Item 1A. Risk Factors.
Set forth below is a discussion of certain risks affecting our business. The categorization of risks set forth below is meant to help you better understand the risks facing our business and is not intended to limit your consideration of the possible effects of these risks to the listed categories. Any impacts from the realization of any of the risks discussed, including our financial condition and results of operations, may, and likely will, adversely affect many aspects of our business. In addition to the other information contained or incorporated by reference in this Form 10-K, readers should carefully consider the following risk factors:
Risks Related to Our Business
If we are unable to re-rent properties upon the expiration of our leases or if our tenants default or seek bankruptcy protection, our rental income will be reduced and we would incur additional costs.
Substantially all of our rental income is derived from rent paid by our tenants. From 2024 through 2029, the following leases expire:
Percentage of
Number of 2024 Contractual 2024 Contractual
Leases Expiring December 31, Leases Rental Income Rental Income
If our tenants, and in particular, our significant tenants, (i) do not renew their leases upon lease expiration, (ii) default on their obligations or (iii) seek rent relief, lease renegotiation or other accommodations, our revenues would decline and, in certain cases, co-tenancy provisions (i.e., a tenant’s right to reduce their rent or terminate their lease if certain key tenants vacate a property) may be triggered possibly allowing other tenants at the same property to reduce their rental payments or terminate their leases. At the same time, we would remain responsible for the payment of the mortgage obligations with respect to the related properties, would become responsible for the operating expenses (e.g., real estate taxes, maintenance and insurance) related to these properties, and, in the event of tenant defaults, would incur expenses in enforcing our rights as landlord. Our efforts to find replacement tenants may be challenged as there are a limited number of tenants interested in certain types of properties, such as our theaters (i.e., Regal Cinemas) and health and fitness centers (i.e., LA Fitness) which accounts in the aggregate for $3.8 million, or 5.4%, of 2024 contractual rental income and the cost of reconfiguring such properties to make them more attractive to a broader set of potential tenants may be prohibitive. Even if we find replacement tenants or renegotiate leases with current tenants, the terms of the new or renegotiated leases, after giving effect to tenant concessions or the cost of required renovations/ reconfigurations may be less favorable than current lease terms and could reduce the amount of cash available to meet expenses and pay dividends. If we are unable to re-rent properties on favorable terms with respect to properties at which tenants default on their rent obligation or do not renew their leases at lease expiration, our results of operations, cash flow and financial condition will be adversely affected.
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Our portfolio of properties is concentrated in the industrial and retail real estate sectors, and our business would be adversely affected by an economic downturn in either of such sectors.
Approximately 66.1% and 24.2% of our 2024 contractual rental income is derived from industrial and retail tenants, respectively, and we are vulnerable to economic declines that negatively impact these sectors of the economy, which would have an adverse effect on our results of operations, liquidity and financial condition.
Traditional retail tenants account for 24.2% of our 2024 contractual rental income and the competition that such tenants face from e-commerce retail sales could adversely affect our business.
Approximately 24.2% of our 2024 contractual rental income is derived from retail tenants, including 5.6% from tenants engaged in selling furniture (i.e., Havertys Furniture accounts for 4.7% of 2024 contractual rental income) and 2.9% from a tenant engaged in selling office supplies (i.e., Office Depot, a tenant at five properties, one of which is currently closed but for which the tenant continues to pay rent and the lease expires in May 2025). Because e-commerce retailers (unlike “bricks and mortar” or “traditional” retailers) may be able to provide customers with better pricing and the ease, comfort and safety of shopping from their home or office, our retail tenants face extensive competition from e-commerce retailers. E-commerce sales decrease the need for traditional retail outlets and reduce retailers’ space and property requirements. This adversely impacts our ability to rent space at our retail properties and increases competition for retail tenants thereby reducing the rent we would receive at these properties and adversely affecting our results of operations, cash flow and financial condition.
Approximately 22.3% of our 2024 contractual rental income is derived from five tenants. The default, financial distress or failure of any of these tenants, or such tenant’s determination not to renew or extend their lease, would significantly reduce our revenues.
FedEx, Havertys Furniture, Northern Tool, NARDA Holdings, Inc. and LA Fitness account for approximately 5.5%, 4.7%, 4.3%, 4.1% and 3.7%, respectively, of our 2024 contractual rental income, and the weighted average remaining lease term for such tenants is 3.7 years, 4.4 years, 5.3 years, 9.7 years and 7.0 years, respectively. The default, financial distress or bankruptcy of any of these or other significant tenants or such tenant’s determination not to renew or extend their lease, would significantly reduce our revenues, would cause interruptions in the receipt of, or the loss of, a significant amount of rental income and would require us to pay operating expenses (including real estate taxes) currently paid by the tenant. This could also result in the vacancy of the property or properties occupied by the defaulting or non-renewing tenant, which would significantly reduce our rental revenues and net income until the re-rental of the property or properties and could decrease the ultimate sale value of the property.
Write-offs of unbilled rent receivables and intangible lease assets will reduce our net income, total assets and stockholders’ equity and may result in breaches of financial covenants under our credit facility.
At December 31, 2023, the aggregate of our unbilled rent receivable and intangible lease assets is $31.3 million (including $14.7 million of intangible lease assets): six tenants (i.e., Northern Tool, Famous Footwear, NARDA Holdings, Inc., FedEx, Q.E.P. Co., Inc., and LA Fitness) account for 35.6% of such sum. We are required to assess the collectability of our unbilled rent receivables and the remaining useful lives of our intangible lease assets. Such assessments take into consideration, among other things, a tenant’s payment history, financial condition, and the likelihood of collectability of future rent. If we determine that the collectability of a tenant’s unbilled rent receivable is not probable or that the useful life of a tenant’s intangible lease asset has changed, write-offs would be required. Such write-offs result in a reduction of our net income, total assets and stockholders’ equity and in certain circumstances may result in the breach of our financial covenants under the credit facility.
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The concentration of our properties in certain states makes our revenues and the value of our portfolio vulnerable to adverse changes in local economic conditions.
Approximately 47.2% of our 2024 contractual rental income is derived from properties located in six states — South Carolina (12.0%), New York (9.2%), Texas (7.9%), Pennsylvania (7.6%), New Jersey (5.3%) and Maryland (5.2%). As a result, a decline in the economic conditions in these states or in regions where our properties are concentrated, may have an adverse effect on the rental and occupancy rates for, and the property values of, these properties, which could lead to a reduction of our rental income and/or impairment charges.
Declines in the value of our properties could result in impairment charges.
If we are presented with indicators of impairment in the value of a particular property or group of properties, we will be required to perform an impairment analysis for such property or properties. If we determine that any of our properties at which indicators of impairment exist have undiscounted cash flows below the net book value of such property, we will be required to recognize an impairment charge for the difference between the fair value and the book value during the quarter in which we make such determination. Any impairment charge would reduce our net income and stockholder’s equity.
Our ability to fully control the maintenance of our net-leased properties may be limited.
The tenants of our net-leased properties are responsible for maintenance and other day-to-day management of the properties. If a property is not adequately maintained in accordance with the terms of the applicable lease, we may incur expenses for deferred maintenance or other liabilities once the property is no longer leased. While we visit our properties on an intermittent basis, these visits are not comprehensive inspections and deferred maintenance items may go unnoticed. While our leases generally provide for recourse against the tenant in these instances, a bankrupt or financially-troubled tenant may be more likely to defer maintenance, and it may be more difficult to enforce remedies against such a tenant.
A significant portion of our leases are long-term and do not have fair market rental rate adjustments, which could negatively impact our income and reduce the amount of funds available to make distributions to stockholders.
