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 June 30, 2022
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).Yes ⌧ No ◻
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 August 3, 2022, the registrant had 21,096,958 shares of common stock outstanding.
One Liberty Properties, Inc. and Subsidiaries
Page No.
Part I — Financial Information
Item 1.
Unaudited Consolidated Financial Statements
Consolidated Balance Sheets — June 30, 2022 and December 31, 2021………………………………………
1
Consolidated Statements of Income — Three and six months ended June 30, 2022 and 2021….……………..
2
Consolidated Statements of Comprehensive Income — Three and six months ended June 30, 2022 and 2021
3
Consolidated Statements of Changes in Equity — Three and six months ended June 30, 2022 and 2021….....
4
Consolidated Statements of Cash Flows — Six months ended June 30, 2022 and 2021………….……………
5
Notes to Consolidated Financial Statements……………………………………………………………….…...
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations…………….…….
24
Item 3.
Quantitative and Qualitative Disclosures About Market Risk………………………………………….………
38
Item 4.
Controls and Procedures……………………………………………………………………………….………..
Part II — Other Information………………………………………………………………………………….…………
39
Unregistered Sales of Equity Securities and Use of Proceeds…………………………………………………..
Item 5.
Other Information……………………………………………………………………………………………….
Item 6.
Exhibits……………………………………………………………………………………………….…………
Part I — FINANCIAL INFORMATION
Item 1. Financial Statements
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Par Value)
June 30,
December 31,
2022
2021
ASSETS
(Unaudited)
Real estate investments, at cost
Land
$
180,952
180,183
Buildings and improvements
680,098
657,458
Total real estate investments, at cost
861,050
837,641
Less accumulated depreciation
163,792
160,664
Real estate investments, net
697,258
676,977
Properties held-for-sale
3,766
1,270
Investment in unconsolidated joint ventures
10,398
10,172
Cash and cash equivalents
17,624
16,164
Unbilled rent receivable
14,826
14,330
Unamortized intangible lease assets, net
20,845
20,694
Escrow, deposits and other assets and receivables
15,936
13,346
Total assets(1)
780,653
752,953
LIABILITIES AND EQUITY
Liabilities:
Mortgages payable, net of $3,339 and $3,316 of deferred financing costs, respectively
399,476
396,344
Line of credit, net of $108 and $216 of deferred financing costs, respectively
27,392
11,484
Dividends payable
9,575
9,448
Accrued expenses and other liabilities
17,238
18,992
Unamortized intangible lease liabilities, net
10,870
10,407
Total liabilities(1)
464,551
446,675
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 shares authorized; 20,281 and 20,239 shares issued and outstanding
20,281
20,239
Paid-in capital
323,104
322,793
Accumulated other comprehensive income (loss)
925
(1,513)
Distributions in excess of net income
(29,150)
(36,187)
Total One Liberty Properties, Inc. stockholders’ equity
315,160
305,332
Non-controlling interests in consolidated joint ventures(1)
942
946
Total equity
316,102
306,278
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
Six Months Ended
Revenues:
Rental income, net
21,472
20,305
43,003
40,989
Lease termination fees
117
25
249
Total revenues
20,422
43,028
41,238
Operating expenses:
Depreciation and amortization
5,905
5,702
11,748
11,459
General and administrative (see Note 9 for related party information)
3,973
3,769
7,765
7,411
Real estate expenses (see Note 9 for related party information)
3,549
3,387
7,236
7,073
State taxes
77
91
151
166
Total operating expenses
13,504
12,949
26,900
26,109
Other operating income
Gain on sale of real estate, net
8,050
21,491
12,699
Operating income
16,018
28,964
28,827
36,620
Other income and expenses:
Equity in earnings (loss) of unconsolidated joint ventures
112
20
228
(2)
Prepayment costs on debt
(799)
Income on settlement of litigation (see Note 13)
5,388
Other income (see Note 13)
54
17
980
187
Interest:
Expense
(4,353)
(4,574)
(8,659)
(9,208)
Amortization and write-off of deferred financing costs
(434)
(296)
(639)
(509)
Net income
16,785
23,332
26,125
26,289
Net (income) loss attributable to non-controlling interests
(18)
(3)
(35)
Net income attributable to One Liberty Properties, Inc.
16,767
23,329
26,090
26,291
Weighted average number of common shares outstanding:
Basic
20,364
20,013
20,372
20,008
Diluted
20,480
20,187
20,485
20,175
Per common share attributable to common stockholders:
.80
1.13
1.24
1.27
.79
1.12
1.23
1.26
Cash distributions per share of common stock
.45
.90
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
Other comprehensive income
Net unrealized gain on derivative instruments
665
841
2,440
2,342
Comprehensive income
17,450
24,173
28,565
28,631
Adjustment for derivative instruments attributable to non-controlling interests
(1)
(4)
Comprehensive income attributable to One Liberty Properties, Inc.
17,432
24,169
28,528
28,629
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Accumulated
Non-Controlling
Other
Distributions
Interests in
Common
Paid-in
Comprehensive
in Excess of
Consolidated
Stock
Capital
Income (Loss)
Net Income
Joint Ventures
Total
Balances, December 31, 2020
19,878
313,430
(5,002)
(37,539)
1,193
291,960
Distributions – common stock
Cash – $.45 per share
(9,329)
Restricted stock vesting
130
(130)
Contribution from non-controlling interest
Distributions to non-controlling interests
(13)
Compensation expense – restricted stock and RSUs
1,343
Net income (loss)
2,962
(5)
2,957
1,498
1,501
Balances, March 31, 2021
314,643
(3,504)
(43,906)
1,198
288,439
(9,330)
16
(16)
(11)
1,685
840
Balances, June 30, 2021
20,024
316,312
(2,664)
(29,907)
1,196
304,961
Balances, December 31, 2021
(9,559)
131
(131)
Shares issued through equity offering program – net
546
563
Shares issued through dividend reinvestment plan
156
161
(33)
1,325
9,323
9,340
1,773
1,775
Balances, March 31, 2022
20,392
324,689
260
(36,423)
932
309,850
(9,494)
Repurchases of common stock – net
(133)
(3,285)
(3,418)
6
157
163
(8)
1,559
18
Balances, June 30, 2022
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (Continued on Next Page)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
(12,699)
(21,491)
(Increase) decrease in unbilled rent receivable
(1,087)
121
Amortization and write-off of intangibles relating to leases, net
(396)
(440)
Amortization of restricted stock and RSU compensation expense
2,884
3,028
Equity in (earnings) loss of unconsolidated joint ventures
(228)
Distributions of earnings from unconsolidated joint ventures
100
639
509
Payment of leasing commissions
(1,030)
(555)
(Increase) decrease in escrow, deposits, other assets and receivables
(1,411)
7,380
(Decrease) increase in accrued expenses and other liabilities
(756)
719
Net cash provided by operating activities
23,789
27,121
Cash flows from investing activities:
Purchase of real estate
(39,888)
(7,061)
Improvements to real estate
(2,423)
(2,521)
Investments in ground leased property
(343)
(1,132)
Net proceeds from sale of real estate
22,424
39,491
Insurance recovery proceeds due to casualty loss
918
300
Net cash (used in) provided by investing activities
(19,312)
29,077
Cash flows from financing activities:
Scheduled amortization payments of mortgages payable
(6,613)
(7,114)
Repayment of mortgages payable
(33,571)
(18,832)
Proceeds from mortgage financings
43,339
4,500
Proceeds from sale of common stock, net
Proceeds from bank line of credit
39,500
9,500
Repayments on bank line of credit
(23,700)
(22,450)
Issuance of shares through dividend reinvestment plan
324
Repurchases of common stock
Payment of financing costs
(554)
(86)
Capital contributions from non-controlling interest
(41)
(24)
Cash distributions to common stockholders
(18,926)
(18,590)
Net cash used in financing activities
(3,097)
(53,071)
Net increase in cash, cash equivalents and restricted cash
1,380
3,127
Cash, cash equivalents and restricted cash at beginning of year
16,666
13,564
Cash, cash equivalents and restricted cash at end of period
18,046
16,691
Supplemental disclosure of cash flow information:
Cash paid during the period for interest expense
8,673
10,068
Supplemental disclosure of non-cash investing activity:
Purchase accounting allocation - intangible lease assets
2,816
1,057
Purchase accounting allocation - intangible lease liabilities
(1,152)
(Unaudited) (Continued)
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:
15,981
Restricted cash included in escrow, deposits and other assets and receivables
422
710
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 represents 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)
JUNE 30, 2022
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 and retail properties, many of which are subject to long-term net leases. As of June 30, 2022, OLP owns 119 properties, including three properties owned by consolidated joint ventures and three properties owned by unconsolidated joint ventures. The 119 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 six months ended June 30, 2022 and 2021 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, 2021.
