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TABLE OF CONTENTS Form 10-K
PART IV

Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K


ý

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

Or

o

 

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.
(Exact name of registrant as specified in its charter)

MARYLAND
(State or other jurisdiction of
Incorporation or Organization)
  13-3147497
(I.R.S. employer
Identification No.)

60 Cutter Mill Road, Great Neck, New York
(Address of principal executive offices)

 

11021
(Zip Code)

Registrant's telephone number, including area code: (516) 466-3100

         Securities registered pursuant to Section 12(b) of the Act:

Title of each class   Name of exchange on which registered
Common Stock, par value $1.00 per share   New York Stock Exchange

         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 o    No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o    No ý

         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 ý    No o

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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. o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "small reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o
(Do not check if a
small reporting company)
  Smaller reporting company o

Emerging growth company o

         If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 13(a) of the Exchange Act. o

         Indicate by check mark whether registrant is a shell company (defined in Rule 12b-2 of the Act). Yes o    No ý

         As of June 30, 2017 (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 $338 million.

         As of March 1, 2018, the registrant had 19,068,336 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the proxy statement for the 2018 annual meeting of stockholders of One Liberty Properties, Inc., to be filed pursuant to Regulation 14A not later than April 30, 2018, are incorporated by reference into Part III of this Annual Report on Form 10-K.

   


Table of Contents


TABLE OF CONTENTS
Form 10-K

Item No.    
  Page(s)  

PART I

 

 

       

1.

 

Business

    1  

1A.

 

Risk Factors

    9  

1B.

 

Unresolved Staff Comments

    19  

2.

 

Properties

    19  

3.

 

Legal Proceedings

    25  

4.

 

Mine Safety Disclosures

    25  

PART II

 

 

       

5.

 

Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    26  

6.

 

Selected Financial Data

    28  

7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

    32  

7A.

 

Quantitative and Qualitative Disclosures About Market Risk

    46  

8.

 

Financial Statements and Supplementary Data

    47  

9.

 

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

    47  

9A.

 

Controls and Procedures

    47  

9B.

 

Other Information

    48  

PART III

 

 

       

10.

 

Directors, Executive Officers and Corporate Governance

    51  

11.

 

Executive Compensation

    52  

12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    52  

13.

 

Certain Relationships and Related Transactions, and Director Independence

    53  

14.

 

Principal Accountant Fees and Services

    53  

PART IV

 

 

       

15.

 

Exhibits and Financial Statement Schedules

    54  

16.

 

Form 10-K Summary

    56  

Signatures

    57  

Table of Contents


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 in Maryland on December 20, 1982. We acquire, own and manage a geographically diversified portfolio of industrial, retail (including furniture stores and supermarkets), restaurant, health and fitness and theater properties, many of which are subject to long-term leases. Most of our leases are "net leases" under which the tenant, directly or indirectly, is responsible for paying the real estate taxes, insurance and ordinary maintenance and repairs of the property. As of December 31, 2017, we own 113 properties (excluding a property disposed of in January 2018) and participate in joint ventures that own five properties. These 118 properties are located in 30 states and have an aggregate of approximately 10.7 million square feet (including an aggregate of approximately 1.2 million square feet at properties owned by our joint ventures).

        As of December 31, 2017:

    our 2018 contractual rental income (as described below) is $67.7 million.

    the occupancy rate of our properties is 99.6% based on square footage.

    the weighted average remaining term of our mortgage debt is 8.8 years and the weighted average interest rate thereon is 4.22%.

    the weighted average remaining term of the leases generating our 2018 contractual rental income is 8.4 years.

        Our 2018 contractual rental income represents, after giving effect to any abatements, concessions or adjustments, the base rent payable to us in 2018 under leases in effect at December 31, 2017. Excluded from 2018 contractual rental income are approximately $483,000 of straight-line rent, amortization of approximately $1.0 million of intangibles, $56,000 of base rent payable through January 31, 2018 with respect to a property we sold in January 2018, and our share of the base rent payable to our joint ventures, which in 2018 is approximately $2.4 million.

