ONE LIBERTY PROPERTIES INC - Quarter Report: 2011 June (Form 10-Q)

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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 June 30, 2011
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)

 

 

 

(516) 466-3100

(Registrant’s 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 “small reporting company” in Rule 12b-2 of the Exchange Act.

 

 

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 issuer’s classes of common stock, as of the latest practicable date.

 

As of August 1, 2011, the registrant had 14,494,859 shares of common stock outstanding.

 

 

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One Liberty Properties Inc. and Subsidiaries

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				Page No.
Part I - Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets — June 30, 2011 and December 31, 2010			1
	Consolidated Statements of Income — Three and six months ended June 30, 2011 and 2010			2
	Consolidated Statement of Stockholders’ Equity and Comprehensive Income — Six months ended June 30, 2011 and year ended December 31, 2010			4
	Consolidated Statements of Cash Flows — Six months ended June 30, 2011 and 2010			5
	Notes to Consolidated Financial Statements			7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			25
Item 4.	Controls and Procedures			26
Part II — Other Information
Item 6.	Exhibits			26
	Signatures			27
	Ex 31.1
	Ex 31.2
	Ex 32.1
	Ex 32.2
	Ex 101

 

 

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Part I — FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except Par Value)

 

		June 30, 2011			December 31, 2010
		(Unaudited)
Assets
Real estate investments, at cost
Land		$	127,531		$	126,697
Buildings and improvements		323,110			319,203
		450,641			445,900
Less accumulated depreciation		58,365			54,137
Real estate investments, net		392,276			391,763
Property held for sale (including related assets of $808)		—			10,678
Investment in unconsolidated joint ventures		5,287			4,777
Cash and cash equivalents		11,447			7,732
Available-for-sale securities		367			422
Unbilled rent receivable		11,811			11,149
Unamortized intangible lease assets		10,501			10,887
Escrow, deposits and other assets and receivables		3,021			4,684
Investment in BRT Realty Trust at market (related party)		234			266
Unamortized deferred financing costs		2,402			2,265
Total assets		$	437,346		$	444,623
Liabilities and Stockholders’ Equity
Liabilities:
Mortgages payable		$	198,174		$	215,308
Line of credit		4,500			36,200
Dividends payable		4,762			3,806
Accrued expenses and other liabilities		4,323			5,144
Unamortized intangible lease liabilities		5,384			4,982
Total liabilities		217,143			265,440
Commitments and contingencies		—			—
Stockholders’ equity:
Preferred stock, $1 par value; 12,500 shares authorized; none issued		—			—
Common stock, $1 par value; 25,000 shares authorized; 14,081 and 11,212 shares issued and outstanding		14,081			11,212
Paid-in capital		187,222			147,158
Accumulated other comprehensive loss		(443		)	(156		)
Accumulated undistributed net income		19,343			20,969
Total stockholders’ equity		220,203			179,183
Total liabilities and stockholders’ equity		$	437,346		$	444,623

 

See accompanying notes to consolidated financial statements.

 

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ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in Thousands, Except Per Share Data)

(Unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2011			2010			2011			2010
Revenues:
Rental income, net		$	11,241		$	10,323		$	22,343		$	20,079
Operating expenses:
Depreciation and amortization		2,323			2,091			4,648			4,159
General and administrative (including $847, $647, $1,444 and $1,194, respectively, to related party)		2,053			1,913			3,802			3,566
Real estate acquisition costs		18			168			45			514
Real estate expenses		527			485			988			665
Leasehold rent		77			77			154			154
Total operating expenses		4,998			4,734			9,637			9,058
Operating income		6,243			5,589			12,706			11,021
Other income and expenses:
Equity in earnings of unconsolidated joint ventures		105			128			135			253
Gain on disposition of real estate held by unconsolidated joint venture		—			107			—			107
Gain on settlement of debt		1,240			—			1,240			—
Other income, including realized gain on sale of available-for-sale securities and interest income		40			174			53			225
Interest:
Expense		(3,333		)	(3,701		)	(6,974		)	(6,980		)
Amortization of deferred financing costs		(182		)	(150		)	(495		)	(292		)
Income from continuing operations		4,113			2,147			6,665			4,334
Discontinued operations:
Income from operations		97			252			277			486
Net gain on sale		932			—			932			—
Income from discontinued operations		1,029			252			1,209			486
Net income		$	5,142		$	2,399		$	7,874		$	4,820
Weighted average number of common shares outstanding:
Basic		14,078			11,453			13,419			11,424
Diluted		14,178			11,453			13,469			11,453

