Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 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 November 1, 2022, the registrant had 21,073,936 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 — September 30, 2022 and December 31, 2021………………………………..
1
Consolidated Statements of Income — Three and nine months ended September 30, 2022 and 2021………..
2
Consolidated Statements of Comprehensive Income — Three and nine months ended September 30, 2022 and 2021………………………………………………………………………………………………………...
3
Consolidated Statements of Changes in Equity — Three and nine months ended September 30, 2022 and 2021……………………………………………………………………………………………………………..
4
Consolidated Statements of Cash Flows — Nine months ended September 30, 2022 and 2021………………
6
Notes to Consolidated Financial Statements……………………………………………………………….…...
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations…………….…….
25
Item 3.
Quantitative and Qualitative Disclosures About Market Risk………………………………………….………
40
Item 4.
Controls and Procedures……………………………………………………………………………….………..
Part II — Other Information………………………………………………………………………………….…………
41
Unregistered Sales of Equity Securities and Use of Proceeds…………………………………………………..
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)
September 30,
December 31,
2022
2021
ASSETS
(Unaudited)
Real estate investments, at cost
Land
$
181,086
180,183
Buildings and improvements
680,722
657,458
Total real estate investments, at cost
861,808
837,641
Less accumulated depreciation
168,430
160,664
Real estate investments, net
693,378
676,977
Property held-for-sale
—
1,270
Investment in unconsolidated joint ventures
10,309
10,172
Cash and cash equivalents
11,579
16,164
Unbilled rent receivable
15,285
14,330
Unamortized intangible lease assets, net
19,594
20,694
Escrow, deposits and other assets and receivables
17,202
13,346
Total assets(1)
767,347
752,953
LIABILITIES AND EQUITY
Liabilities:
Mortgages payable, net of $3,404 and $3,316 of deferred financing costs, respectively
402,760
396,344
Line of credit, net of $54 and $216 of deferred financing costs, respectively
10,946
11,484
Dividends payable
9,618
9,448
Accrued expenses and other liabilities
18,212
18,992
Unamortized intangible lease liabilities, net
10,560
10,407
Total liabilities(1)
452,096
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; 20,311 and 20,239 shares issued and outstanding
20,311
20,239
Paid-in capital
323,576
322,793
Accumulated other comprehensive income (loss)
1,855
(1,513)
Distributions in excess of net income
(31,450)
(36,187)
Total One Liberty Properties, Inc. stockholders’ equity
314,292
305,332
Non-controlling interests in consolidated joint ventures(1)
959
946
Total equity
315,251
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
Nine Months Ended
Revenues:
Rental income, net
21,473
20,349
64,476
61,338
Lease termination fees
87
336
Total revenues
20,436
64,501
61,674
Operating expenses:
Depreciation and amortization
5,970
5,596
17,718
17,055
General and administrative (see Note 9 for related party information)
3,769
3,559
11,534
10,970
Real estate expenses (see Note 9 for related party information)
3,970
3,199
11,206
10,272
State taxes
60
55
211
221
Total operating expenses
13,769
12,409
40,669
38,518
Other operating income
Gain on sale of real estate, net
4,063
1,277
16,762
22,768
Operating income
11,767
9,304
40,594
45,924
Other income and expenses:
Equity in earnings of unconsolidated joint ventures
82
77
310
75
Equity in earnings from sale of unconsolidated joint venture property
801
Prepayment costs on debt
(38)
(837)
Income on settlement of litigation (see Note 13)
5,388
Other income (see Note 13)
17
678
997
865
Interest:
Expense
(4,367)
(4,365)
(13,026)
(13,573)
Amortization and write-off of deferred financing costs
(278)
(245)
(917)
(754)
Net income
7,221
6,212
33,346
32,501
Net income attributable to non-controlling interests
(17)
(153)
(52)
(151)
Net income attributable to One Liberty Properties, Inc.
7,204
6,059
33,294
32,350
Weighted average number of common shares outstanding:
Basic
20,340
20,115
20,361
20,044
Diluted
20,416
20,273
20,472
20,198
Per common share attributable to common stockholders:
.34
.29
1.58
1.56
.28
1.57
1.55
Cash distributions per share of common stock
.45
1.35
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
Other comprehensive income
Net unrealized gain on derivative instruments
931
317
3,371
2,659
Comprehensive income
8,152
6,529
36,717
35,160
Adjustment for derivative instruments attributable to non-controlling interests
(1)
(3)
(7)
Comprehensive income attributable to One Liberty Properties, Inc.