2017 Highlights and Recent Developments

        In 2017:

    our rental income, net, increased by $4.1 million, or 6.4%, from 2016.

    we acquired four properties for an aggregate purchase price of $43.2 million. The acquired properties account for $3.1 million, or 4.6%, of our 2018 contractual rental income.

    we sold four properties, three of which were vacant, for a net gain on sale of real estate of $9.8 million. The properties sold accounted for 0.5% and 2.6% of 2017 and 2016 rental income, net, respectively.

    we obtained proceeds of $21.2 million from mortgage financings, all of which relate to properties acquired in 2017.

    we increased our quarterly dividend by 4.7% to $0.45 per share, commencing with the dividend declared in December 2017 and paid in January 2018.

    we raised net proceeds of approximately $5.6 million from the issuance of 231,000 shares of common stock pursuant to our at-the-market equity offering program.

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    we re-leased four vacant properties or portions thereof. In 2017, we incurred an aggregate of $739,000 of real estate operating expenses in carrying such properties. In 2018, we will generate an aggregate of approximately $1.2 million of rental income from such properties and in the future, will not be responsible for the related operating expenses.

    on January 30, 2018, we sold a multi-tenant retail property located in Fort Bend, Texas, in which we held an 85% interest, for gross proceeds of $9.2 million and paid off the $4.4 million mortgage. In the quarter ending March 31, 2018, we anticipate recognizing a gain on this sale of approximately $2.4 million. The non-controlling interests' share of the gain from the transaction will be approximately $800,000.

        In the narrative portion of this Annual Report on Form 10-K, except as otherwise indicated:

    the information with respect to our consolidated joint ventures is generally described as if such ventures are our wholly owned subsidiaries and information with respect to unconsolidated joint ventures is generally separately described,

    (i) all references to joint ventures refer to unconsolidated joint ventures, (ii) all interest rates with respect to debt give effect to the related interest rate derivative, if any, (iii) amounts reflected as debt, reflects the gross debt owed, without deducting deferred financing costs, and (iv) square footage and terms of like import refers to the total square footage of the applicable building, including common areas, if any,

    2018 contractual rental income derived from multiple properties leased pursuant to a master lease is allocated among such properties based on management's estimate of the appropriate allocations, and

    the rental, operating, mortgage and statistical information, excludes the Fort Bend, Texas property sold in January 2018, other than with respect to the disclosures under "Item 6. Selected Financial Data" and "Item 7. Management's Discussion and Analysis of Financial Condition—Results of Operations—Comparison of Years Ended December 31, 2017 and 2016 " and "—Results of Operations—Comparison of Years Ended December 31, 2016 and 2015."

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 primary goal is to acquire single-tenant properties that are subject to long-term net leases that include periodic contractual rental increases or rent increases based on increases in the consumer price index. Periodic contractual rental increases provide reliable increases in future rent payments and rent increases based on the consumer price index provide protection against inflation. Historically, long-term leases have made 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 and reducing the outstanding principal balance over time. We may, however, acquire a property that is subject to a short-term lease when we believe the property represents a favorable opportunity for generating additional income from its re-lease or has significant residual value. Although the acquisition of single-tenant properties subject to net leases is the focus of our investment strategy, we also consider investments in, among other things, (i) properties that can be re-positioned or re-developed, (ii) community shopping centers anchored by national or regional tenants and (iii) properties ground leased to operators of multi-family properties. We pay substantially all the operating expenses at community shopping centers, a significant portion of which is reimbursed by tenants pursuant to their leases.

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        Generally, we 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, we will dispose of a property if we regard the disposition of the property as an opportunity to realize the overall value of the property sooner or to avoid future risks by achieving a determinable return from the property.

        Historically, a significant portion of our portfolio generated rental income from retail properties. We are sensitive to the risks facing the retail industry and have been addressing our exposure thereto by seeking to acquire properties that capitalize on e-commerce activities, such as e-commerce distribution and warehousing facilities, and by being especially selective in acquiring retail properties. As a result of this emphasis, retail properties generated 43.3%, 46.1%, and 49.5% of rental income, net, in 2017, 2016, and 2015, respectively.

        We identify properties through the network of contacts of our senior management and our affiliates, which contacts include real estate brokers, private equity firms, banks and law firms. In addition, we attend industry conferences and engage in direct solicitations.

