ONE LIBERTY PROPERTIES INC - Quarter Report: 2014 March (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 March 31, 2014

 

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 “smaller 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 May 2, 2014, the registrant had 15,978,064 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 – March 31, 2014 and December 31, 2013	1
	Consolidated Statements of Income – Three months ended March 31, 2014 and 2013	2
	Consolidated Statements of Comprehensive Income – Three months ended March 31, 2014 and 2013	3
	Consolidated Statements of Changes in Equity – Three months ended March 31, 2014 and year ended December 31, 2013	4
	Consolidated Statements of Cash Flows – Three months ended March 31, 2014 and 2013	5
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
Part II - Other Information
Item 6.	Exhibits	31

 

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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)

 

		March 31, 2014			December 31, 2013
		(Unaudited)
Assets
Real estate investments, at cost
Land		$	155,499		$	153,529
Buildings and improvements		416,995			413,829
Total real estate investments, at cost		572,494			567,358
Less accumulated depreciation		74,165			71,171
Real estate investments, net		498,329			496,187
Properties held-for-sale		—			5,177
Investment in unconsolidated joint ventures		4,916			4,906
Cash and cash equivalents		16,168			16,631
Unbilled rent receivable		14,079			13,743
Unamortized intangible lease assets		25,771			26,035
Escrow, deposits and other assets and receivables		4,509			5,690
Investment in BRT Realty Trust at market (related party)		264			262
Unamortized deferred financing costs		3,344			3,267
Total assets		$	567,380		$	571,898
Liabilities and Equity
Liabilities:
Mortgages payable		$	284,903		$	278,045
Line of credit		12,850			23,250
Dividends payable		5,872			5,806
Accrued expenses and other liabilities		7,512			7,790
Unamortized intangible lease liabilities		7,106			6,917
Total liabilities		318,243			321,808
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; 15,422 and 15,221 shares issued and outstanding		15,422			15,221
Paid-in capital		212,533			210,324
Accumulated other comprehensive loss		(1,196		)	(490		)
Accumulated undistributed net income		21,278			23,877
Total One Liberty Properties, Inc. stockholders’ equity		248,037			248,932
Non-controlling interests in joint ventures		1,100			1,158
Total equity		249,137			250,090
Total liabilities and equity		$	567,380		$	571,898

 

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 March 31,
		2014			2013
Revenues:
Rental income, net		$	14,402		$	11,862
Operating expenses:
Depreciation and amortization		3,577			2,634
General and administrative (including $609 and $572, respectively, to related party)		2,211			1,960
Federal excise and state taxes		62			42
Real estate expenses (including $213 and $150, respectively, to related party)		1,098			772
Leasehold rent		77			77
Real estate acquisition costs		40			151
Total operating expenses		7,065			5,636
Operating income		7,337			6,226
Other income and expenses:
Equity in earnings of unconsolidated joint ventures		133			334
Other income		8			69
Interest:
Expense		(3,953		)	(3,103		)
Amortization of deferred financing costs		(238		)	(213		)
Income from continuing operations		3,287			3,313
Income from discontinued operations		13			136
Net income		3,300			3,449
Less net (income) loss attributable to non-controlling interests		(27		)	1
Net income attributable to One Liberty Properties, Inc.		$	3,273		$	3,450
Weighted average number of common shares outstanding:
Basic		15,356			14,672
Diluted		15,456			14,772
Per common share attributable to common stockholders — basic:
Income from continuing operations		$	.20		$	.21
Income from discontinued operations		—			.01
		$	.20		$	.22
Per common share attributable to common stockholders — diluted:
Income from continuing operations		$	.20		$	.21
Income from discontinued operations		—			.01
		$	.20		$	.22
Cash distributions declared per share of common stock		$	.37		$	.35

 

See accompanying notes to consolidated financial statements.

 

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ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in Thousands)

(Unaudited)

 

		Three Months Ended March 31,
		2014			2013
Net income		$	3,300		$	3,449
Other comprehensive (loss) gain
Net unrealized gain on available-for-sale securities		5			46
Net unrealized (loss) gain on derivative instruments		(718		)	178
One Liberty Property’s share of joint venture net unrealized (loss) gain on derivative instruments		(3		)	10
Other comprehensive (loss) gain		(716		)	234
Comprehensive income		2,584			3,683
Less: comprehensive (income) loss attributable to non-controlling interests		(27		)	1
Plus: unrealized loss on derivative instruments attributable to non-controlling interests		(10		)	—
Comprehensive income attributable to One Liberty Properties, Inc.		$	2,547		$	3,684

 

See accompanying notes to consolidated financial statements.