A significant portion of our rental income comes from long-term net leases. There is an increased risk with long-term leases, which risk is heightened in an inflationary environment, that the contractual rental increases in future years will fail to result in fair market rental rates during those years. If we do not accurately judge the potential for increases in market rental rates when negotiating these long-term leases or if we are unable to obtain any increases in rental rates over the terms of our leases, significant increases in future property operating costs, to the extent not covered under the net leases, could result in us receiving less than fair value from these leases. As a result, our income and distributions to our stockholders could be lower than they would otherwise be if we did not engage in long-term net leases. In addition, increases in interest rates may also negatively impact the value of our properties that are subject to long-term leases. While a significant number of our net leases provide for annual escalations in the rental rate, the increase in interest rates may outpace the annual escalations.
Risks Related to Our Financing Activities, Indebtedness and Capital Resources
If we are unable to refinance our mortgage loans at maturity, we may be forced to sell properties at disadvantageous terms, which would result in the loss of revenues and in a decline in the value of our portfolio.
We had, as of December 31, 2023, $422.6 million in mortgage debt outstanding (all of which is non-recourse subject to standard carve-outs). The risks associated with our mortgage debt, include the risks that cash flow from properties securing the indebtedness and our available cash and cash equivalents will be insufficient to meet required payments of principal and interest.
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Generally, only a portion of the principal of our mortgage indebtedness will be repaid prior to or at maturity and we do not plan to retain sufficient cash to repay such indebtedness at maturity. Accordingly, to meet these obligations if they cannot be refinanced at maturity, we will have to use funds available under our credit facility, if any, and our available cash and cash equivalents to pay our mortgage debt or seek to raise funds through the financing of unencumbered properties, sale of properties or the issuance of additional equity. From 2024 through 2028, approximately $168.6 million of our mortgage debt matures. If we are unsuccessful in refinancing or extending existing mortgage indebtedness or financing unencumbered properties, selling properties on favorable terms or raising additional equity, our cash flow will be insufficient to repay all maturing mortgage debt when payments become due, and we may be forced to dispose of properties on disadvantageous terms or convey properties secured by mortgages to the mortgagees, which would lower our revenues and the value of our portfolio.
We may find that the value of a property could be less than the mortgage secured by such property. We may also have to decide whether we should refinance or pay off a mortgage on a property at which the mortgage matures prior to lease expiration and the tenant may not renew the lease. In these types of situations, after evaluating various factors, including among other things, the tenant’s competitive position in the applicable sub-market, our and our tenant’s estimates of its prospects, consideration of alternative uses and opportunities to re-purpose or re-let the property, we may seek to renegotiate the terms of the mortgage, or to the extent that the loan is non-recourse and the terms of the mortgage cannot be satisfactorily renegotiated, forfeit the property by conveying it to the mortgagee and writing off our investment.
Volatile or increasing interest rates, or credit market tightening, may make it more difficult for us to secure financing, which may limit our ability to finance or refinance our real estate properties, reduce the number of properties we can acquire, sell certain properties, and decrease our stock price.
Increases or volatility in interest rates, or reduced access to credit markets, may make it difficult for us to obtain financing, refinance mortgage debt, limit the mortgage debt available on properties we wish to acquire and limit the properties we can acquire. Even in the event that we are able to secure mortgage debt on, or otherwise finance our real estate properties, due to increased costs associated with securing financing and other factors beyond our control, we may be unable to refinance the entire outstanding loan balance or be subject to unfavorable terms (such as higher loan fees, interest rates and periodic payments). In addition, increasing interest rates could decrease the amount third parties are willing to pay for our assets, thereby limiting our ability to dispose of assets on more favorable terms.
Interest rates have been volatile as the interest rate on the 10-year treasury notes ranged from 0.90% to 5.02% during the three years ended December 31, 2023. At March 1, 2024, the interest rate on such notes was 4.19%. If we are required to refinance mortgage debt that matures over the next several years at higher interest rates than such mortgage debt currently bears, the funds available for dividends may be reduced. The following table sets forth, as of December 31, 2023, the principal balance of the mortgage payments due at maturity on our properties and the weighted average interest rate thereon (dollars in thousands):
Principal
Balances Weighted Average
Due at Interest Rate
Year Maturity Percentage
We manage a substantial portion of our exposure to interest rate risk by accessing debt with staggered maturities, obtaining fixed rate mortgage debt and by fixing the interest rate on substantially all of our variable rate debt through the use of interest rate swap agreements. However, no amount of hedging activity can fully insulate us from the risks associated with changes in interest rates. Swap agreements involve risk, including that counterparties may fail to honor their obligations under these arrangements, and these arrangements have caused
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us to pay higher interest rates on our debt obligations than would otherwise be the case. Failure to hedge effectively against interest rate risk could adversely affect our results of operations and financial condition.
Because REIT stocks are often perceived as high-yield investments, investors may perceive less relative benefit to owning REIT stocks as interest rates and the yield on government treasuries and other bonds increase or are especially volatile. Accordingly, increases and volatility in interest rates may reduce the amount investors are willing to pay for our common stock.
If our borrowings increase, the risk of default on our repayment obligations and our debt service requirements will also increase.
At December 31, 2023, we had $422.6 million of debt outstanding all related to our mortgage debt and no debt outstanding on our credit facility. Increased leverage, whether pursuant to our credit facility or mortgage debt, could result in increased risk of default on our payment obligations related to borrowings and in an increase in debt service requirements, which could reduce our net income and the amount of cash available to meet expenses and to pay dividends.
A breach of our credit facility could occur if a significant number of our tenants default or fail to renew expiring leases, or we take impairment charges against our properties.
Our credit facility includes covenants that require us to maintain certain financial ratios and comply with other requirements. If our tenants default under their leases or fail to renew expiring leases, we may recognize impairment charges against our properties, and our financial position could be adversely affected causing us to be in breach of the financial covenants contained in our credit facility.
Failure to meet interest and other payment obligations under our revolving credit facility or a breach by us of the covenants to maintain the financial ratios could place us in default under our credit facility. In such event, if no amounts were outstanding under the facility, we would not be entitled to draw on the facility which could impede our ability, among other things, to acquire properties or fund working capital requirements. If we defaulted on the facility while amounts were outstanding, the lenders could require us to repay the full amount outstanding, and we might be required to rapidly dispose of our properties, which could have an adverse impact on the amounts we receive on such dispositions. If we are unable to dispose of our properties in a timely fashion to the satisfaction of the banks, the banks could foreclose on that portion of our collateral pledged to the banks, which could result in the disposition of our properties at below-market values. The disposition of our properties at below our carrying value would adversely affect our net income, reduce our stockholders’ equity and adversely affect our ability to pay dividends.
Certain of our leases require us to pay property related expenses that are not the obligations of our tenants.
In addition to satisfying their rent obligations, our tenants are generally responsible for the payment of real estate taxes, insurance and ordinary maintenance and repairs. However, under the provisions of certain leases, we are required to pay some expenses, such as the costs of environmental liabilities, roof and structural repairs, insurance premiums, certain non-structural repairs and maintenance. If our properties incur significant expenses that must be paid by us under the terms of our leases, our business, financial condition and results of operations will be adversely affected and the amount of cash available to meet expenses and pay dividends may be reduced.
Our failure to comply with our obligations under our mortgages may reduce our stockholders’ equity, and adversely affect our net income and ability to pay dividends.
Several of our mortgages include covenants that require us to maintain certain financial ratios, including various coverage ratios, and comply with other requirements. Failure to meet interest and other payment obligations under these mortgages or a breach by us of the covenants to comply with certain financial ratios would place us in non-compliance under such mortgages. If a mortgagee called a default and required us to repay the full amount outstanding under such mortgage, we might be required to rapidly dispose of the property subject to such mortgage which could have an adverse impact on the amounts we receive on such disposition. If we are unable to satisfy the covenants of a mortgage, the mortgagee could exercise remedies available to it under the
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applicable mortgage and as otherwise provided by law, including the possible appointment of a receiver to manage the property, application of deposits or reserves maintained under the mortgage for payment of the debt, or foreclose and/or cause the forced sale of the property or asset securing such debt. A foreclosure or other forced disposition of our assets could result in the disposition of such assets at below such assets’ carrying values. The disposition of our properties or assets at below their carrying values may adversely affect our net income, reduce our stockholders’ equity and adversely affect our ability to pay dividends.