 

Continued on next page

 

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ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in Thousands, Except Per Share Data)

(Unaudited) (Continued)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2011			2010			2011			2010
Net income per common share — basic:
Income from continuing operations		$	.29		$	.19		$	.48		$	.38
Income from discontinued operations		.07			.02			.09			.04
Net income per common share — basic		$	.36		$	.21		$	.57		$	.42
Net income per common share — diluted:
Income from continuing operations		$	.28		$	.19		$	.48		$	.38
Income from discontinued operations		.07			.02			.09			.04
Net income per common share — diluted		$	.35		$	.21		$	.57		$	.42
Cash distribution declared per share of common stock		$	.33		$	.30		$	.66		$	.60

 

See accompanying notes to consolidated financial statements.

 

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ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

For the six month period ended June 30, 2011 (Unaudited)

and the year ended December 31, 2010

(Amounts in Thousands, Except Per Share Data)

 

		Common Stock			Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Undistributed Net Income			Total
Balances, January 1, 2010		$	10,879		$	143,272		$	191		$	25,786		$	180,128
Distributions - common stock
Cash - $1.23 per share		—			—			—			(14,123		)	(14,123		)
Issuance of stock for stock dividend obligation at December 31, 2009		216			1,888			—			—			2,104
Restricted stock vesting		36			(36		)	—			—			—
Shares issued through dividend reinvestment plan		81			1,119			—			—			1,200
Compensation expense - restricted stock		—			915			—			—			915
Net income		—			—			—			9,306			9,306
Other comprehensive income -
Net unrealized loss on available-for-sale securities		—			—			(60		)	—			(60		)
Net unrealized loss on derivative instruments		—			—			(287		)	—			(287		)
Comprehensive income		—			—			—			—			8,959
Balances, December 31, 2010		11,212			147,158			(156		)	20,969			179,183
Distributions - common stock
Cash - $.66 per share		—			—			—			(9,500		)	(9,500		)
Restricted stock vesting		46			(46		)	—			—			—
Shares issued in stock offering - net of offering costs of $282		2,700			37,869			—			—			40,569
Shares issued through dividend reinvestment plan		123			1,720			—			—			1,843
Compensation expense - restricted stock		—			521			—			—			521
Net income		—			—			—			7,874			7,874
Other comprehensive income -
Net unrealized loss on available-for-sale securities		—			—			(87		)	—			(87		)
Net unrealized loss on derivative instruments		—			—			(128		)	—			(128		)
OLP’s share of joint venture net unrealized loss on derivative instruments		—			—			(72		)	—			(72		)
Comprehensive income		—			—			—			—			7,587
Balances, June 30, 2011		$	14,081		$	187,222		$	(443	)	$	19,343		$	220,203

 

See accompanying notes to consolidated financial statements.

 

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ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited)

 

