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OLP > SEC Filings for OLP > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for ONE LIBERTY PROPERTIES INC

Form 10-Q for ONE LIBERTY PROPERTIES INC


12-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may," "will," "could," "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions or variations thereof. Forward-looking statements should not be relied on since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, performance or achievements. Investors are encouraged to review the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2012 under the caption "Item 1A. Risk Factors" for a discussion of certain factors which may cause actual results to differ materially from current expectations and are cautioned not to place undue reliance on any forward-looking statements.

Overview

We are a self-administered and self-managed real estate investment trust, organized in Maryland in 1982. We acquire, own and manage a geographically diversified portfolio of retail industrial, flex, office, health and fitness and other properties, a substantial portion of which are under long-term net leases.
As of September 30, 2013, we owned 107 properties (including five properties owned by our unconsolidated joint ventures) located in 29 states. Our occupancy rate at September 30, 2013, based on square footage, was approximately 99.6%.

We face a variety of risks and challenges in our business. We, among other things, face the possibility we will not be able to acquire accretive properties on acceptable terms, lease our properties on terms favorable to us or at all and that our tenants may not be able to pay their rental and other obligations or may choose not to renew expiring leases. Tenants with respect to four properties with an aggregate of 299,325 square feet and that accounted for an aggregate of approximately $1.3 million of rental income in the nine months ended September 30, 2013,have advised us that they will, at the expiration of the applicable lease in December 2013 or January 2014, be vacating their respective property. We are negotiating leases with new tenants for two of such properties and subsequent to September 30, 2013, we entered into a contract to sell the other two properties which are located in Michigan, for an aggregate purchase price of $5.5 million. We cannot give any assurance that these lease or sale transactions will be completed or that if completed, will be on terms favorable to us.

We seek to manage the risk of our real property portfolio by diversifying among types of properties and industries, locations, tenants and scheduled lease expirations. We monitor the risk of tenant non-payments through a variety of approaches tailored to the applicable situation. Generally, based on our assessment of the credit risk posed by our tenants, we monitor a tenant's financial condition through one or more of the following actions: reviewing tenant financial statements, obtaining other tenant related financial information, regular contact with tenant representatives, tenant credit checks and regular management reviews of our tenants.


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In acquiring properties, we balance an evaluation of the terms of the leases and the credit of the existing tenants with a fundamental analysis of the real estate to be acquired, which analysis takes into account, among other things, our estimated value of the property, local demographics and the ability to re-rent or dispose of the property on favorable terms upon lease expiration or early termination.

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute currently at least 90% of ordinary taxable income to our stockholders. We intend to comply with these requirements and to maintain our REIT status.

During the three months ended September 30, 2013, we acquired eight properties for an aggregate contract purchase price of $96.9 million. (We obtained mortgage financing aggregating $51.9 million contemporaneously with the acquisition of three of these properties with an aggregate purchase price of $77.5 million.) As a result of these eight acquisitions and the acquisition of a property for $4.6 million in March 2013, our 2014 contractual rental income (as described below) is $52.4 million, an increase of $6.6 million, or 14.4%, from our 2013 contractual rental income of $45.8 million. The 2014 contractual rental income takes into account the expiration of leases with respect to the tenants vacating four properties effective December 31, 2013 and January 31, 2014.

The 2014 contractual rental income and 2013 contractual rental income include, after giving effect to any abatements, concessions or adjustments, rental income that is payable to us in 2014 and 2013, respectively, under leases existing at September 30, 2013 and December 31, 2012, respectively. The 2014 contractual rental income excludes approximately $1.1 million of straight-line rent income, estimated amortization of $70,000 of intangibles and our $1.4 million share of the rental income payable to our unconsolidated joint ventures. The 2013 contractual rental income excludes approximately $679,000 of straight-line rent income, amortization of approximately $6,000 of intangibles and our $3.1 million share of the rental income payable to our unconsolidated joint ventures.

The following table sets forth, after giving effect to the nine properties purchased in 2013, scheduled lease expirations for our properties (excluding unconsolidated joint ventures) as of September 30, 2013 for the calendar years indicated below:

                              Number        Approximate        2014 Contractual    Percent of 2014 Contractual
                                of             Square           Rental Income             Rental Income
Year of Lease                Expiring    Footage Subject to         Under                Represented by
Expiration (1)                Leases      Expiring Leases      Expiring Leases           Expiring Leases
2013                                 2               52,756   $                0                            .0 %
2014                                11              639,203            3,672,715                          7.01
2015                                 9              204,601            1,997,342                          3.81
2016                                13              356,731            3,137,832                          5.99
2017                                 8               89,718            1,781,737                          3.40
2018                                18              387,319            5,687,804                         10.85
2019                                 4               73,672            1,145,631                          2.19
2020                                 6              167,606            4,106,523                          7.83
2021                                 6              119,260            1,121,779                          2.14
2022 and Thereafter                 37            3,265,670           29,771,103                         56.78
                                   114            5,356,536   $       52,422,466                         100.0 %



(1) Lease expirations assume tenants do not exercise existing renewal options.


