ONE LIBERTY PROPERTIES INC - Quarter Report: 2016 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, 2016

 

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 3, 2016, the registrant had 17,148,686 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, 2016 and December 31, 2015	1
	Consolidated Statements of Income – Three months ended March 31, 2016 and 2015	2
	Consolidated Statements of Comprehensive Income – Three months ended March 31, 2016 and 2015	3
	Consolidated Statements of Changes in Equity – Three months ended March 31, 2016 and 2015	4
	Consolidated Statements of Cash Flows – Three months ended March 31, 2016 and 2015	5
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38
Part II – Other Information
Item 6.	Exhibits	39

 

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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, 2016		December 31, 2015
		(Unaudited)
Assets
Real estate investments, at cost
Land		$188,215		$186,994
Buildings and improvements		477,080		460,379
Total real estate investments, at cost		665,295		647,373
Less accumulated depreciation		88,435		85,116
Real estate investments, net		576,860		562,257
Properties held-for-sale		—		12,259
Investment in unconsolidated joint ventures		11,076		11,350
Cash and cash equivalents		10,537		12,736
Restricted cash		1,031		1,074
Unbilled rent receivable (including $712 related to properties held-for-sale in 2015)		13,472		13,577
Unamortized intangible lease assets, net		28,988		28,978
Escrow, deposits and other assets and receivables		5,374		4,268
Total assets		$647,338		$646,499
Liabilities and Equity
Liabilities:
Mortgages payable, net of $3,425 and $3,373 deferred financing costs, respectively		$321,761		$331,055
Line of credit, net of $464 and $506 deferred financing costs, respectively		29,386		17,744
Dividends payable		6,996		6,901
Accrued expenses and other liabilities		17,599		13,852
Unamortized intangible lease liabilities, net		14,310		14,521
Total liabilities		390,052		384,073
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; 16,458 and 16,292 shares issued and outstanding		16,458		16,292
Paid-in capital		234,866		232,378
Accumulated other comprehensive loss		(8,378	)	(4,390	)
Accumulated undistributed net income		12,506		16,215
Total One Liberty Properties, Inc. stockholders’ equity		255,452		260,495
Non-controlling interests in consolidated joint ventures		1,834		1,931
Total equity		257,286		262,426
Total liabilities and equity		$647,338		$646,499

 

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,
		2016			2015
Revenues:
Rental income, net		$	15,056		$	13,894
Tenant reimbursements		1,288			782
Lease termination fee		—			650
Total revenues		16,344			15,326
Operating expenses:
Depreciation and amortization		4,185			3,734
General and administrative (see Note 11 for related party information)		2,609			2,392
Real estate expenses (see Note 11 for related party information)		2,175			1,334
Real estate acquisition costs (see Note 11 for related party information)		204			248
Federal excise and state taxes		76			74
Leasehold rent		77			77
Total operating expenses		9,326			7,859
Operating income		7,018			7,467
Other income and expenses:
Gain on sale of real estate, net		787			5,392
Purchase price fair value adjustment		—			960
Prepayment costs on debt		(423		)	(568		)
Equity in earnings of unconsolidated joint ventures		209			147
Other income		13			3
Interest:
Expense		(4,075		)	(3,739		)
Amortization and write-off of deferred financing costs		(244		)	(455		)
Net income		3,285			9,207
Net loss (income) attributable to non-controlling interests		2			(1,351		)
Net income attributable to One Liberty Properties, Inc.		$	3,287		$	7,856
Weighted average number of common shares outstanding:
Basic		16,388			15,776
Diluted		16,495			15,876
Per common share attributable to common stockholders:
Basic		$	.19		$	.48
Diluted		$	.18		$	.48
Cash distributions declared per share of common stock		$	.41		$	.39

 

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,
		2016			2015
Net income		$	3,285		$	9,207
Other comprehensive loss
Net unrealized gain on available-for-sale securities		2			3
Net unrealized loss on derivative instruments		(3,900		)	(734		)
One Liberty Properties Inc.’s share of joint venture net unrealized loss on derivative instruments		(105		)	(48		)
Other comprehensive loss		(4,003		)	(779		)
Comprehensive (loss) income		(718		)	8,428
Net loss (income) attributable to non-controlling interests		2			(1,351		)
Adjustment for derivative instruments attributable to non-controlling interests		15			25
Comprehensive (loss) income attributable to One Liberty Properties, Inc.		$	(701	)	$	7,102

 

See accompanying notes to consolidated financial statements.