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.
Purchase Accounting for Acquisition of Real Estate
In acquiring real estate, the Company evaluates whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, and if that requirement is met, the asset group is accounted for as an asset acquisition and not a business combination. Transaction costs incurred with such asset acquisitions are capitalized to real estate assets and depreciated over the respectful useful lives.
The Company allocates the purchase price of real estate, including direct transaction costs applicable to an asset acquisition, among land, building, improvements and intangibles, such as the value of above, below and at-market leases, and origination costs associated with in-place leases at the acquisition date. The Company assesses the fair value of the tangible assets of an acquired property by valuing the property as if it were vacant. The value, as determined, is allocated to land, building and improvements based on management’s determination of the relative fair values of these assets.
The Company assesses the fair value of the lease intangibles based on estimated cash flow projections that utilize available market information; such inputs are categorized as Level 3 inputs in the fair value hierarchy. In valuing an acquired property’s intangibles, factors considered by management include estimates of carrying costs (e.g., real estate taxes, insurance and other operating expenses), lost rental revenue during the expected lease-up periods based on its evaluation of current market demand, and discount rates. Management also estimates costs to execute similar leases, including leasing commissions and tenant improvements.
JUNE 30, 2022 (Continued)
NOTE 2 – SUMMARY ACCOUNTING POLICIES (CONTINUED)
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.
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 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.
8
NOTE 3 – LEASES
Lessor Accounting
The Company owns rental properties which are leased to tenants under operating leases with current expirations ranging from 2022 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.
The components of lease revenues are as follows (amounts in thousands):
Fixed lease revenues
18,405
17,435
36,746
34,900
Variable lease revenues
2,860
2,662
5,861
5,649
Lease revenues (a)
21,265
20,097
42,607
40,549
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.
On a quarterly basis, the Company assesses the collectability of substantially all lease payments due by reviewing the tenant’s payment history or financial condition. Changes to collectability are recognized as a current period adjustment to rental revenue. The Company has assessed the collectability of all recorded lease revenues as probable as of June 30, 2022.
Impact of COVID-19
During 2020, in response to requests for rent relief from tenants impacted by the COVID-19 pandemic and the governmental and non-governmental responses thereto, the Company deferred and accrued $3,360,000 of rent payments, excluding amounts related to Regal Cinemas as described below. Through June 30, 2022, the Company collected an aggregate of $3,261,000, or 97.1%, of such deferred rents. The balance of deferred rents deemed collectible, or $88,000, is expected to be repaid during the remainder of 2022 through January 2023.
In 2021, the Company executed lease amendments with Regal Cinemas, a tenant at two properties, which was adversely affected by the pandemic. Pursuant to these lease amendments, the Company agreed, among other things, to defer an aggregate of $1,449,000 of rent which was originally payable from September 2020 through August 2021 and that such deferred amounts would be repaid beginning in 2022 (the deferred amounts were not accrued as collections were deemed less than probable). Through June 30, 2022, the tenant is current on all lease payments in accordance with these lease amendments and the Company collected an aggregate of $483,000, or 33.3%, of such deferred rents. The $966,000 balance of deferred rents is to be collected in equal monthly installments during the remainder of 2022 through June 2023.
9
NOTE 3 – LEASES (CONTINUED)
Minimum Future Rents
As of June 30, 2022, the minimum future contractual rents to be received on non-cancellable operating leases are included in the table below (amounts in thousands). The minimum future contractual rents do not include (i) straight-line rent or amortization of intangibles, (ii) COVID-19 lease deferral repayments accrued to rental income in 2020, (iii) $966,000 of COVID-19 lease deferral repayments due from Regal Cinemas which were not accrued to rental income and (iv) variable lease payments as described above.
From July 1 – December 31, 2022
35,498
For the year ending December 31,
2023
70,042
2024
61,917
2025
57,631
2026
53,345
2027
45,033
Thereafter
159,107
482,573
Lease Termination Fees
In January 2022, the Company received $25,000 as a lease termination fee from a retail tenant which was recognized during the six months ended June 30, 2022.
In January 2021, the Company received $350,000 as a lease termination fee from a retail tenant, of which $88,000 and $175,000 were recognized during the three and six months ended June 30, 2021, respectively.
In December 2020, the Company received $88,000 as a lease termination fee from an industrial tenant, of which $29,000 and $74,000 were recognized during the three months and six months ended June 30, 2021, respectively.
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 June 30, 2022, the remaining lease term, including renewal options deemed exercised, is 12.7 years. The Company recognized lease expense related to this ground lease of $150,000 and $300,000 for both the three and six months ended June 30, 2022 and 2021, 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 for a five-year renewal option. As of June 30, 2022, the remaining lease term, including the renewal option deemed exercised, is 14.5 years. The Company recognized lease expense related to this office lease of $14,000 and $28,000 for both the three and six months ended June 30, 2022 and 2021, respectively, which is included in General and administrative expenses on the consolidated statements of income.
10
Minimum Future Lease Payments
As of June 30, 2022, the minimum future lease payments related to the operating ground and office leases are as follows (amounts in thousands):
253
507
557
626
627
629
5,591
Total undiscounted cash flows
8,790
Present value discount
(1,722)
Lease liability
7,068
NOTE 4 – REAL ESTATE ACQUISITIONS
The following tables detail the Company’s real estate acquisitions and allocations of the purchase price during the six months ended June 30, 2022 (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.
Contract
Capitalized
Date
Purchase
Terms of
Transaction
Description of Property
Acquired
Price
Payment
Costs
Conditioned Air Company of Naples LLC industrial facility,
Fort Myers, Florida
January 5, 2022
8,100
All cash (a)
66
Q.E.P. Co., Inc. industrial facility,
Dalton, Georgia
May 12, 2022
17,000
330
Multi-tenant industrial facility,
Hillside, Illinois
May 16, 2022
5,770
All cash
Curaleaf, Inc. industrial facility,
Lexington, Kentucky
June 17, 2022
8,430
Cash and $5,480 mortgage (b)
80
Totals - Six months ended June 30, 2022
39,300
588
Building &
Intangible Lease
Market Cap
Discount
Improvements
Asset
Liability
Rate (c)
991
6,876
568
(269)
8,166
5.50%
5.60%
547
15,836
1,223
(276)
17,330
5.00%
5.69%
2,560
2,975
539
(192)
5,882
6.25%
6.63%
(d)
1,558
6,881
486
(415)
8,510
5.25%
5.88%
5,656
32,568
39,888
______________________
11
NOTE 5 – SALES OF PROPERTIES AND PROPERTY HELD-FOR-SALE
Sales of Properties
The following table details the Company’s sales of real estate during the six months ended June 30, 2022 and 2021 (amounts in thousands):
Gross
Gain on Sale of
Date Sold
Sales Price
Real Estate, Net
Wendys restaurant property,
Palmyra, Pennsylvania
March 22, 2022
2,555
1,200
(a)
Reading, Pennsylvania
2,525
1,184
2,485
1,175
Trexlertown, Pennsylvania
2,435
1,090
Orlando Baking industrial property,
Columbus, Ohio (b)
May 2, 2022
8,500
6,925
Havertys retail property,
Fayetteville, Georgia
4,800
1,125
(c)
23,300
Whole Foods retail property & parking lot,
West Hartford, Connecticut (d)
June 17, 2021
40,510
(e)
Totals - Six months ended June 30, 2021
_______________________
Property Held-for-Sale
In February 2022, the Company entered into a contract to sell a retail property located in Columbus, Ohio for a gross sales price of $8,300,000. The buyer’s right to terminate the contract without penalty expired on June 6, 2022. At June 30, 2022, the Company classified the $3,766,000 net book value of the property’s land, building and improvements as Property held-for-sale in the accompanying consolidated balance sheet. The property is scheduled to be sold in early August 2022 and it is anticipated the sale will result in a gain of approximately $4,000,000, which will be recognized as Gain on sale of real estate, net, on the consolidated statements of income for the three and nine months ending September 30, 2022.