		Six Months Ended June 30,
		2011			2010
Cash flows from operating activities:
Net income		$	7,874		$	4,820
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on settlement of debt		(1,240		)	—
Gain on sale of real estate		(932		)	—
Gain on sale of available-for-sale securities		—			(129		)
Increase in rental income from straight-lining of rent		(679		)	(880		)
Decrease in rental income resulting from bad debt expense		508			79
Decrease in rental income from amortization of intangibles relating to leases		47			10
Amortization of restricted stock expense		521			460
Gain on disposition of real estate held by unconsolidated joint venture		—			(107		)
Equity in earnings of unconsolidated joint ventures		(135		)	(253		)
Distributions of earnings from unconsolidated joint ventures		199			209
Depreciation and amortization		4,711			4,291
Amortization and write off of financing costs		495			292
Changes in assets and liabilities:
(Increase) decrease in escrow, deposits, other assets and receivables		(693		)	89
Decrease in accrued expenses and other liabilities		(887		)	(1		)
Net cash provided by operating activities		9,789			8,880
Cash flows from investing activities:
Purchase of real estate and improvements		(2,612		)	(15,936		)
Net proceeds from sale of real estate		11,544			—
Investment in unconsolidated joint ventures		(669		)	—
Distributions of return of capital from unconsolidated joint ventures		23			22
Prepaid tenant improvement allowance		—			(1,750		)
Net proceeds from sale of available-for-sale securities		—			5,997
Net cash provided by (used in) investing activities		8,286			(11,667		)
Cash flows from financing activities:
Scheduled amortization payments of mortgages payable		(2,750		)	(2,721		)
Repayment of mortgages payable		(15,303		)	(2,433		)
Proceeds from mortgage financings		2,000			3,000
Proceeds from common stock offering, net		40,569			—
Proceeds from bank line of credit		4,500			—
Repayment on bank line of credit		(36,200		)	—
Issuance of shares through dividend reinvestment plan		1,843			—
Payment of financing costs		(475		)	(882		)
Cash distributions to common stockholders		(8,544		)	(3,683		)
Expenses associated with stock issuance		—			(48		)
Net cash used in financing activities		(14,360		)	(6,767		)
Net increase (decrease) in cash and cash equivalents		3,715			(9,554		)
Cash and cash equivalents at beginning of period		7,732			28,036
Cash and cash equivalents at end of period		$	11,447		$	18,482

 

Continued on next page

 

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ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited) (Continued)

 

		Six Months Ended June 30,
		2011			2010
Supplemental disclosures of cash flow information:
Cash paid during the period for interest expense		$	7,131		$	6,783
Supplemental schedule of non-cash investing and financing activities:
Common stock dividend — portion paid in shares of Company’s common stock		—			2,209
Assumption of mortgage payable in connection with purchase of real estate		—			17,654
Settlement of mortgage debt		1,259			—
Purchase accounting allocation — intangible lease assets		234			1,121
Purchase accounting allocation — intangible lease liabilities		612			365
Reclassification of 2010 prepaid tenant improvement allowance to building improvements		1,750			—
Reclassification of real estate owned to property held for sale		—			10,678

 

See accompanying notes to consolidated financial statements.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2011

 

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 June 30, 2011, OLP owned 84 properties, three of which are vacant and one of which is a 50% tenancy in common interest.  OLP’s joint ventures owned a total of five properties. The 89 properties are located in 29 states.

 

Note 2 - Basis of Preparation

 

The accompanying interim unaudited consolidated financial statements as of June 30, 2011 and for the three and six months ended June 30, 2011 and 2010 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 six months ended June 30, 2011 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 and its wholly-owned subsidiaries (collectively, the “Company”).   Material intercompany items and transactions have been eliminated. The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting.  All investments in 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 the venture. As a result, none of the Company’s joint ventures are variable interest entities.  In addition, although the Company is the managing member of these joint ventures, 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.

 

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 assets of one property, which was sold in May 2011, to property held for sale at December 31, 2010 and to reclassify the operations of this property to discontinued operations for the three and six months ended June 30, 2011 and 2010.  In addition, the operations of one property, which was sold in September 2010, were reclassified to discontinued operations for the three and six months ended June 30, 2010.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2011 (Continued)

 

Note 2   Basis of Preparation (Continued)

 

These statements should be read in conjunction with the consolidated financial statements and related notes which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

 

Note 3 - Earnings Per Common Share

 

