UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of l934
For the fiscal year ended December 31, 2006
Or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number 001-09279
ONE LIBERTY PROPERTIES, INC.
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(Exact name of registrant as specified in its charter)
MARYLAND 13-3147497
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
60 Cutter Mill Road, Great Neck, New York 11021
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 466-3100
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Securities registered pursuant to Section 12(b) of the Act:
Name of exchange
Title of each class on which registered
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Common Stock, par value $1.00 New York Stock Exchange
per share
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned
issuer as defined in Rule 405 of the Securities Act.
Yes No X
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Act.
Yes No X
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act (Check One):
Large Accelerated Filer __ Accelerated Filer X Non-Accelerated Filer __
Indicate by check mark whether registrant is a shell company (defined
in Rule 12b-2 of the Exchange Act).
Yes No X
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As of June 30, 2006 (the last business day of the registrant's most
recently completed second quarter), the aggregate market value of all common
equity held by non-affiliates of the registrant, computed by reference to the
price at which common equity was last sold on said date, was approximately
$148.8 million.
As of March 10, 2007, the registrant had 10,034,576 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of stockholders
of One Liberty Properties, Inc., to be filed pursuant to Regulation 14A not
later than April 30, 2007, are incorporated by reference into Part III of this
Form 10-K.
PART I
Item 1. Business
General
We are a self-administered and self-managed real estate investment
trust, also known as a REIT. We were incorporated under the laws of the State of
Maryland on December 20, 1982. We acquire, own and manage a geographically
diversified portfolio of retail, industrial, office, health and fitness and
other properties, a substantial portion of which are under long-term leases.
Substantially all of our leases are "net leases," under which the tenant is
typically responsible for real estate taxes, insurance and ordinary maintenance
and repairs. As of December 31, 2006, we owned sixty-six properties, including a
50% tenancy in common interest in one property, and participated in seven joint
ventures that own six properties (including two vacant properties held for
sale). Our properties and the properties owned by our joint ventures are located
in twenty-eight states and have an aggregate of approximately 5.9 million square
feet of space (including approximately 106,000 square feet of space at the
property in which we own a tenancy in common interest and approximately 1.6
million square feet of space at properties owned by the joint ventures in which
we participate).
Under the terms of our current leases, our 2007 contractual rental
income (rental income that is payable to us in 2007 under leases existing at
December 31, 2006) will be approximately $36 million, including approximately
$1.2 million of rental income payable on our tenancy in common interest. In
2007, we expect that our share of the rental income payable to our seven joint
ventures will be approximately $1.4 million, without taking into consideration
any rent that we would receive if the two vacant properties owned by our joint
ventures are rented. On December 31, 2006, the occupancy rate of properties
owned by us was 100% based on square footage (including the property in which we
own a tenancy in common interest) and the occupancy rate of properties owned by
our joint ventures was 98.9% based on square footage (exclusive of vacant land
owned by one of our joint ventures). The weighted average remaining term of the
leases in our portfolio, including our tenancy in common interest, is 10.8 years
and 12.3 years for the leases at properties owned by our joint ventures.
Acquisition Strategies
We seek to acquire properties throughout the United States that have
locations, demographics and other investment attributes that we believe to be
attractive. We believe that long-term leases provide a predictable income stream
over the term of the lease, making fluctuations in market rental rates and in
real estate values less significant to achieving our overall investment
objectives. Our goal is to acquire properties that are subject to long-term net
leases that include periodic contractual rental increases. Periodic contractual
rental increases provide reliable increases in future rent payments, while rent
increases based on the consumer price index provide protection against
inflation. Long-term leases also make it easier for us to obtain longer-term,
fixed-rate mortgage financing with principal amortization, thereby moderating
the interest rate risk associated with financing or refinancing our property
portfolio by reducing the outstanding principal balance over time. Although we
regard long-term leases as an important element of our acquisition strategy, we
may acquire a property that is subject to a short-term lease where we believe
the property represents a good opportunity for recurring income and residual
value.
Generally, we intend to hold the properties we acquire for an extended
period of time. Our investment criteria are intended to identify properties from
which increased asset value and overall return can be realized from an extended
period of ownership. Although our investment criteria favor an extended period
of ownership of our properties, we may dispose of a property following a lease
termination or expiration or even during the term of a lease (i) if we regard
the disposition of the property as an opportunity to realize the overall value
of the property sooner or (ii) to avoid future risks by achieving a determinable
return from the property. In 2006, favorable market conditions provided us with
the opportunity to realize the overall value of our movie theater portfolio
sooner than anticipated and accordingly we sold one movie theater property and
two of our movie theater joint ventures sold nine movie theater properties.
We generally identify properties through the network of contacts of our
senior management and our affiliates, which include real estate brokers, private
equity firms, banks and law firms. In addition, we attend industry conferences
and engage in direct solicitations.
There is no limit on the number of properties in which we may invest,
the amount or percentage of our assets that may be invested in any specific
property or property type, or on the concentration of investments in any
geographic area in the United States. We do not intend to acquire properties
located outside of the United States. We will continue to form entities to
acquire interests in real properties, either alone or with other investors, and
we may acquire interests in joint ventures or other entities that own real
property.
It is our policy, and the policy of our affiliated entities, that any
investment opportunity presented to us or to any of our affiliated entities that
involves primarily the acquisition of a net leased property will first be
offered to us and declined by us before any of our affiliated entities may
pursue the opportunity.
Investment Evaluation
In evaluating potential net lease investments, we consider, among other
criteria, the following:
o an evaluation of the property and improvements, given its location
and use;
o the current and projected cash flow of the property;
o the estimated return on equity to us;
o local demographics (population and rental trends);
o the ability of the tenant to meet operational needs and lease
obligations;
o the terms of tenant leases, including the relationship between
current rents and market rents;
o the projected residual value of the property;
o potential for income and capital appreciation;
o occupancy of and demand for similar properties in the market area; and
o alternative use for the property at lease termination.
Our Business Objectives and Growth Strategy
Our business objective is to maintain and increase the cash available
for distribution to our stockholders by:
o acquiring a diversified portfolio of net leased properties subject to
long-term leases;
o obtaining mortgage indebtedness on favorable terms and increasing
access to capital to finance property acquisitions; and
o managing assets effectively through property acquisitions, lease
extensions and opportunistic property sales.
Our growth strategy includes the following elements:
o to maintain, renew and enter into new long-term leases that contain
provisions for contractual rent increases;
o to acquire additional properties within the United States that are
subject to long-term net leases and that satisfy our
other investment criteria; and
o to acquire properties in market or industry sectors that we identify,
from time to time, as offering superior risk-adjusted returns.
Typical Property Attributes
The properties in our portfolio and owned by our joint ventures
typically have the following attributes:
o Net leases. Substantially all of the leases are net leases under which
the tenant is typically responsible for real estate taxes, insurance
and ordinary maintenance and repairs. We believe that investments in
net leased properties offer more predictable returns than investments
in properties that are not net leased;
o Long-term leases. The properties acquired are generally subject to
long-term leases. Excluding leases relating to properties owned by our
joint ventures, leases representing approximately 84% of our 2007
contractual rental income expire after 2012, and leases representing
approximately 55% of our 2007 contractural rental income expire after
2016; and
o Scheduled rent increases. Leases representing approximately 93% of our
2007 contractual rental income provide for either scheduled rent
increases or periodic contractual rent increases based on the consumer
price index. None of the leases on properties owned by our joint
ventures provide for scheduled rent increases.
Our Tenants
The following table sets forth information about the diversification of
our tenants (excluding tenants of our joint ventures) by industry sector as of
December 31, 2006:
Percentage of
Type of Number of Number of 2007 Contractual 2007 Contractual
Property Tenants Properties Rental Income (1) Rental Income
-------- -------- ---------- ----------------- -------------
Retail - various (2) 33 33 $11,727,402 32.5%
Retail - furniture (3) 5 15 7,295,933 20.2
Industrial 8 8 6,923,408 19.2
Office (4) 3 3 4,157,444 11.5
Flex 3 2 2,454,855 6.8
Health & fitness 3 3 1,640,441 4.6
Movie theater (5) 1 1 1,242,019 3.4
Residential 1 1 650,000 1.8
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57 66 $36,091,502 100.0%
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(1) 2007 contractual rental income includes rental income that is payable to
us during 2007 for properties owned by us at December 31, 2006, including
rental income payable on our tenancy in common interest.
(2) Twenty-one of the retail properties are net leased to single tenants.
Four properties are net leased to a total of 11 separate tenants pursuant
to separate leases and 8 properties are net leased to one tenant pursuant
to a master lease.
(3) Eleven properties are net leased to Haverty Furniture Companies, Inc.
pursuant to a master lease covering all locations and four of the
properties are net leased to single tenants.
(4) Includes a property in which we own a 50% tenancy in common interest.
(5) We are the ground lessee of this property under a long-term lease and
net lease the movie theater to an operator.
Although the main focus of our analysis is the intrinsic value of a
property, we seek to acquire properties that we believe will provide attractive
current returns from leases with tenants that operate profitably, even if our
tenants are typically not rated or are rated below investment grade. We will
acquire a property if we believe that the quality of the underlying real estate
mitigates the risk that may be associated with any default by the tenant. Most
of our retail tenants operate on a national basis and include, among others,
Barnes & Noble, Inc., Walgreen Co., The Sports Authority, Inc., Best Buy Co.,
Inc., TGI Friday's Inc., Party City Corporation, Circuit City Stores, Inc.,
Petco Animal Supplies, Inc. and CarMax Auto Superstores, Inc., and some of our
tenants operate on a regional basis, including Haverty's Furniture Companies,
Inc.
Our Leases
Substantially all of our leases are net leases (including the leases
entered into by our joint ventures) under which the tenant, in addition to its
rental obligation, typically is responsible for expenses attributable to the
operation of the property, such as real estate taxes and assessments, water and
sewer rents and other charges. The tenant is also generally responsible for
maintaining the property, including non-structural repairs, and for restoration
following a casualty or partial condemnation. The tenant is typically obligated
to indemnify us for claims arising from the property and is responsible for
maintaining insurance coverage for the property it leases. Under some net
leases, we are responsible for structural repairs, including foundation and
slab, roof repair or replacement and restoration following a casualty event, and
at several properties we are responsible for certain expenses related to the
operation and maintenance of the property.
Our typical lease provides for contractual rent increases periodically
throughout the term of the lease. Some of our leases provide for rent increases
pursuant to a formula based on the consumer price index. While some of our
leases also provide for minimum rents supplemented by additional payments based
on sales derived from the property subject to the lease, such additional
payments were not a material part of our 2006 rental revenues and are not
expected to be a material part of our 2007 rental revenues.
Our policy has been to acquire properties that are subject to existing
long-term leases or to enter into long-term leases with our tenants. Our leases
generally provide the tenant with one or more renewal options.
The following table sets forth scheduled lease expirations of leases for
our properties (excluding joint venture properties) as of December 31, 2006:
% of 2007 Contractual
Approximate Square 2007 Contractual Rental Income
Year of Lease Number of Feet Subject to Rental Income Under Represented by
Expiration (1)(2) Expiring Leases Expiring Leases Expiring Leases (3) Expiring Leases
---------- --------------- --------------- --------------- ---------------
2007 2 19,000 $ 359,604 1.0
2008 3 520,272 1,858,129 5.1
2009 3 200,468 928,177 2.6
2010 3 19,038 349,825 1.0
2011 4 208,428 2,080,129 5.7
2012 - - - -
2013 5 106,996 1,583,263 4.4
2014 14 700,200 5,698,432 15.8
2015 4 150,795 1,765,765 4.9
2016 and
thereafter 19 2,407,259 21,468,178 59.5
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57 4,332,456 $36,091,502 100.0%
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(1) Lease expirations assume tenants do not exercise existing renewal options.
(2) Includes a property in which we have a tenancy in common interest.
(3) 2007 contractual rental income includes rental income that is payable to us
during 2007 under existing leases on properties we owned at December 31,
2006 (including rental income payable on our tenancy in common interest).
Financing, Re-Renting and Disposition of Our Properties
Under our governing documents, there is no limit on the level of debt
that we may incur. Our credit facility is provided by VNB New York Corp., Bank
Leumi, USA, Manufacturers and Traders Trust Company and Israel Discount Bank of
New York and is a full recourse obligation. The credit facility limits total
indebtedness that we may incur to an amount equal to approximately 70% of the
value (as defined) of our properties, among other limitations in the credit
facility on our ability to incur additional indebtedness. We borrow funds on a
secured and unsecured basis and intend to continue to do so in the future. We
mortgage specific properties on a non-recourse basis (subject to standard
carve-outs) to enhance the return on our investment in a specific property. The
proceeds of mortgage loans and amounts drawn on our credit line may be used for
property acquisitions, investments in joint ventures or other entities that own
real property, to reduce bank debt and for working capital purposes.
With respect to properties we acquire on a free and clear basis, we
usually seek to obtain long-term fixed-rate mortgage financing shortly after the
acquisition of such property to avoid the risk of movement of interest rates and
fluctuating supply and demand in the mortgage markets. We also will acquire a
property that is subject to (and will assume) a fixed-rate mortgage.
Substantially all of our mortgages provide for amortization of part of the
principal balance during the term, thereby reducing the refinancing risk at
maturity. Some of our properties may be financed on a cross-defaulted or
cross-collateralized basis, and we may collateralize a single financing with
more than one property.
After termination or expiration of any lease relating to any of our
properties (either at lease expiration or early termination), we will seek to
re-rent or sell such property in a manner that will maximize the return to us,
considering, among other factors, the income potential and market value of such
property. We acquire properties for long-term investment for income purposes and
do not typically engage in the turnover of investments. We will consider the
sale of a property prior to termination or expiration of the relevant lease if a
sale appears advantageous in view of our investment objectives. We may take a
purchase money mortgage as partial payment in lieu of cash in connection with
any sale and may consider local custom and prevailing market conditions in
negotiating the terms of repayment. If there is a substantial tax gain, we may
seek to enter into a tax deferred transaction and reinvest the proceeds in
another property. It is our policy to use any cash realized from the sale of
properties, net of any distributions to stockholders to maintain our REIT
status, to pay down amounts due under our line of credit, if any, and for the
acquisition of additional properties.
Our Joint Ventures
As of December 31, 2006, we are a joint venture partner in seven joint
ventures that own a total of six properties (including two vacant properties
held for sale, one of which was sold March 2007) and have an aggregate of
approximately 1.6 million square feet of space. We own a 50% equity interest in
six of our joint ventures and a 36% equity interest in one joint venture. At
December 31, 2006 our investment in unconsolidated joint ventures was
approximately $7 million.
We are designated as "managing member" or "manager" under the operating
agreements of five of our seven joint ventures. We are a joint venture partner
in two movie theater joint ventures, each with the same joint venture partner.
One of our movie theater joint ventures sold all five of its movie theater
properties in October 2006 for a sale price of $91.3 million and realized a gain
of $35.2 million on the sale, after the payment of closing expenses and
brokerage fees. In connection with this sale, the joint venture paid $4.9
million in prepayment premiums to its mortgage lender, which is reflected as
interest expense in the joint venture's financial statements in accordance with
generally accepted accounting principles and is not netted against the gain on
sale. This movie theater joint venture does not currently own any real property.
The second movie theater joint venture sold one movie theater property in
September 2006 for $16 million and three movie theater properties in October
2006 for $45.3 million, and realized an aggregate gain of $20.5 million on the
sales, after the payment of closing expenses and brokerage fees. In connection
with these sales, the joint venture paid $5.6 million in prepayment premiums to
its mortgage lenders, which is reflected as interest expense in the joint
venture's financial statements in accordance with generally accepted accounting
principles and not netted against the gain on sale. As a result of these
property sales, the second movie theater joint venture owned one property at
December 31, 2006, a vacant .26 of an acre of land located in Monroe, New York.
This property has been written down on the joint venture's books to $40,000 and
on March 14, 2007 was sold by the joint venture for an aggregate purchase price
of $1.25 million.
Each of the other five joint ventures in which we participate as a
joint venture partner owns one property, three of which are retail properties
and two of which are industrial properties. One of the retail properties, which
contains 17,108 square feet of rental space, has been vacant since February 2004
and we cannot at this time project when a new lease will be consummated or
whether the joint venture will be able to consummate an advantageous sale of the
property. The joint venture has recorded a provision for valuation adjustment of
$960,000, of which our share is $480,000, based on an evaluation of market
conditions in the area in which the property is located.
Based on existing leases, we anticipate that our share of rental income
payable to our joint ventures in 2007 will be approximately $1.4 million. The
leases for two properties (each of which is owned by one of our joint ventures)
that are expected to contribute 81% of the aggregate projected rental income
payable to all of our joint ventures in 2007, will expire in 2021 and 2022,
respectively.
Other Types of Investments
From time to time we have invested, on a limited basis, in publicly
traded shares of other REITs, and we may make such investments on a limited
basis in the future. We also may invest, on a limited basis, in the shares of
entities not involved in real estate investments, provided that no such
investment adversely affects our ability to qualify as a REIT under the Internal
Revenue Code of 1986, as amended. We do not have any plans to invest in or to
originate loans to other persons, whether or not secured by real property.
Although we have not done so in the past, we may issue our securities in
exchange for properties that fit our investment criteria. We have not previously
invested in the securities of another entity for the purpose of exercising
control over it and we do not have any present plans to invest in the securities
of another entity for such purpose.
Competition
We face competition for the acquisition of net leased properties from a
variety of investors including domestic and foreign corporations and real estate
companies, 1031 exchange buyers, financial institutions, insurance companies,
pension funds, investment funds, other REITs and individuals, some of which have
significant advantages over us, including a larger, more diverse group of
properties and greater financial and other resources than we have. We have
recently experienced increased competition for the acquisition of net leased
properties. We believe that our management's experience in real estate, mortgage
lending, credit underwriting and transaction structuring allows us to compete
effectively for properties.
Our Structure
In 2006, Patrick J. Callan, Jr., our president, Lawrence G. Ricketts,
Jr., our executive vice president, and three other employees devoted
substantially all of their business time to our company. Our other executive,
administrative, legal, accounting and clerical personnel shared their services
on a part-time basis with us and other affiliated entities that share our
executive offices pursuant to a shared services agreement between several
affiliated entities including, among others, Gould Investors L.P., a limited
partnership involved in the ownership and operation of a diversified portfolio
of real estate, which owned 8% of our common stock at December 31, 2006, and BRT
Realty Trust, a publicly-traded mortgage lending REIT.
In 2006, pursuant to the shared services agreement, we reimbursed $1.3
million to Gould Investors L.P. for services performed by personnel that shared
their services with us on a part-time basis and for expenses for the shared
facilities and other resources. The allocation of expenses for the shared
facilities, personnel and other resources was computed in accordance with the
shared services agreement and was based on the estimated time devoted by
executive, administrative, legal, accounting and clerical personnel to the
affairs of each entity that is a party to the shared services agreement.
Additionally, pursuant to certain management agreements between us and certain
affiliated entities, we also paid an aggregate of $308,000 to affiliated
entities for property management services, property sales and property leasing
services, and mortgage brokerage services.
Effective as of January 1, 2007, we entered into a compensation and
services agreement with Majestic Property Management Corp., a company
wholly-owned by our chairman and chief executive officer and in which certain of
our executive officers are officers and from which they receive compensation.
Under the terms of the agreement, Majestic assumed our obligations to make
payments to Gould Investors L.P. (and other affiliated entities) under the
shared services agreement and agreed to provide to us the services of all
affiliated executive, administrative, legal, accounting and clerical personnel
that we have heretofore utilized on a part-time (as needed) basis and for which
we had paid, as a reimbursement, an allocated portion of the payroll expenses of
such personnel in accordance with the shared services agreement. Since Majestic
and its affiliates will arrange for such personnel for us, we will no longer
incur any allocated payroll expenses. Under the terms of the agreement, Majestic
(or its affiliates) will continue to provide to us customary property management
services, property acquisition, sales and leasing counseling services and
mortgage brokerage services that it has provided to us in the past, and we will
not incur any fees or expenses for such services except for the annual fees
described below. As consideration for providing to us the services of such
personnel and property management services (including construction supervisory
services), property acquisition, sales and leasing counseling services and
mortgage brokerage services, we will pay Majestic an annual fee of $2,125,000 in
2007, in equal monthly installments. Majestic will credit against the fee
payments due to it under the agreement any management or other fees received by
it from any joint venture in which we are a joint venture partner (exclusive of
fees paid by the tenant in common on a property located in Los Angeles,
California). In addition, the agreement provides for us to pay compensation to
our chairman of $250,000 per annum, an increase from $50,000. We also agreed to
make an additional payment to Majestic of $175,000 in 2007 for our share of all
direct office expenses, such as rent, telephone, postage, computer services,
internet usage, etc., previously allocated to us under the shared services
agreement. The annual payments we make to Majestic will be negotiated each year
by us and Majestic, and will be approved by our Audit Committee and our
independent directors. The annual payments will be based upon the prior years'
experience and a budget prepared by Majestic.
We believe that the agreement entered into by us with Majestic Property
Management Corp. will continue to allow our company to benefit from access to,
and from the services of, a group of senior executives with significant
knowledge and experience in the real estate industry and our company and its
activities. If not for the shared services agreement, as superseded by the new
agreement, we believe that a company of our size would not have access to the
skills and expertise of these executives at the cost that we have incurred and
will incur in the future. For a description of the background of our management,
please see the information under the heading "Executive Officers" in Part I of
this Annual Report.
Available Information
Our Internet address is www.onelibertyproperties.com. On the Investor
Information page on our web site, we post the following filings as soon as
reasonably practicable after they are electronically filed with or furnished to
the Securities and Exchange Commission: our Annual Report on Form 10-K, our
quarterly reports on Form 10-Q, our current reports on Form 8-K, and any
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended. All such filings on
our Investor Information Web page, which also includes Forms 3, 4 and 5 filed
pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended,
are available to be viewed free of charge.
On the Corporate Governance page of our web site, we post the following
charters and guidelines: Audit Committee Charter, Compensation Committee
Charter, Nominating and Corporate Governance Committee Charter, Corporate
Governance Guidelines and Code of Business Conduct and Ethics, as amended and
restated. All such charters and guidelines on our Corporate Governance Web page
are available to be viewed free of charge.
Information contained on our web site is not part of, and is not
incorporated by reference into, this Annual Report on Form 10-K or our other
filings with the Securities and Exchange Commission. A copy of this Annual
Report on Form 10-K and those items disclosed on our Investor Information Web
page and our Corporate Governance Web page are available without charge upon
written request to: One Liberty Properties, Inc., 60 Cutter Mill Road, Suite
303, Great Neck, New York 11021, Attention: Secretary.
Forward-Looking Statements
This Annual Report on Form 10-K, together with other statements and
information publicly disseminated by One Liberty Properties, Inc., contains
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," "believe," "expect," "intend," "anticipate," "estimate,"
"project" or similar expressions or variations thereof. 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.
Factors which may cause actual results to differ materially from current
expectations include, but are not limited to:
o general economic and business conditions;
o general and local real estate conditions;
o the financial condition of our tenants and the performance of their
lease
o obligations;
o changes in governmental laws and regulations relating to real
estate and related investments; o the level and volatility of interest
rates;
o competition in our industry;
o accessibility of debt and equity capital markets;
o the availability of and costs associated with sources of liquidity; and
o the other risks described under "Risks Related to Our Company" and
"Risks Related to the REIT Industry."
Any or all of our forward-looking statements in this report, in our
Annual Report to Stockholders 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 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 Securities and Exchange
Commission.
Set forth below is a detailed discussion of certain risks affecting our
business. The categorization of risks set forth below is meant to help you
better understand the risks facing our business and is not intended to limit
your consideration of the possible effects of these risks to the listed
categories. Any adverse effects arising from the realization of any of the risks
discussed including our financial condition and results of operation may, and
likely will, adversely affect many aspects of our business.
Item 1A. Risk Factors.
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In addition to the other information contained or incorporated by
reference in this Form 10-K, readers should carefully consider the following
risk factors:
Risks Related to Our Business
The financial failure of our tenants would likely cause significant reductions
in our revenues, our equity in earnings of unconsolidated joint ventures and in
the value of our real estate portfolio.
Based on 2007 contractual rental income, 88% of our rental revenues are
generated from properties which are leased to single tenants. Accordingly, the
financial failure or other default of a tenant in non-payment of rent or
property related expenses or the termination of a lease could cause a
significant reduction in our revenues. Additionally, approximately 51.4% of our
rental revenues (excluding rental revenues from our joint ventures) for the year
ended December 31, 2006 was derived from retail tenants and approximately 52.7%
of our 2007 contractual rental income will be derived from retail tenants,
including 20.2% from our tenants engaged in retail furniture operations.
