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 March 31, 2024
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 May 1, 2024, the registrant had 21,320,443 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 — March 31, 2024 and December 31, 2023
1
Consolidated Statements of Income — Three months ended March 31, 2024 and 2023
2
Consolidated Statements of Comprehensive Income — Three months ended March 31, 2024 and 2023
3
Consolidated Statements of Changes in Equity — Three months ended March 31, 2024 and 2023
4
Consolidated Statements of Cash Flows — Three months ended March 31, 2024 and 2023
5
Notes to Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
35
Item 4.
Controls and Procedures
Part II — Other Information
36
Item 5.
Other Information
Item 6.
Exhibits
Part I — FINANCIAL INFORMATION
Item 1. Financial Statements
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Par Value)
March 31,
December 31,
2024
2023
ASSETS
(Unaudited)
Real estate investments, at cost
Land
$
172,135
172,309
Buildings and improvements
692,489
692,346
Total real estate investments, at cost
864,624
864,655
Less accumulated depreciation
187,346
182,705
Real estate investments, net
677,278
681,950
Investment in unconsolidated joint ventures
2,104
2,051
Cash and cash equivalents
27,373
26,430
Unbilled rent receivable
16,872
16,661
Unamortized intangible lease assets, net
13,650
14,681
Escrow, deposits and other assets and receivables
18,392
19,833
Total assets(1)
755,669
761,606
LIABILITIES AND EQUITY
Liabilities:
Mortgages payable, net (see Note 7)
416,539
418,347
Line of credit
—
Dividends payable
10,092
9,916
Accrued expenses and other liabilities
13,309
15,502
Unamortized intangible lease liabilities, net
9,679
10,096
Total liabilities(1)
449,619
453,861
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; 20,526 and 20,323 shares issued and outstanding
20,526
20,323
Paid-in capital
328,883
326,379
Accumulated other comprehensive income
755
844
Distributions in excess of net income
(45,330)
(40,843)
Total One Liberty Properties, Inc. stockholders’ equity
304,834
306,703
Non-controlling interests in consolidated joint ventures(1)
1,216
1,042
Total equity
306,050
307,745
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
Revenues:
Rental income, net
22,446
22,952
Lease termination fee
250
Total revenues
22,696
Operating expenses:
Depreciation and amortization
6,021
6,145
General and administrative (see Note 8 for related party information)
3,923
4,039
Real estate expenses (see Note 8 for related party information)
4,470
4,124
State taxes
63
68
Total operating expenses
14,477
14,376
Other operating income
Gain on sale of real estate, net
1,784
1,534
Operating income
10,003
10,110
Other income and expenses:
Equity in earnings of unconsolidated joint ventures
53
85
Other income
267
15
Interest:
Expense
(4,717)
(4,600)
Amortization and write-off of deferred financing costs
(226)
(202)
Net income
5,380
5,408
Net income attributable to non-controlling interests
(225)
(22)
Net income attributable to One Liberty Properties, Inc.
5,155
5,386
Weighted average number of common shares outstanding:
Basic
20,509
20,514
Diluted
20,579
Per common share attributable to common stockholders:
.24
.25
.23
Cash distributions per share of common stock
.45
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
Other comprehensive income
Net unrealized loss on derivative instruments
(89)
(409)
Comprehensive income
5,291
4,999
Comprehensive income attributable to One Liberty Properties, Inc.
5,066
4,977
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, 2023
Distributions – common stock
Cash – $.45 per share
(9,642)
Shares issued through dividend reinvestment plan
66
1,369
1,435
Restricted stock vesting
137
(137)
Compensation expense — restricted stock and RSUs
1,272
Contribution from non-controlling interest
43
Distributions to non-controlling interests
(94)
225
Other comprehensive loss
Balances, March 31, 2024
Balances, December 31, 2022
20,362
325,895
1,810
(32,102)
972
316,937
(9,628)
49
1,025
1,074
135
(135)
Compensation expense – restricted stock and RSUs
1,328
(9)
22
Balances, March 31, 2023
20,546
328,113
1,401
(36,344)
985
314,701
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:
(1,784)
(1,534)
Increase in net amortization of unbilled rental income
(283)
(669)
Amortization and write-off of intangibles relating to leases, net
(378)
(224)
Amortization of restricted stock and RSU compensation expense
(53)
(85)
226
202
Payment of leasing commissions
(4)
(179)
Decrease in escrow, deposits, other assets and receivables
740
5,571
Decrease in accrued expenses and other liabilities
(2,230)
(1,251)
Net cash provided by operating activities
8,907
14,712
Cash flows from investing activities:
Net proceeds from sale of real estate
2,670
4,076
Improvements to real estate
(844)
(725)
Investments in ground leased property
(447)
Net cash provided by investing activities
1,826
2,904
Cash flows from financing activities:
Scheduled amortization payments of mortgages payable
(3,046)
(3,078)
Repayments of mortgages payable
(26,527)
Proceeds from mortgage financings
28,000
4,800
Proceeds from bank line of credit
8,400
Repayments on bank line of credit
(18,700)
Issuance of shares through dividend reinvestment plan
Payment of financing costs
(449)
(118)
Capital contribution from non-controlling interest
Cash distributions to common stockholders
(9,466)
(9,483)
Net cash used in financing activities
(10,104)
(17,114)
Net increase in cash, cash equivalents and restricted cash
629
502
Cash, cash equivalents and restricted cash at beginning of year
29,592
7,277
Cash, cash equivalents and restricted cash at end of period
30,221
7,779
Supplemental disclosure of cash flow information:
Cash paid during the period for interest expense
4,741
4,630
(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:
7,016
Restricted cash included in escrow, deposits and other assets and receivables
2,848
763
Total cash, cash equivalents and restricted cash shown in the consolidated statements 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 or when the related reserve conditions are satisfied.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2024
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, to a lesser extent, retail properties, many of which are subject to long-term net leases. As of March 31, 2024, OLP owns 110 properties, including three properties owned by consolidated joint ventures and two properties owned by unconsolidated joint ventures. The 110 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 months ended March 31, 2024 and 2023 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, 2023.
