One Liberty Properties Inc: Form 10-Q for the period ended Sep 30, 2025

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, together with other statements and information publicly disseminated by us, contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “could,” “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions or variations thereof and include, without limitations, statements regarding our future estimated rental income, funds from operations, adjusted funds from operations and our dividend. Among other things, forward looking statements with respect to (i) estimates of base rent and rental income exclude variable rent (including tenant reimbursements) and the adjustments required by GAAP to present rental income, (ii) estimates of base rent may not, unless otherwise expressly indicated, reflect the expenses (e.g., real estate expenses, interest, depreciation and amortization or any one or more of the foregoing) with respect to the associated property, (iii) anticipated property purchases, sales, financings and/or refinancings may not be completed during the period or on the terms indicated or at all, and (iv) estimates of gains and/or net proceeds from property sales (i.e., cash collected by us at closing after giving effect to, among other things, as applicable, the payoff of any mortgages on the properties sold and our non-controlling interest’s share of the proceeds) or proceeds from financing or refinancing transactions are subject to adjustment, among other things, because actual closing costs may differ from the estimated costs. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, performance or achievements.

The uncertainties, risks and factors which may cause actual results to differ materially from current expectations include, but are not limited to:

• the financial failure of, or other default in payment by, tenants under their leases and the potential resulting vacancies;
• adverse changes and disruption in the sectors in which our tenants operate (e.g., industrial and retail), which could impact our tenants’ ability to pay rent and expense reimbursement;
• the level and volatility of interest rates;
• loss or bankruptcy of one or more of our tenants, and bankruptcy laws that may limit our remedies if a tenant becomes bankrupt and rejects its lease;
• general economic and business conditions and developments, including those currently affecting or that may affect our economy;
• general and local real estate conditions, including any changes in the value of our real estate;
• our ability to renew or re-lease space as leases expire;
• our ability to pay dividends;
• the effect of changes in political conditions in the U.S., including in connection with the new administration’s policies and priorities, or otherwise;
• changes in governmental laws and regulations relating to real estate and related investments;
• compliance with credit facility and mortgage debt covenants;
• the availability of, and costs associated with, sources of capital and liquidity;
• competition in our industry;
• technological changes, such as artificial intelligence, autonomous vehicles, reconfiguration of supply chains, robotics, 3D printing or other technologies;
• potential natural disasters, epidemics, pandemics or outbreak of infectious disease, such as COVID-19, and other potentially catastrophic events such as acts of war and/or terrorism; and
• the other risks, uncertainties and factors described in the reports and documents we file with the SEC including the risks, uncertainties and factors described in our Annual Report on Form 10-K for the year ended December 31, 2024 (the “Annual Report”) under the caption “Item 1A. Risk Factors” for a discussion of certain factors which may cause actual results to differ materially from current.

In light of the factors referred to above, the future events discussed or incorporated by reference in this report and other documents we file with the SEC may not occur, and actual results, performance or achievements could differ materially from those anticipated or implied in the forward-looking statements. Given these uncertainties, you should not rely on any forward-looking statements.

Except as may be required under the U.S. federal securities laws, we undertake no obligation to publicly update our forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make in our reports that are filed with or furnished to the SEC.

Challenges and Uncertainties Facing Certain Tenants and Properties

We face challenges due to the volatile economic environment (including the impact of threatened and/or imposed tariffs, and the related possibility of trade wars and the impact of the foregoing on us and in particular, on our seaport based industrial/warehouse properties). Our cash flow and profitability will be adversely impacted if these challenges are not resolved in a satisfactory manner.

Overview

We are a self-administered and self-managed real estate investment trust, or REIT. To qualify as a REIT, under the Internal Revenue Code of 1986, as amended, we must meet a number of organizational and operational requirements, including a requirement that we distribute currently at least 90% of ordinary taxable income to our stockholders. We intend to comply with these requirements and to maintain our REIT status.

We acquire, own and manage a portfolio consisting primarily of industrial properties. As of September 30, 2025, we own 98 properties (including 61 industrial properties) located in 30 states. Based on square footage, our occupancy rate at September 30, 2025 is approximately 98.2%.

We face a variety of risks and challenges in our business, including the possibility we will not be able to: acquire or dispose of properties on acceptable terms, 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.

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. Substantially all of our mortgage debt either bears interest at fixed rates or is subject to interest rate swaps, limiting our exposure to fluctuating interest rates on our outstanding mortgage debt.

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 have in the past, and we may in the future, sell a property if the tenant’s financial condition is unsatisfactory.