8,134
6,373
36,662
35,002
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, 2021
Distributions – common stock
Cash – $.45 per share
(9,559)
Restricted stock vesting
131
(131)
Shares issued through equity offering program – net
546
563
Shares issued through dividend reinvestment plan
5
156
161
Distributions to non-controlling interests
(33)
Compensation expense – restricted stock and RSUs
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)
16
(16)
Repurchases of common stock – net
(133)
(3,285)
(3,418)
157
163
(8)
1,559
16,767
18
16,785
665
Balances, June 30, 2022
20,281
323,104
925
(29,150)
942
316,102
(9,504)
Restricted stock unit vesting
65
(65)
(75)
(1,747)
(1,822)
978
1,018
1,306
930
Balances, September 30, 2022
Balances, December 31, 2020
19,878
313,430
(5,002)
(37,539)
1,193
291,960
(9,329)
130
(130)
Contribution from non-controlling interest
20
(13)
1,343
Net income (loss)
2,962
(5)
2,957
1,498
1,501
Balances, March 31, 2021
20,008
314,643
(3,504)
(43,906)
1,198
288,439
(9,330)
(11)
1,685
23,329
23,332
840
841
Balances, June 30, 2021
20,024
316,312
(2,664)
(29,907)
1,196
304,961
(9,416)
74
(74)
49
1,375
1,424
31
832
863
(425)
1,163
153
314
Balances, September 30, 2021
20,178
319,608
(2,350)
(33,264)
927
305,099
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:
(16,762)
(22,768)
Increase in unbilled rent receivable
(1,579)
(79)
Amortization and write-off of intangibles relating to leases, net
(617)
(606)
Amortization of restricted stock and RSU compensation expense
4,190
4,191
(310)
(801)
Distributions of earnings from unconsolidated joint ventures
170
1,303
917
754
Payment of leasing commissions
(1,101)
(608)
(Increase) decrease in escrow, deposits, other assets and receivables
(2,049)
4,936
Increase in accrued expenses and other liabilities
897
757
Net cash provided by operating activities
34,820
36,560
Cash flows from investing activities:
Purchase of real estate
(39,888)
(16,491)
Improvements to real estate
(3,529)
(3,050)
Investments in ground leased property
(499)
(1,353)
Net proceeds from sale of real estate
30,253
47,214
Insurance recovery proceeds due to casualty loss
918
550
Distributions of capital from unconsolidated joint venture
97
Net cash (used in) provided by investing activities
(12,745)
26,967
Cash flows from financing activities:
Scheduled amortization payments of mortgages payable
(9,601)
(10,590)
Repayment of mortgages payable
(54,585)
(26,630)
Proceeds from mortgage financings
70,690
10,600
Proceeds from sale of common stock, net
Proceeds from bank line of credit
39,500
12,700
Repayments on bank line of credit
(40,200)
(22,450)
Issuance of shares through dividend reinvestment plan
1,342
Repurchases of common stock
(5,240)
Payment of financing costs
(839)
(229)
Capital contributions from non-controlling interest
(42)
(449)
Cash distributions to common stockholders
(28,387)
(27,920)
Net cash used in financing activities
(26,799)
(62,656)
Net (decrease) increase in cash, cash equivalents and restricted cash
(4,724)
871
Cash, cash equivalents and restricted cash at beginning of year
16,666
13,564
Cash, cash equivalents and restricted cash at end of period
11,942
14,435
Supplemental disclosure of cash flow information:
Cash paid during the period for interest expense
12,988
14,546
Supplemental disclosure of non-cash investing activity:
Purchase accounting allocation - intangible lease assets
2,816
1,758
Purchase accounting allocation - intangible lease liabilities
(1,152)
(596)
(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:
13,740
Restricted cash included in escrow, deposits and other assets and receivables
363
695
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.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 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 September 30, 2022, OLP owns 118 properties, including three properties owned by consolidated joint ventures and three properties owned by unconsolidated joint ventures. The 118 properties are located in 31 states.
NOTE 2 – SUMMARY ACCOUNTING POLICIES
Principles of Consolidation/Basis of Preparation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and include all of the information and disclosures required by U.S. Generally Accepted Accounting Principles (“GAAP”) for interim reporting. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statement disclosures. In the opinion of management, all adjustments of a normal recurring nature necessary for fair presentation have been included. The results of operations for the three and nine months ended September 30, 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.
SEPTEMBER 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.
9
NOTE 3 – LEASES
Lessor Accounting
The Company owns rental properties which are leased to tenants under operating leases with current expirations ranging from 2023 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
18,339
17,602
55,085
52,502
Variable lease revenues
2,914
2,581
8,774
8,230
Lease revenues (a)
21,253
20,183
63,859
60,732
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 September 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 September 30, 2022, the Company collected an aggregate of $3,301,000, or 98.2%, of such deferred rents. The balance of deferred rents deemed collectible, or $48,000, is expected to be repaid during the remainder of 2022 through January 2023.
In September 2022, Regal Cinemas’, a tenant at two properties (excluding a property owned by an unconsolidated joint venture) parent company, Cineworld Group plc., filed for Chapter 11 bankruptcy protection. As of September 30, 2022, Regal Cinemas did not pay their September (i) base rent of $158,000 and (ii) COVID-19 deferral repayments of $81,000. Of an aggregate of $1,449,000 of COVID-19-related deferred rent, the tenant still owes approximately $805,000 as of September 30, 2022. Such deferred rents were to be collected in equal monthly installments from September 2022 through June 2023. No base or deferred rents have been accrued as collections were deemed less than probable. In October 2022, the Company received the aggregate of $239,000 of rent and deferred rent due for October 2022. The Company prepared an impairment analysis on the properties tenanted by Regal Cinemas and determined no impairment charge was required as of September 30, 2022.
10
NOTE 3 – LEASES (CONTINUED)
Minimum Future Rents
As of September 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 include $23,399,000 of rent related to Regal Cinemas and does not include (i) straight-line rent or amortization of intangibles, (ii) COVID-19 lease deferral repayments accrued to rental income in 2020, (iii) $805,000 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 October 1 – December 31, 2022
17,731
For the year ending December 31,
2023
70,266
2024
62,228
2025
57,942
2026
53,644
2027
45,287
Thereafter
160,427
467,525
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 nine months ended September 30, 2022.
In January 2021, the Company received $350,000 as a lease termination fee from a retail tenant, of which $87,000 and $262,000 were recognized during the three and nine months ended September 30, 2021, respectively.
In December 2020, the Company received $88,000 as a lease termination fee from an industrial tenant, of which $74,000 was recognized during the nine months ended September 30, 2021.
Lessee Accounting
Ground Lease
The Company is a lessee under a ground lease in Greensboro, North Carolina, which is classified as an operating lease. The ground lease expires March 3, 2025 and provides for up to four, 5-year renewal options and one seven-month renewal option. As of September 30, 2022, the remaining lease term, including renewal options deemed exercised, is 12.4 years. The Company recognized lease expense related to this ground lease of $150,000 and $449,000 for both the three and nine months ended September 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 September 30, 2022, the remaining lease term, including the renewal option deemed exercised, is 14.3 years. The Company recognized lease expense related to this office lease of $14,000 and $42,000 for the three and nine months ended September 30, 2022, respectively, and $14,000 and $41,000 for the three and nine months ended September 30, 2021, respectively, which is included in General and administrative expenses on the consolidated statements of income.