For the three and six months ended June 30, 2011 and 2010, 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, including the effect of the 2,700,000 shares sold in February 2011 as described in Note 10. Net income during the applicable period is also allocated to the unvested restricted stock 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 weighted average unvested shares of restricted stock outstanding was 348,000 and 357,000 during the three and six months ended June 30, 2011, respectively, and 327,000 and 342,000 during the three and six months ended June 30, 2010, respectively.  The dividends declared payable to unvested restricted stockholders was $115,000 and $230,000 during the three and six months ended June 30, 2011, respectively, and $97,000 and $204,000 during the three and six months ended June 30, 2010, respectively.  The restricted stock units awarded under the Pay-for-Performance program described in Note 13 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, converted or otherwise resulted in the issuance of common stock that shared in the earnings of the Company.  The weighted average number of common shares outstanding used  for the  diluted  earnings  per share calculation for the three and six months ended June 30, 2010 includes the full impact of common stock issued in connection with the dividend paid in January 2010, based on the December 11, 2009 dividend declaration date, as the shares were contingently issuable as of December 11, 2009.  This stock dividend was included in basic earnings per share as of the January 25, 2010 issuance date. The diluted weighted average number of common shares also includes 100,000 shares of common stock underlying the restricted stock units awarded on September 14, 2010 under the Pay-for-Performance Program.  These shares would be deemed issued based on the Company’s stock price at June 30, 2011 and dividends paid through such date.  The remaining 100,000 shares of common stock underlying the restricted stock units awarded under the Pay-For-Performance Program are not included, as they did not meet the defined performance metric as of June 30, 2011.

 

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 six months ended June 30, 2011 and 2010.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2011 (Continued)

 

Note 4 - Investment in Unconsolidated Joint Ventures

 

The Company’s five unconsolidated joint ventures each own and operate one property, including a 50% owned joint venture which acquired a retail property in March 2011 for a total purchase price of $3,200,000.  At June 30, 2011 and December 31, 2010, the Company’s equity investment in unconsolidated joint ventures totaled $5,287,000 and $4,777,000, respectively. In addition to the $107,000 gain on sale of property in the three and six months ended June 30, 2010, the Company recorded equity in earnings of $135,000 and $253,000 for the six months ended June 30, 2011 and 2010, respectively, and $105,000 and $128,000 for the three months ended June 30, 2011 and 2010, respectively.

 

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 June 30, 2011 and December 31, 2010, the balance in allowance for doubtful accounts was $1,485,000 and $977,000, respectively, recorded as a reduction to accounts receivable. The Company records bad debt expense as a reduction of rental income. For the three and six months ended June 30, 2011, the Company recorded bad debt expense of $197,000 and $508,000, respectively.   For the three and six months ended June 30, 2010, the Company recorded bad debt expense of $17,000 and $79,000, respectively.  For the three and six months ended June 30, 2010, $14,000 of such bad debt expense was recorded in discontinued operations. The bad debt expense for the three months ended June 30, 2011 results substantially from uncollected rental income and real estate taxes related to a property previously leased by Robb & Stucky.  Robb & Stucky filed for bankruptcy protection in February 2011, thereafter rejected its lease and vacated the property as of June 30, 2011.

 

Note 6 - Real Estate Acquisition

 

On March 4, 2011, the Company acquired a retail property in Illinois for an all cash purchase price of $2,325,000. The Company incurred third party acquisition costs of $21,000 related to this acquisition.

 

As a result of this acquisition, the Company recorded intangible lease liabilities of $612,000 and intangible lease assets of $234,000, representing the value of the acquired below market lease and origination costs.  The Company assessed the fair value of the lease intangibles based on estimated cash flow projections that use appropriate discount rates and available market information (including an evaluation of lease renewal options). Such inputs are Level 3 in the fair value hierarchy. The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant.  The value, as determined, is allocated to land, buildings and improvements based on management’s judgment.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2011 (Continued)

 

Note 7 - Discontinued Operations and Property Held for Sale

 

On May 20, 2011, the Company sold a property, leased to Office Depot and located in California, to an unrelated party for consideration of $11,544,000, net of closing costs, and realized a gain of approximately $932,000, which is included in net gain on sale in discontinued operations in the three and six months ended June 30, 2011. The net book value of the property, including related assets of $808,000, was $10,678,000 at December 31, 2010 and is included in property held for sale on the accompanying balance sheet.

