UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2012
OR
o 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
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
|
Accelerated filer x |
|
|
|
Non-accelerated filer o |
|
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
As of November 1, 2012, the registrant had 15,005,642 shares of common stock outstanding.
One Liberty Properties, Inc. and Subsidiaries
Part I FINANCIAL INFORMATION
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
(Amounts in Thousands, Except Par Value)
|
|
September 30, |
|
December 31, |
| ||
|
|
(Unaudited) |
|
|
| ||
Assets |
|
|
|
|
| ||
Real estate investments, at cost |
|
|
|
|
| ||
Land |
|
$ |
133,017 |
|
$ |
129,223 |
|
Buildings and improvements |
|
327,046 |
|
317,294 |
| ||
Total real estate investments, at cost |
|
460,063 |
|
446,517 |
| ||
Less accumulated depreciation |
|
62,720 |
|
56,148 |
| ||
Real estate investments, net |
|
397,343 |
|
390,369 |
| ||
|
|
|
|
|
| ||
Property contributed to joint venture |
|
|
|
11,842 |
| ||
Properties held for sale, net (including related assets of $87 and $502, respectively) |
|
3,173 |
|
10,986 |
| ||
Investment in unconsolidated joint ventures |
|
17,312 |
|
5,093 |
| ||
Cash and cash equivalents |
|
15,434 |
|
12,668 |
| ||
Unbilled rent receivable |
|
13,346 |
|
12,303 |
| ||
Unamortized intangible lease assets |
|
14,193 |
|
11,779 |
| ||
Escrow, deposits and other assets and receivables |
|
4,831 |
|
3,252 |
| ||
Investment in BRT Realty Trust at market (related party) |
|
241 |
|
235 |
| ||
Unamortized deferred financing costs |
|
3,185 |
|
2,209 |
| ||
|
|
|
|
|
|
|
|
Total assets |
|
$ |
469,058 |
|
$ |
460,736 |
|
|
|
|
|
|
|
|
|
Liabilities and Equity |
|
|
|
|
| ||
Liabilities: |
|
|
|
|
| ||
Mortgages and loan payable |
|
$ |
210,545 |
|
$ |
198,879 |
|
Mortgages payable - property held for sale |
|
|
|
6,970 |
| ||
Line of credit |
|
6,350 |
|
20,000 |
| ||
Dividends payable |
|
4,931 |
|
4,805 |
| ||
Accrued expenses and other liabilities |
|
5,886 |
|
5,969 |
| ||
Unamortized intangible lease liabilities |
|
4,843 |
|
5,166 |
| ||
|
|
|
|
|
| ||
Total liabilities |
|
232,555 |
|
241,789 |
| ||
|
|
|
|
|
| ||
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; 25,000 shares authorized; 14,535 and 14,213 shares issued and outstanding |
|
14,535 |
|
14,213 |
| ||
Paid-in capital |
|
194,746 |
|
189,486 |
| ||
Accumulated other comprehensive loss |
|
(1,575 |
) |
(1,019 |
) | ||
Accumulated undistributed net income |
|
28,319 |
|
15,605 |
| ||
Total One Liberty Properties, Inc. stockholders equity |
|
236,025 |
|
218,285 |
| ||
Non-controlling interests in joint ventures |
|
478 |
|
662 |
| ||
Total equity |
|
236,503 |
|
218,947 |
| ||
|
|
|
|
|
| ||
Total liabilities and equity |
|
$ |
469,058 |
|
$ |
460,736 |
|
See accompanying notes to consolidated financial statements.
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Revenues: |
|
|
|
|
|
|
|
|
| ||||
Rental income, net |
|
$ |
11,792 |
|
$ |
10,755 |
|
$ |
34,570 |
|
$ |
32,309 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating expenses: |
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
|
2,503 |
|
2,334 |
|
7,410 |
|
6,803 |
| ||||
General and administrative (including $572, $572, $1,716 and $1,716, respectively, to related party) |
|
1,911 |
|
1,804 |
|
5,598 |
|
5,307 |
| ||||
Real estate acquisition costs |
|
93 |
|
131 |
|
259 |
|
176 |
| ||||
Real estate expenses (including $150, $150, $450 and $450, respectively, to related party) |
|
644 |
|
553 |
|
1,949 |
|
1,711 |
| ||||
Leasehold rent |
|
77 |
|
77 |
|
231 |
|
231 |
| ||||
Total operating expenses |
|
5,228 |
|
4,899 |
|
15,447 |
|
14,228 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating income |
|
6,564 |
|
5,856 |
|
19,123 |
|
18,081 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Other income and expenses: |
|
|
|
|
|
|
|
|
| ||||
Equity in earnings of unconsolidated joint ventures |
|
121 |
|
105 |
|
575 |
|
241 |
| ||||
Gain on settlement of debt |
|
|
|
|
|
|
|
1,240 |
| ||||
Other income |
|
6 |
|
9 |
|
230 |
|
61 |
| ||||
Interest: |
|
|
|
|
|
|
|
|
| ||||
Expense |
|
(3,383 |
) |
(3,150 |
) |
(10,121 |
) |
(9,906 |
) | ||||
Amortization of deferred financing costs |
|
(202 |
) |
(177 |
) |
(583 |
) |
(656 |
) | ||||
Gain on sale of real estate |
|
|
|
|
|
319 |
|
|
| ||||
Income from continuing operations |
|
3,106 |
|
2,643 |
|
9,543 |
|
9,061 |
| ||||
Discontinued operations: |
|
|
|
|
|
|
|
|
| ||||
Income from operations |
|
264 |
|
122 |
|
602 |
|
646 |
| ||||
Net gain on sales |
|
15,050 |
|
|
|
17,254 |
|
932 |
| ||||
Income from discontinued operations |
|
15,314 |
|
122 |
|
17,856 |
|
1,578 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income |
|
18,420 |
|
2,765 |
|
27,399 |
|
10,639 |
| ||||
Less net income attributable to non-controlling interests |
|
(6 |
) |
|
|
(13 |
) |
|
| ||||
Net income attributable to One Liberty Properties, Inc. |
|
$ |
18,414 |
|
$ |
2,765 |
|
$ |
27,386 |
|
$ |
10,639 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
14,443 |
|
14,143 |
|
14,370 |
|
13,663 |
| ||||
Diluted |
|
14,543 |
|
14,143 |
|
14,470 |
|
13,663 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Per common share attributable to common stockholders basic: |
|
|
|
|
|
|
|
|
| ||||
Income from continuing operations |
|
$ |
.21 |
|
$ |
.18 |
|
$ |
.64 |
|
$ |
.64 |
|
Income from discontinued operations |
|
1.03 |
|
.01 |
|
1.21 |
|
.11 |
| ||||
|
|
$ |
1.24 |
|
$ |
.19 |
|
$ |
1.85 |
|
$ |
.75 |
|
Per common share attributable to common stockholders diluted: |
|
|
|
|
|
|
|
|
| ||||
Income from continuing operations |
|
$ |
.21 |
|
$ |
.18 |
|
$ |
.64 |
|
$ |
.64 |
|
Income from discontinued operations |
|
1.02 |
|
.01 |
|
1.20 |
|
.11 |
| ||||
|
|
$ |
1.23 |
|
$ |
.19 |
|
$ |
1.84 |
|
$ |
.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions declared per share of common stock |
|
$ |
.33 |
|
$ |
.33 |
|
$ |
.99 |
|
$ |
.99 |
|
See accompanying notes to consolidated financial statements.