Weakening economic conditions (nationally and/or locally) could result in the
financial failure, or other default, of a significant number of our tenants and
the tenants of our joint ventures. In the event of a default by a tenant, we may
experience delays in enforcing our rights as landlord and sustain a loss of
revenues and incur substantial costs in protecting our investment. We may also
face liabilities arising from the tenant's actions or omissions that would
reduce our revenues and the value of our portfolio. Also, if we are unable to
re-rent a property when an existing lease terminates, we receive no revenues
from such property and are required to pay taxes, insurance and other operating
expenses during the vacancy period, and could as a result experience a decline
in the value of the property.
A significant portion of our 2006 revenues and our 2007 contractual rental
income is derived from five tenants. The default, financial distress or failure
of any of these tenants could significantly reduce our revenues.
Haverty's Furniture Companies, Inc., Nutritional Products, Inc., New
Flyer of America, Inc. and L-3 Communications Corp., accounted for approximately
10.7%, 6.2%, 5.4% and 5.2%, respectively, of our rental revenues (excluding
rental revenues from our joint ventures) for the year ended December 31, 2006
and account for 11.5%, 5.2%, 4.2%, and 4.8%, respectively, of our 2007
contractual rental income. Ferguson Enterprises, Inc., a tenant at a property we
acquired in December 2006, accounts for 5.3% of our 2007 contractual rental
income. The default, financial distress or bankruptcy of any of these tenants
could cause interruptions in the receipt or the loss of a significant amount of
rental revenues and result in the vacancy of the property or properties occupied
by the defaulting tenant, which would significantly reduce our rental revenues
and net income until the re-rental of the property or properties, and could
decrease the ultimate sale value of the property.
The inability to repay our indebtedness could reduce cash available for
distributions and cause losses.
As of December 31, 2006, we had outstanding approximately $228 million in
long-term mortgage and loan indebtedness, all of which is non-recourse (subject
to standard carve-outs). As of December 31, 2006, our ratio of mortgage and loan
debt to total assets was approximately 54%. In addition, as of December 31,
2006, our joint ventures had approximately $19 million in total long-term
mortgage indebtedness (all of which is non-recourse subject to standard
carve-outs). The risks associated with our debt and the debt of our joint
ventures include the risk that cash flow for the properties securing the
mortgage indebtedness will be insufficient to meet required payments of
principal and interest. Further, if a property or properties are mortgaged to
collateralize payment of indebtedness and we or any of our joint ventures are
unable to make mortgage payments on the secured indebtedness, the lender could
foreclose upon the property or properties resulting in a loss of revenues to us
and a decline in the value of our portfolio. Even with respect to our
non-recourse indebtedness, the lender may have the right to recover deficiencies
from us under certain circumstances, which could result in a reduction in the
amount of cash available to us to meet expenses and to make distributions to our
stockholders and in a deterioration of our financial condition.
If we are unable to refinance our borrowings at maturity at favorable rates or
otherwise raise funds, our net income may decline or we may be forced to sell
properties on disadvantageous terms, which would result in the loss of revenues
and in a decline in the value of our portfolio.
Only a small portion of the principal of our mortgage indebtedness and
the mortgage indebtedness of our joint ventures will be repaid prior to
maturity. Neither we nor our joint ventures plan to retain sufficient cash to
repay such indebtedness at maturity. Accordingly, in order to meet these
obligations, we will have to use funds available under our credit line, if any,
to refinance debt or seek to raise funds through the financing of unencumbered
properties, sale of properties or the issuance of additional equity. Between
January 2007 and December 31, 2011, we will need to refinance an aggregate of
approximately $39.4 million of maturing debt, of which approximately $3.8 will
have to be refinanced in 2007 and approximately $4.2 million will have to be
refinanced in 2008. Our joint ventures do not have maturing mortgage debt until
2015. We can not provide any assurance that we (or our joint ventures) will be
able to refinance this debt or arrange additional debt financing on unencumbered
properties on terms as favorable as the terms of existing indebtedness, or at
all. If interest rates or other factors at the time of refinancing result in
interest rates higher than the interest rates currently being paid, our interest
expense would increase, which would adversely affect our net income, financial
condition and the amount of cash available for distribution to stockholders. If
we (or our joint ventures) are not successful in refinancing existing
indebtedness or financing unencumbered properties, selling properties on
favorable terms or raising additional equity, our cash flow (or the cash flow of
a joint venture) will not be sufficient to repay all maturing debt when payments
become due, and we (or a joint venture) may be forced to dispose of properties
on disadvantageous terms, which would result in the loss of revenues and in a
decline in the value of our portfolio.
As of December 31, 2006 and March 1, 2007, we had no balance
outstanding under our revolving credit facility. Our credit facility expires on
March 31, 2007. We are in the process of amending our credit facility with our
lending syndicate which will extend its maturity date from March 31, 2007 to
March 31, 2010 and will reduce the interest rate from its current rate to the
lower of LIBOR plus 2.15% or the bank's prime rate. All other material terms and
conditions of current credit facility will remain the same. In the event the
extension is not consummated, we will endeavor to secure a new credit facility.
If we are able to secure a new credit facility (of which there is no assurance),
it may be on terms less favorable than our current credit facility.
Increased borrowings could result in increased risk of default on our repayment
obligations and increased debt service requirements.
Our governing documents do not contain any limitation on the amount of
indebtedness we may incur. However, the terms of our credit facility with VNB
New York Corp., Bank Leumi, USA, Manufacturers and Traders Trust Company and
Israel Discount Bank of New York limit the total indebtedness that we may incur
to an amount equal to approximately 70% of the value (as defined in the credit
agreement) of our properties, in addition to other limitations in the credit
facility on our ability to incur additional indebtedness. Increased leverage
could result in increased risk of default on our payment obligations related to
borrowings and in an increase in debt service requirements, which could reduce
our net income and the amount of cash available to meet expenses and to make
distributions to our stockholders.
If we are unable to re-rent properties upon the expiration of our leases, it
could adversely affect our revenues and ability to make distributions, and could
reduce the value of our portfolio.
Substantially all of our revenues are derived from rental income paid by
tenants at our properties. We cannot predict whether current tenants will renew
their leases upon the expiration of their terms. In addition, we cannot predict
whether current tenants will attempt to terminate their leases (including taking
advantage of provisions of the federal bankruptcy laws), or whether defaults by
tenants may result in termination of their leases prior to the expiration of
their current terms. If tenants terminate or fail to renew their leases, or if
leases terminate due to defaults or in the course of a bankruptcy proceeding, we
may not be able to locate qualified replacement tenants and, as a result, we
would lose a source of revenue while remaining responsible for the payment of
our mortgage obligations and the expenses related to the properties, including
real estate taxes and insurance. Even if tenants decide to renew their leases or
we find replacement tenants, the terms of renewals or new leases, including the
cost of required renovations or concessions to tenants, or the expense of
reconfiguration of a single tenancy property for use by multiple tenants, may be
less favorable than current lease terms and could reduce the amount of cash
available to meet expenses and to make distributions to holders of our common
stock.
We are required by certain of our net lease agreements to pay property related
expenses that are not the obligations of our tenants.
Under the terms of substantially all of our net lease agreements, in
addition to satisfying their rent obligations, our tenants are responsible for
the payment of real estate taxes, insurance and ordinary maintenance and
repairs. However, in the case of certain leases, we may pay some expenses, such
as the costs of environmental liabilities, roof and structural repairs,
insurance and certain non-structural repairs and repairs and maintenance. If our
properties incur significant expenses that must be paid by us under the terms of
our lease agreements, our business, financial condition and results of
operations will be adversely affected and the amount of cash available to meet
expenses and to make distributions to holders of our common stock may be
reduced.
Uninsured and underinsured losses may affect the revenues generated by, the
value of, and the return from, a property affected by a casualty or other claim.
Substantially all of our tenants obtain, for our benefit, comprehensive
insurance covering our properties in amounts that are intended to be sufficient
to provide for the replacement of the improvements at each property. However,
the amount of insurance coverage maintained for any property may not be
sufficient to pay the full replacement cost of the improvements at the property
following a casualty event. In addition, the rent loss coverage under the policy
may not extend for the full period of time that a tenant may be entitled to a
rent abatement as a result of, or that may be required to complete restoration
following, a casualty event. In addition, there are certain types of losses,
such as those arising from earthquakes, floods, hurricanes and terrorist
attacks, that may be uninsurable or that may not be economically insurable.
Changes in zoning, building codes and ordinances, environmental considerations
and other factors also may make it impossible or impracticable for us to use
insurance proceeds to replace damaged or destroyed improvements at a property.
If restoration is not or cannot be completed to the extent, or within the period
of time specified in certain of our leases, the tenant may have the right to
terminate the lease. If any of these or similar events occur, it may reduce our
revenues, or the value of, or our return from, an affected property.
Our revenues and the value of our portfolio are affected by a number of factors
that affect investments in real estate generally.
We are subject to the general risks of investing in real estate. These
include adverse changes in economic conditions and local conditions such as
changing demographics, retailing trends and traffic patterns, declines in the
rental rates, changes in the supply and price of quality properties and the
market supply and demand of competing properties, the impact of environmental
laws, security concerns, prepayment penalties applicable under mortgage
financings, changes in tax, zoning, building code, fire safety and other laws
and regulations, the type of insurance coverages available in the market, and
changes in the type, capacity and sophistication of building systems. In
particular, approximately 52.7% of our 2007 contractual rental income will come
from retail tenants and is therefore vulnerable to any economic decline that
negatively impacts the retail sector of the economy. Any of these conditions
could have an adverse effect on our results of operations, liquidity and
financial condition.
Our revenues and the value of our portfolio are affected by a number of factors
that affect investments in leased real estate generally.
We are subject to the general risks of investing in leased real estate.
These include the non-performance of lease obligations by tenants, improvements
that will be costly or difficult to remove should it become necessary to re-rent
the leased space for other uses, covenants in certain retail leases that limit
the types of tenants to which available space can be rented (which may limit
demand or reduce the rents realized on re-renting), rights of termination of
leases due to events of casualty or condemnation affecting the leased space or
the property or due to interruption of the tenant's quiet enjoyment of the
leased premises, and obligations of a landlord to restore the leased premises or
the property following events of casualty or condemnation. Any of these
conditions could have an adverse impact on our results of operations, liquidity
and financial condition.
Our real estate investments are relatively illiquid and their values may
decline.
Real estate investments are relatively illiquid. Therefore, we will be
limited in our ability to reconfigure our real estate portfolio in response to
economic changes. We may encounter difficulty in disposing of properties when
tenants vacate either at the expiration of the applicable lease or otherwise. If
we decide to sell any of our properties, our ability to sell these properties
and the prices we receive on their sale may be affected by many factors,
including the number of potential buyers, the number of competing properties on
the market and other market conditions, as well as whether the property is
leased and if it is leased, the terms of the lease. As a result, we may be
unable to sell our properties for an extended period of time without incurring a
loss, which would adversely affect our results of operations, liquidity and
financial condition.
The concentration of our properties in certain geographic areas may make our
revenues and the value of our portfolio vulnerable to adverse changes in local
economic conditions.
We do not have specific limitations on the total percentage of our real
estate properties that may be located in any one geographic area. Consequently,
properties that we own may be located in the same or a limited number of
geographic regions. Approximately 35% of our rental income (excluding our share
of the rental income from our joint ventures) for the year ended December 31,
2006 were, and approximately 32% of our 2007 contractual rental income will be,
derived from properties located in Texas and New York. As a result, a decline in
the economic conditions in these geographic regions, or in geographic regions
where our properties may be concentrated in the future, may have an adverse
effect on the rental and occupancy rates for, and the property values of, these
properties, which could lead to a reduction in our rental income and in the
results of operations.
Our inability to control our joint ventures or our tenancy in common arrangement
could result in diversion of time and effort by our management and the inability
to achieve the goals of the joint venture or the tenancy in common arrangement.
We presently are a venturer in seven joint ventures which own six
properties and we own 50% of another property as tenant in common with a group
of investors pursuant to a tenancy in common agreement. At December 31, 2006,
our investment in unconsolidated joint ventures was approximately $7 million and
the tenancy in common interest represents a net investment of approximately
$531,000 by us. These investments may involve risks not otherwise present in
investments made solely by us, including that our co-investors may have
different interests or goals than we do, or that our co-investors may not be
able or willing to take an action that we desire. Disagreements with or among
our co-investors could result in substantial diversion of time and effort by our
management team and the inability of the joint venture or the tenancy in common
to successfully operate, finance, lease or sell properties as intended by our
joint venture agreements or tenancy in common agreement. In addition, we may
invest a significant amount of our funds into joint ventures which ultimately
may not be profitable as a result of disagreements with or among our
co-investors.
Competition in the real estate business is intense and could reduce our revenues
and harm our business.
We compete for real estate investments with all types of investors,
including domestic and foreign corporations and real estate companies, 1031
exchange buyers, financial institutions, insurance companies, pension funds,
investment funds, other REITs and individuals. Many of these competitors have
significant advantages over us, including a larger, more diverse group of
properties and greater financial and other resources. We have recently
experienced increased competition for the acquisition of net leased properties.
Our failure to compete successfully with these competitors could result in our
inability to identify and acquire valuable properties and to achieve our growth
objectives.
Compliance with environmental regulations and associated costs could adversely
affect our liquidity.
Under various federal, state and local laws, ordinances and regulations,
an owner or operator of real property may be required to investigate and clean
up hazardous or toxic substances or petroleum product releases at the property
and may be held liable to a governmental entity or to third parties for property
damage and for investigation and cleanup costs incurred in connection with
contamination. The cost of investigation, remediation or removal of hazardous or
toxic substances may be substantial, and the presence of such substances, or the
failure to properly remediate a property, may adversely affect our ability to
sell or rent the property or to borrow money using the property as collateral.
In connection with our ownership, operation and management of real properties,
we may be considered an owner or operator of the properties and, therefore,
potentially liable for removal or remediation costs, as well as certain other
related costs, including governmental fines and liability for injuries to
persons and property, not only with respect to properties we own now or may
acquire, but also with respect to properties we have owned in the past.
We cannot provide any assurance that existing environmental studies with
respect to any of our properties reveal all potential environmental liabilities,
that any prior owner of a property did not create any material environmental
condition not known to us, or that a material environmental condition does not
otherwise exist, or may not exist in the future, as to any one or more of our
properties. If a material environmental condition does in fact exist, or exists
in the future, it could have a material adverse impact upon our results of
operations, liquidity and financial condition.
Our senior management and other key personnel are critical to our business and
our future success depends on our ability to retain them.
We depend on the services of Fredric H. Gould, chairman of our board of
directors and chief executive officer, Patrick J. Callan, Jr., our president,
Lawrence G. Ricketts, Jr., our executive vice president, and other members of
our senior management to carry out our business and investment strategies. Only
two of our senior officers, Messrs. Callan and Ricketts, devote substantially
all of their business time to our company. The remainder of our senior
management provide services to us on a part-time, as needed basis. As we expand,
we will continue to need to attract and retain qualified senior management and
other key personnel, both on a full-time and part-time basis. The loss of the
services of any of our senior management or other key personnel, or our
inability to recruit and retain qualified personnel in the future, could impair
our ability to carry out our business and investment strategies. We do not carry
key man life insurance on members of our senior management.
Our transactions with affiliated entities involve conflicts of interest.
We have entered into a number of transactions with persons and entities
affiliated with us and with certain of our officers and directors. In
particular, during the year ended December 31, 2006, Majestic Property
Management Corp., a company owned by Mr. Gould and in which certain of our
executive officers are officers and from which they receive compensation,
received from our joint ventures an aggregate of approximately $1.3 million as a
commission in connection with the sale for an aggregate consideration of $136.7
million of eight movie theater properties owned by two of our joint ventures and
$105,000 for management fees and construction supervisory fees. In addition, in
2006 we paid Majestic Property Management Corp. approximately $308,000 for
mortgage brokerage fees, sales commissions, management fees and construction
supervisory fees. Our policy is (i) to receive terms in transactions with
affiliates that are at least as favorable to us as similar transactions we would
enter into with unaffiliated persons and (ii) to have these transactions
approved by our Audit Committee and by a majority of our board of directors,
including a majority of our independent directors. Effective January 1, 2007, we
entered into a compensation and services agreement with Majestic Property
Management Corp. which provides for a continuation of the services we previously
received under the shared services agreement, including executive,
administrative, legal, accounting and clerical personnel, and customary property
management services, property acquisition, sales and leasing counseling services
and mortgage brokerage services and the elimination of any allocated expenses to
us. In consideration thereof, we will pay an annual fee to Majestic Property
Management Corp. In addition, the agreement provides for us to pay additional
compensation to our chairman and for us to make a payment to Majestic for our
share of all direct office expenses such as rent, telephone, postage, computer
services, internet usage, etc. previously allocated to us under the shared
services agreement. Any transactions with affiliated entities raise the
potential that we may not receive terms as favorable as those that we would
receive if the transactions were entered into with unaffiliated entities or that
our executive officers might otherwise seek benefits for affiliated entities at
our expense.
An SEC investigation involving us has resulted in significant costs to us, may
result in future costs to us and could adversely affect us.
As previously disclosed in our public filings, we are currently the
subject of a formal order of investigation by the SEC, pursuant to which the SEC
served a subpoena on us requesting that we produce certain documents. Based upon
the items requested in the subpoena and the examination by the SEC of one of our
executive officers, we believe that the matters being investigated by the SEC
focus on the (i) improper payments received by Jeffrey Fishman, our former
president and chief executive officer, (ii) related party transactions between
us and entities affiliated with us and with certain of our executive officers
and directors, and (iii) compensation paid to certain of our executives by those
affiliated entities.
Our Audit Committee has conducted an investigation concerning these
issues. Both we and the Audit Committee have fully cooperated and intend to
continue to fully cooperate with the SEC investigation. However, there can be no
assurance that the SEC will not take any action that could adversely affect us
as a result of the matters investigated by it and by the Audit Committee. We
have incurred significant legal fees in connection with the on-going SEC
investigation and the substantially completed Audit Committee investigation, and
could incur significant legal fees in the future in connection with the SEC
investigation. Moreover, members of our senior management have devoted in the
past and may need to devote a significant amount of time in the future to these
matters, which could have the effect of reducing the time that they have to
devote to the operation of our business.
Compliance with the Americans with Disabilities Act could be costly.
Under the Americans with Disabilities Act of 1990, all public
accommodations must meet Federal requirements for access and use by disabled
persons. A determination that our properties do not comply with the Americans
with Disabilities Act could result in liability for both governmental fines and
damages. If we are required to make unanticipated major modifications to any of
our properties to comply with the Americans with Disabilities Act, which are
determined not to be the responsibility of our tenants, we could incur
unanticipated expenses that could have an adverse impact upon our results of
operations, liquidity and financial condition.
We cannot assure you of our ability to pay dividends in the future.
We intend to pay quarterly dividends and to make distributions to our
stockholders in amounts such that all or substantially all of our taxable income
in each year, subject to certain adjustments, is distributed. This, along with
other factors, should enable us to quality for the tax benefits accorded to a
REIT under the Internal Revenue Code of 1986, as amended. We have not
established a minimum dividend payment level and our ability to pay dividends
may be adversely affected by the risk factors described in this Annual Report.
All distributions will be made at the discretion of our board of directors and
will depend on our earnings, our financial condition, maintenance of our REIT
status and such other factors as our board of directors may deem relevant from
time to time. We cannot assure you that we will be able to pay dividends in the
future.
Risks Related to the REIT Industry
Failure to qualify as a REIT would result in material adverse tax consequences
and would significantly reduce cash available for distributions.
We believe that we operate so as to qualify as a REIT under the Internal
Revenue Code of 1986, as amended. Qualification as a REIT involves the
application of technical and complex legal provisions for which there are
limited judicial and administrative interpretations. The determination of
various factual matters and circumstances not entirely within our control may
affect our ability to qualify as a REIT. In addition, no assurance can be given
that legislation, new regulations, administrative interpretations or court
decisions will not significantly change the tax laws with respect to
qualification as a REIT or the federal income tax consequences of such
qualification. If we fail to quality as a REIT, we will be subject to federal,
certain additional state and local income tax (including any applicable
alternative minimum tax) on our taxable income at regular corporate rates and
would not be allowed a deduction in computing our taxable income for amounts
distributed to stockholders. In addition, unless entitled to relief under
certain statutory provisions, we would be disqualified from treatment as a REIT
for the four taxable years following the year during which qualification is
lost. The additional tax would reduce significantly our net income and the cash
available for distributions to stockholders.
We are subject to certain distribution requirements that may result in our
having to borrow funds at unfavorable rates.
To obtain the favorable tax treatment associated with being a REIT, we
generally are required, among other things, to distribute to our stockholders at
least 90% of our ordinary taxable income (subject to certain adjustments) each
year. To the extent that we satisfy these distribution requirements, but
distribute less than 100% of our taxable income we will be subject to federal
corporate tax on our undistributed taxable income. In addition, we will be
subject to a 4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by us with respect to any calendar year are less than the sum
of 85% of our ordinary income, 95% of our capital gain net income and 100% of
our undistributed income from prior years.
As a result of differences in timing between the receipt of income and
the payment of expenses, and the inclusion of such income and the deduction of
such expenses in arriving at taxable income, and the effect of nondeductible
capital expenditures, the creation of reserves and the timing of required debt
service (including amortization) payments, we may need to borrow funds on a
short-term basis in order to make the distributions necessary to retain the tax
benefits associated with qualifying as a REIT, even if we believe that then
prevailing market conditions are not generally favorable for such borrowings.
Such borrowings could reduce our net income and the cash available for
distributions to holders of our common stock.
Compliance with REIT requirements may hinder our ability to maximize profits.
In order to qualify as a REIT for Federal income tax purposes, we must
continually satisfy tests concerning, among other things, our sources of income,
the amounts we distribute to our stockholders and the ownership of our stock. We
may also be required to make distributions to stockholders at disadvantageous
times or when we do not have funds readily available for distribution.
Accordingly, compliance with REIT requirements may hinder our ability to operate
solely on the basis of maximizing profits.
In order to qualify as a REIT, we must also ensure that at the end of
each calendar quarter, at least 75% of the value of our assets consists of cash,
cash items, government securities and qualified REIT real estate assets. Any
investment in securities cannot include more than 10% of the outstanding voting
securities of any one issuer or more than 10% of the total value of the
outstanding securities of any one issuer. In addition, no more than 5% of the
value of our assets can consist of the securities of any one issuer, other than
a qualified REIT security. If we fail to comply with these requirements, we must
dispose of such portion of these securities in excess of these percentages
within 30 days after the end of the calendar quarter in order to avoid losing
our REIT status and suffering adverse tax consequences. This requirement could
cause us to dispose of assets for consideration that is less than their true
value and could lead to a material adverse impact on our results of operations
and financial condition.
Item 1B. Unresolved Staff Comments.
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None.
EXECUTIVE OFFICERS
The following sets forth information with respect to our executive officers:
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Fredric H. Gould* 71 Chairman of the Board and
Chief Executive Officer
Patrick J. Callan, Jr. 44 President and Director
Jeffrey A. Gould* 41 Senior Vice President and
Director
Matthew J. Gould* 47 Senior Vice President and
Director
David W. Kalish 60 Senior Vice President and
Chief Financial Officer
Israel Rosenzweig 59 Senior Vice President
Simeon Brinberg** 73 Senior Vice President
Mark H. Lundy** 44 Senior Vice President and
Secretary
Lawrence G. Ricketts, Jr. 30 Executive Vice President
Karen Dunleavy 48 Vice President, Financial
and Treasurer
* Matthew J. Gould and Jeffrey A. Gould are Fredric H. Gould's sons.
** Mark H. Lundy is Simeon Brinberg's son-in-law.
Fredric H. Gould. Mr. Gould has served as Chairman of the Board of One Liberty
Properties since 1989 and as Chief Executive Officer from December 1999 to
December 2001, and from July 2005 to the present. He also served as our
President from July 2005 to December 2005. Mr. Gould has served as Chairman of
the Board of Trustees of BRT Realty Trust, a real estate investment trust that
focuses on mortgage lending, since 1984 and Chief Executive Officer of BRT
Realty Trust from 1996 to December 2001. Since 1985, Mr. Gould has been an
executive officer (currently Chairman of the Board) of the managing general
partner of Gould Investors L.P., a limited partnership primarily engaged in the
ownership and operation of real properties, and he serves as sole member of a
limited liability company which is the other general partner of Gould Investors
L.P. Mr. Gould is President of the advisor to BRT Realty Trust and a director of
EastGroup Properties, Inc., a New York Stock Exchange listed real estate
investment trust that focuses on ownership of industrial properties in major
sunbelt markets throughout the United States.
Patrick J. Callan, Jr. Mr. Callan has been President of One Liberty Properties
since January 2006 and a Director since June 2002. Mr. Callan was Senior Vice
President of First Washington Realty, Inc. from March 2004 to December 2005, and
Vice President of Real Estate for Kimco Realty Corporation, a real estate
investment trust, from May 1998 to March 2004.