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 (e.g., the value of above, below and at-market leases, and origination costs associated with in-place leases and above or below-market mortgages assumed at the acquisition date). The value, as determined, is allocated to the gross assets acquired based on management’s determination of the relative fair values of these assets and liabilities.
The Company assesses the fair value of the gross assets acquired based on available market information which utilize estimated cash flow projections; such inputs are categorized as Level 3 inputs in the fair value hierarchy. In determining fair value, factors considered by management include an evaluation of current market demand, market capitalization rates and discount rates, estimates of carrying costs (e.g., real estate taxes, insurance, and other operating expenses), and lost rental revenue during the expected lease-up periods. Management also estimates costs to execute similar leases, including leasing commissions and tenant improvements.
MARCH 31, 2024 (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 reviews on a quarterly basis its investments in unconsolidated joint ventures for other-than-temporary losses in investment value. Any decline that is not expected to be recovered based on the underlying assets of the investment is considered other than temporary and an impairment charge is recorded as a reduction in the carrying value of the investment. During the three months ended March 31, 2024 and 2023, there were no such other-than-temporary impairment charges related to the Company’s investments in unconsolidated joint ventures.
The Company has elected to follow the cumulative earnings approach when assessing, for the consolidated statement of cash flows, whether the distribution from the investee is a return of the investor’s investment as compared to a return on its investment. The source of the cash generated by the investee to fund the distribution is not a factor in the analysis (that is, it does not matter whether the cash was generated through investee refinancing, sale of assets or operating results). Consequently, the investor only considers the relationship between the cash received from the investee to its equity in the undistributed earnings of the investee, on a cumulative basis, in assessing whether the distribution from the investee is a return on or a return of its investment. Cash received from the unconsolidated entity is presumed to be a return on the investment to the extent that, on a cumulative basis, distributions received by the investor are less than its share of the equity in the undistributed earnings of the entity.
8
NOTE 3 – LEASES
Lessor Accounting
The Company owns rental properties which are leased to tenants under operating leases with current expirations ranging from 2024 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 its respective leases, and any lease incentives paid or payable to the lessee, reported on a straight-line basis over the non-cancelable term of the lease. Variable lease revenues typically 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 and (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
18,272
19,358
Variable lease revenues
3,796
3,370
Lease revenues (a)
22,068
22,728
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 the Company’s 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. As of March 31, 2024, the Company has assessed the collectability of all recorded lease revenues as probable.
Minimum Future Rents
As of March 31, 2024, the minimum future contractual rents to be received on non-cancellable operating leases are included in the table below (amounts in thousands). The minimum future contractual rents do not include (i) straight-line rent or amortization of lease intangibles or incentives and (ii) variable lease payments as described above.
From April 1 – December 31, 2024
53,150
For the year ending December 31,
2025
66,344
2026
62,269
2027
52,627
2028
41,328
2029
32,078
Thereafter
94,798
402,594
9
NOTE 3 – LEASES (CONTINUED)
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, five-year renewal options and one seven-month renewal option. As of March 31, 2024, the remaining lease term, including a five-year renewal option deemed exercised, is 5.9 years. The Company recognized lease expense related to this ground lease of $122,000 and $150,000 for the three months ended March 31, 2024 and 2023, 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 March 31, 2024, the remaining lease term, including the renewal option deemed exercised, is 12.8 years. The Company recognized lease expense related to this office lease of $14,000 in each of the three months ended March 31, 2024 and 2023, respectively, which is included in General and administrative expenses on the consolidated statements of income.
Minimum Future Lease Payments
As of March 31, 2024, the minimum future lease payments related to these operating leases are as follows (amounts in thousands):
430
626
627
630
692
537
Total undiscounted cash flows
4,171
Present value discount
(893)
Lease liability
3,278
The lease liability is included in Accrued expenses and other liabilities on the consolidated balance sheet.