11
Minimum Future Lease Payments
As of September 30, 2022, the minimum future lease payments related to the operating ground and office leases are as follows (amounts in thousands):
126
507
557
626
627
629
5,591
Total undiscounted cash flows
8,663
Present value discount
(1,667)
Lease liability
6,996
NOTE 4 – REAL ESTATE ACQUISITIONS
The following tables detail the Company’s real estate acquisitions and allocations of the purchase price during the nine months ended September 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
112
Curaleaf, Inc. industrial facility,
Lexington, Kentucky
June 17, 2022
8,430
Cash and $5,480 mortgage (b)
80
Totals - Nine months ended September 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
______________________
12
NOTE 5 – SALES OF PROPERTIES
The following table details the Company’s sales of real estate during the nine months ended September 30, 2022 and 2021 (amounts in thousands):
Gross
Gain on Sale of
Date Sold
Sales Price
Real Estate, Net
Wendy's 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)
Vacant retail property,
Columbus, Ohio
August 8, 2022
8,300
31,600
Whole Foods retail property & parking lot,
West Hartford, Connecticut (d)
June 17, 2021
40,510
21,469
(e)
Philadelphia, Pennsylvania (f)
July 1, 2021
1,299
(g)
Totals - Nine months ended September 30, 2021
48,810
_______________________
13
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 September 30, 2022, the VIE’s maximum exposure to loss was $16,146,000 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 $65,122,000 as of September 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 $156,000 and $499,000 during the three and nine months ended September 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 $5,481 and $4,957, respectively
17,916
18,472
Cash
941
1,134
1,058
1,020
491
548
808
878
Mortgages payable, net of unamortized deferred financing costs of $163 and $195, respectively
18,676
19,193
472
875
437
475
21
Non-controlling interests in consolidated joint ventures
14
NOTE 6 – VARIABLE INTEREST ENTITIES, CONTINGENT LIABILITY AND CONSOLIDATED JOINT VENTURES (CONTINUED)
As of September 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 $4,612,000 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 September 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 $10,309,000 and $10,172,000, respectively. The Company recorded equity in earnings of $82,000 and $310,000 for the three and nine months ended September 30, 2022, respectively, and equity in earnings of $77,000 and $75,000 for the three and nine months ended September 30, 2021, respectively.
On July 12, 2021, an unconsolidated joint venture sold a portion of its land, located in Savannah, Georgia for $2,559,000, net of closing costs. The Company’s 50% share of the gain from this sale was $801,000, which is included in Equity in earnings from sale of unconsolidated joint venture property on the consolidated statements of income for the three and nine months ended September 30, 2021. The unconsolidated joint venture retained approximately 2.2 acres of land at this property.
As of September 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 $8,920,000 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
406,164
399,660
Unamortized deferred financing costs
(3,404)
(3,316)
Mortgages payable, net
Line of Credit
The Company has a credit facility with Manufacturers and 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.
15
NOTE 8 – DEBT OBLIGATIONS (CONTINUED)
The facility, which matures December 31, 2022, provides for an interest rate equal to the 30-day 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 September 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 2.74% and 1.86% for the nine months ended September 30, 2022 and 2021, respectively. The Company was in compliance with all covenants at September 30, 2022.
The following table details the Line of credit, net, balances per the consolidated balance sheets (amounts in thousands):
Line of credit, gross
11,000
11,700
(54)
(216)
Line of credit, net
At September 30, 2022 and November 1, 2022, $89,000,000 and $86,200,000, respectively, was available to be borrowed under the facility, including an aggregate of up to $30,000,000 available at each date for renovation and operating expense purposes.
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 $763,000 and $2,289,000 for the three and nine months ended September 30, 2022, respectively, and $766,000 and $2,330,000 for the three and nine months ended September 30, 2021, respectively. Included in these amounts are fees for property management services of $333,000 and $999,000 for the three and nine months ended September 30, 2022, respectively, and $330,000 and $1,021,000 for the three and nine months ended September 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 $238,000 for the three and nine months ended September 30, 2022, respectively, and $74,000 and $221,000 for the three and nine months ended September 30, 2021, respectively, for the Company’s share of all direct office expenses, including rent, telephone, postage, computer services, internet usage and supplies.
NOTE 9 – RELATED PARTY TRANSACTIONS (CONTINUED)
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 $640,000 and $1,927,000 for the three and nine months ended September 30, 2022, respectively, and $581,000 and $1,971,000 for the three and nine months ended September 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.
Joint Venture Partners and Affiliates
The Company paid an aggregate of $19,000 and $60,000 for the three and nine months ended September 30, 2022, respectively, and $21,000 and $59,000 for the three and nine months ended September 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 $32,000 and $101,000 for the three and nine months ended September 30, 2022, respectively, and $28,000 and $88,000 for the three and nine months ended September 30, 2021, respectively, to the other partner of the ventures (none of whom are officers, directors, or employees of the Company), which reduced Equity in earnings on the consolidated statements of income by $16,000 and $51,000 for the three and nine months ended September 30, 2022, respectively, and $14,000 and $44,000 for the three and nine months ended September 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. Amounts reimbursed to Gould Investors were $586,000 during the three and nine months ended September 30, 2022 and $1,402,000 during the three and nine months ended September 30, 2021. Included in Real estate expenses on the consolidated statements of income is insurance expense of $187,000 and $793,000 for the three and nine months ended September 30, 2022, respectively, and $366,000 and $928,000 for the three and nine months ended September 30, 2021, respectively. The balance of amounts reimbursed to Gould Investors represents prepaid insurance and is included in Other Assets on the consolidated balance sheets.