12
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. The ground lease provides for rent which can be deferred and paid based on the operating performance of the property; therefore, this rent is recognized as rental income when the operating performance is achieved and the rent is received. No ground lease rental income has been collected since October 2020.
As of June 30, 2022, the VIE’s maximum exposure to loss was $16,012,000 which represented the carrying amount of the land. In purchasing the property in 2016, 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 multi-family property. The Company provided its land as collateral for the owner/operator’s mortgage loan; accordingly, the land position is subordinated to the mortgage. The mortgage balance was $65,417,000 as of June 30, 2022.
Pursuant to the ground lease, as amended in November 2020, the Company agreed, in its discretion, to fund 78% of (i) any operating expense shortfalls at the property and (ii) any capital expenditures required at the property. The Company funded $1,746,000 during the year ended December 31, 2021 and an additional $73,000 and $343,000 during the three and six months ended June 30, 2022, respectively. These amounts are included as part of the carrying amount of the land.
Variable Interest Entities – Consolidated Joint Ventures
The Company has determined the three 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 the applicable joint venture.
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):
10,365
Buildings and improvements, net of accumulated depreciation of $5,325 and $4,957, respectively
18,142
18,472
Cash
869
1,134
1,048
1,020
510
548
589
878
Mortgages payable, net of unamortized deferred financing costs of $174 and $195, respectively
18,850
19,193
472
875
449
475
Accumulated other comprehensive loss
Non-controlling interests in consolidated joint ventures
13
NOTE 6 – VARIABLE INTEREST ENTITIES, CONTINGENT LIABILITY AND CONSOLIDATED JOINT VENTURES (CONTINUED)
As of June 30, 2022 and December 31, 2021, MCB Real Estate, LLC and its affiliates (‘‘MCB’’) are the Company’s joint venture partner in two consolidated joint ventures in which the Company has aggregate equity investments of approximately $4,478,000 and $4,691,000, respectively.
Distributions to each joint venture partner are determined pursuant to the applicable operating agreement and, in the event of a sale of, or refinancing of the mortgage encumbering, the property owned by such venture, the distributions to the Company may be less than that implied by the Company’s equity ownership interest in the venture.
NOTE 7 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
As of June 30, 2022 and December 31, 2021, the Company participated in three unconsolidated joint ventures, each of which owns and operates one property; the Company’s equity investment in these ventures totaled $10,398,000 and $10,172,000, respectively. The Company recorded equity in earnings of $112,000 and $228,000 for the three and six months ended June 30, 2022, respectively, and equity in earnings of $20,000 and equity in loss of $2,000 for the three and six months ended June 30, 2021, respectively.
As of June 30, 2022 and December 31, 2021, MCB and the Company are partners in an unconsolidated joint venture in which the Company’s equity investment is approximately $8,909,000 and $8,773,000, respectively.
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
402,815
399,660
Unamortized deferred financing costs
(3,339)
(3,316)
Mortgages payable, net
Line of Credit
The Company has a credit facility with Manufacturers & Traders Trust Company and VNB New York, LLC, 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 renovation purposes and (ii) $10,000,000 for operating expense purposes. Net proceeds received from the sale, financing or refinancing of properties are generally required to be used to repay amounts outstanding under the credit facility. The facility is guaranteed by subsidiaries of the Company that own unencumbered properties and the Company is required to pledge to the lenders the equity interests in such subsidiaries.
14
NOTE 8 – DEBT OBLIGATIONS (CONTINUED)
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 175 basis points at June 30, 2022 and 2021. An unused facility fee of .25% per annum applies to the facility. The weighted average interest rate on the facility was approximately 2.31% and 1.86% for the six months ended June 30, 2022 and 2021, respectively. The Company was in compliance with all covenants at June 30, 2022.
The following table details the Line of credit, net, balances per the consolidated balance sheets (amounts in thousands):
Line of credit, gross
27,500
11,700
(108)
(216)
Line of credit, net
At August 1, 2022, there was an outstanding balance of $17,500,000 (before unamortized deferred financing costs) and an aggregate of up to $30,000,000 was available for renovation and operating expense purposes under the facility.
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 certain (i) executive, administrative, legal, accounting, clerical, property management, property acquisition, consulting (i.e., sale, leasing, brokerage, and mortgage financing), and construction supervisory services (collectively, the “Services”) and (ii) facilities and other resources. Majestic is wholly-owned by the Company’s vice chairman and it provides compensation to several of the Company’s executive officers.
In consideration for the Services, the Company paid Majestic $760,000 and $1,526,000 for the three and six months ended June 30, 2022, respectively, and $780,000 and $1,564,000 for the three and six months ended June 30, 2021, respectively. Included in these fees are $329,000 and $666,000 for the three and six months ended June 30, 2022, respectively, and $343,000 and $691,000 for property management services for the three and six months ended June 30, 2021, 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, $79,000 and $159,000 for the three and six months ended June 30, 2022, respectively, and $74,000 and $148,000 for the three and six months ended June 30, 2021, respectively, for the Company’s share of all direct office expenses, including rent, telephone, postage, computer services, internet usage and supplies.
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 11). The related expense charged to the Company’s operations was $643,000 and $1,287,000 for the three and six months ended June 30, 2022, respectively, and $739,000 and $1,390,000 for the three and six months ended June 30, 2021, 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.
15
NOTE 9 – RELATED PARTY TRANSACTIONS (CONTINUED)
Joint Venture Partners and Affiliates
The Company paid an aggregate of $20,000 and $42,000 for the three and six months ended June 30, 2022, respectively, and $20,000 and $38,000 for the three and six months ended June 30, 2021, respectively, to its consolidated joint venture partner 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 $34,000 and $70,000 for the three and six months ended June 30, 2022, respectively, and $31,000 and $60,000 for the three and six months ended June 30, 2021, respectively, to the other partner of the ventures, which reduced Equity in earnings on the consolidated statements of income by $17,000 and $35,000 for the three and six months ended June 30, 2022, respectively, and $16,000 and $30,000 for the three and six months ended June 30, 2021, respectively.
During 2022 and 2021, the Company paid quarterly fees of (i) $78,250 and $74,500, respectively, to the Company’s chairman and (ii) $31,300 and $29,800, 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. Included in Real estate expenses on the consolidated statements of income is insurance expense of $267,000 and $606,000 for the three and six months ended June 30, 2022, respectively, and $281,000 and $562,000 for the three and six months ended June 30, 2021, respectively, of amounts reimbursed to Gould Investors in prior periods.