        Our charter documents do not limit 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 the concentration of investments in any region 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 the acquisition of a net leased property, a ground lease (other than a ground lease of a multi-family property) or a community shopping center, will first be offered to us and may not be pursued by any of our affiliated entities unless we decline the opportunity. Further, to the extent our affiliates are unable or unwilling to pursue an acquisition of a multi-family property (including a ground lease of a multi-family property), we may pursue such transaction if it meets our investment objectives.

Investment Evaluation

        In evaluating potential investments, we consider, among other criteria, the following:

    the current and projected cash flow of the property;

    the estimated return on equity to us;

    an evaluation of the property and improvements, given its location and use;

    local demographics (population and rental trends);

    the terms of tenant leases, including co-tenancy provisions and the relationship between current rents and market rents;

    the ability of a tenant, if a net leased property, or major tenants, if a multi-tenant property, to meet operational needs and lease obligations;

    an evaluation of the credit quality of the tenant;

    the projected residual value of the property;

    the potential to finance or refinance the property;

    potential for income and capital appreciation;

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    occupancy of and demand for similar properties in the market area; and

    alternate uses or tenants for the property.

Our Business Objective

        Our business objective is to maintain and increase, over time, the cash available for distribution to our stockholders by:

    identifying opportunistic and strategic property acquisitions consistent with our portfolio and our acquisition strategies;

    obtaining mortgage indebtedness (including refinancings) on favorable terms and maintaining access to capital to finance property acquisitions; and

    monitoring and maintaining our portfolio, including tenant negotiations and lease amendments with tenants that are renewing, expanding or having financial difficulty; and

    managing our portfolio effectively, including opportunistic and strategic property sales.

Typical Property Attributes

        As of December 31, 2017, the properties in our portfolio have the following attributes:

    Net leases.  Most of our 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 reasonably predictable returns.

    Long-term leases.  Many of our leases are long-term leases. The weighted average remaining term of our leases is 8.4 years. Leases representing approximately 27.3% of our 2018 contractual rental income expire between 2023 and 2026 and leases representing approximately 36.4% of our 2018 contractual rental income expire after 2027.

    Scheduled rent increases.  Leases representing approximately 73.6% of our 2018 contractual rental income provide for either periodic contractual rent increases or a rent increase based on the consumer price index.

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Our Tenants

        The following table sets forth information about the diversification of our tenants by industry sector as of December 31, 2017:

Type of Property
  Number of
Tenants
  Number of
Properties
  2018 Contractual
Rental Income
  Percentage of
2018 Contractual
Rental Income
 

Industrial

    31     28   $ 25,119,990     37.1  

Retail—General

    57     35     15,963,958     23.6  

Retail—Furniture(1)

    3     14     6,109,003     9.0  

Restaurant

    10     16     3,185,623     4.7  

Health & Fitness

    1     3     3,080,333     4.5  

Retail—Supermarket

    3     3     2,718,682     4.0  

Retail—Office Supply(2)

    1     7     2,406,728     3.6  

Theater

    1     2     2,293,132     3.4  

Other

    5     5     6,856,708     10.1  

    112     113   $ 67,734,157     100.0  

(1)
Eleven properties are net leased to Haverty Furniture Companies, Inc., which we refer to as Haverty Furniture, pursuant to a master lease covering all such properties.

(2)
Includes seven properties which are net leased to Office Depot pursuant to seven separate leases. Five of the Office Depot leases contain cross-default provisions.

        Many of our tenants (including franchisees of national chains) operate on a national basis including, among others, Advanced Auto, Applebees, Barnes & Noble, Burlington Coat Factory, CarMax, CVS, Famous Footwear, FedEx, Ferguson Enterprises, LA Fitness, Marshalls, Men's Wearhouse, Northern Tool, Office Depot, Party City, PetSmart, Ross Stores, Shutterfly, TGI Friday's, The Toro Company, Urban Outfitters, Walgreens, Wendy's and Whole Foods, and some of our tenants operate on a regional basis, including Haverty Furniture and Giant Food Stores.

