Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements of the company and the notes thereto
included elsewhere in this report.
Forward Looking Statements:
This Quarterly Report on Form 10-Q of Urstadt Biddle Properties Inc. (the “Company”), including this Item 2, contains certain
forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such statements can generally be identified by such words as “anticipate”, “believe”, “can”, “continue”, “could”, “estimate”,
“expect”, “intend”, “may”, “plan”, “seek”, “should”, “will” or variations of such words or other similar expressions and the negatives of such words. All statements included in this report that address activities, events or developments that we
expect, believe or anticipate will or may occur in the future, including such matters as future capital expenditures, dividends and acquisitions (including the amount and nature thereof), business strategies, expansion and growth of our operations
and other such matters, are forward-looking statements. These statements are based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions, expected future developments
and other factors we believe are appropriate. Such statements are inherently subject to risks, uncertainties and other factors, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and
actual results, performance or achievements, financial and otherwise, may differ materially from the results, performance or achievements expressed or implied by the forward-looking statements. Risks, uncertainties and other factors that might cause
such differences, some of which could be material, include, but are not limited to:
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economic and other market conditions, including local real estate and market conditions, that could impact us, our
properties or the financial stability of our tenants;
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financing risks, such as the inability to obtain debt or equity financing on favorable terms, as well as the level and
volatility of interest rates;
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any difficulties in renewing leases, filling vacancies or negotiating improved lease terms;
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the inability of the Company’s properties to generate revenue increases to offset expense increases;
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environmental risk and regulatory requirements;
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risks of real estate acquisitions and dispositions (including the failure of transactions to close);
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risks of operating properties through joint ventures that we do not fully control;
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risks related to our status as a real estate investment trust, including the application of complex federal income tax
regulations that are subject to change;
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as well as other risks identified in our Annual Report on Form 10-K for the fiscal year ended October 31, 2018 under Item
1A. Risk Factors and in the other reports filed by the Company with the Securities and Exchange Commission (the “SEC”).
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Executive Summary
Overview
We are a fully integrated, self-administered real estate company that has elected to be a REIT for federal income tax purposes,
engaged in the acquisition, ownership and management of commercial real estate, primarily neighborhood and community shopping centers, with a concentration in the metropolitan New York tri-state area outside of the City of New York. Other real estate
assets include office properties, single tenant retail or restaurant properties and office/retail mixed-use properties. Our major tenants include supermarket chains and other retailers who sell basic necessities.
At July 31, 2019, we owned or had equity interests in 83 properties, which include equity interests we own in six consolidated joint
ventures and seven unconsolidated joint ventures, containing a total of 5.3 million square feet of Gross Leasable Area (“GLA”). Of the properties owned by wholly-owned subsidiaries or joint venture entities that we consolidate, approximately 93.0%
of the GLA was leased (93.2% at October 31, 2018). Of the properties owned by unconsolidated joint ventures, approximately 96.2% of the GLA was leased (96.3% at October 31, 2018).
We have paid quarterly dividends to our stockholders continuously since our founding in 1969 and have increased the level of dividend
payments to our stockholders for 25 consecutive years.
We derive substantially all of our revenues from rents and operating expense reimbursements received pursuant to long-term operating
leases and focus our investment activities on community and neighborhood shopping centers, anchored principally by regional supermarket or pharmacy chains. We believe that because consumers need to purchase food and other types of staple goods and
services generally available at supermarket or pharmacy anchored shopping centers, the nature of our investments provides for relatively stable revenue flows even during difficult economic times.
We have a conservative capital structure, which includes permanent equity sources of Common Stock, Class A Common Stock and two series
of perpetual preferred stock, which are only redeemable at our option. In addition, we have mortgage debt. We have one $3.2 million mortgage maturing in October 2019, which we believe could easily be refinanced if we so choose or repaid with
available cash. For further information please see the Financing Strategy, Unsecured Revolving Credit Facility and other Financing Transactions section of this Item 2 below. Thereafter, we do not have any additional secured debt maturing until March
of 2022.
We focus on increasing cash flow, and consequently the value of our properties, and seek continued growth through strategic
re-leasing, renovations and expansions of our existing properties and selective acquisitions of income-producing properties. Key elements of our growth strategies and operating policies are to:
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acquire quality neighborhood and community shopping centers in the northeastern part of the United States with a
concentration on properties in the metropolitan New York tri-state area outside of the City of New York, and unlock further value in these properties with selective enhancements to both the property and tenant mix, as well as improvements
to management and leasing fundamentals. Our hope is to grow our assets through acquisitions by 5% to 10% per year on a dollar value basis subject to the availability of acquisitions that meet our investment parameters;
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selectively dispose of underperforming properties and re-deploy the proceeds into potentially higher performing properties
that meet our acquisition criteria;
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invest in our properties for the long-term through regular maintenance, periodic renovations and capital improvements,
enhancing their attractiveness to tenants and customers, as well as increasing their value;
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leverage opportunities to increase GLA at existing properties, through development of pad sites and reconfiguring of
existing square footage, to meet the needs of existing or new tenants;
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proactively manage our leasing strategy by aggressively marketing available GLA, renewing existing leases with strong
tenants, and replacing weak ones when necessary, with an eye towards securing leases that include regular or fixed contractual increases to minimum rents, replacing below-market-rent leases with increased market rents when possible and
further improving the quality of our tenant mix at our shopping centers;
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maintain strong working relationships with our tenants, particularly our anchor tenants;
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maintain a conservative capital structure with low debt levels; and
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control property operating and administrative costs.