In acquiring and disposing of properties, among other things, we evaluate the terms of the leases, the credit of the existing tenants, the terms and conditions of the related financing arrangement (including any contemplated financing) and engage in a fundamental analysis of the real estate to be bought or sold. This fundamental analysis takes into account, among other things, the estimated value of the property, local competition and demographics, and the ability to re-rent or dispose of the property on favorable terms upon lease expiration or early termination. In addition, in evaluating property sales, we take into account, among other things, the property type (i.e., industrial, retail or other), our perception of the property’s long-term prospects (including the likelihood for, and the extent of, any further appreciation or diminution in value), the term remaining on the related lease and mortgage debt, the price and other terms and conditions for the sale of such property and the returns anticipated to be generated from the reinvestment of the net proceeds to us from such property sale.

Our 2026 base rent is approximately $77.4 million and represents, after giving effect to any abatements, concessions, deferrals or adjustments, the base rent (excluding tenant reimbursements) payable to us during the twelve months ending September 30, 2026 under leases in effect at September 30, 2025.

Our 2026 base rent:

• excludes $103,000 representing the 2026 base rent of a retail property in Port Clinton, Ohio which is anticipated to be sold during the three months ending December 31, 2025.
• includes $235,000 of base rent from Hooters, a restaurant tenant at our Myrtle Beach, South Carolina property which filed for bankruptcy protection in April 2025.

The following table sets forth information about our properties by industry sector as of September 30, 2025:

(a) Includes Retail-Furniture which accounts for $3.1 million, or 4.1%, and Retail-Office Supply which accounts for $642,000, or 0.8%.

(b) Includes an office, two theaters, a health and fitness center, a restaurant and The Vue Apartments.

The following table sets forth scheduled expirations of leases at our properties as of September 30, 2025 for the years indicated below:

(a) Lease expirations assume tenants do not exercise existing renewal or termination options.

(b) Excludes an aggregate of 206,761 square feet of vacant space.

Property Transactions

Acquisition during the three months ended September 30, 2025

On August 27, 2025, we acquired a 210,600 square foot, single-tenant industrial property located in Blythewood, South Carolina for $24.0 million, incurred $87,000 of transaction costs that were capitalized and simultaneously obtained new mortgage debt of $14.0 million bearing an interest rate of 5.77% (interest only through maturity) and maturing in 2030 (see Note 4 to our consolidated financial statements). We estimate that commencing October 1, 2025, the quarterly rental income (excluding variable lease revenues), depreciation and amortization expense and mortgage interest expense from this property will be $405,000, $223,000 and $202,000, respectively.

Sales during the three months ended September 30, 2025

We sold the following properties (amounts in thousands):

(a) This parcel was owned through a consolidated joint venture in which we held a 90% interest; the non-controlling interest’s share of the gain was $641. The net proceeds on sale give effect to the non-controlling interest’s $800 share.

(b) The net proceeds on sale give effect to the payoff of the $966 mortgage on this property.

On August 26, 2025, we and our joint venture partners sold the last two remaining unconsolidated joint venture properties in Savannah, Georgia for an aggregate of $4.6 million, net of closing costs. Our 50% share of the (i) gain from these sales was $991,000, which is recorded as Equity in earnings from sale of unconsolidated joint venture properties on the consolidated statements of income for the three and nine months ended September 30, 2025, and (ii) net proceeds was $2.4 million.

Properties held-for-sale and Impairment loss at September 30, 2025

On September 9, 2025, we entered into a contract to sell a retail property located in Port Clinton, Ohio for $1.3 million. It is anticipated that the (i) property will be sold during the fourth quarter of 2025, (ii) net proceeds on sale will be approximately $500,000, after repaying approximately $700,000 of mortgage debt on the property, and (iii) sale will result in a gain of approximately $200,000, which will be recognized as Gain on sale of real estate, net, in the consolidated statement of income for the year-ending December 31, 2025.

On September 10, 2025, we and our ground lease tenant entered into a contract to sell the entire collective interest in The Vue Apartments, a multi-family property located in Beachwood, Ohio (see Notes 5 and 7 to our consolidated financial statements). We had not generated any revenue from this property since 2020. In connection with the sale, we recorded an impairment charge of $1.3 million during the three and nine months ended September 30, 2025. The property was sold on November 4, 2025 and the net proceeds to us will be approximately $16.4 million. On October 30, 2025, we entered into an agreement pursuant to which we are to receive $1.3 million in connection with the settlement of a lawsuit with respect to this property which will be recognized on the consolidated statement of income for the year ending December 31, 2025 (see Note 15 to our consolidated financial statements). We expect to receive these settlement proceeds in November 2025. We anticipate (i) using the proceeds from this sale and the settlement of this litigation to fund acquisitions, including the proposed acquisition of the Pittsburgh Portfolio (as defined), and for general working capital purposes and (ii) investing such proceeds in short-term government securities until such proceeds are applied for the foregoing or other purposes.

