One Liberty Properties Inc: Form 10-Q for the period ended Mar 31, 2022

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. 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 our results of operations, financial condition, cash flows, performance or achievements.

Currently, a significant risk and uncertainty we face is the impact of the COVID-19 pandemic, the various governmental and non-governmental responses thereto, and the related economic consequences of the foregoing on (i) our and our tenants’ financial condition, results of operations, cash flows and performance, and (ii) the real estate market, global economy and financial markets. The extent to which the pandemic impacts us, our tenants and the economy generally will depend on future developments, which are highly uncertain and cannot be predicted with confidence. Additional 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 disruptions in the retail, theater and health and fitness sectors, which could impact our tenants’ ability to pay rent and expense reimbursement;
• 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;
• our ability to renew or re-lease space as leases expire;
• our ability to reinvest the proceeds of property sales, and in particular, the proceeds from sales of retail properties, on terms that will generate as or more favorable returns than the properties sold;
• our ability to identify and complete accretive acquisitions;
• the ability or willingness of mortgage lenders to make accommodations with respect to our debt service obligations at properties for which we provide rent relief to our tenants or which are otherwise challenged;
• our ability to pay dividends;
• changes in governmental laws and regulations relating to real estate and related investments;
• limitations on our ability to exercise legal remedies due to court closures and/or moratoriums on the exercise of certain types of remedies or activities;
• the level and volatility of interest rates;
• general economic and business conditions, including those currently affecting our nation’s economy and real estate markets;
• general and local real estate conditions, including any changes in the value of our real estate;
• compliance with credit facility and mortgage debt covenants;
• the availability of, and costs associated with, sources of capital and liquidity;
• competition in our industry; 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 under “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”), and in the Quarterly Reports on Form 10-Q and the other reports we file thereafter with the SEC.

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.

Any or all of our forward-looking statements in this report and in any other public statements we make may turn out to be incorrect. Actual results may differ from our forward-looking statements because of inaccurate assumptions we might make or because of the occurrence of known or unknown risks and uncertainties. Many factors mentioned in the discussion below and elsewhere in this report will be important in determining future results. Consequently, no forward-looking statement can be guaranteed and you are cautioned not to place undue reliance on these forward-looking statements. Actual future results may vary materially.

Except as may be required under the United States 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

As more fully described in our Annual Report, and in particular, the sections thereof entitled “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations”, our properties face challenges due to the pandemic or other factors. There have been no material changes to the status of such properties as described in our Annual Report.

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 geographically diversified portfolio consisting primarily of industrial and retail properties, and to a lesser extent, health and fitness, restaurant, theater, and other properties, many of which are subject to long-term net leases. As of March 31, 2022, we own 118 properties (including three properties owned by consolidated joint ventures and three properties owned by unconsolidated joint ventures) located in 31 states. Based on square footage, our occupancy rate at March 31, 2022 is approximately 97.1%.

In addition to the challenges and uncertainties presented by the pandemic, we, among other things, face additional challenges and uncertainties, which are heightened by the pandemic, 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.

We 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, 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.

In acquiring or disposing of properties, we evaluate the terms of the leases and the credit of the existing tenants with a fundamental analysis of the real estate to be bought or sold, 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. 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 depreciation 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.

Over the past several years, we have been addressing the challenges presented by the growth of e-commerce and our exposure to the retail industry by focusing on acquiring industrial properties (including warehouse and distribution facilities) and properties that we believe capitalize on e-commerce activities, and disposing of retail properties which we did not believe to be advantageous to hold for the long-term. Approximately 58.8% of our 2022 contractual base rent (as described below) is derived from industrial properties and 27.2%, 4.7%, 4.1%, 2.8%, and 2.4% from retail, health and fitness, restaurant, theater, and other properties, respectively. We face significant competition in seeking to acquire industrial properties. The returns and cash flow we generate from industrial properties, and in particular, the returns and cash flow generated by the reinvestment in industrial properties of the net proceeds from the sale of retail properties may not be, and in many cases are not, as favorable to us as the returns and cash flow currently generated by our retail properties. Decreases in cash flows or returns on investments resulting from the ongoing transition to the ownership of lower yielding industrial properties from the ownership of higher yielding retail properties will make it more difficult for us to sustain our current level of dividend payments.