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Highlights of Fiscal 2019; Recent Developments
Set forth below are highlights of our recent property acquisitions, potential acquisitions under contract, other investments, property
dispositions and financings:
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In December 2018, we purchased the Lakeview Plaza Shopping Center (“Lakeview”) for $12 million, exclusive of closing costs.
Lakeview is a 177,000 square foot grocery-anchored shopping center located in Brewster, NY. When we purchased the property, we anticipated having to invest up to $8 million for capital improvements and for re-tenanting at the property. We
purchased the property with available cash and a borrowing on our Unsecured Revolving Credit Facility (“Facility”). As of the date of this report, we have expended approximately $4.2 million of the $8 million anticipated additional
investment.
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In March 18, 2019, we completed the refinancing of our $14.9 million mortgage secured by our Darien, CT shopping center.
The new mortgage principal balance is $25 million, and the note has a term of ten years and requires payments of principal and interest at the rate of LIBOR plus 1.65%. We also entered into an interest rate swap with the new lender, which
converts the variable interest rate (based on LIBOR) to a fixed rate of 4.815% per annum. The fixed interest rate on the refinanced mortgage was 6.55%.
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In March 2019, we completed the refinancing of our existing $9.1 million mortgage secured by our Newark, NJ shopping
center. The new mortgage principal balance is $10 million, and the note has a term of ten years and requires payments of principal and interest at the fixed rate of 4.63%, which is a reduction from the fixed interest rate of 6.15% on the
refinanced mortgage.
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In March 2019, we sold Plaza 59, a commercial real estate property located in Spring Valley, NY of which we owned a 50%
undivided tenancy-in-common interest, and we accounted for under the equity method of accounting. The total loss on sale was $913,600, of which our 50% share was $456,700. This resulted in our equity in net income from Plaza 59 being
reduced by $456,700. This loss has been added back to our Funds from Operations (“FFO”) as discussed below in this Item 2.
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In June 2019, we placed a first mortgage on our Brewster, NY property. The new mortgage has a principal balance of $12.0
million, has a term of 10 years and requires payments of principal and interest at the rate of LIBOR plus 1.75%. Concurrent with entering into the mortgage, we also entered into an interest rate swap contract with the new lender, which
converts the variable interest rate (based on LIBOR) to a fixed rate of 3.6325% per annum.
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In June 2019, we sold our Starbucks Plaza Shopping Center located in Monroe, CT as that property did not meet our stated
investment objective of owing grocery or pharmacy-anchored shopping centers in the suburban communities that surround New York City. The property was acquired by us in 2007 and we sold the property for $3.65 million and realized a book
“GAAP” gain on sale of $409,000. This gain is not included in our Funds from Operations (“FFO”) as discussed below in this Item 2.
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In June 2019, we redeemed 4,150 units of UB New City I, LLC (“New City”) from the noncontrolling member. The total cash
price paid for the redemption was $91,000. As a result of the redemption our ownership percentage of New City increased to 78.2% from 75.3%.
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In June 2019, we redeemed 44,701 units of UB High Ridge, LLC (“High Ridge”) from the noncontrolling member. The total cash
price paid for the redemption was $1,002,000. As a result of the redemption our ownership percentage of High Ridge increased to 12.6% from 10.9%.
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In August 2019, we redeemed for $3 million, the remaining 16% limited partnership interest in UB Ironbound, LP
("Ironbound"). Ironbound owns a grocery-anchored shopping center located in Newark, NJ. After the redemption, we own 100% of the limited partnership, through two wholly-owned subsidiaries.
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Known Trends; Outlook
We believe that shopping center REITs face opportunities and challenges that are both common to and unique from other REITs and real
estate companies. As a shopping center REIT, we are focused on certain challenges that are unique to the retail industry. In particular, we recognize the challenges presented by e-commerce to brick-and-mortar retail establishments, including our
tenants. However, we believe that because consumers generally prefer to purchase food and other staple goods and services available at supermarkets in person, the nature of our properties makes them less vulnerable to the encroachment of e-commerce
than other properties whose tenants may more directly compete with the internet. Moreover, we believe the nature of our properties makes them less susceptible to economic downturns than other retail properties whose anchor tenants are not
supermarkets or other staple goods providers. We note, however, that many prospective in-line tenants are seeking smaller spaces than in the past, as a result, in part, of internet encroachment on their brick-and-mortar business. When feasible, we
actively work to place tenants that are less susceptible to internet encroachment, such as restaurants, fitness centers, healthcare and personal services. We continue to be sensitive to these considerations when we establish the tenant mix at our
shopping centers, and believe that our strategy of focusing on supermarket anchors is a strong one.
In the metropolitan tri-state area outside of New York City, demographics (income, density, etc.) remain strong and opportunities for
new development, as well as acquisitions, are competitive, with high barriers to entry. We believe that this will remain the case for the foreseeable future, and have focused our growth strategy accordingly.
As a REIT, we are susceptible to changes in interest rates, the lending environment, the availability of capital markets and the
general economy. The impact of such changes are difficult to predict.
Leasing
Rollovers
For the nine months ended July 31, 2019, we signed leases for a total of 503,000 square feet of retail space in our consolidated
portfolio. New leases for vacant spaces were signed for 140,000 square feet at an average rental decrease of 8.3% on a cash basis. Renewals for 363,000 square feet of space previously occupied were signed at average rental rates that were
relatively the same level as the expiring rental rates on renewal leases on a cash basis.