Our Leases

        Most of our leases are net leases under which the tenant, in addition to its rental obligation, typically is responsible, directly or indirectly for expenses attributable to the operation of the property, such as real estate taxes and assessments, insurance and ordinary maintenance and repairs. The tenant is also generally responsible for maintaining the property 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 and naming us an additional insured. 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 or for rent increases pursuant to a formula based on the consumer price index. Some of our leases provide for minimum rents supplemented by additional payments based on sales derived from the property subject to the lease (i.e., percentage rent). Percentage rent from four properties contributed $263,000 to 2017 rental income, of which $174,000 was contributed by one tenant. Percentage rent contributed $42,000, and $38,000 to rental income in 2016 and 2015, respectively.

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        Generally, our strategy is 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 expirations of leases at our properties as of December 31, 2017:

Year of Lease Expiration(1)
  Number of
Expiring
Leases
  Approximate
Square
Footage
Subject to
Expiring
Leases
  2018 Contractual
Rental Income
Under Expiring
Leases
  Percentage of
2018 Contractual
Rental Income
Represented by
Expiring Leases
 

2018

    12     206,592   $ 1,333,898     2.0  

2019

    12     321,507     2,952,389     4.4  

2020

    9     110,548     1,621,506     2.4  

2021

    18     578,070     4,194,598     6.2  

2022

    25     2,144,389     14,424,295     21.3  

2023

    13     852,141     5,689,479     8.4  

2024

    6     408,093     2,069,484     3.1  

2025

    10     387,202     5,410,643     8.0  

2026

    11     551,229     5,266,182     7.8  

2027 and thereafter

    33     3,827,219     24,771,683     36.4  

    149     9,386,990   $ 67,734,157     100.0  

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

Financing, Re-Renting and Disposition of Our Properties

        Our revolving credit facility provides us with a source of funds that may be used to acquire properties, payoff existing mortgages, and to a more limited extent, invest in joint ventures, implement property improvements and for working capital purposes. Net proceeds received from the sale, financing or refinancing of properties are generally required to be used to repay amounts outstanding under our facility. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facility".

        We mortgage specific properties on a non-recourse basis, subject to the standard carve-outs described under "Item 2. Properties—Mortgage Debt", to enhance the return on our investment in a specific property. The proceeds of mortgage loans 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, when available at acceptable terms, 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, 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

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investment for income purposes and do not typically engage in the turnover of investments. We will consider the sale of a property if a sale appears advantageous in view of our investment objectives. If there is a substantial tax gain, we may seek to enter into a tax deferred transaction and reinvest the proceeds in another property. Cash realized from the sale of properties, net of required payoffs of the related mortgage debt, if any, required paydowns of our credit facility, and distributions to stockholders, is available for general working capital purposes and the acquisition of additional properties.

Our Joint Ventures

        As of December 31, 2017, we participated in five joint ventures that own an aggregate of five properties, with approximately 1.2 million square feet of space. Four of the properties are retail properties and one is an industrial property. We own 50% of the equity interest in all of these joint ventures. At December 31, 2017, our investment in joint ventures was approximately $10.7 million and the occupancy rate at the properties owned by these ventures, based on square footage, was 97.6%.

        Based on the leases in effect at December 31, 2017, we anticipate that our share of the base rent payable in 2018 to our joint ventures is approximately $2.4 million. Leases for two properties are expected to contribute 86.5% of the aggregate base rent payable to all of our joint ventures in 2018. Leases with respect to 55.6%, 11.9% and 32.5% of the aggregate base rent payable to all of our joint ventures in 2018, is payable pursuant to leases expiring from 2018 to 2019, from 2020 to 2021, and thereafter, respectively.

        See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Other Developments" for information regarding properties tenanted by Kmart.

Competition

        We face competition for the acquisition of properties from a variety of investors, including domestic and foreign corporations and real estate companies, financial institutions, insurance companies, pension funds, investment funds, other REITs and individuals, many of which have significant advantages over us, including a larger, more diverse group of properties and greater financial (including access to debt on more favorable terms) and other resources than we have.