Our 2022 contractual base rent is approximately $68.9 million and represents, after giving effect to any abatements, concessions, deferrals or adjustments in effect as of March 31, 2022, the base rent payable to us during the year ending December 31, 2022 under leases in effect at March 31, 2022. Excluded from 2022 contractual rental income is an aggregate of $6.7 million comprised of: (i) $1.7 million representing our share of the base rent payable in 2022 to our joint ventures, (ii) subject to the property generating specified levels of positive operating cash flow, $1.3 million of estimated variable lease payments from The Vue Apartments, a multi-family complex which ground leases the underlying land from us and as to which there is uncertainty as to when and whether the tenant will resume paying rent, (iii) $966,000 of COVID-19 rent deferral repayments due from Regal Cinemas, a tenant at two properties, which was not accrued to rental income, (iv) approximately $1.5 million of straight-line rent and approximately $784,000 of amortization of intangibles, (v) approximately $335,000 of contractual base rent payable through June 2022 from a property in Columbus, Ohio which the Company sold on May 2, 2022 and (vi) $161,000 of COVID-19 rent deferral repayments accrued to rental income in 2020, of which $57,000 was paid by April 30, 2022.

The following table sets forth scheduled expirations of leases for our properties as of March 31, 2022 for the periods indicated below:

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

(2) Excludes an aggregate of 167,399 square feet of vacant space.

Property Transactions During the Three Months Ended March 31, 2022

On January 5, 2022, we acquired an industrial property located in Fort Myers, Florida for a purchase price of $8.1 million and after the acquisition, obtained $4.9 million nine-year mortgage debt with an interest rate of 3.09% and maturing in February 2031. We estimate that for 2022, this acquisition will contribute rental income (excluding variable lease revenues) of $528,000, and depreciation and amortization expense and mortgage interest expense of $241,000 and $139,000, respectively.

On March 22, 2022, we completed the sale of four Wendy’s restaurant properties located in Pennsylvania for a gross sales price of $10.0 million and recognized a $4.6 million gain from this sale. These properties contributed (i) $117,000 and $131,000 of rental income, net, (ii) $10,000 and $15,000 of depreciation and amortization expense and (iii) $0 and $30,000 of mortgage interest expense in the three months ended March 31, 2022 and 2021, respectively.

Settlement of the Round Rock Guaranty Litigation

With respect to the lawsuit captioned OLP Wyoming Springs, LLC, Plaintiff, v. Harden Healthcare, LLC, Defendant, v Benjamin Hanson, Intervenor (the “Lawsuit”) more fully described in our Annual Report on Form 10-K for the year ended December 31, 2021, on April 15, 2022, we received, pursuant to the settlement agreement entered into in February 2022, approximately $5.4 million representing the amount we were to receive pursuant to such agreement. This sum will be recognized as Other income on the consolidated statements of income during the three and six months ending June 30, 2022. As a result of the receipt of this payment, the parties to the Lawsuit are, among other things, to seek dismissal of the Lawsuit with prejudice and release each other and certain other persons from claims and liabilities with respect to matters pertaining to the Lawsuit.

Property Transaction Subsequent to March 31, 2022

On May 2, 2022, we sold an industrial property located in Columbus, Ohio for a gross sales price of $8.5 million. For the three and six months ending June 30, 2022, we anticipate that we will recognize a gain of $6.9 million from this sale. This property contributed (i) $190,000 and $187,000 of rental income, net, and (ii) $27,000 and $40,000 of operating expenses (including depreciation and amortization expense of $0 and $18,000) in the three months ended March 31, 2022 and 2021, respectively.

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 properties acquired since January 1, 2021.

(b) Represents rental income from properties sold since January 1, 2021.

(c) Represents rental income from 113 properties that were owned for the entirety of the periods presented.

Changes due to acquisitions and dispositions

The three months ended March 31, 2022 reflect an increase of $612,000 generated by four properties acquired in 2021 and 2022 (i.e., $484,000 from the three properties acquired in 2021 and $128,000 from the property acquired during 2022). Offsetting the increase is a decrease due to the inclusion, in the 2021 period, of rental income of $528,000 from properties sold during 2021 and 2022 (i.e., $514,000 from four properties sold in 2021).

Changes at same store properties

The increase in same store rental income is due primarily to a net increase of (i) $452,000 from two Regal Cinemas properties (including the collection of $242,000 of deferred rent from 2021 and 2020) for which we are recording rental income on a cash basis (as collections are deemed less than probable), (ii) $139,000 of rental income due to a lease amendment and extension at our El Paso, Texas property, (iii) $108,000 of rental income from a tenant at our Lake Charles, Louisiana property representing a full quarter of rental income compared to no rental income in 2021 due to a casualty loss (see “Other income”) and (iv) an aggregate of $203,000 from a new tenant (i.e., Lion Brewery at our Pittston, Pennsylvania property) and from various lease amendments and extensions.

The increase in same store rental income was offset by a $148,000 decrease due to a lease termination at our Columbus, Ohio property for which we had received a $350,000 lease termination fee in 2021.

Lease termination fees.

In connection with the exercise of early lease termination options, we recognized $25,000 and $132,000 in the three months ended March 31, 2022 and 2021, respectively.

