the amount we can borrow for these purposes will revert to $20.0 million for renovation expenses and $10.0 million for operating expenses. To the extent that as of March 1, 2021 more than $10.0 million is outstanding for operating expense purposes, such excess must be repaid immediately. See “- Liquidity and Capital Resources. The facility matures December 31, 2022 and bears interest equal to the one month LIBOR rate plus the applicable margin. The applicable margin ranges from 175 basis points if our ratio of total debt to total value (as calculated pursuant to the facility) is equal to or less than 50%, increasing to a maximum of 300 basis points if such ratio is greater than 65%. There is an unused facility fee of 0.25% per annum on the difference between the outstanding loan balance and $100.0 million. The credit facility requires the maintenance of $3.0 million in average deposit balances. At September 30, 2020 and November 1, 2020, the interest rate on the facility was 1.91% and 1.90%, respectively.
The terms of our credit facility include certain restrictions and covenants which limit, among other things, the incurrence of liens, and which require compliance with financial ratios relating to, among other things, the minimum amount of tangible net worth, the minimum amount of debt service coverage, the minimum amount of fixed charge coverage, the maximum amount of debt to value, the minimum level of net income, certain investment limitations and the minimum value of unencumbered properties and the number of such properties. Net proceeds received from the sale, financing or refinancing of properties are generally required to be used to repay amounts outstanding under our credit facility. At September 30, 2020, we were in compliance with the covenants under this facility.
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Off-Balance Sheet Arrangement
We are not a party to any off-balance sheet arrangements other than with respect to a land parcel owned by us and located in Beachwood, Ohio. This parcel is improved by a multi-family complex and we ground leased the parcel to the owner/operator of such complex. This ground lease generated $729,000 of rental income during the nine months ended September 30, 2020. At September 30, 2020, our maximum exposure to loss with respect to this property is $13.9 million, representing the carrying value of the land; such leasehold position is subordinate to $67.4 million of mortgage debt incurred by our tenant, the owner/operator of the multi-family complex. We do not believe this type of off-balance sheet arrangement has been or will be material to our liquidity and capital resource positions. See “- Challenges and Uncertainties Facing our Beachwood, Ohio Property” and Note 6 to our consolidated financial statements for additional information regarding this arrangement.
Funds from Operations and Adjusted Funds from Operations
We compute funds from operations, or FFO, in accordance with the “White Paper on Funds From Operations” issued by the National Association of Real Estate Investment Trusts (“NAREIT”) and NAREIT’s related guidance. FFO is defined in the White Paper as net income (calculated in accordance with GAAP), excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control, impairment write-downs of certain real estate assets and investments in entities where the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis. In computing FFO, we do not add back to net income the amortization of costs in connection with our financing activities or depreciation of non-real estate assets.
We compute adjusted funds from operations, or AFFO, by adjusting from FFO for our straight-line rent accruals and amortization of lease intangibles, deducting lease termination fees and adding back amortization of restricted stock and restricted stock unit compensation expense, amortization of costs in connection with our financing activities (including our share of our unconsolidated joint ventures), income on insurance recoveries from casualties and debt prepayment costs. Since the NAREIT White Paper does not provide guidelines for computing AFFO, the computation of AFFO may vary from one REIT to another.
We believe that FFO and AFFO are useful and standard supplemental measures of the operating performance for equity REITs and are used frequently by securities analysts, investors and other interested parties in evaluating equity REITs, many of which present FFO and AFFO when reporting their operating results. FFO and AFFO are intended to exclude GAAP historical cost depreciation and amortization of real estate assets, which assumes that the value of real estate assets diminish predictability over time. In fact, real estate values have historically risen and fallen with market conditions. As a result, we believe that FFO and AFFO provide a performance measure that when compared year over year, should reflect the impact to operations from trends in occupancy rates, rental rates, operating costs, interest costs and other matters without the inclusion of depreciation and amortization, providing a perspective that may not be necessarily apparent from net income. We also consider FFO and AFFO to be useful to us in evaluating potential property acquisitions.
FFO and AFFO do not represent net income or cash flows from operations as defined by GAAP. FFO and AFFO and should not be considered to be an alternative to net income as a reliable measure of our operating performance; nor should FFO and AFFO be considered an alternative to cash flows from operating, investing or financing activities (as defined by GAAP) as measures of liquidity. FFO and AFFO do not measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization, capital improvements and distributions to stockholders.