 

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ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the three month period ended March 31, 2014 (Unaudited)

and the year ended December 31, 2013

(Amounts in Thousands, Except Per Share Data)

 

		Common Stock			Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Undistributed Net Income			Non- Controlling Interests in Joint Ventures			Total
Balances, December 31, 2012		$	14,598		$	196,107		$	(1,578	)	$	28,001		$	931		$	238,059
Distributions - common stock Cash - $1.42 per share		—			—			—			(21,999		)	—			(21,999		)
Shares issued through equity offering program – net		363			8,802			—			—			—			9,165
Restricted stock vesting		50			(50		)	—			—			—			—
Shares issued through dividend reinvestment plan		210			4,025			—			—			—			4,235
Contributions from non-controlling interests		—			—			—			—			480			480
Distributions to non-controlling interests		—			—			—			—			(298		)	(298		)
Compensation expense - restricted stock		—			1,440			—			—			—			1,440
Net income		—			—			—			17,875			49			17,924
Other comprehensive income		—			—			1,088			—			(4		)	1,084
Balances, December 31, 2013		15,221			210,324			(490		)	23,877			1,158			250,090
Distributions - common stock Cash - $.37 per share		—			—			—			(5,872		)	—			(5,872		)
Shares issued through equity offering program – net		33			611			—			—			—			644
Restricted stock vesting		101			(101		)	—			—			—			—
Shares issued through dividend reinvestment plan		67			1,227			—			—			—			1,294
Distributions to non-controlling interests		—			—			—			—			(75		)	(75		)
Compensation expense - restricted stock		—			472			—			—			—			472
Net income		—			—			—			3,273			27			3,300
Other comprehensive income		—			—			(706		)	—			(10		)	(716		)
Balances, March 31, 2014		$	15,422		$	212,533		$	(1,196	)	$	21,278		$	1,100		$	249,137

 

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)

 

		Three Months Ended March 31,
		2014			2013
Cash flows from operating activities:
Net income		$	3,300		$	3,449
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of available-for-sale securities		—			(6		)
Increase in rental income from straight-lining of rent		(336		)	(221		)
Increase in rental income from amortization of intangibles relating to leases		(56		)	(22		)
Amortization of restricted stock expense		472			397
Equity in earnings of unconsolidated joint ventures		(133		)	(334		)
Distributions of earnings from unconsolidated joint ventures		113			454
Depreciation and amortization		3,577			2,670
Amortization and write off of financing costs		240			213
Changes in assets and liabilities:
Decrease (increase) in escrow, deposits, other assets and receivables		1,099			(372		)
(Decrease) increase in accrued expenses and other liabilities		(1,028		)	316
Net cash provided by operating activities		7,248			6,544
Cash flows from investing activities:
Purchase of real estate		(5,109		)	(4,640		)
Improvements to real estate		(38		)	(332		)
Distributions of return of capital from unconsolidated joint ventures		7			5
Net proceeds from sale of real estate		5,177			—
Payment of leasing commissions		(3		)	(16		)
Net proceeds from sale of available-for-sale securities		—			19
Net cash provided by (used in) investing activities		34			(4,964		)
Cash flows from financing activities:
Scheduled amortization payments of mortgages payable		(1,874		)	(1,569		)
Repayment of mortgages payable		(19,003		)	—
Proceeds from mortgage financings		27,735			2,000
Proceeds from sale of common stock, net		644			—
Proceeds from bank line of credit		3,500			3,500
Repayment on bank line of credit		(13,900		)	—
Issuance of shares through dividend reinvestment plan		1,294			1,149
Payment of financing costs		(260		)	(71		)
Capital contributions from non-controlling interests		—			471
Distribution to non-controlling interests		(75		)	—
Cash distributions to common stockholders		(5,806		)	(5,252		)
Net cash (used in) provided by financing activities		(7,745		)	228
Net (decrease) increase in cash and cash equivalents		(463		)	1,808
Cash and cash equivalents at beginning of period		16,631			14,577
Cash and cash equivalents at end of period		$	16,168		$	16,385

 

Continued on next page

 

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ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited) (Continued)

 

		Three Months Ended March 31,
		2014			2013
Supplemental disclosures of cash flow information:
Cash paid during the period for interest expense		$	4,027		$	3,063
Supplemental schedule of non-cash investing and financing activities:
Purchase accounting allocation - intangible lease assets		408			582
Purchase accounting allocation - intangible lease liabilities		371			857

 

See accompanying notes to consolidated financial statements.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2014

 

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 stores, restaurants, office supply stores and supermarkets), industrial, flex, office, health and fitness and other properties, a substantial portion of which are subject to long-term net leases.  As of March 31, 2014, OLP owned 109 properties, including five properties owned by consolidated joint ventures and five properties owned by unconsolidated joint ventures. The 109 properties are located in 29 states.