Tenant improvements and leasing commissions averaged $42.91 per square foot for new leases and $2.06 per square foot for renewals for
the nine months ended July 31, 2019. The average term for new leases was 6 years and the average term for renewal leases was 4 years.
The rental increases/decreases associated with new and renewal leases generally include all leases signed in arms-length transactions
reflecting market leverage between landlords and tenants during the period. The comparison between average rent for expiring leases and new leases is determined by including minimum rent paid on the expiring lease and minimum rent to be paid on the
new lease in the first year. In some instances, management exercises judgment as to how to most effectively reflect the comparability of spaces reported in this calculation. The change in rental income on comparable space leases is impacted by
numerous factors including current market rates, location, individual tenant creditworthiness, use of space, market conditions when the expiring lease was signed, the age of the expiring lease, capital investment made in the space and the specific
lease structure. Tenant improvements include the total dollars committed for the improvement (fit-out) of a space as it relates to a specific lease but may also include base building costs (i.e. expansion, escalators or new entrances) that are
required to make the space leasable. Incentives (if applicable) include amounts paid to tenants as an inducement to sign a lease that do not represent building improvements.
The leases signed in 2019 generally become effective over the following one to two years. There is risk that some new tenants will not
ultimately take possession of their space and that tenants for both new and renewal leases may not pay all of their contractual rent due to operating, financing or other matters.
In 2019, we believe our leasing volume will be in-line with our historical averages, with overall positive increases in rental income
for renewal leases and small decreases for new leases. However, changes in rental income associated with individual signed leases on comparable spaces may be positive or negative, and we can provide no assurance that the rents on new leases will
continue to increase at the above described levels, if at all.
Significant Events with Impacts on Leasing
In July 2015, one of our largest tenants, A&P, filed a voluntary petition under chapter 11 of title 11 of the United States
Bankruptcy Code (the “Bankruptcy Code”). Subsequently, A&P determined that it would be liquidating the company. Prior to A&P filing for bankruptcy, A&P leased and occupied nine spaces totaling 365,000 square feet in our portfolio. The
bankruptcy process relating to our nine spaces is complete, with eight of the nine A&P leases having been assumed by new operators in the bankruptcy process or re-leased by us to new operators. The remaining lease, located in our Pompton Lakes
shopping center, totaling 63,000 square feet, was rejected by A&P in bankruptcy, and we are continuing to market that space for re-lease. In July 2018, one other 36,000 square foot space formerly occupied by A&P that we had released to a
local grocery operator became vacant, as that operator failed to perform under its lease and was evicted. We have signed a lease with Whole Foods Market for this location, and we expect to deliver the space to the lessee by the end of fiscal 2019 or
early in fiscal 2020.
In May 2018, the grocery tenant occupying 30,600 square feet at our Passaic, NJ property went vacant, the tenant was evicted, and the
lease was terminated. In May 2019, we signed two leases to re-lease a large portion of this space at a rental rate that is 12% below the rent we received from the prior grocery tenant.
In April 2018, we reached agreement with the grocery tenant at our Newark, NJ property to terminate its 63,000 square foot lease in
exchange for a $3.7 million lease termination payment, which was recorded as revenue in the second quarter of fiscal year ended October 31, 2018. Also in April 2018, we leased that same space to a new grocery store operator who took possession in
May 2018. While the rental rate on the new lease is 30% less than the rental rate on the terminated lease, we hope that part of this decreased rental rate will be recaptured with the receipt of percentage rent in subsequent years as the store
matures and its sales increase. The new lease required no tenant improvements or tenant allowances.
In 2017, Toys R’ Us and Babies R’ Us (“Toys”) filed a voluntary petition under chapter 11 of title 11 of the United States Bankruptcy
Code. Subsequently, Toys determined that it would be liquidating the company. Toys ground leased 65,700 square feet of space in our Danbury, CT shopping center. In August 2018, this lease was purchased out of bankruptcy from Toys and assumed by a
new owner. The base lease rate for the 65,700 square foot space was and remains at $0 for the duration of the lease, and we did not have any other leases with Toys R’ Us or Babies R’ Us, so the Company’s cash flow was not impacted by the bankruptcy
of Toys R’ Us and Babies R’ Us. As of the date of this report, we have not been informed by the new owner of the lease which operator will occupy the space.
Impact of Inflation on Leasing
Our long-term leases contain provisions to mitigate the adverse impact of inflation on our operating results. Such provisions include
clauses entitling us to receive (a) scheduled base rent increases and (b) percentage rents based upon tenants’ gross sales, which could increase as prices rise. In addition, many of our non-anchor leases are for terms of less than ten years, which
permits us to seek increases in rents upon renewal at then current market rates if rents provided in the expiring leases are below then existing market rates. Most of our leases require tenants to pay a share of operating expenses, including common
area maintenance, real estate taxes, insurance and utilities, thereby reducing our exposure to increases in costs and operating expenses resulting from inflation.
Critical Accounting Policies
Critical accounting policies are those that are both important to the presentation of our financial condition and results of
operations and require management’s most difficult, complex or subjective judgments. For a further discussion about our critical accounting policies, please see Note 1 in our consolidated financial statements included in Item 1 of this Quarterly
Report on Form 10-Q.