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Results of Operations



The following table compares revenues and operating expenses of continuing
operations for the periods indicated:



                            Three Months                                    Nine Months
                                Ended                                          Ended
                            September 30,       Increase       %           September 30,       Increase       %
(Dollars in thousands)     2013       2012     (Decrease)    Change       2013       2012     (Decrease)    Change
Revenues:

Rental income            $ 13,214   $ 11,333   $     1,881     16.6 %   $ 37,542   $ 33,193   $     4,349     13.1 %

Operating expenses:
Depreciation and
amortization                3,019      2,426           593     24.4        8,406      7,179         1,227     17.1
General and
administrative              1,938      1,873            65      3.5        5,841      5,463           378      6.9
Federal excise and
state taxes                    (7 )       38           (45 ) (118.4 )        218        135            83     61.5
Real estate expenses          851        640           211     33.0        2,375      1,939           436     22.5
Leasehold rent                 77         77             -        -          231        231             -        -
Real estate
acquisition costs             544         93           451    484.9          822        259           563    217.4
Total operating
expenses                    6,422      5,147         1,275     24.8       17,893     15,206         2,687     17.7

Operating income         $  6,792   $  6,186   $       606      9.8     $ 19,649   $ 17,987   $     1,662      9.2

Revenues

Rental income. The increase in the three months ended September 30, 2013 is primarily due to rental income of $1.7 million earned from 14 properties acquired since October 2012, and the increase in the nine months ended September 30, 2013 is primarily due to rental income of $3.6 million earned from 20 properties acquired since February 2012. Real estate tax and expense reimbursements from tenants (primarily from seven properties acquired since February 2012) of $232,000 and $545,000, in the three and nine months ended September 30, 2013, respectively, also contributed to the increases.

We estimate that the rental income (calculated on a straight line basis, but excluding rebill income and adjustments related to intangible assets and liabilities, which income and adjustments have not been definitively determined) from the nine properties we acquired in the nine months ended September 30, 2013, will be approximately $8.3 million in 2014. These nine properties contributed $998,000 and $1,157,000 in rental income in the three and nine months ended September 30, 2013, respectively. The increase to our 2014 rental income may be partially offset by the loss of rental revenue from the four properties at which the tenants indicated they intend to vacate at the expiration of their leases.

Operating Expenses

Depreciation and amortization. Approximately $551,000 and $1.1 million of the increase for the three and nine months ended September 30, 2013, is due to depreciation expense on the properties we acquired in 2012 and 2013, as described above. The balance of the increase is primarily due to depreciation on improvements to properties. This expense will increase in 2014 due to the nine properties acquired in the nine months ended September 30, 2013.

General and administrative expenses. Contributing to the increase in the three and nine months ended September 30, 2013 were increases of (i) $43,000 and $223,000, respectively, in non-cash compensation expense primarily related to the increase in the number of restricted


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stock awards granted and the higher fair value of such awards at the time of grant and (ii) $43,000 and $149,000, respectively, in payroll and payroll related expenses due to additional employees and higher compensation levels.

Real estate expenses. The increases are related primarily to properties we acquired in 2012 and 2013.

Real estate acquisition costs. These costs, which include acquisition fees, legal and other transactional costs and expenses, increased in the three and nine months ended September 30, 2013 due to expenses related to the acquisitions in these periods.

Other Income and Expenses



The following table compares other income and expenses for the periods
indicated:



                                Three Months                                  Nine Months
                                   Ended                                         Ended
                               September 30,        Increase       %         September 30,       Increase       %
(Dollars in thousands)        2013        2012     (Decrease)    Change      2013      2012     (Decrease)    Change
Other income and
expenses:
Equity in earnings of
unconsolidated joint
ventures                    $    122    $    268   $      (146 )  (54.5 )% $    513   $ 1,015   $      (502 )  (49.5 )%
Gain on disposition of
real estate -
unconsolidated joint
venture                            -           -             -      n/a       2,807         -         2,807      n/a
Gain on sale -
unconsolidated joint
venture interest                   -           -             -      n/a       1,898         -         1,898      n/a
Other income                      10           6             4     66.7          89       230          (141 )  (61.3 )
Interest:
Expense                       (3,473 )    (3,261 )         212      6.5      (9,865 )  (9,753 )         112      1.1
Amortization of deferred
financing costs                 (223 )      (198 )          25     12.6        (662 )    (570 )          92     16.1
Gain on sale of real
estate                             -           -             -      n/a           -       319          (319 )    100