NOTE 10 – EARNINGS PER COMMON SHARE
Basic earnings per share was determined by dividing net income allocable to common stockholders for each period by the weighted average number of shares of common stock outstanding during the applicable period. Net income is also allocated to the unvested restricted stock outstanding during each period, as the restricted stock is entitled to receive dividends and is therefore considered a participating security. As of June 30, 2022, the shares of common stock underlying the RSUs awarded between 2019 and 2021 under the 2019 Incentive Plan (see Note 11) are excluded from the basic earnings per share calculation, as these units are not participating securities.
Diluted earnings per share reflects the potential dilution that could occur if securities or other rights exercisable for, or convertible into, common stock were exercised or converted or otherwise resulted in the issuance of common stock that shared in the earnings of the Company.
NOTE 10 – 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
Deduct earnings allocated to unvested restricted stock (a)
(570)
(801)
(891)
(907)
Net income available for common stockholders: basic and diluted
16,197
22,528
25,199
25,384
Denominator for basic earnings per share:
Weighted average number of common shares outstanding
Effect of dilutive securities: RSUs
116
174
113
167
Denominator for diluted earnings per share:
Weighted average number of shares
Earnings per common share, basic
Earnings per common share, diluted
________________________________________________________________
The following table identifies the number of shares of common stock underlying the RSUs that are included in the calculation, on a diluted basis, of the weighted average number of shares of common stock for such periods:
Three and Six Months Ended June 30, 2022:
Total Number
Shares Included Based on (a)
of Underlying
Return on
Stockholder
Shares
Date of Award
Shares (b)(c)
Capital Metric
Return Metric
Excluded (d)
August 3, 2021
80,700
40,350
August 3, 2020
75,026
37,513
July 1, 2019 (e)
26,975
64,488
10,538
Totals
230,752
115,376
179,864
50,888
Three and Six Months Ended June 30, 2021:
Excluded
July 1, 2018 (f)
73,750
36,875
223,802
111,901
__________________________
NOTE 11 – STOCKHOLDERS’ EQUITY
Common Stock Dividend
On June 9, 2022, the Board of Directors declared a quarterly cash dividend of $0.45 per share on the Company’s common stock, totaling approximately $9,467,000. The quarterly dividend was paid on July 6, 2022 to stockholders of record on June 21, 2022.
Stock Repurchase Program
In March 2016, the Board of Directors authorized a repurchase program of up to $7,500,000 of the Company’s common stock through, among other things, in open market or privately negotiated transactions. During the three and six months ended June 30, 2022, the Company repurchased approximately 133,000 shares of common stock for total consideration of $3,392,000, net of commissions of $8,000. After giving effect to such repurchases, the Company is authorized to repurchase approximately $4,108,000 of shares of common stock. No shares were repurchased by the Company during the three and six months ended June 30, 2021.
Shares Issued through the At-the-Market Equity Offering Program
During the six months ended June 30, 2022, the Company sold approximately 17,000 shares for proceeds of $604,000, net of commissions of $12,000, and incurred offering costs of $41,000 for professional fees. No shares were sold by the Company during the three and six months ended June 30, 2021.
Dividend Reinvestment Plan
The Dividend Reinvestment Plan (the “DRP”), among other things, provides 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, determined in the Company’s sole discretion, of up to 5% from the market price (as such price is calculated pursuant to the DRP). From June 2020 through June 2021, the Company suspended the dividend reinvestment feature of its DRP; such feature was reinstated in June 2021. The discount from the market price is currently 3%. Under the DRP, the Company issued approximately 6,000 and 11,000 shares of common stock during the three and six months ended June 30, 2022. No shares were issued during the three and six months ended June 30, 2021.
Stock Based Compensation
The Company’s 2022, 2019 and 2016 Incentive Plans (collectively, the “Plans”), permit 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 was authorized for issuance pursuant to each Plan at such plan’s inception.
The following details the shares subject to awards that are outstanding under the Plans as of June 30, 2022:
2019
2016
Incentive Plan (a)
Incentive Plan (b)
Restricted stock
437,375
275,000
RSUs
155,726
593,101
_________________
NOTE 11 – STOCKHOLDERS’ EQUITY (CONTINUED)
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 five years from the grant date, and under certain circumstances may vest earlier.
The following table reflects the activities involving RSUs:
2022 (a)
2020
2018
RSUs granted (b)
85,350
77,776
76,250
RSUs vested
RSUs forfeited (e)
13,288
2,500
RSUs outstanding
Vesting Date (f) (g)
6/30/2025
6/30/2024
6/30/2023
6/30/2022
6/30/2021
The specific metrics and other material terms and conditions of the RSUs are as follows:
Year RSU Granted
Metric
Weight
Minimum Performance Criteria (a)
Maximum Performance Criteria (a)
2018 - 2020 (b)
ROC Metric (c)
50%
Average of annual ROC of at least 7%
Average of annual ROC of at least 9.75%
TSR Metric (d)
Average of annual TSR of at least 7%
Average of annual TSR of at least 12.0%
2021 - 2022 (e) (f)
Average of annual ROC of at least 6%
Average of annual ROC of at least 8.75%
Average of annual TSR of at least 6%
Average of annual TSR of at least 11.0%
As of June 30, 2022, based on performance and market assumptions, the fair value of the RSUs granted in 2021 and 2020 is $1,846,000 and $962,000, respectively. Recognition of such deferred compensation will be charged to General and administrative expense over the respective three-year performance cycles. None of these RSUs were forfeited or vested during the three and six months ended June 30, 2022.
19
The following is a summary of the activity of the Plans:
Restricted stock grants:
Number of shares
153,575
151,500
Average per share grant price
33.75
20.34
Deferred compensation to be recognized over vesting period
5,183,000
3,082,000
Number of non-vested shares:
Non-vested beginning of period
728,775
723,050
706,450
701,675
Grants
Vested during period
(16,150)
(15,800)
(146,900)
(145,725)
Forfeitures
(250)
(200)
(750)
(400)
Non-vested end of period
712,375
707,050
RSU grants:
Number of underlying shares
(64,488)
(73,750)
(10,538)
150,052
Restricted stock and RSU grants (based on grant price):
Weighted average per share value of non-vested shares
26.25
24.53
Value of stock vested during the period
2,299,000
2,340,000
5,535,000
5,165,000
Weighted average per share value of shares forfeited during the period
28.91
24.86
29.12
24.24
Total charge to operations:
Outstanding restricted stock grants
1,197,000
1,092,000
2,154,000
1,989,000
Outstanding RSUs
362,000
593,000
730,000
1,039,000
Total charge to operations
1,559,000
1,685,000
2,884,000
3,028,000
As of June 30, 2022, total compensation costs of $10,142,000 and $1,601,000 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 2.6 years for the restricted stock and 1.5 years for the RSUs.
NOTE 12 – FAIR VALUE MEASUREMENTS
The Company measures the fair value of financial instruments based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. In accordance with the fair value hierarchy, Level 1 assets/liabilities are valued based on quoted prices for identical instruments in active markets, Level 2 assets/liabilities are valued based on quoted prices in active markets for similar instruments, on quoted prices in less active or inactive markets, or on other “observable” market inputs and Level 3 assets/liabilities are valued based significantly on “unobservable” market inputs.
The carrying amounts of cash and cash equivalents, escrow, deposits and other assets and receivables (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.
The fair value and carrying amounts of the Company’s mortgages payable are as follows (amounts in thousands):
Fair value of mortgages payable (a)
388,421
419,354
Carrying value of mortgages payable
Fair value (less) greater than carrying value
(14,394)
19,694
Blended market interest rate
4.9
%
3.2
Weighted average remaining term to maturity (years)
6.4
At June 30, 2022 and December 31, 2021, the carrying amount of the Company’s line of credit (before unamortized deferred financing costs) of $27,500,000 and $11,700,000, respectively, approximates its fair value.