Risks Related to Real Estate Investments
Our revenues and the value of our portfolio are affected by a number of factors that affect investments in leased real estate generally.
We are subject to the general risks of investing in leased real estate. These include the non-performance of lease obligations by tenants, leasehold improvements that will be costly or difficult to remove should it become necessary to re-rent the leased space for other uses, covenants in certain retail leases that limit the types of tenants to which available space can be rented (which may limit demand or reduce the rents realized on re-renting), rights to terminate leases due to co-tenancy provisions, events of casualty or condemnation affecting the leased space or the property or due to interruption of the tenant’s quiet enjoyment of the leased premises, obligations of a landlord to restore the leased premises or the property following events of casualty or condemnation, adverse changes in economic conditions and local conditions (e.g., changing demographics, retailing trends and traffic patterns), declines in rental rates, changes in the supply and price of quality properties and the market supply and demand of competing properties, the impact of environmental laws, security concerns, prepayment penalties applicable under mortgage financings, changes in tax, zoning, building code, fire safety and other laws and regulations, the type of insurance coverage available, and changes in the type, capacity and sophistication of building systems. The occurrence of any of these events could adversely impact our results of operations, liquidity and financial condition.
Real estate investments are relatively illiquid and their values may decline.
Real estate investments are relatively illiquid. Therefore, we will be limited in our ability to reconfigure our real estate portfolio in response to economic changes. We may encounter difficulty in disposing of properties when tenants vacate either at the expiration of the applicable lease or otherwise. If we decide to sell any of our properties, our ability to sell these properties and the prices we receive on their sale may be affected by many factors, including the number of potential buyers, the number of competing properties on the market and other market conditions, as well as whether the property is leased and if it is leased, the terms of the lease. As a result, we may be unable to sell our properties for an extended period of time without incurring a loss, which would adversely affect our results of operations, liquidity and financial condition.
Uninsured and underinsured losses may affect the revenues generated by, the value of, and the return from a property affected by a casualty or other claim.
Most of our tenants obtain, for our benefit, comprehensive insurance covering our properties in amounts that are intended to be sufficient to provide for the replacement of the improvements at each property. However, the amount of insurance coverage maintained for any property may be insufficient (i) to pay the full replacement cost of the improvements at the property following a casualty event or (ii) if coverage is provided pursuant to a blanket policy and the tenant’s other properties are subject to insurance claims. In addition, the rent loss coverage under the policy may not extend for the full period of time that a tenant may be entitled to a rent abatement as a result of, or that may be required to complete restoration following, a casualty event. In addition, there are certain types of losses, such as those arising from earthquakes, floods, hurricanes and terrorist attacks, that may be uninsurable or that may not be economically insurable. Changes in zoning, building codes and ordinances, environmental considerations and other factors also may make it impossible or impracticable for us to use insurance proceeds to replace damaged or destroyed improvements at a property. If restoration is not or cannot be completed to the extent, or within the period of time, specified in certain of our leases, the tenant may have the right to terminate the lease. If any of these or similar events occur, it may reduce our revenues, the value of, or our return from, an affected property.
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We have been, and will continue to be, subject to significant competition and we may not be able to compete successfully for investments.
We have been, and will continue to be, subject to significant competition for attractive investment opportunities, and in particular, opportunities for industrial properties which are the primary focus of our and many of our competitors acquisition efforts. Our competitors include publicly-traded REITs, non-traded REITs, insurance companies, commercial and investment banking firms, private institutional funds, hedge funds, private equity funds and other investors, many of whom have greater financial and other resources than we have. We may not be able to compete successfully for investments. If we pay higher prices for investments, our returns may be lower and the value of our assets may not increase or may decrease significantly below the amount we paid for such assets. If such events occur, we may experience lower returns on our investments.
Our current and future investments in joint ventures could be adversely affected by the lack of sole decision making authority, reliance on joint venture partners’ financial condition or insurance coverage, disputes that may arise between our joint venture partners and us and our reliance on one significant joint venture partner.
Five properties in which we have an interest are owned through consolidated joint ventures (three properties) and unconsolidated joint ventures (two properties). We may continue to acquire properties through joint ventures and/or contribute some of our properties to joint ventures. Investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved, including the possibility that joint venture partners might file for bankruptcy protection, fail to fund their share of required capital contributions or obtain insurance coverage pursuant to a blanket policy as a result of which claims with respect to other properties covered by such policy and in which we have no interest could reduce or eliminate the coverage available with respect to the joint venture properties. Further, joint venture partners may have conflicting business interests or goals, and as a result there is the potential risk of impasses on decisions, such as a sale and the timing thereof. Any disputes that may arise between joint venture partners and us may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by or disputes with joint venture partners might result in subjecting properties owned by the joint venture to additional risk. With respect to our (i) consolidated joint ventures, we own, with two joint venture partners and their respective affiliates, properties that account for 4.3% of 2024 contractual rental income, and (ii) unconsolidated joint ventures, we own, with one joint venture partner and their affiliates, properties which account for our $235,000 share of 2024 base rent payable. We may be adversely affected if we are unable to maintain a satisfactory working relationship with these joint venture partners or if any of these partners becomes financially distressed.
Regulatory and Tax Risks
Compliance with environmental regulations and associated costs could adversely affect our results of operations and liquidity.
Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at the property and may be held liable to a governmental entity or to third parties for property damage and for investigation and cleanup costs incurred in connection with contamination. The cost of investigation, remediation or removal of hazardous or toxic substances may be substantial, and the presence of such substances, or the failure to properly remediate a property, may adversely affect our ability to sell or rent the property or to borrow money using the property as collateral. In connection with our ownership, operation and management of real properties, we may be considered an owner or operator of the properties and, therefore, potentially liable for removal or remediation costs, as well as certain other related costs, including governmental fines and liability for injuries to persons and property, not only with respect to properties we own now or may acquire, but also with respect to properties we have owned in the past.
We cannot provide any assurance that existing environmental studies with respect to any of our properties reveal all potential environmental liabilities, that any prior owner of a property did not create any material environmental condition not known to us, or that a material environmental condition does not otherwise exist, or may not exist in the future, as to any one or more of our properties. If a material environmental condition does in
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fact exist, or exists in the future, the remediation costs could have a material adverse impact upon our results of operations, liquidity and financial condition.
Compliance with the Americans with Disabilities Act could be costly.
Under the Americans with Disabilities Act of 1990, all public accommodations must meet Federal requirements for access and use by disabled persons. A determination that our properties do not comply with the Americans with Disabilities Act could result in liability for both governmental fines and damages. If we are required to make unanticipated major modifications to any of our properties to comply with the Americans with Disabilities Act, which are determined not to be the responsibility of our tenants, we could incur unanticipated expenses that could have an adverse impact upon our results of operations, liquidity and financial condition.
Legislative or regulatory tax changes could have an adverse effect on us.
There are a number of issues associated with an investment in a REIT that are related to the Federal income tax laws, including, but not limited to, the consequences of our failing to continue to qualify as a REIT. At any time, the Federal income tax laws governing REITs or the administrative interpretations of those laws may be amended or modified. Any new laws or interpretations may take effect retroactively and could adversely affect us or our stockholders.
Risks Related to OLP’s Organization, Structure and Ownership of Stock
Our transactions with affiliated entities involve conflicts of interest.