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in Thousands)
(Unaudited)
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
18,420 |
|
$ |
2,765 |
|
$ |
27,399 |
|
$ |
10,639 |
|
|
|
|
|
|
|
|
|
|
| ||||
Other comprehensive (loss) |
|
|
|
|
|
|
|
|
| ||||
Net unrealized (loss) gain on available-for-sale securities |
|
(1 |
) |
(21 |
) |
10 |
|
(108 |
) | ||||
Net unrealized (loss) on derivative instruments |
|
(118 |
) |
(595 |
) |
(530 |
) |
(724 |
) | ||||
One Liberty Propertys share of joint venture net unrealized (loss) on derivative instruments |
|
(11 |
) |
(106 |
) |
(36 |
) |
(177 |
) | ||||
Other comprehensive (loss) |
|
(130 |
) |
(722 |
) |
(556 |
) |
(1,009 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive income |
|
18,290 |
|
2,043 |
|
26,843 |
|
9,630 |
| ||||
Less: comprehensive income attributable to non-controlling interests |
|
(6 |
) |
|
|
(13 |
) |
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive income attributable to One Liberty Properties, Inc. |
|
$ |
18,284 |
|
$ |
2,043 |
|
$ |
26,830 |
|
$ |
9,630 |
|
See accompanying notes to consolidated financial statements.
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the nine month period ended September 30, 2012 (Unaudited)
and the year ended December 31, 2011
(Amounts in Thousands, Except Per Share Data)
|
|
Common |
|
Paid-in |
|
Accumulated |
|
Accumulated |
|
Non- |
|
Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1, 2011 |
|
$ |
11,212 |
|
$ |
147,158 |
|
$ |
(156 |
) |
$ |
20,969 |
|
$ |
|
|
$ |
179,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Distributions - common stock |
|
|
|
|
|
|
|
(19,088 |
) |
|
|
(19,088 |
) | ||||||
Shares issued in public offering - |
|
2,700 |
|
37,869 |
|
|
|
|
|
|
|
40,569 |
| ||||||
Shares issued through dividend reinvestment plan |
|
255 |
|
3,496 |
|
|
|
|
|
|
|
3,751 |
| ||||||
Contribution from non-controlling interest |
|
|
|
|
|
|
|
|
|
666 |
|
666 |
| ||||||
Restricted stock vesting |
|
46 |
|
(46 |
) |
|
|
|
|
|
|
|
| ||||||
Compensation expense - restricted stock |
|
|
|
1,009 |
|
|
|
|
|
|
|
1,009 |
| ||||||
Net income |
|
|
|
|
|
|
|
13,724 |
|
(4 |
) |
13,720 |
| ||||||
Other comprehensive (loss) |
|
|
|
|
|
(863 |
) |
|
|
|
|
(863 |
) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balances, December 31, 2011 |
|
14,213 |
|
189,486 |
|
(1,019 |
) |
15,605 |
|
662 |
|
218,947 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Distributions - common stock |
|
|
|
|
|
|
|
(14,672 |
) |
|
|
(14,672 |
) | ||||||
Shares issued through dividend reinvestment plan |
|
152 |
|
2,368 |
|
|
|
|
|
|
|
2,520 |
| ||||||
Shares issued through equity offering program - net |
|
121 |
|
2,032 |
|
|
|
|
|
|
|
2,153 |
| ||||||
Contribution from non-controlling interest |
|
|
|
|
|
|
|
|
|
93 |
|
93 |
| ||||||
Distribution to non-controlling interest |
|
|
|
|
|
|
|
|
|
(290 |
) |
(290 |
) | ||||||
Restricted stock vesting |
|
49 |
|
(49 |
) |
|
|
|
|
|
|
|
| ||||||
Compensation expense - restricted stock |
|
|
|
909 |
|
|
|
|
|
|
|
909 |
| ||||||
Net income |
|
|
|
|
|
|
|
27,386 |
|
13 |
|
27,399 |
| ||||||
Other comprehensive (loss) |
|
|
|
|
|
(556 |
) |
|
|
|
|
(556 |
) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balances, September 30, 2012 |
|
$ |
14,535 |
|
$ |
194,746 |
|
$ |
(1,575 |
) |
$ |
28,319 |
|
$ |
478 |
|
$ |
236,503 |
|
See accompanying notes to consolidated financial statements.
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
|
|
Nine Months Ended |
| ||||
|
|
2012 |
|
2011 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
|
$ |
27,399 |
|
$ |
10,639 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Gain on settlement of debt |
|
|
|
(1,240 |
) | ||
Gain on sales of real estate |
|
(17,573 |
) |
(932 |
) | ||
Gain on sale of available-for-sale securities |
|
(9 |
) |
|
| ||
Increase in rental income from straight-lining of rent |
|
(1,009 |
) |
(1,019 |
) | ||
(Increase) decrease in rental income resulting from bad debt expense |
|
(116 |
) |
514 |
| ||
Decrease in rental income from amortization of intangibles relating to leases |
|
12 |
|
50 |
| ||
Amortization of restricted stock expense |
|
909 |
|
770 |
| ||
Equity in earnings of unconsolidated joint ventures |
|
(575 |
) |
(241 |
) | ||
Distributions of earnings from unconsolidated joint ventures |
|
356 |
|
308 |
| ||
Depreciation and amortization |
|
7,597 |
|
7,135 |
| ||
Amortization and write off of financing costs |
|
607 |
|
681 |
| ||
Changes in assets and liabilities: |
|
|
|
|
| ||
Increase in escrow, deposits, other assets and receivables |
|
(1,899 |
) |
(362 |
) | ||
Decrease in accrued expenses and other liabilities |
|
(614 |
) |
(368 |
) | ||
Net cash provided by operating activities |
|
15,085 |
|
15,935 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Purchase of real estate and improvements |
|
(17,022 |
) |
(22,887 |
) | ||
Net proceeds from sale of real estate |
|
24,823 |
|
11,544 |
| ||
Investment in unconsolidated joint ventures |
|
|
|
(669 |
) | ||
Distributions of return of capital from unconsolidated joint ventures |
|
95 |
|
58 |
| ||
Net proceeds from sale of available-for-sale securities |
|
369 |
|
|
| ||
Net cash provided by (used in) investing activities |
|
8,265 |
|
(11,954 |
) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Scheduled amortization payments of mortgages payable |
|
(4,364 |
) |
(4,132 |
) | ||
Repayment of mortgages payable |
|
(29,758 |
) |
(15,302 |
) | ||
Proceeds from mortgage financings |
|
38,818 |
|
3,004 |
| ||
Proceeds from sale of common stock, net |
|
2,153 |
|
40,569 |
| ||
Proceeds from bank line of credit |
|
9,300 |
|
20,000 |
| ||
Repayment on bank line of credit |
|
(22,950 |
) |
(36,200 |
) | ||
Issuance of shares through dividend reinvestment plan |
|
2,520 |
|
2,807 |
| ||
Payment of financing costs |
|
(1,560 |
) |
(723 |
) | ||
Capital contributions from non-controlling interests |
|
93 |
|
|
| ||
Distribution to non-controlling interest |
|
(290 |
) |
|
| ||
Cash distributions to common stockholders |
|
(14,546 |
) |
(13,306 |
) | ||
Net cash used in financing activities |
|
(20,584 |
) |
(3,283 |
) | ||
|
|
|
|
|
| ||
Net increase in cash and cash equivalents |
|
2,766 |
|
698 |
| ||
Cash and cash equivalents at beginning of period |
|
12,668 |
|
7,732 |
| ||
Cash and cash equivalents at end of period |
|
$ |
15,434 |
|
$ |
8,430 |
|
Continued on next page
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited) (Continued)
|
|
Nine Months Ended |
| ||||
|
|
2012 |
|
2011 |
| ||
|
|
|
|
|
| ||
Supplemental disclosures of cash flow information: |
|
|
|
|
| ||
Cash paid during the period for interest expense |
|
$ |
10,386 |
|
$ |
10,440 |
|
|
|
|
|
|
| ||
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
| ||
Contribution of property to unconsolidated joint venture |
|
11,734 |
|
|
| ||
Settlement of mortgage debt |
|
|
|
1,259 |
| ||
Purchase accounting allocation - intangible lease assets |
|
3,487 |
|
1,622 |
| ||
Purchase accounting allocation - intangible lease liabilities |
|
11 |
|
612 |
| ||
Reclassification of real estate owned to property contributed to joint venture |
|
|
|
11,829 |
| ||
Reclassification of real estate owned to properties held for sale |
|
3,173 |
|
11,118 |
| ||
Reclassification of 2010 prepaid tenant improvement allowance to building improvements |
|
|
|
1,750 |
| ||
See accompanying notes to consolidated financial statements.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2012
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 of retail (including furniture and office supply stores), industrial, office, flex, health and fitness and other properties, a substantial portion of which are under long-term net leases. As of September 30, 2012, OLP owned 91 properties, two of which are owned by consolidated joint ventures and one of which is a 50% tenancy in common interest. OLPs unconsolidated joint ventures owned a total of six properties. The 97 properties are located in 29 states.