Our Structure

        Nine employees, including Patrick J. Callan, Jr., our president and chief executive officer, Lawrence G. Ricketts, Jr., our executive vice president and chief operating officer, Justin Clair, a vice president, Karen Dunleavy, vice president-financial and five other employees, devote all of their business time to us. Our other executive, administrative, legal, accounting and clerical personnel provide their services to us on a part-time basis pursuant to the compensation and services agreement described below.

        We entered into a compensation and services agreement with Majestic Property Management Corp. effective as of January 1, 2007. Majestic Property is wholly-owned by our vice chairman of the board and it provides compensation to certain of our executive officers. Pursuant to this agreement, we pay fees to Majestic Property and Majestic Property provides us with the services of all affiliated executive, administrative, legal, accounting and clerical personnel that we use on a part time basis, as well as property management services, property acquisition, sales and leasing and mortgage brokerage services. The fees we pay Majestic Property are negotiated by us and Majestic Property in consultation with our audit and compensation committees, and are approved by these committees and our independent directors.

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        In 2017, pursuant to the compensation and services agreement, we paid Majestic Property a fee of approximately $2.7 million plus $216,000 for our share of all direct office expenses, including rent, telephone, postage, computer services, supplies and internet usage. Included in the $2.7 million fee is $1,154,000 for property management services—the fee for the property management services is based on 1.5% and 2.0% of the rental payments (including tenant reimbursements) actually received by us from net lease tenants and operating lease tenants, respectively. Property management fees are not paid to Majestic Property with respect to properties managed by third parties. Based on our portfolio of properties at December 31, 2017, we estimate that the property management fee in 2018 will be approximately $1,190,000.

        We believe that the compensation and services agreement allows us to benefit from (i) 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, (ii) other individuals who perform services on our behalf, and (iii) general economies of scale. If not for this 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. See Note 12 to our consolidated financial statements for information regarding equity awards to individuals performing services on our behalf pursuant to the compensation and services agreement.

Available Information

        Our Internet address is www.onelibertyproperties.com. On the Investor Information page of 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 (the "SEC"): 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 documents 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 SEC. 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 us, 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," "could," "believe," "expect,"

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"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:

    the financial condition of our tenants and the performance of their lease obligations;

    general economic and business conditions, including those currently affecting our nation's economy and real estate markets;

    the availability of and costs associated with sources of liquidity;

    accessibility of debt and equity capital markets;

    general and local real estate conditions, including any changes in the value of our real estate;

    compliance with credit facility covenants;

    increased competition for leasing of vacant space due to current economic conditions;

    changes in governmental laws and regulations relating to real estate and related investments;

    the level and volatility of interest rates;

    competition in our industry; and

    the other risks described under Item 1A. Risk Factors.

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

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

Item 1A.    Risk Factors.

        Set forth below is a 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 operations, may, and likely will, adversely affect many aspects of our business. 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

Approximately 40.2% of our 2018 contractual rental income is derived from tenants operating in the retail industry and the failure of those tenants to pay rent would significantly reduce our revenues.

        Approximately 40.2% of our 2018 contractual rental income is derived from retail tenants, including 9.0% from tenants engaged in retail furniture (i.e., Haverty Furniture accounts for 7.1% of

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2018 contractual rental income) and 3.6% from tenants engaged in office supply activities (i.e., Office Depot accounts for 3.6% of 2018 contractual rental income).

        Various factors could cause our retail tenants to close their locations, including difficult economic conditions and e-commerce competition. The failure of our retail tenants to meet their lease obligations, including rent payment obligations, due to these and other factors, may make it difficult for us to satisfy our operating and debt service requirements, make capital expenditures and pay dividends.

If we are unable to re-rent properties upon the expiration of our leases or if our tenants default or seek bankruptcy protection, our rental income will be reduced and we would incur additional costs.