Liquidity and Capital Resources
Overview
At July 31, 2019, we had cash and cash equivalents of $8.6 million, compared to $10.3 million at October 31, 2018. Our sources of
liquidity and capital resources include operating cash flows from real estate operations, proceeds from bank borrowings and long-term mortgage debt, capital financings and sales of real estate investments. Substantially all of our revenues are
derived from rents paid under existing leases, which means that our operating cash flow depends on the ability of our tenants to make rental payments. For the nine months ended July 31, 2019 and 2018, net cash flows from operating activities
amounted to $52.3 million and $55.6 million, respectively. The nine month period ended 2018 net cash flows from operations included a one-time $3.7 million lease termination payment received from a grocery store tenant in our Newark, NJ property
(see Significant Events with Impacts on Leasing section earlier in this Item 2 for more information).
Our short-term liquidity requirements consist primarily of normal recurring operating expenses and capital expenditures, debt service,
management and professional fees, cash distributions to certain limited partners and non-managing members of our consolidated joint ventures, and regular dividends paid to our Common and Class A Common stockholders, which we expect to continue. Cash
dividends paid on Common and Class A Common stock for the nine months ended July 31, 2019 and 2018 totaled $31.9 million and $31.2 million, respectively. Historically, we have met short-term liquidity requirements, which is defined as a rolling
twelve month period, primarily by generating net cash from the operation of our properties. We believe that our net cash provided by operations will continue to be sufficient to fund our short-term liquidity requirements, including payment of
dividends necessary to maintain our federal income tax REIT status.
Our long-term liquidity requirements consist primarily of obligations under our long-term debt, dividends paid to our preferred
stockholders, capital expenditures and capital required for acquisitions. In addition, the limited partners and non-managing members of our six consolidated joint venture entities, Ironbound, UB McLean, LLC, UB Orangeburg, LLC, UB High Ridge, LLC,
UB Dumont I, LLC and UB New City I, LLC, have the right to require us to repurchase all or a portion of their limited partner or non-managing member interests at prices and on terms as set forth in the governing agreements. See Note 4 to the
financial statements included in Item 1 of this Report on Form 10-Q. Historically, we have financed the foregoing requirements through operating cash flow, borrowings under our Facility, debt refinancings, new debt, equity offerings and other
capital market transactions, and/or the disposition of under-performing assets, with a focus on keeping our debt level low. We expect to continue doing so in the future. We cannot assure you, however, that these sources will always be available to
us when needed, or on the terms we desire.
Capital Expenditures
We invest in our existing properties and regularly make capital expenditures in the ordinary course of business to maintain our
properties. We believe that such expenditures enhance the competitiveness of our properties. For the nine months ended July 31, 2019, we paid approximately $13.7 million for land improvements, property improvements, tenant improvements and leasing
commission costs (approximately $5.2 million representing land improvements (see Highlights of Fiscal 2019 earlier in this Item 2 for more information on our purchase of Lakeview), $3.9 million representing property improvements and approximately
$4.6 million related to new tenant space improvements, leasing costs and capital improvements as a result of new tenant spaces). The amount of these expenditures can vary significantly depending on tenant negotiations, market conditions and rental
rates. We expect to incur approximately $6.2 million for anticipated capital improvements, tenant improvements/allowances and leasing costs related to new tenant leases and property improvements during the remainder of fiscal 2019. This amount is
inclusive of the remaining investment needed on Lakeview (see Highlights section above). These expenditures are expected to be funded from operating cash flows, bank borrowings or other financing sources.
We are currently in the process of developing 3.4 acres of land we own adjacent to one of our shopping centers. The development
consists of construction of two pad site buildings totaling approximately 5,260 square feet each pre-leased to national restaurant chains and building an approximately 131,000 gross square foot self-storage facility, which will be managed for us by a
national self-storage company. We anticipate the total development cost will be approximately $15 million over the next two years. We plan on funding the development costs with available cash, borrowing on our Facility, or using other sources of
equity as more fully described earlier in this Item 2.
Financing Strategy, Unsecured Revolving Credit Facility and other Financing Transactions
Our strategy is to maintain a conservative capital structure with low leverage levels by commercial real estate standards. Mortgage
notes payable and other loans of $311.4 million consist of $1.7 million in variable rate debt with an interest rate of 5.00% as of July 31, 2019 and $309.7 million in fixed-rate mortgage loans with a weighted average interest rate of 4.1% at July 31,
2019. The mortgages are secured by 27 properties with a net book value of $562 million and have fixed rates of interest ranging from 3.4% to 4.8%. The $1.7 million in variable rate debt is unsecured. We may refinance our mortgage loans, at or
prior to scheduled maturity, through replacement mortgage loans. The ability to do so, however, is dependent upon various factors, including the income level of the properties, interest rates and credit conditions within the commercial real estate
market. Accordingly, there can be no assurance that such re-financings can be achieved.
We have 11 promissory notes secured by properties we consolidate and 3 promissory notes secured by properties in joint ventures that
we do not consolidate. The interest rate on these 14 notes is based on some variation of the London Interbank Offered Rate (“LIBOR”) plus some amount of credit spread. In addition, on the day these notes were executed by us we entered into
derivative interest rate swap contracts, the counterparty of which was either the lender on the aforementioned promissory notes or an affiliate of that lender. These swap contracts are in accordance with the International Swaps and Derivatives
Association, Inc ("ISDA"). These swap contracts convert the variable interest rate in the notes, which are based on LIBOR, to a fixed rate of interest for the life of each note. All indications are that the LIBOR reference rate will no longer be
published beginning on or around the year 2021. All contracts, including our 14 promissory notes and 14 swap contracts that use LIBOR, will no longer have the reference rate available and the reference rate will need to be replaced. We have very
good working relationships with all of our lenders to our notes, who are also the counterparties to our swap contracts. All indications we have received from our lenders and counterparties is that their goal is to have the replacement reference rate
under the notes match the replacement rates in the swaps. If this were to happen, we believe there would be no effect on our financial position or results of operations. However, because this is the first time any of our promissory notes or swap
contracts reference rates have stopped being published, we cannot be sure how the replacement rate event will conclude. Until we have more clarity from our lenders and counterparties on how they plan on dealing with this replacement rate event, we
cannot be certain of the impact on the Company.