Jeffrey A. Gould. Mr. Gould has been a Vice President of One Liberty Properties
since 1989 and a Senior Vice President and Director since December 1999. He was
President and Chief Operating Officer of BRT Realty Trust from March 1996 to
December 2001 and has been President and Chief Executive Officer of BRT Realty
Trust since January 2002. Mr. Gould has served as a Trustee of BRT Realty Trust
since March 1997. He has also served as a Senior Vice President of the managing
general partner of Gould Investors L.P. since 1996.
Matthew J. Gould. Mr. Gould served as President and Chief Executive Officer of
One Liberty Properties from 1989 to December 1999 and became a Senior Vice
President and Director of One Liberty Properties in December 1999. He has served
as President of the managing general partner of Gould Investors L.P. since 1996.
He has been a Vice President of BRT Realty Trust since 1986, has served as a
Trustee of BRT Realty Trust from March 2001 to March 2004 and since June 2004
and serves as a Vice President of the advisor to BRT Realty Trust.
David W. Kalish. Mr. Kalish has served as Senior Vice President and Chief
Financial Officer of One Liberty Properties since June 1990. Mr. Kalish has
served as Senior Vice President, Finance of BRT Realty Trust since August 1998
and Vice President and Chief Financial Officer of the managing general partner
of Gould Investors L.P. since June 1990. Mr. Kalish is a certified public
accountant.
Israel Rosenzweig. Mr. Rosenzweig has been a Senior Vice President of One
Liberty Properties since June 1997 and a Senior Vice President of BRT Realty
Trust since March 1998. He has been a Vice President of the managing general
partner of Gould Investors L.P. since May 1997 and President of GP Partners,
Inc., a sub-advisor to a registered investment advisor, since 2000.
Simeon Brinberg. Mr. Brinberg has served as a Senior Vice President of One
Liberty Properties since 1989. He has been Secretary of BRT Realty Trust since
1983, a Senior Vice President of BRT Realty Trust since 1988 and a Vice
President of the managing general partner of Gould Investors L.P. since 1988.
Mr. Brinberg, is an attorney-at-law and a member of the bar of the State of
New York.
Mark H. Lundy. Mr. Lundy has served as the Secretary of One Liberty Properties
since June 1993 and a Vice President since June 2000 (Senior Vice President
since June 2006). Mr. Lundy has been a Vice President of BRT Realty Trust since
April 1993 (Senior Vice President since March 2005) and a Vice President of the
managing general partner of Gould Investors L.P. since July 1990. He is an
attorney-at-law and a member of the bars of New York and the District of
Columbia.
Lawrence G. Ricketts, Jr. Mr. Ricketts has been an Vice President of One
Liberty Properties since December 1999 (Executive Vice President since June
2006), and has been employed by One Liberty Properties, Inc. since January 1999.
Karen Dunleavy. Ms. Dunleavy has been Vice President, Financial of One Liberty
Properties since August 1994 and Treasurer since June 2006. She has served as
Treasurer of the managing general partner of Gould Investors L.P. since 1986.
Ms. Dunleavy is a certified public accountant.
Item 2. Properties.
As of December 31, 2006, we owned 66 properties, including a 50% tenancy
in common interest in one property, and participated in seven joint ventures
that owned a total of six properties (including two vacant properties held for
sale). The properties owned by us and our joint ventures are suitable and
adequate for their current uses. The tables below set forth information as of
December 31, 2006 concerning each property which we own and in which we
currently own an equity interest. We and our joint ventures own fee title to
each property.
Our Properties
Percentage
of 2007 Approximate
Type of Contractual Building
Location Property Rental Income (1) Square Feet
-------- -------- ----------------- -----------
Baltimore, MD Industrial 5.3% 367,000
Parsippany, NJ Office 5.2 106,680
Hauppauge, NY Flex 4.8 149,870
El Paso, TX Retail 4.4 110,179
St. Cloud, MN Industrial 4.2 338,000
Hanover, PA Industrial 3.8 458,560
Plano, TX Retail (2) 3.6 112,389
Greensboro, NC Theater 3.4 61,213
Los Angeles, CA (3) Office 3.4 106,262
Brooklyn, NY Office 3.0 66,000
Knoxville, TN Retail 2.8 35,330
Columbus, OH Retail (2) 2.7 96,924
Plano, TX Retail (4) 2.4 51,018
Philadelphia, PA Industrial 2.4 166,000
Tucker, GA Health & Fitness 2.2 58,800
Ronkonkoma, NY Flex 2.0 89,500
Lake Charles, LA Retail 1.9 54,229
Manhattan, NY Residential 1.8 125,000
Cedar Park, TX Retail (2) 1.8 50,810
Ft. Myers, FL Retail 1.5 29,993
Columbus, OH Industrial 1.5 100,220
Grand Rapids, MI Health & Fitness 1.5 130,000
Newark, DE Retail 1.5 23,547
Atlanta, GA Retail 1.4 50,400
Wichita, KS Retail (2) 1.3 88,108
Saco, ME Retail 1.3 91,400
Champaign, IL Retail 1.3 50,530
Athens, GA Retail 1.3 41,280
Greenwood Village, CO Retail 1.2 45,000
Tyler, TX Retail (2) 1.2 72,000
Onalaska, WI Retail 1.1 63,919
Fayetteville, GA Retail (2) 1.1 65,951
Melville, NY Industrial 1.1 51,351
Percentage
of 2007 Approximate
Type of Contractual Building
Location Property Rental Income (1) Square Feet
-------- -------- ----------------- -----------
Mesquite, TX Retail (2) 1.1 22,900
Richmond, VA Retail (2) 1.0 38,788
Amarillo, TX Retail (2) 1.0 72,227
Virginia Beach, VA Retail (2) 1.0 58,937
Selden, NY Retail .9 14,550
Lexington, KY Retail (2) .9 30,173
Antioch, TN Retail .9 34,059
Duluth, GA Retail (2) .9 50,260
Grand Rapids, MI Health & Fitness .8 72,000
Gurnee, IL Retail .8 22,768
Newport News, VA Retail (2) .8 49,865
Batavia, NY Retail .7 23,483
St. Louis, MO Retail .7 30,772
Somerville, MA Retail .7 12,054
Fairview Heights, IL Retail .7 31,252
Bluffton, SC Retail (2) .7 35,011
Ferguson, MO Retail .6 32,046
New Hyde Park, NY Industrial .6 89,000
Hauppauge, NY Retail .5 7,000
Vicksburg, MS Retail .5 2,790
Florence, KY Retail .4 31,252
Killeen, TX Retail .4 8,000
Houston, TX Retail .4 12,000
Flowood, MS Retail .4 4,505
Bastrop, LA Retail .4 2,607
Monroe, LA Retail .4 2,756
D'Iberville, MS Retail .4 2,650
Kentwood, LA Retail .4 2,578
Monroe, LA Retail .4 2,806
Vicksburg, MS Retail .4 4,505
Rosenberg, TX Retail .3 8,000
West Palm Beach, FL Industrial .3 10,361
Seattle, WA Retail .2 3,038
---- ---------
100% 4,332,456
==== =========
Properties Owned
by Joint Ventures (5)
Percentage
of Our Share
of Rent Payable Approximate
Type of in 2007 to Our Building
Location Property Joint Ventures Square Feet
-------- -------- -------------- -----------
Lincoln, NE Retail 41.8% 112,260
Milwaukee, WI Industrial 38.9 927,685
Miami, FL Industrial 10.7 396,000
Savannah, GA Retail 8.6 101,550
Shreveport, LA Retail Vacant 17,108
Monroe, NY Land Vacant -
------ ---------
100% 1,554,603
=== =========
(1) Percentage of 2007 contractual rental income payable to us pursuant
to leases as of December 31, 2006.
(2) This property is leased to a retail furniture operator.
(3) An undivided 50% interest in this property is owned by us as tenant in
common with an unrelated entity. Percentage of contractual rental
income indicated represents our share of the 2007 rental income.
Approximate square footage indicated represents the total rentable
square footage of the property.
(4) Property has two tenants, of which approximately 54% is leased to a
retail furniture operator.
(5) Each property is owned by a joint venture in which we are a venture
partner. Except for the joint venture which owns the Miami, Florida
property, in which we own a 36% economic interest, we own a 50%
economic interest in each joint venture. Approximate square footage
indicated represents the total rentable square footage of the property
owned by the joint venture.
The occupancy rate for our properties (including the property in which
we own a tenancy in common interest), based on total rentable square footage,
was 100% as of December 31, 2006 and 2005. The occupancy rate for the properties
owned by our joint ventures (except for the Monroe, New York property which was
vacant land at December 31, 2006 and was sold by the joint venture in March
2007), based on total rentable square footage, was approximately 98.9% as of
December 31, 2006 and 2005.
As of December 31, 2006, the 66 properties owned by us and the 6
properties owned by our joint ventures are located in 28 states. The following
table sets forth certain information, presented by state, related to our
properties and properties owned by our joint ventures as of December 31, 2006.
Our Properties
Approximate
Number of 2007 Contractual Building
State Properties Rental Income Square Feet
----- ---------- ------------- -----------
Texas 10 $ 6,017,299 519,523
New York 9 5,550,014 615,754
Georgia 5 2,444,346 266,691
Pennsylvania 2 2,230,019 624,560
Maryland 1 1,924,423 367,000
New Jersey 1 1,874,901 106,680
Ohio 2 1,522,776 197,144
Minnesota 1 1,509,499 338,000
Tennessee 2 1,319,356 69,389
Louisiana 5 1,263,882 64,976
North Carolina 1 1,242,019 61,213
Other 27 9,192,970 1,101,526
-- ------------ ---------
66 $ 36,091,504 4,332,456
== ============ =========
Properties Owned
by Joint Ventures
Our Share
of Rent Payable Approximate
Number of in 2007 to Our Building
State Properties (1) Joint Ventures Square Feet
----- ---------- -------------- -----------
Nebraska 1 $ 603,594 112,260
Wisconsin 1 562,500 927,685
Florida 1 154,488 396,000
Georgia 1 123,750 101,550
Louisiana 1 (2) - 17,108
- ---------- ---------
5 $1,444,332 1,554,603
= ========== =========
(1) Excludes vacant land located in Monroe, New York, which was sold in
March, 2007.
(2) This property has been vacant since February 2004.
At December 31, 2006, we had first mortgages on 57 of the 66 properties
we owned as of that date (including our 50% tenancy in common interest, but
excluding properties owned by our joint ventures). At December 31, 2006, we had
approximately $221 million of mortgage loans outstanding, bearing interest at
rates ranging from 5.13% to 8.8%. Substantially all of our mortgage loans
contain prepayment penalties. In addition, we had one outstanding loan payable
with a balance of approximately $6.6 million at December 31, 2006, bearing
interest at 6.25%. The following table sets forth scheduled principal mortgage
and loan payments due for our properties as of December 31, 2006 (assumes no
payment is made on principal on any outstanding mortgage or loan in advance of
its due date):
PRINCIPAL PAYMENTS DUE
YEAR IN YEAR INDICATED
---- -----------------
(Amounts in Thousands)
2007 $ 4,717
2008 12,942
2009 9,998
2010 22,264
2011 8,538
2012 and thereafter 169,464
--------
Total $227,923
========
At December 31, 2006, our joint ventures had first mortgages on three
properties with outstanding balances of approximately $19.1 million, bearing
interest at rates ranging from 5.8% to 6.4%. Substantially all these mortgages
contain prepayment penalties. The following table sets forth the scheduled
principal mortgage payments due for properties owned by our joint ventures as of
December 31, 2006 (assumes no payment is made on principal on any outstanding
mortgage in advance of its due date):
PRINCIPAL PAYMENTS DUE
YEAR IN YEAR INDICATED
---- -----------------
(Amounts in Thousands)
2007 $ 387
2008 410
2009 435
2010 462
2011 490
2012 and thereafter 16,954
-------
Total $19,138
=======
Significant Tenant
------------------
As of December 31, 2006, no single property owned by us had a book value
equal to or greater than 10% of our total assets or had revenues which accounted
for more than 10% of our aggregate annual gross revenues in the year ended
December 31, 2006. However, as of December 31, 2006, we owned a portfolio of
eleven properties, (leased under a master lease to Haverty's Furniture
Companies, Inc.) which had a net book value of 13% of our total assets at
December 31, 2006 and revenues which accounted for 10.7% of our aggregate annual
gross revenues in the year ended December 31, 2006.
On April 7, 2006, a wholly-owned subsidiary of ours acquired the eleven
properties leased to Haverty's Furniture Companies, Inc. which are located as
follows: three in each of Texas and Virginia, two in Georgia, and one in each of
Kansas, Kentucky and South Carolina. The properties aggregate approximately 43
acres and contain buildings with an aggregate of approximately 612,130 square
feet.
The properties are net leased to Haverty's Furniture Companies, Inc.
pursuant to a master lease, which expires on August 14, 2022. Haverty's
Furniture Companies, Inc. is a New York Stock Exchange listed company and
operates over 100 showrooms in 17 states. The lease provides the tenant with two
five-year renewal options, and under certain circumstances, three additional
five-year renewal options. The lease provides for a current base rent of
$4,066,148 per annum, increasing on August 15, 2007 and every five years
thereafter. Pursuant to the lease, the tenant is responsible for maintenance and
repairs, and for real estate taxes and assessments on the properties. The
aggregate 2006 annual real estate taxes on the properties were $749,000. The
tenant utilizes approximately 86% of the properties for retail and 14% of the
properties for warehouse.
Upon the acquisition of the properties, our wholly-owned subsidiary
assumed the existing mortgage loan which is secured by mortgages/deeds of trust
on all eleven properties in the principal amount of approximately $27 million.
The mortgage loan bears interest at 6.87% per annum, matures on September 1,
2012 and is being amortized based on a 25-year amortization schedule. Assuming
no additional payments are made on the principal amount of the mortgage loan in
advance of the maturity date, the principal balance due on the maturity date
will be approximately $20 million. Although the mortgage loan provides for
defeasances, it is generally not prepayable until 90 days prior to the maturity
date.
Item 3. Legal Proceedings.
-----------------
In July 2005, Jeffrey Fishman resigned as our president, chief executive
officer and a member of our Board of Directors following discovery of what
appeared to be inappropriate financial dealings by Mr. Fishman with the former
tenant of a movie theater property located in Brooklyn, NY, formerly owned by a
joint venture in which we are a 50% venture partner and the managing member. We
had reported this matter to the Securities and Exchange Commission in July 2005.
The Audit Committee of our Board of Directors conducted an investigation of this
matter and related matters and retained special counsel to assist it in the
investigation. This investigation was completed and the Audit Committee and its
special counsel, based on the materials gathered and interviews conducted, found
no evidence that any other officer or employee of our company was aware of, or
knowingly assisted in, Mr. Fishman's inappropriate financial dealings.
On August 12, 2005, the former tenant of the Brooklyn, NY theater
property, Pritchard Square Cinema LLC, and Pritchard Square LLC, commenced
litigation in the Supreme Court of the State of New York, Nassau County against
us, certain of our affiliated entities, Mr. Fishman and Britannia Management,
LLC ("Britannia"), a company which we believe is owned and/or controlled by Mr.
Fishman. Pritchard Square LLC was the seller and Pritchard Square Cinema LLC was
the tenant of the Brooklyn, NY property which was acquired in a "sale and
leaseback transaction" by the joint venture. The former tenant and its related
entity allege that it or its affiliates paid $815,000 in the aggregate to Mr.
Fishman and/or Britannia. As against Mr. Fishman, Britannia, us and our
affiliated entities, the complaint alleges fraud, breach of contract,
intentional tort, negligent supervision, respondeat superior, negligent
misrepresentation, tortious interference with prospective economic relations and
conduct in violation of the Racketeer Influenced and Corrupt Organizations Act
("RICO"). The damages sought in the complaint are $9 million plus punitive
damages, interest and costs and a demand for treble damages under RICO. The
Brooklyn, NY property was sold by the joint venture in September 2006.
On the same date that the complaint was filed against us and certain of
our affiliated entities, we filed suit in the Supreme Court of the State of New
York, Nassau County, against the former tenant of the Brooklyn, NY property,
Norman Adie, the former tenant's principal, Mr. Fishman, Britannia and others.
Our complaint alleges that Mr. Adie, Mr. Fishman and other defendants conspired
to defraud us. Our lawsuit alleges commercial bribery, fraud, breach of
fiduciary duty, tortious interference, intentional tort, violation of the New
York Enterprise Corruption Act, respondeat superior, unjust enrichment and
violations of RICO. The damages alleged in this lawsuit exceed $1 million, plus
punitive damages, interest and costs.
Motions were made by both parties to consolidate the two actions and the
court ordered a consolidation of the actions for all purposes. Effective March
14, 2007, the consolidated actions were settled with respect to Pritchard
Square Cinema LLC, Pritchard Square LLC, Norman Adie (the principal of both
Pritchard Square entities) and certain other persons associated or affiliated
with the Pritchard Square entities and Mr. Adie (the "Pritchard Square parties")
on the one hand, and us and certain other persons associated or affiliated with
us (the "One Liberty parties") on the other. Although the Pritchard Square
parties entered into an agreement with and released Mr. Fishman, his wife, and
Britannia, the litigation commenced by us and certain of our affiliated entities
against Mr. Fishman, his wife, and Britannia continues. Under the terms of a
settlement agreement entered into between the Pritchard Square parties and the
One Liberty parties, a designee of Pritchard Square purchased from a joint
venture in which we are a 50% joint venture partner, a property located in
Monroe, New York for a consideration of $1,250,000 and satisfied or caused to
be satisfied two (2) mechanic's liens filed of record by two entities against
the Monroe, New York property. In addition, the parties exchanged general
releases and stipulations of discontinuance. Mr. Adie warranted and represented
to us in the settlement agreement that he had no knowledge of, nor did he make
or cause any agent of his, or in which he is or was affiliated, to make any
payments to Mr. Fishman or any of his agents, entities or enterprises other
than those payments described in the allegations contained in the litigation,
and such representation of Mr. Adie is stated to be a material representation
and an inducement to us to enter into the settlement agreement. In the event
that such representation turns out to be false, we may reinstate and pursue the
claims we had asserted against Mr. Adie.
On May 26, 2006, we received notification of a formal order of
investigation from the SEC. We believe that the matters being investigated by
the SEC focus on the improper payments received by Mr. Fishman. The SEC has also
requested information regarding "related party" transactions between us and
affiliated entities and with certain of our officers and directors and
compensation paid to certain of our executive officers by those affiliates. Our
Audit Committee (and its counsel), having previously conducted an investigation
regarding Mr. Fishman's inappropriate financial dealings, has also investigated
the related party transactions. Our direct legal expenses related to these
investigations totaled $726,000 in 2006.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Annual Report on Form 10-K.
Part II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
----------------------------------------------------------------------
and Issuer Purchase of Equity Securities.
-----------------------------------------
Our common stock is listed on the New York Stock Exchange. The following
table sets forth the high and low prices for our common stock as reported by the
New York Stock Exchange for 2006 and for 2005 and the per share cash
distributions paid on our common stock during each quarter of the years ended
December 31, 2006 and 2005.
DISTRIBUTIONS
2006 HIGH LOW PER SHARE
---- ---- --- ---------
First Quarter $21.00 $18.33 $.33
Second Quarter $21.00 $17.91 $.33
Third Quarter $22.40 $18.66 $.33
Fourth Quarter $25.53 $22.01 $.36
DISTRIBUTIONS
2005 HIGH LOW PER SHARE
---- ---- --- ---------
First Quarter $20.70 $18.50 $.33
Second Quarter $21.40 $18.65 $.33
Third Quarter $22.64 $19.20 $.33
Fourth Quarter $20.19 $18.41 $.33
As of March 2, 2007, there were 426 common stockholders of record and we
estimate that at such date there were approximately 3,600 beneficial owners of
our common stock.
We qualify as a REIT for federal income tax purposes. In order to
maintain that status, we are required to distribute to our shareholders at least
90% of our annual ordinary taxable income. The amount and timing of future
distributions will be at the discretion of the Board of Directors and will
depend upon our financial condition, earnings, business plan, cash flow and
other factors. We intend to pay cash distributions in an amount at least equal
to that necessary for us to maintain our status as a real estate investment
trust for Federal income tax purposes.
Equity Compensation Plan Information
The following table provides information about shares of our common stock that
may be issued upon the exercise of options, warrants, rights and restricted
stock under our 2003 Stock Incentive Plan as of December 31, 2006.
Number of
securities
remaining
available for
Number of future
securities issuance under
to be issued Weighted- equity
upon exercise average compensation
of outstanding exercise price plans (excluding
options, of outstanding securities
warrants and options, warrants reflected in
Plan Category rights and rights column(a))
------------- ----- ---------- ----------
(a) (b) (c)
Equity compensation
plans approved by
security holders (1) - - 133,000
Equity compensation
plans not approved
by security holders - - -
------- ------- -------
Total - - 133,000
======= ======= =======
(1) Our 2003 Stock Incentive Plan, which was approved by our stockholders in
2003, is our only equity compensation plan. Our 2003 Stock Incentive Plan
permits us to grant stock options and restricted stock to our employees,
officers, directors and consultants. Currently, there are no options outstanding
under our 2003 Stock Incentive Plan.
Purchase of Securities
In 2006, we did not purchase any of our outstanding equity securities.
Item 6. Selected Financial Data.
-----------------------
The following table sets forth the selected consolidated statement of
operations data for each of the periods indicated, all of which are derived from
our audited consolidated financial statements and related notes. The selected
financial data for each of the three years in the period ended December 31, 2006
should be read together with our consolidated financial statements and related
notes appearing elsewhere in this Annual Report on Form 10-K and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
As of and for the Year Ended
December 31
(Amounts in Thousands, Except Per Share Data)
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
OPERATING DATA (Note a)
--------------
Rental revenues $33,370 $27,232 $20,833 $16,170 $13,718
Equity in (loss) earnings of unconsolidated joint ventures
(Note b) (3,276) 2,102 2,869 2,411 1,078
Gain on dispositions of real estate of
unconsolidated joint ventures 26,908 - - - -
Net gain (loss) on sale of air rights, other and
real estate 413 10,248 73 14 (29)
Income from continuing operations 31,882 19,182 7,733 6,406 5,133
Income from discontinued operations 4,543 2,098 3,241 747 665
Net income 36,425 21,280 10,974 8,525 5,880
Calculation of net income
applicable to common stockholders (Note c):
Net income 36,425 21,280 10,974 8,525 5,880
Less: dividends and accretion on preferred stock - - - 1,037 1,037
Net income applicable to common stockholders $36,425 $21,280 $10,974 $ 7,488 $ 4,843
Weighted average number of common
shares outstanding:
Basic 9,931 9,838 9,728 6,340 4,614
Diluted 9,934 9,843 9,744 6,372 4,644
Net income per common share - basic:
Income from continuing operations $3.21 $ 1.95 $ .80 $ .85 $ .89
Income from discontinued operations .46 .21 _ .33 _ .33 _ .16
------- ------- ----- ----- -----
Net income $3.67 $2.16 $1.13 $1.18 $1.05
Net income per common share - diluted:
Income from continuing operations $3.21 $1.95 $ .80 $ .85 $ .88
Income from discontinued operations .46 .21 .33 _ .33 _ .16
------- ------- ------ ----- -----
Net income $3.67 $2.16 $1.13 $1.18 $1.04
Cash distributions per share of:
Common Stock $1.35 $1.32 $1.32 $1.32 $1.32
Preferred Stock (Note c) - - - $1.60 $1.60
BALANCE SHEET DATA
------------------
Real estate investments, net $351,841 $258,122 $228,536 $177,316 $140,437
Investment in unconsolidated joint ventures 7,014 27,335 37,023 24,441 23,453
Cash and cash equivalents 34,013 26,749 6,051 45,944 2,624
Total assets 422,037 330,583 284,386 259,089 179,609
Mortgages and loan payable 227,923 167,472 124,019 106,133 77,367
Line of credit - - 7,600 - 10,000
Total liabilities 241,912 175,064 138,271 113,120 90,915
Total stockholders' equity 180,125 155,519 146,115 145,969 88,694
OTHER DATA (Note d)
----------
Funds from operations applicable to
common stockholders $13,707 $26,658 $16,789 $11,776 $7,757
Funds from operations per common share:
Basic $1.38 $2.71 $1.73 $1.86 $1.68
Diluted $1.38 $2.71 $1.72 $1.85 $1.67
Note a: Certain amounts reported in prior periods have been reclassified
to conform to the current year's presentation.
Note b: For the year ended December 31, 2006, "Equity in (loss) earnings
of unconsolidated joint ventures" is after giving effect to $5.3 million, our
share of the mortgage prepayment premium expense incurred in connection with the
dispositions of real estate of unconsolidated joint ventures. This expense is
reflected as interest expense on the books of the joint ventures and not netted
against the gain on dispositions.
Note c: On December 30, 2003, we redeemed all of our outstanding
preferred stock.