In March 2024, a consolidated joint venture in Lakewood, Colorado, in which the Company holds a 90% interest, recognized a lease termination fee of $250,000 from a tenant due to the early termination of its lease in connection with the sale of the related restaurant parcel (see Note 4).
10
NOTE 4 – SALES OF PROPERTIES
On March 6, 2024, a consolidated joint venture, in which the Company holds a 90% interest, sold a restaurant parcel at its multi-tenant shopping center in Lakewood, Colorado for $2,670,000, net of closing costs. The sale resulted in a gain of $1,784,000 which was recorded as Gain on sale of real estate, net, in the consolidated statement of income for the three months ended March 31, 2024. In connection with this sale, the joint venture (i) wrote-off $50,000 of unbilled rent receivable and $68,000 of other assets as an adjustment to Gain on sale of real estate, net and (ii) paid down $1,885,000 of the mortgage on this property. The non-controlling interest’s share of the gain was $178,000.
On February 28, 2023, the Company sold a restaurant property located in Hauppauge, New York for $4,076,000, net of closing costs. The sale resulted in a gain of $1,534,000 which was recorded as Gain on sale of real estate, net, in the consolidated statement of income for the three months ended March 31, 2023. In connection with the sale, the Company wrote-off $128,000 of other assets and receivables as an adjustment to Gain on sale of real estate, net.
Sales subsequent to March 31, 2024
During the quarter ended March 31, 2024, the Company entered into contracts to sell the following properties (amounts in thousands):
Estimated Gain
Held-for-sale
Date Sold/
Gross
on Sale of Real
Description of Property
City, State
Date (a)
Estimated Sale
Sales Price
Estate Net (b)
Applebee's restaurant property
Kennesaw, Georgia
April 5, 2024
May 6, 2024
2,834
1,000
Vacant retail property (c)
April 16, 2024
June 28, 2024
6,700
1,900
FedEx industrial property
Miamisburg, Ohio
April 17, 2024
May 8, 2024
2,793
1,500
Havertys retail property
Wichita, Kansas
April 21, 2024
June 6, 2024
6,600
2,000
NOTE 5 – 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 other than the $4,642,000 proceeds from a settlement in 2022.
As of March 31, 2024, the VIE’s maximum exposure to loss was $17,276,000 which represented the carrying amount of the land. In purchasing the property in 2016, the owner/operator obtained a $67,444,000 mortgage 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
11
NOTE 5 – VARIABLE INTEREST ENTITIES, CONTINGENT LIABILITY AND CONSOLIDATED JOINT VENTURES (CONTINUED)
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 $63,247,000 as of March 31, 2024.
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 $932,000 during the year ended December 31, 2023. These amounts are included as part of the carrying amount of the land. No such amounts were funded during the three months ended March 31, 2024.
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):
2024 (a)
9,743
9,917
Buildings and improvements, net of accumulated depreciation of $6,383 and $6,380, respectively
16,952
17,475
Cash
889
1,059
910
938
406
412
833
749
Mortgages payable, net of unamortized deferred financing costs of $99 and $109, respectively
13,731
16,660
705
745
379
385
Non-controlling interests in consolidated joint ventures
As of March 31, 2024 and December 31, 2023, 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 $5,242,000 and $4,448,000, 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 6 – INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
As of March 31, 2024 and December 31, 2023, the Company participated in two unconsolidated joint ventures, each of which owns and operates one property; the Company’s equity investment in these ventures totaled $2,104,000 and $2,051,000, respectively. The Company recorded equity in earnings of $53,000 and $85,000 for the three months ended March 31, 2024 and 2023, respectively.
12
NOTE 7 – DEBT OBLIGATIONS
Mortgages Payable
The following table details the Mortgages payable, net, balances per the consolidated balance sheets (amounts in thousands):
Mortgages payable, gross
420,992
422,565
Unamortized deferred financing costs
(3,683)
(3,414)
Unamortized mortgage intangible assets (a)
(770)
(804)
Mortgages payable, net
The following table sets forth, as of March 31, 2024, scheduled principal repayments with respect to the Company’s mortgage debt during the nine months ending December 31, 2024 and for each of the subsequent twelve months through maturity (amounts in thousands):
Year Ending December 31,
Amortization payments
8,954
10,908
10,865
9,797
9,141
36,859
86,524
Principal due at maturity
25,309
29,157
19,179
38,525
30,156
192,142
334,468
34,263
40,065
30,044
48,322
39,297
229,001
Line of Credit
The Company’s credit facility with Manufacturers and Traders Trust Company and VNB New York, LLC, provides that 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 $40,000,000 and 40% of the borrowing base. 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.
The facility, which matures December 31, 2026, provides for an interest rate equal to 30-day SOFR plus an applicable margin ranging from 175 basis points to 275 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 March 31, 2024 and 2023. An unused facility fee of 0.25% per annum applies to the facility. The Company had no balance outstanding on the facility during the three months ended March 31, 2024. The weighted average interest rate on the facility was approximately 6.23% for the three months ended March 31, 2023. The Company was in compliance with all covenants at March 31, 2024.