At July 31, 2019, we had $12.6 million in additional variable-rate debt consisting of draws on our Facility (see below) that were not
fixed through an interest rate swap or otherwise. See “Item 3. Quantitative and Qualitative Disclosures about Market Risk” included in this Report on Form 10-Q for additional information on our interest rate risk.
We currently maintain a ratio of total debt to total assets below 32.6% and a fixed charge coverage ratio of over 3.4 to 1 (excluding
preferred stock dividends), which we believe will allow us to obtain additional secured mortgage loans or other types of borrowings, if necessary. We own 50 properties in our consolidated portfolio that are not encumbered by secured mortgage debt.
At July 31, 2019, we had borrowing capacity of $87 million on our Facility. Our Facility includes financial covenants that limit, among other things, our ability to incur unsecured and secured indebtedness. See Note 3 in our consolidated financial
statements included in Item 1 of this Quarterly Report on Form 10-Q for additional information on these and other restrictions.
We have a $100 million unsecured revolving credit facility with a syndicate of three banks, BNY Mellon, Bank of Montreal and Wells
Fargo N.A. with the ability under certain conditions to additionally increase the capacity to $150 million, subject to lender approval. The maturity date of the Facility is August 23, 2020 with a one-year extension at our option. Borrowings under
the Facility can be used for general corporate purposes and the issuance of up to $10 million of letters of credit. Borrowings will bear interest at our option of Eurodollar rate plus 1.35% to 1.95% or The Bank of New York Mellon's prime lending
rate plus 0.35% to 0.95%, based on consolidated indebtedness, as defined. We pay a quarterly commitment fee on the unused commitment amount of 0.15% to 0.25% per annum, based on outstanding borrowings during the year. As of July 31, 2019, $87
million was available to be drawn on the Facility. Our ability to borrow under the Facility is subject to its compliance with the covenants and other restrictions on an ongoing basis. The principal financial covenants limit our level of secured and
unsecured indebtedness and additionally require us to maintain certain debt coverage ratios. We were in compliance with such covenants at July 31, 2019.
During the nine months ended July 31, 2019, we borrowed $25.5 million on our Facility for property acquisitions, to fund capital
improvements to our properties and for general corporate purposes. For the nine months ended July 31, 2019 we repaid $41.5 million of borrowings on our Facility, with available cash, proceeds from mortgage financings, proceeds from investment
property sales and proceeds from the sale of marketable securities.
Net Cash Flows from:
Operating Activities
Net cash flows provided by operating activities amounted to $52.3 million for the nine months
ended July 31, 2019 compared to $55.6 million in the comparable period of fiscal 2018. The decrease in operating cash flows when compared with the corresponding prior period was due primarily to our receiving a $3.7 million lease termination payment
in the second quarter of fiscal 2018 from one of our grocery store tenants who wanted to terminate its lease early (see Significant Events with Impacts on Leasing earlier in this Item 2 for more information). This decrease was partially offset by
our properties generating additional operating income in the nine months ended July 31, 2019 when compared with the corresponding prior period. This additional operating income was predominantly from properties acquired after in fiscal 2018 and in
the first nine months of fiscal 2019. In addition, our net income increased as a result of increased base rent from a grocery store tenant amending and extending its lease at the beginning of fiscal 2019 at a significantly higher base rent than in
the prior period.
Investing Activities
Net cash flows used in investing activities amounted to $15.1 million for the nine months ended
July 31, 2019 compared to $21.8 million in the comparable period of fiscal 2018. The decrease in net cash flows used in investing activities in fiscal 2019 when compared to the corresponding prior period was the result of selling our marketable
security portfolio in the second quarter of fiscal 2019 and realizing proceeds on that sale of $6 million. The marketable securities were purchased in the first half of fiscal 2018. These transactions created an $11 million positive variance in
cash flows from investing activities for the nine month period ended July 31, 2019 compared with the corresponding prior period. In addition, the decrease in cash flows used in investing activities was the result of one of our unconsolidated joint
ventures selling a property it owned in the second quarter of fiscal 2019 and distributing $5 million in sales proceeds to us. In addition, this decrease in net cash used by investing activities was the result of us selling one property in the nine
months ended July 31, 2019 that provided $3.4 million in sales proceeds versus having no property sales in the corresponding prior period. This positive variance was partially offset by us acquiring one property for $12 million in the first nine
months of fiscal 2019 versus purchasing three properties in the first nine months of fiscal 2018 for $7.2 million and expending $7.3 million more for improvements to properties and deferred charges in the first nine months of fiscal 2019 versus the
corresponding prior period.
We regularly make capital investments in our properties for property improvements, tenant improvements costs and leasing commissions.
Financing Activities
The $7.2 million increase in net cash flows used by financing activities for the nine months
ended July 31, 2019 when compared to the corresponding prior period was predominantly the result of repaying $32.5 million more and borrowing $5.1 million less on our Facility in the first nine months of fiscal 2019 when compared with the
corresponding period of fiscal 2018. This increase was partially offset by our generating a net $30 million more in cash flow from mortgage refinancings and a new mortgage financing on a previously unencumbered property in the nine months ended July
31, 2019 when compared to the corresponding prior period.