Acquisition-related transactions subsequent to September 30, 2025

On October 13, 2025, we entered into a contract to acquire a 397,440 square foot, six-building, multi-tenant industrial property (the “Pittsburgh Portfolio”) located in Sewickley, Pennsylvania, part of the Pittsburgh MSA, for $53.5 million. In connection with the acquisition, we anticipate obtaining new mortgage debt of approximately $32.4 million bearing an interest rate of 5.45% (interest only for five years) and maturing in 2032. We anticipate paying the balance of the purchase price from our available cash, including the net proceeds from property sales and, if needed, our line of credit. We estimate the annual base rent will be approximately $3.4 million (with annual base rent increases ranging from 2.0% to 3.0%) and anticipate the closing will occur during the three months ending December 31, 2025.

On October 30, 2025, we acquired a 199,919 square foot, single-tenant industrial property located in Oakdale, Minnesota for $23.0 million. We obtained new mortgage debt on the property of approximately $13.8 million bearing an interest rate of 5.10% (interest only until maturity) and maturing in 2030. We estimate the annual base rent will be approximately $1.5 million (with annual base rent increases of 4.0%).

Results of Operations

Total revenues

The following table compares total revenues for the periods indicated:

(Dollars in thousands)

Rental income, net

The following table details the components of rental income, net, for the periods indicated:

(Dollars in thousands)

(a) Represents rental income from eight properties acquired since January 1, 2024.

(b) Represents rental income from 17 properties sold since January 1, 2024.

(c) Represents rental income from 90 properties that were owned for the entirety of the periods presented.

Changes at same store properties

The changes in same store rental income during the three and nine months ended September 30, 2025 are due primarily to increases of:

• $410,000 and $1.1 million, respectively, from lease amendments and/or extensions at several properties,
• $335,000 and $861,000, respectively, due to new tenants at several properties, and
• $236,000 and $1.1 million, respectively, in tenant reimbursements, of which $154,000 and $634,000, respectively, relates to the reimbursement of real estate tax expense generally incurred during the applicable period.

The increases were offset during the three and nine months ended September 30, 2025 by decreases in rental income of $652,000 and $1.3 million, respectively, from lease expirations at various properties.

Lease Termination Fees

In the nine months ended September 30, 2025, we recognized a lease termination fee of $66,000 from an industrial tenant in a lease buy-out transaction. The space was simultaneously re-leased to a new industrial tenant. In the nine months ended September 30, 2024, a consolidated joint venture in Lakewood, Colorado, in which we held a 90% interest, received a lease termination fee of $250,000 due to the early termination of a lease in connection with the sale of the related restaurant parcel.

Operating Expenses

The following table compares operating expenses for the periods indicated:

(Dollars in thousands)

Depreciation and amortization. The increases in the three and nine months ended September 30, 2025 are due primarily to (i) $1.1 million and $3.3 million, respectively, from the properties acquired since January 1, 2024, and (ii) in the nine months ended September 30, 2025, $321,000 from improvements at several properties.

The increases were offset during the three and nine months ended September 30, 2025 primarily by (i) the inclusion, in the corresponding 2024 periods, of $358,000 and $972,000, respectively, from the properties sold since January 1, 2024, and (ii) decreases of $264,000 and $684,000, respectively, related to tenant origination costs at several properties that prior to September 30, 2025 were fully amortized.

Real estate expenses. The increases in the three and nine months ended September 30, 2025 are due primarily to (i) $522,000 and $1.3 million, respectively, from the properties acquired since January 1, 2024, (ii) $370,000 and $1.0 million, respectively, related to real estate taxes at several properties, and (iii) in the nine months ended September 30, 2025, $505,000 related to common area maintenance and insurance expense at several properties, none of which were individually significant.

The increase was offset by the inclusion, in the corresponding 2024 periods, of $387,000 and $787,000, respectively, from the properties sold since January 1, 2024.

A substantial portion of real estate expenses is rebilled to tenants and is included in Rental income, net, on the consolidated statements of income.

General and administrative. The increases (i) in the three and nine months ended September 30, 2025 are due primarily to increases of non-cash expense of $151,000 and $354,000, respectively, primarily from the re-assessment of the achievability of performance metrics related to the RSUs, and (ii) of $153,000 for the nine months ended September 30, 2025, is primarily due to higher levels of payroll and payroll-related expenses.