Note d: We consider funds from operations (FFO) to be a relevant and
meaningful supplemental measure of the operating performance of an equity REIT,
and it should not be deemed to be a measure of liquidity. FFO does not represent
cash generated from operations as defined by generally accepted accounting
principles (GAAP) and is not indicative of cash available to fund all cash
needs, including distributions. It should not be considered as an alternative to
net income for the purpose of evaluating our performance or to cash flows as a
measure of liquidity.
We compute FFO in accordance with the "White Paper on Funds From
Operations" issued in April 2002 by the National Association of Real Estate
Investment Trusts (NAREIT). FFO is defined in the White Paper as "net income
(computed in accordance with generally accepting accounting principles),
excluding gains (or losses) from sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. Adjustments for unconsolidated partnerships and joint ventures will be
calculated to reflect funds from operations 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, but
those items that are defined as "extraordinary" under GAAP are added back to net
income. Since the NAREIT White Paper only provides guidelines for computing FFO,
the computation of FFO may vary from one REIT to another.
We believe that FFO is a useful and a standard supplemental measure of
the operating performance for equity REITs and is used frequently by securities
analysts, investors and other interested parties in evaluating equity REITs,
many of which present FFO when reporting their operating results. FFO is
intended to exclude GAAP historical cost depreciation and amortization of real
estate assets, which assures 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 provides 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 to be useful to us in evaluating potential
property acquisitions.
FFO does not represent net income or cash flows from operations as
defined by GAAP. FFO should not be considered to be an alternative to net income
as a reliable measure of our operating performance; nor should FFO be considered
to be an alternative to cash flows from operating, investing or financing
activities (as defined by GAAP) as measures of liquidity.
FFO does not measure whether cash flow is sufficient to fund all of our
cash needs, including principal amortization, capital improvements and
distributions to stockholders. FFO does not represent cash flows from operating,
investing or financing activities as defined by GAAP.
Management recognizes that there are limitations in the use of FFO. In
evaluating the performance of our company, management is careful to examine GAAP
measures such as net income and cash flows from operating, investing and
financing activities. Management also reviews the reconciliation of net income
to FFO.
The table below provides a reconciliation of net income in accordance
with GAAP to FFO, as calculated under the current NAREIT definition of FFO, for
each of the years in the five year period ended December 31, 2006.
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
Net income (Note 1) $36,425 $21,280 $10,974 $8,525 $5,880
Add: depreciation of properties 7,091 5,905 4,758 3,473 2,617
Add: our share of depreciation
in unconsolidated joint ventures 716 1,277 1,075 790 268
Add: amortization of deferred leasing costs 43 101 55 39 -
Deduct: (gain) loss on sale of real estate (3,660) (1,905) (73) (14) 29
Deduct: gain on dispositions of real estate
of unconsolidated joint ventures (26,908) - - - -
Deduct: preferred distributions - - - (1,037) (1,037)
------- ------- ------- ------- -------
Funds from operations applicable
to common stockholders (Note 1) $13,707 $26,658 $16,789 $11,776 $7,757
======= ======= ======= ======= ======
Note 1: For the year ended December 31, 2006, net income and funds from
operations applicable to common stockholders (FFO) is after giving effect to
$5.3 million, our share of the mortgage prepayment premium expense incurred in
connection with the dispositions of real estate of unconsolidated joint
ventures. This expense is reflected as interest expense on the books of the
joint ventures and not netted against gain on dispositions.
For the year ended December 31, 2005, net income and FFO include $10.2
million from the gain on sale of air rights.
The table below provides a reconciliation of net income per common share
(on a diluted basis) in accordance with GAAP to FFO.
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
Net income (Note 2) $3.67 $2.16 $1.13 $1.34 $1.27
Add: depreciation of properties .71 .60 .49 .55 .56
Add: our share of depreciation
in unconsolidated joint ventures .07 .13 .11 .12 .06
Add: amortization of deferred leasing costs .01 .01 - - -
Deduct: gain on sale of real estate (.37) (.19) (.01) - -
Deduct: gain on dispositions of real estate
of unconsolidated joint ventures (2.71) - - - -
Deduct: preferred distributions - - - (.16) (.22)
------ ------ ------- ----- -----
Funds from operations applicable
to common stockholders (Note 2) $1.38 $2.71 $1.72 $1.85 $1.67
===== ===== ===== ===== =====
Note 2: For the year ended December 31, 2006, net income and FFO is after $.53,
our share of the mortgage prepayment premium expense. See Note 1 above. For the
year ended December 31, 2005, net income and FFO include $1.04 from the gain on
sale of air rights.
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations.
-----------------------
General
We are a self-administered and self-managed REIT and we primarily own
real estate that we net lease to tenants. As of December 31, 2006, we owned 66
properties, including a 50% tenancy in common interest in one property, and
participated in seven joint ventures that owned a total of six properties
(including two vacant properties held for sale). These 72 properties are located
in 28 states.
We have elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended. To qualify as a REIT, we must meet a number of organizational
and operational requirements, including a requirement that we currently
distribute at least 90% of ordinary taxable income to our stockholders. We
intend to comply with these requirements and to maintain our REIT status.
Our principal business strategy is to acquire improved, commercial
properties subject to long-term net leases. We acquire properties for their
value as long-term investments and for their ability to generate income over an
extended period of time. We have borrowed funds in the past to finance the
purchase of real estate and we expect to do so in the future.
Our rental properties are generally leased to corporate tenants under
operating leases substantially all of which are noncancellable. Substantially
all of our lease agreements are net lease arrangements that require the tenant
to pay not only rent, but also substantially all of the operating expenses of
the leased property, including maintenance, taxes, utilities and insurance. A
majority of our lease agreements provide for periodic rental increases and
certain of our other leases provide for increases based on the consumer price
index.
During the year ended December 31, 2006, we purchased 22 single tenant
properties located in 11 states, for a total consideration of $111.9 million.
These purchases include our April 2006 acquisition of 11 properties for a
consideration of $55.7 million that are net leased to a single tenant under a
master lease. An aggregate of $35.9 million of first mortgage financing was
completed with respect to ten of these properties and we assumed a pre-existing
first mortgage loan of $27 million on the 11 properties purchased in April 2006.
We are a venturer in two joint ventures organized for the purpose of
acquiring and owning megaplex stadium-style movie theaters. We own a 50% equity
interest and are the managing member in each of these ventures with the same
co-venturer. One of our movie theater joint ventures sold all five of its movie
theater properties in October 2006 for $91.3 million and realized a gain of
$35.2 million on the sale, after the payment of closing expenses and brokerage
fees. In connection with this sale, the joint venture paid $4.9 million in
prepayment premiums to its mortgage lender, which is reflected as interest
expense on the books of the joint venture and not netted against the gain on
sale. This movie theater joint venture does not currently own any real property.
The second movie theater joint venture sold one movie theater property in
September 2006 for $16 million and three movie theater properties in October
2006 for $45.3 million, and realized an aggregate gain of $20.5 million on the
sales, after the payment of closing expenses and brokerage fees. In connection
with these sales, the joint venture paid $5.6 million in prepayment premiums to
its mortgage lenders, which is reflected as interest expense and not netted
against the gain on sale. At December 31, 2006, the second movie theater joint
venture owned one property, .26 of an acre of vacant land located in Monroe, New
York and sold this property in March 2007. Our equity investment in these joint
ventures at December 31, 2006 was $284,000, net of distributions. As of December
31, 2006, we are also a joint venturer in five additional joint ventures, each
of which owns one single-tenanted property. Our equity investment in these five
joint ventures at December 31, 2006 was $6.7 million, net of distributions.
At December 31, 2006, excluding mortgages payable of our unconsolidated
joint ventures, we had 36 outstanding mortgages payable, aggregating $221
million in principal amount, all of which are secured by first liens on
individual real estate investments with an aggregate carrying value, as adjusted
for intangibles, of approximately $351.8 million before accumulated
depreciation. The mortgages bear interest at fixed rates ranging from 5.13% to
8.8%, and mature between 2007 and 2037. In addition, we had one loan payable
outstanding with a principal amount of $6.6 million, bearing interest at 6.25%
and maturing in 2018.
Results of Operations
Outlook
We anticipate that in 2007 we will use any available cash (after taking
into account required cash distributions to shareholders), funds derived from
the placement of additional mortgages and a credit line to acquire additional
properties, either directly or through joint ventures. As a result, we
anticipate that we will acquire and own additional properties and unless we
experience an unexpected number of lease terminations and/or cancellations in
2007 (taking into consideration the lease expirations and terminations that we
know will occur in 2007, and without giving effect to any re-letting of such
properties), we anticipate that our revenues will increase in 2007.
Comparison of Years Ended December 31, 2006 and December 31, 2005
-----------------------------------------------------------------
Rental Revenues
Rental revenues increased by $6.1 million, or 22.5%, to $33.4 million
for the year ended December 31, 2006 from $27.2 million for the year ended
December 31, 2005. The increase in rental revenues is substantially due to
rental revenues earned during the year ended December 31, 2006 on 30 properties
acquired by us between January 2005 and December 2006.
Operating Expenses
Depreciation and amortization expense increased by $1.6 million, or
28.8%, to $7 million for the year ended December 31, 2006 from $5.4 million for
the year ended December 31, 2005. The increase in depreciation and amortization
was due to the acquisition of 30 properties between January 2005 and December
2006.
General and administrative expenses increased by $1.1 million, or
26.8%, to $5.3 million for the year ended December 31, 2006 from $4.1 million
for the year ended December 31, 2005. The increase was due to a number of
factors, including a $495,000 increase in payroll and payroll related expenses
resulting primarily from compensation paid to our president (elected effective
January 1, 2006) for all of 2006, while we did not have any payroll expenses for
our president for five months in 2005, as well as from staff increases. An
increase of $166,000 relates to professional fees incurred in connection with an
investigation by the Securities and Exchange Commission described elsewhere in
this report (Part I - Item 3 - Legal Proceedings) and investigations by our
Audit Committee. Similarly, there was an increase of $72,000 in legal fees
relating to a civil litigation arising out of the activities of our former
president and chief executive officer. Additionally, for the year ended December
31, 2006, expenses allocated to us under the Shared Services Agreement among us
and various affiliated companies, increased by $109,000 for executive and
support personnel, primarily legal and accounting services, a significant
portion of which relates to the SEC and Audit Committee investigations, as well
as to property acquisitions and the overall increase in the level of our
business activity. Also included in the year ended December 31, 2006, is a
$222,000 increase in compensation expense relating to our restricted stock
program. The balance of the increase in general and administrative expenses
includes an increase in directors' fees.
Federal excise tax of $490,000 was accrued at December 31, 2006, based
on taxable income generated but not yet distributed. There was no such tax for
the year ended December 31, 2005.
Real estate expenses decreased by $74,000, or 21.5%, to $270,000 for
the year ended December 31, 2006, resulting primarily from unusual repair items
incurred in the year ended December 31, 2005 at three properties.
Other Income and Expenses
Our equity in earnings of unconsolidated joint ventures decreased by
$5.4 million, or 256%, to a loss of $3.3 million for the year ended December 31,
2006 from income of $2.1 million for the year ended December 31, 2005. This
decrease resulted primarily from $10.5 million of prepayment premiums, of which
50%, or $5.3 million is our share, paid by two of our joint ventures upon the
sales of its nine movie theater properties. Such sales also contributed to an
operating income decrease from these ventures of $1.3 million, of which $646,000
is our share, caused by a decrease in rental income, offset in part by a
decrease in mortgage interest expense and depreciation. The decrease in earnings
from unconsolidated joint ventures also resulted from a $960,000 provision for
valuation adjustment, of which 50%, or $480,000 was our share, by one of our
joint ventures which owns a vacant property. These decreases were offset, in
part, by a $2.56 million provision for valuation adjustment taken in the year
ended December 31, 2005 by one of our movie theater joint ventures against its
vacant parcel of land, of which 50%, or $1.3 million, was our share. During the
year ended December 31, 2006, the joint venture recorded an additional $600,000
provision against this property, of which $300,000 is our share. The joint
venture sold this property in March 2007 for an aggregate consideration of $1.25
million.
Gain on dispositions of real estate of unconsolidated joint ventures
resulted from the sales of nine movie theater properties by two of our joint
ventures. On September 13, 2006, one of our joint ventures sold a movie theater
property located in Brooklyn, New York to an unrelated party for $16 million.
The joint venture recognized a gain of $6.6 million on the sale, of which our
share is $3.3 million. On October 5, 2006, two of our joint ventures sold eight
movie theater properties to a single unrelated party for an aggregate of $136.7
million and realized a gain of $49 million on the sale, of which $24.5 million
is our share. We wrote off the unamortized premium balance of $924,000 in our
investment in this joint venture against such gain.
Interest and other income increased by $585,000, or 186%, to $899,000
for the year ended December 31, 2006. The primary reason for the increase was
the investment in short-term cash equivalents of the distributions received from
the movie theater joint ventures upon the sale of its nine theater properties.
Interest expense increased by $2.8 million, or 28.3%, including an
increase of $2.9 million on our mortgages payable, principally resulting from
mortgages placed on 20 properties between March 2005 and December 2006 and the
assumption of a mortgage in connection with the purchase of 11 properties in
April 2007. The increase was offset by a $215,000 decrease in interest expense
related to our line of credit.
During February 2006, we sold an option to buy an interest in certain
property adjacent to one of our properties and recognized a gain on the sale of
$228,000. In June 2005, we closed on the sale of unused development or "air
rights" relating to our property located in Brooklyn, New York for a net gain,
after closing costs, of approximately $10.25 million. These gains are included
in "Gain on sale of air rights and other gains."
Included in gain on sale of real estate is our sale of excess acreage
at a property we own to an unrelated party. We recognized a gain of $185,000 in
July 2006 from this sale.
Discontinued Operations
Income from discontinued operations increased by $2.4 million, or 117%,
to $4.5 million for the year ended December 31, 2006. This increase was
primarily due to the $3.7 million gain on sale of a movie theater that was
wholly owned by us and sold for $15.2 million. This sale was part of a sale
which closed on October 5, 2006 pursuant to which an unrelated party purchased
one movie theater from us and eight movie theaters from two of our joint
ventures. This increase was offset in part by net gains of $1.9 million in the
year ended December 31, 2005 on the sale of five of our properties. The increase
in discontinued operations also resulted from an increase in income from
operations caused by a $469,000 provision for valuation adjustment that was
recorded in the year ended December 31, 2005 against one of the properties which
was sold later in that year.
Comparison of Years Ended December 31, 2005 and December 31, 2004
-----------------------------------------------------------------
Rental Revenues
Rental revenues increased by $6.4 million, or 30.7%, to $27.2 million
for the year ended December 31, 2005 from $20.8 million for the year ended
December 31, 2004. The increase in rental revenues is substantially due to
rental revenues earned during the year ended December 31, 2005 on fourteen
properties acquired by us between March 2004 and November 2005.
Operating Expenses
Depreciation and amortization expense increased by $1.4 million, or
35.4%, to $5.4 million for the year ended December 31, 2005 from $4 million for
the year ended December 31, 2004. The increase in depreciation and amortization
was due to the acquisition of fourteen properties between March 2004 and
November 2005.
General and administrative expenses increased by $1 million, or 32.4%,
to $4.1 million for the year ended December 31, 2005 from $3.1 million for the
year ended December 31, 2004. The increase was due to a number of factors, the
largest of which (totaling $560,000 and representing approximately 55% of the
increase) relates to the fees of Special Counsel retained by our Audit Committee
in connection with its investigation into certain financial dealings of our
former president and chief executive officer. Additional legal fees were
incurred relating to a litigation arising out of the matter involving our former
president and chief executive officer. In addition, for the year ended December
31, 2005 expenses allocated to us under a Shared Services Agreement among us and
various affiliated companies, increased by $228,000, primarily due to an
increase in our level of business activity, including property acquisitions,
mortgage financings, Sarbanes-Oxley Act compliance, and activities related to
the Audit Committee's investigation. Also included in the year ended December
31, 2005 is a $73,000 increase in compensation expense relating to the
restricted stock program established in July 2003. The balance of the increase
in general and administrative expenses for the year ended December 31, 2005, as
compared to the year ended December 31, 2004, is due to increases in a number of
items including auditing expenses, fees relating to our internal control audit,
as required by Section 404 of the Sarbanes-Oxley Act, an increase in directors'
fees (resulting primarily from additional fees to members of our Audit Committee
in connection with its investigation), an increase in directors and officers
liability insurance, and an increase in state taxes. Offsetting these increases
in expenses was a decrease in payroll and payroll related expenses resulting
from the resignation of our president and chief executive officer in July 2005
and a decrease in public company expense as we incurred a listing fee in 2004 in
connection with the listing of our common stock on the New York Stock Exchange.
Real estate expenses decreased by $151,000, or 30.5%, to $344,000 for
the year ended December 31, 2005. This decrease was primarily due to real estate
operating expenses incurred at two vacant properties in 2004, one of which was
sold in 2004 and the other renovated and relet.
Other Income and Expenses
Our equity in earnings of unconsolidated joint ventures decreased by
$767,000, or 26.7%, to $2.1 million for the year ended December 31, 2005 from
$2.9 million for the year ended December 31, 2004. The decrease resulted
primarily from a $2.56 million provision for valuation adjustment taken by one
of our movie theater joint ventures against one of its five properties, of which
50%, or $1.3 million, is our share. The decrease in our equity in earnings of
joint ventures year versus year was also a result of the vacancy (due to the
rejection of the lease by the bankrupt tenant) of a retail property owned by a
joint venture in which we have a 50% equity position, and the sale in 2004 by
this venture of its bankruptcy claim against the former tenant. The decrease in
our equity in earnings of unconsolidated joint ventures was offset in part by
our share of income earned by two joint ventures organized in the second half of
2004. Additionally, in 2005, the operator of one of the movie theaters owned by
one of our joint ventures sold its business to an independent third party, which
sale resulted in the payment to us in 2005 of rental arrearages totaling
$592,000. We have a 50% interest in this joint venture and the payment resulted
in an additional $296,000 in equity earnings to us for the year ended December
31, 2005. An additional increase in equity earnings to us in 2005 resulted from
rent payments from the new tenant of this movie theater and the write off during
the year ended December 31, 2004 of the entire balance of the unbilled rent
receivable relating to this movie theater.
Interest and other income decreased by $72,000, or 18.7% to $314,000
for the year ended December 31, 2005. The primary reason for the decrease was
the receipt by us in 2004 of $134,000 of net acquisition fees from a joint
venture we organized in that year. The net acquisition fee reflects a 50%
reduction based on our ownership in the joint venture. This decrease was offset,
in part, by an increase of $57,000 in interest income earned in 2005 from the
investment of funds obtained from mortgage financings and property sales.
Interest expense increased by $1.6 million, or 19.4%, $1.4 million of
which resulted from mortgages placed on twelve properties between September 2004
and December 2005 and the assumption of a mortgage in connection with the
purchase of one property in November 2004. The increases were offset by a
$432,000 decrease in interest on a mortgage which was paid in full at its
maturity during May 2005. Interest expense related to our line of credit
increased by $229,000 due to borrowings made to facilitate the purchase of
several properties.
On June 30, 2005, we closed on the sale of unused development or "air
rights" relating to our property located in Brooklyn, New York. The purchase
price was approximately $11 million and in addition, the purchaser paid some of
our closing expenses. The financial statement gain of $10.25 million, recognized
in the year ended December 31, 2005, has been deferred for tax purposes since we
entered into a 1031 tax deferred exchange and used the sale proceeds to acquire
an additional property.
Discontinued Operations
In May 2005, we sold a property located in Jupiter, Florida for $16.5
million and recognized a gain of $582,000.
In September 2005, we sold a property located in Cedar Rapids, Iowa for
$1.8 million and recognized a gain of $639,000.
In October 2005, we sold a property located in Houston, Texas for $1.5
million and recognized a gain of $324,000.
In November 2005, we sold a property located in Chattanooga, Tennessee
for $3 million and recognized a gain of $369,000.
During the year ended December 31, 2005, we determined that the
estimated fair value of a property held for sale was lower then the carrying
amount and we recorded a $469,000 provision for the difference. This provision
was in addition to the $366,000 provision on this property recorded by us for
the year ended December 31, 2004. In early 2004, the retail tenant at this
property filed for bankruptcy protection, disaffirmed its lease and vacated the
store. This property was sold for a loss of $9,000 (after giving effect to the
$835,000 in total provisions) in December 2005.
The operations of these five properties that were sold in 2005 and the
one property sold in 2006 and the gain or loss recognized on sale are reported
as discontinued operations. For the year ended December 31, 2005 these six
properties generated net income of $193,000 as compared to net income in the
year ended December 31, 2004 of $3.2 million. The net gain on sale of these five
properties in 2005 was $1.9 million. Accordingly, we reported income from
discontinued operations of $2.1 million for the year ended December 31, 2005 as
compared to $3.2 million for the year ended December 31, 2004, a decrease of
$1.1 million year versus year.
Liquidity and Capital Resources
-------------------------------
Our primary sources of liquidity are cash and cash equivalents, our
revolving credit facility and cash generated from operating activities,
including mortgage financings. We are a party to a credit agreement, as amended,
with VNB New York Corp., Bank Leumi, USA, Manufacturers and Traders Trust
Company and Israel Discount Bank of New York which provides for a $62.5 million
revolving credit facility. The credit facility is available to us to pay down
existing mortgages, to fund the acquisition of additional properties or to
invest in joint ventures. The facility matures on March 31, 2007. Borrowings
under the facility bear interest at the lower of LIBOR plus 2.50% or at the
bank's prime rate and there is an unused facility fee of 1/4% per annum. Net
proceeds received from the sale or refinancing of properties are required to be
used to repay amounts outstanding under the facility if proceeds from the
facility were used to purchase or refinance the property. The facility is
guaranteed by our subsidiaries that own unencumbered properties and is secured
by the outstanding stock of subsidiary entities. As of December 31, 2006 and as
of March 1, 2007, there is no outstanding balance under the facility. We are in
the process of amending our credit facility which will extend the maturity date
from March 31, 2007 to March 31, 2010 and will reduce the interest rate from its
current rate to the lower of LIBOR plus 2.15% or the bank's prime rate. All
other material terms and conditions contained in our current credit facility
will remain the same. We will pay a commitment fee and other expenses of
approximately $650,000 in connection with this amendment.
We are actively engaged in seeking additional property acquisitions and
are involved in various stages of negotiation with respect to the acquisition of
additional net leased properties. We will use our available cash and cash
equivalents, cash provided from operations, cash provided from mortgage
financings and funds available under our credit facility to fund acquisitions.
The following sets forth our contractual cash obligations as of December
31, 2006, which relate to interest and amortization payments and balances due at
maturity under outstanding mortgages secured by our properties for the periods
indicated (amounts in thousands):
Payment due by period
Less than 1-3 4-5 More than
Contractual Obligations Total 1 Year Years Years 5 Years
----------------------- ----- ------ ----- ----- -------
Mortgages and loan payable -
interest and amortization $158,422 $18,432 $38,005 $26,909 $75,076
Mortgages and loan payable -
balances due at maturity 171,302 3,831 8,776 26,817 131,878
------- ----- ----- ------ -------
Total $329,724 $22,263 $46,781 $53,726 $206,954
======== ======= ======= ======= ========
As of December 31, 2006, we had outstanding approximately $228 million in
long-term mortgage and loan indebtedness (excluding mortgage indebtedness of our
unconsolidated joint ventures), all of which is non-recourse (subject to
standard carve-outs). We expect that debt service payments of approximately
$56.4 million due in the next three years will be paid primarily from cash
generated from our operations. We anticipate that loan maturities of
approximately $12.6 million due in the next three years will be paid primarily
from mortgage financings or refinancings. If we are not successful in
refinancing our existing indebtedness or financing our unencumbered properties,
our cash flow, funds available under our credit facility and available cash, if
any, may not be sufficient to repay all maturing debt when payments become due,
and we may be forced to sell additional equity or dispose of properties on
disadvantageous terms.
In addition, we, as ground lessee, are obligated to pay rent under a
ground lease for a property owned in fee by an unrelated third party. The annual
fixed leasehold rent expense is as follows:
More than
Total 2007 2008 2009 2010 2011 5 Years
----- ---- ---- ---- ---- ---- -------
$4,223,976 $237,500 $237,500 $262,240 $296,875 $296,875 $2,892,986
We had no outstanding contingent commitments, such as guarantees of
indebtedness, or any other contractual cash obligations at December 31, 2006.
Cash Distribution Policy
------------------------
We have elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended. To qualify as a REIT, we must meet a number of organizational
and operational requirements, including a requirement that we distribute
currently at least 90% of our ordinary taxable income to our stockholders. It is
our current intention to comply with these requirements and maintain our REIT
status. As a REIT, we generally will not be subject to corporate federal, state
or local income taxes on taxable income we distribute currently (in accordance
with the Internal Revenue Code and applicable regulations) to our stockholders.