At each of March 31, 2024 and May 1, 2024, $100,000,000 was available to be borrowed under the facility, including an aggregate of up to $40,000,000 available for renovation and operating expense purposes. The interest rate on the facility was 7.06% on May 1, 2024.
At March 31, 2024 and December 31, 2023, the Company had unamortized deferred financing costs of $503,000 and $549,000, respectively, which are included in Escrow, deposits and other assets and receivables on the consolidated balance sheets.
13
NOTE 8 – 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 $826,000 and $879,000 for the three months ended March 31, 2024 and 2023, respectively. Included in these amounts are fees for property management services of $357,000 and $428,000 for the three months ended March 31, 2024 and 2023, 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, $84,000 and $79,000 for the three months ended March 31, 2024 and 2023, respectively, for the Company’s share of all direct office expenses, including rent, telephone, postage, computer services, internet usage and supplies.
Executive officers and others providing services to the Company under the compensation and services agreement were awarded shares of restricted stock and restricted stock units (“RSUs”) under the Company’s stock incentive plans (described in Note 9). The related expense charged to the Company’s operations was $614,000 and $642,000 for the three months ended March 31, 2024 and 2023, respectively.
The amounts paid under the compensation and services agreement (except for the property management services 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 $23,000 and $22,000 for the three months ended March 31, 2024 and 2023, 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 $2,000 and $27,000 for the three months ended March 31, 2024 and 2023, respectively, to the other partner of the ventures, which reduced Equity in earnings of unconsolidated joint ventures on the consolidated statements of income by $1,000 and $13,000 for the three months ended March 31, 2024 and 2023, respectively.
During the three months ended March 31, 2024 and 2023, the Company paid quarterly fees of (i) $81,378 and $78,250, respectively, to the Company’s chairman and (ii) $32,551 and $31,300, respectively, to the Company’s vice-chairman. These fees are included in General and administrative expenses on the consolidated statements of income.
The Company obtains its property insurance in conjunction with Gould Investors L.P. (“Gould Investors”), a related party, and reimburses Gould Investors annually for the Company’s insurance cost relating to its properties. Included in Real estate expenses on the consolidated statements of income is insurance expense of $277,000 and $148,000 for the three months ended March 31, 2024 and 2023, respectively, of amounts reimbursed to Gould Investors in prior periods.
14
NOTE 9 – STOCKHOLDERS’ EQUITY
Common Stock Dividend
On March 4, 2024, the Board of Directors declared a quarterly cash dividend of $0.45 per share on the Company’s common stock, totaling approximately $9,564,000, payable to stockholders of record at the close of business on March 27, 2024. The quarterly dividend was paid on April 4, 2024; $8,101,000 was paid in cash and the balance of such dividend payment was satisfied through the issuance of 67,000 shares under the Company’s dividend reinvestment plan.
Dividend Reinvestment Plan
The Company’s 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). The discount is currently being offered at 3%. Under the DRP, the Company issued approximately 66,000 and 49,000 shares of common stock during the three months ended March 31, 2024 and 2023, respectively.
Stock Repurchase Program
During 2022 and 2023, the Board of Directors authorized and/or amended repurchase programs pursuant to which the Company could repurchase shares of its common stock in open-market, through privately negotiated transactions or otherwise. No such shares were repurchased during the three months ended March 31, 2024 and 2023.
Stock Based Compensation
The Company’s 2022 and 2019 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 March 31, 2024:
2022
2019
Incentive Plan
Incentive Plan (a)
Restricted stock
300,515
426,625
RSUs
168,490
79,622
Totals
469,005
506,247
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.
NOTE 9 – STOCKHOLDERS’ EQUITY (CONTINUED)
The following table reflects the RSUs outstanding as of March 31, 2024:
2023 Grant
2022 Grant
2021 Grant
RSUs outstanding (a)(b)
85,250
83,240
Vesting Date (c)(d)
6/30/2026
6/30/2025
6/30/2024
The specific metrics and other material terms and conditions of the RSUs are as follows:
Performance Criteria (a)
Year RSU Granted
Metric
Weight
Minimum
Maximum
2021 - 2023 (b)(c)
ROC Metric (d)
50%
Average annual of at least 6.0%
Average annual of at least 8.75%
TSR Metric (e)
Average annual of at least 11.0%
As of March 31, 2024, based on performance and market assumptions, the fair value of the RSUs granted in 2023, 2022 and 2021 is $959,000, $1,419,000 and $1,822,000, respectively. Recognition of such deferred compensation will be charged to General and administrative expense over the respective three-year performance cycles.