 

The following is a summary of income from discontinued operations applicable to the property sold in May 2011 and the two properties sold in July 2010 and September 2010 (dollars in thousands):

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2011			2010			2011			2010
Rental income		$	120		$	371		$	342		$	717
Depreciation and amortization		21			66			63			132
Real estate expenses		2			10			2			12
Interest expense		—			43			—			87
Total expenses		23			119			65			231
Income from operations		97			252			277			486
Net gain on sale		932			—			932			—
Income from discontinued operations		$	1,029		$	252		$	1,209		$	486

 

Note 8 — Gain on Settlement of Debt

 

On June 27, 2011, the Company paid off the $8,893,000 principal balance of the mortgage secured by the property previously leased to Robb & Stucky with a payment of $7,634,000. The $1,240,000 gain on settlement of debt is net of a $19,000 write off of the remaining balance of related deferred mortgage costs.

 

This property was tested for impairment and it was determined that no charge was required.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2011 (Continued)

 

Note 9 - Line of Credit

 

On January 6, 2011, 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 Manufacturer’s & Trader’s Trust Company, which, among other things, increased the Company’s borrowing capacity by $15,000,000 to $55,000,000 and extended the maturity by one year to March 31, 2013.  The interest rate thereon is the greater of (i) 90 day LIBOR plus 3% (3.25% at June 30, 2011), and (ii) 6% per annum, and there is an unused facility fee of .25% per annum. In connection with the amendment, the Company incurred a $350,000 commitment fee which is being amortized over the remaining term of the facility. At June 30, 2011, there was $4,500,000 outstanding under the facility.  The Company was in compliance with all covenants at June 30, 2011.

 

Note 10 — Public Offering

 

On February 11, 2011, the Company sold 2,700,000 shares of its common stock for net proceeds of approximately $40,569,000.  The proceeds were used to repay two mortgages in aggregate amount of $7,700,000 having a weighted average interest rate of 7.9% and to reduce the amount outstanding under the line of credit by $26,200,000.  The remaining balance of the proceeds was used for general corporate purposes, including the purchase of a property in March 2011.

 

Note 11 - Common Stock Cash Dividend

 

On June 14, 2011, the Board of Directors declared a quarterly cash dividend of $.33 per share on the Company’s common stock, totaling $4,762,000. The quarterly dividend was paid on July 6, 2011 to stockholders of record as of June 28, 2011.

 

Note 12 - Comprehensive Income

 

Comprehensive income for the three and six months ended June 30, 2011 and 2010 is as follows (dollars in thousands):

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2011			2010			2011			2010
Net income		$	5,142		$	2,399		$	7,874		$	4,820
Other comprehensive income -
Net unrealized gain (loss) on available- for-sale securities		(8		)	(206		)	(87		)	(133		)
Net unrealized gain (loss) on derivative instruments		(308		)	(277		)	(200		)	(406		)
Comprehensive income		$	4,826		$	1,916		$	7,587		$	4,281

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

  June 30, 2011 (Continued)

 

Note 12 - Comprehensive Income (Continued)

 

Accumulated other comprehensive loss includes an accumulated net unrealized loss on available-for-sale securities of $40,000, an unrealized loss on available-for-sale securities in a joint venture of $27,000, a net unrealized loss on derivative instruments of $303,000, and our 50% share of a net unrealized loss on a joint venture derivative instrument of $73,000, resulting in a total cumulative net loss of $443,000 at June 30, 2011.  At December 31, 2010, accumulated other comprehensive loss of $156,000 was comprised of a net accumulated unrealized gain on available-for-sale securities of $47,000, an unrealized loss on available-for-sale securities in a joint venture of $27,000 and a net unrealized loss on derivative instruments of $176,000.

 

Note 13 - Stock Based Compensation

 

The Company’s 2009 Incentive Plan, approved by the Company’s stockholders in June 2009, permits the Company to grant stock options, restricted stock and/or performance-based awards to its employees, officers, directors and consultants.  A maximum of 600,000 shares of the Company’s common stock is authorized for issuance pursuant to the 2009 Incentive Plan.

 

The Company’s 2003 Incentive Plan, approved by the Company’s stockholders in June 2003, permitted the Company to grant stock options and restricted stock to its employees, officers, directors and consultants.  A maximum of 275,000 shares of the Company’s common stock was authorized for issuance pursuant to the 2003 Incentive Plan.