If we fail to qualify as a REIT in any taxable year, we will be subject to
federal, state and local income taxes at regular corporate rates and may not be
able to qualify as a REIT for four subsequent tax years. Even if we qualify for
federal taxation as a REIT, we may be subject to certain state and local taxes
on our income and to federal income taxes on our undistributed taxable income
(i.e., taxable income not distributed in the amounts and in the time frames
prescribed by the Internal Revenue Code and applicable regulations thereunder)
and are subject to federal excise taxes on our undistributed taxable income.
It is our intention to pay to our stockholders within the time periods
prescribed by the Internal Revenue Code no less than 90%, and, if possible, 100%
of our annual taxable income, including taxable gains from the sale of real
estate and recognized gains on the sale of securities. It will continue to be
our policy to make sufficient cash distributions to stockholders in order for us
to maintain our REIT status under the Internal Revenue Code.
Off-Balance Sheet Arrangements
------------------------------
We do not have any off-balance sheet arrangements.
Significant Accounting Policies
-------------------------------
Our significant accounting policies are more fully described in Note 2 to
our consolidated financial statements. Certain of our accounting policies are
particularly important to an understanding of our financial position and results
of operations and require the application of significant judgment by our
management; as a result they are subject to a degree of uncertainty. These
significant accounting policies include:
Revenues
Our revenues, which are substantially derived from rental income, include
rental income that our tenants pay in accordance with the terms of their
respective leases reported on a straight line basis over the initial term of
each lease. Since many of our leases provide for rental increases at specified
intervals, straight line basis accounting requires us to record as an asset and
include in revenues, unbilled rent receivables which we will only receive if the
tenant makes all rent payments required through the expiration of the initial
term of the lease. Accordingly, our management must determine, in its judgment,
that the unbilled rent receivable applicable to each specific tenant is
collectible. We review unbilled rent receivables on a quarterly basis and take
into consideration the tenant's payment history, the financial condition of the
tenant, business conditions in the industry in which the tenant is engaged and
economic conditions in the area in which the property is located. In the event
that the collectability of an unbilled rent receivable is in doubt, we would be
required to take a reserve against the receivable or a direct write off of the
receivable, which would have an adverse affect on net income for the year in
which the reserve or direct write off is taken and would decrease total assets
and stockholders' equity.
Value of Real Estate Portfolio
We review our real estate portfolio on a quarterly basis to ascertain if
there has been any impairment in the value of any of our real estate assets in
order to determine if there is any need for a provision for valuation
adjustment. In reviewing the portfolio, we examine the type of asset, the
economic situation in the area in which the asset is located, the economic
situation in the industry in which the tenant is involved and the timeliness of
the payments made by the tenant under its lease, as well as any current
correspondence that may have been had with the tenant, including property
inspection reports. For each real estate asset owned for which indicators of
impairment exist, recognition of impairment is required if the calculated value
is less than the asset's carrying amount. We generally do not obtain any
independent appraisals in determining value but rely on our own analysis and
valuations. Any provision taken with respect to any part of our real estate
portfolio will reduce our net income and reduce assets and stockholders' equity
to the extent of the amount of the valuation adjustment, but it will not affect
our cash flow until such time as the property is sold.
Purchase Accounting for Acquisition of Real Estate
The fair value of the real estate acquired is allocated to the acquired
tangible assets, consisting of land and building, and identified intangible
assets and liabilities, consisting of the value of above-market and below-market
leases and other value of in-place leases based in each case on their fair
values. The fair value of the tangible assets of an acquired property (which
includes land and building) is determined by valuing the property as if it were
vacant, and the "as-if-vacant" value is then allocated to land and building
based on management's determination of relative fair values of these assets. The
allocation made by management may have a positive or negative effect on net
income and may have an effect on the assets and liabilities on the balance
sheet.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk.
----------------------------------------------------------
All of our long-term mortgage debt 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 credit line is a
variable rate facility which is sensitive to interest rates. Therefore, our
primary market risk exposure is the effect of changes in interest rates on the
interest cost of draws on our line of credit. Under current market conditions,
we do not believe that our risk of material potential losses in future earnings,
fair values and/or cash flows from near-term changes in market rates that we
consider reasonably possible is material.
The fair market value (FMV) of our long term debt is estimated based on
discounting future cash flows at interest rates that our management believes
reflect the risks associated with long term debt of similar risk and duration.
The following table sets forth our long-term debt obligations by
scheduled principal cash flow payments and maturity date, weighted average
interest rates and estimated FMV at December 31, 2006 (amounts in thousands):
For the Year Ended December 31
There-
2007 2008 2009 2010 2011 after Total FMV
---- ---- ---- ---- ---- ----- ----- ---
Long term debt $4,717 $12,942 $9,998 $22,264 $ 8,538 $169,464 $227,923 $229,803
Fixed rate
weighted
average
interest rate 6.51% 6.50% 6.50% 6.39% 6.33% 6.33% 6.36% 6.25%
Variable rate - - - - - - - -
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
This information appears in Item 15(a) of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
---------------------
None.
Item 9A. Controls and Procedures.
-----------------------
A review and evaluation was performed by our management, including our
Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this Annual Report on Form
10-K. Based on that review and evaluation, the CEO and CFO have concluded that
our current disclosure controls and procedures, as designed and implemented,
were effective. There have been no significant changes in our internal controls
or in other factors that could significantly affect our internal controls
subsequent to the date of their evaluation. There were no significant material
weaknesses identified in the course of such review and evaluation and,
therefore, we took no corrective measures.
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the
Securities Exchange Act of 1934, as amended, as a process designed by, or under
the supervision of, a company's principal executive and principal financial
officers and effected by a company's board, management and other personnel to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with GAAP and includes those policies and procedures that:
o pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of a company;
o provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that receipts and expenditures of a company are being
made only in accordance with authorizations of management and directors
of a company; and
o provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of a company's assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2006. In making this assessment, our
management used criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on its assessment, our management believes that, as of December
31, 2006, our internal control over financial reporting was effective based on
those criteria.
Our independent registered public accounting firm, Ernst & Young LLP,
has issued an audit report on management's assessment of our internal control
over financial reporting. This report appears on page F1 of this Annual Report
on Form 10-K.
Item 9B. Other Information.
-----------------
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
------------------------------------------------------
We have an amended and restated Code of Business Conduct and Ethics
that applies to all directors, officers and employees, including our principal
executive officer, principal financial officer and principal accounting officer.
You can find our Code of Business Conduct and Ethics on our web site by going to
the following address: www.onelibertyproperties.com. We will post any amendments
to our amended and restated Business Code of Conduct and Ethics as well as any
waivers that are required to be disclosed by the rules of either the Securities
and Exchange Commission or The New York Stock Exchange, on our web site.
Our Board of Directors has adopted Corporate Governance Guidelines and
Charters for the Audit, Compensation and Nominating and Corporate Governance
Committees of the Board of Directors. You can find these documents on our web
site by going to the following address: www.onelibertyproperties.com.
You can also obtain a printed copy of any of the materials referred to
above by contacting us at the following address: One Liberty Properties, Inc.,
60 Cutter Mill Road, Great Neck, New York 11021, Attention: Secretary, telephone
number (1-800-450-5816).
The Audit Committee of our Board of Directors is an "Audit Committee"
for the purposes of Section 3(a) (58) of the Securities Exchange Act of 1934, as
amended. The members of that Committee are Charles Biederman, Chairman, Joseph
A. DeLuca and James J. Burns.
Apart from certain information concerning our executive officers which
is set forth in Part I of this Annual Report, the other information required by
this Item is incorporated herein by reference to the applicable information in
the proxy statement for our 2007 Annual Meeting of Stockholders including the
information set forth under the captions "Election of Directors," "Section 16(a)
Beneficial Ownership Reporting Compliance" and "Governance of the Company."
Item 11. Executive Compensation.
----------------------
The information concerning our executive compensation required by Item
11 shall be included in the Proxy Statement to be filed relating to our 2007
Annual Meeting of Stockholders and is incorporated herein by reference,
including the information set forth under the caption "Executive Compensation,"
"Compensation of Directors," "Compensation Committee Interlocks and Insider
Participation" and "Report of Compensation Committee."
Item 12. Security Ownership of Certain Beneficial Owners and Management and
------------------------------------------------------------------
Related Stockholder Matters.
----------------------------
The information concerning our beneficial owners and management
required by Item 12 shall be included in the Proxy Statement to be filed
relating to our 2007 Annual Meeting of Stockholders and is incorporated herein
by reference, including the information set forth under the caption "Stock
Ownership of Certain Beneficial Owners, Directors and Officers."
Equity compensation plan information is incorporated by reference from
Part II, Item 5, "Market For Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities," of this report.
Item 13. Certain Relationships and Related Transactions.
----------------------------------------------
The information concerning certain relationships, related transactions
and director independence required by Item 13 shall be included in the Proxy
Statement to be filed relating to our 2007 Annual Meeting of Stockholders and is
incorporated herein by reference, including the information set forth under the
caption "Certain Relationships and Related Transactions," and "Governance of the
Company."
Item 14. Principal Accountant Fees and Services.
--------------------------------------
The information concerning our principal accounting fees required by
Item 14 shall be included in the Proxy Statement to be filed relating to our
2007 Annual Meeting of Stockholders and is incorporated herein by reference,
including the information set forth under the caption "Independent Registered
Public Accounting Firm."
PART IV
Item 15. Exhibits and Financial Statement Schedules
------------------------------------------
(a) Documents filed as part of this Report:
(1) The following financial statements of the Company are included in
this Report on Form 10-K:
- Reports of Independent Registered
Public Accounting Firm F-1 through F-2
- Statements:
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6 through F-7
Notes to Consolidated Financial Statements F-8 through F-30
(2) Financial Statement Schedules:
- Schedule III-Real Estate
and Accumulated Depreciation F-31 through F-32
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or the
notes thereto.
(3) Exhibits:
3.1 Articles of Amendment and Restatement of One Liberty Properties, Inc.,
dated July 20, 2004 (incorporated by reference to Exhibit 3.1 to One
Liberty Properties, Inc.'s Form 10-Q for the quarter ended June 30,
2004).
3.2 Articles of Amendment to Restated Articles of Incorporation of One
Liberty Properties, Inc. filed with the State of Assessments and
Taxation of Maryland on June 17, 2005 (incorporated by reference to
Exhibit 3.1 to One Liberty Properties, Inc.'s Form 10-Q for the quarter
ended June 30, 2005).
3.3 Articles of Amendment to Restated Articles of Incorporation of One
Liberty Properties, Inc. filed with the State of Assessments and
Taxation of Maryland on June 21, 2005 (incorporated by reference to
Exhibit 3.2 to One Liberty Properties, Inc.'s Form 10-Q for the quarter
ended June 30, 2005).
3.4 By-Laws of One Liberty Properties, Inc., as amended (incorporated by
reference to Exhibit 3.2 to One Liberty Properties, Inc.'s Form 10-K
for the year ended December 31, 2004).
3.5 Amendment to By-Laws of One Liberty Properties, Inc. (incorporated by
reference to Exhibit 3.1 to One Liberty Properties, Inc.'s Form 8-K
filed on March 14, 2006).
4.1 One Liberty Properties, Inc. 1996 Stock Option Plan (incorporated by
reference to Exhibit 10.5 to One Liberty Properties, Inc.'s
Registration Statement on Form S-2, Registration No. 333-86850, filed
on April 24, 2002 and declared effective on May 24, 2002).
4.2 One Liberty Properties, Inc. 2003 Incentive Plan (incorporated by
reference to Exhibit 4.1 to One Liberty Properties, Inc.'s Registration
Statement on Form S-8 filed on July 15, 2003).
4.3 Form of Common Stock Certificate (incorporated by reference to Exhibit
4.1 to One Liberty Properties, Inc.'s Registration Statement on Form
S-2, Registration No. 333-86850, filed on April 24, 2002 and declared
effective on May 24, 2002).
10.1 Amended and Restated Loan Agreement, dated as of June 4, 2004, by and
among One Liberty Properties, Inc., Valley National Bank, Merchants
Bank Division, Bank Leumi USA, Israel Discount Bank of New York and
Manufacturers and Traders Trust Company (incorporated by reference to
the Exhibit to One Liberty Properties, Inc.'s Form 8-K filed on June 8,
2004).
10.2 Shared Services Agreement, dated as of January 1, 2002, by and among
One Liberty Properties, Inc., Gould Investors L.P., BRT Realty Trust,
Majestic Property Management Corp., Majestic Property Affiliates, Inc.
and REIT Management Corp. (incorporated by reference to Exhibit 15 to
One Liberty Properties, Inc.'s Form 10-K for the year ended December
31, 2002).
10.3 Compensation and Services Agreement, effective as of January 1, 2007,
between One Liberty Properties, Inc. and Majestic Property Management
Corp. (incorporated by reference to Exhibit 10.1 to One Liberty
Properties, Inc.'s Form 8-K filed on March 14, 2007).
10.4 Purchase and Sale Agreement, dated as of November 6, 2006, between FR
Hollins Ferry, LLC and OLP Baltimore (incorporated by reference to
Exhibit 10.1 to One Liberty Properties, Inc.'s Form 8-K filed on
November 8, 2006).
10.5 First Amendment to Purchase and Sale Agreement, dated as of November
21, 2006, between FR Hollins Ferry, LLC and OLP Baltimore (incorporated
by reference to Exhibit 10.1 to One Liberty Properties, Inc.'s Form 8-K
filed on November 27, 2006).
10.6 Second Amendment to Purchase and Sale Agreement, dated as of November
29, 2006, between FR Hollins Ferry, LLC and OLP Baltimore (incorporated
by reference to Exhibit 10.1 to One Liberty Properties, Inc.'s Form 8-K
filed on November 30, 2006).
10.7 Third Amendment to Purchase and Sale Agreement, dated as of December 6,
2006, between FR Hollins Ferry, LLC and OLP Baltimore (incorporated by
reference to Exhibit 10.1 to One Liberty Properties, Inc.'s Form 8-K/A
filed on December 11, 2006).
10.8 Contract of Sale, dated as of June 12, 2006, between OLP Brooklyn
Pavillion, LLC and HID Acquisition Group, LLC (incorporated by
reference to Exhibit 10.1 to One Liberty Properties, Inc.'s Form 8-K
filed on June 16, 2006).
10.9 Contract of Sale, dated as of June 14, 2006, by and among OLP Chula
Vista Corp., OLP Norwalk LLC, OLP Austell, LLC, OLP Beavercreek LLC,
OLP Southlake, LLC, OLP Roanoke, LLC, OLP Lubbock Venture Limited
Partnership, OLP Live Oak Limited Partnership, OLP Henrietta, LLC and
ECM Diversified Income & Growth Fund, LLC (incorporated by reference to
Exhibit 10.2 to One Liberty Properties, Inc.'s Form 8-K filed on June
16, 2006).
10.10 First Amendment to Contract of Sale, dated as of July 20, 2006, by and
among OLP Chula Vista Corp., OLP Norwalk LLC, OLP Austell, LLC, OLP
Beavercreek LLC, OLP Southlake, LLC, OLP Roanoke, LLC, OLP Lubbock
Venture Limited Partnership, OLP Live Oak Limited Partnership, OLP
Henrietta, LLC and ECM Diversified Income & Growth Fund, LLC
(incorporated by reference to Exhibit 10.1 to One Liberty Properties,
Inc.'s Form 8-K filed on August 1, 2006).
10.11 Amendment to Contract of Sale, dated as of July 26, 2006, by and among
OLP Chula Vista Corp., OLP Norwalk LLC, OLP Austell, LLC, OLP
Beavercreek LLC, OLP Southlake, LLC, OLP Roanoke, LLC, OLP Lubbock
Venture Limited Partnership, OLP Live Oak Limited Partnership, OLP
Henrietta, LLC and ECM Diversified Income & Growth Fund, LLC
(incorporated by reference to Exhibit 10.2 to One Liberty Properties,
Inc.'s Form 8-K filed on August 1, 2006).
10.12 Amendment to Contract of Sale, dated as of August 9, 2006, by and among
OLP Chula Vista Corp., OLP Norwalk LLC, OLP Austell, LLC, OLP
Beavercreek LLC, OLP Southlake, LLC, OLP Roanoke, LLC, OLP Lubbock
Venture Limited Partnership, OLP Live Oak Limited Partnership, OLP
Henrietta, LLC and ECM Diversified Income & Growth Fund, LLC
(incorporated by reference to Exhibit 10.1 to One Liberty Properties,
Inc.'s Form 8-K filed on August 10, 2006).
10.13 Purchase and Sale Agreement, dated as of November 22, 2005, between OLP
Haverty's LLC and HAVERTACQ 11 LLC (incorporated by reference to
Exhibit 10.1 to One Liberty Properties, Inc.'s Form 8-K filed on
November 23, 2005).
14.1 Code of Business Conduct and Ethics (incorporated by reference to
Exhibit 14.1 to One Liberty Properties, Inc.'s Form its 8-K filed on
March 14, 2006).
21.1 Subsidiaries of Registrant*
23.1 Consent of Ernst & Young LLP*
31.1 Certification of Chairman of the Board and Chief Executive Officer*
31.2 Certification of President*
31.3 Certification of Senior Vice President and Chief Financial Officer*
32.1 Certification of Chairman of the Board and Chief Executive Officer*
32.2 Certification of President*
32.3 Certification of Senior Vice President and Chief Financial Officer*
* Filed herewith
[PG NUMBER]
F-45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf of the undersigned, thereunto duly authorized.
ONE LIBERTY PROPERTIES, INC.
By: /s/ Patrick J. Callan, Jr.
---------------------------
Patrick J. Callan, Jr.
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Fredric H. Gould Chairman of the
-------------------- Board of Directors March 14, 2007
Fredric H. Gould and Chief Executive Officer
/s/ Patrick J. Callan, Jr. President and
-------------------------- Director March 14, 2007
Patrick J. Callan, Jr.
/s/ Joseph A. Amato
-------------------
Joseph A. Amato Director March 14, 2007
/s/ Charles Biederman
---------------------
Charles Biederman Director March 14, 2007
/s/ James J. Burns
------------------
James J. Burns Director March 14, 2007
/s/ Jeffrey A. Gould
--------------------
Jeffrey A. Gould Director March 14, 2007
/s/ Matthew J. Gould
--------------------
Matthew J. Gould Director March 14, 2007
/s/ Marshall Rose
-----------------
Marshall Rose Director March 14, 2007
/s/ Joseph De Luca
------------------
Joseph De Luca Director March 14, 2007
/s/ J. Robert Lovejoy
--------------------
J. Robert Lovejoy Director March 14, 2007
/s/ Eugene I. Zuriff
-------------------
Eugene I. Zuriff Director March 14, 2007
/s/ David W. Kalish
-------------------
David W. Kalish Senior Vice President and
Chief Financial Officer March 14, 2007
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
One Liberty Properties, Inc. and Subsidiaries
We have audited management's assessment, included in the accompanying Management
Report on Internal Control over Financial Reporting in Item 9A, Controls and
Procedures, of Form 10K, that One Liberty Properties, Inc. and Subsidiaries (the
"Company") maintained effective internal control over financial reporting as of
December 31, 2006, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the COSO criteria. Also, in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006, based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
One Liberty Properties, Inc. and Subsidiaries as of December 31, 2006 and 2005,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2006 of
the Company and our report dated March 14, 2007 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
New York, New York
March 14, 2007
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
One Liberty Properties, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of One Liberty
Properties, Inc. and Subsidiaries (the "Company") as of December 31, 2006 and
2005, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2006. Our audits also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of One Liberty
Properties, Inc. and Subsidiaries at December 31, 2006 and 2005, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2006, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of One Liberty
Properties, Inc. and Subsidiaries' internal control over financial reporting as
of December 31, 2006, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 14, 2007 expressed an unqualified
opinion thereon.
/s/ Ernst & Young LLP
New York, New York
March 14, 2007
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in Thousands, Except Per Share Data)
ASSETS
December 31,
------------
2006 2005
---- ----
Real estate investments, at cost
Land $ 72,431 $ 53,846
Buildings and improvements 307,679 226,200
------- --------
380,110 280,046
Less accumulated depreciation 28,269 21,924
-------- ---------
351,841 258,122
Investment in unconsolidated joint ventures 7,014 27,335
Cash and cash equivalents 34,013 26,749
Restricted cash 7,409 -
Unbilled rent receivable 8,218 6,613
Escrow, deposits and other receivables 2,251 4,027
Investment in BRT Realty Trust at market (related party) 831 717
Deferred financing costs 3,062 2,822
Other assets (including available-for-sale securities
at market of $1,372 and $163) 2,145 744
Unamortized intangible lease assets 5,253 3,454
-------- --------
$422,037 $330,583
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgages and loan payable $227,923 $167,472
Dividends payable 3,587 3,255
Accrued expenses and other liabilities 4,391 3,554
Unamortized intangible lease liabilities 6,011 783
-------- --------
Total liabilities 241,912 175,064
-------- --------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $1 par value; 12,500 shares authorized;
none issued - -
Common Stock, $1 par value; 25,000 shares authorized;
9,823 and 9,770 shares issued and outstanding 9,823 9,770
Paid-in capital 134,826 134,645
Accumulated other comprehensive income - net unrealized
gain on available-for-sale securities 935 818
Unearned compensation - (1,250)
Accumulated undistributed net income 34,541 11,536
-------- --------
Total stockholders' equity 180,125 155,519
-------- --------
$422,037 $330,583
======== ========
See accompanying notes.
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Amounts in Thousands, Except Per Share Data)
Year Ended December 31,
-----------------------
2006 2005 2004
---- ---- ----
Revenues:
Rental income $33,370 $27,232 $20,833
------- ------- -------
Operating expenses:
Depreciation and amortization 6,995 5,432 4,013
General and administrative (including $1,317, $1,208,
and $980, respectively, to related party) 5,250 4,140 3,127
Federal excise tax 490 - -
Real estate expenses 270 344 495
Leasehold rent 308 308 119
-------- -------- --------
Total operating expenses 13,313 10,224 7,754
-------- -------- --------
Operating income 20,057 17,008 13,079
Other income and expenses:
Equity in (loss) earnings of unconsolidated joint ventures (3,276) 2,102 2,869
Gain on dispositions of real estate of
unconsolidated joint ventures 26,908 - -
Interest and other income 899 314 386
Interest:
Expense (12,524) (9,764) (8,175)
Amortization of deferred financing costs (595) (726) (499)
Gain on sale of air rights (2005) and other gains 228 10,248 60
Gain on sale of real estate 185 - 13
-------- -------- --------
Income from continuing operations 31,882 19,182 7,733
-------- -------- --------
Discontinued operations:
Income from operations 883 193 3,241
Net gain on sale 3,660 1,905 -
-------- -------- --------
Income from discontinued operations 4,543 2,098 3,241
-------- -------- --------
Net income $36,425 $21,280 $10,974
======= ======= =======
Weighted average number of common shares outstanding:
Basic 9,931 9,838 9,728
===== ===== =====
Diluted 9,934 9,843 9,744
===== ===== =====
Net income per common share - basic and diluted:
Income from continuing operations $ 3.21 $ 1.95 $ .80
Income from discontinued operations .46 .21 .33
------ ------ ------
Net income per common share $ 3.67 $ 2.16 $ 1.13
====== ====== ======
Cash distributions per share of common stock $ 1.35 $ 1.32 $ 1.32
====== ====== ======
See accompanying notes.
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Three Years Ended December 31, 2006
(Amounts in Thousands, Except Per Share Data)
Accum-
ulated Accum-
Other ulated
Compre- Unearned Undis-
Preferred Common Paid-in hensive Compen- tributed
Stock Stock Capital Income sation Net Income Total
----- ----- ------- ------ ------ ---------- -----
Balances, December 31, 2003 $ - $ 9,605 $130,863 $ 823 $ (447) $ 5,125 $145,969
Distributions - Common Stock
($1.32 per share) - - - - - (12,853) (12,853)
Exercise of options - 49 543 - - - 592
Shares issued through dividend
reinvestment plan - 72 1,247 - - - 1,319
Issuance of restricted stock - - 699 - (699) - -
Restricted stock vesting - 2 (2) - - - -
Compensation expense -
restricted stock - - - - 220 - 220
Net income - - - - - 10,974 10,974
Other comprehensive income -
net unrealized loss on available-
for-sale securities - - - (106) - - (106)
-------
Comprehensive income - - - - - - 10,868
-------- ------- -------- -------- ------- -------- --------
Balances, December 31, 2004 - 9,728 133,350 717 (926) 3,246 146,115
Distributions - Common Stock
($1.32 per share) - - - - - (12,990) (12,990)
Exercise of options - 11 109 - - - 120
Shares issued through dividend
reinvestment plan - 31 569 - - - 600
Issuance of restricted stock - - 617 - (617) - -
Compensation expense -
restricted stock - - - - 293 - 293
Net income - - - - - 21,280 21,280
Other comprehensive income -
net unrealized gain on available-
for-sale securities - - - 101 - - 101
--------
Comprehensive income - - - - - - 21,381
-------- ------- -------- -------- ------- ------- --------
Balances, December 31, 2005 - 9,770 134,645 818 (1,250) 11,536 155,519
Reclassification - upon the adoption
of FASB No. 123(R) - - (1,250) - 1,250 - -
Distributions - Common Stock
($1.35 per share) - - - - - (13,420) (13,420)
Exercise of options - 9 101 - - - 110
Shares issued through dividend
reinvestment plan - 44 815 - - - 859
Compensation expense -
restricted stock - - 515 - - - 515
Net income - - - - - 36,425 36,425
Other comprehensive income -
net unrealized gain on available-
for-sale securities - - - 117 - - 117
--------
Comprehensive income - - - - - - 36,542
--------- -------- -------- -------- -------- -------- --------
Balances, December 31, 2006 $ - $ 9,823 $134,826 $ 935 $ - $ 34,541 $180,125
========= ======== ======== ======== ========= ======== ========
See accompanying notes.