Note 2 - Basis of Preparation
The accompanying interim unaudited consolidated financial statements as of September 30, 2012 and for the three and nine months ended September 30, 2012 and 2011 reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for such interim periods. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results for the full year.
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
The consolidated financial statements include the accounts and operations of OLP, its wholly-owned subsidiaries and its investment in two joint ventures in which the Company, as defined, has a controlling interest. OLP and its subsidiaries are hereinafter referred to as the Company. Material intercompany items and transactions have been eliminated in consolidation.
The Company accounts for its 50% tenancy in common interest as an undivided interest in the assets, liabilities, revenues and expenses of the tenancy in common.
The Financial Accounting Standards Board, or FASB, guidance for determining whether an entity is a variable interest entity, or VIE, requires the performance of a qualitative rather than a quantitative analysis to determine the primary beneficiary of a VIE. Under this guidance, an entity would be required to consolidate a VIE if it has (i) the power to direct the activities that most significantly impact the entitys economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE.
The Company assesses the accounting treatment for each joint venture investment. This assessment includes a review of each joint venture or limited liability company agreement to determine the rights of each party and whether those rights are protective or participating. For the Companys VIE, the Company reviews such agreement to determine which party has the power to direct the activities that most significantly impact the entitys economic performance.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2012 (Continued)
Note 2 - Basis of Preparation (Continued)
The agreements typically contain certain protective rights such as the requirement of partner approval to sell, finance or refinance the property and the payment of capital expenditures and operating expenditures outside of the approved budget or operating plan. In situations where the Company and its partner (i) approve the annual budget, (ii) approve certain expenditures, (iii) prepare or review and approve the joint ventures tax return before filing, and (iv) approve each lease at each property, the Company does not consolidate the joint venture as the Company considers these to be substantive participation rights that result in shared power of the activities that most significantly impact the performance of the joint venture.
With respect to the two consolidated joint ventures in which the Company has a 90% and 95% interest, the Company has determined that (i) such ventures are not VIEs and (ii) the Company exercises substantial operating control and accordingly, such ventures are consolidated for financial statement purposes.
In February 2012, the Company contributed its property located in Plano, Texas to a joint venture (see Note 4) in exchange for a 90% equity interest therein. The Company has determined that this joint venture is a VIE; however, the Company is not the primary beneficiary and accordingly, the Company accounts for its investment in this joint venture under the equity method from the date of contribution.
The Company accounts for its investments in five other unconsolidated joint ventures under the equity method of accounting. All investments in these five 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 five joint ventures are variable interest entities. In addition, although the Company is the managing member, it does not exercise substantial operating control 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.
Certain amounts reported in previous consolidated financial statements have been reclassified in the accompanying consolidated financial statements to conform to the current periods presentation, primarily to reclassify the transferred assets and liabilities of three properties that were sold between June 2012 and September 2012 and one property that was sold in October 2012 to properties held for sale at December 31, 2011 and to classify the operations of these properties to discontinued operations for all periods presented. In addition, the net book value of the Plano, Texas property that was contributed to a joint venture in February 2012 was reclassified from real estate investments to property contributed to joint venture at December 31, 2011. The accounting treatment presentation on the accompanying consolidated statements of income is to reflect the results of this propertys operations
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2012 (Continued)
Note 2 - Basis of Preparation (Continued)
prospectively following its transfer to the joint venture as equity in earnings of unconsolidated joint ventures with no reclassification adjustments for discontinued operations.
These statements should be read in conjunction with the consolidated financial statements and related notes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2011.
Note 3 - Earnings Per Common Share
For the three and nine months ended September 30, 2012 and 2011, basic earnings per share was determined by dividing net income allocable to common stockholders for the applicable period by the weighted average number of shares of common stock outstanding during such period. Net income is also allocated to the unvested restricted stock during the applicable period as the restricted stock is entitled to receive dividends and is therefore considered a participating security. Unvested restricted stock is not allocated net losses and/or any excess of dividends declared over net income; such amounts are allocated entirely to the common stockholders other than the holders of unvested restricted stock. The restricted stock units awarded under the Pay-for-Performance program described in 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. For the three and nine months ended September 30, 2012, the diluted weighted average number of common shares includes 100,000 shares of common stock underlying the restricted stock units awarded on September 14, 2010 under the Pay-For-Performance Program. These 100,000 shares may vest upon satisfaction of the total stockholder return metric. The number of shares that would be issued pursuant to this metric is based on the current market price and dividends paid at the end of each quarterly period assuming the end of that quarterly period was the end of the vesting period. These 100,000 shares are not included for the three and nine months ended September 30, 2011 as they did not meet the total stockholder return metric for such periods. The remaining 100,000 shares of common stock underlying the restricted stock units awarded under the Pay-For-Performance Program are not included during the three and nine months ended September 30, 2012 and 2011, as they did not meet the return of capital performance metric during such periods.