 

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ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Amounts in Thousands, Except Per Share Data)

 

		Common Stock		Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Undistributed Net Income		Non- Controlling Interests in Consolidated Joint Ventures		Total
Balances, December 31, 2014		$15,728		$219,867		$(3,195	)	$21,876		$1,628		$255,904
Distributions - common stock Cash - $.39 per share		—		—		—		(6,380	)	—		(6,380	)
Restricted stock vesting		71		(71	)	—		—		—		—
Shares issued through dividend reinvestment plan		23		562		—		—		—		585
Contribution from non-controlling interest		—		—		—		—		663		663
Distributions to non-controlling interests		—		—		—		—		(1,582	)	(1,582	)
Compensation expense - restricted stock		—		577		—		—		—		577
Net income		—		—		—		7,856		1,351		9,207
Other comprehensive (loss) income		—		—		(804	)	—		25		(779	)
Balances, March 31, 2015		$15,822		$220,935		$(3,999	)	$23,352		$2,085		$258,195
Balances, December 31, 2015		$16,292		$232,378		$(4,390	)	$16,215		$1,931		$262,426
Distributions - common stock Cash - $.41 per share		—		—		—		(6,996	)	—		(6,996	)
Shares issued through equity offering program — net		62		1,285		—		—		—		1,347
Restricted stock vesting		73		(73	)	—		—		—		—
Shares issued through dividend reinvestment plan		31		610		—		—		—		641
Distributions to non-controlling interests		—		—		—		—		(80	)	(80	)
Compensation expense - restricted stock		—		666		—		—		—		666
Net income (loss)		—		—		—		3,287		(2	)	3,285
Other comprehensive loss		—		—		(3,988	)	—		(15	)	(4,003	)
Balances, March 31, 2016		$16,458		$234,866		$(8,378	)	$12,506		$1,834		$257,286

 

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,
		2016			2015
Cash flows from operating activities:
Net income		$	3,285		$	9,207
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of real estate		(787		)	(5,392		)
Purchase price fair value adjustment		—			(960		)
Prepayment costs on debt		—			568
Increase in unbilled rent receivable		(601		)	(401		)
Write-off of unbilled rent receivable		—			226
Decrease in rental income and tenant reimbursements resulting from bad debt expense		153			—
Amortization of intangibles relating to leases, net		(160		)	(127		)
Amortization of restricted stock expense		666			577
Equity in earnings of unconsolidated joint ventures		(209		)	(147		)
Distributions of earnings from unconsolidated joint ventures		205			212
Depreciation and amortization		4,185			3,734
Amortization and write-off of deferred financing costs		244			455
Payment of leasing commissions		(347		)	(550		)
Increase in escrow, deposits, other assets and receivables		(444		)	(84		)
Decrease in accrued expenses and other liabilities		(601		)	(983		)
Net cash provided by operating activities		5,589			6,335
Cash flows from investing activities:
Purchase of real estate		(17,050		)	(31,413		)
Improvements to real estate		(1,523		)	(355		)
Net proceeds from sale of real estate		13,750			16,025
Purchase of partner’s interest in unconsolidated joint venture		—			(6,300		)
Investment in unconsolidated joint ventures		—			(3,664		)
Distributions of capital from unconsolidated joint ventures		173			575
Net cash used in investing activities		(4,650		)	(25,132		)
Cash flows from financing activities:
Scheduled amortization payments of mortgages payable		(2,077		)	(1,875		)
Repayment of mortgages payable		(30,515		)	(12,168		)
Proceeds from mortgage financings		23,350			28,268
Prepayment costs on debt		—			(568		)
Proceeds from sale of common stock, net		1,347			—
Proceeds from bank line of credit		20,500			29,900
Repayment on bank line of credit		(8,900		)	(14,900		)
Issuance of shares through dividend reinvestment plan		641			585
Payment of financing costs		(503		)	(397		)
Capital contributions from non-controlling interests		—			663
Distributions to non-controlling interests		(80		)	(1,582		)
Cash distributions to common stockholders		(6,901		)	(6,320		)
Net cash (used in) provided by financing activities		(3,138		)	21,606
Net (decrease) increase in cash and cash equivalents		(2,199		)	2,809
Cash and cash equivalents at beginning of year		12,736			20,344
Cash and cash equivalents at end of period		$	10,537		$	23,153

 

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,
		2016			2015
Supplemental disclosures of cash flow information:
Cash paid during the period for interest expense		$	4,129		$	3,783
Cash paid during the period for Federal excise tax		190			300
Supplemental schedule of non-cash investing and financing activities:
Mortgage debt extinguished upon conveyance of the Company’s Morrow, Georgia property to mortgagee by deed-in-lieu of foreclosure		$	—		$	1,466
Consolidation of real estate investment		—			2,633
Purchase accounting allocation — intangible lease assets		959			2,518
Purchase accounting allocation — intangible lease liabilities		(96		)	(4,813		)

 

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, 2016

 

Note 1 — Organization and Background

 

One Liberty Properties, Inc. (“OLP”) was incorporated in 1982 in Maryland.  OLP is a self-administered and self-managed real estate investment trust (“REIT”).  OLP acquires, owns and manages a geographically diversified portfolio consisting primarily of retail, industrial, flex and health and fitness properties, many of which are subject to long-term net leases.  As of  March 31, 2016, OLP owns 114 properties, including seven properties owned by consolidated joint ventures and five properties owned by unconsolidated joint ventures. The 114 properties are located in 30 states.