NOTE 10 – 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 September 30, 2022, the shares of common stock underlying the RSUs awarded between 2020 and 2022 under the 2019 and 2022 Incentive Plans (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 net income attributable to non-controlling interests
Deduct earnings allocated to unvested restricted stock (a)
(320)
(318)
(1,134)
(1,108)
Net income available for common stockholders: basic and diluted
6,884
5,741
32,160
31,242
Denominator for basic earnings per share:
Weighted average number of common shares outstanding
Effect of dilutive securities: RSUs
76
158
111
154
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 Nine Months Ended September 30, 2022:
Total Number
Shares Included Based on (a)
of Underlying
Return on
Stockholder
Shares
Date of Award (b)
Capital Metric
Return Metric
Excluded (c)
July 1, 2022
85,350
20,210
65,140
August 3, 2021
80,700
40,350
August 3, 2020
75,026
37,513
Totals
241,076
98,073
135,586
105,490
Three and Nine Months Ended September 30, 2021:
Shares (d)
23,375
17,722
41,097
39,603
July 1, 2019 (e)
230,752
98,401
92,748
191,149
__________________________
NOTE 11 – STOCKHOLDERS’ EQUITY
Common Stock Dividend
On September 15, 2022, the Board of Directors declared a quarterly cash dividend of $0.45 per share on the Company’s common stock, totaling approximately $9,460,000. The quarterly dividend was paid on October 7, 2022 to stockholders of record on September 27, 2022.
Stock Repurchase Program
In September 2022, the Board of Directors authorized a repurchase program of up to $7,500,000 of the Company’s common stock in the open market, through privately negotiated transactions or otherwise. (The $7,500,000 includes the $2,286,000 available pursuant to the repurchase program authorized in March 2016.) During the three and nine months ended September 30, 2022, the Company repurchased approximately 75,000 and 208,000 shares of common stock, for total consideration of $1,822,000 and $5,214,000, net of commissions of $5,000 and $12,000, respectively. At September 30, 2022, the entire $7,500,000 is available for the repurchase of shares of common stock. No shares were repurchased by the Company during the three and nine months ended September 30, 2021.
Shares Issued through the At-the-Market Equity Offering Program
During the nine months ended September 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 during the three months ended September 30, 2022. During the three and nine months ended September 30, 2021, the Company sold approximately 49,000 shares for proceeds of $1,489,000, net of commissions of $30,000, and incurred offering costs of $65,000 for professional fees.
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 40,000 and 51,000 shares of common stock during the three and nine months ended September 30, 2022, respectively, and 31,000 shares were issued during the three and nine months ended September 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 September 30, 2022:
2019
2016
Incentive Plan (a)
Incentive Plan (b)
Restricted stock
437,375
275,000
RSUs
155,726
593,101
_________________
19
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)
77,776
76,250
RSUs vested
64,488
73,750
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 September 30, 2022, based on performance and market assumptions, the fair value of the RSUs granted in 2022, 2021 and 2020 is $1,352,000, $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 nine months ended September 30, 2022.
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
712,375
707,050
706,450
701,675
Grants
Vested during period
(146,900)
(145,725)
Forfeitures
(500)
(750)
(900)
Non-vested end of period
706,550
RSU grants:
Number of underlying shares
26.44
30.46
1,352,000
1,647,000
150,052
223,802
(64,488)
(73,750)
(10,538)
Restricted stock and RSU grants (based on grant price):
Weighted average per share value of non-vested shares
26.26
25.04
Value of stock vested during the period
5,535,000
5,165,000
Weighted average per share value of shares forfeited during the period
24.84
29.12
24.57
Total charge to operations:
Outstanding restricted stock grants
951,000
871,000
3,106,000
2,859,000
Outstanding RSUs
355,000
292,000
1,084,000
1,332,000
Total charge to operations
1,306,000
1,163,000
4,190,000
4,191,000
As of September 30, 2022, total compensation costs of $9,191,000 and $2,599,000 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 2.3 years for the restricted stock and 1.8 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 (dollars in thousands):
Fair value of mortgages payable (a)
377,467
419,354
Carrying value of mortgages payable
Fair value (less) greater than carrying value
(28,697)
19,694
Blended market interest rate
5.75
%
3.20
Weighted average remaining term to maturity (years)
6.7
6.4
At September 30, 2022 and December 31, 2021, the carrying amount of the Company’s line of credit (before unamortized deferred financing costs) of $11,000,000 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 September 30, 2022, the Company had in effect 17 interest rate derivatives, all of which were interest rate swaps, related to 17 outstanding mortgage loans with an aggregate $49,721,000 notional amount maturing between 2023 and 2026 (weighted average remaining term to maturity of 1.9 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 4.62% and a weighted average interest rate of 4.07% at September 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 September 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.
22
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
September 30, 2022
1,856
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
(31)
2,886
722
Amount of reclassification from Accumulated other comprehensive income (loss) into Interest expense
(348)
(485)
(1,937)
During the nine months ended September 30, 2021, in connection with the sale of two properties and the early payoff of the related mortgages, the Company determined to discontinue hedge accounting on the related interest rate swaps as the hedged forecasted transactions were no longer probable to occur. As such, the Company accelerated the reclassification of $24,000 and $808,000 during the three and nine months ended September 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 September 30, 2023, the Company estimates an additional $1,001,000 will be reclassified from Accumulated other comprehensive loss as a decrease to Interest expense.