There were no options outstanding to purchase shares of common stock or other rights exercisable for, or convertible into, common stock during the three and nine months ended September 30, 2012 and 2011.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2012 (Continued)
Note 3 - Earnings Per Common Share (Continued)
The following table provides a reconciliation of the numerator and denominator of earnings per share calculations (dollars in thousands, except per share calculations):
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Numerator for basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
| ||||
Income from continuing operations |
|
$ |
3,106 |
|
$ |
2,643 |
|
$ |
9,543 |
|
$ |
9,061 |
|
Less net income attributable to noncontrolling interests |
|
(6 |
) |
|
|
(13 |
) |
|
| ||||
Less earnings allocated to unvested shares |
|
|
|
(115 |
) |
|
|
(345 |
) | ||||
Income from continuing operations available for common stockholders |
|
3,100 |
|
2,528 |
|
9,530 |
|
8,716 |
| ||||
Discontinued operations |
|
15,314 |
|
122 |
|
17,856 |
|
1,578 |
| ||||
Net income available for common stockholders, basic and diluted |
|
$ |
18,414 |
|
$ |
2,650 |
|
$ |
27,386 |
|
$ |
10,294 |
|
|
|
|
|
|
|
|
|
|
| ||||
Denominator for basic earnings per share |
|
|
|
|
|
|
|
|
| ||||
- weighted average common shares |
|
14,443 |
|
14,143 |
|
14,370 |
|
13,663 |
| ||||
- weighted average unvested restricted stock shares (a) |
|
408 |
|
|
|
412 |
|
|
| ||||
|
|
14,851 |
|
14,143 |
|
14,782 |
|
13,663 |
| ||||
Effect of diluted securities |
|
|
|
|
|
|
|
|
| ||||
- restricted stock units awarded under Pay-for-Performance program |
|
100 |
|
|
|
100 |
|
|
| ||||
Denominator for diluted earnings per share |
|
|
|
|
|
|
|
|
| ||||
- weighted average shares |
|
14,951 |
|
14,143 |
|
14,882 |
|
13,663 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Earnings per common share, basic |
|
$ |
1.24 |
|
$ |
.19 |
|
$ |
1.85 |
|
$ |
.75 |
|
Earnings per common share, diluted |
|
$ |
1.23 |
|
$ |
.19 |
|
$ |
1.84 |
|
$ |
.75 |
|
|
|
|
|
|
|
|
|
|
| ||||
Amounts attributable to One Liberty Properties, Inc. common stockholders, net of noncontrolling interests: |
|
|
|
|
|
|
|
|
| ||||
Income from continuing operations |
|
$ |
3,100 |
|
$ |
2,643 |
|
$ |
9,530 |
|
$ |
9,061 |
|
Income from discontinued operations |
|
15,314 |
|
122 |
|
17,856 |
|
1,578 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
18,414 |
|
$ |
2,765 |
|
$ |
27,386 |
|
$ |
10,639 |
|
(a) The three and nine months ended September 30, 2012 include unvested restricted stock since the earnings are in excess of the distributions for such periods.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2012 (Continued)
Note 4 - Investment in Unconsolidated Joint Ventures
In February 2012, the Company entered into a joint venture with an affiliate of Trammell Crow Company pursuant to which the venture contemplates re-developing a 6.2 acre site located in Plano, Texas into up to two Class A office buildings. The Company contributed this property to the joint venture in exchange for a 90% equity interest therein and Trammell Crow contributed $1,500,000 in exchange for a 10% equity interest therein which resulted in a $319,000 gain to the Company. At September 30, 2012, the Companys investment in this VIE, which includes the original basis of the property it contributed to the joint venture adjusted for the Companys share of net income for the nine months ended September 30, 2012, was $12,116,000, which represents its maximum exposure to loss.
The Companys six unconsolidated joint ventures each own and operate one property. At September 30, 2012 and December 31, 2011, the Companys equity investment in unconsolidated joint ventures totaled $17,312,000 and $5,093,000, respectively. The Company recorded equity in earnings of $575,000 and $241,000 for the nine months ended September 30, 2012 and 2011, respectively, and $121,000 and $105,000 for the three months ended September 30, 2012 and 2011, respectively. Equity in earnings for the nine months ended September 30, 2012 includes the Companys $233,000 equity share of income pertaining to the net settlement entered into with a former tenant.
Note 5 - Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its tenants to make required rent payments. If the financial condition of a specific tenant were to deteriorate resulting in an impairment of its ability to make payments, additional allowances may be required. At September 30, 2012 and December 31, 2011, the balance in allowance for doubtful accounts was $218,000 and $335,000, respectively, recorded as a reduction to accounts receivable. The Company records bad debt expense as a reduction of rental income. For the three and nine months ended September 30, 2012, the Company recorded bad debt expense of $16,000 and $56,000, respectively, in income from continuing operations and net recoveries of previously recognized bad debt expense of $116,000 and $173,000, respectively, in discontinued operations, as a result of collections from one tenant. For the three and nine months ended September 30, 2011, the Company recorded bad debt expense of $6,000 and $514,000, respectively, in income from continued operations. There was no bad debt expense in discontinued operations in the three and nine months ended September 30, 2011.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2012 (Continued)
Note 6 - Real Estate Acquisitions
The following chart details the Companys real estate acquisitions during the nine months ended September 30, 2012.
Description of Property |
|
Date Acquired |
|
Contract |
|
Terms of |
|
Third Party |
| ||
|
|
|
|
|
|
|
|
|
| ||
Urban Outfitters retail store, Lawrence, Kansas |
|
February 7, 2012 |
|
$ |
1,230,000 |
|
Cash |
|
$ |
21,000 |
|
|
|
|
|
|
|
|
|
|
| ||
Three Applebees restaurants, Carrollton, Kennesaw and Cartersville, Georgia |
|
March 12, 2012 |
|
8,568,000 |
|
Cash |
|
81,000 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Avalon Carpet Tile and Flooring, retail store and warehouse, Deptford, New Jersey |
|
April 24, 2012 |
|
2,200,000 |
|
Cash and $2,040,000 mortgage (b) |
|
|
(c) | ||
|
|
|
|
|
|
|
|
|
| ||
Applebees restaurant, Lawrenceville, Georgia |
|
May 17, 2012 |
|
2,340,000 |
|
Cash |
|
18,000 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Other (d) |
|
|
|
|
|
|
|
139,000 |
| ||
|
|
|
|
$ |
14,338,000 |
|
|
|
$ |
259,000 |
|
(a) Expensed in the accompanying consolidated statements of income.
(b) The mortgage bears interest at 5% per annum through April 2017 and matures May 2022.
(c) Owned by a consolidated joint venture in which the Company has a 95% interest. The noncontrolling interest contributed $68,000 for its 5% equity interest. Transaction costs of $90,000 incurred with this asset acquisition were capitalized.
(d) Costs incurred for potential acquisitions.
All of the properties purchased by the Company during 2012 are 100% occupied and are each leased to a single tenant pursuant to a long term net lease.
As a result of the 2012 purchases, the Company recorded intangible lease assets of $3,487,000 and intangible lease liabilities of $11,000, representing the value of the acquired leases and origination costs. As of September 30, 2012, the weighted average amortization period for the 2012 acquisitions is 18.5 years for the intangible lease assets and 8.5 years for the intangible lease liabilities. The Company assessed the fair value of the lease intangibles based on estimated cash flow projections that utilize appropriate discount rates and available market information. Such inputs are Level 3 (as defined in Note 12) in the fair value hierarchy. The Company is currently in the process of finalizing the purchase price allocations for the properties purchased in April and May 2012; therefore, these allocations are preliminary and subject to change.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2012 (Continued)
Note 7 - Discontinued Operations and Properties Held for Sale
During the nine months ended September 30, 2012, the Company sold to unrelated parties, a property located in Florida and leased to Office Depot and two properties located in New York. The total sales price aggregated $24,823,000, net of closing costs, and the Company realized aggregate gains of $17,254,000.
On October 18, 2012, the Company sold a property located in Texas for $5,000,000 and estimates that the gain will be approximately $1,650,000. At September 30, 2012, this property had a net book value of $3,173,000, including related assets of $87,000, and is reflected as held for sale on the accompanying consolidated balance sheets and statement of operations.