From time to time we have entered into transactions with persons and entities affiliated with us and with certain of our officers and directors. Such transactions involve a potential conflict of interest and entail a risk that we could have obtained more favorable terms if we had entered into such transaction with an unaffiliated third party. We are a party to a compensation and services agreement with Majestic Property effective as of January 1, 2007, as amended. Majestic Property is wholly owned by the vice chairman of our board of directors and it provides compensation to certain of our part-time senior executive officers and other individuals performing services on our behalf. Pursuant to the compensation and services agreement, we pay an annual fee to Majestic Property which provides us with the Services. See “Item 1. Business—Human Capital Resources”. In 2023 we paid, and in 2024 we anticipate paying, Majestic Property, (i) a fee of $3.3 million and $3.3 million, respectively, and (ii) $317,000 and $336,000, respectively, for our share of all direct office expenses, including rent, telephone, postage, computer services, supplies, and internet usage. We also obtain our property insurance in conjunction with Gould Investors, our affiliate, and in 2023, reimbursed Gould Investors $1.1 million for our share of the insurance premiums paid by Gould Investors. At December 31, 2023, Gould Investors beneficially owns approximately 10.4% of our outstanding common stock and certain of our senior executive officers are also executive officers of the managing general partner of Gould Investors.
Our senior management and other key personnel, including those performing services on a part-time basis, are critical to our business and our future success depends on our ability to retain them.
We depend on the services of Matthew J. Gould, chairman of our board of directors, Fredric H. Gould, vice chairman of our board of directors, Patrick J. Callan, Jr., our president and chief executive officer, Lawrence G. Ricketts, Jr., our executive vice president and chief operating officer, Isaac Kalish, our chief financial officer and senior vice president and David W. Kalish, our senior vice president- financial, and other members of senior management to carry out our business and investment strategies. Of the foregoing executive officers, only Messrs. Callan and Ricketts, devote all of their business time to us. Other members of senior management provide services to us either on a full-time or part-time, as-needed basis. The loss of the services of any of our senior management or other key personnel, the inability or failure of the members of senior management providing services to us on a part-time basis to devote sufficient time or attention to our activities or our inability to recruit and retain qualified personnel in the future, could impair our ability to carry out our business and investment strategies.
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Certain provisions of our charter, our Bylaws, as amended, and Maryland law may inhibit a change in control that stockholders consider favorable and could also limit the market price of our common stock.
Certain provisions of our charter (the “Charter”), our Bylaws and Maryland law may impede, or prevent, a third party from acquiring control of us without the approval of our board of directors. These provisions:
Certain provisions of the Maryland General Corporation Law (the “MGCL”) may impede a third party from making a proposal to acquire us or inhibit a change of control under circumstances that otherwise could be in the best interest of holders of shares of our common stock, including:
Failure to qualify as a REIT could result in material adverse tax consequences and could significantly reduce cash available for distributions.
We operate so as to qualify as a REIT under the Code. Qualification as a REIT involves the application of technical and complex legal provisions for which there are limited judicial and administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. In addition, no assurance can be given that legislation, new regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification. If we fail to quality as a REIT, we will be subject to federal, certain additional state and local income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and would not be allowed a deduction in computing our taxable income for amounts distributed to stockholders. In addition, unless entitled to relief under certain statutory provisions, we would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost. The additional tax would reduce significantly our net income and the cash available to pay dividends.
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We are subject to certain distribution requirements that may result in our having to borrow funds at unfavorable rates.
To obtain the favorable tax treatment associated with being a REIT, we generally are required, among other things, to distribute to our stockholders at least 90% of our ordinary taxable income (subject to certain adjustments) each year. To the extent that we satisfy these distribution requirements but distribute less than 100% of our taxable income we will be subject to Federal and state corporate tax on our undistributed taxable income.
As a result of differences in timing between the receipt of income and the payment of expenses, and the inclusion of such income and the deduction of such expenses in arriving at taxable income, and the effect of nondeductible capital expenditures and the timing of required debt service (including amortization) payments, we may need to borrow funds in order to make the distributions necessary to retain the tax benefits associated with qualifying as a REIT, even if we believe that then prevailing market conditions are not generally favorable for such borrowings. Such borrowings could reduce our net income and the cash available to pay dividends.
Compliance with REIT requirements may hinder our ability to maximize profits.
In order to qualify as a REIT for Federal income tax purposes, we must continually satisfy tests concerning, among other things, our sources of income, the amounts we distribute to our stockholders and the ownership of our stock. We may also be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Accordingly, compliance with REIT requirements hinders our ability to operate solely on the basis of maximizing profits.
In order to qualify as a REIT, we must also ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and real estate assets. Any investment in securities cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, no more than 5% of the value of our assets can consist of the securities of any one issuer, other than a qualified REIT security. If we fail to comply with these requirements, we must dispose of such portion of these securities in excess of these percentages within 30 days after the end of the calendar quarter in order to avoid losing our REIT status and suffering adverse tax consequences. This requirement could cause us to dispose of assets for consideration that is less than their true value and could lead to an adverse impact on our results of operations and financial condition.
If we reduce or do not increase our dividend, the market value of our common stock may decline.
The level of our dividend is established by our board of directors from time to time based on a variety of factors, including our cash available for distribution, funds from operations, adjusted funds from operations and maintenance of our REIT status. Various factors could cause our board of directors to decrease or not increase our dividend, including tenant defaults or bankruptcies resulting in a material reduction in our funds from operations, a material loss resulting from an adverse change in the value of one or more of our properties, or insufficient income to cover our dividends. It is possible that a portion of the dividends we would pay in 2023 would constitute a return of capital and in such event we would not be required to pay such sum to maintain our REIT status. If our board of directors determines to reduce or not increase our dividend for the foregoing or any other reason, the market value of our common stock could be adversely affected.
The stock market is volatile, and fluctuations in our operating results, removal from various indices and other factors could cause our stock price to decline.
The stock market has experienced, and may continue to experience, fluctuations that significantly impact the market prices of securities issued by many companies. Market fluctuations could adversely affect our stock price. These fluctuations have often been unrelated or disproportionate to the operating performance of particular companies. These broad market fluctuations, as well as general economic, systemic, political and market conditions, such as pandemics, recessions, loss of investor confidence, interest rate changes, government shutdowns, or trade wars, may negatively affect the market price of our common stock. Moreover, our operating results may fluctuate and vary from period to period due to the risk factors set forth herein.
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Although our common stock is quoted on the New York Stock Exchange, the volume of trades on any given day has been limited historically, as a result of which stockholders might not have been able to sell or purchase our common stock at the volume, price or time desired. Further, if our common stock is removed from the Russell 3000® Index because it does not meet the criteria for continued inclusion in such index, index funds, institutional investors, or other holders attempting to track the composition of that index may be required to sell our common stock, which would adversely impact the price and frequency at which it trades.
General Business Risks
Enhanced market and economic volatility due to adverse economic and geopolitical conditions, health crises or dislocations in the credit markets, could have a material adverse effect on our results of operations, financial condition and ability to pay dividends.
Our business may be adversely affected by market and economic volatility experienced by the U.S. and global economies, the real estate industry as a whole and/or the local economies in the markets in which our properties are located. Such adverse conditions may be due to, among other issues, rising inflation and interest rates, volatility in the public equity and debt markets, labor market challenges and international economic and other conditions, including pandemics, geopolitical instability (such as the war in Ukraine), sanctions and other conditions beyond our control. These current conditions, or similar conditions existing in the future, may adversely affect our results of operations, financial condition and ability to pay dividends as a result of one or more of the following, among other potential consequences:
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Breaches of information technology systems could materially harm our business and reputation.
We collect and retain on information technology systems, certain financial, personal and other sensitive information provided by third parties, including tenants, vendors, employees and joint venture partners. We also rely on information technology systems for the collection and distribution of funds. We have been, and continue to be, subject to cybersecurity attacks although we have not incurred any significant loss therefrom. There can be no assurance that we will be able to prevent unauthorized access to sensitive information or the unauthorized distribution of funds. Any loss of this information or unauthorized distribution of funds as a result of a cybersecurity attack may result in loss of funds to which we are entitled, legal liability and costs (including damages and penalties), as well as damage to our reputation, that could materially and adversely affect our business.