The derivative agreements in effect at September 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 December 31, 2021, the fair value of the derivatives in a liability position, including accrued interest of $84,000, but excluding any adjustments for non-performance risk, was approximately $1,632,000. 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 $1,632,000 as of December 31, 2021. This termination liability value, net of adjustments for non-performance risk of $34,000, is included in Accrued expenses and other liabilities on the consolidated balance sheet at December 31, 2021. There were no such derivatives in a liability position at September 30, 2022.
23
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 is recognized as Income on settlement of litigation on the consolidated statement of income for the nine months ended September 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 nine months ended September 30, 2022, respectively, and $675,000 and $695,000 during the three and nine months ended September 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 nine months ended September 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.
24
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”, certain of our properties and tenants (including the Manahawkin Property (as defined below) and The Vue (as described below)) face various challenges. There have been no material changes to the status of such properties from that described in our Annual Report expect as described below:
Regal Cinemas
Regal Cinemas, or Regal, is a tenant at three properties, including a property owned by an unconsolidated joint venture in which we have a 50% equity interest. Regal’s parent, Cineworld Group plc, filed for Chapter 11 bankruptcy protection in September 2022. At September 30, 2022, Regal is obligated to pay us (and with respect to the unconsolidated joint venture, our 50% share of), (i) through September 30, 2023, $3.0 million, including $906,000 of COVID-19 rent deferral repayments, and (ii) from October 1, 2023 through 2035, an aggregate of $22.2 million of base rent (collectively, the “Obligated Amount”). Regal did not pay the rent (i.e., $178,000) or deferred rent (i.e., $91,000) that was payable for September 2022 but paid $269,000 in October 2022, representing the rent and deferred rent due for such month. As a result, during the three months ended September 30, 2022, we collected $181,000 of deferred rent and $356,000 of base rent, representing 66.7% and 66.7% of the deferred rent and base rent, respectively, payable by Regal during such quarter. (Because the collection of amounts owed by Regal is deemed to be less than probable, we have not accrued Regal’s base rent or deferred rent and since October 2020, have been reporting same on a cash basis). We and Regal are discussing significant modifications to the terms of these leases, including the cancellation of deferred rent, the reduction of base rent and shortened lease terms. We anticipate that the amounts we collect in the future will be significantly reduced from the Obligated Amount and there is uncertainty as to whether we will be required to take an impairment with respect to these properties. We summarize below certain information about these properties.
At September 30, 2022, our Indianapolis, Indiana property had mortgage debt, intangible lease liabilities and intangible lease assets of approximately $3.8 million, $580,000 and $624,000, respectively. There is no mortgage debt, intangible lease liabilities or intangible lease assets at the Greensboro, North Carolina property at which we lease the underlying fee and in turn lease the property to Regal. We estimate that the carrying costs for these two properties for the twelve months ending September 30, 2023, are approximately $1.2 million, including ground lease rent of $464,000 (which sum has historically been paid directly by Regal to the owner of the Greensboro property), real estate taxes of approximately $249,000, and debt service of $450,000 (including $134,000 of deferred interest payments). Regal is the primary obligor with respect to $456,000 of these carrying costs and we are responsible with respect to such amount if it is not paid by Regal.
Regal is a tenant at a multi-tenant property located in Manahawkin, New Jersey (the “Manahawkin Property”) and which is owned by an unconsolidated joint venture. Our 50% share of the base rent paid by Regal at this property during the
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nine months ended September 30, 2022, and the year ended December 31, 2021 was $158,000 and $139,000, respectively, representing 14.9% and 10.3%, respectively, of our share of the total base rent payable by all tenants at the Manahawkin Property, respectively. (Our 50% share of the deferred rent paid by Regal at this property during the nine months ended September 30, 2022 was $81,000 and is excluded from the base rent payments described in the immediately preceding sentence). At September 30, 2022, our share of the mortgage debt at this property was approximately $10.8 million.
Our cash flow and profitability will be adversely impacted by the anticipated modifications to Regal’s leases or if the issues with respect to the other challenged properties identified in the Annual Report are not resolved in a satisfactory manner.
Challenges and Uncertainties as a Result of the Volatile Economic Environment
During the three and nine months ended September 30, 2022, economic uncertainty and stock market volatility have increased due to a number of factors, including rising inflation, increasing interest rates, the continuing COVID-19 pandemic, and lingering supply chain disruptions. This uncertainty, volatility and the related causes may adversely impact us in the future. Most of our leases require the tenants to pay (or to reimburse us for) their pro rata share of operating expenses, including real estate taxes, insurance and common area maintenance, thereby reducing our exposure to increases in operating expenses resulting from inflation or other factors. Additionally, many of our leases include scheduled rent increases. In the event inflation causes increases in our real estate operating expense (to the extent such expense is not paid directly by or reimbursed to us by our tenants), general and administrative expenses, or higher interest rates on our floating rate debt increase our cost of doing business, such increased costs would not be passed through to tenants and could adversely affect our results of operations. Finally, due to these uncertain conditions, we anticipate that in the near-term we will be especially cautious in acquiring properties. As a result, our ability, in the near term, to grow revenue and net income through acquisitions will 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 September 30, 2022, we own 118 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 September 30, 2022 is approximately 98.4%.
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.
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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 62.2% of our 2022 contractual base rent (as described below) is derived from industrial properties and 26.6%, 4.7%, 4.1%, and 2.4% from retail, health and fitness, restaurant, 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 $69.6 million and represents, after giving effect to any abatements, concessions, deferrals or adjustments in effect as of September 30, 2022, the base rent payable to us during the twelve months ending September 30, 2023 under leases in effect at September 30, 2022. Excluded from such contractual rental income is an aggregate of $7.5 million comprised of: (i) $2.1 million of base rent and $906,000 of COVID-19 rent deferral repayments due from Regal Cinemas during the twelve months ending September 30, 2023 (including our share of $237,000 of base rent payable and $101,000 of COVID-19 rent deferral repayments due from Regal Cinemas at a joint venture property) - (See “-Challenges and Uncertainties Facing Certain Tenants and Properties”), (ii) $1.4 million representing our share of the base rent payable during the twelve months ending September 30, 2023 to our joint ventures (excluding amounts from Regal Cinemas noted above), (iii) 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, (iv) approximately $949,000 of straight-line rent and $821,000 of amortization of intangibles, and (v) $48,000 of COVID-19 rent deferral repayments (other than those due from Regal Cinemas noted above) due during the twelve months ending September 30, 2023, which were accrued to rental income in 2020, and of which $12,000 was paid in October 2022.