 

Note 2 - Basis of Preparation

 

Principles of Consolidation/Basis of Preparation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and include all of the information and disclosures required by U.S. Generally Accepted Accounting Principles (“GAAP”) for interim reporting. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statement disclosures. In the opinion of management, all adjustments necessary for fair presentation (including normal recurring accruals) have been included. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results for the full year. These statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

 

The consolidated financial statements include the accounts and operations of OLP, its wholly-owned subsidiaries and its investment in five joint ventures in which the Company, as defined, has a controlling interest.  OLP and its consolidated subsidiaries are hereinafter referred to as the “Company”.   Material intercompany items and transactions have been eliminated in consolidation.

 

Investment in Joint Ventures

 

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 entity’s 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.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2014 (Continued)

 

Note 2 - Basis of Preparation (Continued)

 

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.  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, among other things, (i) approve the annual budget, (ii) approve certain expenditures, (iii) prepare or review and approve the joint venture’s 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 over the activities that most significantly impact the performance of the joint venture.

 

With respect to the five consolidated joint ventures in which the Company has between an 85% to 95% interest, the Company has determined that (i) such ventures are not VIE’s and (ii) the Company exercises substantial operating control and accordingly, such ventures are consolidated for financial statement purposes.

 

The Company accounts for its investments in five 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 VIE’s.  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.

 

Reclassification

 

Certain amounts reported in the consolidated financial statements for the three months ended March 31, 2013 relating to the operations of two properties that were sold in February 2014 have been reclassified to discontinued operations in the accompanying consolidated financial statements to conform to the current period’s presentation.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2014 (Continued)

 

Note 3 - Earnings Per Common Share

 

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 12 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 months ended March 31, 2014 and 2013, the diluted weighted average number of common shares includes 100,000 shares (of an aggregate of 200,000 shares) of common stock underlying the restricted stock units awarded pursuant to 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 market price and dividends paid as of the end of each quarterly period assuming the end of that quarterly period was the end of the vesting period.  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 months ended March 31, 2014 and 2013, as they did not meet the return on 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 months ended March 31, 2014 and 2013.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2014 (Continued)

 

Note 3 - Earnings Per Common Share (Continued)

 

The following table provides a reconciliation of the numerator and denominator of earnings per share calculations (amounts in thousands, except per share amounts):

 

		Three Months Ended March 31,
		2014			2013
Numerator for basic and diluted earnings per share:
Income from continuing operations		$	3,287		$	3,313
Less net (income) loss attributable to non-controlling interests		(27		)	1
Less earnings allocated to unvested shares		(178		)	(165		)
Income from continuing operations available for common stockholders		3,082			3,149
Discontinued operations		13			136
Net income available for common stockholders, basic and diluted		$	3,095		$	3,285
Denominator for basic earnings per share:
- weighted average common shares		15,356			14,672
- weighted average unvested restricted stock shares		—			—
		15,356			14,672
Effect of diluted securities:
- restricted stock units awarded under Pay-for-Performance program		100			100
Denominator for diluted earnings per share
- weighted average shares		15,456			14,772
Earnings per common share, basic		$	.20		$	.22
Earnings per common share, diluted		$	.20		$	.22
Amounts attributable to One Liberty Properties, Inc. common stockholders, net of non-controlling interests:
Income from continuing operations		$	3,260		$	3,314
Income from discontinued operations		13			136
Net income attributable to One Liberty Properties, Inc.		$	3,273		$	3,450

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2014 (Continued)

 

Note 4 - Real Estate Acquisitions

 

The following chart details the Company’s real estate acquisitions during the three months ended March 31, 2014 (amounts in thousands):

 

Description of Property		Date Acquired		Contract Purchase Price			Terms of Payment		Third Party Real Estate Acquisition Costs (a)
Total Wine and More retail store, Greensboro, North Carolina		January 21, 2014		$	2,971		All cash		$	7
Chuck E Cheese restaurant, Indianapolis, Indiana		January 23, 2014		2,138			All cash		9
Other (b)				—					24
Totals				$	5,109				$	40

 

(a)         Included as an expense in the accompanying consolidated statement of income.

(b)         Costs incurred for potential acquisitions and properties purchased in 2013.