Results of Operations
The following information summarizes our results of operations for the nine months and three months ended July 31, 2019 and 2018 (amounts
in thousands):
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Nine months ended
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July 31,
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Change Attributable to
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Revenues
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2019
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2018
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Increase (Decrease)
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% Change
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Property Acquisitions/Sales
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Properties Held In Both Periods (Note 1)
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Base rents
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$
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74,243
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$
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72,162
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$
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2,081
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2.9
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%
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$
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2,275
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$
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(194
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)
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Recoveries from tenants
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24,664
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23,390
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1,274
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5.4
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%
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940
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334
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Lease termination
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194
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3,790
|
|
|
|
(3,596
|
)
|
|
|
(94.9
|
)%
|
|
|
-
|
|
|
|
(3,596
|
)
|
Other income
|
|
|
4,196
|
|
|
|
3,467
|
|
|
|
729
|
|
|
|
21.0
|
%
|
|
|
58
|
|
|
|
671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating
|
|
|
16,670
|
|
|
|
16,850
|
|
|
|
(180
|
)
|
|
|
(1.1
|
)%
|
|
|
906
|
|
|
|
(1,086
|
)
|
Property taxes
|
|
|
17,603
|
|
|
|
15,604
|
|
|
|
1,999
|
|
|
|
12.8
|
%
|
|
|
641
|
|
|
|
1,358
|
|
Depreciation and amortization
|
|
|
20,926
|
|
|
|
21,287
|
|
|
|
(361
|
)
|
|
|
(1.7
|
)%
|
|
|
348
|
|
|
|
(709
|
)
|
General and administrative
|
|
|
7,149
|
|
|
|
7,024
|
|
|
|
125
|
|
|
|
1.8
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Operating Income/Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
10,607
|
|
|
|
10,178
|
|
|
|
429
|
|
|
|
4.2
|
%
|
|
|
95
|
|
|
|
334
|
|
Interest, dividends, and other investment income
|
|
|
228
|
|
|
|
246
|
|
|
|
(18
|
)
|
|
|
(7.3
|
)%
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
|
|
|
|
|
Change Attributable to
|
|
Revenues
|
|
2019
|
|
|
2018
|
|
|
Increase (Decrease)
|
|
|
% Change
|
|
|
Property Acquisitions/Sales
|
|
|
Properties Held In Both Periods (Note 1)
|
|
Base rents
|
|
$
|
24,537
|
|
|
$
|
24,668
|
|
|
$
|
(131
|
)
|
|
|
(0.5
|
)%
|
|
$
|
603
|
|
|
$
|
(734
|
)
|
Recoveries from tenants
|
|
|
7,839
|
|
|
|
7,074
|
|
|
|
765
|
|
|
|
10.8
|
%
|
|
|
177
|
|
|
|
588
|
|
Lease termination
|
|
|
178
|
|
|
|
36
|
|
|
|
142
|
|
|
|
394.4
|
%
|
|
|
-
|
|
|
|
142
|
|
Other income
|
|
|
1,995
|
|
|
|
1,031
|
|
|
|
964
|
|
|
|
93.5
|
%
|
|
|
17
|
|
|
|
947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating
|
|
|
4,955
|
|
|
|
4,804
|
|
|
|
151
|
|
|
|
3.1
|
%
|
|
|
193
|
|
|
|
(42
|
)
|
Property taxes
|
|
|
5,885
|
|
|
|
5,300
|
|
|
|
585
|
|
|
|
11.0
|
%
|
|
|
222
|
|
|
|
363
|
|
Depreciation and amortization
|
|
|
7,001
|
|
|
|
7,370
|
|
|
|
(369
|
)
|
|
|
(5.0
|
)%
|
|
|
82
|
|
|
|
(451
|
)
|
General and administrative
|
|
|
2,230
|
|
|
|
2,322
|
|
|
|
(92
|
)
|
|
|
(4.0
|
)%
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Operating Income/Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
3,497
|
|
|
|
3,439
|
|
|
|
58
|
|
|
|
1.7
|
%
|
|
|
23
|
|
|
|
35
|
|
Interest, dividends, and other investment income
|
|
|
44
|
|
|
|
104
|
|
|
|
(60
|
)
|
|
|
(57.7
|
)%
|
|
|
n/a
|
|
|
|
n/a
|
|
Note 1 – Properties held in both periods includes only properties owned for the entire periods of 2019 and 2018
and for interest expense the amount also includes parent company interest expense. All other properties are included in the property acquisition/sales column. There are no properties excluded from the analysis.
Base rents increased by 2.9% to $74.2 million for the nine month period ended July 31, 2019 as
compared with $72.2 million in the comparable period of 2018. Base rents decreased by 0.5% to $24.5 million for the three month period ended July 31, 2019 as compared with $24.7 million in the comparable period of 2018. The change in base rent and
the changes in other income statement line items analyzed in the table above were attributable to:
Property Acquisitions and Properties Sold:
In fiscal 2018, we purchased three properties totaling 53,700 square feet of GLA. In the first nine months of fiscal 2019, we
purchased one property totaling 177,000 square feet and sold one property totaling 10,100 square feet. These properties accounted for all of the revenue and expense changes attributable to property acquisitions and sales in the nine months ended
July 31, 2019 when compared with fiscal 2018.