Equity in earnings of unconsolidated joint ventures. The decreases are attributable substantially to the following factors: (i) the sale on May 31, 2013 of a property owned by us and another entity as tenants-in-common resulting in decreases of $146,000 and $367,000 in the three and nine months ended September 30, 2013, respectively, including a $148,000 mortgage prepayment penalty in the nine months ended September 30, 2013 incurred as a result of the sale, and (ii) the inclusion in the corresponding 2012 periods of our share of the net settlement entered into in May 2012 with a former tenant which accounted for $230,000 of the decrease for the nine months ended September 30, 2013. These decreases were partially offset in the nine months ended September 30, 2013 by an increase of $111,000 in the net operating income derived from our Plano, Texas joint venture resulting from an increase in overage rental income received in 2013 and the inclusion in 2012 of real estate acquisition costs.

Gain on disposition of real estate - unconsolidated joint venture. In May 2013, the property in which we held a tenant-in-common interest was sold and we recorded a gain of $2,807,000.


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Gain on sale - unconsolidated joint venture interest. In April 2013, we sold our 90% equity interest in our Plano, Texas unconsolidated joint venture and recorded a gain of $1,898,000.

Other income. The nine months ended September 30, 2012 includes a $199,000 recovery from an insurance claim.

Interest expense. The following table details interest expense for the periods indicated:

                           Three Months                                 Nine Months
                               Ended                                       Ended
                           September 30,      Increase       %         September 30,      Increase       %
(Dollars in thousands)    2013      2012     (Decrease)    Change     2013      2012     (Decrease)    Change
Interest expense:
Credit line interest     $    78   $   224   $      (146 )  (65.2 )% $   181   $   795   $      (614 )  (77.2 )%
Mortgage interest          3,395     3,037           358     11.8      9,684     8,958           726      8.1
Total                    $ 3,473   $ 3,261   $       212      6.5    $ 9,865   $ 9,753   $       112      1.1

Credit line interest

Substantially all of the decrease is due to the $10.7 million and $16.7 million decrease in the weighted average balance outstanding under our line of credit in the three and nine months ended September 30, 2013, respectively. The weighted average balance decreased due to repayments on the facility (i) with proceeds from the financing of several properties in 2012 and 2013 and (ii) from the use of a portion of the proceeds from the sale of four properties in 2012 and 2013. In September 2013, we borrowed $23.5 million to purchase three properties, partially offsetting the decrease in the weighted average balance outstanding.

Mortgage interest

The following table reflects the interest rate on our mortgage debt and principal amount of outstanding mortgage debt, in each case on a weighted average basis:

                             Three Months                                       Nine Months
                                 Ended                                             Ended
                             September 30,         Increase        %           September 30,         Increase        %
(Dollars in thousands)     2013        2012       (Decrease)     Change      2013        2012       (Decrease)     Change
Interest rate on
mortgage debt                 5.48 %      6.00 %         (.52 )%   (8.7 )%      5.51 %      6.01 %         (.50 )%   (8.3 )%

Principal amount of
mortgage debt            $ 247,732   $ 202,480   $     45,252      22.3 %  $ 234,550   $ 198,608   $     35,942      18.1 %

The increases in mortgage interest expense for the three and nine months ended September 30, 2013 are due to the increases in the weighted average amount of mortgage debt outstanding, partially offset by a decrease in the weighted average interest rate on outstanding mortgage debt. The increase in the weighted average balance outstanding is due to the incurrence of mortgage debt of $77.7 million in connection with properties acquired in 2012 and 2013 and the financing or refinancing of $22.0 million, net of refinanced amounts, in connection with properties acquired in prior years. The decrease in the weighted average interest rate is due to the financing (including financings effectuated in connection with acquisitions) or refinancing in 2012 and 2013 of $130.3 million of gross new mortgage debt with a weighted


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average interest rate of approximately 4.7%.

We estimate that the mortgage interest expense associated with the three properties acquired with mortgage debt in the nine months ended September 30, 2013, will be approximately $2.55 million in 2014. Interest expense for these three properties was $283,000 for the three and nine months ended September 30, 2013.

Gain on sale of real estate. In February 2012, we contributed our Plano, Texas property to an unconsolidated joint venture in exchange for a 90% interest therein and our joint venture partner contributed $1.5 million for a 10% interest therein and we realized a gain of $319,000.

Discontinued operations. Discontinued operations for the three and nine months ended September 30, 2012 includes the income from operations of five properties sold in 2012. There was no such income for the three and nine months ended September 30, 2013.