The following table sets forth scheduled expirations of leases for our properties as of September 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
280,083
1,154,115
1.7
29
1,179,047
9,695,576
13.9
629,368
5,376,593
7.7
726,371
4,461,082
30
1,941,021
13,023,481
18.7
2028
1,219,654
7,026,969
10.1
2029
1,401,245
6,955,959
10.0
2030
519,187
4,164,261
6.0
2031
874,126
4,620,956
6.6
2032
264,231
2,296,671
3.3
2033 and thereafter
1,553,510
10,866,049
15.6
169
10,587,843
69,641,712
100.0
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Property Transaction During the Three Months Ended September 30, 2022
On August 8, 2022, we sold a retail property located in Columbus, Ohio for a gross sales price of $8.3 million and recognized a gain of $4.1 million from this sale. This property contributed (i) $40,000 and $552,000 of rental income, net, (ii) $0 and $262,000 of lease termination fee income and (iii) $233,000 and $126,000 of operating expenses (including depreciation and amortization expense of $62,000 and $112,000) in the nine months ended September 30, 2022 and 2021, respectively.
During the three months ended September 30, 2022, we repurchased approximately 75,000 shares of common stock for total consideration of $1.8 million. In September 2022, the Board of Directors authorized a repurchase program of up to $7.5 million of our common stock in the open market, through privately negotiated transactions or otherwise. The $7.5 million includes the $2.3 million available pursuant to the share repurchase program authorized in March 2016. At September 30, 2022, the entire $7.5 million is available for the repurchase of shares of our common stock.
Potential Receipt of Proceeds from The Vue
Our ground lease tenant at The Vue – Beachwood, Ohio, is a plaintiff/claimant in various legal proceedings (the “Proceedings”) against, among others, the developer of such apartment complex alleging, among other things, that the buildings’ construction was flawed. In late October, the parties to the Proceedings entered into a settlement agreement which provides, among other things, that the payment to be made to settle the Proceedings (the “Settlement Payment”) will be made by late November 2022 and contemplates that although we were not a party to the Proceedings, that we will release certain claims, if any, related to or arising out of the Proceedings. Our lease with the tenant provides that we are entitled, after the payment of certain expenses, to the Settlement Payment. As a result, we estimate that we are entitled to receive between $3.5 million to $4.5 million in the quarter ending December 31, 2022. We can provide no assurance that we will receive the net proceeds from the Settlement Payment.
Lease Extensions
Subsequent to September 30, 2022, we entered into lease amendments with Shutterfly, a tenant at our property in Fort Mill, South Carolina and Power Distributors, a tenant at our property in Ankeny, Iowa – these tenants account for an aggregate of $2.2 million, or 3.2%, of our 2022 contractual rental income. Shutterfly’s lease was extended through 2033 and provides, effective as of July 1, 2023, for an annual base rent of $2.0 million (an approximate 67% increase in base rent over the base rent payable in June 2023) with annual increases of not less than 3%. We agreed to provide Shutterfly up to $1.0 million of tenant improvements. Power Distributors’ lease was extended for seven years and effective as of November 1, 2023, provides for an annual base rent of $864,000 (an increase of 10% from the base rent in effect in October 2022), with 3% annual increases thereafter.
Results of Operations
The following table compares total revenues for the periods indicated:
Increase
(Dollars in thousands)
(Decrease)
% Change
1,124
5.5
3,138
5.1
(87)
(100.0)
(311)
(92.6)
1,037
2,827
4.6
Rental income, net.
The following table details the components of rental income, net, for the periods indicated:
Acquisitions (a)
1,213
139
1,074
772.7
2,705
192
2,513
1,308.9
Dispositions (b)
693
(691)
(99.7)
618
2,887
(2,269)
(78.6)
Same store (c)
20,258
19,517
741
3.8
61,153
58,259
2,894
5.0
Changes due to acquisitions and dispositions
The three and nine months ended September 30, 2022 reflect increases of $1.1 million and $2.5 million, respectively, generated by seven properties acquired in 2021 and 2022 (i.e., for the three and nine months ended September 30, 2022, $341,000 and $1.3 million, respectively, from the three properties acquired in 2021 and $733,000 and $1.2 million, respectively, from the four properties acquired during 2022). Offsetting the increases are decreases due to the inclusion, in the three and nine months ended September 30, 2021, of rental income of $691,000 and $2.3 million, respectively, from properties sold during 2021 and 2022 (i.e., for the three and nine months ended September 30, 2022, $74,000 and $1.1 million, respectively, from four properties sold in 2021 and $617,000 and $1.2 million, respectively, from seven properties sold in 2022).
Changes at same store properties
The increases in same store rental income during the three and nine months ended September 30, 2022 are due to:
Lease termination fees.
In connection with the exercise of early lease termination options, we recognized $87,000 and $336,000, respectively, in the three and nine months ended September 30, 2021.