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in Thousands)
Year Ended December 31,
----------------------------------------------
2006 2005 2004
---- ---- ----
Cash flows from operating activities:
Net income $36,425 $21,280 $ 10,974
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of real estate, air rights and other (4,181) (12,152) (75)
Increase in rental income from straight-lining of rent (1,763) (1,311) (1,037)
(Increase) decrease in rental income from amortization
of intangibles relating to leases (187) 29 43
Provision for valuation adjustment - 469 366
Amortization of restricted stock expense 515 293 220
Gain on dispositions of real estate related to
unconsolidated joint ventures (26,908) - -
Equity in loss (earnings) of unconsolidated joint ventures 3,276 (2,102) (2,869)
Distributions of earnings from unconsolidated joint ventures 24,165 3,108 2,775
Depreciation and amortization 7,091 5,905 4,758
Amortization of financing costs 600 758 503
Changes in assets and liabilities:
Increase in escrow, deposits and other receivables (945) (1,640) (848)
Increase in accrued expenses and other liabilities 839 132 891
--------- -------- --------
Net cash provided by operating activities 38,927 14,769 15,701
--------- -------- --------
Cash flows from investing activities:
Purchase of real estate and improvements (79,636) (59,427) (49,734)
Net proceeds from sale of real estate, air rights and other 16,228 34,114 1,302
Investment in unconsolidated joint ventures (1,553) (282) (13,149)
Distributions of return of capital from unconsolidated
joint ventures 21,264 9,084 662
Net proceeds from sale of available-for-sale securities 348 5 4
Purchase of available-for-sale securities (1,364) - -
--------- -------- --------
Net cash used in investing activities (44,713) (16,506) (60,915)
--------- -------- --------
Cash flows from financing activities:
(Repayments) proceeds from bank line of credit, net - (7,600) 7,600
Proceeds from mortgages payable 37,564 64,706 12,150
Payment of financing costs (916) (1,172) (949)
Repayment of mortgages payable (4,070) (21,253) (2,368)
Increase in restricted cash (7,409) - -
Cash distributions - Common Stock (13,088) (12,966) (13,023)
Exercise of stock options 110 120 592
Issuance of shares through dividend reinvestment plan 859 600 1,319
-------- -------- --------
Net cash provided by financing activities 13,050 22,435 5,321
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 7,264 20,698 (39,893)
Cash and cash equivalents at beginning of year 26,749 6,051 45,944
------- ------- --------
Cash and cash equivalents at end of year $34,013 $26,749 $ 6,051
======= ======= ========
Continued on next page
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Amounts in Thousands)
Year Ended December 31,
----------------------------------------------
2006 2005 2004
---- ---- ----
Supplemental disclosures of cash flow information:
Cash paid during the year for interest expense $12,576 $10,150 $ 8,347
Cash paid during the year for income taxes 16 15 18
Supplemental schedule of non-cash investing and financing activities:
Assumption of mortgages payable in connection with
purchase of real estate $26,957 $ - $ 9,854
Purchase accounting allocations (3,346) 1,655 1,105
Reclassification of 2005 deposit in connection
with purchase of real estate 2,525 - -
Additions to real estate included in other liabilities - - (1,413)
See accompanying notes.
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2006
NOTE 1 - ORGANIZATION AND BACKGROUND
One Liberty Properties, Inc. (the "Company") was incorporated in 1982 in the
state of Maryland. The Company is a self-administered and self-managed real
estate investment trust ("REIT"). The Company acquires, owns and manages a
geographically diversified portfolio of retail, including retail furniture
stores, industrial, office, health and fitness and other properties, a
substantial portion of which are under long-term net leases. As of December 31,
2006, the Company owned sixty-five properties, held a 50% tenancy in common
interest in one property and participated in seven joint ventures that owned a
total of six properties, including two properties that were held for sale.
The seventy-two properties are located in twenty-eight states.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of One Liberty
Properties, Inc. and its wholly-owned subsidiaries. One Liberty Properties,
Inc. and its subsidiaries are hereinafter referred to as the Company.
Material intercompany items and transactions have been eliminated.
Investment in Unconsolidated Joint Ventures
The Company accounts for its investments in unconsolidated joint ventures under
the equity method of accounting as the Company (1) is primarily the managing
member but does not exercise substantial operating control over these entities
pursuant to EITF 04-05, and (2) such entities are not variable-interest entities
pursuant to FASB Interpretation No. 46R, "Consolidation of Variable Interest
Entities". These investments are recorded initially at cost, as investments in
unconsolidated joint ventures, and subsequently adjusted for equity in earnings
and cash contributions and distributions. Any difference between the carrying
amount of these investments on the balance sheet of the Company and the
underlying equity in net assets is amortized as an adjustment to equity in
earnings of unconsolidated joint ventures over 40 years. See Note 4. None of the
joint venture debt is recourse to the Company.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Management believes that the estimates and assumptions that are most important
to the portrayal of the Company's financial condition and results of operations,
in that they require management's most difficult, subjective or complex
judgments, form the basis of the accounting policies deemed to be most
significant to the Company. These significant accounting policies relate to
revenues and the value of the Company's real estate portfolio. Management
believes its estimates and assumptions related to these significant accounting
policies are appropriate under the circumstances; however, should future events
or occurrences result in unanticipated consequences, there could be a material
impact on the Company's future financial condition or results of operations.
Revenue Recognition
Rental income includes the base rent that each tenant is required to pay in
accordance with the terms of their respective leases reported on a straight-line
basis over the initial term of the lease. Some of the leases provide for
additional contingent rental revenue in the form of percentage rents and
increases based on the
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
consumer price index. The percentage rents are based upon the level of sales
achieved by the lessee and are recorded once the required sales levels are
reached.
Gains or losses on disposition of properties are recorded when the criteria for
recognizing such gains or losses under generally accepted accounting principles
have been met.
Purchase Accounting for Acquisition of Real Estate
In accordance with Statement of Financial Accounting Standards No. 141, or SFAS
141, "Business Combinations," the Company allocates the purchase price of real
estate to land and building and intangibles, such as the value of above, below
and at-market leases and origination costs associated with in-place leases. The
Company depreciates the amount allocated to building and intangible assets or
liabilities over their estimated useful lives, which generally range from two to
forty years. The values of the above and below market leases are amortized and
recorded as either an increase (in the case of below market leases) or a
decrease (in the case of above market leases) to rental income over the
remaining term of the associated lease. The tenant improvements and origination
costs are amortized as an expense over the remaining life of the lease. The
Company assesses fair value of the leases based on estimated cash flow
projections that utilize appropriate discount rates and available market
information. With respect to the Company's acquisition of a property in December
2006, the fair value of its in-place lease and other intangibles have been
allocated on a preliminary basis and is subject to change.
As a result of its evaluation under SFAS 141 of the acquisitions made, the
Company recorded additional deferred intangible lease assets of $2,210,000 and
$1,732,000, representing the value of the acquired above market leases and
assumed lease origination costs for the years ended December 31, 2006 and 2005,
respectively. The Company also recorded additional deferred intangible lease
liabilities of $5,556,000 and $77,000, representing the value of the acquired
below market leases for the years ended December 31, 2006 and 2005,
respectively. The Company recognized a net increase in rental revenue of
$187,000 for the amortization of the above/below market leases for the year
ended 2006 and recognized a net reduction in rental revenue of $29,000 for the
amortization of the above/below market leases for the year ended 2005. The
Company recognized amortization expense of $233,000 and $150,000 relating to
lease origination costs, resulting from the reallocation of the purchase price
of the acquired properties for the years ended 2006 and 2005, respectively. At
December 31, 2006 and 2005, accumulated amortization of intangible lease assets
was $758,000 and $385,000, respectively. At December 31, 2006 and 2005,
accumulated amortization of intangible lease liabilities was $448,000 and
$119,000, respectively.
The unamortized balance of intangible lease assets at December 31, 2006 will be
deducted from future operations through 2025 as follows:
2007 $ 460,000
2008 454,000
2009 441,000
2010 441,000
2011 441,000
Thereafter 3,016,000
----------
$5,253,000
==========
The unamortized balance of intangible lease liabilities at December 31, 2006
will be added to future operations through 2022 as follows:
2007 $ 438,000
2008 404,000
2009 404,000
2010 404,000
2011 404,000
Thereafter 3,957,000
----------
$6,011,000
==========
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities of three
months or less when purchased.
Restricted Cash
Restricted cash consists of a cash deposit as required by a certain loan payable
for collateral. (See Note 5.)
Escrow, Deposits and Other Receivables
Includes $815,000 and $883,000 at December 31, 2006 and 2005, respectively, of
restricted cash relating to real estate taxes, insurance and other escrows.
Depreciation and Amortization
Depreciation of buildings and improvements is computed on the straight-line
method over an estimated useful life of 40 years for commercial properties and
27 1/2 years for its residential property. Depreciation ceases when a property
is deemed "held for sale". Leasehold interest is amortized over the initial
lease term of the leasehold position. Depreciation expense, including
amortization of the leasehold position, amounted to $6,762,000, $5,282,000 and
$3,868,000 for the three years ended December 31, 2006, 2005 and 2004,
respectively.
Leasehold Rent
Ground lease payments on a leasehold position are computed on the straight line
method.
Deferred Financing Costs
Mortgage and credit line costs are deferred and amortized on a straight-line
basis over the terms of the respective debt obligations, which approximates the
effective interest method. At December 31, 2006 and 2005, accumulated
amortization of such costs was $1,939,000 and $1,367,000, respectively.
Federal Income Taxes
The Company has qualified as a real estate investment trust under the applicable
provisions of the Internal Revenue Code. Under these provisions, the Company
will not be subject to federal income taxes on amounts distributed to
stockholders providing it distributes substantially all of its taxable income
and meets certain other conditions.
Distributions made during 2006 and 2005 included approximately -0-% and 18%,
respectively, to be treated by the stockholders as return of capital and 67% and
5%, respectively, as capital gain distributions, with the balance to be treated
as ordinary income.
Investment in Equity Securities
The Company determines the appropriate classification of equity securities at
the time of purchase and reassesses the appropriateness of the classification at
each reporting date. At December 31, 2006, all marketable securities have been
classified as available-for-sale and, as a result, are stated at fair value.
Unrealized gains and losses on available-for-sale securities are recorded as
accumulated other comprehensive income in the stockholders' equity section.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company's investment in 30,048 common shares of BRT Realty Trust ("BRT"), a
related party of the Company, (accounting for less than 1% of the total voting
power of BRT), purchased at a cost of $97,000, has a fair market value at
December 31, 2006 of $831,000. At December 31, 2006, the total cumulative
unrealized gain of $935,000 on all investments in equity securities is reported
as accumulated other comprehensive income in the stockholders' equity section.
Realized gains and losses are determined using the average cost method and is
included in "Interest and other income" on the income statement. During 2006,
2005 and 2004, sales proceeds and gross realized gains and losses on securities
classified as available-for-sale were:
2006 2005 2004
---- ---- ----
Sales proceeds $348,000 $ 5,000 $ 4,000
======== ========= ==========
Gross realized losses $ 3,000 $ 1,000 $ -
======== ========= ==========
Gross realized gains $111,000 $ - $ 2,000
======== ========= ==========
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for these instruments approximate their fair values.
Restricted cash: The carrying amount reported in the balance sheet for this
instrument approximates its fair value.
Investment in equity securities: Since these investments are considered
"available-for-sale", they are reported in the balance sheet based upon quoted
market prices.
Mortgages and loan payable: At December 31, 2006, the estimated fair value of
the Company's mortgages and loan payable exceeded their carrying value by
approximately $1,880,000, assuming a market interest rate of 6.25%.
Considerable judgment is necessary to interpret market data and develop
estimated fair value. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
Concentration of Credit Risk
The Company maintains accounts at various financial institutions. While the
Company attempts to limit any financial exposure, its deposit balances may, at
times, exceed federally insured limits. The Company has not experienced any
losses on such accounts.
While the Company's properties are located in twenty-eight states, 17.9%, 17.6%
and 22.8% of the Company's rental revenues were attributable to properties
located in Texas and 17.2%, 20.2% and 25.6% of the Company's rental revenues
were attributable to properties located in New York for the years ended December
31, 2006, 2005 and 2004, respectively. No other state contributed over 10% to
the Company's rental revenues.
On April 7, 2006, the Company acquired eleven retail furniture stores, located
in six states, net leased to a single tenant pursuant to a master lease. The
basic term of the net lease expires August 14, 2022, with several renewal
options. For the year ended December 31, 2006, these properties generated rental
revenues of $3,559,000, or 10.7% of the Company's total revenues. No tenant
contributed over 10% of the Company's rental revenues for the years ended
December 31, 2005 and 2004.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Common Share
Basic earnings per share was determined by dividing net income applicable to
common stockholders for each year by the weighted average number of shares of
Common Stock outstanding during each year.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts exercisable for or convertible into Common Stock
were exercised or converted or resulted in the issuance of Common Stock that
then shared in the earnings of the Company. Diluted earnings per share was
determined by dividing net income applicable to common stockholders for each
year by the total of the weighted average number of shares of Common Stock
outstanding plus the dilutive effect of the Company's outstanding options
(2,315, 4,738 and 16,288 shares for the years ended 2006, 2005 and 2004,
respectively) using the treasury stock method.
Accounting for Long-Lived Assets and Impairment of Real Estate Owned
The Company reviews each real estate asset owned for which indicators of
impairment are present to determine whether the carrying amount of the asset
will be recovered. Recognition of impairment is required if the aggregate future
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Measurement is based upon the fair market value of
the asset determined by applying the appropriate capitalization rate in the area
in which the property is located, and applying such capitalization rate to the
net operating income derived from that asset. Real estate assets that are
expected to be disposed of are valued at the lower of carrying amount or fair
value less costs to sell on an individual asset basis.
During the year ended December 31, 2004, the Company determined that the
estimated fair value of a retail property, where the tenant filed for bankruptcy
protection and vacated the premises, was lower than its carrying value and
recorded a $366,000 provision for the difference. At June 30, 2005, the Company
wrote down the asset by an additional $469,000 based on an updated evaluation of
market conditions in the geographic area in which the property is located. The
provisions were recorded as direct write-downs of the investment on the balance
sheet and depreciation was calculated using the new basis. The Company sold this
property in December 2005 and recognized a loss of $9,000.
During the year ended December 31, 2005, one of the Company's joint ventures
determined that the fair value of one of the five properties owned by it was
lower than its carrying value and recorded a provision for valuation adjustment
of $2,562,000, of which the Company's share was $1,281,000. During the year
ended December 31, 2006, the joint venture wrote down the property by an
additional $600,000 based on an updated evaluation of market conditions in the
geographic area in which the property is located, of which the Company's share
was $300,000. The provisions were recorded as direct write downs on the balance
sheet of the joint venture.
During the year ended December 31, 2006, another of the Company's joint ventures
determined that the fair value of a vacant property owned by it was lower than
its carrying value and recorded a provision for valuation adjustment of
$960,000, of which the Company's share was $480,000. The provision was based on
an evaluation of market conditions in the area in which the property is located.
The provision was recorded as a direct write down on the balance sheet of the
joint venture.
In accordance with FIN 47, "Accounting for Conditional Asset Retirement
Obligations", the Company records a conditional asset retirement obligation
("CARO") if the liability can be reasonable estimated. A CARO is an obligation
that is settled at the time the asset is retired or disposed of and for which
the timing and/or method of settlement are conditional on future events. The
Company currently does not have any known conditions that would require
remediation.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Segment Reporting
Virtually all of the Company's real estate assets are comprised of real estate
owned that is net leased to tenants on a long-term basis. Therefore, the Company
operates predominantly in one industry segment.
Consolidation of Variable Interest Entities
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities", which
explains how to identify variable interest entities ("VIE") and how to assess
whether to consolidate such entities. In December 2003, a revision was issued
(46R) to clarify some of the original provisions. Management has reviewed its
unconsolidated joint ventures and determined that none represent variable
interest entities which would require consolidation by the Company pursuant to
the interpretation.
Share Based Compensation
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123R, "Share-Based Payments", effective January 1, 2006.
SFAS No. 123R established financial accounting and reporting standards for
stock-based employee compensation plans, including all arrangements by which
employees receive shares of stock or other equity instruments of the employer,
or the employer incurs liabilities to employees in amounts based on the price of
the employer's stock. The statement also defined a fair value based method of
accounting for an employee stock option or similar equity instrument whereby the
fair-value is recorded based on the market value of the common stock on the
grant date and is amortized to general and administrative expense over the
respective vesting periods.
New Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes" ("FIN 48"). This interpretation, among other things, creates a
two step approach for evaluating uncertain tax positions. Recognition (step one)
occurs when an enterprise concludes that a tax position, based solely on its
technical merits, is more-likely-than-not to be sustained upon examination.
Measurement (step two) determines the amount of benefit that
more-likely-than-not will be realized upon settlement. Derecognition of a tax
position that was previously recognized would occur when a company subsequently
determines that a tax position no longer meets the more-likely-than-not
threshold of being sustained. FIN 48 specifically prohibits the use of a
valuation allowance as a substitute for derecognition of tax positions, and it
has expanded disclosure requirements. FIN 48 is effective for fiscal years
beginning after December 15, 2006, in which the impact of adoption should be
accounted for as a cumulative-effect adjustment to the beginning balance of
retained earnings. The Company is evaluating FIN 48 and has not yet determined
the impact the adoption will have on the consolidated financial statements, but
it is not expected to be significant.
In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 provides guidance for using fair value to measure
assets and liabilities. This statement clarifies the principle that fair value
should be based on the assumptions that market participants would use when
pricing the asset or liability. SFAS No.157 establishes a fair value hierarchy,
giving the highest priority to quoted prices in active markets and the lowest
priority to unobservable data. SFAS No. 157 applies whenever other standards
require assets or liabilities to be measured at fair value. This statement is
effective in fiscal years beginning after November 15, 2007. The Company is
evaluating SFAS No. 157 and has not yet determined the impact the adoption will
have on the consolidated financial statements, but it is not expected to be
significant.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108 ("SAB 108"), which became effective for the fiscal
year ended December 31, 2006. SAB 108 provides guidance on the consideration of
the effects of prior period misstatements in quantifying current year
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
misstatements for the purpose of a materiality assessment. SAB 108 provides for
the quantification of the impact of correcting all misstatements, including both
the carryover and reversing effects of prior year misstatements, on the current
year financial statements. If a misstatement is material to the current year
financial statements, the prior year financial statements should also be
corrected, even though such revision was, and continues to be, immaterial to the
prior year financial statements. Correcting prior year financial statements for
immaterial errors would not require previously filed reports to be amended. Such
correction should be made in the current period filings. The adoption of SAB No.
108 did not have a material effect on the consolidated financial statements.
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159") SFAS No. 159
provides companies with an option to report selected financial assets and
liabilities at fair value. The Standard's objective is to reduce both complexity
in accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. The FASB believes that
SFAS No. 159 helps to mitigate this type of accounting-induced volatility by
enabling companies to report related assets and liabilities at fair value, which
would likely reduce the need for companies to comply with detailed rules for
hedge accounting. SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and liabilities.
SFAS No. 159 is effective as of the beginning of an entity's first fiscal year
beginning after November 15, 2007. Early adoption is permitted as of the
beginning of the previous fiscal year provided that the entity makes that choice
in the first 120 days of that fiscal year and also elects to apply the
provisions of SFAS No. 157. The Company is evaluating SFAS No. 159 and has not
yet determined the impact the adoption will have on the consolidated financial
statements, but it is not expected to be significant.
Reclassification
Certain amounts reported in previous financial statements have been reclassified
in the accompanying financial statements to conform to the current year's
presentation primarily to present discontinued operations for the sale of a
property in 2006.
NOTE 3 - REAL ESTATE INVESTMENTS AND MINIMUM FUTURE RENTALS
During the year ended December 31, 2006, the Company purchased twenty-two single
tenant properties in eleven states for a total consideration of $111,872,000.
The rental properties owned at December 31, 2006 are leased under noncancellable
operating leases to corporate tenants with current expirations ranging from 2007
to 2038, with certain tenant renewal rights. Virtually all of the lease
agreements are net lease arrangements which require the tenant to pay not only
rent but all the expenses of the leased property including maintenance, taxes,
utilities and insurance. Certain lease agreements provide for periodic rental
increases and others provide for increases based on the consumer price index.
The minimum future rentals to be received over the next five years and
thereafter on the operating leases in effect at December 31, 2006 are as
follows:
Year Ending
December 31, (In Thousands)
------------ --------------
2007 $ 36,092
2008 35,944
2009 34,951
2010 35,239
2011 34,065
Thereafter 260,525
--------
Total $436,816
========
NOTE 3 - REAL ESTATE INVESTMENTS AND MINIMUM FUTURE RENTALS (Continued)
Included in the minimum future rentals are rentals from a property owned in fee
(ground lease) by an unrelated third party. The Company pays annual fixed
leasehold rent of $237,500 through July 2009 with 25% increases every five years
through March 3, 2020 and has a right to extend the lease for up to five 5-year
and one seven month renewal options.
At December 31, 2006, the Company has recorded an unbilled rent receivable
aggregating $8,218,000, representing rent reported on a straight-line basis in
excess of rental payments required under the initial term of the respective
leases. This amount is to be billed and received pursuant to the lease terms
during the next nineteen years. The minimum future rentals presented above
include amounts applicable to the repayment of these unbilled rent receivables.
Sales of Air Rights, Other and Real Estate
During July 2006, the Company sold excess acreage to an unrelated third party
for a sales price of $975,000 and realized a gain of $185,000.
During February 2006, the Company sold an option it owned to buy an interest in
certain property adjacent to one of the Company's properties and realized a gain
of $228,000.
In June 2005, the Company sold the unused development or "air" rights relating
to a property located in Brooklyn, New York for a sales price of approximately
$11,000,000, which resulted in a gain after closing costs of $10,248,000 for
financial statement purposes. This gain has been deferred for federal tax
purposes in accordance with Section 1031 of the Internal Revenue Code of 1986,
as amended. (See Note 8 for the related party fee paid as a result of this
sale).
In August 2004, the Company realized a gain of $60,000 resulting from its grant
of an underground easement to a power company at one of its properties. In July
2004, the Company sold a retail property, which had been vacant since February
2003, for a sales price of $1,340,000 and realized a gain of $13,000. The net
operating loss for the property was $74,000 for the year ended December 31,
2004.
Unaudited Pro Forma Information
On April 7, 2006, the Company acquired eleven retail furniture stores, located
in six states, leased to a single tenant pursuant to a master lease. The
properties were acquired for a purchase price, before closing costs, of
approximately $51,200,000, with approximately $22,250,000 paid in cash,
$2,000,000 borrowed under the Company's line of credit and the remainder through
the assumption of a mortgage of approximately $26,957,000. The basic term of the
net lease expires August 14, 2022, with several renewal options. As a result of
its evaluation of this acquisition under SFAS 141 and 142, the Company recorded
a deferred asset of $843,000, representing assumed lease origination costs and
it also recorded a deferred liability of $5,112,000 representing the net value
of the acquired below market lease. These deferred amounts will be written off
over the initial lease term and the Company will recognize additional rental
income from the amortization of the deferred liability and additional
amortization expense relating to the amortization of the deferred lease
origination costs.
On December 20, 2006, the Company acquired an industrial property located in
Baltimore, Maryland, leased to a single tenant. The property was acquired for a
purchase price of approximately $32,200,000, with approximately $9,200,000 paid
in cash and the remainder through a mortgage of approximately $23,000,000. The
basic term of the net lease expires March 2022, with several renewal options. As
a result of its preliminary evaluation under SFAS 141 and 142 of this
acquisition, the Company recorded a deferred asset of $461,000, representing
assumed lease origination costs and it also recorded a deferred liability of
$110,000 representing the net value of the acquired below market lease. These
deferred amounts will be written off over the initial lease term and the Company
will recognize additional rental income from the amortization of the deferred
liability and additional amortization expense relating to the amortization of
the deferred lease origination costs. Payments to be received under an agreement
entered into with the seller of the property, since the property was not
producing adequate rent at the time of the acquisition, will be recorded as a
reduction to building and improvements rather than rental income in accordance
with Emerging Issues Task Force ("EITF") Issue 85-27, "Recognition of Receipts
from Made-Up Rental Shortfalls".