 

The following chart provides the allocation of the purchase price for the Company’s real estate acquisitions during the three months ended March 31, 2014 (amounts in thousands):

 

								Building			Intangible Lease
Description of Property		Land			Building			Improvements			Asset			Liability			Total
Total Wine and More retail store, Greensboro, North Carolina		$	1,044		$	1,465		$	89		$	373		$	—		$	2,971
Chuck E Cheese restaurant, Indianapolis, Indiana		852			1,319			147			94			(274		)	2,138
Subtotals		1,896			2,784			236			467			(274		)	5,109
Other (a)		74			70			18			(59		)	(97		)	6
Totals		$	1,970		$	2,854		$	254		$	408		$	(371	)	$	5,115

 

(a)         Adjustments relating to properties purchased in 2013.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2014 (Continued)

 

Note 4 - Real Estate Acquisitions (continued)

 

Each property purchased by the Company in 2014 is net leased by a single tenant pursuant to a lease that expires in 2017 or 2018.

 

As a result of these acquisitions, the Company recorded intangible lease assets of $467,000 and intangible lease liabilities of $274,000, representing the value of the origination costs and acquired leases.  As of March 31, 2014, the weighted average amortization period for these acquisitions is 3.7 years for the intangible lease assets and 4.3 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 13) in the fair value hierarchy. The Company is currently in the process of finalizing the purchase price allocations for these properties; therefore, these allocations are preliminary and subject to change.

 

Note 5 - Investment in Unconsolidated Joint Ventures

 

At March 31, 2014 and December 31, 2013, the Company had investments in five unconsolidated joint ventures, each of which owned and operated one property. The Company’s equity investment in such unconsolidated joint ventures totaled $4,916,000 and $4,906,000, respectively. The Company recorded equity in earnings of $133,000 and $334,000 for the three months ended March 31, 2014 and 2013, respectively.

 

Note 6 - 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 March 31, 2014 and December 31, 2013, there was no balance in allowance for doubtful accounts.

 

The Company records bad debt expense as a reduction of rental income. For the three months ended March 31, 2014 and 2013, the Company did not incur any bad debt expense.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2014 (Continued)

 

Note 7 - Discontinued Operations and Sale of Properties

 

On February 3, 2014, the Company sold two properties located in Michigan for a total sales price of $5,177,000, net of closing costs.  At December 31, 2013, the Company recorded a $61,700 impairment charge representing the loss on the sale of these properties.  The following table summarizes the components of income from discontinued operations applicable to these properties (amounts in thousands):

 

		Three Months Ended March 31,
		2014			2013
Rental income		$	141		$	240
Depreciation and amortization		—			36
Real estate expenses		17			1
Interest expense		111			67
Total expenses		128			104
Income from discontinued operations		$	13		$	136

 

Note 8 - Line of Credit

 

The Company has a $75,000,000 revolving credit facility with Manufacturer’s & Trader’s Trust Company, VNB New York Corp., Bank Leumi USA and Israel Discount Bank of New York.  This facility matures March 31, 2015 and provides that the Company pay interest at the greater of (i) 90 day LIBOR plus 3% (3.23% at March 31, 2014) and (ii) 4.75% per annum, and there is an unused facility fee of .25% per annum. At March 31, 2014 and May 5, 2014, the outstanding balance under the facility was $12,850,000. The Company was in compliance with all covenants at March 31, 2014.

 

Note 9 - Compensation and Services Agreement

 

The Company agreed to pay fees of $3,300,000 and $3,465,000 in 2014 and 2015, respectively (including overhead expenses of $186,375 and $195,694 and property management fees, included in real estate expenses on the income statement, of $850,000 and $892,500 in 2014 and 2015, respectively) pursuant to the compensation and services agreement, as amended, with Majestic Property Management Corp.  Majestic Property Management Corp is wholly-owned by the Vice Chairman of the Company’s Board of Directors.   The 2014 fee represents an increase of $400,000 over the 2013 fee and the 2015 fee represents a $165,000 increase over the 2014 fee. The results of a report prepared by an independent compensation consultant were used to evaluate and support these increases.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2014 (Continued)

 

Note 10 - Common Stock Cash Dividend

 

On March 13, 2014, the Board of Directors declared a quarterly cash dividend of $.37 per share on the Company’s common stock, totaling $5,872,000. The quarterly dividend was paid on April 3, 2014 to stockholders of record on March 25, 2014.

 

Note 11 - Shares Issued through Equity Offering Program

 

On March 20, 2014, the Company entered into an amended and restated equity offering sales agreement to sell shares of the Company’s common stock from time to time with an aggregate sales price of up to approximately $38,360,000, through an “at the market” equity offering program.  During the three months ended March 31, 2014, the Company sold 32,844 shares for proceeds of $720,000, net of commissions of $7,000, and incurred offering costs, primarily professional fees, of $76,000. Subsequent to March 31, 2014 and through April 4, 2014, the Company sold 26,262 shares for proceeds of $573,300, net of commissions of $6,000.

