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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Material Contractual Obligations
The following sets forth our material contractual obligations as of December 31, 2023:
Payment due by period
Less than More than
(Dollars in thousands) 1 Year 1 ‐ 3 Years 4 ‐ 5 Years 5 Years Total
Credit facility (1) — — — — —
As of December 31, 2023, we had $422.6 million of mortgage debt outstanding, all of which is non-recourse (subject to standard carve-outs). We expect that mortgage interest and amortization payments (excluding repayments of principal at maturity) of approximately $77.1 million due through 2026 will be paid primarily from cash generated from our operations. We anticipate that principal balances due at maturity through 2026 of $99.9 million will be paid primarily from cash and cash equivalents and mortgage financings and refinancings. If we are unsuccessful in refinancing our existing indebtedness or financing our unencumbered properties, our cash flow, funds available under our credit facility and available cash, if any, may not be sufficient to repay all debt obligations when payments become due, and we may need to issue additional equity, obtain long or short- term debt, or dispose of properties on unfavorable terms.
Credit Facility
Our credit facility provides that subject to borrowing base requirements, we can borrow up to $100.0 million for the acquisition of commercial real estate, repayment of mortgage debt, and renovation and operating expense purposes; provided, that if used for renovation and operating expense purposes, the amount outstanding for such purposes will not exceed the lesser of $40.0 million and 40% of the borrowing base. See “—Liquidity and Capital Resources”. The facility matures December 31, 2026 and bears interest equal to 30-day SOFR plus the applicable margin. The applicable margin ranges from 175 basis points if our ratio of total debt to total value (as calculated pursuant to the facility) is equal to or less than 50%, increasing to a maximum of 275 basis points if such ratio is greater than 60%. The applicable margin was 175 basis points for each of 2023 and 2022. There is an unused facility fee of 0.25% per annum on the difference between the outstanding loan balance and $100.0 million. The credit facility requires the maintenance of $3.0 million in average deposit balances. For 2023, the weighted average interest rate on the facility was approximately 6.69% and as of February 29, 2024, the rate on the facility was 7.08%.
The terms of our 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.
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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.
Inflation
We are exposed to inflation risk as income from long-term leases is the primary source of our cash flows from operations. Approximately 69% of our leases contain provisions intended to mitigate the impact of inflation. These provisions generally increase rental rates during the terms of the leases either at fixed rates or indexed escalations (based on the Consumer Price Index or other measures). In addition, many of our leases require the tenant to pay, or reimburse us for our payment of, all or a majority of the property’s operating expenses, including real estate taxes, utilities, insurance and building repairs, which may also mitigate our risks associated with rising costs. However, these rent escalation provisions may not adequately offset the effects of inflation.
Inflation may also affect the overall cost of our unhedged debt (i.e., primarily debt incurred pursuant to our credit facility) and mortgage debt we may incur in the future. (The interest rate risk associated with substantially all of our current mortgage debt is either mitigated through long-term fixed interest rate loans and interest rate hedges). Increasing interest rates on acquisition mortgage debt limits the acquisition opportunities we can pursue and reduces the prices at which we sell our properties.
Distribution Policy
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. Accordingly, to qualify as a REIT, we must, among other things, meet a number of organizational and operational requirements, including a requirement that we distribute currently at least 90% of our ordinary taxable income to our stockholders. It is our current intention to comply with these requirements and maintain our REIT status. As a REIT, we generally will not be subject to corporate federal, state or local income taxes on taxable income we distribute currently (in accordance with the Internal Revenue Code and applicable regulations) to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal, state and local income taxes at regular corporate rates and may not be able to qualify as a REIT for four subsequent tax years. Although we qualify for federal taxation as a REIT, we are subject to certain state and local taxes on our income and to federal income taxes on our undistributed taxable income (i.e., taxable income not distributed in the amounts and in the time frames prescribed by the Internal Revenue Code and applicable regulations thereunder) and are subject to Federal excise taxes on our undistributed taxable income.
It is our current intention to pay to our stockholders within the time periods prescribed by the Internal Revenue Code no less than 90%, and, if possible, 100% of our annual taxable income, including taxable gains from the sale of real estate. It will continue to be our policy to make sufficient distributions to stockholders in order for us to maintain our REIT status under the Internal Revenue Code.
Our board of directors will continue to evaluate, on a quarterly basis, the amount and nature (i.e., cash, stock or a combination of the foregoing) of dividend payments based on its assessment of, among other things, our short and long-term cash and liquidity requirements, prospects, debt maturities, projections of our REIT taxable income, net income, funds from operations, and adjusted funds from operations.
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Critical Accounting Estimates
Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we reconsider and evaluate our estimates and assumptions.
We base our estimates on historical experience, current trends and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could materially differ from any of our estimates under different assumptions or conditions. Our significant accounting policies are discussed in Note 2 of our consolidated financial statements in this report. We believe the accounting estimates listed below are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.