Properties Held in Both Periods:
Revenues
Base Rent
The decrease in base rents for the nine month and three month periods ended July 31, 2019, when compared to the corresponding prior
periods, was predominantly caused by an increase in base rent in the nine months ended July 31, 2018 as a result of $725,000 in amortization of a below market rent in accordance with ASC Topic 805 from a lease with a tenant who vacated a shopping
center and whose lease was terminated. This decrease was offset by new leasing activity at several properties held in both periods and a lease renewal with a grocery-store tenant at a significantly higher rent than the expiring period rent, both of
which created a positive variance in base rent.
In the first nine months of fiscal 2019, we leased or renewed approximately 503,000 square feet (or approximately 11.0% of total
consolidated property leasable area). At July 31, 2019, the Company’s consolidated properties were 93.0% leased (93.2% leased at October 31, 2018).
Tenant Recoveries
In the nine month and three month periods ended July 31, 2019, recoveries from tenants (which represent reimbursements from tenants
for operating expenses and property taxes) increased by $334,000 and $588,000, respectively, when compared with the corresponding prior periods. This increase was a result of an increase in property tax expense caused by an increase in property tax
assessments in both periods predominantly related to properties the Company owns in Stamford, CT. This increase was partially offset by a decrease in property operating expenses mostly related to a decrease in snow removal costs at our properties
owned in both periods.
Lease Termination Income
In April 2018, we reached agreement with the grocery tenant at our Newark, NJ property to terminate its 63,000 square foot lease in
exchange for a one-time $3.7 million lease termination payment, which we received and recorded as revenue in the nine month period ended July 31, 2018. Also in March 2018, we leased that same space to a new grocery store operator who took possession
in May 2018. While the rental rate on the new lease is 30% less than the rental rate on the terminated lease, we hope that part of this decreased rental rate will be recaptured with the receipt of percentage rent in subsequent years as the store
matures and its sales increase. The new lease required no tenant improvement allowance.
Expenses
Property Operating
In the nine month and three month periods ended July 31, 2019, property operating expenses
decreased by $1.1 million and $42,000, respectively, when compared with the corresponding prior periods, predominantly as a result of a decrease in snow removal costs at our properties owned in both periods.
Property Taxes
In the nine month and three month periods ended July 31, 2019, property taxes increased by $1.4
million and $363,000, respectively, when compared with the corresponding prior periods, as a result of an increase in property tax assessments for a number of our properties owned in both periods, specifically in the City of Stamford, CT.
Interest
In the nine month and three month periods ended July 31, 2019, interest expense increased by
$334,000 and $35,000, respectively, when compared with the corresponding prior periods as a result of the Company having a larger balance drawn on its Facility for a large portion of fiscal 2019 when compared with the corresponding prior periods.
Depreciation and Amortization
In the nine month and three month periods ended July 31, 2019, depreciation and amortization decreased by $709,000 and $451,000,
respectively when compared with the prior period primarily as a result of increased ASC Topic 805 amortization expense for lease intangibles in the nine month and three month periods ended July 31, 2018 for a tenant who vacated the property and whose
lease was terminated.
General and Administrative Expenses
General and administrative expense was relatively unchanged for the nine month and three months
ended July 31, 2019 when compared with the corresponding prior periods.
Funds from Operations
We consider Funds from Operations (“FFO”) to be an additional measure of our operating performance. We report FFO in addition to net
income applicable to common stockholders and net cash provided by operating activities. Management has adopted the definition suggested by The National Association of Real Estate Investment Trusts (“NAREIT”) and defines FFO to mean net income
(computed in accordance with GAAP) excluding gains or losses from sales of property, plus real estate-related depreciation and amortization and after adjustments for unconsolidated joint ventures.
Management considers FFO a meaningful, additional measure of operating performance because it primarily excludes the assumption that
the value of our real estate assets diminishes predictably over time and industry analysts have accepted it as a performance measure. FFO is presented to assist investors in analyzing our performance. It is helpful as it excludes various items
included in net income that are not indicative of our operating performance, such as gains (or losses) from sales of property and depreciation and amortization. However, FFO:
•
|
does not represent cash flows from operating activities in accordance with GAAP (which, unlike FFO, generally reflects all
cash effects of transactions and other events in the determination of net income); and
|
•
|
should not be considered an alternative to net income as an indication of our performance.