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 June 30, 2022, the Company had in effect 18 interest rate derivatives, all of which were interest rate swaps, related to 18 outstanding mortgage loans with an aggregate $51,396,000 notional amount maturing between 2022 and 2026 (weighted average remaining term to maturity of 2.1 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 4.09% at June 30, 2022). The Company does not use derivatives for trading or speculative purposes.
Fair values are approximated using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivatives. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. Although the Company has determined 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 June 30, 2022, 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 currently own any financial instruments that are measured on a recurring basis and that are classified as Level 1 or 3.
21
NOTE 12 – 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
As of
Fair Value
Classification
Financial assets: Interest rate swaps
June 30, 2022
927
Other assets
December 31, 2021
Financial liabilities: Interest rate swaps
Other liabilities
1,514
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 gain (loss) recognized on derivatives in other comprehensive loss
466
(340)
1,955
753
Amount of reclassification from Accumulated other comprehensive income (loss) into Interest expense
(199)
(1,181)
(485)
(1,589)
During the second quarter of 2021, in connection with the sale of a property and the early payoff of the related mortgage, the Company determined to discontinue hedge accounting on the related interest rate swap as the hedged forecasted transaction was no longer probable to occur. As such, the Company accelerated the reclassification of $784,000 during the three and six months ended June 30, 2021, from accumulated other comprehensive loss to interest expense which is recorded as Prepayment costs on debt on the consolidated statements of income.
During the twelve months ending June 30, 2023, the Company estimates an additional $450,000 will be reclassified from Accumulated other comprehensive loss as an decrease to Interest expense.
The derivative agreements in effect at June 30, 2022 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, the Company is a party to the derivative agreements and if there is a default by the subsidiary on the loan subject to the derivative agreement to which the Company is a party and if there are swap breakage losses on account of the derivative being terminated early, the Company could be held liable for such swap breakage losses.
As of June 30, 2022 and December 31, 2021, the fair value of the derivatives in a liability position, including accrued interest of $1,000 and $84,000, respectively, but excluding any adjustments for non-performance risk, was approximately $2,000 and $1,632,000, respectively. In the event the Company had breaches of any of the contractual provisions of the derivative contracts, it would be required to settle its obligations thereunder at their termination liability value of $2,000 and $1,632,000 as of June 30, 2022 and December 31, 2021, respectively. This termination liability value, net of adjustments for non-performance risk of $0 and $34,000, is included in Accrued expenses and other liabilities on the consolidated balance sheets at June 30, 2022 and December 31, 2021, respectively.
22
NOTE 13 – OTHER INCOME
Settlement of the Round Rock Guaranty Litigation
On April 15, 2022, the Company received $5,388,000 in connection with the settlement of the lawsuit captioned OLP Wyoming Springs, LLC, Plaintiff, v. Harden Healthcare, LLC, Defendant, v Benjamin Hanson, Intervenor, which sum was recognized as Income on settlement of litigation on the consolidated statements of income during the three and six months ended June 30, 2022.
Insurance Recoveries on Hurricane Casualty
In 2020, a portion of a multi-tenant building at the Company’s Lake Charles, Louisiana property was damaged due to Hurricane Laura. The Company submitted a claim to its insurance carrier to cover, less the $263,000 deductible, and by February 2022, the Company has been reimbursed (i) the approximate $2,306,000 cost to rebuild the damaged portion of the building and (ii) $259,000 of losses in rental income. The Company recognized a gain on insurance recoveries of $0 and $918,000 during the three and six months ended June 30, 2022, respectively, and $0 and $20,000 during the three and six months ended June 30, 2021, respectively, which is included in Other income on the consolidated statements of income.
Lease Assignment Fee Income
In March 2021, the Company received $100,000 from a tenant in connection with consenting to a lease assignment related to six of its properties; such amount is included in Other income on the consolidated statement of income for the six months ended June 30, 2021.
NOTE 14 – NEW ACCOUNTING PRONOUNCEMENTS
In March 2020, the FASB issued ASU No. 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. In 2020, the Company 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 the extent to which it may impact the Company’s consolidated financial statements.
NOTE 15 – 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.
23
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, a significant risk and uncertainty we face is the impact of the COVID-19 pandemic, the various governmental and non-governmental responses thereto, and the related economic consequences of the foregoing on (i) our and our tenants’ financial condition, results of operations, cash flows and performance, and (ii) the real estate market, global economy and financial markets. The extent to which the pandemic impacts us, our tenants and the economy generally will depend on future developments, which are highly uncertain and cannot be predicted with confidence. 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.
Except as may be required under the United States federal securities laws, 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 Facing Certain Tenants and Properties
As more fully described in our Annual Report, and in particular, the sections thereof entitled “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations - Challenges and Uncertainties Facing Certain Properties and Tenants”, certain properties and tenants face various challenges. There have been no material changes to the status of such properties from that described in our Annual Report. In addition to the challenged properties identified in our Annual Report, Regal Cinemas faces significant challenges and/or uncertainties.
Regal Cinemas, or Regal, is a tenant at three properties, including a tenancy at the Manahawkin Property (as defined), an unconsolidated joint venture. At June 30, 2022, Regal is obligated to pay us (and with respect to the unconsolidated joint venture, our share of), (i) deferred rent of approximately $1.1 million, which is payable in equal monthly installments through June 30, 2023, and (ii) through 2035, an aggregate of $24.9 million of base rent. It is our understanding that Regal’s parent, Cineworld, faces various challenges, including significant debt and litigation. Although Regal is paying us base rent and deferred rent on a timely basis, we are not accruing the rental income due from Regal on a straight-line basis and are recording the rent (including deferred rent) on a cash basis.
If the challenges or uncertainties with respect to Regal Cinemas and the other challenged properties identified in the Annual Report are not resolved in a satisfactory manner, we may be adversely affected.
Overview
We are a self-administered and self-managed real estate investment trust, or REIT. 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 and retail properties, and to a lesser extent, health and fitness, restaurant, theater, and other properties, many of which are subject to long-term net leases. As of June 30, 2022, we own 119 properties (including three 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 June 30, 2022 is approximately 97.6%.
In addition to the challenges and uncertainties presented by the pandemic, we, among other things, face additional challenges and uncertainties, which are heightened by the pandemic, including the possibility we will not be able to: acquire or dispose of properties on acceptable terms, lease our properties on terms favorable to us or at all, collect amounts owed to us by our tenants, renew or re-let, on acceptable terms, leases that are expiring or otherwise terminating.
We seek to manage the risk of our real property portfolio and the related financing arrangements by (i) diversifying among locations, tenants, scheduled lease expirations, mortgage maturities and lenders, and (ii) minimizing 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, 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 and their payment practices. We may sell a property if a tenant’s financial condition is unsatisfactory.
In acquiring and disposing of properties, among other things, we evaluate the terms of the leases, the credit of the existing tenants, the terms and conditions of the related financing arrangement (including any contemplated financing) and engage in a fundamental analysis of the real estate to be bought or sold; this analysis takes into account, among other things, the estimated value of the property, local demographics and the ability to re-rent or dispose of the property on favorable terms upon lease expiration or early termination. In addition, in evaluating property sales, we take into account, among other things, the property type (i.e., industrial, retail or other), our perception of the property’s long-term prospects (including the likelihood for, and the extent of, any further appreciation or diminution in value), the term remaining on the related lease and mortgage debt, the price and other terms and conditions for the sale of such property and the returns anticipated to be generated from the reinvestment of the net proceeds to us from such property sale.