NOTE 3 - REAL ESTATE INVESTMENTS AND MINIMUM FUTURE RENTALS (Continued)
The following table summarizes, on an unaudited pro forma basis, the combined
results of continuing operations of the Company for the years ended December 31,
2006 and 2005 as though the acquisitions of these properties in 2006 were
completed on January 1, 2005. The information does not purport to be indicative
of what the operating results of the Company would have been had the
acquisitions been consummated on January 1, 2005. Results of operations acquired
are included in the consolidated statements of income from the date of
acquisition. (Amounts in thousands, except per share data.)
2006 2005
---- ----
Pro forma revenues $35,888 $33,724
Pro forma income from continuing operations 31,298 20,020
Pro forma common shares:
Basic 9,931 9,838
Diluted 9,934 9,843
Pro forma income from continuing operations
Basic $3.15 $2.04
Diluted $3.15 $2.03
NOTE 4 - INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
The Company is a member in seven unconsolidated joint ventures which own and
operate six properties as of December 31, 2006. Summaries of the two most
significant joint ventures in which the Company was designated the managing
member are below.
At December 31, 2006, the Company owns a 50% equity interest in two joint
ventures with MTC Investors LLC ("MTC"), an unrelated entity. Approval of both
members of these two joint ventures is needed for all material decisions
including property acquisitions, financing and transfer of interest. During the
year ended December 31, 2006, the first joint venture (Joint Venture #1) sold
five megaplex stadium-style movie theaters and the second joint venture (Joint
Venture #2) sold one partial stadium-style movie theater located in Brooklyn, NY
and three megaplex stadium-style movie theaters. The remaining real estate
asset, owned by Joint Venture #2, is a vacant parcel of land located in Monroe,
NY, that was sold on March 14, 2007.
The following tables present condensed financial statements for the two movie
theater joint ventures at December 31, 2006 and for the year then ended. All
such operations were discontinued as a result of property sales during 2006 and
the remaining asset is considered held for sale. (Amounts in thousands):
Condensed Balance Sheets Joint Venture #1 Joint Venture #2
------------------------ ---------------- ----------------
Cash and cash equivalents $ 77 $ 354
Property held for sale - 40 (A)
Other assets, including investment in
Access Integrated Technologies, Inc.
Class A common stock - 429(B)
------------ ----------
Total assets $ 77 $ 823
============ ==========
Other liabilities $ 90 $ 228
Equity (13) 595
------------- ----------
Total liabilities and equity $ 77 $ 823
============ ==========
Company's equity investment $ (7) $ 291
============ ==========
NOTE 4 - INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (Continued)
Condensed Statements of Operations Joint Venture #1 Joint Venture #2
---------------------------------- ---------------- ----------------
Rental income $ 5,572 $ 3,596
--------- ----------
Depreciation and amortization 481 337
Operating expenses (C) 388 124
Provision for valuation adjustment of
real estate - 600 (A)
---------- ----------
Total operating expenses 869 1,061
---------- ----------
Operating income 4,703 2,535
Other income and expenses:
Interest income - 9
Interest:
Expense (1,866) (1,448)
Mortgage prepayment premium and
fees (D) (4,942) (5,596)
Amortization of deferred
financing costs (52) (24)
Gain on sale of properties (D) 35,167 20,498
Gain on sale of AIXD stock - 166 (B)
---------- ----------
Net income attributable to members $ 33,010 $ 16,140
========== ==========
Company's share of net income $ 16,505 $ 8,070
========== ==========
Amount recorded in income statement:
From operations $ (1,099) $ (2,179)
From gain on sale of properties 16,659 (E) 10,249
---------- ----------
$ 15,560 $ 8,070
========== ==========
Distributions received by the Company:
From operations $ 15,560 $ 8,106
========== ==========
From capital $ 12,724 $ 7,236
========== ==========
(A) The remaining real estate is a vacant parcel of land located in
Monroe, NY, that was sold on March 14, 2007 for a consideration of
approximately $1,250. This property has a nominal book value after
provisions for valuation adjustment of $600 and $2,562 taken as direct
write downs on the balance sheet during the years ended December 31,
2006 and 2005, respectively.
(B) The joint venture owned 40,000 restricted shares of Class A common
stock of Access Integrated Technologies, Inc. (NASDAQ:AIXD), the parent
company of a former tenant of the joint venture. In April 2006, the
joint venture sold 20,000 shares of the AIXD stock and realized a gain
on sale of $166. The closing price per share of AIXD at December 31,
2006 was $8.72.
(C) Includes management fees of $52 and $33, respectively, paid to
Majestic Property Management Corp. ("Majestic"), a company wholly owned
by the Chairman of the Board of Directors and Chief Executive Officer
and in which certain executive officers of the Company are officers and
from which such officers receive compensation. The management fee is
equal to 1% of rent paid by the tenants. In addition, Majestic was paid
a fee of $8 for supervision of improvements to a property.
(D) On October 5, 2006, the joint ventures sold eight of their movie
theater properties to a single unrelated purchaser for an aggregate
sales price of $136,658 and realized a gain, for book purposes, after
expenses, fees and brokerage commissions, of $49,077. The joint ventures
paid a prepayment premium of $9,707 on the outstanding mortgage loans
secured by the properties which were sold. In connection with this sale,
a brokerage commission totaling $1,277 was paid to Majestic. In
addition, the joint ventures paid an aggregate bonus of $90 to two other
officers of the Company (neither of whom are officers of Majestic) for
their efforts in connection with this sale.
NOTE 4 - INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (Continued)
On September 13, 2006, Joint Venture #2 sold a movie theater property
located in Brooklyn, New York to an unrelated party for a consideration
of $16,000 and realized a gain of $6,588. The joint venture paid a
premium of $831 in connection with the prepayment of the mortgage loan
secured by this property.
(E) The difference between the carrying amount of the Company's
investment in the joint venture and the underlying equity in net assets
was a premium amortized as an adjustment to equity in earnings of
unconsolidated joint ventures over 40 years. The unamortized premium
balance was approximately $924 at October 5, 2006 when the real estate
assets of the joint venture were sold and thus, such balance was offset
against gain on disposition of real estate related to unconsolidated
ventures.
The following tables present condensed financial statements for the two movie
theater joint ventures at December 31, 2005 and for the year then ended. All
such operations were discontinued as a result of property sales during 2006 and
the remaining asset is considered held for sale. (Amounts in thousands):
Condensed Balance Sheets Joint Venture #1 Joint Venture #2
------------------------ ---------------- ----------------
Cash and cash equivalents $ 368 $ 927
Real estate investments, net 53,384 37,989
Property held for sale - 640 (A)
Deferred financing costs 458 419
Unbilled rent receivable 1,390 1,136
Other assets, primarily investment in
Access Integrated Technologies, Inc.
Class A common stock 3 432 (B)
--------- ---------
Total assets $ 55,603 $ 41,543
========= =========
Mortgage loans payable $ 31,720 $ 25,514
Other liabilities 337 559
Equity 23,546 15,470
--------- ---------
Total liabilities and equity $ 55,603 $ 41,543
========= =========
Company's equity investment $ 12,706 (C) $ 7,632
========= =========
Condensed Statements of Operations Joint Venture #1 Joint Venture #2
---------------------------------- ---------------- ----------------
Rental income $ 7,351 $ 5,415
---------- ---------
Depreciation and amortization 1,154 810
Operating expenses (D) 301 130
---------- ----------
Total operating expenses 1,455 940
---------- ----------
Operating income 5,896 4,475
Other income and expenses:
Interest and other income 3 -
Interest:
Expense (2,515) (1,989)
Amortization of deferred
financing costs (70) (32)
---------- ---------
Income from continuing operations 3,314 2,454
Loss from discontinued operations - (2,583) (A)
---------- ----------
Net income (loss) attributable to members $ 3,314 $ (129)
========== ==========
Company's share of net income (loss) $ 1,657 $ (65)
========== ==========
NOTE 4 - INVESTMENT IN UNCONSOLIDATED JOINT VENTURES (Continued)
Amount recorded in income statement $ 1,637(C) $ (65)
========== ==========
Distributions received by the Company:
From operations $ 1,645 $ 840
========== ==========
From capital $ 39 $ 235
========== ==========
(A) During the year ended December 31, 2005, the joint venture
determined that the fair value of one of the five properties owned by
it, where the joint venture was funding the construction of a six screen
movie theater, located in Monroe, NY, pursuant to the lease entered into
with the former tenant, was lower than its carrying value. The lease
with the former tenant was terminated by mutual agreement in September
2004 and construction was suspended. The joint venture was seeking
alternative uses for this property and also offered this property for
sale. Included in loss from discontinued operations is a provision for
valuation adjustment of $2,562 which is based on a third party appraisal
which values the land only and a report by an independent engineering
firm which estimates the value of the construction completed to date,
against which management has taken a significant discount. The
provision was recorded as a direct write down on the balance sheet.
(B) During February 2005, the tenant/operator of one of the joint
venture's movie theaters, located in Brooklyn, NY, who had the same
principal as the tenant described in (A) above, sold its business to an
independent third party. In consideration of the joint venture's consent
to the lease assignment and a lease amendment and its waiver of the
requirement for a security deposit under the amended lease, the joint
venture received 40,000 restricted shares of Class A common stock of
Access Integrated Technologies, Inc., the new tenant's parent company
(NASDAQ:AIXD). The closing price per share on the date of the
transaction for these shares was $4.40 and at December 31, 2005 was
$10.38. These shares have certain restrictions regarding the disposition
thereof.
(C) The difference between the carrying amount of the Company's
investment in the joint venture and the underlying equity in net assets
is a premium amortized as an adjustment to equity in earnings of
unconsolidated joint ventures over 40 years.
(D) Includes management fees of $68 and $51, respectively, paid to
Majestic. The management fee is equal to 1% of rent paid by the tenants.
The remaining five unconsolidated joint ventures each own one property. At
December 31, 2006 and 2005, the Company's equity investment in these five joint
ventures totaled $6,730,000 and $6,997,000, respectively. The December 31, 2006
balance is net of distributions, including distributions received in 2006 of
$1,823,000 received from these five joint ventures, including a $1,061,000
distribution of financing proceeds the Company received from one of its joint
ventures. These five unconsolidated joint ventures contributed $2,000 and
$530,000 in equity earnings for the years ended December 31, 2006 and 2005,
respectively. The $2,000 equity in earnings for the year ended December 31, 2006
is net of a $960,000 provision for valuation adjustment, of which the Company's
share is $480,000, recorded by the joint venture against its vacant property.
The joint venture had determined that the fair value of this vacant property was
lower than its carrying value based on an evaluation of market conditions in the
area in which the property is located.
Mortgage brokerage fees relating to financings of two joint venture properties
in 2005 aggregating $156,000, were paid by the two ventures to Majestic. These
fees were deferred and are being amortized over the life of the respective
mortgages. In addition, one of these joint ventures paid Majestic $12,000 in
management fees for each of the years ended December 31, 2006 and 2005.
NOTE 5 - DEBT OBLIGATIONS
Mortgages Payable
At December 31, 2006, there are thirty-six outstanding mortgages payable, all of
which are secured by first liens on individual real estate investments with an
aggregate carrying value before accumulated depreciation, as adjusted for
intangibles, of $351,811,000. The mortgages bear interest at rates ranging from
5.13% to 8.8%, and mature between 2007 and 2037. The weighted average interest
rate was 6.4% for the years ended December 31, 2006 and 2005.
Scheduled principal repayments during the next five years and thereafter are as
follows:
Year Ending
December 31, (In Thousands)
------------ --------------
2007 $ 4,573
2008 12,788
2009 9,834
2010 22,090
2011 8,353
Thereafter 163,638
---------
Total $ 221,276
=========
Loan Payable
At December 31, 2006, there is one outstanding loan payable with a balance of
$6,647,000, which is collateralized by cash held in escrow and shown on the
balance sheet as restricted cash. The loan bears interest at a rate of 6.25% and
matures December 1, 2018. The loan was originally a mortgage collateralized by a
movie theater property the Company owned in California. During 2006, the
property was sold and cash was substituted for collateral at 110% of the
principal balance at the date of sale. The mortgagee will place the loan on a
suitable replacement property for a 2% fee on the then principal balance. The
Company still retains the right to prepay the loan and pay the normal prepayment
penalty but has determined not to do so at this time.
Scheduled principal repayments during the next five years and thereafter are as
follows:
Year Ending
December 31, (In Thousands)
------------ --------------
2007 $ 144
2008 154
2009 164
2010 174
2011 185
Thereafter 5,826
----------
Total $ 6,647
==========
Line of Credit
The Company has a $62,500,000 revolving credit facility ("Facility") with VNB
New York Corp. (formerly Valley National Bank), Bank Leumi USA, Israel Discount
Bank of New York and Manufacturers and Traders Trust Company. The Facility
matures on March 31, 2007 and provides that the Company pay interest at the
lower of LIBOR plus 2.5% or at the bank's prime rate on funds borrowed and an
unused facility fee of 1/4%. The Company paid $636,000 in fees and closing costs
relating to the Facility increase which are being amortized over the term of the
Facility.
The Company is in the process of amending its existing revolving credit facility
which will extend its maturity date from March 31, 2007 to March 31, 2010 and
reduce the interest rate to the lower of LIBOR plus 2.15% or at the bank's prime
rate on funds borrowed. In connection with the amendment, the Company will pay a
commitment fee and other expenses totaling approximately $650,000, and
substantially all material covenants will remain the same.
NOTE 5 - DEBT OBLIGATIONS (Continued)
The Facility is guaranteed by all of the Company's subsidiaries which own
unencumbered properties and the shares of stock of all other subsidiaries are
pledged as collateral. The Company has agreed that it and its affiliates
(including entities that are participants in a Shared Services Agreement - see
Note 8) will maintain on deposit with the banks at least 10% of the average
outstanding annual principal balance under the Facility. If minimum balances are
not maintained by the Company and its affiliates, a deficiency fee will be
charged to the Company.
The Facility is available to finance the acquisition or financing of interests
in commercial real estate. The Company is required to comply with certain
covenants. Net proceeds received from the sale or refinance of properties are
required to be used to repay amounts outstanding under the Facility if proceeds
from the Facility were used to purchase the property.
NOTE 6 - PREFERRED STOCK
At the Company's Annual Meeting of Stockholders held on June 14, 2005, the
stockholders approved an Amendment to the Company's Restated Articles of
Incorporation to increase the aggregate number of shares of authorized capital
stock by authorizing the issuance of 12,500,000 shares of preferred stock, par
value $1.00 per share. To date, none have been issued.
NOTE 7 - PUBLIC OFFERING
A shelf registration statement, which was declared effective by the U.S.
Securities and Exchange Commission on October 2, 2003, allows the Company to
sell common stock from time to time in one or more public offerings (at prices
and terms to be determined at the time of the offering) up to an aggregate
public offering price of $200,000,000. Approximately $132,000,000 remains
available for issuance under the shelf registration statement.
NOTE 8 - RELATED PARTY TRANSACTIONS
At December 31, 2006 and 2005, Gould Investors L.P. ("Gould"), a related party,
owned 830,911 and 818,679 shares of the common stock of the Company or
approximately 8% of the equity interest. During 2006, Gould purchased 12,232
shares of the Company through the Company's dividend reinvestment plan.
The Company reimbursed Gould for allocated expenses and paid fees to companies
wholly owned by the Chairman of the Board of Directors and Chief Executive
Officer and in which certain executive officers of the Company are officers and
from which such officers receive compensation ("Majestic Entities"). The
Company's policy is to receive terms in transactions with affiliates that are at
least as favorable to the Company as similar transactions the Company would
enter into with unaffiliated persons. Such fees and costs paid directly by the
Company are as follows:
Years Ended December 31,
------------------------
2006 2005 2004
---- ---- ----
Allocated expenses (A) $1,317,000 $1,208,000 $ 980,000
Mortgage brokerage fees (B) 100,000 543,000 122,000
Sales commissions (C) 152,000 404,000 47,000
Management fees (D) 15,000 42,000 58,000
Supervisory fees (E) 41,000 37,000 26,000
---------- ---------- ---------
Total fees $1,625,000 $2,234,000 $1,233,000
========== ========== ==========
NOTE 8 - RELATED PARTY TRANSACTIONS (Continued)
The Company's unconsolidated joint ventures paid the following fees to Majestic
Property Management Corp. ("Majestic"), one of the Majestic Entities. Such
amounts represent 100% of the fees paid by the joint ventures, of which the
Company's share is 50%:
Years Ended December 31,
------------------------
2006 2005 2004
---- ---- ----
Mortgage brokerage fees (F) $ - $ 156,000 $ -
Sales commissions (G) 1,277,000 - -
Management fees (H) 97,000 131,000 108,000
Supervisory fees (I) 8,000 - -
---------- --------- ---------
Total fees $1,382,000 $ 287,000 $ 108,000
========== ========= =========
(A) The Company reimbursed Gould for allocated general and administrative
expenses and payroll based on estimated time incurred by various employees
pursuant to a Shared Services Agreement. At December 31, 2006 and 2005, $241,000
and $268,000 remain unpaid and is reflected in accrued expenses on the balance
sheet. This does not include payments under a direct lease, effective July 2005,
with a subsidiary of Gould, for approximately 1,200 square feet, expiring in
2011, at an annual rent of $40,000, increasing 3% per year.
(B) Fees paid to Majestic relating to mortgages placed on nine, eleven and three
of the Company's properties for the years ended December 31, 2006, 2005 and
2004, respectively, for mortgages in the aggregate amounts of $12,900,000,
$57,706,000 and $13,976,000. Except for two of the mortgages, where the fees
were .5% and .8% of the principal balance, all fees were 1% of the principal
balances of the mortgages. These fees were deferred and are being amortized over
the life of the respective mortgages.
(C) Fees paid to Majestic Entities relating to the sales of one property, two
properties and air rights, and one property for the years ended December 31,
2006, 2005 and 2004, respectively, for aggregate sales prices of $15,227,000,
$30,524,000 and $1,340,000, respectively. Such fees were based on 1% of the
sales price in 2006, 1% to 2% of the sales price in 2005 and 3.5% of the sales
price in 2004.
(D) Fees paid to Majestic relating to management of one, two and two of the
Company's properties for the years ended December 31, 2006, 2005 and 2004,
respectively. Such fees were based on 2% to 4% of rent collections.
(E) Fees paid to Majestic for supervision of improvements to properties. Such
fees are generally based on 8% of the cost of the improvements.
(F) Fees paid to Majestic relating to mortgages placed on two joint venture
properties for mortgages in the aggregate amount of $17,500,000. These fees,
ranging from .8% to 1% of the principal balance of the mortgages, were deferred
and are being amortized over the life of the respective mortgages.
(G) Fee paid to Majestic relating to the sale by two of the Company's joint
ventures of eight movie theater properties at approximately 1% of the aggregate
sales price.
(H) Fees paid to Majestic for the management of ten joint venture properties
at 1% of rent collections.
(I) Fee paid to Majestic for supervision of improvements to a property at
8% of the cost of the improvements.
See Note 4 for further information regarding the Company's unconsolidated joint
ventures.
NOTE 8 - RELATED PARTY TRANSACTIONS (Continued)
New Compensation and Services Agreement
Effective as of January 1, 2007, the Company entered into a compensation and
services agreement with Majestic Property Management Corp., a company
wholly-owned by our Chairman and Chief Executive Officer and in which certain of
the Company's executive officers are officers and from which they receive
compensation. Under the terms of the agreement, Majestic assumed the Company's
obligations to make payments to Gould (and other affiliated entities) under the
shared services agreement and agreed to provide to the Company the services of
all affiliated executive, administrative, legal, accounting and clerical
personnel that the Company has heretofore utilized on a part-time (as needed)
basis and for which the Company had paid, as a reimbursement, an allocated
portion of the payroll expenses of such personnel in accordance with the shared
services agreement. Since Majestic and its affiliates will arrange for such
personnel for the Company, it will no longer incur any allocated payroll
expenses. Under the terms of the agreement, Majestic (or its affiliates) will
continue to provide to the Company certain property management services,
property acquisition, sales and leasing services and mortgage brokerage services
that it has provided to the Company in the past, and the Company will not incur
any fees or expenses for such services except for the annual fees described
below. As consideration for providing to the Company the services of such
personnel and property management services (including construction supervisory
services), property acquisition, sales and leasing counseling services and
mortgage brokerage services, the Company will pay Majestic an annual fee of
$2,125,000 in 2007, in equal monthly installments. Majestic will credit against
the fee payments due to it under the agreement any management or other fees
received by it from any joint venture in which the Company is a joint venture
partner (exclusive of fees paid by the tenant in common on a property located in
Los Angeles, California). In addition, the agreement calls for the Company to
pay compensation to the Company's Chairman of $250,000 per annum, an increase
from $50,000. The Company also agreed to make an additional payment to Majestic
of $175,000 in 2007 for the Company's share of all direct office expenses, such
as rent, telephone, postage, computer services, internet usage, etc., previously
allocated to the Company under the shared services agreement. The annual
payments the Company makes to Majestic will be negotiated each year by the
Company and Majestic, and will be approved by the Company's Audit Committee and
the Company's independent directors. The annual payments will be based upon the
prior years' experience and a budget prepared by Majestic.
NOTE 9 - STOCK OPTIONS AND RESTRICTED STOCK
Stock Options
On December 6, 1996, the directors of the Company adopted the 1996 Stock Option
Plan (Incentive/Nonstatutory Stock Option Plan), which was approved by the
Company's stockholders in June 1997. The options granted under the Plan were
granted at per share amounts at least equal to their fair market value at the
date of grant, were cumulatively exercisable at a rate of 25% per annum,
commencing six months after the date of grant, and expired five years after the
date of grant. A maximum of 225,000 shares of common stock of the Company were
reserved for issuance to employees, officers, directors, consultants and
advisors to the Company, of which none are available for grant at December 31,
2006.
Changes in the number of common shares under all option arrangements are
summarized as follows:
Years Ended December 31,
----------------------------------------
2006 2005 2004
---- ---- ----
Outstanding at beginning of period 9,000 19,500 68,688
Exercised (9,000) (10,500) (49,188)
Outstanding at end of period - 9,000 19,500
Exercisable at end of period - 9,000 19,500
Option price per share outstanding - $12.19 $11.125-$12.19
NOTE 9 - STOCK OPTIONS AND RESTRICTED STOCK (Continued)
Pro forma information regarding net income and earnings per share is required
by FASB No. 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method. The fair value for the
outstanding options was estimated at the date of the grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for these options which were granted in 2001: risk free interest
rate of 4.06%, dividend yield of 10.07%, volatility factor of the expected
market price of the Company's Common Stock based on historical results of
.141; and expected life of 5 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and changes in the
subjective input assumptions can materially affect the fair value estimate,
management believes the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. The Company
has elected not to present pro forma information for 2006, 2005 and 2004
because the impact on the reported net income and earnings per share is
immaterial.
Restricted Stock
The Company's 2003 Stock Incentive Plan (the "Incentive Plan"), approved by
the Company's stockholders in June 2003, provides for the granting of
restricted shares. The maximum number of shares of the Company's common stock
that may be issued pursuant to the Incentive Plan is 275,000. The restricted
stock grants are valued at the fair value as of the date of the grant and
specify vesting upon the fifth anniversary of the date of grant and under
certain circumstances may vest earlier. For accounting purposes, the
restricted stock is not included in the outstanding shares shown on the
balance sheet until they vest. The value of such grants are initially
deferred, and amortization of amounts deferred is being charged to operations
over the respective vesting periods.
Years Ended December 31,
----------------------------------------
2006 2005 2004
---- ---- ----
Restricted share grants 50,050 40,750 35,700
Average per share grant price $ 20.66 $ 19.05 $ 19.58
Recorded as deferred compensation $ 1,034,000 $ 776,000 $ 699,000
Total charge to operations $ 515,000 $ 293,000 $ 220,000
Non-vested shares:
Non-vested beginning of period 92,725 60,300 26,350
Grants 50,050 40,750 35,700
Vested during period - - (1,750)
Forfeitures (2,600) (8,325) -
--------- --------- ---------
Non-vested end of period 140,175 92,725 60,300
========= ========= =========
Through December 31, 2006, a total of approximately 142,000 shares were issued
and approximately 133,000 shares remain available for grant pursuant to the
Incentive Plan, and approximately $1,750,000 remains as deferred compensation
and will be charged to expense over the remaining weighted average vesting
period of approximately 3.1 years. On February 28, 2007, 51,225 shares were
issued as restricted share grants having an aggregate value of approximately
$1,255,000.