 

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 upon the fifth anniversary of the grant date and under certain circumstances may vest earlier. 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.

 

On September 14, 2010, the Board of Directors approved a Pay-For-Performance Program under the Company’s 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 accounting 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 Company’s 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 Company’s common stock will be issued for those Units.  No Units were granted, vested or forfeited in the six months ended June 30, 2011.

 

Through June 30, 2011, a total of 416,910 and 274,100 stock awards (i.e. restricted shares and restricted stock units) were issued pursuant to the Company’s 2009 and 2003

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2011 (Continued)

 

Note 13 - Stock Based Compensation (Continued)

 

Incentive Plans, respectively. Under the 2009 Incentive Plan, 183,090 shares remain available for grant. No additional shares may be granted under the 2003 Incentive Plan.  As of June 30, 2011, there were approximately $2,932,000 of total compensation costs related to nonvested awards that have not yet been recognized, including $537,000 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 four years.  As of June 30, 2011, there were no options outstanding under the 2009 and 2003 Incentive Plans.

 

A summary of the activity of the incentive plans follows:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2011			2010			2011			2010
Restricted share grants		—			—			74,040			—
Average per share grant price		—			—			$	16.19		—
Recorded as deferred compensation		—			—			$	1,199,000		—
Non-vested shares:
Non-vested beginning of period		348,385			357,925			320,940			357,925
Grants		—			—			74,040			—
Vested during period		—			(36,050		)	(46,450		)	(36,050		)
Forfeitures		—			—			(145		)	—
Non-vested end of period		348,385			321,875			348,385			321,875
Average per share value of non-vested shares (based on grant price)		$	12.96		$	13.33		$	12.96		$	13.33
Value of shares vested during the period (based on grant price)		$	—		$	—		$	960,000		$	687,000
Total charge to operations:
Outstanding restricted stock grants		$	227,000		$	210,000		$	476,000		$	460,000
Outstanding restricted stock units		22,000			—			45,000			—
		$	249,000		$	210,000		$	521,000		$	460,000

 

Note 14 - Fair Value of Financial Instruments

 

Financial Instruments Not Measured at Fair Value

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which adjustments to measure at fair value are not reported:

 

Cash and cash equivalents:  The carrying amounts reported in the balance sheet for these instruments approximate their fair values.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2011 (Continued)

 

Note 14 - Fair Value of Financial Instruments (Continued)

 

Mortgages payable: At June 30, 2011, the $201,819,000 estimated fair value of the Company’s mortgages payable is more than their carrying value by approximately $3,645,000, assuming a blended market interest rate of 5.5% based on a five year weighted average remaining term of the mortgages.

 

Line of credit: The $4,500,000 carrying amount of the Company’s line of credit approximates its fair value at June 30, 2011.

 

The fair value of the Company’s mortgages and line of credit were estimated using observable 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.

 

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.

 

Financial Instruments Measured at Fair Value

 

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 Company does not currently own any financial instruments that are classified as Level 3.

 

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Table of Contents

 

One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2011 (Continued)

 

Note 14 - Fair Value of Financial Instruments (Continued)

 

The fair values of the Company’s financial instruments were determined using the following inputs as of June 30, 2011 (dollars in thousands):

 

		Carrying and			Fair Value Measurements Using Fair Value Hierarchy
		Fair Value			Level 1			Level 2
Financial assets:
Available-for-sale securities:
Equity securities		$	601		$	601		$	—
Derivative financial instrument		65			—			65
Financial liabilities:
Derivative financial instrument		368			—			368

 

Available-for-sale securities

 

The Company’s available-for-sale securities have a total cost of $641,000.  At June 30, 2011, unrealized gains on such securities were $120,000 and unrealized losses were $160,000. The aggregate net unrealized loss of $40,000 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 impairment because the Company expects the value of these securities to recover and plans on holding them until at least such recovery occurs.

 

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, foreign exchange rates, and implied volatilities.  At June 30, 2011 and December 31, 2010, these derivatives are included in other liabilities and other assets on the consolidated balance sheet.

 

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.  However, as of June 30, 2011, 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

 

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