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| OLP > SEC Filings for OLP > Form 10-Q on 6-Aug-2009 | All Recent SEC Filings |
6-Aug-2009
Quarterly Report
Forward-Looking Statements
With the exception of historical information, this Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may," "will," "could," "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions or variations thereof. Forward-looking statements should not be relied on since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, performance or achievements. Investors are cautioned not to place undue reliance on any forward-looking statements.
Overview
We are a self-administered and self-managed real estate investment trust, or REIT, and we primarily own real estate that we net lease to tenants. As of June 30, 2009, we owned 78 properties, including a 50% tenancy in common interest in one property and participated in five joint ventures which owned a total of five properties. These 83 properties are located in 29 states.
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute currently at least 90% of ordinary taxable income to our stockholders. We intend to comply with these requirements and to maintain our REIT status.
Traditionally, we have sought to acquire properties throughout the United States that have locations, demographics and other investment attributes that we believe to be attractive. To fund these acquisitions, we typically used funds borrowed under our credit facility and then sought mortgage indebtedness for the purchased properties on a non-recourse basis, repaying any funds borrowed under our credit facility. Over the past several quarters, institutions have significantly curtailed their lending activities and as a result, it has been challenging to obtain mortgage indebtedness. Due to the current lack of liquidity in the market, we are carefully monitoring our cash needs, our liquidity and the status of our portfolio to preserve our cash and, until the economy stabilizes, we have adopted a conservative acquisition strategy. We continue to maintain a strong cash position to enable us to withstand tenant fallouts.
We are a party to a credit agreement, as amended, with VNB New York Corp., Bank Leumi, USA, Manufacturers and Traders Trust Company and Israel Discount Bank of New York, under which $27 million is currently outstanding. This credit facility expires on March 31, 2010. We have been seeking either to refinance the credit facility or identify alternative lending sources. Given the current challenges in the credit markets, we cannot be certain that we will successfully refinance or secure an alternative source of financing prior to March 31, 2010 or that, if we do, the terms will be satisfactory.
Results of Operations
Comparison of Six and Three Months Ended June 30, 2009 and 2008
Revenues
Rental income increased by $2.4 million, or 12.5%, to $21.2 million for the six months ended June 30, 2009 from $18.8 million for the six months ended June 30, 2008. For the three months ended June 30, 2009, rental income increased by $1.1 million, or 11.4%, to $10.5 million from $9.5 million for the three months ended June 30, 2008. The increase in rental income is primarily due to rental revenues during the six and three months ended June 30, 2009 of $2.3 million and $1.1 million, respectively, earned on twelve properties acquired by us during 2008.
Lease termination fee income resulted from a $1,905,000 lease termination payment received in June 2009 from a retail tenant that had been paying its rent on a current basis, but had vacated the property in March 2009, offset by the write off of the entire balance of the unbilled rent receivable and intangible lease asset related to this property, aggregating $121,000.
Operating Expenses
Depreciation and amortization expense increased by $408,000, or 9.9%, and $110,000, or 5.1%, to $4.5 million and $2.3 million for the six and three months ended June 30, 2009. The increase was primarily due to depreciation and amortization of $463,000 and $228,000 for the six and three months ended June 30, 2009, respectively, taken on twelve properties acquired during 2008. The increase was offset by "catch-up" depreciation of $98,000 and $157,000 recorded in the six and three months ended June 30, 2008, respectively, on a property which had been classified as "held for sale" with no depreciation recorded from August 2007 through March 31, 2008.
General and administrative expenses increased by $54,000, or 1.7%, to $3.3 million for the six months ended June 30, 2009, substantially due to an increase in accounting and legal fees in connection with our year end audit and filings with the Securities and Exchange Commission.
Real estate expenses increased by $226,000, or 198%, and $106,000, or 183%, to $340,000 and $164,000 for the six and three months ended June 30, 2009, respectively, resulting primarily from real estate taxes and utilities for one of our vacant properties. In addition, the 2009 periods include real estate taxes for another property which became subject to a lease with a new tenant under which we are responsible for the real estate taxes, and an increase in repairs, maintenance and other operating expenses at various properties.
Other Income and Expenses
We recognized a net gain of $297,000 on the sale by a joint venture of a vacant property in the six months ended June 30, 2008. There was no comparable gain in the six months ended June 30, 2009.