|
FFO as defined by us may not be comparable to similarly titled items reported by other real estate investment trusts due to possible
differences in the application of the NAREIT definition used by such REITs. The table below provides a reconciliation of net income applicable to Common and Class A Common stockholders in accordance with GAAP to FFO for the nine months and three
months ended July 31, 2019 and 2018 (amounts in thousands):
Reconciliation of Net Income Available to Common and Class A Common Stockholders To Funds From Operations:
|
|
Nine months ended
|
|
|
Three Months Ended
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net Income Applicable to Common and Class A Common Stockholders
|
|
$
|
18,922
|
|
|
$
|
20,098
|
|
|
$
|
7,270
|
|
|
$
|
5,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real property depreciation
|
|
|
16,930
|
|
|
|
16,558
|
|
|
|
5,597
|
|
|
|
5,562
|
|
Amortization of tenant improvements and allowances
|
|
|
2,706
|
|
|
|
3,046
|
|
|
|
974
|
|
|
|
967
|
|
Amortization of deferred leasing costs
|
|
|
1,223
|
|
|
|
1,618
|
|
|
|
411
|
|
|
|
820
|
|
Depreciation and amortization on unconsolidated joint ventures
|
|
|
1,129
|
|
|
|
1,290
|
|
|
|
376
|
|
|
|
482
|
|
(Gain) on sale of property
|
|
|
(409
|
)
|
|
|
-
|
|
|
|
(409
|
)
|
|
|
-
|
|
Loss on sale of property in unconsolidated joint venture
|
|
|
457
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from Operations Applicable to Common and Class A Common Stockholders
|
|
$
|
40,958
|
|
|
$
|
42,610
|
|
|
$
|
14,219
|
|
|
$
|
13,410
|
|
FFO amounted to $41.0 million in the first nine months of fiscal 2019 compared to $42.6 million in the comparable period of fiscal
2018. The net decrease in FFO is attributable, among other things, to: (i) the receipt of a $3.7 million one-time lease termination payment in the second quarter of fiscal 2018 from a grocery store tenant who wanted to terminate its lease early (see
Significant Events with an Impact on Leasing section earlier in this Item 2); (ii) an increase of $725,000 in base rent in the third quarter of fiscal 2018 related to the amortization of a below market rent in accordance with ASC Topic 805 for a
grocery store tenant who was evicted and whose lease was terminated at our Passaic property (see Significant Events with an Impact on Leasing section earlier in this Item 2) and (iii) an increase in interest expense as a result of having more
outstanding on our Facility in the nine month and three month periods ended July 31, 2019 when compared with the corresponding prior periods; offset by (iv) a $403,000 gain on sale of marketable securities in the first nine months of fiscal 2019 when
we sold all of our marketable securities; (v) the additional net income generated from properties acquired in fiscal 2018 and the first nine months of fiscal 2019; (vi)
additional net income generated from increased base rent revenue for our existing properties, specifically related to a property where the grocery store tenant renewed its lease at a significantly higher rent than the current rent.
FFO amounted to $14.2 million in the three months ended July 31, 2019 compared to $13.4 million in the comparable period of fiscal
2018. The net increase in FFO is attributable, among other things, to: (i) the additional net income generated from properties acquired in fiscal 2018 and the first nine
months of fiscal 2019; (ii) additional net income generated from increased base rent revenue for our existing properties, specifically related to a property where the grocery store tenant renewed its lease at a significantly higher rent than the
current rent; offset by: (iii) an increase of $725,000 in base rent in the third quarter of fiscal 2018 related to the amortization of a below market rent in accordance with ASC Topic 805 for a grocery store tenant who was evicted and whose
lease was terminated at our Passaic property (see Significant Events with an Impact on Leasing section earlier in this Item 2).
Off-Balance Sheet Arrangements
We have six off-balance sheet investments in real property through unconsolidated joint ventures:
•
|
a 66.67% equity interest in the Putnam Plaza Shopping Center,
|
•
|
an 11.642% equity interest in Midway Shopping Center, L.P.,
|
•
|
a 50% equity interest in the Chestnut Ridge Shopping Center,
|
•
|
a 50% equity interest in the Gateway Plaza shopping center and the Riverhead Applebee’s Plaza, and
|
•
|
a 20% interest in a suburban office building with ground level retail.
|
These unconsolidated joint ventures are accounted for under the equity method of accounting, as we have the ability to exercise
significant influence over, but not control of, the operating and financial decisions of these investments. Our off-balance sheet arrangements are more fully discussed in Note 5, “Investments in and Advances to Unconsolidated Joint Ventures” in our
financial statements in Item 1 of this Quarterly Report on Form 10-Q. Although we have not guaranteed the debt of these joint ventures, we have agreed to customary environmental indemnifications and nonrecourse carve-outs (e.g. guarantees against
fraud, misrepresentation and bankruptcy) on certain loans of the joint ventures. The below table details information about the outstanding non-recourse mortgage financings on our unconsolidated joint ventures (amounts in thousands):
|
|
Principal Balance
|
|
|
|
|
Joint Venture Description
|
Location
|
Original Balance
|
|
At July 31, 2019
|
|
Fixed Interest Rate Per Annum
|
|
Maturity Date
|
|
|
|
|
|
|
|
|
|
Midway Shopping Center
|
Scarsdale, NY
|
|
$
|
32,000
|
|
|
$
|
26,900
|
|
|
|
4.80
|
%
|
Dec-2027
|
Putnam Plaza Shopping Center
|
Carmel, NY
|
|
$
|
18,900
|
|
|
$
|
18,700
|
|
|
|
4.81
|
%
|
Oct-2028
|
Gateway Plaza
|
Riverhead, NY
|
|
$
|
14,000
|
|
|
$
|
12,100
|
|
|
|
4.18
|
%
|
Feb-2024
|
Applebee's Plaza
|
Riverhead, NY
|
|
$
|
2,300
|
|
|
$
|
1,900
|
|
|
|
3.38
|
%
|
Aug-2026
|
Environmental Matters
Based upon management's ongoing review of its properties, management is not aware of any
environmental condition with respect to any of our properties that would be reasonably likely to have a material adverse effect on us. There can be no assurance, however, that (a) the discovery of environmental conditions that were previously
unknown, (b) changes in law, (c) the conduct of tenants or (d) activities relating to properties in the vicinity of our properties, will not expose us to material liability in the future. Changes in laws increasing the potential liability for
environmental conditions existing on properties or increasing the restrictions on discharges or other conditions may result in significant unanticipated expenditures or may otherwise adversely affect the operations of our tenants, which could
adversely affect our financial condition and results of operations.