 

Note 2 — Summary Accounting Policies

 

Principles of Consolidation/Basis of Preparation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and include all of the information and disclosures required by U.S. Generally Accepted Accounting Principles (“GAAP”) for interim reporting. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statement disclosures. In the opinion of management, all adjustments necessary for fair presentation (including normal recurring accruals) have been included. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results for the full year. These statements should be read in conjunction with the consolidated financial statements and related notes included in OLP’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

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

 

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

 

Investment in Joint Ventures and Variable Interest Entities

 

The Financial Accounting Standards Board, or FASB, provides guidance for determining whether an entity is a VIE.  VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. A VIE is required to be consolidated by its primary beneficiary, which is the party that (i) has the power to control the activities that most significantly impact the VIE’s economic performance and (ii) has the obligation to absorb losses, or the right to receive benefits, of the VIE that could potentially be significant to the VIE.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016 (Continued)

 

Note 2 — Summary Accounting Policies (Continued)

 

On January 1, 2016, the Company adopted ASU 2015-02, Amendments to the Consolidation Analysis, which amends the current consolidation guidance.  The ASU introduces a separate consolidation analysis specific to limited partnerships and other similar entities. Under this analysis, limited partnerships and other similar entities will be considered a VIE unless the limited partners hold substantive kick-out rights or participating rights (see Note 6).

 

Consistent with the adoption of ASU 2015-02, the Company assesses the accounting treatment for each of its investments, including  a review of each venture or limited liability company or partnership agreement to determine the rights of each party and whether those rights are protective or participating. The agreements typically contain certain protective rights, such as the requirement of partner approval to sell, finance or refinance the property and to pay capital expenditures and operating expenditures outside of the approved budget or operating plan. In situations where 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 a 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.

 

Additionally, the Company assesses the accounting treatment for any interests pursuant to which the Company may have a variable interest as a lessor.  Leases may contain certain protective rights, such as the right of sale and the receipt of certain escrow deposits.  In situations where the Company does not have the power over tenant activities that most significantly impact the performance of the property, the Company would not consolidate tenant operations.

 

The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting.  All investments in the unconsolidated joint ventures have sufficient equity at risk to permit the entity to finance its activities without additional subordinated financial support and, as a group, the holders of the equity at risk have power through voting rights to direct the activities of these ventures. As a result, none of these joint ventures are VIEs.  In addition, the Company has shared power with its co-managing members over these entities, and therefore the entities are not consolidated. These investments are recorded initially at cost, as investments in unconsolidated joint ventures, and subsequently adjusted for their share of equity in earnings, cash contributions and distributions.  None of the joint venture debt is recourse to the Company, subject to standard carve-outs.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016 (Continued)

 

Note 2 — Summary Accounting Policies (Continued)

 

The Company has elected to follow the cumulative earnings approach when assessing, for the consolidated statement of cash flows, whether the distribution from the investee is a return of the investor’s investment as compared to a return on its investment. The source of the cash generated by the investee to fund the distribution is not a factor in the analysis (that is, it does not matter whether the cash was generated through investee refinancing, sale of assets or operating results). Consequently, the investor only considers the relationship between the cash received from the investee to its equity in the undistributed earnings of the investee, on a cumulative basis, in assessing whether the distribution from the investee is a return on or return of its investment.  Cash received from the unconsolidated entity is presumed to be a return on the investment to the extent that, on a cumulative basis, distributions received by the investor are less than its share of the equity in the undistributed earnings of the entity.

 

Properties Held-for-Sale

 

Real estate investments are classified as properties held-for-sale when management determines that the investment meets the applicable criteria.  Real estate investments which are held-for-sale are not depreciated.

 

Tenant Reimbursements

 

Tenant reimbursements represent tenants’ contractual obligations for recoverable real estate taxes and operating expenses and are recognized when earned.

 

Reclassifications

 

Certain amounts previously reported in the consolidated financial statements have been reclassified in the accompanying consolidated financial statements to conform to the current period’s presentation, primarily to present debt issuance costs as a direct deduction from the carrying amount of the associated debt on the Company’s December 31, 2015 consolidated balance sheet. See Note 10.

 

Note 3 — Earnings Per Common Share

 

Basic earnings per share was determined by dividing net income allocable to common stockholders for each period by the weighted average number of shares of common stock outstanding during the applicable period. Net income is also allocated to the unvested restricted stock outstanding during each period, as the restricted stock is entitled to receive dividends and is therefore considered a participating security.  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 are excluded from the basic earnings per share calculation, as these units are not participating securities (see Note 14).