Operating Expenses

The following table compares operating expenses for the periods indicated:

(Dollars in thousands)

Depreciation and amortization. The increase is due primarily to $330,000 of such expense from properties acquired in 2022 and 2021 (including $276,000 from properties acquired in 2021). The increase was offset by (i) the inclusion of $135,000 of such expense, in the corresponding period in 2021, from the properties sold since January 1, 2021, and (ii) $115,000 of accelerated amortization of tenant origination costs for the three months ended March 31, 2021 in connection with a tenant’s exercise of a lease termination option.

General and administrative. The increase is primarily due to an increase of $164,000 of compensation expense due to higher levels of compensation, and to a lesser extent, an additional employee.

We anticipate that for the quarter ending June 30, 2022, we will recognize non-cash compensation expense of $227,000 resulting from the accelerated vesting of restricted stock awards due to a director not standing for re-election.

Real estate expenses. The increase is primarily due to an aggregate increase of $217,000 in these expenses for several properties, none of which were individually significant (including a $92,000 increase in real estate tax expense, a $65,000 increase in insurance expense, and a $41,000 increase from properties acquired in 2022 and 2021). The increase was offset in the three months ended March 31, 2022 due primarily to (i) $119,000 related to properties sold in 2021 and 2022 and (ii) $97,000 in Round Rock litigation expense.

A substantial portion of real estate expenses are rebilled to tenants and are included in Rental income, net, on the consolidated statements of income, other than the Round Rock litigation expense, which is not rebilled.

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 $4.6 million gain in the 2022 period was realized from the sale of four Wendy’s restaurant properties in Pennsylvania. There were no property sales during the three months ended March 31, 2021.

Other Income and Expenses

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

(Dollars in thousands)

Equity in earnings (loss) of unconsolidated joint ventures. The increase is primarily due to an increase at our Manahawkin, New Jersey property (the “Manahawkin Property”) resulting from (i) a $94,000 (our 50% share) increase in rental income, including $30,000 of deferred rent from 2020 and 2021, that we received from Regal Cinemas, a tenant for which we are recording rental income on a cash basis, and (ii) a decrease in real estate taxes, net of amounts rebilled to tenants, due to a lower assessment.

Other income. The three months ended March 31, 2022 includes $918,000 representing the final property insurance recovery related to our Lake Charles, Louisiana property damaged in an August 2020 hurricane. The three months ended March 31, 2021 includes a $100,000 fee obtained in connection with an assignment of a lease.

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 decrease in mortgage interest is due primarily to the net decrease in the average principal amount of mortgage debt outstanding which resulted from mortgage payoffs (generally in connection with property sales and scheduled amortization payments). The decrease was offset by financings effectuated in connection with acquisitions.

Credit line interest

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

(Dollars in thousands)

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 May 3, 2022, was $112.5 million, including $12.5 million of cash and cash equivalents (including the credit facility’s required $3.0 million average deposit maintenance balance) and $100.0 million available under our credit facility. At May 3, 2022, the facility is available for the acquisition of commercial real estate, repayment of mortgage debt, and $20.0 million for operating expenses and $10.0 million for renovation expenses.

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 and possible repurchases of our common stock (we are authorized to repurchase up to $7.5 million of common stock)) 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 $2.0 million of capital and other expenditures for Havertys Furniture and The Vue Apartments) from the foregoing, as well as property financings, property sales and sales of our common stock. We and our joint venture partner are also re-developing the Manahawkin Property – however, because the re-development plan is being refined, we are not providing an estimate of the re-development costs or the time frame within which the re-development will be completed.

At March 31, 2022, excluding the mortgage debt of our unconsolidated joint venture, we had 70 outstanding mortgages payable secured by 80 properties in the aggregate principal amount of $401.1 million (before netting unamortized deferred financing costs of $3.3 million). These mortgages represent first liens on individual real estate investments with an aggregate carrying value of $679.9 million, before accumulated depreciation of $123.8 million. After giving effect to interest rate swap agreements, the mortgage payments bear interest at fixed rates ranging from 3.02% to 5.50% (a 4.17% weighted average interest rate) and mature between 2022 and 2042 (a 6.2 year weighted average remaining term to maturity).

The following table sets forth, as of March 31, 2022, information with respect to our mortgage debt that is payable during the nine months ending December 31, 2022 and for each of the subsequent twelve months through December 31, 2025 (excluding the mortgage debt of our unconsolidated joint venture):

(Dollars in thousands)

At March 31, 2022, an unconsolidated joint venture had a first mortgage on its property with an outstanding balance of $21.9 million, bearing an interest rate of 4.0% and maturing in 2025.

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 2022 through 2025. 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 interest, which also generates additional liquidity. Further, since each of our encumbered properties is subject to a non-recourse mortgage (with standard carve-outs), if our in-house evaluation of the market value of such property is less than the principal balance outstanding on the mortgage loan, we may determine to convey, in certain circumstances, such property to the mortgagee in order to terminate our mortgage obligations, including payment of interest, principal and real estate taxes, with respect to such property.

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 $30.0 million and 30% of the borrowing base subject to a cap of (i) $10.0 million for renovation purposes and (ii) $20.0 million for operating expense purposes. These renovation and operating expense limits will apply through June 30, 2022. On July 1, 2022, the maximum amounts we can borrow for renovation expenses and operating expenses will change to $20.0 million and $10.0 million, respectively, and to the extent that either of these maximums is exceeded as of June 30, 2022, such excess must be repaid immediately. The facility matures December 31, 2022 and bears interest equal to the one month LIBOR rate 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 300 basis points if such ratio is greater than 65%. The applicable margin was 175 and 200 basis points for the three months ended March 30, 2022 and 2021, respectively. 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 2.07% and 2.24% at March 31, 2022 and May 1, 2022, respectively.

The terms of our credit facility include certain restrictions and covenants which 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 total 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 March 31, 2022, we were in compliance with the covenants under this facility.

Off-Balance Sheet Arrangement

We are not a party to any off-balance sheet arrangements other than with respect to a land parcel owned by us and located in Beachwood, Ohio. This parcel is improved by a multi-family complex (i.e., The Vue Apartments) and we ground leased the parcel to the owner/operator of such complex. This ground lease did not generate any rental income during the three months ended March 31, 2022 and 2021. At March 31, 2022, the carrying value of the land on our balance sheet was approximately $16.0 million; our leasehold position is subordinate to $65.7 million of mortgage debt incurred by our tenant, the owner/operator of the multi-family complex. In addition, we have agreed, in our discretion, to fund certain capital expenditures and operating cash flow shortfalls at this property. We do not believe that this type of off-balance sheet arrangement has been or will be material to our liquidity and capital resource positions, except to the extent we determine to continue to fund the capital expenditures required by, and the operating cash flow shortfalls at, this property. See Note 6 to our consolidated financial statements for additional information regarding this arrangement.

Application of Critical Accounting Estimates

A complete discussion of our critical accounting estimates is included in our Form 10-K for the year ended December 31, 2021. There have been no significant changes in such estimates since December 31, 2021.

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 our straight-line rent accruals and amortization of lease intangibles, deducting lease termination and certain other non-recurring fees and adding back amortization of restricted stock and restricted stock unit compensation expense, amortization of costs in connection with our financing activities (including our share of our unconsolidated joint ventures), income on insurance recoveries from casualties and debt prepayment costs. Since the NAREIT White Paper does not provide guidelines for computing AFFO, the computation of AFFO may vary 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 provides 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.

The $1.8 million, or 20.3%, increase in FFO is due to:

• an $847,000 net increase in rental income,
• a $756,000 increase in other income,
• a $328,000 decrease in interest expense, and
• a $138,000 increase in equity in earnings of unconsolidated ventures.

Offsetting the increase is a $150,000 increase in general and administrative expense and a $107,000 decrease in lease termination fee income.

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

The $645,000, or 6.4%, increase in AFFO is due to the increase in FFO as described above, offset by the exclusion from AFFO of:

• a $798,000 increase in other income from insurance recoveries and lease assignment fees,
• a $473,000 increase in rental income related to straight-line rent accruals, and
• a $107,000 decrease in lease termination fee income.

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

Diluted per share FFO and AFFO were impacted negatively in the three months ended March 31, 2022 by an average increase from March 31, 2021 of approximately 482,000 in the weighted average number of shares of common stock outstanding as a result of stock issuances pursuant to the equity incentive, at-the-market equity offering 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 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 March 31, 2022, our aggregate liability in the event of the early termination of our swaps was $195,000.

At March 31, 2022, we had 19 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 March 31, 2022, if there had been an increase of 100 basis points in forward interest rates, the fair market value of the interest rate swaps would have increased by approximately $1.1 million and the net unrealized gain on derivative instruments would have increased by $1.1 million. If there were a decrease of 100 basis points in forward interest rates, the fair market value of the interest rate swaps would have decreased by approximately $1.1 million and the net unrealized gain on derivative instruments would have decreased by $1.1 million. These changes would not have any impact on our cash or net income.

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

Our variable rate credit facility is sensitive to interest rate changes. Based on the $5.1 million outstanding balance under this facility at March 31, 2022, a 100 basis point increase of the interest rate would increase our related interest costs over the next twelve months by approximately $51,000 and a 100 basis point decrease of the interest rate would decrease our related interest costs over the next twelve months by approximately $17,000.

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 March 31, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.