Over the past several years, we have been addressing the challenges presented by the growth of e-commerce and our exposure to the retail industry by focusing on acquiring industrial properties (primarily warehouse and distribution facilities) and properties that we believe capitalize on e-commerce activities, and disposing of retail properties which we did not believe to be advantageous to hold for the long-term. Approximately 60.5% of our 2022 contractual base rent (as described below) is derived from industrial properties and 25.8%, 4.6%, 4.1%, 2.7%, and 2.3% from retail, health and fitness, restaurant, theater, and other properties, respectively. We face significant competition in seeking to acquire industrial properties. The returns and cash flow we generate from industrial properties, and in particular, the returns and cash flow generated by the reinvestment in industrial properties of the net proceeds from the sale of retail properties is not, in many cases, as favorable to us as the returns and cash flow currently generated by our retail properties. Decreases in cash flows or returns on investments resulting from the ongoing transition to the ownership of lower yielding industrial properties from the ownership of higher yielding retail properties will make it more difficult for us to sustain our current level of dividend payments.
Our 2022 contractual base rent is approximately $71.2 million and represents, after giving effect to any abatements, concessions, deferrals or adjustments in effect as of June 30, 2022, the base rent payable to us during the twelve months ending June 30, 2023 under leases in effect at June 30, 2022. Excluded from such contractual rental income is an aggregate of $6.1 million comprised of: (i) $1.6 million representing our share of the base rent payable during the twelve months ending June 30, 2023 to our joint ventures, (ii) subject to the property generating specified levels of positive operating cash flow, $1.3 million of estimated variable lease payments from The Vue Apartments, a multi-family complex which ground leases the underlying land from us and as to which there is uncertainty as to when and whether the tenant will resume paying rent, (iii) approximately $1.3 million of straight-line rent and approximately $849,000 of amortization of intangibles, (iv) $966,000 of COVID-19 rent deferral repayments due from Regal Cinemas during the twelve months ending June 30, 2023, which has not been accrued to rental income, and (v) $88,000 of COVID-19 rent deferral repayments (other than those due from Regal Cinemas) due during the twelve months ending June 30, 2023, which were accrued to rental income in 2020, and of which $14,000 was paid in July 2022.
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The following table sets forth scheduled expirations of leases for our properties as of June 30, 2022 for the periods indicated below:
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
266,456
1,355,754
1.9
1,049,605
8,519,864
12.0
786,304
6,935,767
9.7
665,774
3,853,759
5.4
806,802
6,655,712
9.4
2028
2,217,063
12,264,138
17.2
2029
1,595,853
8,287,950
11.6
2030
425,489
3,307,105
4.6
2031
742,476
4,317,185
6.1
2032
267,839
2,295,308
2033 and thereafter
1,767,798
13,409,512
18.9
170
10,591,459
71,202,054
100.0
Property Transactions During the Three Months Ended June 30, 2022
During the three months ended June 30, 2022, we acquired three industrial properties for an aggregate purchase price of $31.7 million, new mortgage debt of $15.5 million, and $522,000 of transaction costs that were capitalized (see Note 4 to our consolidated financial statements). These acquisitions contributed $254,000 of rental income, net, $156,000 of operating expenses (including depreciation and amortization expense of $103,000) and $33,000 of mortgage interest expense. We estimate that commencing July 1, 2022, the aggregate quarterly rental income (excluding variable lease revenues), depreciation and amortization expense and mortgage interest expense from these properties will be $486,000, $252,000, and $142,000, respectively.
On May 2, 2022, we sold an industrial property located in Columbus, Ohio for a gross sales price of $8.5 million and recognized a gain of $6.9 million from this sale. This property contributed (i) $245,000 and $374,000 of rental income, net, and (ii) $22,000 and $83,000 of operating expenses (including depreciation and amortization expense of $0 and $35,000) in the six months ended June 30, 2022 and 2021, respectively.
On June 6, 2022, we classified the $3.8 million net book value of our retail property located in Columbus, Ohio (the “Columbus Held-for-Sale Property”) as held-for-sale as the buyer’s right to terminate the contract without penalty expired. We anticipate this property will be sold for a gross sales price of $8.3 million in early August 2022 and will result in a gain of approximately $4.0 million, which will be recognized as Gain on sale of real estate, net, on the consolidated statements of income for the three and nine months ending September 30, 2022. This property contributed (i) $40,000 and $366,000 of rental income, net, (ii) $0 and $175,000 of lease termination fee income and (iii) $204,000 and $82,000 of operating expenses (including depreciation and amortization expense of $62,000 and $74,000) in the six months ended June 30, 2022 and 2021, respectively. We anticipate that the estimated $7.8 million of net proceeds from the sale will be used to pay down the $17.5 million outstanding as of August 1, 2022 under our credit facility.
On June 17, 2022, we sold a retail property located in Fayetteville, Georgia for a gross sales price of $4.8 million and recognized a gain of $1.1 million from this sale. This property contributed (i) $214,000 and $230,000 of rental income, net, (ii) $101,000 and $110,000 of depreciation and amortization expense, and (iii) $38,000 and $43,000 of mortgage interest expense in the six months ended June 30, 2022 and 2021, respectively.
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On April 15, 2022, we received a $5.4 million payment in connection with the settlement (the “Round Rock Settlement”) of the lawsuit captioned OLP Wyoming Springs, LLC, Plaintiff, v. Harden Healthcare, LLC, Defendant, v Benjamin Hanson, Intervenor, which sum was recognized as Income on settlement of litigation on the consolidated statements of income during the three and six months ended June 30, 2022.
During the three and six months ended June 30, 2022, we repurchased approximately 133,000 shares of common stock for total consideration of approximately $3.4 million. After giving effect to such repurchases, we are authorized to repurchase, from time-to-time in open market or privately negotiated transactions, approximately $4.1 million of shares of our common stock.
Equity Incentive Program Activity
On June 21, 2022, we awarded an aggregate of 85,350 shares subject to restricted stock units (“RSUs”), and related dividend equivalent rights, to 16 individuals. Generally, the awards vest in 2025 subject to satisfaction of, among other things, market and performance conditions similar to the RSUs granted in 2021.
On August 3, 2022, our Compensation Committee determined that the performance and market conditions with respect to the 64,488 RSUs granted in 2019 (of an aggregate of 77,776 then granted) had been met and authorized the issuance of the underlying shares of common stock.
Results of Operations
The following table compares total revenues for the periods indicated:
Increase
(Dollars in thousands)
(Decrease)
% Change
1,167
5.7
2,014
(117)
(100.0)
(224)
(90.0)
1,050
5.1
1,790
4.3
Rental income, net.
The following table details the components of rental income, net, for the periods indicated:
Acquisitions (a)
880
52
828
1,592.3
1,492
1,440
2,769.2
Dispositions (b)
155
(725)
(82.4)
577
1,827
(1,250)
(68.4)
Same store (c)
20,437
19,373
1,064
5.5
40,934
39,110
1,824
4.7
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Changes due to acquisitions and dispositions
The three and six months ended June 30, 2022 reflect increases of $828,000 and $1.4 million, respectively, generated by seven properties acquired in 2021 and 2022 (i.e., for the three and six months ended June 30, 2022, $440,000 and $924,000, respectively, from the three properties acquired in 2021 and $388,000 and $515,000, respectively, from the four properties acquired during 2022). Offsetting the increases are decreases due to the inclusion, in the three and six months ended June 30, 2021, of rental income of $725,000 and $1.3 million, respectively, from properties sold during 2021 and 2022 (i.e., for the three and six months ended June 30, 2022, $447,000 and $961,000, respectively, from four properties sold in 2021 and $278,000 and $297,000, respectively, from the six properties sold in 2022).
Changes at same store properties
The increases in same store rental income during the three and six months ended June 30, 2022 are due primarily to net increases of :
The increases were offset during the three and six months ended June 30, 2022 by net decreases of $179,000 and $327,000, respectively, due to a lease termination at our Columbus Held-for-Sale Property for which we had received a $350,000 lease termination fee in 2021 and has been vacant since January 2022.
Lease termination fees.
In connection with the exercise of early lease termination options, we recognized $25,000 in the six months ended June 30, 2022, and $117,000 and $249,000, respectively, in the three and six months ended June 30, 2021.