NOTE 10 - DISTRIBUTION REINVESTMENT PLAN
In May 1996, the Company implemented a Distribution Reinvestment Plan (the
"Plan"). The Plan provides owners of record of 100 shares or more of its common
and/or preferred stock the opportunity to reinvest cash distributions in
newly-issued common stock of the Company at a 5% discount from the market price.
No open market purchases are made under the Plan. During the years ended
December 31, 2006, 2005 and 2004, the Company issued 43,970, 31,441 and 72,214
common shares, respectively, under the Plan.
NOTE 11 - DISCONTINUED OPERATIONS
During the years ended December 31, 2006 and 2005, the Company sold one and five
properties, respectively. In accordance with SFAS 144, "Accounting for
Impairment or Disposal of Long Lived Assets," the Company recorded the results
of operations and the related gain as income from discontinued operations.
The following is a summary of income from discontinued operations for the years
ended December 31, 2006, 2005 and 2004 (in thousands):
Years Ended December 31,
------------------------
2006 2005 2004
---- ---- ----
Revenues, primarily rental income $ 1,362 $ 2,387 $ 5,309
------- ------- -------
Depreciation and amortization 97 474 745
Real estate expenses 47 698 734
Interest expense 335 553 223
Provision for valuation adjustment
of real estate - 469 366
------- ------- -------
Total expenses 479 2,194 2,068
------- ------- -------
Income from discontinued
operations before gain on sale 883 193 3,241
Net gain on sale of discontinued operations 3,660 (A) 1,905 -
-------- ------- --------
Income from discontinued operations $ 4,543 $ 2,098 $ 3,241
======== ======= ========
(A) The $3,660 gain has been deferred for federal tax purposes in
accordance with Section 1031 of the Internal Revenue Code of
1986, as amended.
Real estate investment, net of accumulated depreciation, and mortgage payable
for the one property sold during 2006 was $11,193,000 and $6,783,000,
respectively, at December 31, 2005.
NOTE 12 - FORMER PRESIDENT RESIGNATION AND CONTINGENCIES
In July 2005, Jeffrey Fishman resigned as the Company's president, chief
executive officer and a member of its Board of Directors following the
discovery of what appeared to be inappropriate financial dealings by Mr.
Fishman with a tenant of a movie theater property located in Brooklyn, NY,
owned by a joint venture in which the Company is a 50% venture partner and the
managing member. The Company reported this matter to the Securities and
Exchange Commission in July 2005. The Audit Committee of the Board of
Directors conducted an investigation of this matter and related matters and
retained special counsel to assist the committee in the investigation. The
investigation was completed and the Audit Committee and its special counsel,
based on the materials gathered and interviews conducted found no evidence
that any other officer or employee of the Company was aware of, or knowingly
assisted in Mr. Fishman's inappropriate financial dealings.
NOTE 12 - FORMER PRESIDENT RESIGNATION AND CONTINGENCIES (Continued)
On August 12, 2005, the tenant of the Brooklyn, NY theater property, (referred
to in the preceding paragraph), Pritchard Square Cinema LLC, and Pritchard
Square LLC, commenced litigation in the Supreme Court of the State of New
York, Nassau County against the Company, certain of its affiliated entities,
Mr. Fishman and Britannia Management, LLC ("Britannia"), a company which the
Company believes is owned and/or controlled by Mr. Fishman. Pritchard Square
LLC was the seller and Pritchard Square Cinema LLC was the tenant of the
Brooklyn, NY property which was acquired in a "sale and leaseback transaction"
by the joint venture. The tenant of the Brooklyn, NY theater sold its business
operations and assigned its interest as tenant under its lease to an
unaffiliated entity in February 2005. In the litigation, the tenant and its
related entity allege that it or its affiliates paid $815,000 in the aggregate
to Mr. Fishman and/or Britannia. As against Mr. Fishman, Britannia, the
Company and affiliated entities, the complaint alleges fraud, breach of
contract, intentional tort, negligent supervision, respondeat superior,
negligent misrepresentation, tortious interference with prospective economic
relations and conduct in violation of the Racketeer Influenced and Corrupt
Organizations Act ("RICO"). The damages sought in the complaint are $9 million
plus punitive damages, interest and costs and a demand for treble damages
under RICO. The Brooklyn, NY property was sold by the joint venture in
September 2006. (See Note 4.)
On the same date that the complaint was filed against the Company and certain
of its affiliated entities, the Company filed suit in the Supreme Court of the
State of New York, Nassau County against the former tenant of the Brooklyn, NY
property, Norman Adie, the former tenant's principal, Jeffrey Fishman,
Britannia and others. The Company's complaint alleges that Mr. Adie, Mr.
Fishman and other defendants conspired to defraud the Company. The Company's
lawsuit alleges commercial bribery, fraud, breach of fiduciary duty, tortious
interference, intentional tort, violation of the New York Enterprise
Corruption Act, respondeat superior, unjust enrichment and violations of RICO.
The damages alleged in this lawsuit exceed $1 million, plus punitive damages,
interest and costs.
Motions were made by both parties to consolidate the two actions and the Court
has ordered a consolidation of the actions for all purposes. On March 14,
2007, the consolidated actions were settled with respect to Pritchard Square
Cinema LLC, Pritchard Square LLC, Norman Aide (the principal of both Pritchard
Square entities) and certain other persons associated or affiliated with the
Pritchard Square entities and Mr. Aide (Pritchard Square parties). The
litigation commenced by the Company and certain of its affiliated entities
against Mr. Fishman, his wife and Britannia will continue. Under the terms of
a settlement agreement entered into between Pritchard Square parties and the
Company, a designee of Pritchard Square purchased from a joint venture in
which the Company is a 50% joint venture partner, a property located in
Monroe, New York for a consideration of $1,250,000.
On June 21, 2006 the Company announced that it had received notification of a
formal order of investigation from the SEC. Management believes that the
matters being investigated by the SEC focus on the improper payments received
by Mr. Fishman. The SEC has also requested information regarding "related
party" transactions between the Company and entities affiliated with it and
with certain of the Company's officers and directors and compensation paid to
certain of the Company's executive officers by those affiliates. The Company's
Audit Committee (and its counsel), having previously conducted an
investigation regarding Mr. Fishman's inappropriate financial dealings,
conducted an investigation concerning "related party transactions", which has
been substantially completed. The Company's direct legal expenses related to
these investigations totaled $726,000 and $560,000 in the years ended December
31, 2006 and 2005, respectively.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Company maintains a non-contributory defined contribution pension plan
covering eligible employees and officers. Contributions by the Company are
made through a money purchase plan, based upon a percent of qualified
employees' total salary as defined. Pension expense approximated $90,000,
$60,000 and $56,000 during the years ended December 31, 2006, 2005 and 2004,
respectively. At December 31, 2006, $25,000 remains unpaid and is included in
accrued expenses and other liabilities on the consolidated balance sheet.
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
In the ordinary course of business the Company is party to various legal
actions which management believes are routine in nature and incidental to the
operation of the Company's business. Management believes that the outcome of
the proceedings will not have a material adverse effect upon the Company's
consolidated statements taken as a whole.
NOTE 14 - TAXES
The Company elected to be taxed as a real estate investment trust (REIT) under
the Internal Revenue Code, commencing with its taxable year ended December 31,
1983. To qualify as a REIT, the Company must meet a number of organizational
and operational requirements, including a requirement that it currently
distribute at least 90% of its adjusted taxable income to its stockholders. It
is management's current intention to adhere to these requirements and maintain
the Company's REIT status. As a REIT, the Company generally will not be
subject to corporate level federal, state and local income tax on taxable
income it distributes currently to its stockholders. If the Company fails to
qualify as a REIT in any taxable year, it will be subject to federal, state
and local income taxes at regular corporate rates (including any applicable
alternative minimum tax) and may not be able to qualify as a REIT for four
subsequent taxable years. Even though the Company qualifies for taxation as a
REIT, the Company is subject to certain state and local taxes on its income
and property, and to federal excise taxes on its undistributed taxable income.
During the year ended December 31, 2006, the Company recorded a $490,000
accrual of Federal excise tax which is based on taxable income generated but
not yet distributed. Included in general and administrative expenses for the
years ended December 31, 2006, 2005 and 2004 are state tax expense of
$143,000, $140,000 and $107,000, respectively.
Reconciliation Between Financial Statement Net Income and Federal Taxable
Income:
The following unaudited table reconciles financial statement net income to
federal taxable income for the years ended December 31, 2006, 2005 and 2004
(amounts in thousands):
2006 2005 2004
Estimate Actual Actual
-------- ------ ------
Net income $36,425 $21,280 $10,974
Straight line rent adjustments (343) (1,602) (1,205)
Financial statement gain on sale
in excess of tax gain (A) (3,660) (11,287) -
Rent received in advance, net 77 (590) 275
Financial statement provisions for
valuation adjustment 780 1,751 366
Fee income subject to tax,
not recorded for books - - 134
Financial statement adjustment for
above/below market leases (252) (118) 188
Restricted stock expense, non-deductible 515 294 189
Financial statement depreciation
in excess of tax depreciation 770 537 207
Other adjustments (47) 59 35
------- ------- -------
Federal taxable income $34,265 $10,324 $11,163
======= ======= =======
(A) Amounts include $3,660 GAAP gain on sale of real estate and
$10,248 GAAP gain on sale of air rights for the years ended
December 31, 2006 and 2005, respectively, which were
deferred for federal tax purposes in accordance with Section
1031 of the Internal Revenue Code of 1986, as amended.
NOTE 14 - TAXES (Continued)
Reconciliation Between Cash Dividends Paid and Dividends Paid Deduction:
The following unaudited table reconciles cash dividends paid with the dividends
paid deduction for the years ended December 31, 2006, 2005 and 2004 (amounts in
thousands):
2006 2005 2004
Estimate Actual Actual
-------- ------ ------
Cash dividends paid $13,420 $12,990 $12,854
Dividend reinvestment plan (B) 59 37 57
------- ------- -------
13,479 13,027 12,911
Less: Spillover dividends designated to
following year (C) - (3,265) (3,235)
Less: Return of capital - (2,623) (1,109)
Plus: Spillover dividends designated from
prior year 3,265 3,235 2,646
Plus: Dividends designated from
following year (D) 17,571 - -
------- ------- -------
Dividends paid deduction (E) $34,315 $10,374 $11,213
======= ======= =======
(B) Amount reflects the 5% discount on the Company's common shares
purchased through the dividend reinvestment plan.
(C) The entire dividend paid in January 2006 and 2005 was
considered 2006 and 2005 dividends, respectively, as it was in
excess of the Company's accumulated earnings and profits through
2005 and 2004, respectively.
(D) This amount will be paid no later than the October 2007
dividend.
(E) Dividends paid deduction is slightly higher than federal
taxable income in 2006, 2005 and 2004 so as to account for
adjustments made to federal taxable income as a result of the
impact of the alternative minimum tax.
NOTE 15 - QUARTERLY FINANCIAL DATA (Unaudited):
(In Thousands, Except Per Share Data)
Quarter Ended
Total
March 31 June 30 September 30 December 31 For Year
-------- ------- ------------ ----------- --------
2006
Rental revenues as previously
reported $7,584 $8,562 $8,615 $8,912 $33,673
Revenues from discontinued
operations (A) (303) - - - (303)
------ ------ ------ ------ -------
Revenues (B) $7,281 $8,562 $8,615 $8,912 $33,370
====== ====== ====== ====== =======
Income from continuing
operations $2,932 $2,639 $5,534 (C) $20,777 (D) $31,882
Income from discontinued
operations 138 553 201 3,651 4,543
------ ------ ------ ------- -------
Net income $3,070 $3,192 $5,735 (C) $24,428 (D) $36,425
====== ====== ====== ======= =======
Weighted average number of common shares outstanding:
Basic 9,894 9,930 9,937 9,963 9,931
Diluted 9,897 9,934 9,940 9,963 9,934
Net income per common share - basic and diluted:
Income from continuing
operations $ .30 $ .26 $ .56 $ 2.09 $ 3.21 (E)
Income from
discontinued operations .01 .06 .02 .37 .46 (E)
------ ------ ------ ------ ------
Net income $ .31 $ .32 $ .58 $ 2.46 $ 3.67 (E)
====== ====== ====== ====== ======
(A) Excludes revenues from discontinued operations which were
previously excluded from total revenues as previously reported in
the June, September and December 2006 quarters.
(B) Amounts have been adjusted to give effect to the Company's
discontinued operations in accordance with Statement No. 144.
(C) Includes $3,294 (or $.33 per common share) from gain on
disposition of real estate related to unconsolidated joint
venture.
(D) Includes $23,614 (or $2.37 per common share) from gain on
dispositions of real estate related to unconsolidated joint
ventures.
(E) Calculated on weighted average shares outstanding for the year.
NOTE 15 - QUARTERLY FINANCIAL DATA (Unaudited) (Continued):
(In Thousands, Except Per Share Data)
Quarter Ended
Total
March 31 June 30 September 30 December 31 For Year
-------- ------- ------------ ----------- --------
2005
Rental revenues as previously
reported $7,106 $7,174 $7,107 $7,545 $28,932
Revenues from discontinued
operations (F) (633) (461) (303) (303) (1,700)
------ ------ ------ ------ -------
Revenues (G) $6,473 $6,713 $6,804 $7,242 $27,232
====== ====== ====== ====== =======
Income from continuing
operations $2,728 $12,763 (H) $1,026 $2,665 $19,182
Income (loss) from discontinued
operations (5) 520 703 880 2,098
------ ------- ------ ------ -------
Net income $2,723 $13,283 (H) $1,729 $3,545 $21,280
====== ======= ====== ====== =======
Weighted average number of
common shares outstanding:
Basic 9,795 9,841 9,852 9,863 9,838
Diluted 9,802 9,845 9,857 9,868 9,843
Net income per common share - basic and diluted:
Income from continuing
operations $ .28 $ 1.30 $ .11 $ .27 $ 1.95 (I)
Income from
discontinued operations - .05 .07 .09 .21 (I)
------ ------ ------ ----- ------
Net income $ .28 $ 1.35 $ .18 $ .36 $ 2.16 (I)
====== ====== ====== ===== ======
(F) Excludes revenues from discontinued operations which were previously
excluded from total revenues as previously reported in the September
and December 2005 quarters.
(G) Amounts have been adjusted to give effect to the Company's
discontinued operations in accordance with Statement No. 144.
(H) Includes $10,248 (or $1.04 per common share) from the sale of air
rights.
(I) Calculated on weighted average shares outstanding for the year.
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
Schedule III - Consolidated Real Estate and Accumulated Depreciation
December 31, 2006
(Amounts in Thousands)
Cost Gross Amount at Which Carried at
Capitalized December 31, 2006
Initial Cost to Acquisition Buildings
to Company Improve- and
Encumbrances Land Buildings ments Land Improvements Total
------------ ---- --------- ----- ---- ------------ -----
Free Standing
Retail Locations:
-----------------
11 Properties -
Note 1 $26,561 $10,286 $45,414 $ - $10,286 $ 45,414 $55,700
Miscellaneous 85,949 30,178 119,041 921 30,178 119,962 150,140
Flex Buildings:
---------------
Miscellaneous 12,396 3,780 15,125 407 3,780 15,532 19,312
Office Buildings:
-----------------
Parsippany, NJ 16,699 6,055 23,300 - 6,055 23,300 29,355
Miscellaneous 17,400 3,537 13,688 2,524 3,537 16,212 19,749
Apartment Building:
-------------------
Miscellaneous 4,372 1,110 4,439 - 1,110 4,439 5,549
Industrial:
-----------
Baltimore, MD 23,000 6,530 25,769 - 6,530 25,769 32,299
Miscellaneous 18,559 8,722 37,206 57 8,722 37,263 45,985
Theater:
--------
Miscellaneous 6,328 - 8,328 - - 8,328 8,328
Health Clubs:
-------------
Miscellaneous 10,012 2,233 8,729 2,731 2,233 11,460 13,693
-------- ------- -------- ------ ------- -------- --------
$221,276 $72,431 $301,039 $6,640 $72,431 $307,679 $380,110
======== ======= ======== ====== ======= ======== ========
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
Schedule III - Consolidated Real Estate and Accumulated Depreciation
December 31, 2006
(Amounts in Thousands)
Life on Which
Depreciation in
Latest Income
Date of Statement is
Accumulated Construc- Date Computed
Depreciation tion Acquired (Years)
------------ ---- -------- -------
Free Standing
Retail Locations:
-----------------
11 Properties -
Note 1 $ 804 Various 4/7/06 40
Miscellaneous 13,905 Various Various 40
Flex Buildings:
---------------
Miscellaneous 2,305 Various Various 40
Office Buildings:
-----------------
Parsippany, NJ 752 1997 9/16/05 40
Miscellaneous 2,090 Various Various 40
Apartment Building:
-------------------
Miscellaneous 2,025 1910 6/14/94 27.5
Industrial:
-----------
Baltimore, MD 27 1960 12/20/06 40
Miscellaneous 3,629 Various Various 40
Theater:
--------
Miscellaneous 1,292 2000 8/10/04 15.6
Health Clubs:
-------------
Miscellaneous 1,440 Various Various 40
------
$28,269
=======
Note 1 - These 11 properties are retail furniture stores covered by one
master lease and one loan that is secured by crossed mortgages. They are
located in six states (Georgia, Kansas, Kentucky, South Carolina, Texas
and Virginia) and no individual property is greater than 5% of the
Company's total assets.
ONE LIBERTY PROPERTIES, INC. AND SUBSIDIARIES
Notes To Schedule III
Consolidated Real Estate And Accumulated Depreciation
(a) Reconciliation of "Real Estate and Accumulated Depreciation"
(Amounts In Thousands)
Year Ended December 31,
2006 2005 2004
---- ---- ----
Investment in real estate:
Balance, beginning of year $280,046 $247,183 $191,471
Addition: Land, buildings and
improvements 112,462 57,772 57,427
Deductions:
Cost of properties sold (12,398) (24,440) (1,349)
Valuation allowance (c) - (469) (366)
-------- -------- --------
Balance, end of year $380,110 $280,046 $247,183
======== ======== ========
Accumulated depreciation:
Balance, beginning of year $21,924 $ 18,647 $ 14,155
Addition: depreciation 6,857 5,755 4,614
Deductions:
Accumulated depreciation
related to properties sold (512) (2,478) (122)
-------- -------- --------
Balance, end of year $ 28,269 $ 21,924 $ 18,647
======== ======== ========
(b) The aggregate cost of the properties is approximately $18,541 lower
for federal income tax purposes at December 31, 2006.
(c) During the years ended December 31, 2005 and 2004, the Company recorded
provisions for valuation adjustment of real estate totaling $469 and
$366, respectively. See Note 2 to the consolidated financial statements
for further information.
Exhibit 21.1
SUBSIDIARIES OF THE COMPANY
Company State of Organization
------- ---------------------
OLP Texas, Inc. Texas
OLP-TSA Georgia, Inc. Georgia
OLP Dixie Drive Houston, Inc. Texas
OLP Greenwood Village, Colorado, Inc. Colorado
OLP Ft. Myers, Inc. Florida
OLP Rabro Drive Corp. New York
OLP Columbus, Inc. Ohio
OLP Mesquite, Inc. Texas
OLP South Highway Houston, Inc. Texas
OLP Selden, Inc. New York
OLP Palm Beach, Inc. Florida
OLP New Hyde Park, Inc. New York
OLP Champaign, Inc. Illinois
OLP Batavia, Inc. New York
OLP Hanover PA, Inc. Pennsylvania
OLP Grand Rapids, Inc. Michigan
OLP El Paso, Inc. Texas
OLP Plano, Inc. Texas
OLP Baltimore, MD, Inc. Maryland
OLP Hauppauge, LLC New York
OLP Ronkonkoma, LLC New York
OLP Plano 1, L.P. Texas
OLP El Paso 1, L.P. Texas
OLP Plano, LLC Delaware
OLP El Paso 1, LLC Delaware
OLP Hanover 1, LLC Pennsylvania
OLP Theaters, LLC Delaware
OLP Movies, LLC Delaware
OLP Tucker, LLC Georgia
OLP Lake Charles, LLC Louisiana
OLP Marcus Drive, LLC New York
OLP Sommerville, LLC Massachusetts
OLP Newark, LLC Delaware
OLP Texas, LLC Delaware
OLP GP Inc. Texas
OLP Texas 1, L.P. Texas
OLP Los Angeles, Inc. California
OLP Chula Vista Corp. California
OLP Knoxville LLC Tennessee
OLP Athens LLC Delaware
OLP NNN Manager LLC Delaware
OLP Greensboro LLC Delaware
OLP South Milwaukee Manager LLC Delaware
OLP Onalaska LLC Delaware
OLP Saint Cloud LLC Minnesota
OLP CC Antioch LLC Tennessee
OLP CC Fairview Heights LLC Illinois
OLP CC Ferguson LLC Missouri
OLP CC St. Louis LLC Missouri
OLP CC Florence LLC Kentucky
OLP Tomlinson LLC Pennsylvania
OLP Parsippany LLC Delaware
OLP Veterans Highway LLC New York
OLP Haverty's LLC Delaware
OLP Havertportfolio L.P. Delaware
OLP Havertportfolio GP LLC Delaware
OLP Maine LLC Delaware
OLP 6609 Grand LLC Delaware
OLP Savannah LLC Delaware
OLP Baltimore LLC Delaware
OLP LA-MS LLC Delaware
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements (i)
on Form S-3 (No. 333-108765) and in the related Prospectus; (ii) on Form S-8
(No. 333-101681) pertaining to the 1996 Stock Option Plan; and (iii) on Form S-8
(No. 333-104461) pertaining to the 2003 Incentive Plan of One Liberty
Properties, Inc., of our reports dated March 14, 2007, with respect to the
consolidated financial statements and schedule of One Liberty Properties, Inc.,
One Liberty Properties, Inc. management's assessment of the effectiveness of
internal control over financial reporting, and the effectiveness of internal
control over financial reporting of One Liberty Properties, Inc., included in
this Annual Report (Form 10-K) for the year ended December 31, 2006.
/s/ Ernst & Young LLP
New York, New York
March 14, 2007
Exhibit 31.1
CERTIFICATION
I, Fredric H. Gould, Chairman of the Board and Chief Executive Officer of
One Liberty Properties, Inc., certify that:
1. I have reviewed this Annual Report on Form 10-K for the fiscal year
ended December 31, 2006 of One Liberty Properties, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal controls over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 14, 2007
/s/ Fredric H. Gould
--------------------
Fredric H. Gould
Chairman of the Board and
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Patrick J. Callan, Jr., President of One Liberty Properties, Inc., certify
that:
1. I have reviewed this Annual Report on Form 10-K for the fiscal year
ended December 31, 2006 of One Liberty Properties, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal controls over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 14, 2007
/s/ Patrick J. Callan, Jr.
--------------------------
Patrick J. Callan, Jr.
President
Exhibit 31.3
CERTIFICATION
I, David W. Kalish, Senior Vice President and Chief Financial Officer of
One Liberty Properties, Inc., certify that:
1. I have reviewed this Annual Report on Form 10-K for the fiscal year
ended December 31, 2006 of One Liberty Properties, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal controls over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 14, 2007
/s/ David W. Kalish
-------------------
David W. Kalish
Senior Vice President and
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION OF CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)
The undersigned, Fredric H. Gould, Chairman of the Board and Chief Executive
Officer of One Liberty Properties, Inc. (the "Registrant"), does hereby certify
to his knowledge, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that based upon a review of the
Annual Report on Form 10-K for the year ended December 31, 2006 of the
Registrant, as filed with the Securities and Exchange Commission on the date
hereof (the "Report"):
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Registrant.
Date: March 14, 2007 /s/ Fredric H. Gould
--------------------
Fredric H. Gould
Chairman of the Board and
Chief Executive Officer
EXHIBIT 32.2
CERTIFICATION OF PRESIDENT
PURSUANT TO 18 U.S.C. SECTION 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)
The undersigned, Patrick J. Callan, Jr., President of One Liberty Properties,
Inc. (the "Registrant"), does hereby certify to his knowledge, pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that based upon a review of the Annual Report on Form 10-K for the year
ended December 31, 2006 of the Registrant, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"):
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Registrant.
Date: March 14, 2007 /s/ Patrick J. Callan, Jr.
--------------------------
Patrick J. Callan, Jr.
President
EXHIBIT 32.3
CERTIFICATION OF SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)
The undersigned, David W. Kalish, Senior Vice President and Chief Financial
Officer of One Liberty Properties, Inc. (the "Registrant"), does hereby certify
to his knowledge, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that based upon a review of the
Annual Report on Form 10-K for the year ended December 31, 2006 of the
Registrant, as filed with the Securities and Exchange Commission on the date
hereof (the "Report"):
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Registrant.
Date: March 14, 2007 /s/ David W. Kalish
-----------------------------
David W. Kalish
Senior Vice President and Chief
Financial Officer