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016 (Continued)

 

Note 3 — Earnings Per Common Share (Continued)

 

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, 2016 and 2015, the diluted weighted average number of shares of common stock includes 107,000 and 100,000 shares, respectively (of an aggregate of 200,000 shares) of common stock underlying the restricted stock units awarded pursuant to the Pay-For-Performance program.  These amounts include 100,000 shares that would be issued pursuant to a metric based on the 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.  Of the remaining 100,000 shares of common stock underlying the restricted stock units awarded under the Pay-For-Performance program, 7,000 shares are included in the diluted weighted average in the three months ended March 31, 2016 and, as they did not meet the return on capital performance metric during such period, none of such 100,000 shares were included in the three months ended March 31, 2015.

 

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,
		2016		2015
Numerator for basic and diluted earnings per share:
Net income		$3,285		$9,207
Add net loss (income) attributable to non-controlling interests		2		(1,351	)
Less earnings allocated to unvested restricted stock (a)		(248	)	(261	)
Net income available for common stockholders, basic and diluted		$3,039		$7,595
Denominator for basic earnings per share:
Weighted average common shares		16,388		15,776
Effect of diluted securities:
Restricted stock units awarded under Pay-for-Performance program		107		100
Denominator for diluted earnings per share:
Weighted average shares		16,495		15,876
Earnings per common share, basic		$.19		$.48
Earnings per common share, diluted		$.18		$.48
Net income attributable to One Liberty Properties, Inc. common stockholders, net of non-controlling interests		$3,287		$7,856

 

(a)         Represents an allocation of distributed earnings to unvested restricted stock which, as participating securities, are entitled to receive dividends.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016 (Continued)

 

Note 4 — Real Estate Acquisitions

 

The following chart details the Company’s acquisitions of real estate during the three months ended March 31, 2016 (amounts in thousands):

 

Description of Property		Date Acquired		Contract Purchase Price			Terms of Payment		Third Party Real Estate Acquisition Costs (a)
Multi-tenant industrial facility, Greenville, SC (b)		March 30, 2016		$	8,100		All cash		$	85
Multi-tenant industrial facility, Greenville, SC (b)		March 30, 2016		8,950			All cash		87
Other costs (c)				—					32
Totals				$	17,050				$	204

 

(a)	Included as an expense in the accompanying consolidated statement of income.
(b)	These properties are adjacent to one another.
(c)	Costs incurred for properties purchased in 2015, potential acquisitions and transactions that were not consummated.

 

The following chart provides the preliminary allocation of the purchase price for the Company’s acquisitions of real estate during the three months ended March 31, 2016 (amounts in thousands):

 

								Building			Intangible Lease
Description of Property		Land			Building			Improvements			Asset			Liability			Total
Multi-tenant industrial facility, Greenville, SC		$	693		$	6,716		$	175		$	516		$	—		$	8,100
Multi-tenant industrial facility, Greenville, SC		528			7,894			181			443			(96		)	8,950
Totals		$	1,221		$	14,610		$	356		$	959		$	(96	)	$	17,050

 

As of March 31, 2016, the weighted average amortization period is 3.4 years for these intangible lease assets and 12.2 years for these 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 15) in the fair value hierarchy. The Company is currently in the process of finalizing the purchase price allocations for the properties acquired during the three months ended March 31, 2016; therefore the allocations are preliminary and subject to change.

 

The properties purchased by the Company during the three months ended March 31, 2016 are each 100% occupied.  Each property is net leased by three unrelated tenants pursuant to leases which expire between 2017 and 2021.

 

As a result of the Company’s $6,300,000 purchase on March 31, 2015 of its partner’s 50% interest in an unconsolidated joint venture that owns a property in Lincoln, Nebraska, the

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016 (Continued)

 

Note 4 — Real Estate Acquisitions (Continued)

 

Company obtained a controlling financial interest. In consolidating the investment, the Company recorded a purchase price fair value adjustment of $960,000 on the consolidated statement of income, representing the difference between the book value of its preexisting equity investment on the March 31, 2015 purchase date and the fair value of the net assets acquired.

 

Note 5 — Sale of Properties

 

On February 1, 2016, the Company sold a portfolio of eight retail properties located in Louisiana and Mississippi for a total sales price of $13,750,000.  The sale resulted in a gain of $787,000, recorded as Gain on sale of real estate, net, for the three months ending March 31, 2016.  In connection with the sale, the Company paid off the $7,801,000 mortgage balance on these properties and incurred a $380,000 expense for the early termination of the mortgage (included in Prepayment costs on debt) and a $26,000 write-off of deferred financing costs (included in Amortization and write-off of deferred financing costs).  As a result of the sale, the Company also wrote-off, as a reduction to Gain on sale of real estate, net, $706,000 of unbilled straight-line rent receivable, $79,000 of intangible lease assets and $54,000 of tenant origination costs.  At December 31, 2015, the Company classified the net book value of the land and buildings, intangible lease assets and tenant origination costs  totaling $12,259,000 as Properties held-for-sale.