Actual or threatened epidemics, pandemics, outbreaks, or other public health crises may adversely affect our tenants’ financial condition and the profitability of our properties.
Our business and the businesses of our tenants could be materially and adversely affected by the risks, or the public perception of the risks, related to an epidemic, pandemic, outbreak, or other public health crisis, such as the COVID-19 pandemic. The risk, or public perception of the risk, of a pandemic or media coverage of infectious diseases could cause customers to avoid retail properties, and with respect to our properties generally, could cause temporary or long-term disruptions in our tenants’ supply chains and/or delays in the delivery of our tenants’ inventory. Moreover, an epidemic, pandemic, outbreak or other public health crisis, such as COVID-19, could cause the on-site employees of our tenants to avoid our tenants’ properties, which could adversely affect our tenants’ ability to adequately manage their businesses. Risks related to an epidemic, pandemic or other health crisis, such as COVID-19, could also lead to the complete or partial closure of one or more of our tenants’ stores or facilities. Such events could adversely impact our tenants’ sales and/or cause the temporary closure of our tenants’ businesses, which could severely disrupt their operations and the rental revenue we generate from our leases with them. The ultimate extent of the impact of any epidemic, pandemic or other health crisis on our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of such epidemic, pandemic or other health crisis and actions taken to contain or prevent their further spread, among others. These and other potential impacts of an epidemic, pandemic or other health crisis, such as COVID-19, could therefore materially and adversely affect our business, financial condition and results of operations.
The failure of any bank in which we deposit our funds could have an adverse impact on our financial condition.
We have diversified our cash and cash equivalents between several banking institutions in an attempt to minimize exposure to any one of these entities. However, the Federal Deposit Insurance Corporation only insures accounts in amounts up to $250,000 per depositor per insured bank. We currently have cash and cash equivalents deposited in certain financial institutions significantly in excess of federally insured levels. If any of the banking institutions in which we have deposited funds ultimately fails, we may lose our deposits over $250,000. The loss of our deposits may have an adverse effect on our financial condition.
We are dependent on third party software for our financial reporting processes and systems.
We are dependent on third party software, and in particular, Yardi’s property management software, for generating tenant invoices, collecting receivables, paying payables and preparing financial reports. If the software does not perform as required (including non-performance resulting from the software vendors’ unwillingness or inability to maintain or upgrade the functionality of the software), our ability to conduct operations would be adversely affected.
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Item 1B. Unresolved Staff Comments.
None.
Item 1C. Cybersecurity.
Our information technology, communication networks, enterprise applications, accounting and financial reporting platforms and related systems are integral to our operations. We use these systems, among others, for internal communications, for accounting and record-keeping functions, and for many other key aspects of our business. Our operations rely on securing, collecting, storing, transmitting, and processing of proprietary and confidential data.
We have deployed various safeguards designed to protect our information technology (“IT”) systems from cybersecurity threats, including firewalls, intrusion prevention and detection systems, anti-malware functionality and access controls. At the management level, these cybersecurity defense systems are overseen by our network administrator who performs services for us on a part-time basis pursuant to the Compensation and Services Agreement. Our network administrator has more than 20 years of experience with IT systems and holds various IT certifications. Our network administrator reports to, and is in regular contact with, our Chief Financial Officer and Senior Vice President-Financial. These officers do not have formal IT or cybersecurity training. In the event of a cybersecurity incident, among other things, the network administrator and these officers would consult with one another and, as needed or appropriate, other members of management to determine the appropriate course of action (including whether such incident should be reported to other members of management and/or the audit committee and whether public disclosure should, or is, required to be made).
Our internal auditor performs certain procedures to test the integrity and functionality of our IT systems (which includes a high-level review of our cybersecurity defenses). In addition, we have retained a third-party cybersecurity consulting firm that (i) advises us as to cybersecurity matters (including prevailing cybersecurity threats), (ii) performs, on a periodic basis, assessments of our cybersecurity defenses and (iii) on a continuous basis, monitors our IT systems for cybersecurity threats and intrusions.
We are not aware of any risks from cybersecurity threats that have materially affected or are reasonably likely to materially affect us. See “Item 1A. Risk Factors” in this Annual Report for additional discussion about cybersecurity-related risks.
To operate our business, we use certain third-party service providers to perform a variety of functions. We seek to engage reliable, reputable service providers that maintain cybersecurity programs and we generally rely on such providers to maintain appropriate cybersecurity practices.
At the Board level, our cybersecurity practices are overseen by the audit committee as part of its oversight of our risk management activities. The committee meets periodically with, among others, our internal auditor and network administrator to review and discuss cybersecurity matters.
Item 2. Properties.
As of December 31, 2023, we own 108 properties with an aggregate net book value of $682.0 million. Our occupancy rate, based on square footage, was 98.8%, 99.8%, and 99.2% as of December 31, 2023, 2022 and 2021, respectively.
At December 31, 2023, we participated in joint ventures that owned two properties and at such date, our investment in these unconsolidated joint ventures is $2.1 million. The occupancy rate of our joint venture properties, based on square footage, was 100%, 58.7%, and 59.1% as of December 31, 2023, 2022 and 2021, respectively.
Our principal executive office is located at 60 Cutter Mill Road, Suite 303, Great Neck, New York. We believe that our facilities are satisfactory for our current and projected needs.
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Our Properties
The following table details, as of December 31, 2023, certain information about our properties (except as otherwise indicated, each property is tenanted by a single tenant):
Percentage of Approximate 2024 Contractual
2024 Contractual Square Footage Rental Income
Location Type of Property Rental Income of Building per Square Foot
Huntersville, NC Industrial 1.0 78,319 8.69
Lake Charles, LA (5) Retail—Office Supply 0.9 54,229 12.07
Chicago, IL Retail—Office Supply 0.8 23,939 24.37
Wichita, KS Retail—Furniture 0.8 88,108 6.35
Cedar Park, TX Retail—Furniture 0.7 50,810 10.00
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Percentage of Approximate 2024 Contractual
2024 Contractual Square Footage Rental Income
Location Type of Property Rental Income of Building per Square Foot
Eugene, OR Retail—Office Supply 0.6 24,978 16.37
Newport, VA Retail—Furniture 0.6 49,865 8.19
Amarillo, TX Retail—Furniture 0.6 72,027 5.64
El Paso, TX Retail—Office Supply 0.5 25,000 15.20
Richmond, VA Retail—Furniture 0.5 38,788 9.12
Bluffton, SC Retail—Furniture 0.4 35,011 7.92
Pinellas Park, FL Industrial 0.4 53,064 5.03
Myrtle Beach, SC Restaurant 0.3 6,734 34.85
Hamilton, OH Health & Fitness 0.2 38,000 3.16
Louisville, KY Industrial 0.1 9,642 6.67
Wauconda, IL (8) Industrial — 53,750 0.49
Bolingbrook, IL (8) Retail — 33,111 0.51
Kennesaw, GA (9) Retail — 32,138 —
Beachwood, OH (10) Land — 349,999 —
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(4) This property has two tenants.
(5) This property has three tenants.
(6) This property has five tenants.
Properties Owned by Joint Ventures
As of December 31, 2023, we own a 50% equity interest in two joint ventures that own two properties. At December 31, 2023, our investment in these joint ventures was approximately $2.1 million and the occupancy rate at these properties, based on square footage, was 100%. Based on the leases in effect at December 31, 2023, we anticipate that our share of the base rent payable in 2024 to our joint ventures is approximately $235,000. The following table sets forth, as of December 31, 2023, information about the properties owned by these joint ventures:
Percentage of
Base Rent Payable
in 2024
Contributed by Approximate 2024
Type of the Applicable Square Footage Base Rent
Location Property Joint Venture (1) of Building per Square Foot
Savannah, GA (2) Restaurant 13.3 — —
(2) This property is a parking lot which is ground leased to a restaurant.