The operations and net gain on sale of the three properties sold in the nine months ended September 30, 2012 and the operations of the property sold in October 2012 are included in discontinued operations. The net book value of the four properties, including related assets of $502,000, was $10,986,000 at December 31, 2011 and is included in properties held for sale on the accompanying consolidated balance sheet.
During 2011, the Company sold one property, leased to Office Depot and located in California, to an unrelated party for $11,544,000, net of closing costs, and realized a gain of $932,000. This gain and the operations of this property are included in discontinued operations.
The following summarizes the components of income from discontinued operations (dollars in thousands):
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
381 |
|
$ |
395 |
|
$ |
1,222 |
|
$ |
1,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
17 |
|
89 |
|
187 |
|
331 |
| ||||
Real estate expenses |
|
|
|
67 |
|
101 |
|
198 |
| ||||
Interest expense |
|
100 |
|
117 |
|
332 |
|
352 |
| ||||
Total expenses |
|
117 |
|
273 |
|
620 |
|
881 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income from operations |
|
264 |
|
122 |
|
602 |
|
646 |
| ||||
Net gain on sales |
|
15,050 |
|
|
|
17,254 |
|
932 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income from discontinued operations |
|
$ |
15,314 |
|
$ |
122 |
|
$ |
17,856 |
|
$ |
1,578 |
|
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2012 (Continued)
Note 8 - Line of Credit
Effective as of July 31, 2012, the Company entered into an amendment of its credit facility with VNB New York Corp., Bank Leumi USA, Israel Discount Bank of New York and Manufacturers & Traders Trust Company, which, among other things, reduced the interest rate floor from 5.5% to 4.75%, increased permitted borrowings from $55,000,000 to $75,000,000, subject to compliance with the borrowing base, and extended the expiration date by two years to March 31, 2015. In connection with the amendment, the Company incurred an aggregate of $800,000 in commitment and extension fees which is being amortized over the term of the facility.
The Company pays interest at the greater of (i) 90 day LIBOR plus 3% (3.36% at September 30, 2012) and (ii) 4.75% per annum, and there is an unused facility fee of .25% per annum. At September 30, 2012 and October 31, 2012, $6,350,000 and $2,850,000, respectively, was outstanding under the facility. The Company is in compliance with all covenants at September 30, 2012.
Note 9 - Common Stock Cash Dividend
On September 11, 2012, the Board of Directors declared a quarterly cash dividend of $.33 per share on the Companys common stock, totaling $4,931,000. The quarterly dividend was paid on October 4, 2012 to stockholders of record as of September 25, 2012.
Note 10 - Accumulated Other Comprehensive Loss
The following table presents the components of accumulated other comprehensive loss reported on the balance sheet (dollars in thousands):
|
|
September 30, |
|
December 31, |
| ||
Net unrealized gain on available-for-sale securities |
|
$ |
127 |
|
$ |
117 |
|
Unrealized loss on available-for-sale securities in a joint venture |
|
(31 |
) |
(31 |
) | ||
Net unrealized loss on derivative instruments |
|
(1,453 |
) |
(923 |
) | ||
50% share of net unrealized loss on derivative instrument in joint ventures |
|
(218 |
) |
(182 |
) | ||
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(1,575 |
) |
$ |
(1,019 |
) |
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2012 (Continued)
Note 11 - Stock Based Compensation
The Companys 2012 Incentive Plan, approved by the Companys stockholders in June 2012, permits the Company to grant, among other things, stock options, restricted stock units and performance share awards and any one or more of the foregoing to its employees, officers, directors and consultants. A maximum of 600,000 shares of the Companys common stock is authorized for issuance pursuant to this Plan, none of which have been issued. An aggregate of 407,460 shares of restricted stock and restricted stock units are outstanding under the Companys 2003 and 2009 equity incentive plans (collectively, the Prior Plans) and have not yet vested. No additional awards may be granted under the Prior Plans.
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. Substantially all restricted stock awards made to date provide for vesting on or about the fifth anniversary of the grant date, subject to accelerated vesting under specified circumstances. For financial statement 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.
On September 14, 2010, the Board of Directors approved a Pay-for-Performance Program under the Companys 2009 Incentive Plan, and awarded 200,000 performance share awards in the form of restricted stock units (the Units). The holders of Units are not entitled to dividends or to vote the underlying shares until the Units vest and shares are issued. Accordingly, for financial statement purposes, the shares underlying the Units are not included in the shares shown as outstanding on the balance sheet. If the defined performance criteria are satisfied in full at June 30, 2017, one share of the Companys common stock will vest and be issued for each Unit outstanding and a pro-rata portion of the Units will vest and be issued if the performance criteria fall between defined ranges. In the event that the performance criteria are not satisfied in whole or in part at June 30, 2017, the unvested Units will be forfeited and no shares of the Companys common stock will be issued for those Units. No Units were granted, vested or forfeited in the nine months ended September 30, 2012.
As of September 30, 2012, there were no options outstanding under our equity incentive plans.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2012 (Continued)
Note 11 - Stock Based Compensation (Continued)
The following is a summary of the activity of the incentive plans:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Restricted share grants |
|
|
|
|
|
109,450 |
|
74,040 |
| ||||
Average per share grant price |
|
|
|
|
|
$ |
16.77 |
|
$ |
16.19 |
| ||
Deferred compensation to be recognized over vesting period |
|
|
|
|
|
$ |
1,835,000 |
|
$ |
1,199,000 |
| ||
|
|
|
|
|
|
|
|
|
| ||||
Non-vested shares: |
|
|
|
|
|
|
|
|
| ||||
Non-vested beginning of period |
|
408,510 |
|
348,385 |
|
348,385 |
|
320,940 |
| ||||
Grants |
|
|
|
|
|
109,450 |
|
74,040 |
| ||||
Vested during period |
|
|
|
|
|
(49,325 |
) |
(46,450 |
) | ||||
Forfeitures |
|
(1,050 |
) |
|
|
(1,050 |
) |
(145 |
) | ||||
Non-vested end of period |
|
407,460 |
|
348,385 |
|
407,460 |
|
348,385 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Average per share value of non-vested shares (based on grant price) |
|
$ |
12.59 |
|
$ |
12.96 |
|
$ |
12.59 |
|
$ |
12.96 |
|
|
|
|
|
|
|
|
|
|
| ||||
Value of shares vested during the period (based on grant price) |
|
$ |
|
|
$ |
|
|
$ |
1,208,000 |
|
$ |
960,000 |
|
|
|
|
|
|
|
|
|
|
| ||||
Total charge to operations: |
|
|
|
|
|
|
|
|
| ||||
Outstanding restricted stock grants |
|
$ |
250,000 |
|
$ |
227,000 |
|
$ |
792,000 |
|
$ |
703,000 |
|
Outstanding restricted stock units |
|
73,000 |
|
22,000 |
|
117,000 |
|
67,000 |
| ||||
|
|
$ |
323,000 |
|
$ |
249,000 |
|
$ |
909,000 |
|
$ |
770,000 |
|
As of September 30, 2012, there were approximately $3,599,000 of total compensation costs related to nonvested awards that have not yet been recognized, including $615,000 related to the Pay-for-Performance Program (net of forfeiture and performance assumptions which are re-evaluated quarterly). These compensation costs will be charged to general and administrative expense over the remaining respective vesting periods. The weighted average vesting period is approximately 3.3 years.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2012 (Continued)
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 entitys 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, 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.