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Operating Expenses
The following table compares operating expenses for the periods indicated:
203
3.6
289
2.5
General and administrative
204
354
4.8
Real estate expenses
162
2.3
(14)
(15.4)
(15)
(9.0)
555
791
3.0
Depreciation and amortization. The increases in the three and six months ended June 30, 2022 are due primarily to (i) $408,000 and $737,000, respectively, of such expense from properties acquired in 2022 and 2021 (including $242,000 and $518,000, respectively, from properties acquired in 2021) and (ii) $102,000 and $176,000, respectively, of depreciation from improvements at several properties.
The increases were offset by:
General and administrative. The increases in the three and six months ended June 30, 2022 are primarily due to increases of:
-
$111,000 and $275,000, respectively, of compensation expense due to higher levels of compensation, and to a lesser extent, an additional employee,
$168,000 and $179,000, respectively, in professional fees primarily related to audit matters, offerings of securities, a property transaction that was terminated, and compensation consulting, and
$106,000 and $166,000, respectively, in non-cash compensation expense related to our restricted stock, primarily related to the increase in the number, and higher fair value, of the shares granted in 2022 in comparison to the awards granted in 2017.
These increases were offset by decreases in non-cash compensation expense of $231,000 and $310,000, respectively, due to the re-assessment in the three and six months ended June 30, 2021, of the achievability of performance metrics related to the RSUs.
Real estate expenses. The increases in the three and six months ended June 30, 2022 are primarily due to:
aggregate increases of $169,000 and $267,000, respectively, in these expenses for several properties, none of which were individually significant,
-$93,000 and $134,000, respectively, from properties acquired in 2022 and 2021, and
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$60,000 and $134,000, respectively, for the Columbus Held-for-Sale Property as we bore these expenses during the period the property was vacant.
The increases were offset in the three and six months ended June 30, 2022 due primarily to decreases of (i) $101,000 and $215,000, respectively, related to properties sold in 2021 and 2022 and (ii) $59,000 and $156,000, respectively, in Round Rock litigation expense.
A substantial portion of real estate expenses are rebilled to tenants and are included in Rental income, net, on the consolidated statements of income, other than the expenses related to the Columbus Held-for-Sale Property and the Round Rock litigation, which are not rebilled.
Gain on sale of real estate, net.
The following table compares gain on sale of real estate, net for the periods indicated:
(13,441)
(62.5)
(8,792)
(40.9)
The gains in the three and six months ended June 30, 2022 reflect a $6.9 milllion gain from the sale of a Columbus, Ohio industrial property, and a $1.1 million gain from the sale of our Fayetteville, Georgia retail property. In addition, the six months ended June 30, 2022 includes a $4.6 million gain from the sale of four Wendy’s restaurant properties in Pennsylvania. The gains in the three and six months ended June 30, 2021 reflects the June 2021 sale of our West Hartford, Connecticut property (including the related parking lot) that was leased to Whole Foods (the “Whole Foods Sale”).
Other Income and Expenses
The following table compares other income and expenses for the periods indicated:
Change
92
(460.0)
230
(11,500.0)
Income on settlement of litigation
(5,388)
n/a
Other income
37
217.6
793
424.1
(221)
(4.8)
(549)
(6.0)
138
46.6
25.5
Equity in earnings (loss) of unconsolidated joint ventures. The increases in the three and six months ended June 30, 2022 are due to increases at our Manahawkin, New Jersey property (the “Manahawkin Property”) resulting from (i) increases of $76,000 and $176,000 (our 50% share) in rental income, including $30,000 and $61,000, respectively, of deferred rent from 2020 and 2021, that we received from Regal Cinemas, a tenant for which we are recording rental income on a cash basis, and (ii) a decrease in real estate taxes, net of amounts rebilled to tenants, due to a lower assessment.
Prepayment costs on debt. The three and six months ended June 30, 2021 include $799,000 incurred in connection with the Whole Foods Sale. There were no such costs in the three and six months ended June 30, 2022.
Income on settlement of litigation. In April 2022, we received $5.4 million pursuant to the Round Rock Settlement. (See Note 13 to our consolidated financial statements.)
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Other income. The six months ended June 30, 2022 includes $918,000 representing the final property insurance recovery related to our Lake Charles, Louisiana property damaged in an August 2020 hurricane. The six months ended June 30, 2021 includes a $100,000 fee obtained in connection with an assignment of a lease.
Interest expense. The following table compares interest expense for the periods indicated:
Interest expense:
Mortgage interest
4,200
4,446
(246)
(5.5)
8,385
8,959
(574)
(6.4)
Credit line interest
153
128
19.5
274
10.0
4,353
4,574
8,659
9,208
The following table reflects the average interest rate on the average principal amount of outstanding mortgage debt for the periods indicated:
Average interest rate
4.17
4.20
(0.03)
(0.7)
Average principal amount
402,788
423,534
(20,746)
(4.9)
402,510
427,036
(24,526)
(5.7)
The decreases in mortgage interest are due primarily to the net decreases in the average principal amount of mortgage debt outstanding which resulted from mortgage payoffs (generally in connection with property sales and scheduled amortization payments). The decrease was offset by financings effectuated in connection with acquisitions.
The following table reflects the weighted average interest rate on the weighted average principal amount of outstanding credit line debt for the periods indicated:
Weighted average interest rate
2.67
1.85
.82
44.3
2.31
1.86
24.2
Weighted average principal amount
14,851
16,002
(1,151)
(7.2)
14,886
15,672
(786)
(5.0)
The increases in credit line interest in the three and six months ended June 30, 2022 are due substantially to increases of 82 and 45 basis points (i.e., to 2.67% from 1.85% and to 2.31% from 1.86%), respectively, in the weighted average interest rate due to increases in the one month LIBOR rate. The increases were offset by decreases of $1.2 million and $786,000, respectively, in the weighted average balance outstanding under our credit line.
Amortization and write-off of deferred financing costs. The increases in the three and six months ended June 30, 2022 are primarily due to the $221,000 write-off of deferred costs related to the mortgages on the eleven Haverty properties that were paid off in June 2022. The three and six months ended June 30, 2021 included a $63,000 write-off of deferred costs related to the Whole Foods Sale.
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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, issuance of our equity securities and property sales. Our available liquidity at August 1, 2022, was $92.5 million, including $10.0 million of cash and cash equivalents (including the credit facility’s required $3.0 million average deposit maintenance balance) and $82.5 million available under our credit facility. At August 1, 2022, the facility is available for the acquisition of commercial real estate, repayment of mortgage debt, $10.0 million for operating expenses and $20.0 million for renovation expenses.
Liquidity and Financing
We expect to meet our short-term (i.e., one year or less) and long-term (i) operating cash requirements, including debt service, anticipated dividend payments and repurchases of our common stock (after giving effect to repurchases affected through the quarter ended June 30, 2022, we are authorized to repurchase up to $4.1 million of common stock), principally from cash flow from operations, our available cash and cash equivalents, proceeds from and, to the extent permitted and needed, our credit facility and (ii) investing and financing cash requirements (including an estimated aggregate of $3.5 million of capital and other expenditures) from the foregoing, as well as property financings, property sales and sales of our common stock. We and our joint venture partner are also re-developing the Manahawkin Property – however, because the re-development plan is being refined, we are not providing an estimate of the re-development costs or the time frame within which the re-development will be completed.
At June 30, 2022, excluding the mortgage debt of our unconsolidated joint venture, we had 70 outstanding mortgages payable secured by 70 properties in the aggregate principal amount of $402.8 million (before netting unamortized deferred financing costs of $3.3 million). These mortgages represent first liens on individual real estate investments with an aggregate carrying value of $640.4 million, before accumulated depreciation of $106.7 million. After giving effect to interest rate swap agreements, the mortgage payments bear interest at fixed rates ranging from 3.02% to 5.50% (a 4.07% weighted average interest rate) and mature between 2022 and 2047 (a 6.4 year weighted average remaining term to maturity).