 

On January 13, 2015, a consolidated joint venture of the Company sold a property located in Cherry Hill, New Jersey for $16,025,000, net of closing costs.  The sale resulted in a gain of $5,392,000, recorded as Gain on sale of real estate, net, for the three months ended March 31, 2015. In connection with the sale, the Company paid off the $7,376,000 mortgage balance on this property and incurred a $472,000 swap termination fee (included in Prepayment costs on debt) and a $249,000 write-off of deferred financing costs (included in Amortization and write-off of deferred financing costs). The non-controlling interest’s share of income from the transaction was $1,320,000 and is included in net income attributable to non-controlling interests.

 

Note 6 — Variable Interest Entities, Contingent Liabilities and Consolidated Joint Ventures

 

Variable Interest Entities — Ground Leases

 

In June 2014, the Company purchased land for $6,510,000 in Sandy Springs, Georgia, improved with a 196 unit apartment complex, and in March 2015, the Company purchased land for $9,300,000 in Lakemoor, Illinois, improved with a 496 unit apartment complex.  With each purchase, the Company simultaneously entered into a triple net ground lease with the owner/operator of the applicable complex.

 

The Company determined that it has a variable interest through its ground leases and the owner/operators are VIEs because their equity investment at risk is insufficient to finance its activities without additional subordinated financial support; this assessment did not change as a result of the adoption of ASU 2015-02 (see Note 2). Simultaneously with the closing of each

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016 (Continued)

 

Note 6 — Variable Interest Entities, Contingent Liabilities and Consolidated Joint Ventures (Continued)

 

acquisition, the owner/operator obtained a mortgage from a third party ($16,230,000 for Sandy Springs and $43,824,000 for Lakemoor) which, together with the Company’s purchase of the land, provided substantially all of the aggregate funds to acquire the complex.  The Company provided its land as collateral for the respective owner/operator’s mortgage loans; accordingly, each land position is subordinated to the applicable mortgage. Other than as described above, no other financial support has been provided by the Company.

 

The Company further determined that for each acquisition it is not the primary beneficiary because the Company does not have the power to direct the activities that most significantly impact the owner/operator’s economic performance, such as management, operational budgets and other rights, including leasing of the units, and therefore, does not consolidate the VIEs for financial statement purposes.  Accordingly, the Company accounts for these investments as land and the revenues from the ground leases as Rental income, net.  Such rental income amounted to $428,000 and $252,000 for the three months ended March 31, 2016 and 2015, respectively.

 

The following is a summary of the Company’s variable interests in identified VIEs, in which it is not the primary beneficiary, and the aggregate carrying amount and maximum exposure to loss as of March 31, 2016 (amounts in thousands):

 

Property		Type of Exposure		Carrying Amount and Maximum Exposure to Loss
River Crossing Apartments, Sandy Springs, Georgia		Land		$	6,528
		Unbilled rent receivable		3
The Meadows Apartments, Lakemoor, Illinois		Land		9,592
		Unbilled rent receivable		12
Total				$	16,135

 

Pursuant to the terms of the ground lease for the property in Sandy Springs, Georgia, the owner/operator is obligated to make certain unit renovations as and when units become vacant.  Cash reserves totaling $1,894,000 were received by the Company in conjunction with the purchase of the property in June 2014 to cover such renovation work and other reserve requirements.  Through the year ended December 31, 2015, an additional $121,000 of reserves was received by the Company and an additional $67,000 was received during the three months ended March 31, 2016.  These cash reserves are held by the Company and disbursed once the renovations have been completed. Through the year ended December 31, 2015, the Company disbursed approximately $941,000 and for the three months ended March 31, 2016 the Company disbursed approximately $110,000 for renovation costs to the owner/operator. The cash reserve balance at March 31, 2016 and December 31, 2015 was $1,031,000 and $1,074,000, respectively, and is classified as Restricted cash on the consolidated balance sheets.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016 (Continued)

 

Note 6 — Variable Interest Entities, Contingent Liabilities and Consolidated Joint Ventures (Continued)

 

Variable Interest Entity — Consolidated Joint Ventures

 

A joint venture in which the Company has a 95% equity interest and a senior preferred equity interest, acquired a property located in Joppa, Maryland.  The Company had historically determined that this joint venture was a VIE.  As a result of the adoption of ASU 2015-02, the Company re-assessed its evaluation and determined this venture is still a VIE as the Company’s voting rights are not proportional to its economic interests and substantially all of the joint venture’s activities are conducted on behalf of the Company.

 

With respect to the six other consolidated joint ventures in which the Company has between an 85% to 95% interest, the Company had historically determined that such ventures were not VIEs.  As a result of the adoption of ASU 2015-02, the Company re-assessed its evaluation of these investments and determined such ventures are VIEs because the non-controlling interests do not have substantive kick-out or participating rights.