Operating Expenses
The following table compares operating expenses for the periods indicated:
374
663
3.9
General and administrative
210
5.9
564
Real estate expenses
771
24.1
934
9.1
(10)
(4.5)
1,360
11.0
2,151
5.6
Depreciation and amortization. The increases in the three and nine months ended September 30, 2022 are due primarily to:
The increases were offset by:
General and administrative. The increase in the three months ended September 30, 2022 is primarily due to increases of:
- $142,000 in non-cash compensation expense related to (i) the increase in the number and higher fair value of the restricted stock granted in 2022 in comparison to the awards granted in 2017, and (ii) more favorable projections of the achievability of performance metrics related to RSUs, and
-
$100,000 of compensation expense primarily due to higher levels of compensation, and to a lesser extent, additional employees.
The increase in the nine months ended September 30, 2022 is primarily due to increases of:
$375,000 of compensation expense primarily due to higher levels of compensation, and to a lesser extent, additional employees, and
$129,000 in professional fees related to various matters, none of which was individually significant.
Real estate expenses. The increases in the three and nine months ended September 30, 2022 are primarily due to:
aggregate increases of $187,000 and $255,000, respectively, of other real estate expenses, and $45,000 and $173,000, respectively, of insurance expense for several properties, none of which were individually significant,
-$170,000 and $304,000, respectively, from properties acquired in 2022 and 2021.
The increase was offset in the nine months ended September 30, 2022 due primarily to decreases of (i) $188,000 in litigation expense (the “Round Rock Litigation”) related to our former assisted living facility in Round Rock, Texas, with respect to which we received a $5.4 million settlement payment (see Note 13 to our consolidated financial statements), and (ii) $82,000 related to properties sold in 2021 and 2022.
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 Round Rock Litigation, which were not rebilled.
Gain on sale of real estate, net.
The following table compares gain on sale of real estate, net for the periods indicated:
2,786
218.2
(6,006)
(26.4)
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The following table lists the sold properties and related gains, net for the periods indicated:
Vacant retail property - Columbus, OH
Havertys retail property - Fayetteville, GA
Orlando Baking industrial property - Columbus, OH
Wendy's restaurants (four properties) - PA
4,649
Whole Foods retail property & parking lot - West Hartford, CT (a)
(22)
Vacant retail property - Philadelphia, PA (b)
Total gain on sale of real estate, net
__________
Other Income and Expenses
The following table compares other income and expenses for the periods indicated:
Change
(6.5)
235
313.3
Income on settlement of litigation
n/a
(5,388)
Other income
(661)
(97.5)
132
15.3
0.0
(547)
(4.0)
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13.5
21.6
Equity in earnings of unconsolidated joint ventures. The increase in the nine months ended September 30, 2022 is due to an increase at the Manahawkin Property resulting primarily from an increase of $173,000 (our 50% share) in rental income, including $162,000 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 (see “- Challenges and Uncertainties Facing Certain Tenants and Properties”).
Equity in earnings from sale of unconsolidated joint venture property. The three and nine months ended September 30, 2021 include a $801,000 gain from the sale of a portion of a joint venture’s Savannah, Georgia property.
Prepayment costs on debt. The nine months ended September 30, 2021 includes $799,000 incurred in connection with the Whole Foods Sale. There were no such costs in the three and nine months ended September 30, 2022.
Income on settlement of litigation. In April 2022, we received $5.4 million pursuant to the settlement of the Round Rock Litigation.
Other income. The nine months ended September 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 three and nine months ended September 30, 2021 include $675,000 and $695,000, respectively, related to such insurance recovery. Additionally, the nine months ended September 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
4,150
4,301
(3.5)
12,535
13,260
(725)
(5.5)
Credit line interest
217
64
239.1
313
178
56.9
4,367
4,365
13,026
13,573
The following table reflects the average interest rate on the average principal amount of outstanding mortgage debt for the periods indicated:
Average interest rate
4.11
4.21
(0.10)
(2.4)
4.15
4.20
(0.05)
(1.2)
Average principal amount
404,178
408,142
(3,964)
(1.0)
403,072
420,972
(17,900)
(4.3)
The decrease in mortgage interest in the nine months ended September 30, 2022 is due primarily to the decrease in the average principal amount of mortgage debt outstanding which resulted from mortgage payoffs (generally in connection with current maturity dates and property sales) and scheduled amortization payments. The decrease was offset by financings effectuated in connection with acquisitions and refinancings.
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
3.59
1.83
1.76
96.2
2.74
1.86
.88
47.3
Weighted average principal amount
16,870
16,731
12,036.7
15,480
10,438
5,042
48.3
The increases in credit line interest in the three and nine months ended September 30, 2022 are due to increases in the weighted average interest rate due to increases in the one month LIBOR rate, and to increases of $16.7 million and $5.0 million, respectively, in the weighted average balance outstanding under our credit line.
Amortization and write-off of deferred financing costs. The increase in the nine months ended September 30, 2022, includes an increase of $214,000 related to the write-off of deferred costs related to the mortgages on the eleven Havertys properties that were paid off in June 2022. Offsetting the increase were write-offs of deferred costs in the nine months ended September 30, 2021, totaling $118,000, of which $63,000 was related to the Whole Foods Sale and the balance was primarily related to mortgages that were paid off before maturity.
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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 November 1, 2022, was $94.2 million, including $8.0 million of cash and cash equivalents (including the credit facility’s required minimum $3.0 million average deposit maintenance balance) and $86.2 million available under our credit facility. At November 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 (we are authorized to repurchase up to $7.5 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 $3.9 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 September 30, 2022, excluding the mortgage debt of our unconsolidated joint venture, we had 65 outstanding mortgages payable secured by 65 properties in the aggregate principal amount of $406.2 million (before netting unamortized deferred financing costs of $3.4 million). These mortgages represent first liens on individual real estate investments with an aggregate carrying value of $630.6 million, before accumulated depreciation of $108.3 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 4.11% weighted average interest rate) and mature between 2023 and 2047 (a 6.7 year weighted average remaining term to maturity).