Interest and other income decreased by $124,000, or 37.5%, to $207,000 and increased by $57,000, or 47.1%, to $178,000 for the six and three months ended June 30, 2009, respectively. We had less cash available for investment in short-term cash equivalents in both periods, as we applied available cash to the purchase of nine properties in September 2008. In addition, the three months ended June 30, 2008 reflects a decline in interest rates earned on short term cash equivalents. Offsetting the decrease in interest income was $110,000 of consulting fee income and $37,000 received for an easement at one of our properties, both recorded in the three months ended June 30, 2009.
Interest expense increased by $276,000, or 3.9%, and $96,000, or 2.7%, to $7.3 million and $3.6 million for the six and three months ended June 30, 2009, respectively. The increase results primarily from increases of $349,000 and $170,000 for the six and three months ended June 30, 2009, respectively, of interest expense related to our line of credit as we drew down funds for the purchase of eight properties in September 2008. Additionally, the increase was due to interest expense on fixed rate mortgages placed on four properties between September 2008 and March 2009, offset in part by a $111,000 gain on hedge ineffectiveness related to an interest rate swap on one of the four new mortgages. These increases were offset in part from the payoff in full of a loan payable, as well as from the monthly principal amortization of mortgages.
Amortization of deferred financing costs increased by $138,000, or 45.8%, and $14,000, or 9.3%, to $439,000 and $164,000 for the six and three months ended June 30, 2009, respectively. The increase in the six month period results primarily from $118,000 of accelerated amortization of deferred financing costs relating to a mortgage loan that was refinanced during the quarter ended March 31, 2009. The balance of the increase results from mortgages placed on several of our properties since September 2008.
During the six months ended June 30, 2008, we sold five acres of excess land that we acquired as part of the purchase of a flex building in 2000 and recognized a gain of $1.8 million. There was no such gain in the six months ended June 30, 2009.
Discontinued Operations
Loss from discontinued operations decreased by $268,000, or 42.1%, and $450,000, or 58.8%, to losses of $369,000 and $315,000 for the six and three months ended June 30, 2009, respectively. Included in discontinued operations are the operations of five properties that were formerly leased to Circuit City, which filed for protection under the federal bankruptcy laws in November 2008. These five properties had net income in the six and three months ended June 30, 2008, but produced losses in the current six and three month periods due to the rejection by Circuit City of its leases with us in the last quarter of 2008 and the first quarter of 2009 and the recording of real estate tax expense. Offsetting these losses are the discontinued operations of a property for which we received a $400,000 lease termination payment in March 2009 from its retail tenant that had been paying its rent on a current basis, but had vacated the property in 2006. In March 2009, we sold this property to an unrelated party and recorded an impairment charge of $229,000 to recognize the loss. This is in addition to an impairment charge of $752,000 taken against this property during the three months ended June 30, 2008.
Liquidity and Capital Resources
We require capital to fund our operations. Our capital sources include income from operating activities, borrowings under our revolving credit facility and mortgage loans secured by our properties. Our available liquidity at June 30, 2009 includes approximately $18.2 million of cash and cash equivalents and $35.5 million under our revolving credit facility, which can be used to pay off existing mortgages, to fund the acquisition of additional properties or to invest in joint ventures. With the tightening of liquidity by lending institutions, it has been difficult to secure mortgage indebtedness and as a result, our ability to make new property acquisitions or increase liquidity will continue to be limited until credit, particularly mortgage loans, become more readily available.
We expect to meet our short-term liquidity requirements generally through our cash and cash equivalents and cash provided by operating activities. The most significant source available to us for a new property acquisition is our revolving credit facility. All of our requests for draw downs under our credit facility have been satisfied to date. However, in view of the current uncertainties in the economy and our limited ability to secure mortgage indebtedness, we have adopted a conservative acquisition strategy and will likely make few, if any, acquisitions in the near term.
We expect to meet our long term liquidity requirements through existing cash resources, proceeds from debt, including under a credit facility, mortgage financings on our properties (including refinances), and if required, the liquidation of properties. We believe that the value of our real estate portfolio is, and will continue to be, sufficient to allow us to refinance the existing mortgage debt at maturity and repay all indebtedness we owe under our credit facility. In addition, in order to increase our cash position, in January 2009, we reduced our quarterly dividend by 38.8%, to $.22 per share, and in connection with our most recent quarterly dividends of $.22 per share paid in April and July 2009, took advantage of a recently adopted Internal Revenue Service revenue ruling which allows us to satisfy our REIT dividend requirement relating to taxable income earned in 2009, by paying our quarterly dividend in cash and shares of our common stock, provided the cash portion of the dividend is at least 10% of the aggregate amount.