Liquidity and Capital Resources

Our sources of liquidity and capital include cash flow from operations, cash and cash equivalents, borrowings under our revolving credit facility, refinancing existing mortgage loans, obtaining mortgage loans secured by our unencumbered properties, issuance of equity securities and property sales. Our available liquidity at November 4, 2013 was approximately $69.5 million, including $15 million of cash and cash equivalents and $54.5 million, subject to maintenance of required deposit balances, available under our revolving line of credit.

Liquidity and Financing

We expect to meet substantially all of our operating cash requirements (including dividend payments) from cash flow from operations. To the extent that cash flow from operations is inadequate to cover all of our operating needs, we will be required to use our available cash and cash equivalents, funds generated from the issuance of equity securities or draw on our credit line (to the extent permitted).

At September 30, 2013, excluding mortgage indebtedness of our unconsolidated joint ventures, we had 49 outstanding mortgages payable secured by 71 properties, in aggregate principal amount of approximately $276.8 million. These mortgages represent first liens on individual real estate investments with an aggregate carrying value of approximately $456.6 million, before accumulated depreciation of $55.9 million. After giving effect to interest rate swap agreements and excluding variable rate debt on one property, the mortgage payments bear interest at fixed rates ranging from 3.13% to 8.8% (a 5.14% weighted average interest rate) and mature between 2014 and 2037.

The following table sets forth, as of September 30, 2013, information with respect to our mortgage debt (excluding mortgage debt of our unconsolidated joint ventures), that is payable from October 1, 2013 through December 31, 2015:

(Dollars in thousands)       2013       2014       2015      Total

Amortization payments       $ 1,653   $  7,796   $  7,148   $ 16,597
Principal due at maturity         -     28,637      7,454     36,091
Total                       $ 1,653   $ 36,433   $ 14,602   $ 52,688


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At September 30, 2013, the Company's unconsolidated joint ventures had first mortgages on four properties with outstanding balances of approximately $17.9 million, bearing interest at rates ranging from 5.8% to 6.0% (a 5.9% weighted average interest rate) and mature between 2015 and 2018.

We intend to make debt amortization payments from operating cash flow and, though no assurance can be given that we will be successful in this regard, generally intend to refinance or extend the mortgage loans which mature in 2014 or 2015. We intend to repay the amounts not refinanced or extended from our existing funds and sources of funds, including our available cash and our credit line (to the extent available).

We continuously seek to refinance existing mortgage loans on terms we deem acceptable, in order to generate additional liquidity. Additionally, in the normal course of our business, we sell properties when we determine that it is in our best interests, which may also generate additional liquidity. Further, since each of our encumbered properties is subject to a non-recourse mortgage (with standard carve outs), if our in-house evaluation of the market value of such property is substantially less than the principal balance outstanding on the mortgage loan, we may determine to convey such property to the mortgagee in order to terminate our mortgage obligations, including payment of interest, principal and real estate taxes, with respect to such property.

Generally we try to obtain mortgage financing concurrent with the acquisition of a significant property. During the nine months ended September 30, 2013, we obtained mortgage financing aggregating $51.9 million for three properties with an aggregate purchase price of $77.5 million, simultaneous with the closing of the acquisitions. If such mortgage financing is unavailable, unavailable on a timely basis or not needed to complete the acquisition, we may use funds from our credit facility to acquire a property and, thereafter secure long term, fixed rate mortgage debt on such property. We then apply the proceeds from the mortgage loan to repay borrowings under the credit facility, thus providing us with the ability to re-borrow under the facility for the acquisition of additional properties.

Credit Facility

We can borrow up to $75 million pursuant to our revolving credit facility which is available to us for the acquisition of commercial real estate, repayment of mortgage debt, property improvements and general working capital purposes; provided, that if used for property improvements and working capital purposes, such use will not exceed the lesser of $15 million and 15% of the borrowing base and if used for working capital purposes, will not exceed $10 million. The facility matures on March 31, 2015 and bears interest at the greater of (i) 90 day LIBOR plus 3% and (ii) 4.75%. There is an unused facility fee of 0.25% per annum on the difference between the outstanding loan balance and $75 million. The credit facility requires maintenance of $7.5 million in average deposit balances.

The terms of our revolving credit facility include certain restrictions and covenants which may limit, among other things, the incurrence of liens, and which require compliance with financial ratios relating to, among other things, the minimum amount of tangible net worth, the minimum amount of debt service coverage, the minimum amount of fixed charge coverage, the maximum amount of debt to value, the minimum level of net income, certain investment limitations and the minimum value of unencumbered properties and the number of such properties. Net proceeds received from the sale, financing or refinancing of properties are generally required to be used to repay amounts outstanding under our credit facility. At


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September 30, 2013, we were in compliance with all covenants under this facility.

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements.

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