Management recognizes that there are limitations in the use of FFO and AFFO. In evaluating our performance, management is careful to examine GAAP measures such as net income and cash flows from operating, investing and financing activities.
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The table below provides a reconciliation of net income in accordance with GAAP to FFO and AFFO for the periods indicated (dollars in thousands):
GAAP net income attributable to One Liberty Properties, Inc.
Add: depreciation and amortization of properties
5,623
5,457
16,895
16,033
Add: our share of depreciation and amortization of unconsolidated joint ventures
130
409
396
Add: impairment due to casualty loss
Add: amortization of deferred leasing costs
100
109
306
320
Add: our share of amortization of deferred leasing costs of unconsolidated joint ventures
Deduct: gain on sale of real estate
(10,316)
(2,544)
Deduct: equity in earnings from sale of unconsolidated joint venture property
Adjustments for non-controlling interests
(22)
(23)
348
NAREIT funds from operations applicable to common stock
9,680
8,250
27,135
26,669
Deduct: straight-line rent accruals and amortization of lease intangibles
(685)
(192)
(2,226)
(1,498)
Deduct: our share of straight-line rent accruals and amortization of lease intangibles of unconsolidated joint ventures
(40)
(19)
(143)
(56)
Add: amortization of restricted stock compensation
Add: prepayment costs on debt
58
Deduct: income on insurance recoveries from casualty loss
(430)
Add: amortization and write-off of deferred financing costs
301
252
Add: our share of amortization and write-off of deferred financing costs of unconsolidated joint ventures
(37)
Adjusted funds from operations applicable to common stock
10,026
9,361
29,676
28,878
The table below provides a reconciliation of net income per common share (on a diluted basis) in accordance with GAAP to FFO and AFFO for the periods:
GAAP net income per common share attributable to One Liberty Properties, Inc.
.27
.84
.83
.01
.02
(.50)
(.13)
(.72)
(.18)
(.01)
NAREIT funds from operations per share of common stock
.47
.41
1.34
(.03)
(.12)
(.08)
.06
.05
.17
.14
(.02)
.04
Adjusted funds from operations per share of common stock
.49
1.46
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our primary market risk exposure is the effect of changes in interest rates on the interest cost of draws on our variable rate credit facility and the effect of changes in the fair value of our interest rate swap agreements. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.
We use interest rate swaps to limit interest rate risk on variable rate mortgages. These swaps are used for hedging purposes-not for speculation. We do not enter into interest rate swaps for trading purposes. At September 30, 2020, our aggregate liability in the event of the early termination of our swaps was $6.0 million.
At September 30, 2020, we had 23 interest rate swap agreements outstanding. The fair market value of the interest rate swaps is dependent upon existing market interest rates and swap spreads, which change over time. As of September 30, 2020, if there had been an increase of 100 basis points in forward interest rates, the fair market value of the interest rate swaps would have increased by approximately $3.2 million and the net unrealized loss on derivative instruments would have decreased by $3.2 million. If there were a decrease of 100 basis points in forward interest rates, the fair market value of the interest rate swaps would have decreased by approximately $3.4 million and the net unrealized loss on derivative instruments would have increased by $3.4 million. These changes would not have any impact on our net income or cash.
Our mortgage debt, after giving effect to interest rate swap agreements, 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 variable rate credit facility is sensitive to interest rate changes. Based on the outstanding balance under this facility of $17.2 million at September 30, 2020, a 100 basis point increase of the interest rate would increase our related interest costs over the next twelve months by approximately $172,000 and a 100 basis point decrease of the interest rate would decrease our related interest costs over the next twelve months by approximately $27,000.
The fair market value of our long-term debt is estimated based on discounting future cash flows at interest rates that our management believes reflect the risks associated with long term debt of similar risk and duration.
Item 4. Controls and Procedures
Based on their evaluation as of the end of the period covered by this report, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are effective.
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) promulgated under the Exchange Act) during the three months ended September 30, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II – Other Information
Item 1A. Risk Factors
The following amends and supplements the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 and in Part II, Item 1A. of our Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30, 2020.