Revenue Recognition
Our main source of revenue is rental income from our tenants. Rental income primarily includes: (i) base rents that our tenants pay in accordance with the terms of their respective leases reported on a straight-line basis over the non-cancellable term of each lease and (ii) reimbursements by tenants of certain real estate operating expenses. Since many of our leases provide for rental increases at specified intervals, straight-line basis accounting requires us to record as an asset and include in revenues, unbilled rent receivables which we will only receive if the tenant makes all rent payments required through the expiration of the term of the lease. Accordingly, our management must determine, in its judgment, that the unbilled rent receivable applicable to each specific tenant is collectable. We review unbilled rent receivables on a quarterly basis and take into consideration the tenant’s payment history and the financial condition of the tenant. In the event that the collectability of an unbilled rent receivable is unlikely, we are required to write-off the receivable, which has an adverse effect on net income for the year in which the direct write-off is taken, and will decrease total assets and stockholders’ equity.
Purchase Accounting for Acquisition of Real Estate
The fair value of real estate acquired is allocated to acquired tangible assets (which includes land, building and building improvements) and identified intangible assets and liabilities (which include the value of above, below and at-market leases and origination costs associated with in-place leases and assumed mortgages) based in each case on their fair values. The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, building and building improvements based on our determination of the relative fair values of these assets. We assess the fair value of the lease intangibles and assumed mortgages based on estimated cash flow projections that utilize appropriate discount rates and available market information. The fair values associated with below-market rental renewal options are determined based on our experience and the relevant facts and circumstances that existed at the time of the acquisitions. The portion of the values of the leases associated with below-market renewal options that we deem reasonably certain to be exercised by the tenant are amortized to rental income over the respective renewal periods. The allocation made by us may have a positive or negative effect on net income and may have an effect on the assets and liabilities on the balance sheet.
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Carrying Value of Real Estate Portfolio
We review our real estate portfolio on a quarterly basis to ascertain if there are any indicators of impairment to the value of any of our real estate assets, including deferred costs and intangibles, to determine if there is any need for an impairment charge. In reviewing the portfolio, we examine the type of asset, the current financial statements or other available financial information of the tenant, the economic situation in the area in which the asset is located, the economic situation in the industry in which the tenant is involved and the timeliness of the payments made by the tenant under its lease, as well as any current correspondence that may have been had with the tenant, including property inspection reports. For each real estate asset owned for which indicators of impairment exist, we perform a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the asset to its carrying amount. Management’s assumptions and estimates include projected rental rates during the holding period and property capitalization rates in order to estimate undiscounted future cash flows. If the undiscounted cash flows are less than the asset’s carrying amount, an impairment loss is recorded to the extent that the estimated fair value is less than the asset’s carrying amount. The estimated fair value is determined using a discounted cash flow model of the expected future cash flows through the useful life of the property. Real estate assets that are expected to be disposed of are valued at the lower of carrying amount or fair value less costs to sell on an individual asset basis. We generally do not obtain any independent appraisals in determining value but rely on our own analysis and valuations. Any impairment charge taken with respect to any part of our real estate portfolio will reduce our net income and reduce assets and stockholders’ equity to the extent of the amount of any impairment charge, but it will not affect our cash flow or our distributions until such time as we dispose of the property.
Equity-Based Compensation
We grant shares of restricted stock and restricted stock units ("RSUs") to eligible plan participants, subject to the recipient's continued service over a specified period and, with respect to the RSUs, the satisfaction of specified conditions over a specified period. The RSUs vest based upon satisfaction of specified metrics with respect to (i) average of our annual total stockholder return (“TSR Awards”) and/or (ii) average annual return of capital (“ROC Awards”), in each case as calculated pursuant to the applicable award agreement. We account for the restricted stock awards and RSUs in accordance with ASC 718, Compensation - Stock Compensation, which requires that such compensation be recognized in the financial statements based on its estimated grant-date fair value. The value of such awards is recognized as compensation expense in general and administrative expenses in the accompanying consolidated statements of operations over the applicable service periods. Grant date fair value is determined with respect to the (i) the restricted stock awards, by the closing stock price on the date of grant, (ii) TSR Awards, by using a Monte Carlo simulation relying upon various assumptions and (iii) ROC Awards, by using the closing stock price on the grant date, subject to quarterly adjustment based upon management’s projection as to the achievability of the specified metrics related to the ROC Awards. See Note 11 to our consolidated financial statements.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our primary market risk exposure is the effect of changes in interest rates on the interest cost of draws on our revolving variable rate credit facility and the effect of changes in the fair value of our interest rate swap agreements. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.
We use interest rate swaps to limit interest rate risk on substantially all variable rate mortgages. These swaps are used for hedging purposes-not for speculation. We do not enter into interest rate swaps for trading purposes. At December 31, 2023, we had no liability in the event of the early termination of our swaps.
At December 31, 2023, we had 13 interest rate swap agreements outstanding with an aggregate $29.6 million notional amount. The fair market value of the interest rate swaps is dependent upon existing market interest rates and swap spreads, which change over time. As of December 31, 2023, if there had been an increase of 100 basis points in forward interest rates, the fair market value of the interest rate swaps and the net unrealized gain on derivative instruments would have increased by $309,000. If there were a decrease of 100 basis points in forward interest rates, the fair market value of the interest rate swaps and the net unrealized gain on derivative instruments would have decreased by $316,000. These changes would not have any impact on our net income or cash.