 

In each of these seven joint ventures, the Company has determined it is the primary beneficiary of the VIE as it has the power to direct the activities that most significantly impact each joint venture’s performance including management, approval of expenditures, and the obligation to absorb the losses or rights to receive benefits.  Accordingly, the Company has continued to consolidate the operations of these joint ventures for financial statement purposes.  The joint ventures’ creditors do not have recourse to the assets of the Company other than those held by these joint ventures.

 

The following is a summary of the consolidated VIEs’ carrying amounts and classification in the Company’s consolidated balance sheets, none of which are restricted (amounts in thousands):

 

		March 31,			December 31,
		2016			2015
Land		$	18,400		$	18,400
Buildings and improvements, net of depreciation of $2,343 and $2,076, respectively		34,258			34,287
Cash		1,588			1,960
Unbilled rent receivable		358			330
Unamortized intangible lease assets, net		1,894			1,996
Escrow, deposits and other assets and receivables		1,016			752
Mortgages payable, net of deferred financing costs of $464 and $438, respectively		26,693			25,926
Accrued expenses and other liabilities		1,308			793
Unamortized intangible lease liabilities, net		2,341			2,392
Accumulated other comprehensive loss		(280		)	(126		)
Non-controlling interests in consolidated joint ventures		1,834			1,931

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016 (Continued)

 

Note 6 — Variable Interest Entities, Contingent Liabilities and Consolidated Joint Ventures (Continued)

 

MCB Real Estate, LLC and its affiliates (“MCB”) are the Company’s joint venture partner in five consolidated joint ventures.  At March 31, 2016, the Company has aggregate equity investments of approximately $18,064,000 in such ventures.

 

A joint venture with MCB, in which the Company has a net equity investment of $2,763,000, owns a property formerly operated as a Pathmark supermarket in Philadelphia, Pennsylvania. In July 2015, this tenant filed for Chapter 11 bankruptcy protection, rejected the lease, and in late September 2015, vacated the property. This tenant accounted for approximately 1.3% of the Company’s rental income for the three months ended March 31, 2015.  At March 31, 2016, the mortgage debt on such property is $4,485,000. The Company has determined that no impairment charge is required currently with respect to this property.

 

Distributions by Consolidated Joint Ventures

 

Distributions to each joint venture partner are determined pursuant to the applicable operating agreement and may not be pro rata to the equity interest each partner has in the applicable venture.

 

Note 7 — Investment in Unconsolidated Joint Ventures

 

At March 31, 2016 and December 31, 2015, the Company’s five unconsolidated joint ventures each own and operate one property.  Such ventures are not considered VIEs (see Note 2).  The Company’s equity investment in such unconsolidated joint ventures at such dates totaled $11,076,000 and $11,350,000, respectively. The Company recorded equity in earnings of $209,000 and $147,000 for the three months ended March 31, 2016 and 2015, respectively.

 

Note 8 — Lease Termination Fee Income

 

In March 2015, the Company received a $650,000 lease termination fee from an industrial tenant in a lease buy-out transaction.  In connection with the receipt of this fee, the Company wrote-off $226,000 as an offset to rental income, representing the entire balance of the unbilled rent receivable related to the sole tenant at this property.  The Company re-leased this property simultaneously with the termination of the lease.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016 (Continued)

 

Note 9 — 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, 2016 and December 31, 2015, there was no balance in allowance for doubtful accounts.

 

The Company records bad debt expense as a reduction of rental income and/or tenant reimbursements. On March 2, 2016, Sports Authority Inc., a tenant at the Company’s Greenwood Village, Colorado property filed for Chapter 11 bankruptcy protection. This tenant accounted for approximately 0.8% of the Company’s rental income for the three months ended March 31, 2015.  At March 31, 2016, the Company recorded an aggregate bad debt expense of $153,000, relating to rental income and tenant reimbursements due from this tenant.

 

Note 10 — Debt Obligations

 

Mortgages Payable

 

On January 1, 2016, the Company adopted ASU 2015-03, Interest — Imputation of Interest — Simplifying the Presentation of Debt Issuance Costs, which amends the balance sheet presentation for debt issuance costs.  Under the amended guidance, a company will present unamortized debt issuance costs as a direct deduction from the carrying amount of that debt liability with retrospective application to all prior periods presented.  The adoption of this ASU had no impact on the Company’s previously reported income from operations, net income or accumulated undistributed net income for the periods presented.

 

As a result of the adoption of this guidance, the following table depicts the adjustments to the Company’s previously reported consolidated balance sheet amounts at December 31, 2015 (amounts in thousands):

 

		As Reported			As Adjusted
Unamortized deferred financing costs, net		$	3,914		$	—
Escrow, deposits and other assets and receivables		4,233			4,268
Total assets		650,378			646,499
Mortgages payable		334,428			331,055
Line of credit		18,250			17,744
Total liabilities		387,952			384,073
Total liabilities and equity		650,378			646,499

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016 (Continued)

 

Note 10 — Debt Obligations (Continued)

 

The following table details the Mortgages payable, net, balances per the consolidated balance sheets at March 31, 2016 and December 31, 2015 (amounts in thousands):

 

		March 31, 2016			December 31, 2015
Mortgages payable, gross		$	325,186		$	334,428
Unamortized deferred financing costs		(3,425		)	(3,373		)
Mortgages payable, net		$	321,761		$	331,055

 

At March 31, 2016 and December 31, 2015, $236,000 and $35,000, respectively, is included in other assets on the consolidated balance sheets representing unamortized deferred financing costs incurred for which there is no associated mortgage debt.

 

Line of Credit

 

The Company has a $75,000,000 credit facility with Manufacturers & Traders Trust Company, VNB New York, LLC, Bank Leumi USA and Israel Discount Bank of New York which matures December 31, 2018.  The facility provides that the Company pay an interest rate equal to the one month LIBOR rate plus an applicable margin which ranges from 175 basis points to 300 basis points depending on the ratio of the Company’s total debt to total value, as determined pursuant to the facility.   The applicable margin was 175 basis points at March 31, 2016 and 2015.   An unused facility fee of .25% per annum applies to the facility.  The average interest rate on the facility was 2.18% and 1.92% for the three months ended March 31, 2016 and 2015, respectively.

 

The following table details the Line of credit, net, balances per the consolidated balance sheets at March 31, 2016 and December 31, 2015 (amounts in thousands):

 

		March 31, 2016			December 31, 2015
Line of credit, gross		$	29,850		$	18,250
Unamortized deferred financing costs		(464		)	(506		)
Line of credit, net		$	29,386		$	17,744

 

At May 2, 2016, there was an outstanding balance of $25,350,000 (before netting unamortized deferred financing costs) under the facility.  The Company was in compliance with all covenants at March 31, 2016.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016 (Continued)

 

Note 11 — Related Party Transactions

 

Effective January 1, 2016, pursuant to the compensation and services agreement, as amended, with Majestic Property Management Corp., a company wholly-owned by the Company’s vice-chairman, property management fees are paid based on 1.5% and 2.0% of the rental payments (including tenant reimbursements) actually received by the Company from net lease tenants and operating lease tenants, respectively.  The Company will not pay Majestic property management fees with respect to properties managed by third parties.  For the three months ended March 31, 2016, the Company paid $652,000 (including overhead expenses of $49,000 and property management fees of $241,000).  For the three months ended March 31, 2015, such quarterly fees were $634,000 (including overhead expenses of $49,000 and property management fees of $223,000).

 

For 2016, the Company agreed to pay quarterly fees of $65,625 to the Company’s chairman and $26,250 to the Company’s vice-chairman, the same fees paid to such officers in 2015.

 

Executive officers and others providing services under the compensation and services agreement were awarded shares of restricted stock and restricted stock units under the Company’s stock incentive plans (described in Note 14).  The costs of the plans charged to the Company’s operations applicable to the executive officers and others providing services under the compensation and services agreement amounted to $344,000 and $310,000 for the three months ended March 31, 2016 and 2015, respectively.

 

In February 2015, a subsidiary of Gould Investors L.P. (“Gould”), a related party, sold the building where the Company’s corporate offices are located to an unrelated party. During the three months ended March 31, 2015, the Company paid the Gould subsidiary rent of $7,000 and all subsequent lease payments have been made to the purchaser.

 

The fees paid under the compensation and services agreement (except for the property management fees which are included in Real estate expenses), the chairman and vice-chairman fees, the costs of the stock incentive plans, and the rent expense are included in General and administrative expense on the consolidated statements of income.

 

The Company obtains its property insurance in conjunction with Gould and reimburses Gould annually for the Company’s insurance cost relating to its properties. Included in Real estate expenses on the consolidated statements of income is insurance expense of $101,000 and $57,000 for the three months ended March 31, 2016 and 2015, respectively.

 

During the three months ended March 31, 2016 and 2015, the Company paid an aggregate of $51,000 and $105,000, respectively, to its joint venture partners or their affiliates for property management and acquisition fees, which are included in Real estate expenses and Real estate acquisition costs on the consolidated statements of income.  Additionally, in the three months ended March 31, 2016, an unconsolidated joint venture of the Company paid management fees of $35,000 to the other partner of the venture, of which $17,500 reduced Equity in earnings of unconsolidated joint ventures on the consolidated statement of income.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016 (Continued)

 

Note 12 — Common Stock Cash Dividend

 

On March 10, 2016, the Board of Directors declared a quarterly cash dividend of $.41 per share on the Company’s common stock, totaling $6,996,000. The quarterly dividend was paid on April 7, 2016 to stockholders of record on March 24, 2016.

 

Note 13 — 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.  The Company did not sell any shares during the three months ended March 31, 2015.  During the three months ended March 31, 2016, the Company sold 62,499 shares for proceeds of $1,387,000, net of commissions of $14,000, and incurred offering costs of $40,000 for professional fees.  Subsequent to March 31, 2016 and through April 4, 2016, the Company sold 53,563 shares for proceeds of $1,190,000, net of commissions of $12,000.

 

Note 14 — Stock Based Compensation

 

A maximum of 600,000 shares of the Company’s common stock is authorized for issuance pursuant to the Company’s 2012 Incentive Plan, of which 497,500 shares of restricted stock are outstanding and have not yet vested as of March 31, 2016.  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.  An aggregate of 307,500 shares of restricted stock and restricted stock units outstanding under the Company’s 2009 equity incentive plan have not yet vested and no additional awards may be granted under this plan.

 

Pursuant to the Pay-for-Performance program, there are 200,000 performance share awards in the form of restricted stock units (the “Units”) outstanding under the Company’s 2009 Incentive Plan. 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.  No Units were forfeited or vested in the three months ended March 31, 2016.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016 (Continued)

 

Note 14 — Stock Based Compensation (Continued)

 

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,
		2016			2015
Restricted share grants		139,225			129,975
Per share grant price		$	21.74		$	24.60
Deferred compensation to be recognized over vesting period		$	3,027,000		$	3,197,000
Number of non-vested shares:
Non-vested beginning of period		538,755			480,995
Grants		139,225			129,975
Vested during period		(72,730		)	(70,685		)
Forfeitures		(250		)	—
Non-vested end of period		605,000			540,285

 

The following information includes the 200,000 Units:

 

Average per share value of non-vested shares (based on grant price)		$	18.00		$	17.12
Value of shares vested during the period (based on grant price)		$	1,177,000		$	586,000
Average value of shares forfeited during the period (based on grant price)		$	21.05		$	—
The total charge to operations for all incentive plans is as follows:
Outstanding restricted stock grants		$	649,500		$	548,000
Outstanding restricted stock units		16,200			29,000
Total charge to operations		$	665,700		$	577,000

 

As of March 31, 2016, there were approximately $8,080,000 of total compensation costs related to non-vested awards that have not yet been recognized, including $151,000 related to the Units (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 2.5 years.

 

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One Liberty Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016 (Continued)

 

Note 15 — 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, restricted cash, escrow, deposits and other assets and receivables (excluding available-for-sale securities), dividends payable, and accrued expenses and other liabilities (excluding interest rate swaps), are not measured at fair value on a recurring basis, but are considered to be recorded at amounts that approximate fair value.

 

At March 31, 2016, the $336,424,000 estimated fair value of the Company’s mortgages payable is more than their $325,186,000 carrying value (before netting unamortized deferred financing costs) by approximately $11,238,000 assuming a blended market interest rate of 4.01% based on the 9.7 year weighted average remaining term of the mortgages.  At December 31, 2015, the $346,614,000 estimated fair value of the Company’s mortgages payable is more than their $334,428,000 carrying value (before netting unamortized deferred financing costs) by approximately $12,186,000 assuming a blended market interest rate of 4.07% based on the 8.9 year weighted average remaining term of the mortgages.

 

At March 31, 2016 and December 31, 2015, the carrying amount of the Company’s line of credit (before netting unamortized deferred financing costs) of $29,850,000 and $18,250,000, respectively, 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, 2016 (Continued)

 

Note 15 — Fair Value Measurements (Continued)

 

Fair Value on a Recurring Basis

 

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 on a Recurring Basis
		As of		Fair Value			Level 1			Level 2
Financial assets:
Available-for-sale securities:
Equity securities		March 31, 2016		$	34		$	34		$	—
		December 31, 2015		32			32			—
Financial liabilities:
Derivative financial instruments:
Interest rate swaps		March 31, 2016		$	8,203		$	—		$	8,203
		December 31, 2015		4,299			—			4,299

 

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

 

Available-for-sale securities

 

At March 31, 2016 and December 31, 2015, the Company’s available-for-sale securities included an investment in equity securities of $34,000 and $32,000, respectively (included in other assets on the consolidated balance sheets). The aggregate cost of these securities was $5,300, and at March 31, 2016 and December 31, 2015, the unrealized gain was $28,600 and $27,000, respectively.  Such unrealized gains are included in accumulated other comprehensive loss on the consolidated balance sheets.  Fair values are approximated based on current market quotes from financial sources that track such securities.

 

Derivative financial instruments

 

The Company’s objective in using interest rate swaps is to add stability to interest expense and to manage its exposure to interest rate movements. The Company does not use derivatives for trading or speculative purposes.

 

Fair values are approximated using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivatives. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.

 

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