The following table sets forth, as of September 30, 2022, information with respect to our mortgage debt that is payable during the three 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
2,998
12,102
11,199
9,842
36,141
Principal due at maturity
12,973
50,695
32,063
95,731
25,075
61,894
41,905
131,872
Weighted average interest rate % on principal due at maturity
4.31
4.42
4.32
4.37
At September 30, 2022, the Manahawkin Property, owned by an unconsolidated joint venture, had a first mortgage on its property with an outstanding balance of $21.5 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 2023 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 (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 nine months ended September 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 4.51% and 5.06% at September 30, 2022 and October 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 September 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 nine months ended September 30, 2022 and 2021. At September 30, 2022, the carrying value of the land on our balance sheet was approximately $16.1 million; our leasehold position is subordinate to $65.1 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
5,800
5,483
17,297
16,735
Add: our share of depreciation and amortization of unconsolidated joint ventures
121
389
387
Add: amortization of deferred leasing costs
113
421
320
Add: our share of amortization of deferred leasing costs of unconsolidated joint ventures
Deduct: gain on sale of real estate, net
(4,063)
(1,277)
Deduct: equity in earnings from sale of unconsolidated joint venture property
Adjustments for non-controlling interests
(49)
73
NAREIT funds from operations applicable to common stock
9,229
9,816
34,606
26,316
Deduct: straight-line rent accruals and amortization of lease intangibles
(712)
(366)
(2,196)
(685)
Deduct: our share of straight-line rent accruals and amortization of lease intangibles of unconsolidated joint ventures
(6)
Deduct: income on settlement of litigation
Deduct: income on insurance recoveries from casualty loss
(675)
(918)
(695)
Deduct: lease termination fee income
(25)
(336)
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
38
837
Add: amortization and write-off of deferred financing costs
278
245
Add: our share of amortization of deferred financing costs of unconsolidated joint venture
Adjusted funds from operations applicable to common stock
10,101
10,140
31,159
30,299
GAAP net income per common share attributable to One Liberty Properties, Inc.
.27
.26
.81
.78
.01
.02
(.19)
(.06)
(.79)
(1.09)
(.04)
NAREIT funds from operations per share of common stock (a)
.44
.47
1.63
1.25
(.03)
(.11)
(.25)
(.02)
.06
.20
.04
Adjusted funds from operations per share of common stock (a)
.48
1.47
1.44
Three Months Ended September 30, 2022 and 2021
The $584,000, or 6%, decrease in FFO for the three months ended September 30, 2022 from the corresponding 2021 period is due primarily to:
Offsetting the decrease is a $1.1 million net increase in rental income, including the collection of $161,000 of deferred rent.
See “—Results of Operations” for further information regarding these changes.
The $39,000, or 0.4%, decrease in AFFO is due to the factors impacting FFO as described above, as well as the exclusion from AFFO of a $292,000 increase in rental income related to straight-line rent accruals.
Offsetting the decrease in AFFO was the exclusion from AFFO of:
Diluted per share FFO and AFFO were impacted negatively in the three months ended September 30, 2022 by an average increase from September 30, 2021 of approximately 157,000 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 2022.
Nine Months Ended September 30, 2022 and 2021
The $8.3 million, or 31.5%, increase in FFO for the nine months ended September 30, 2022 from the corresponding 2021 period is due primarily to:
Offsetting the increase is:
The $860,000, or 2.8%, increase in AFFO is due to the factors impacting FFO as described immediately above, offset by the exclusion from AFFO of:
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The increase in AFFO was offset by the exclusion from AFFO of a $311,000 decrease in lease termination fee income.
Diluted per share FFO and AFFO were impacted negatively in the nine months ended September 30, 2022 by an average increase from September 30, 2021 of approximately 270,000 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 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 September 30, 2022, we had no liability in the event of the early termination of our swaps.
At September 30, 2022, we had 17 interest rate swap agreements outstanding. The fair market value of the interest rate swaps is dependent upon existing market interest rates and swap spreads, which change over time. As of September 30, 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 $820,000 and the net unrealized gain on derivative instruments would have increased by $820,000. 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 $842,000 and the net unrealized gain on derivative instruments would have decreased by $842,000. 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 $11.0 million outstanding balance under this facility at September 30, 2022, a 100 basis point increase of the interest rate would increase our related interest costs over the next twelve months by approximately $110,000 and a 100 basis point decrease of the interest rate would decrease our related interest costs over the next twelve months by approximately $110,000.
The fair market value of our long-term debt is estimated based on discounting future cash flows at interest rates that our management believes reflect the risks associated with long-term debt of similar risk and duration.
Item 4. Controls and Procedures
Based on their evaluation as of the end of the period covered by this report, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are effective.
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) promulgated under the Exchange Act) during the three months ended September 30, 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 September 2022, our Board of Directors authorized a repurchase program of up to $7,500,000 of shares of our common stock in the open market, through privately negotiated transactions or otherwise. (The $7,500,000 includes the $2,286,000 available pursuant to the repurchase program authorized in March 2016.) There is no stated expiration date for this program. Set forth below is a table describing the purchases we made in the quarter ended September 30, 2022:
Issuer Purchases of Equity Securities
Total Number of
Approximate Dollar Value
Average
Shares Purchased
of Shares that May Yet Be
of Shares
Price Paid
as Part of Publicly
Purchased Under
Period
Purchased
per Share
Announced Programs
the Programs
July 1, 2022 - July 31, 2022
4,107,799
August 1, 2022 - August 31, 2022
19,723
24.79
3,617,762
September 1, 2022 - September 30, 2022
55,289
24.03
7,500,000
75,012
24.23
Item 6. Exhibits
Exhibit No.
Title of Exhibit
31.1
Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Senior Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Senior Vice President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
The following financial statements and notes from the One Liberty Properties, Inc. Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2022 filed on November 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: November 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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