Impairment loss. During the three and nine months ended September 30, 2025, we recorded a $1.3 million impairment loss at our Beachwood, Ohio property. During the nine months ended September 30, 2024, we recorded a $1.1 million impairment loss at our former Hamilton, Ohio property. (See Note 5 to our consolidated financial statements).

State tax expense. During the nine months ended September 30, 2025, our state tax expense was offset by a $135,000 refund from Tennessee related to franchise taxes paid in 2023, as the state amended the method of calculating such taxes, resulting in an overpayment in 2023.

Gain on sale of real estate, net

The following table compares gain on sale of real estate, net for the periods indicated:

(Dollars in thousands)

The following table lists the sold properties and the related gains, net, for the periods indicated:

(Dollars in thousands)

(a) A multi-tenant shopping center in Lakewood, Colorado, which was owned through a consolidated joint venture in which we held a 90% interest (the “Colorado JV”), sold a land parcel at this property. The non-controlling interest’s share of this gain was $641.

(b) The Colorado JV sold the multi-tenant, in-line retail stores at this property. In connection with this sale, the joint venture paid off the $5,808 mortgage balance on the property. The non-controlling interest’s share of this gain was $972.

(c) The Colorado JV sold a land parcel and the related parking lot in connection with the sale of the restaurant parcel in (d) below. The non-controlling interest’s share of the loss was $4.

(d) This restaurant parcel was part of the Colorado JV. The non-controlling interest’s share of this gain was $178.

(e) This property was owned through a consolidated joint venture in which we had a 95% interest. The non-controlling interest’s share of this gain was $105.

Other Income and Expenses

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

(Dollars in thousands)

Equity in earnings from sale of unconsolidated joint venture properties. The three and nine months ended September 30, 2025 include our 50% share of the gain on the sales of our two Savannah, Georgia joint venture properties which were sold in August 2025. (See Note 6 to our consolidated financial statements).

Other income. The three and nine months ended September 30, 2025 primarily reflect decreases in interest income from less amounts invested in short-term U.S. treasury bills.

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

(Dollars in thousands)

Mortgage interest

The following table reflects the average interest rate on the average principal amount of outstanding mortgage debt for the periods indicated:

(Dollars in thousands)

The increases in mortgage interest in the three and nine months ended September 30, 2025 are due to increases in the weighted average principal amount of mortgage debt outstanding and the weighted average interest rate.

We anticipate that our mortgage interest expense will increase (and our earnings and the amount we are required to distribute to stockholders to maintain our REIT status may decrease) as we refinance our mortgages maturing through 2027 because current comparable mortgage interest rates are generally higher than the weighted average interest rate on such maturing mortgages. The weighted average interest rate of (i) our mortgages maturing in the three months ending December 31, 2025 and for the years ending December 31, 2026 and 2027 is 3.78%, 3.91% and 3.64%, respectively, and (ii) the mortgages we obtained in connection with the acquisitions completed during the nine months ended September 30, 2025 is 6.11%.

Credit line interest

The Company paid off the principal balance outstanding on the credit facility in July 2025. The weighted average principal amount outstanding was $4.5 million and the weighted average interest rate was 6.07% for the nine months ended September 30, 2025.

There was no balance outstanding on the credit line during the three and nine months ended September 30, 2024. The interest expense of $64,000 and $189,000 for the three and nine months ended September 30, 2024, respectively, constitutes the unused facility fee.

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. Our available liquidity at October 31, 2025, was $109.4 million, including $9.4 million of cash and cash equivalents (including the credit facility’s required minimum $3.0 million average deposit maintenance balance) and up to $100.0 million available under our credit facility. At October 31, 2025, the facility is available for the acquisition of commercial real estate, repayment of mortgage debt, and up to $40.0 million for renovation and operating expense purposes.

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 $3.0 million of capital expenditures) from the foregoing, as well as property financings, property sales and sales of our common stock.

At September 30, 2025, we had 59 outstanding mortgages payable secured by 61 properties in the aggregate principal amount of $463.1 million (before netting unamortized deferred financing costs of $3.9 million and mortgage intangibles of $564,000). These mortgages represent first liens on individual real estate investments with an aggregate carrying value of $723.8 million, before accumulated depreciation of $130.5 million. After giving effect to interest rate swap agreements, the mortgage payments bear interest at fixed rates ranging from 3.05% to 6.42% (a 4.79% weighted average interest rate) and mature between 2025 and 2047 (a 6.0 year weighted average remaining term to maturity).