16
The following is a summary of the activity of the Plans:
Restricted stock grants:
Number of shares
151,180
152,955
Average per share grant price
21.60
22.09
Deferred compensation to be recognized over vesting period
3,265,000
3,379,000
Number of non-vested shares:
Non-vested beginning of the period
712,560
712,375
Grants
Vested during the period
(136,600)
(134,800)
Forfeitures
Non-vested end of the period
727,140
730,530
RSU grants:
Number of underlying shares
248,112
241,076
Restricted stock and RSU grants (based on grant price):
Weighted average per share value of non-vested shares
25.27
25.74
Value of stock vested during the period
3,511,000
3,412,000
Weighted average per share value of shares forfeited during the period
Total charge to operations:
Outstanding restricted stock grants
893,000
950,000
Outstanding RSUs
379,000
378,000
Total charge to operations
1,272,000
1,328,000
As of March 31, 2024, total compensation costs of $10,000,000 and $1,467,000 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 2.8 years for the restricted stock and 1.3 years for the RSUs. The Company recognizes the effect of forfeitures on restricted stock awards and RSUs when they occur, and previously recognized compensation expense is reversed in the period the grant or unit is forfeited.
17
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 March 31, 2024, the shares of common stock underlying the RSUs (see Note 9) are excluded from the basic earnings per share calculation, as these units are not participating securities until they vest and are issued.
Diluted earnings per share reflects the potential dilution that could occur if securities or other rights exercisable for, or convertible into, common stock were exercised or converted or otherwise resulted in the issuance of common stock that shared in the earnings of the Company.
The following table 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)
(327)
(329)
Net income available for common stockholders: basic and diluted
4,828
5,057
Denominator for basic earnings per share:
Weighted average number of common shares outstanding
Effect of dilutive securities: RSUs
70
65
Denominator for diluted earnings per share:
Weighted average number of shares
Earnings per common share: basic
Earnings per common share: diluted
18
NOTE 10 – EARNINGS PER COMMON SHARE (CONTINUED)
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 Months Ended March 31, 2024:
Total Number
Shares Included Based on (a)
of Underlying
Return on
Stockholder
Shares
Date of Award
Capital Metric
Return Metric
Excluded (b)
July 1, 2023 (c)
27,062
42,625
69,687
15,563
July 1, 2022 (c)
36,917
46,323
August 3, 2021 (c)
39,811
103,790
146,415
101,697
Three Months Ended March 31, 2023:
July 1, 2022 (c)(d)
85,350
42,522
42,828
August 3, 2021 (c)(d)
80,700
40,350
August 3, 2020 (e)
75,026
37,513
120,385
157,898
83,178
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NOTE 11 – 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, 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)
394,661
397,031
Carrying value of mortgages payable, gross
Fair value less than the carrying value
(26,331)
(25,534)
Blended market interest rate (a)
6.08
%
5.93
Weighted average interest rate
4.41
4.31
Weighted average remaining term to maturity (years)
6.3
5.9
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 March 31, 2024, the Company had in effect 12 interest rate derivatives, all of which were interest rate swaps, related to 12 outstanding mortgage loans with an aggregate $28,485,000 notional amount maturing between 2024 and 2026 (weighted average remaining term to maturity of 1.0 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 SOFR based variable rate mortgages to fixed annual rate mortgages. The interest rates range from 3.22% to 4.34% and a weighted average interest rate of 3.86% at March 31, 2024. 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 fair value 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 associated credit valuation adjustments 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 March 31, 2024, 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.
20
NOTE 11 – 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
March 31, 2024
Other assets
December 31, 2023
824
As of March 31, 2024 and December 31, 2023, there were no derivatives in a liability position.
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 income
183
(121)
Amount of reclassification from Accumulated other comprehensive income into Interest expense
272
288
During the twelve months ending March 31, 2025, the Company estimates an additional $610,000 will be reclassified from Accumulated other comprehensive income as a decrease to Interest expense.
The derivative agreements in effect at March 31, 2024 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.
NOTE 12 – REAL ESTATE ACQUISITION
Acquisition subsequent to March 31, 2024
On April 24, 2024, the Company acquired a single-tenant industrial property located in Albuquerque, New Mexico for $6,450,000. The initial term of the lease expires in 2031.
21
NOTE 13 – NEW ACCOUNTING PRONOUNCEMENT
On January 1, 2024, the Company adopted the FASB ASU No. 2023-07, Segment Reporting – Improvements to Reportable Segments Disclosures, which enhances disclosures of significant segment expenses regularly provided to the chief operating decision maker.
Substantially all of the Company’s real estate assets, at acquisition, are comprised of real estate owned that is leased to tenants on a long-term basis. Therefore, the Company aggregates real estate assets for reporting purposes and operates in one reportable segment.
The Company’s Chief Operating Decision Makers (“CODMs”) are its Chief Executive Officer and Chief Operating Officer. As the Company operates in one reportable segment, the CODMs are provided financial reports which include (i) a consolidated income statement (detailing total revenues, operating income and net income) and (ii) Funds from Operations (“FFO”) and Adjusted Funds from Operations (“AFFO”). These financial reports assist the CODMs in assessing the Company’s financial performance and in allocating resources appropriately.