Our current credit facility matures on March 31, 2010. The growth of our business through acquisitions is dependent on securing an extension of our credit facility or securing a new credit facility. Any decision by our lenders (or potential lenders) to provide us with financing will depend upon a number of factors, such as the continuation of the current economic recession, our compliance with the terms of our existing credit facility, our financial performance, industry and market trends, the general availability of and rates applicable to financing transactions, such lenders' resources and policies concerning the terms under which they make capital commitments and the relative attractiveness of alternative investment or lending opportunities. Given the current environment, we expect that the terms of a new facility will be less favorable than our existing facility. We owe $27 million under the facility and we would have to identify other sources including, if necessary, the sale of some properties, if we were required to repay the debt.
At June 30, 2009, excluding mortgages payable of our unconsolidated joint ventures, we had 40 outstanding mortgages payable covering 61 properties, aggregating approximately $225 million in principal amount, all of which are secured by first liens on individual real estate investments with an aggregate carrying value of approximately $360 million, before accumulated depreciation. The mortgages bear interest at fixed rates ranging from 5.44% to 8.8%, and mature between 2009 and 2037. During the period July 1, 2009 through December 31, 2009, $3.2 million of our mortgage debt will mature and we believe our present and anticipated cash position is sufficient to repay this mortgage debt.
No payments have been made since December 1, 2008 on non-recourse mortgages totaling $8.7 million secured by five properties formerly leased to Circuit City by five of our wholly-owned subsidiaries and a letter of default was received on March 16, 2009. In July 2009, these properties were conveyed to the mortgagee by deeds-in-lieu of foreclosure.
Credit Facility
We are a party to a credit agreement, as amended, with VNB New York Corp., Bank Leumi, USA, Manufacturers and Traders Trust Company and Israel Discount Bank of New York which provides for a $62.5 million revolving credit facility. The credit facility is available to us to pay off existing mortgages, to fund the acquisition of additional properties or to invest in joint ventures. The facility matures on March 31, 2010. Borrowings under the facility bear interest at the lower of LIBOR plus 2.15% or the bank's prime rate and there is an unused facility fee of ¼% per annum. Net proceeds received from the sale or refinancing of properties are required to be used to repay amounts outstanding under the facility if proceeds from the facility were used to purchase or refinance the property. The facility is guaranteed by our subsidiaries that own unencumbered properties and is secured by the outstanding stock of subsidiary entities. In September 2008, we borrowed $34 million under our line of credit to facilitate the purchase of eight properties, of which $7 million was repaid in November 2008 with a portion of the proceeds from a mortgage financing of one of our properties. As of June 30, 2009, there was $27 million outstanding under the facility.
At June 30, 2009, we had no outstanding contingent commitments, such as guarantees of indebtedness, or any other contractual cash obligations, other than mortgage payable debt, interest rate swaps and the amount outstanding under our line of credit.
Distribution Policy
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute currently at least 90% of our ordinary taxable income to our stockholders. It is our current intention to comply with these requirements and maintain our REIT status. As a REIT, we generally will not be subject to corporate federal, state or local income taxes on taxable income we distribute currently (in accordance with the Internal Revenue Code and applicable regulations) to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal, state and local income taxes at regular corporate rates and may not be able to qualify as a REIT for four subsequent tax years. Even if we qualify as a REIT for federal taxation purposes, we may be subject to certain state and local taxes on our income and to federal income and/or excise taxes on our undistributed taxable income (i.e., taxable income not distributed in the amounts and in the time frames prescribed by the Internal Revenue Code and applicable regulations thereunder).
With respect to the quarterly dividends paid in April and July 2009, we took advantage of a recently adopted IRS revenue ruling which allows us to satisfy our REIT distribution requirement relating to taxable income earned in 2009, by paying the dividend in cash and our common stock, provided the cash component represents at least 10% of the aggregate distribution. Accordingly, the dividend paid on July 21, 2009, aggregating $2,333,000, consisted of $234,000 in cash and 376,000 shares of our common stock valued at approximately $5.58. The dividend paid on April 27, 2009, aggregating $2,229,000, consisted of $223,000 in cash and 529,000 shares of our common stock valued at approximately $3.79.
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