The following table sets forth, as of June 30, 2022, information with respect to our mortgage debt that is payable during the six months ending December 31, 2022 and for each of the subsequent twelve months through December 31, 2025 (excluding the mortgage debt of our unconsolidated joint venture):
Amortization payments
6,112
12,048
11,139
9,701
39,000
Principal due at maturity
14,643
12,973
50,695
32,063
110,374
20,755
25,021
61,834
41,764
149,374
At June 30, 2022, the Manahawkin Property, owned by an unconsolidated joint venture, had a first mortgage on its property with an outstanding balance of $21.7 million, bearing an interest rate of 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 2022 through 2025. 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 interest, 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.
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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 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, as of July 1, 2022 (i) $20.0 million for renovation purposes and (ii) $10.0 million for operating expense purposes. 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%. The applicable margin was 175 basis points for each of the six months ended June 30, 2022 and 2021. 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. The interest rate on the facility was 2.95% and 3.62% at June 30, 2022 and July 31, 2022, 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 total 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 June 30, 2022, we were in compliance with the covenants under this facility.
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 (i.e., The Vue Apartments) and we ground leased the parcel to the owner/operator of such complex. This ground lease did not generate any rental income during the six months ended June 30, 2022 and 2021. At June 30, 2022, the carrying value of the land on our balance sheet was approximately $16.0 million; our leasehold position is subordinate to $65.4 million of mortgage debt incurred by our tenant, the owner/operator of the multi-family complex. In addition, we have agreed, in our discretion, to fund certain capital expenditures and operating cash flow shortfalls at this property. We do not believe that this type of off-balance sheet arrangement has been or will be material to our liquidity and capital resource positions, except to the extent we determine to continue to fund the capital expenditures required by, and the operating cash flow shortfalls at, this property. See Note 6 to our consolidated financial statements for additional information regarding this arrangement.
Application of Critical Accounting Estimates
A complete discussion of our critical accounting estimates is included in our Form 10-K for the year ended December 31, 2021. There have been no significant changes in such estimates since December 31, 2021.
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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 income on settlement of litigations, income on insurance recoveries from casualties, lease termination and assignment 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), 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 tables below provides a reconciliation of net income and net income per common share (on a diluted basis) in accordance with GAAP to FFO and AFFO for the periods indicated (dollars in thousands, except per share amounts):
GAAP net income attributable to One Liberty Properties, Inc.
Add: depreciation and amortization of properties
5,772
5,597
11,497
11,253
Add: our share of depreciation and amortization of unconsolidated joint ventures
132
259
267
Add: amortization of deferred leasing costs
133
105
251
206
Add: our share of amortization of deferred leasing costs of unconsolidated joint ventures
Deduct: gain on sale of real estate, net
(8,050)
Adjustments for non-controlling interests
(17)
(19)
(32)
NAREIT funds from operations applicable to common stock
14,741
7,661
25,377
16,500
Deduct: straight-line rent accruals and amortization of lease intangibles
(917)
(182)
(1,483)
(319)
Deduct/Add: our share of straight-line rent accruals and amortization of lease intangibles of unconsolidated joint ventures
(7)
Deduct: income on settlement of litigation
Deduct: income on insurance recoveries from casualty loss
(918)
(20)
Deduct: lease termination fee income
(25)
(249)
Deduct: our share of unconsolidated joint venture lease termination fee income
Deduct: lease assignment fee income
(100)
Add: amortization of restricted stock and RSU compensation
Add: prepayment costs on debt
799
Add: amortization and write-off of deferred financing costs
434
296
Add: our share of amortization of deferred financing costs of unconsolidated joint venture
Adjusted funds from operations applicable to common stock
10,404
10,150
21,058
20,159
GAAP net income per common share attributable to One Liberty Properties, Inc.
.26
.27
.54
.01
(.38)
(1.03)
(.60)
NAREIT funds from operations per share of common stock (a)
.69
.37
1.19
(.04)
(.01)
(.08)
(.02)
(.25)
.07
.08
.14
.04
.02
.03
Adjusted funds from operations per share of common stock (a)
.49
.48
.99
.96
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Three Months Ended June 30, 2022 and 2021
The $7.1 million, or 92.4%, increase in FFO for the three months ended June 30, 2022 from the corresponding 2021 period is due primarily to:
Offsetting the increase is a $204,000 increase in general and administrative expense.
See “—Results of Operations” for further information regarding these changes.
The $254,000, or 2.5%, increase in AFFO is due to the factors impacting FFO as described above, offset by the exclusion from AFFO of:
Diluted per share FFO and AFFO were impacted negatively in the three months ended June 30, 2022 by an average increase from June 30, 2021 of approximately 303,000 in the weighted average number of shares of common stock outstanding as a result of stock issuances pursuant to the equity incentive, at-the-market equity offering and dividend reinvestment programs, offset by the Company’s repurchase of shares during May and June of 2022.
Six Months Ended June 30, 2022 and 2021
The $8.9 million, or 53.8%, increase in FFO for the six months ended June 30, 2022 from the corresponding 2021 period is due primarily to:
Offsetting the increase is a $354,000 increase in general and administrative expense.
The $899,000, or 4.5%, increase in AFFO is due to the factors impacting FFO as described immediately above, offset by the exclusion from AFFO of:
Diluted per share FFO and AFFO were impacted negatively in the six months ended June 30, 2022 by an average increase from June 30, 2021 of approximately 317,000 in the weighted average number of shares of common stock outstanding as a result of stock issuances pursuant to the equity incentive, at-the-market equity offering and dividend reinvestment programs, offset by the Company’s repurchase of shares during May and June of 2022.
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 revolving 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 June 30, 2022, our aggregate liability in the event of the early termination of our swaps was $2,000.
At June 30, 2022, we had 18 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 June 30, 2022, 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 $962,000 and the net unrealized gain on derivative instruments would have increased by $962,000. 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 $990,000 and the net unrealized gain on derivative instruments would have decreased by $990,000. These changes would not have any impact on our cash or net income.
Our variable mortgage debt, after giving effect to the 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 $27.5 million outstanding balance under this facility at June 30, 2022, a 100 basis point increase of the interest rate would increase our related interest costs over the next twelve months by approximately $275,000 and a 100 basis point decrease of the interest rate would decrease our related interest costs over the next twelve months by approximately $275,000.
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 June 30, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In March 2016, our Board of Directors authorized the repurchase of up to $7,500,000 of our common stock through, among other things, open market or privately negotiated transactions. There is no stated expiration date for this program. Set forth below is a table describing the purchases we made in the quarter ended June 30, 2022:
Issuer Purchases of Equity Securities
Total Number of
Approximate Dollar Value
Shares Purchased
of Shares that May Yet Be
Average Price
as Part of Publicly
Purchased Under
Period
Paid per Share
Announced Programs
the Programs
April 1, 2022 - April 30, 2022
7,500,000
May 1, 2022 - May 31, 2022
57,162
25.67
6,028,989
June 1, 2022 - June 30, 2022
75,783
25.29
4,107,799
132,945
25.46
Item 5. Other Information
Effective with the filing of this Quarterly Report on Form 10-Q, B. Riley Securities, the sales agent on our at-the-market equity offering program effected through our Prospectus Supplement dated August 19, 2020, as supplemented by our Prospectus Supplement dated March 18, 2022, has substituted Duane Morris LLP as counsel for the sales agent, in lieu of Sidley Austin LLP.
Item 6. Exhibits
Exhibit No.
Title of Exhibit
10.1
Form of Performance Award Agreement for RSU grants in 2022 pursuant to the 2022 Incentive Plan.
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 June 30, 2022 filed on August 4, 2022, 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: August 4, 2022
/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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