NOTE 14 – SUBSEQUENT EVENTS
Subsequent events have been evaluated and except as disclosed herein, there were no other events relative to the consolidated financial statements that require additional disclosure.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q, together with other statements and information publicly disseminated by us, contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “could,” “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions or variations thereof and include, without limitations, statements regarding our future estimated rental income, funds from operations, adjusted funds from operations and our dividend. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect our results of operations, financial condition, cash flows, performance or achievements.
The 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”, we face challenges due to the volatile economic environment, and certain of our properties and tenants (including The Vue Apartments, LA Fitness and Regal Cinemas) face various challenges. Our cash flow and profitability will be adversely impacted if the issues with respect to the challenged tenants/properties identified in the Annual Report are not resolved in a satisfactory manner. There have been no material changes to the status of such tenants/properties.
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, to a lesser extent, retail properties, many of which are subject to long-term net leases. As of March 31, 2024, we own 110 properties (including three properties owned by consolidated joint ventures and two properties owned by unconsolidated joint ventures) located in 31 states. Based on square footage, our occupancy rate at March 31, 2024 is approximately 98.4%.
We face a variety of risks and challenges in our business, 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, changes in tenant payment patterns, regular contact with tenant’s representatives, tenant credit checks and regular management reviews of our tenants. We may sell a property if the tenant’s financial condition is unsatisfactory.
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 fundamental 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.
24
Our 2024 contractual base rent is approximately $70.2 million and represents, after giving effect to any abatements, concessions, deferrals or adjustments, the base rent payable to us during the year ending December 31, 2024 under leases in effect at March 31, 2024.
Included in such contractual rental income is an aggregate of $1.6 million comprised of:
Excluded from such contractual rental income is an aggregate of $2.5 million comprised of:
The following table sets forth scheduled expirations of leases at our properties as of March 31, 2024 for the years indicated below:
Percentage of
Approximate
2024 Contractual
Number of
Square Footage
Rental Income
Expiring
Subject to
Rental Income Under
Represented by
Year of Lease Expiration (a)
Leases
Expiring Leases (b)
Expiring Leases
545,028
2,468,628
3.5
565,136
4,587,040
6.5
1,007,595
6,229,965
8.9
2,238,958
14,205,415
20.2
1,489,205
9,837,933
14.0
1,276,554
7,174,637
10.2
2030
672,179
7,315,582
10.4
2031
864,358
4,099,948
2032
325,456
3,250,054
4.6
2033
853,179
7,309,776
2034 and thereafter
832,770
3,765,177
5.4
162
10,670,418
70,244,155
100.0
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Property Transaction During the Three Months Ended March 31, 2024
On March 6, 2024, a consolidated joint venture, in which we hold a 90% interest, sold a restaurant parcel at its multi-tenant shopping center in Lakewood, Colorado for a gross sales price of $2.9 million and recognized a gain of $1.8 million from this sale. The non-controlling interest’s share of the gain was $178,000. In connection with the sale, we recognized a $250,000 lease termination fee from the former tenant.
Property Transactions Subsequent to March 31, 2024
Acquisition
On April 24, 2024, we acquired a 63,421 square foot industrial property located in Albuquerque, New Mexico for $6.5 million. The property is leased by a single tenant whose current base rent is $431,000 with 1.5% annual increases.
Sales and Contemplated Sales
During May 2024 and June 2024, we have sold and will sell the following properties:
2023 Depreciation
Estimated
2023 Rental
& Amortization
Gain on Sale
Income, net
2,834,000
1,000,000
187,000
38,000
2,793,000
1,500,000
238,000
59,000
6,600,000
2,000,000
544,000
140,000
Vacant retail property (a)
6,700,000
1,900,000
111,000
240,000
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Results of Operations
The following table compares total revenues for the periods indicated:
Increase
(Dollars in thousands)
(Decrease)
% Change
(506)
(2.2)
n/a
(256)
(1.1)
The following table details the components of rental income, net, for the periods indicated:
Acquisition (a)
354
Dispositions (b)
792
(792)
(100.0)
Same store (c)
22,092
22,160
(68)
(0.3)
Changes at same store properties
The decrease in same store rental income during the three ended March 31, 2024 is due primarily to decreases of:
The decrease was offset during the three months ended March 31, 2024 by increases in rental income of:
Lease Termination Fee
In March 2024, a consolidated joint venture in Lakewood, Colorado, in which we hold a 90% interest, received a lease termination fee of $250,000 from a tenant due to the early termination of its lease in connection with the sale of the related restaurant parcel.
27
Operating Expenses
The following table compares operating expenses for the periods indicated:
(124)
(2.0)
General and administrative
(116)
(2.9)
Real estate expenses
346
8.4
(5)
(7.4)
101
.7
Depreciation and amortization. The decrease in the three months ended March 31, 2024 is due primarily to (i) decreases of $356,000, related to tenant origination costs at several properties that prior to March 31, 2024 were fully amortized, and (ii) the inclusion in the corresponding 2023 period of $160,000 of such expense from the properties sold since January 1, 2023.