The ongoing COVID-19 pandemic and the governmental responses thereto has adversely impacted, and may in the future, adversely impact our business, income, cash flow, results of operations, financial condition, liquidity, prospects, ability to service our debt obligations, or our ability to pay cash dividends to our stockholders.
Unprecedented, extraordinary actions have been taken by federal, state and local governmental authorities to combat the spread of COVID-19, including issuance of “stay-at-home” directives and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. These measures, while intended to protect human life, have and may continue to prevent our tenants’ customers from frequenting our tenants’ facilities (and may further accelerate the trend toward the provision of goods and services through “e-commerce channels” and away from “bricks and mortar channels”) and our tenants from accessing their leased space and operating their businesses. The foregoing have led to, and may continue to lead to, reduced economic activity and continued high levels of unemployment throughout the United States, including the markets where our properties are located. As a result, there has been, and may continue to be, a severe economic slowdown and there is uncertainty regarding how long the pandemic will impact the economy. Such economic slowdown, among other disruptions caused by the COVID-19 pandemic has, and may continue to, adversely impact our and our tenants’ financial condition and results of operations. Further, the longer the pandemic and the related economic slowdown continue, the more likely it is that it will adversely impact, or more significantly adversely impact, tenants that to date have been only been minimally impacted by these factors.
Our ability to lease our properties and collect rental revenues and expense reimbursements, and the ability of our tenants to fulfill their obligations to us, is dependent in part upon national, regional and local economic conditions. As a result of the severe economic slowdown, many of our tenants have and are continuing to experience a deterioration in their financial position, results of operations and cash flow, and have requested rent abatements and/or deferrals. In response, during the six months ended September 30, 2020, we (i) abated $1.4 million (without giving effect to lease extensions which partially offset the abatements) of rental income and (ii) deferred $3.5 million of rent payments (the “Deferred Rent”), of which approximately 47.0% is owed by four tenants and approximately $291,000 of which is to be paid by tenants, or their affiliates, that filed for bankruptcy protection. If the economic slowdown continues for an extended period, our tenants may be unable to satisfy their obligations to us (including obligations under deferral arrangements or extended leases) and will seek additional rent relief. Our financial condition, results of operations and cash flows could be adversely affected if we grant additional rent relief or if tenants are unable to satisfy their obligations, including modified obligations, to us.
The economic uncertainty surrounding the COVID-19 pandemic is causing disruption and instability in the financial markets and may impact our ability to raise capital from debt and equity markets on favorable terms or at all. Further, our management team is focused on mitigating the impacts of the responses to the pandemic, which has required and will continue to require, a large investment of time and resources. Many of our employees and others performing services on our behalf are currently working remotely. An extended period of remote work arrangements could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business.
The ongoing COVID-19 pandemic and the current economic, financial and capital markets environment present material risks and uncertainties for us. However, the rapid development and fluidity of the situation precludes any prediction as to the ultimate impact COVID-19 will have on our business, financial condition, results of operation and cash flows, which will depend largely on future developments directly or indirectly relating to the duration and scope of the COVID-19 pandemic in the United States. To the extent the COVID-19 pandemic adversely affects our business, financial condition, results of operations and cash flows, it may also have the effect of heightening many of the other risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019.
We have, and may continue to pay, all or a portion of dividends in our own stock, in which case stockholders may be required to pay tax in excess of the cash they receive.
We have, and may continue to, distribute taxable dividends that are payable all or in part in our stock. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as income to the extent of our current and accumulated earnings and profits for federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of the cash dividend received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, the issuance of stock in lieu of cash dividend may be dilutive and may result in a reduction in earnings per share and other per share metrics used to evaluate us. Finally, the trading price of our stock would experience downward pressure if a significant number of our stockholders sell shares of our stock in order to pay taxes owed on dividends.
Item 6. Exhibits
Exhibit No.
Title of Exhibit
31.1
Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Senior Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Senior Vice President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
The following financial statements and notes from the One Liberty Properties, Inc. Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020 filed on November 5, 2020, formatted in Inline XBRL: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Changes in Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to the Consolidated Financial Statements.
104
Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document and included in Exhibit 101).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: November 5, 2020
/s/ Patrick J. Callan, Jr.
Patrick J. Callan, Jr.
President and Chief Executive Officer
(principal executive officer)
/s/ David W. Kalish
David W. Kalish
Senior Vice President and
Chief Financial Officer
(principal financial officer)
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