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Geographic Concentration
As of December 31, 2023, the 108 properties owned by us are located in 31 states. The following table sets forth information, presented by state, related to our properties as of December 31, 2023:
Percentage of
Contractual Contractual Approximate
Number of Rental Rental Building
State Properties Income Income Square Feet
(1) These properties are located in four states.
The following table sets forth information, presented by state, related to the properties owned by our joint ventures as of December 31, 2023:
Our Share
of the
Base Rent
Payable in 2024 Approximate
Number of to these Building
State Properties Joint Ventures Square Feet
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Mortgage Debt
At December 31, 2023, we had:
● 68 first mortgages secured by 69 of our 108 properties; and
The following table sets forth scheduled principal mortgage payments due on our properties as of December 31, 2023 (dollars in thousands):
PRINCIPAL
YEAR PAYMENTS DUE
The mortgages on our properties are generally non-recourse, subject to standard carve-outs.
Item 3. Legal Proceedings.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
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Part II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is listed on the New York Stock Exchange under the symbol “OLP.” As of March 1, 2024, there were approximately 241 holders of record of our common stock.
We qualify as a REIT for Federal income tax purposes. In order to maintain that status, we are required to distribute to our stockholders at least 90% of our annual ordinary taxable income. The amount and timing of future distributions will be at the discretion of our board of directors and will depend upon our financial condition, earnings, business plan, cash flow and other factors. We intend to make distributions in an amount at least equal to that necessary for us to maintain our status as a real estate investment trust for Federal income tax purposes.
Issuer Purchases of Equity Securities
As of March 1, 2024, we are authorized to repurchase up to $8.1 million of shares our common stock through, among other things, open market or privately negotiated transactions. There is no stated expiration date for our stock repurchase program. Set forth below is a table describing the purchases we made in the quarter ended December 31, 2023:
Approximate
Total Number of Dollar Value
Total Number Average of Shares Purchased of Shares that May
of Shares Price Paid as Part of Publicly Yet Be Purchased
Period Purchased per Share Announced Programs Under the Programs
Item 6. [Reserved.]
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We are a self-administered and self-managed REIT focused on acquiring, owning and managing a geographically diversified portfolio consisting of industrial and, to a lesser extent, retail properties, many of which are subject to long-term leases. Most of our leases are “net leases” under which the tenant, directly or indirectly, is responsible for paying the real estate taxes, insurance and ordinary maintenance and repairs of the property. As of December 31, 2023, we own, in 31 states, 110 properties, including three properties owned by consolidated joint ventures and two properties owned through unconsolidated joint ventures.
Challenges and Uncertainties as a Result of the Volatile Economic Environment
During the past two years, there has been a significant economic uncertainty due, among other things, to volatile interest rates and the challenges presented by an inflationary/potential recessionary environment. This uncertainty, volatility and the related causes may adversely impact us in the future. Due to this uncertainty, we were especially cautious in pursuing acquisition opportunities in 2023 and may continue to be cautious in pursuing such opportunities in the near future. As a result, our ability, in the near term, to grow revenue and net income through acquisitions may be adversely affected.
General Challenges and Uncertainties
In addition to the challenges and uncertainties as also described under “Cautionary Note Regarding Forward-Looking Statements”, “Item 1A. Risk Factors”, and “— Challenges and Uncertainties as a Result of the Volatile Economic Environment”, we, among other things, face additional challenges and uncertainties, including the possibility we will not be able to: lease our properties on terms favorable to us or at all; collect amounts owed to us by our tenants; renew or re-let, on acceptable terms, leases that are expiring or otherwise terminating; acquire or dispose of properties on acceptable terms; or grow, through acquisitions or otherwise, our property portfolio so as to generate additional rental and net income. If we are unable to address these challenges successfully, we may be unable to sustain our current level of dividend payments.
Other than with respect to our continuing focus on acquiring industrial properties, we generally seek to manage the risk of our real property portfolio and the related financing arrangements by (i) diversifying among locations, tenants, scheduled lease expirations, mortgage maturities and lenders, and (ii) minimizing our exposure to interest rate fluctuations. As a result, as of December 31, 2023:
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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 or other financial information, obtaining other tenant related information, changes in tenant payment patterns, regular contact with tenant’s representatives, tenant credit checks and regular management reviews of our tenants. We may sell a property if the tenant’s financial condition is unsatisfactory.
We monitor, on an ongoing basis, our expiring leases and generally approach tenants with expiring leases (including those subject to renewal options) at least a year prior to lease expiration to determine their interest in renewing their leases. During the three years ending December 31, 2026, 49 leases for 42 tenants at 35 properties representing $14.3 million, or 20.0%, of 2024 contractual rental income expire.
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, the 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.
At December 31, 2023, we have unhedged variable rate mortgage debt in the principal amount of $16.0 million of which bears a weighted average interest rate of 5.73%. The table below provides information about such debt as of December 31, 2023.
Current Interest Rate
Property Principal Amount Maturity Date Interest Rate Reset Date
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Challenges and Uncertainties Facing Certain Properties and Tenants
Set forth below is a description of the challenges and uncertainties facing certain tenants or properties. If these challenges, and in particular, the challenges faced by Regal Cinemas, The Vue and LA Fitness, are not resolved in a satisfactory manner, we will be adversely affected.
Regal Cinemas
Regal Cinemas, or Regal, is a tenant at two properties. Regal’s parent, Cineworld Group plc, filed for Chapter 11 bankruptcy protection in September 2022 and as a result, we and Regal amended the leases at these properties to, among other things, shorten the lease terms and reduce the rent payable. Specifically, prior to the amendments, the leases were scheduled to expire in 2032 and 2035 and as of January 1, 2024, without giving effect to such amendments, would have provided for an aggregate base rent of $21.0 million through the remaining lease term. After giving effect to the amendments, the leases expire in 2030 and as of January 1, 2024 provide for an aggregate base rent of $7.7 million payable over the remaining lease term.
At December 31, 2023, our Indianapolis, Indiana property had mortgage debt, intangible lease liabilities and intangible lease assets of approximately $3.6 million, $527,000 and $476,000, respectively. There is no mortgage debt, intangible lease liabilities or intangible lease assets at the Greensboro, North Carolina property at which we lease the underlying fee and in turn lease the property to Regal. We estimate that the carrying costs for these two properties for the twelve months ending December 31, 2024, are approximately $1.3 million, including ground lease rent of $512,000 (which sum has historically been paid directly by Regal to the owner of the Greensboro property), real estate taxes of approximately $356,000, and debt service of $290,000. Regal is the primary obligor with respect to $460,000 of these carrying costs and we are responsible with respect to such amount if it is not paid by Regal.
Because the collection of amounts owed by Regal is deemed to be less than probable, we have not accrued Regal’s base rent (but have collected all base rent payable pursuant to the amended leases) and since October 2020, have been reporting same on a cash basis. If Regal continues to face financial challenges, it will be difficult and costly (due, among other things, to the limited number of exhibitors and the unique configuration of theater properties) to find a replacement tenant.