At September 30, 2012, the $217,039,000 estimated fair value of the Companys mortgages and loan payable is more than their carrying value by approximately $6,494,000 assuming a blended market interest rate of 4.75% based on the 6.9 year weighted average remaining term of the mortgages and loan.
At September 30, 2012, the $6,350,000 carrying amount of the Companys line of credit approximates its fair value.
The fair value of the Companys mortgages and loan payable and line of credit were estimated using unobservable inputs such as available market information and discounted cash flow analysis based on borrowing rates the Company believes it could obtain with similar terms and maturities. These fair value measurements fall within Level 3 of the fair value hierarchy.
Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2012 (Continued)
Note 12 - Fair Value Measurements (Continued)
Financial Instruments Measured at Fair Value
The following table presents the fair values of the Companys financial instruments on a recurring basis as of September 30, 2012 (dollars in thousands):
|
|
Carrying and |
|
Fair Value Measurements |
| |||||
|
|
Fair Value |
|
Level 1 |
|
Level 2 |
| |||
Financial assets: |
|
|
|
|
|
|
| |||
Available-for-sale securities: |
|
|
|
|
|
|
| |||
Equity securities |
|
$ |
280 |
|
$ |
280 |
|
$ |
|
|
|
|
|
|
|
|
|
| |||
Financial liabilities: |
|
|
|
|
|
|
| |||
Derivative financial instruments |
|
1,453 |
|
|
|
1,453 |
| |||
The Company does not currently own any financial instruments that are classified as Level 3.
Available-for-sale securities
The Companys available-for-sale securities have a total cost of $153,000 and are included in other assets on the balance sheet. At September 30, 2012, unrealized gains on such securities were $128,000 and unrealized losses were $1,000. The aggregate net unrealized gain of $127,000 is included in accumulated other comprehensive loss on the balance sheet. Fair values are approximated based on current market quotes from financial sources that track such securities. All of the available-for-sale securities in an unrealized loss position are equity securities and amounts are not considered to be other than temporary impairments because the Company expects the value of these securities to recover and plans on holding them until at least such recovery occurs.
During the nine months ended September 30, 2012, the Company sold certain available-for-sale securities for gross proceeds of $369,000 and recognized a gain of $9,000, which is included in other income on the consolidated statement of income. At December 31, 2011, the Company recorded an impairment charge of $126,000 on such securities.
Derivative financial instruments
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. At September 30, 2012 and December 31, 2011, these derivatives are included in other liabilities on the consolidated balance sheet.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2012 (Continued)
Note 12 - Fair Value Measurements (Continued)
Although the Company has determined that 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 utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparty. As of September 30, 2012, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuation is classified in Level 2 of the fair value hierarchy.
Note 13 - Derivative Financial Instruments
As of September 30, 2012, the Company had the following outstanding interest rate derivatives pertaining to certain of its mortgages payable, all of which were designated as cash flow hedges of interest rate risk (dollars in thousands):
Interest Rate Derivative |
|
Notional Amount |
|
Fixed Interest |
|
Maturity Date |
| |
Interest Rate Swap |
|
$ |
9,089 |
|
6.50 |
% |
December 2014 |
|
Interest Rate Swap |
|
4,346 |
|
5.75 |
|
November 2020 |
| |
Interest Rate Swap |
|
3,909 |
|
4.75 |
|
August 2016 |
| |
Interest Rate Swap |
|
5,789 |
|
4.63 |
|
February 2019 |
| |
Interest Rate Swap |
|
2,168 |
|
4.50 |
|
April 2016 |
| |
Interest Rate Swap |
|
3,915 |
|
4.50 |
|
March 2017 |
| |
The following table presents the fair value of the Companys derivatives designated as hedging instruments as of September 30, 2012 and December 31, 2011 (dollars in thousands):
Liability Derivatives as of |
| ||||||||
September 30, 2012 |
|
December 31, 2011 |
| ||||||
Balance Sheet |
|
Fair Value |
|
Balance Sheet |
|
Fair Value |
| ||
Other Liabilities |
|
$ |
1,453 |
|
Other Liabilities |
|
$ |
923 |
|
The Company did not have any asset derivatives as of September 30, 2012 and December 31, 2011.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2012 (Continued)
Note 13 - Derivative Financial Instruments (Continued)
The following table presents the effect of the Companys derivative financial instruments on the consolidated statements of income for the periods presented (dollars in thousands):
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Amount of (loss) recognized on derivatives in Other Comprehensive (Loss) |
|
$ |
(251 |
) |
$ |
(687 |
) |
$ |
(901 |
) |
$ |
(977 |
) |
Amount of (loss) reclassified from Accumulated Other Comprehensive (Loss) into Interest Expense |
|
$ |
(133 |
) |
$ |
(92 |
) |
$ |
(371 |
) |
$ |
(253 |
) |
No gain or loss was recognized with respect to hedge ineffectiveness or to amounts excluded from effectiveness testing on the Companys cash flow hedges for the three and nine months ended September 30, 2012 and 2011. During the twelve months ending September 30, 2013, the Company estimates an additional $523,000 will be reclassified from other comprehensive income as an increase to interest expense.
The derivative agreements in effect at September 30, 2012 provide that if the wholly owned subsidiary of the Company which is a party to the agreement defaults or is capable of being declared in default on any of its indebtedness, then a default can be declared on such subsidiarys derivative obligation. In addition, the Company is a party to one of the derivative agreements and if the subsidiary defaults on the loan subject to the derivative agreement to which the Company is a party and if these are swap breakage losses on account of the derivative being terminated early, the Company could be held liable for interest rate swap breakage losses, if any.
As of September 30, 2012, the fair value of the derivatives including accrued interest but excluding any adjustments for nonperformance risk was approximately $1,572,000. If the Company breaches any of the contractual provisions of the derivative contracts, it would be required to settle its obligations thereunder at their termination liability value of $1,572,000.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2012 (Continued)
Note 13 - Derivative Financial Instruments (Continued)
Two of the Companys unconsolidated joint ventures, in which a wholly owned subsidiary of the Company is a 50% partner, had a $3,897,000 interest rate derivative outstanding at September 30, 2012. The interest rate derivative has an interest rate of 5.81% and matures in April 2018. The following table presents the Companys 50% share of such derivative financial instrument (dollars in thousands):
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
Amount of (loss) recognized on derivative in Other Comprehensive (Loss) |
|
$ |
(25 |
) |
$ |
(119 |
) |
$ |
(78 |
) |
$ |
(206 |
) |
Amount of (loss) reclassified from Accumulated Other Comprehensive (Loss) into Interest Expense |
|
(14 |
) |
(14 |
) |
(42 |
) |
(29 |
) | ||||
Note 14 - New Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-05, Presentation of Comprehensive Income. This standard eliminates the current option to report other comprehensive income and its components in the statement of stockholders equity and instead requires the components of other comprehensive income to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This standard is intended to enhance comparability between entities that report under GAAP and to provide a more consistent method of presenting other comprehensive income transactions that affect an entitys equity. This standard was effective for the Company on January 1, 2012 and was applied retrospectively. The amendments in this update did not change the items reported in other comprehensive income or the reclassification of an item of other comprehensive income to net income but now the Company presents the components of other comprehensive income in two separate but consecutive statements.
In May 2011, FASB issued ASU No. 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S GAAP and IFRS. This update defines fair value, clarifies a framework to measure fair value, and requires specific disclosures of fair value measurements. The guidance was effective for the Company on January 1, 2012. The adoption of this guidance did not have a material impact on the Companys financial condition, results of operations, or disclosures.