The fair market value of our long-term debt is estimated based on discounting future cash flows at interest rates that our management believes reflect the risks associated with long-term debt of similar risk and duration.
The following table sets forth our debt obligations by scheduled principal cash flow payments and maturity date, weighted average interest rates and estimated fair market value at December 31, 2023:
For the Year Ended December 31,
Fair
Market
Fixed rate:
Variable rate:
Long‐term debt(1)(2) $ — $ — $ — $ — $ — $ — $ — $ —
Item 8. Financial Statements and Supplementary Data.
This information appears in Item 15(a) of this Annual Report on Form 10-K and is incorporated into this Item 8 by reference thereto.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
A review and evaluation was performed by our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Annual Report on Form 10-K. Based on that review and evaluation, our CEO and CFO have concluded that our disclosure controls and procedures, as designed and implemented as of December 31, 2023, were effective.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2023. In making this assessment, our management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013).
Based on its assessment, our management concluded that, as of December 31, 2023, our internal control over financial reporting was effective based on those criteria.
Changes in Internal Controls over Financial Reporting
There have been no changes in our internal controls over financial reporting, as defined in in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, that occurred during the three months ended December 31, 2023 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Item 9B. Other Information.
None of our officers or directors had any contract, instruction, or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement” in effect at any time during the three months ended December 31, 2023.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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PARTIII
Item 10. Directors, Executive Officers and Corporate Governance.
Apart from certain information concerning our executive officers which is set forth in Part I of this Annual Report, additional information required by this Item 10 shall be included in our proxy statement for our 2024 annual meeting of stockholders, to be filed with the SEC not later than April 29, 2024, and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item 11 will be included in our proxy statement for our 2024 annual meeting of stockholders, to be filed with the SEC not later than April 29, 2024, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Apart from the equity compensation plan information required by Item 201(d) of Regulation S-K which is set forth below, the information required by this Item 12 will be included in our proxy statement for our 2024 annual meeting of stockholders, to be filed with the SEC not later than April 29, 2024 and is incorporated herein by reference.
Equity Compensation Plan Information
The following table provides information as of December 31, 2023 about shares of our common stock that may be issued upon the exercise of options, warrants and rights under our 2016 Incentive Plan (the “2016 Plan”), our 2019 Incentive Plan (the “2019 Plan”; and together with the 2016 Plan, the “Prior Plans”) and our 2022 Incentive Plan (the “2022 Plan”; and together with the Prior Plans, the “Incentive Plans”). No further awards may be granted under the Prior Plans.
Number of
securities
remaining available
Number of for future issuance
securities Weighted average under equity
to be issued exercise price compensation
upon exercise of outstanding plans (excluding
of outstanding options, securities
options, warrants warrants reflected in
Plan Category and rights(1) and rights column(a))(2)
(a) (b) (c)
Equity compensation plans approved by security holders 248,112 — 428,675
Equity compensation plans not approved by security holders — — —
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Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 will be included in our proxy statement for our 2024 annual meeting of stockholders, to be filed with the SEC not later than April 29, 2024 and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
The information required by this Item 14 will be included in our proxy statement for our 2024 annual meeting of stockholders, to be filed with the SEC not later than April 29, 2024 and is incorporated herein by reference.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Documents filed as part of this Report:
—Statements:
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Comprehensive Income F-5
Consolidated Statements of Changes in Equity F-6
Consolidated Statements of Cash Flows F-7 through F-8
Notes to Consolidated Financial Statements F-9 through F-37
(2) Financial Statement Schedules:
—Schedule III—Real Estate and Accumulated Depreciation F-38 through F-41
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or the notes thereto.
(b) Exhibits:
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21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
31.1 Certification of President and Chief Executive Officer
31.2 Certification of Senior Vice President and Chief Financial Officer
32.1 Certification of President and Chief Executive Officer
32.2 Certification of Senior Vice President and Chief Financial Officer
97.1 Registrant’s Clawback Policy effective October 2, 2023
* Indicates a management contract or compensatory plan or arrangement.
The file number for all the exhibits incorporated by reference is 001- 09279 other than exhibit 4.1 whose file number is 333-86850.
Item 16. Form 10-K Summary
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf of the undersigned, thereunto duly authorized.
March 6, 2024 ONE LIBERTY PROPERTIES, INC.
By: /s/ PATRICK J. CALLAN, JR.
Patrick J. Callan, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
Charles Biederman Director March __, 2024
/s/ EDWARD GELLERTEdward Gellert Director March 6, 2024
/s/ JEFFREY A. GOULDJeffrey A. Gould Director March 6, 2024
/s/ J. ROBERT LOVEJOYJ. Robert Lovejoy Director March 6, 2024
/s/ LEOR SIRILeor Siri Director March 6, 2024
/s/ KAREN A. TILLKaren A. Till Director March 6, 2024
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Signature Title Date
Isaac Kalish
Mili Mathew
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of One Liberty Properties, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of One Liberty Properties, Inc. and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.
Impairment of Real Estate Investments
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/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1989.
New York, New York
March 6, 2024
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ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS