One Liberty Properties Inc: Form 10-Q for the period ended Mar 31, 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 from property sales 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.

Actual results may also differ from expectations because, among other things, estimates of rental income exclude any related variable rent, anticipated property purchases, sales and/or financings may not be completed on the terms or during the period indicated or at all, and estimates of gains from property sales and financings are subject to adjustment because actual closing costs may differ from the estimated costs.

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 (i) 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), and (ii) The Vue, our Beachwood, Ohio property. Our cash flow and profitability will be adversely impacted if these issues 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 geographically diversified portfolio consisting primarily of industrial and, to a lesser extent, retail properties, many of which are subject to long-term net leases. As of March 31, 2025, we own 105 properties (including two properties owned by consolidated joint ventures and two properties owned by unconsolidated joint ventures) located in 32 states. Based on square footage, our occupancy rate at March 31, 2025 is approximately 98.5%.

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 2025 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 year ending December 31, 2025 under leases in effect at March 31, 2025. Base rent (i) excludes $233,000 representing our share of the base rent payable to our joint ventures and (ii) 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 scheduled expirations of leases at our properties as of March 31, 2025 for the years indicated below:

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

(b) Excludes an aggregate of 178,817 square feet of vacant space.

Property Transactions

Acquisitions during the three months ended March 31, 2025

We acquired the following properties (amounts in thousands):

(a) The weighted average interest rate is 6.2% (interest only for five years) and the weighted average term to maturity is 9.2 years.

(b) We borrowed $5,000 under our line of credit in connection with this acquisition.

These properties contributed $1.1 million of rental income, net, $670,000 of operating expenses (including depreciation and amortization expense of $512,000) and $492,000 of mortgage interest expense during the period ended March 31, 2025. We estimate that commencing April 1, 2025, the quarterly rental income (excluding variable lease revenues), depreciation and amortization expense and mortgage interest expense from these properties will be $1.6 million, $850,000 and $810,000, respectively.

Sales during the three months ended March 31, 2025

We sold the following properties (amounts in thousands):

(a) This property contributed $11 and $52 in rental income, net and $1 and $13 in depreciation and amortization expense during the three months ended March 31, 2025 and 2024, 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 seven properties acquired since January 1, 2024.

(b) Represents rental income from 11 properties sold since January 1, 2024.

(c) Represents rental income from 96 properties that were owned for the entirety of the periods presented.

Changes at same store properties

The change in same store rental income is due primarily to increases of:

• $362,000 from lease amendments and/or extensions at several properties,
• $316,000 in tenant reimbursements, of which $249,000 relates to operating expenses (i.e., common area maintenance and utilities) generally incurred during such period, and
• $265,000 due to new tenants at several properties.

The increases were offset by decreases in rental income of:

• $288,000 from lease expirations at various properties, a majority for which we have entered into new leases with replacement tenants, and
• $104,000 related to lease intangibles at several properties that prior to March 31, 2025 were fully amortized.

Lease Termination Fee

In March 2024, a consolidated joint venture in Lakewood, Colorado, in which we hold 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 increase is due primarily to (i) $947,000 from the properties acquired since January 1, 2024, and (ii) $150,000 from improvements at several properties.

The increase was offset primarily by (i) the inclusion, in the corresponding 2024 period, of $353,000 from the properties sold since January 1, 2024, and (ii) decreases of $239,000 related to tenant origination costs at several properties that prior to March 31, 2025 were fully amortized.

Real estate expenses. The increase is due primarily to (i) $394,000 primarily related to common area maintenance and utilities at several properties, none of which were individually significant, and (ii) $357,000 from the properties acquired since January 1, 2024.

The increase was offset by the inclusion, in the corresponding 2024 period, of $183,000 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 change is due primarily to an increase in compensation expense of $169,000 from (i) higher levels of payroll and payroll-related expenses, and (ii) non-cash expense from the amortization of our restricted stock and RSUs.

State Tax (Benefit) Expense. During the three months ended March 31, 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 such year.

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 $1.1 million gain in the 2025 period was primarily related to the sale of a restaurant property in Concord, North Carolina.

The $1.8 million gain in the 2024 period was realized from the sale of a restaurant parcel at our Lakewood, Colorado multi-tenant shopping center which is owned through a consolidated joint venture in which we have a 90% interest. The non-controlling interest’s share of this gain was $178,000.

Other Income and Expenses

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

(Dollars in thousands)

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 increase in mortgage interest is due to increases in the weighted average principal amount of mortgage debt outstanding and the weighted average interest rate.

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 1, 2025, was $96.4 million, including $8.9 million of cash and cash equivalents (including the credit facility’s required minimum $3.0 million average deposit maintenance balance) and up to $87.5 million available under our credit facility. At May 1, 2025, the facility is available for the acquisition of commercial real estate, repayment of mortgage debt, and up to $32.5 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 $2.5 million of capital expenditures) from the foregoing, as well as property financings, property sales and sales of our common stock.

At March 31, 2025, we had 64 outstanding mortgages payable secured by 66 properties in the aggregate principal amount of $470.8 million (before netting unamortized deferred financing costs of $4.2 million and mortgage intangibles of $633,000). These mortgages represent first liens on individual real estate investments with an aggregate carrying value of $741.4 million, before accumulated depreciation of $132.5 million. After giving effect to interest rate swap agreements, the mortgage payments bear interest at fixed rates ranging from 3.05% to 6.78% (a 4.78% weighted average interest rate) and mature between 2025 and 2047 (a 6.3 year weighted average remaining term to maturity).

The following table sets forth, as of March 31, 2025, information with respect to our mortgage debt that is payable during the nine months ending December 31, 2025 and for each of the subsequent twelve months through December 31, 2028:

(Dollars in thousands)

(1)

(a) $9,400 matures in June 2025.

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 three months ended March 31, 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 6.07% at both March 31, 2025 and May 1, 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 March 31, 2025, we were in compliance with the covenants under this facility.

Off-Balance Sheet Financing Arrangement

We own a land parcel located in Beachwood, Ohio which is improved by a multi-family complex (i.e., The Vue Apartments) that we ground lease to the owner/operator of such complex. This ground lease did not generate any rental income during the past several years. At March 31, 2025, the carrying value of the land on our balance sheet was approximately $17.4 million; our leasehold position is subordinate to $61.9 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 7 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 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 March 31, 2025 and 2024

The $300,000, or 2.9%, increase in AFFO for the three months ended March 31, 2025 from the corresponding 2024 period is due primarily to:

• a $1.7 million increase in rental income, net, and
• a $157,000 decrease in state tax expense.

Offsetting the increase is:

• a $715,000 increase in interest expense,
• a $568,000 increase in real estate operating expenses,
• a $173,000 increase in general and administrative expenses, and
• a $79,000 decrease in other income.

The $14,000, or 0.1%, increase in FFO for the three months ended March 31, 2025 from the corresponding 2024 period is due to the factors impacting AFFO as described immediately above, other than a $250,000 lease termination fee income recognized in the corresponding 2024 period.

Diluted per share net income, FFO and AFFO were impacted negatively in the quarter ended March 31, 2025 compared to the corresponding quarter in the prior year by an average increase of approximately 376,000 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.

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

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 March 31, 2025, we had no liability in the event of the early termination of our swaps.

At March 31, 2025, we had eight 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, 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 $53,000. 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 $54,000. 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.

Our variable rate credit facility is sensitive to interest rate changes. Based on the $5.0 million outstanding balance under this facility at March 31, 2025, a 100 basis point increase of the interest rate would increase our related interest costs over the next twelve months by approximately $50,000 and a 100 basis point decrease of the interest rate would decrease our related interest costs over the next twelve months by approximately $50,000.

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, 2025 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.