The decrease was offset by (i) $220,000 of such expense from a property acquired in 2023, and (ii) $132,000 of depreciation from improvements at several properties.
General and administrative. The decrease in the three months ended March 31, 2024 is due primarily to a $92,000 net decrease in professional fees incurred in the corresponding 2023 period.
Real estate expenses. The increase in the three months ended March 31, 2024 is due primarily to:
-
$168,000 relating to real estate tax expense (primarily related to our Bolingbrook, Illinois property), and
-$116,000 from a property acquired in 2023.
A substantial portion of real estate expenses is rebilled to tenants and is included in Rental income, net, on the consolidated statements of income.
Gain on sale of real estate, net.
The following table compares gain on sale of real estate, net, for the periods indicated:
16.3
The $1.8 million gain in the 2024 period was realized from the sale of a restaurant parcel at our Lakewood, Colorado multi-tenant shopping center which is owned through a consolidated joint venture in which we have a 90% interest. The non-controlling interest’s share of this gain was $178,000.
The $1.5 million gain in the 2023 period was realized from the sale of our Hauppauge, New York restaurant property.
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Other Income and Expenses
The following table compares other income and expenses for the periods indicated:
Change
(32)
(37.6)
252
1,680.0
117
2.5
11.9
Other Income. The increase in the three months ended March 31, 2024 is due primarily to a $192,000 increase in interest income from investments in short-term U.S. treasury bills.
Interest expense. The following table compares interest expense for the periods indicated:
Interest expense:
Mortgage interest
4,654
4,240
414
9.8
Credit line interest
360
(297)
(82.5)
4,717
4,600
The following table reflects the average interest rate on the average principal amount of outstanding mortgage debt for the periods indicated:
Weighted average principal amount
423,422
410,021
13,401
3.3
4.36
4.11
0.25
6.2
The increase in mortgage interest in the three months ended March 31, 2024 is due primarily to the increase in the average principal amount of mortgage debt outstanding as a result of financings and refinancings, offset by mortgage payoffs (generally in connection with scheduled maturities) and scheduled amortization payments.
The decrease is due to the elimination of the principal balance outstanding on the credit facility. The $63,000 of interest expense constitutes the unused facility fee.
As of March 31, 2023, the weighted average interest rate was 6.23% and the weighted average principal amount outstanding was $20.2 million.
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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 May 1, 2024, was $115.1 million, including $15.1 million of cash and cash equivalents (including the credit facility’s required minimum $3.0 million average deposit maintenance balance) and up to $100.0 million available under our credit facility. At May 1, 2024, the facility is available for the acquisition of commercial real estate, repayment of mortgage debt, and up to $40.0 million for renovation and operating expense purposes.
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, 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 $2.8 million of capital expenditures) from the foregoing, as well as property financings and refinancings, property sales and sales of our common stock.
At March 31, 2024, we had 67 outstanding mortgages payable secured by 68 properties in the aggregate principal amount of $421.0 million (before netting unamortized deferred financing costs of $3.7 million and mortgage intangibles of $770,000). These mortgages represent first liens on individual real estate investments with an aggregate carrying value of $668.0 million, before accumulated depreciation of $130.4 million. After giving effect to interest rate swap agreements, the mortgage payments bear interest at fixed rates ranging from 3.05% to 8.32% (a 4.41% weighted average interest rate) and mature between 2024 and 2047 (a 6.3 year weighted average remaining term to maturity).
The following table sets forth, as of March 31, 2024, information with respect to our mortgage debt that is payable during the nine months ending December 31, 2024 and for each of the subsequent twelve months through December 31, 2027:
40,524
112,170
152,694
Weighted average interest rate % on principal due at maturity
4.74
4.34
3.88
3.64
(1)
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 pay off the mortgage loans which mature in 2024 through 2027. In particular, we anticipate refinancing a substantial portion of the debt maturing in 2024 and 2025 although given the significant increase in interest rates over the past year, we can provide no assurance that we will be able to do so on terms as favorable as those currently in effect or at all. We generally intend to repay the amounts not refinanced or extended from our existing funds and sources of funds, including our available cash, proceeds from the sale of our common stock and our credit facility (to the extent available).
We continually seek to refinance existing mortgage loans on terms we deem acceptable to generate additional liquidity. Additionally, in the normal course of our business, we sell properties when we determine that it is in our best interests, which also generates additional liquidity. Further, although we have done so infrequently and primarily in the context of a tenant default at a property for which we have not found a replacement tenant, if we believe we have negative equity in a property subject to a non-recourse mortgage loan, we may convey such property to the mortgagee to terminate our mortgage obligations, including payment of interest, principal and real estate taxes, with respect to such property.