The Vue – Beachwood, Ohio
A multi-family complex, which we refer to as The Vue, ground leases from us the underlying land located in Beachwood, Ohio. Since 2018, the property has faced, and we anticipate that the property will continue to face, occupancy and financial challenges, and our tenant has not paid rent since October 2020 (i.e., an aggregate of $3.9 million that would have been due had it generated specified levels of positive operating cash flow), and we anticipate that it will not pay rent for an extended period. After giving effect to debt service, the property is operating on a negative cash flow basis, and we anticipate that such trend will continue for an extended period. Since 2021 (through March 1, 2024), we provided The Vue with an aggregate of $3.4 million to cover, among other things, operating cash flow shortfalls and capital expenditures, and the amount to be funded in 2024, if any, has not been definitively determined. At December 31, 2023, (i) there are no unbilled rent receivables, intangibles or tenant origination costs associated with this property and (ii) the net book value of our land subject to this ground lease is $17.3 million and is subordinate to $63.6 million of mortgage debt incurred by the owner/operator. Our cash flow will be adversely impacted by our funding of additional capital expenditures and operating expense shortfalls at the property (including our payment of the tenant’s debt service obligations) and the tenant’s continuing non-payment of rent. If we determine that under GAAP the property has been impaired, we may incur a substantial impairment charge and if we sell the property, we may recognize a substantial loss. See Note 6 to our consolidated financial statements.
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LA Fitness
LA Fitness leases from us three properties pursuant to three separate leases, including a 38,000 square foot health and fitness facility in Hamilton, Ohio. LA Fitness terminated the lease at the Hamilton, Ohio property effective as of May 1, 2024. As a result, we estimate that (i) from January 1, 2024 through the remaining lease term, we will generate $120,000 of rental income and (ii) that through 2024, we will incur approximately $230,000, $180,000 and $170,000 of interest expense, real estate operating expense and depreciation and amortization expense, respectively.
During 2023, this property accounted for (i) $893,000 of rental income and (ii) $198,000, $188,000 and $206,000 of interest expense, real estate operating expense and depreciation and amortization expense, respectively, and during 2022, this property accounted for (iii) $915,000 of rental income and (iv) $197,000, $170,000 and $210,000 of interest expense, real estate operating expense and depreciation and amortization expense, respectively. At December 31, 2023, the variable rate mortgage debt (bearing an interest rate of daily SOFR plus 300 basis points) on this property is $4.0 million and is scheduled to mature in September 2024.
It will be difficult, due to the presence of another health and fitness facility located nearby, to re-lease this property to another health and fitness operator, and if we are unable to re-lease this property to such an operator, it will be costly to reconfigure the space for use other than as a fitness facility. We will be adversely effected if we surrender this property to the lender or if we pay off the mortgage debt without obtaining a suitable replacement tenant at this property.
2023 and Recent Developments
In 2023, we:
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Subsequent to December 31, 2023, we:
Our Business Objective
Our business objective is to increase stockholder value by:
● maintaining and, over time, increasing our dividend.
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Comparison of Years Ended December 31, 2023 and 2022
Results of Operations -
Revenues
The following table compares total revenues for the periods indicated:
Year Ended December 31, Increase
(Dollars in thousands) 2023 2022 (Decrease) % Change
Lease termination fees — 25 (25) (100.0)
Rental income, net.
The following table details the components of rental income, net, for the periods indicated:
Year Ended December 31, Increase
(Dollars in thousands) 2023 2022 (Decrease) % Change
Changes at same store properties
The decrease in same store rental income is due to the inclusion in 2022, of $4.6 million from the litigation settlement proceeds from The Vue, and decreases of:
The decrease was offset by increases of:
- $1.7 million of rental income from various lease amendments and extensions,
- $892,000 of rental income due to new tenants at various properties, and
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Operating Expenses
The following table compares operating expenses for the periods indicated:
Year Ended December 31, Increase
(Dollars in thousands) 2023 2022 (Decrease) % Change
Operating expenses:
Depreciation and amortization. The increase is due primarily to:
- $186,000 of leasing commissions at several same store properties.
The increase was offset by:
General and administrative. The increase in 2023 is due primarily to increases of (i) $441,000 of compensation expense primarily due to additional employees and higher levels of compensation, and (ii) $150,000 in professional fees related to various matters.
Real estate expenses.
The increase is primarily due to:
The increase was offset primarily by a $237,000 decrease related to properties sold in 2022 and 2023.
A substantial portion of real estate expenses are rebilled to tenants and are included in Rental income, net, on the consolidated statements of income.
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Gain on sale of real estate, net
The following table lists the sold properties and related gains, net, for the periods indicated:
Year Ended
December 31, Increase %
(Dollars in thousands) 2023 2022 (Decrease) Change
TGI Fridays restaurant property - Hauppauge, New York $ 1,534 $ —
Havertys retail property - Duluth, Georgia 3,180 —
Land - Lakewood, Colorado (1) 2,177 —
TGI Fridays restaurant property - Richmond, Virginia 265 —
Applebee's restaurant property - Lawrenceville, Georgia 989 —
Havertys retail property - Virginia Beach, Virginia 1,727 —
Barnes & Noble retail property - Fort Myers, Florida 3,997
Orlando Baking industrial property - Columbus, Ohio — 6,925
Havertys retail property - Fayetteville, Georgia — 1,125
Vacant retail property - Columbus, Ohio — 4,063
(1) The non-controlling interest’s share of the gain is $218.
Other Income and Expenses
The following table compares other income and expenses for the periods indicated:
Year Ended December 31, Increase
(Dollars in thousands) 2023 2022 (Decrease) % Change
Other income and expenses:
Income on settlement of litigation — 5,388 (5,388) (100.0)
Interest:
Equity in (loss) earnings of unconsolidated joint ventures. The decrease in 2023 relates to the multi-tenant shopping center in Manahawkin, New Jersey which we sold in December 2023 and reflects (i) our 50% share, or $850,000, of a $1.7 million impairment charge our joint venture recorded, (ii) a $256,000 decrease in base rent collected primarily from Regal Cinemas, a tenant at this property, due to a lease amendment effectuated in connection with its bankruptcy reorganization, and (iii) a $103,000 debt prepayment charge due to the early payoff of the mortgage on this property in connection with its sale. See Note 7 to our consolidated financial statements.
Equity in loss from sale of unconsolidated joint venture property. The 2023 results represent a loss of $108,000 from the sale of our joint venture property in Manahawkin, New Jersey on December 15, 2023.
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Income on settlement of litigation. In April 2022, we received $5.4 million in connection with the settlement of a lawsuit at our former Round Rock, Texas property (the “Round Rock Settlement”). (See Note 13 to our consolidated financial statements.)
Other income.Included in 2022 is $918,000 representing the final property insurance recovery related to our Lake Charles, Louisiana property damaged in a 2020 hurricane. (See Note 13 to our consolidated financial statements.)
Interest expense. The following table compares interest expense for the periods indicated:
Year Ended December 31, Increase
(Dollars in thousands) 2023 2022 (Decrease) % Change
Interest expense:
Mortgage interest
The following table reflects the average interest rate on the weighted average principal amount of outstanding mortgage debt during the applicable year:
Year Ended December 31, Increase
(Dollars in thousands) 2023 2022 (Decrease) % Change
Weighted average interest rate 4.18 % 4.14 % 0.04 % 1.0
The increase in 2023 is due primarily to the increase in the average principal amount of mortgage debt outstanding which resulted from financings effectuated in connection with refinancings and acquisitions.
Credit facility interest
The following table reflects the average interest rate on the average principal amount of outstanding credit line debt during the applicable year:
Year Ended December 31, Increase %
(Dollars in thousands) 2023 2022 (Decrease) Change
Weighted average interest rate 6.69 % 3.42 % 3.27 % 95.6
The increase in 2023 is due to the increase on the weighted average interest rate.
Amortization and write-off of deferred financing costs. The decrease in 2023 is primarily due to the $221,000 write-off of deferred costs related to the mortgages on the eleven Havertys properties that were paid off in June 2022.
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Funds from Operations and Adjusted Funds from Operations
We compute funds from operations, or FFO, in accordance with the “White Paper on Funds From Operations” issued by the National Association of Real Estate Investment Trusts (“NAREIT”) and NAREIT’s related guidance. FFO is defined in the White Paper as net income (calculated in accordance with GAAP), excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control, impairment write-downs of certain real estate assets and investments in entities where the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis. In computing FFO, we do not add back to net income the amortization of costs in connection with our financing activities or depreciation of non-real estate assets.