One Liberty Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2012 (Continued)
Note 15 Shares Issued Through Equity Offering Program
On August 9, 2012, the Company entered into an equity offering sales agreement to sell shares of the Companys common stock from time to time with an aggregate sales price of up to $50,000,000, through an at the market equity offering program. During August and September 2012, the Company sold 120,844 shares for proceeds of $2,296,041, net of commissions of $23,000, and incurred offering costs of $143,000.
Note 16 - Subsequent Events
Subsequent events have been evaluated and except as disclosed in the footnotes hereto, there were no other events relative to our consolidated financial statements that warrant additional disclosure.
Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended 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. Forward-looking statements should not be relied on since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, performance or achievements. Investors are encouraged to review the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2011 under the caption Item 1A. Risk Factors for a discussion of certain factors which may cause actual results to differ materially from current expectations and are cautioned not to place undue reliance on any forward-looking statements.
Overview
We are a self-administered and self-managed real estate investment trust, organized in Maryland in 1982. We acquire, own and manage a geographically diversified portfolio of retail (including furniture and office supply stores), industrial, office, flex, health and fitness and other properties, a substantial portion of which are under long-term net leases. As of September 30, 2012, we owned 91 properties, one of which is a 50% tenancy in common interest. Our joint ventures owned a total of six properties. The 97 properties are located in 29 states. Our occupancy rate at September 30, 2012, based on square footage, is approximately 98.8%.
We face a variety of risks and challenges in our business. We, among other things, face the possibility we will not be able to lease our properties on terms favorable to us or at all and that our tenants may not be able to pay their rental and other obligations owing under their leases.
We seek to manage the risk of our real property portfolio by diversifying among types of properties and industries, tenant identity, geography and lease expiration dates. 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 tenants financial condition through one or more of the following actions: reviewing tenant financial statements, obtaining other tenant related financial information, regular contact with tenant representatives, tenant credit checks and regular management reviews of our tenants.
In acquiring properties, we balance an evaluation of the terms of the leases and the credit of the existing tenants with a fundamental analysis of the real estate to be acquired, which analysis 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.
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute currently at least 90% of ordinary taxable income to our stockholders. We intend to comply with these requirements and to maintain our REIT status.
During the three months ended September 30, 2012, we:
· Amended our line of credit, which amendment, among other things, reduced the interest rate floor to 4.75% from 5.5%, increased permitted borrowings to $75 million from $55 million, subject to compliance with the borrowing base, and extended the facilitys expiration date by two years to March 31, 2015.
· Sold our property located at 119 Madison Avenue, New York, NY for a net gain of $15 million.
· Entered into an at the market offering program and through September 30, 2012, sold 120,844 shares and received net proceeds of $2,296,000.
· Refinanced approximately $22.85 million of mortgage debt which matured September 1, 2012, bearing interest at the rate of 6.87% per year and secured by the eleven properties leased to Haverty Furniture Companies, Inc. with new mortgage debt in the aggregate principal amount of $25 million, maturing September 1, 2032 (subject to the lenders option to call the debt after September 1, 2022) and bearing interest at the rate of 5.125% per year.
Results of Operations
The following table compares revenues and operating expenses of continuing operations for the periods indicated:
|
|
Three Months Ended |
|
Increase |
|
|
|
Nine Months Ended |
|
Increase |
|
|
| ||||||||||
(Dollars in thousands) |
|
2012 |
|
2011 |
|
(Decrease) |
|
% Change |
|
2012 |
|
2011 |
|
(Decrease) |
|
% Change |
| ||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Rental income |
|
$ |
11,792 |
|
$ |
10,755 |
|
$ |
1,037 |
|
9.6 |
% |
$ |
34,570 |
|
$ |
32,309 |
|
$ |
2,261 |
|
7.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Depreciation and amortization |
|
2,503 |
|
2,334 |
|
169 |
|
7.2 |
% |
7,410 |
|
6,803 |
|
607 |
|
8.9 |
% | ||||||
General and administrative |
|
1,911 |
|
1,804 |
|
107 |
|
5.9 |
% |
5,598 |
|
5,307 |
|
291 |
|
5.5 |
% | ||||||
Real estate acquisition costs |
|
93 |
|
131 |
|
(38 |
) |
(29.0 |
)% |
259 |
|
176 |
|
83 |
|
47.2 |
% | ||||||
Real estate expenses |
|
644 |
|
553 |
|
91 |
|
16.5 |
% |
1,949 |
|
1,711 |
|
238 |
|
13.9 |
% | ||||||
Leasehold rent |
|
77 |
|
77 |
|
|
|
|
|
231 |
|
231 |
|
|
|
|
| ||||||
Total operating expenses |
|
5,228 |
|
4,899 |
|
329 |
|
6.7 |
% |
15,447 |
|
14,228 |
|
1,219 |
|
8.6 |
% | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Operating income |
|
$ |
6,564 |
|
$ |
5,856 |
|
$ |
708 |
|
12.1 |
% |
$ |
19,123 |
|
$ |
18,081 |
|
$ |
1,042 |
|
5.8 |
% |
Revenues
Rental income. The increases are attributable primarily to rental revenues of $878,000 and $2.4 million earned during the three and nine months ended September 30, 2012, respectively, from eleven properties we acquired since July 2011, and $72,000 and $111,000, respectively, of real estate tax and expense reimbursements from tenants (primarily from four
properties we acquired since July 2011). The increases in the three and nine months ended September 30, 2012 are also attributable to $100,000 of percentage rent income from one tenant. Partially offsetting the increase during the nine months ended September 30, 2012 was a net decrease of approximately $461,000, resulting from the contribution, on February 6, 2012, of our Plano, Texas property to an unconsolidated joint venture. Rental income for the nine months ended September 30, 2012 only includes January 2012 rent from this property.
Operating Expenses
Depreciation and amortization. The increases are substantially due to depreciation expense on the 12 properties we acquired beginning March 2011, partially offset by the decrease in depreciation resulting from the contribution of our Plano, Texas property to a joint venture.
General and administrative expenses. Contributing to the increase in the three and nine months ended September 30, 2012 were increases of (i) $53,000 and $141,000 in payroll and payroll related expenses due to higher levels of compensation and to a lesser extent, additional employees and (ii) $73,000 and $139,000 in non-cash compensation expense related to restricted stock awards due to the increase in the number of awards granted, the higher fair value of such awards at the time of grant and changes in forfeiture assumptions relating to restricted stock units.
Real estate acquisition costs. These expenses increased in the nine months ended September 30, 2012 due to the inclusion of costs incurred for a potential acquisition not yet completed.
Real estate expenses. The increases in the three and nine months ended September 30, 2012 are attributable to the following factors: (i) approximately $148,000 and $407,000 for such three and nine months, respectively, are due to the net increase in expenses (including approximately $88,000 and $260,000 of real estate taxes) relating to properties we acquired since July 2011 and (ii) increases in various components of real estate expenses, none of which was individually material. The nine months ended September 30, 2012 also included approximately $49,000 due to legal fees incurred for the organization of the Plano, Texas unconsolidated joint venture. Partially offsetting the increase was the inclusion in the three and nine months ended September 30, 2011 of $72,000 and $256,000 of real estate taxes compared to $0 and $22,000 in the three and nine months ended September 30, 2012 related to the Plano, Texas property that was contributed to an unconsolidated joint venture in February 2012.