Typically, we utilize funds from our credit facility to acquire a property and, thereafter secure long-term, fixed rate mortgage debt on such property. We apply the proceeds from the mortgage loan to repay borrowings under the credit facility, thus providing us with the ability to re-borrow under the credit facility for the acquisition of additional properties.
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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 $40.0 million and 40% of the borrowing base. The facility matures December 31, 2026 and bears interest equal to 30-day SOFR 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 275 basis points if such ratio is greater than 60%. The applicable margin was 175 basis points for each of the three months ended March 31, 2024 and 2023. 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 7.08% and 7.06% at March 31, 2024 and May 1, 2024, respectively.
The terms of our credit facility include certain restrictions and covenants which may limit, among other things, the incurrence of liens, and which require compliance with financial ratios relating to, among other things, the minimum amount of tangible net worth, the minimum amount of debt service coverage, the minimum amount of fixed charge coverage, the maximum amount of debt to value, the minimum level of net income, certain investment limitations and the minimum value of unencumbered properties and the number of such properties. Net proceeds received from the sale, financing or refinancing of properties are generally required to be used to repay amounts outstanding under our credit facility. At March 31, 2024, we were in compliance with the covenants under this facility.
Other Financing Sources and Arrangements
We own a land parcel located in Beachwood, Ohio which is improved by a multi-family complex (i.e., The Vue Apartments) that we ground lease to the owner/operator of such complex. This ground lease did not generate any rental income during the three months ended March 31, 2024 and 2023. At March 31, 2024, the carrying value of the land on our balance sheet was approximately $17.3 million; our leasehold position is subordinate to $63.2 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 5 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 Annual Report. There have been no changes in such estimates.
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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 straight-line rent accruals and amortization of lease intangibles, deducting from income additional rent from ground lease tenant, income on settlement of litigation, 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), debt prepayment costs and amortization of lease incentives and mortgage intangible assets. Since the NAREIT White Paper does not provide guidelines for computing AFFO, the computation of AFFO varies 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 provide 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
5,832
5,969
Add: our share of depreciation and amortization of unconsolidated joint ventures
130
Add: amortization of deferred leasing costs
189
176
Add: our share of amortization of deferred leasing costs of unconsolidated joint ventures
Deduct: gain on sale of real estate, net
Adjustments for non-controlling interests
161
(18)
NAREIT funds from operations applicable to common stock
9,559
10,113
Deduct: straight-line rent accruals and amortization of lease intangibles
(661)
Deduct: our share of straight-line rent accruals and amortization of lease intangibles of unconsolidated joint ventures
Deduct: lease termination fee income
(250)
Deduct: other income
(27)
Add: amortization of restricted stock and RSU compensation
Add: amortization and write-off of deferred financing costs
Add: amortization of lease incentives
Add: amortization of mortgage intangible assets
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Add: our share of amortization of deferred financing costs of unconsolidated joint venture
Adjusted funds from operations applicable to common stock
10,210
10,803
.28
.27
.01
(.08)
(.07)
NAREIT funds from operations per share of common stock (a)
.47
(.03)
(.04)
(.01)
.06
Adjusted funds from operations per share of common stock (a)
.48
.50
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Three Months Ended March 31, 2024 and 2023
The $554,000, or 5.5%, decrease in FFO for the three months ended March 31, 2024 from the corresponding 2023 period is due primarily to:
Offsetting the decrease is:
The $593,000, or 5.5%, decrease in AFFO for the three months ended March 31, 2024 from the corresponding 2023 period is due to the factors impacting FFO as described immediately above, excluding the (i) $250,000 lease termination fee income and (ii) a $232,000 increase in rental income, net, due to the exclusion of the amortization of straight line rent and lease-related intangibles.
See “—Results of Operations” for further information regarding these changes.
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 substantially all 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 March 31, 2024, we had no liability in the event of the early termination of our swaps.
At March 31, 2024, we had 12 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 March 31, 2024, if there had been an increase of 100 basis points in forward interest rates, the fair market value of the interest rate swaps and the net unrealized gain on derivative instruments would have increased by $243,000. If there were a decrease of 100 basis points in forward interest rates, the fair market value of the interest rate swaps and the net unrealized gain on derivative instruments would have decreased by $247,000. These changes would not have any impact on our net income or cash.
Our variable mortgage debt, after giving effect to the interest rate swap agreements, primarily bears interest at fixed rates and accordingly, the effect of changes in interest rates would not impact the interest expense we incur under these mortgages.
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 March 31, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 5. Other Information
None of our officers or directors had any contract, instruction, or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any "non-Rule 10b5-1 trading arrangement" in effect at any time during the three months ended March 31, 2024.
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.
The following financial statements and notes from the One Liberty Properties, Inc. Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2024 filed on May 7, 2024, 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: May 7, 2024
/s/ Patrick J. Callan, Jr.
Patrick J. Callan, Jr.
President and Chief Executive Officer
(principal executive officer)
/s/ Isaac Kalish
Isaac Kalish
Senior Vice President and
Chief Financial Officer
(principal financial officer)
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