The following table sets forth, as of September 30, 2025, information with respect to our mortgage debt:

(Dollars in thousands)

(1)

We intend to make debt amortization payments from operating cash flow and, although no assurance can be given that we will be successful in this regard, generally intend to refinance, extend or pay off the mortgage loans which mature from 2025 through 2028. We generally 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.

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. 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 the nine months ended September 30, 2025 and 2024. 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. The interest rate on the facility was 6.03% and 5.88% at September 30, 2025 and October 31, 2025.

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. Net proceeds received from the sale, financing or refinancing of properties are generally required to be used to repay amounts outstanding under our credit facility. At September 30, 2025, we were in compliance with the covenants under this facility.

Application of Critical Accounting Estimates

A complete discussion of our critical accounting estimates is included in our Annual Report. There have been no changes in such estimates.

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 FFO for straight-line rent accruals and amortization of lease intangibles, deducting from income (i) additional rent from a ground lease tenant, (ii) income on settlement of litigation, (iii) income on insurance recoveries from casualties, (iv) lease termination and assignment fees, and adding back to income (i) amortization of restricted stock and restricted stock unit compensation expense, (ii) amortization of costs in connection with its financing activities (including its share of its unconsolidated joint ventures), (iii) debt prepayment costs, (iv) amortization of lease incentives and (v) 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 predictability 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 to us in evaluating potential property acquisitions.

FFO and AFFO do not represent net income or cash flows from operations as defined by GAAP. FFO and AFFO and should not be considered to be an alternative to net income as a reliable measure of our operating performance; nor should FFO and AFFO be considered 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.

The tables below 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 periods indicated (dollars in thousands, except per share amounts):

(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.

Three months ended September 30, 2025 and 2024

The $136,000, or 1.5%, decrease in FFO for the three months ended September 30, 2025 from the corresponding 2024 period is due primarily to a:

• $685,000 increase in interest expense,
• $593,000 increase in real estate operating expenses,
• $268,000 decrease in other income, and
• $242,000 increase in general and administrative expenses.

Offsetting the decrease is a $1.6 million increase in rental income, net.

The $173,000, or 1.7%, increase in AFFO for the three months ended September 30, 2025 from the corresponding 2024 period is due primarily to the factors impacting FFO as described immediately above, including a (i) $180,000 increase (to $1.7 million) in rental income, net, due to the exclusion of the amortization of straight line rent and lease-related intangibles and (ii) $151,000 decrease (to $91,000) in general and administrative expenses due to the exclusion of the amortization of restricted stock and RSU compensation.

See “—Results of Operations” for further information regarding these changes.

Nine months ended September 30, 2025 and 2024

The $327,000, or 1.2%, increase in FFO for the nine months ended September 30, 2025 from the corresponding 2024 period is due primarily to a:

• $6.0 million increase in rental income, net, and
• $182,000 decrease in state tax expense.

Offsetting the increase is a:

• $2.5 million increase in interest expense,
• $2.1 million increase in real estate operating expenses,
• $651,000 increase in general and administrative expenses,
• $485,000 decrease in other income, and
• $184,000 decrease in lease termination fee income.

The $865,000, or 2.9%, increase in AFFO for the nine months ended September 30, 2025 from the corresponding 2024 period is primarily due to the factors impacting FFO as described immediately above, including a $354,000 decrease (to $297,000) in general and administrative expenses due to the exclusion of the amortization of restricted stock and RSU compensation and excluding the $184,000 decrease in lease termination fee income.

See “—Results of Operations” for further information regarding these changes.

Diluted per share net income, FFO and AFFO were impacted negatively in the three and nine months ended September 30, 2025 compared to the corresponding quarter in the prior year by an average increase of approximately 214,000 and 248,000, respectively, in the weighted average number of shares of common stock outstanding as a result of stock issuances in connection with the equity incentive and dividend reinvestment programs.

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 September 30, 2025, we had no liability in the event of the early termination of our swaps.

At September 30, 2025, we had four interest rate swap agreements outstanding. 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 September 30, 2025, 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 $18,000. 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 $18,000. These changes would not have any impact on our net income or cash.

Our variable mortgage debt, after giving effect to the interest rate swap agreements, primarily bears interest at fixed rates and accordingly, the effect of changes in interest rates would not impact the interest expense we incur under these mortgages.

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.

Based on their evaluation as of the end of the period covered by this report, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are effective.

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) promulgated under the Exchange Act) during the three months ended September 30, 2025 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.