 

Note 12 - Stock Based Compensation

 

The Company’s 2012 Incentive Plan, approved by the Company’s stockholders in June 2012, permits the Company to grant, among other things, stock options, restricted stock, 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 Company’s common stock is authorized for issuance pursuant to this Plan, of which 229,000 have been issued as of March 31, 2014.  An aggregate of 452,000 shares of restricted stock and restricted stock units are outstanding under the Company’s 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 upon the fifth anniversary of the date of grant 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

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2014 (Continued)

 

Note 12 - Stock Based Compensation (Continued)

 

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 forfeited or vested in the three months ended March 31, 2014.

 

As of March 31, 2014 and December 31, 2013, there were no options outstanding under the Company’s equity incentive plans.

 

The following is a summary of the activity of the equity incentive plans (excluding, except as otherwise noted, the 200,000 Units):

 

		Three Months Ended March 31,
		2014			2013
Restricted share grants		118,850			112,650
Per share grant price		$	20.54		$	21.59
Deferred compensation to be recognized over vesting period		$	2,441,000		$	2,432,000
Non-vested shares:
Non-vested beginning of period		470,015			407,460
Grants		118,850			112,650
Vested during period		(101,300		)	(50,095		)
Forfeitures		(6,520		)	—
Non-vested end of period		481,045			470,015
Average per share value of non-vested shares (based on grant price)		$	14.55		$	14.22
Value of shares vested during the period (based on grant price)		$	621,000		$	876,000
The total charge to operations for all incentive plans, including the 200,000 Units, is as follows:
Outstanding restricted stock grants		$	443,000		$	367,000
Outstanding restricted stock units		29,000			30,000
Total charge to operations		$	472,000		$	397,000

 

As of March 31, 2014, there were approximately $6,188,000 of total compensation costs related to nonvested awards that have not yet been recognized, including $372,000 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 3.1 years.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2014 (Continued)

 

Note 13 - Fair Value Measurements

 

The Company measures the fair value of financial instruments based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions.  In accordance with the fair value hierarchy, Level 1 assets/liabilities are valued based on quoted prices for identical instruments in active markets, Level 2 assets/liabilities are valued based on quoted prices in active markets for similar instruments, on quoted prices in less active or inactive markets, or on other “observable” market inputs and Level 3 assets/liabilities are valued based significantly on “unobservable” market inputs.

 

The carrying amounts of cash and cash equivalents, escrow, deposits and other assets and receivables, 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 March 31, 2014, the $289,624,000 estimated fair value of the Company’s mortgages payable is more than their carrying value by approximately $4,721,000 assuming a blended market interest rate of 4.8% based on the 9.4 year weighted average remaining term of the mortgages.  At December 31, 2013, the $283,142,000 estimated fair value of the Company’s mortgages payable is more than their carrying value by approximately $5,097,000 assuming a blended market interest rate of 5% based on the 9.0 year weighted average remaining term of the mortgages.

 

At March 31, 2014 and December 31, 2013, the $12,850,000 and $23,250,000, respectively, carrying amount of the Company’s line of credit approximates its fair value.

 

The fair value of the Company’s mortgages payable and line of credit are 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.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2014 (Continued)

 

Note 13 - Fair Value Measurements (Continued)

 

Financial Instruments Measured at Fair Value

 

The fair value of the Company’s available-for-sale securities and derivative financial instruments was determined using the following inputs (amounts in thousands):

 

				Carrying and			Fair Value Measurements Using Fair Value Hierarchy on a Recurring Basis
		As of		Fair Value			Level 1			Level 2
Financial assets:
Available-for-sale securities:
Equity securities		March 31, 2014		$	287		$	287		$	—
		December 31, 2013		282			282			—
Derivative financial instruments:
Interest rate swaps		March 31, 2014		214			—			214
		December 31, 2013		265			—			265
Financial liabilities:
Derivative financial instruments:
Interest rate swaps		March 31, 2014		1,441			—			1,441
		December 31, 2013		774			—			774

 

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

 

Available-for-sale securities

 

At March 31, 2014, the Company’s available-for-sale securities were as follows:

(i) a $264,000 investment in 37,081 shares of BRT Realty Trust and (ii) a $23,000 investment in other equity securities (included in other assets on the balance sheet). The aggregate cost of these securities was $138,000 and the unrealized gain thereon was $149,000. Such unrealized gains were 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.

 

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