Other Income and Expenses
The following table compares other income and expenses for the periods indicated:
|
|
Three Months |
|
Increase |
|
|
|
Nine Months |
|
Increase |
|
|
| ||||||||||
(Dollars in thousands) |
|
2012 |
|
2011 |
|
(Decrease) |
|
% Change |
|
2012 |
|
2011 |
|
(Decrease) |
|
% Change |
| ||||||
Other income and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Equity in earnings of unconsolidated joint ventures |
|
$ |
121 |
|
$ |
105 |
|
$ |
16 |
|
15.2 |
% |
$ |
575 |
|
$ |
241 |
|
$ |
334 |
|
139 |
% |
Gain on settlement of debt |
|
|
|
|
|
|
|
|
|
|
|
1,240 |
|
(1,240 |
) |
(100 |
)% | ||||||
Other income |
|
6 |
|
9 |
|
(3 |
) |
(33.3 |
)% |
230 |
|
61 |
|
169 |
|
277 |
% | ||||||
Interest: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Expense |
|
(3,383 |
) |
(3,150 |
) |
(233 |
) |
(7.4 |
)% |
(10,121 |
) |
(9,906 |
) |
(215 |
) |
(2.2 |
)% | ||||||
Amortization of deferred financing costs |
|
(202 |
) |
(177 |
) |
(25 |
) |
(14.1 |
)% |
(583 |
) |
(656 |
) |
73 |
|
11.1 |
% | ||||||
Gain on sale of real estate |
|
|
|
|
|
|
|
|
|
319 |
|
|
|
319 |
|
n/a |
| ||||||
Equity in earnings of unconsolidated joint ventures. The increase for the nine months ended September 30, 2012 is attributable to: (i) our approximate 36% share (i.e., $233,000) of the net proceeds from a settlement entered into in May 2012 with a former tenant; (ii) the inclusion during the nine months ended September 30, 2011 of our 50% share (i.e., $62,000) of real estate acquisition costs incurred in connection with the purchase of a property by a joint venture in March 2011; and (iii) our 90% share (i.e., $52,000 for the nine months ended September 30, 2012) of the net operating income from our Plano, Texas joint venture. Partially offsetting the increase was the inclusion during the nine months ended September 30, 2012 of our share (i.e., $68,000) of real estate acquisition costs related to this joint venture.
Gain on settlement of debt. The gain in the nine months ended September 30, 2011 represents the satisfaction, at less than face value, of the $8.9 million mortgage payable related to the property previously leased by Robb & Stucky, a former tenant at our Plano, Texas property that filed for bankruptcy in February 2011. The $1.24 million gain is net of a $19,000 write off of the balance of related deferred mortgage costs.
Other income. The nine months ended September 30, 2012 includes a $199,000 settlement with the carrier of a commercial crime insurance policy relating to our claim against our former president.
Interest expense. The following table details interest expense for the periods indicated:
|
|
Three Months |
|
Increase |
|
|
|
Nine Months |
|
Increase |
|
|
| ||||||||||
(Dollars in thousands) |
|
2012 |
|
2011 |
|
(Decrease) |
|
% Change |
|
2012 |
|
2011 |
|
(Decrease) |
|
% Change |
| ||||||
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Credit line interest |
|
$ |
224 |
|
$ |
187 |
|
$ |
37 |
|
19.8 |
% |
$ |
795 |
|
$ |
646 |
|
$ |
149 |
|
23.1 |
% |
Mortgage interest |
|
3,159 |
|
2,963 |
|
196 |
|
6.6 |
% |
9,326 |
|
9,260 |
|
66 |
|
.7 |
% | ||||||
Total |
|
$ |
3,383 |
|
$ |
3,150 |
|
$ |
233 |
|
7.4 |
% |
$ |
10,121 |
|
$ |
9,906 |
|
$ |
215 |
|
2.2 |
% |
Credit line interest
The increases are due to the $3.3 million (29%) and $4.9 million (37%) increase in the weighted average balances outstanding under our line of credit in the three and nine months ended September 30, 2012, respectively. The weighted average balances increased due to borrowings for property acquisitions, partially offset by repayments with financing proceeds from properties purchased in 2011 and with a portion of the proceeds from the sale of two properties in June and September 2012. The increases in credit line interest were partially offset by the (i) decrease from 6% to 5.5%, effective August 5, 2011, and the decrease from 5.5% to 4.75%, effective July 31, 2012, in the annual interest rate charged on the credit line; and (ii) capitalization of $35,000 of interest expense incurred in connection with improving our Cherry Hill, New Jersey property during the nine months ended September 30, 2012.
Mortgage interest
The following table reflects the interest rate on our mortgage debt and principal amount of outstanding mortgage debt, in each case on a weighted average basis:
|
|
Three Months Ended |
|
Increase |
|
% |
|
Nine Months Ended |
|
Increase |
|
% |
| ||||||||||
(Dollars in thousands) |
|
2012 |
|
2011 |
|
(Decrease) |
|
Change |
|
2012 |
|
2011 |
|
(Decrease) |
|
Change |
| ||||||
Interest rate on mortgage debt |
|
6.00 |
% |
6.20 |
% |
(.20 |
)% |
(3.2 |
)% |
6.02 |
% |
6.24 |
% |
(.22 |
)% |
(3.5 |
)% | ||||||
Principal amount of mortgage debt |
|
$ |
210,163 |
|
$ |
191,248 |
|
$ |
18,915 |
|
9.9 |
% |
$ |
206,383 |
|
$ |
197,814 |
|
$ |
8,569 |
|
4.3 |
% |
The increases of $196,000 and $66,000 in mortgage interest expense for the three and nine months ended September 30, 2012 are due to the increases in the weighted average amount of mortgage debt outstanding, partially offset by a decrease in the weighted average interest rate on outstanding mortgage debt. The decrease in the weighted average interest rate is due to the payoffs and settlement in 2011 of $19.6 million of mortgage debt with a weighted average interest rate of approximately 7.3% and the financing in 2011 and 2012 of $58.8 million of mortgage debt with a weighted average interest rate of approximately 4.9%.
Amortization of deferred financing costs. The decrease in the nine months ended September 30, 2012 is primarily due to accelerated amortization of deferred financing costs of approximately $129,000 relating to two mortgage loans that were paid in full in February 2011. These decreases were partially offset by the amortization of deferred financing costs that were incurred in connection with (i) financings on several properties we acquired in 2011 and 2012 and (ii) the amendment to our line of credit effective July 31, 2012.
Gain on sale of real estate. In February 2012, we contributed our Plano, Texas property to an unconsolidated joint venture in exchange for a 90% interest therein and our joint venture partner contributed $1.5 million for a 10% interest therein and we realized a gain of $319,000.
Discontinued Operations
|
|
Three Months |
|
Increase |
|
|
|
Nine Months |
|
Increase |
|
|
| ||||||||||
(Dollars in thousands) |
|
2012 |
|
2011 |
|
(Decrease) |
|
% Change |
|
2012 |
|
2011 |
|
(Decrease) |
|
% Change |
| ||||||
Income from operations |
|
$ |
264 |
|
$ |
122 |
|
$ |
142 |
|
116 |
% |
$ |
602 |
|
$ |
646 |
|
$ |
(44 |
) |
(6.8 |
)% |
Net gain on sales |
|
15,050 |
|
|
|
15,050 |
|
n/a |
|
17,254 |
|