We compute adjusted funds from operations, or AFFO ,by adjusting from FFO for straight-line rent accruals and amortization of lease intangibles, deducting from income, additional rent from ground lease tenant, income on settlement of litigation, income on insurance recoveries from casualties, lease termination and assignment fees, and adding back amortization of restricted stock and restricted stock unit compensation expense, amortization of costs in connection with its financing activities (including its share of its unconsolidated joint ventures), debt prepayment costs and amortization of lease incentives and mortgage intangible assets. Since the NAREIT White Paper does not provide guidelines for computing AFFO, the computation of AFFO varies from one REIT to another.
We believe that FFO and AFFO are useful and standard supplemental measures of the operating performance for equity REITs and are used frequently by securities analysts, investors and other interested parties in evaluating equity REITs, many of which present FFO and AFFO when reporting their operating results. FFO and AFFO are intended to exclude GAAP historical cost depreciation and amortization of real estate assets, which assumes that the value of real estate assets diminish predictably over time. In fact, real estate values have historically risen and fallen with market conditions. As a result, we believe that FFO and AFFO provide a performance measure that when compared year over year, should reflect the impact to operations from trends in occupancy rates, rental rates, operating costs, interest costs and other matters without the inclusion of depreciation and amortization, providing a perspective that may not be necessarily apparent from net income. We also consider FFO and AFFO to be useful in evaluating potential property acquisitions.
FFO and AFFO do not represent net income or cash flows from operating, investing or financing activities as defined by GAAP. FFO and AFFO should not be considered to be an alternative to net income as a reliable measure of our operating performance; nor an alternative to cash flows from operating, investing or financing activities (as defined by GAAP) as measures of liquidity. FFO and AFFO do not measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization, capital improvements and distributions to stockholders.
Management recognizes that there are limitations in the use of FFO and AFFO. In evaluating our performance, management is careful to examine GAAP measures such as net income and cash flows from operating, investing and financing activities.
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The following tables provide a reconciliation of net income and net income per common share (on a diluted basis) in accordance with GAAP to FFO and AFFO for the years indicated (dollars in thousands, except per share amounts):
Year Ended
December 31,
Add: depreciation and amortization of properties 24,063 23,193
Add: amortization of deferred leasing costs 726 588
Add: equity in loss from sale of unconsolidated joint venture property 108 —
Deduct: gain on sale of real estate, net (17,008) (16,762)
Adjustments for non-controlling interests 148 (67)
NAREIT funds from operations applicable to common stock 38,996 49,669
Deduct: additional rent from ground lease tenant (16) (4,626)
Deduct: income on insurance recovery from casualty loss — (918)
Deduct: lease termination fee income — (25)
Add: amortization of restricted stock and RSU compensation 5,367 5,507
Add: amortization and write-off of deferred financing costs 839 1,115
Add: amortization of lease incentives 121 44
Add: amortization of mortgage intangible assets 114 12
Adjustments for non-controlling interests 1 14
Adjusted funds from operations applicable to common stock $ 42,595 $ 42,129
Year Ended
December 31,
GAAP net income attributable to One Liberty Properties, Inc. $ 1.38 $ 1.99
Add: depreciation and amortization of properties 1.13 1.09
Add: amortization of deferred leasing costs .03 .03
Deduct: gain on sale of real estate, net (.80) (.79)
Adjustments for non-controlling interests .01 —
NAREIT funds from operations per share of common stock (a) 1.82 2.34
Deduct: other income and income on settlement of litigation (.01) (.25)
Deduct: additional rent from ground lease tenant — (.22)
Deduct: income on insurance recovery from casualty loss — (.04)
Deduct: lease termination fee income — —
Add: amortization of restricted stock and RSU compensation .25 .26
Add: amortization and write-off of deferred financing costs .04 .05
Add: amortization of lease incentives .01 —
Add: amortization of mortgage intangible assets .01 —
Adjustments for non-controlling interests — —
Adjusted funds from operations per share of common stock (a) $ 1.99 $ 1.98
(a) The weighted average number of diluted common shares used to compute FFO and AFFO applicable to common stock includes unvested restricted shares that are excluded from the computation of diluted EPS.
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The $10.7 million, or 21.5%, decrease in FFO is due primarily to:
● a $1.2 million increase in interest expense,
● a $936,000 increase in real estate operating expenses, and
● a $564,000 increase in general and administrative expense.
Offsetting the decrease is a $3.1 million net increase in rental income.
See “—Comparison of Years Ended December 31, 2023 and 2022” for further information regarding these changes.
The $466,000, or 1.1%, increase in AFFO is due to the factors impacting FFO as described immediately above, excluding the (i) $5.4 million from the Round Rock Settlement, (ii) $4.6 million from the litigation settlement proceeds from The Vue (included in rental income), and (iii) $918,000 of income on insurance recovery from casualty loss.
See “—Comparison of Years Ended December 31, 2023 and 2022” for further information regarding these changes.
Diluted per share FFO and AFFO were impacted negatively in the year ended December 31, 2023 by an average increase from December 31, 2022 of approximately 114,000 in the weighted average number of shares of common stock outstanding as a result of stock issuances pursuant to the equity incentive and dividend reinvestment, offset by the Company’s repurchase of shares during 2023.
Comparison of Years Ended December 31, 2022 and 2021
As we qualify as a smaller reporting company, this comparison is omitted in accordance with Instruction 1 to Item 303(a) of Regulation S-K.
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Liquidity and Capital Resources
Our sources of liquidity and capital include cash flow from operations, cash and cash equivalents, borrowings under our credit facility, refinancing existing mortgage loans, obtaining mortgage loans secured by our unencumbered properties, issuance of our equity securities and property sales. In 2023, we obtained approximately (i) $46.6 million of net proceeds from property sales (after giving effect to our share of $11.3 million of mortgage debt repayments and $1.8 million of seller-financing), (ii) $22.6 million of proceeds from mortgage financings (after giving effect to $13.8 million of refinanced amounts) and (iii) $4.6 million from the litigation settlement proceeds from The Vue. Our available liquidity at March 1, 2024 was approximately $123.9 million, including approximately $23.9 million of cash and cash equivalents (including the credit facility’s required $3.0 million average deposit maintenance balance) and, subject to borrowing base requirements, up to $100.0 million available under our credit facility.
Liquidity and Financing
We expect to meet our short term (i.e., one year or less) and long term (i) operating cash requirements (including debt service and anticipated dividend payments) principally from cash flow from operations, our available cash and cash equivalents, proceeds from and, to the extent permitted and needed, our credit facility and (ii) investing and financing cash requirements (including an estimated aggregate of $2.7 million of capital expenditures) from the foregoing, as well as property financings, property sales and sales of our common stock.
The following table sets forth, as of December 31, 2023, information with respect to our mortgage debt that is payable from January 2024 through December 31, 2026:
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, extend or payoff the mortgage loans which mature in 2024 through 2026. We intend to repay the amounts not refinanced or extended from our existing funds and sources of funds, including our available cash, proceeds from the sale of our common stock and our credit facility (to the extent available).
We continually seek to refinance existing mortgage loans on terms we deem acceptable 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 also generates additional liquidity. Further, although we have done so infrequently and primarily in the context of a tenant default at a property for which we have not found a replacement tenant, if we believe we have negative equity in a property subject to a non-recourse mortgage loan, we may convey such property to the mortgagee to terminate our mortgage obligations, including payment of interest, principal and real estate taxes, with respect to such property.
Typically, we utilize funds from our credit facility to acquire a property and, thereafter secure long-term, fixed rate mortgage debt on such property. We 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 credit facility for the acquisition of additional properties.
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