        Substantially all of our rental income is derived from rent paid by our tenants. From 2018 through 2020, leases with respect to 33 tenants that account for 8.8% of our 2018 contractual rental income, expire. If our tenants, and in particular, our significant tenants, (i) do not renew their leases upon the expiration of same, (ii) default on their obligations or (iii) seek rent relief, lease renegotiation or other accommodations, our revenues could decline and, in certain cases, co-tenancy provisions may be triggered possibly allowing other tenants at the same property to reduce their rental payments or terminate their leases. At the same time, we would remain responsible for the payment of the mortgage obligations with respect to the related properties and would become responsible for the operating expenses related to these properties, including, among other things, real estate taxes, maintenance and insurance. In addition, we may incur expenses in enforcing our rights as landlord. Even if we find replacement tenants or renegotiate leases with current tenants, the terms of the new or renegotiated leases, including the cost of required renovations or concessions to tenants, or the expense of the reconfiguration of a tenant's space, may be less favorable than current lease terms and could reduce the amount of cash available to meet expenses and pay dividends. If tenants facing financial difficulties default on their obligation to pay rent or do not renew their leases at lease expiration, our results of operations and financial condition may be adversely affected. See "Item 7. Management's Discussion and Analysis of Financial Condition or Results of Operations—Other Developments".

Approximately 22.9% of our 2018 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 Furniture, LA Fitness, Northern Tool, Office Depot and Ferguson Enterprises account for approximately 7.1%, 4.5%, 4.2%, 3.6% and 3.5%, respectively, of our 2018 contractual rental income. The default, financial distress or bankruptcy of any of these tenants could cause interruptions in the receipt of, or the loss of, a significant amount of rental income and would require us to pay operating expenses (including real estate taxes) currently paid by the tenant. This could also 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.

Competition that traditional retail tenants face from e-commerce retail sales could adversely affect our business.

        Our retail tenants face increasing competition from e-commerce retailers. These retailers may be able to provide customers with better pricing and the ease and comfort of shopping from their home or office. E-commerce sales have been obtaining an increasing percentage of retail sales over the past few years and this trend is expected to continue. The continued growth of e-commerce sales could decrease the need for traditional retail outlets and reduce retailers' space and property requirements. This could adversely impact our ability to rent space at our retail properties and increase competition for retail tenants thereby reducing the rent we would receive at these properties and adversely affect our results of operations and financial condition.

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If we are unable to refinance our mortgage loans at maturity, we may be forced to sell properties at disadvantageous terms, which would result in the loss of revenues and in a decline in the value of our portfolio.

        We had, as of December 31, 2017, $392.5 million in mortgage debt outstanding, all of which is non-recourse (subject to standard carve-outs) and our ratio of mortgage debt to total assets was 53.3%. Our joint ventures had $35.0 million in total mortgage indebtedness (all of which is non-recourse, subject to standard carve-outs). The risks associated with our mortgage debt and the mortgage debt of our joint ventures include the risk that cash flow from properties securing the indebtedness and our available cash and cash equivalents will be insufficient to meet required payments of principal and interest.

        Generally, only a portion of the principal of our mortgage indebtedness will be repaid prior to or at maturity and we do not plan to retain sufficient cash to repay such indebtedness at maturity. Accordingly, to meet these obligations if they cannot be refinanced at maturity, we will have to use funds available under our credit facility, if any, and our available cash and cash equivalents to pay our mortgage debt or seek to raise funds through the financing of unencumbered properties, sale of properties or the issuance of additional equity. From 2018 through 2022, approximately $111.4 million of our mortgage debt matures—specifically, $20.4 million in 2018, $14.6 million in 2019, $11.9 million in 2020, $20.7 million in 2021 and $43.8 million in 2022. With respect to our joint ventures, approximately $14.2 million of mortgage debt matures from 2018 through 2022—specifically, $4.3 million in 2018, $877,000 in 2019, $911,000 in 2020, $948,000 in 2021, and $7.2 million in 2022. If we (or our joint ventures) are unsuccessful in refinancing or extending existing mortgage 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 mortgage debt when payments become due, and we (or a joint venture) may be forced to dispose of properties on disadvantageous terms or convey properties secured by mortgages to the mortgagees, which would lower our revenues and the value of our portfolio.

        We may find that the value of a property could be less than the mortgage secured by such property. We may also have to decide whether we should refinance or pay off a mortgage on a property at which the mortgage matures prior to lease expiration and the tenant may not renew the lease. In these types of situations, after evaluating various factors, including among other things, the tenant's competitive position in the applicable submarket, our and our tenant's estimates of its prospects, consideration of alternative uses and opportunities to re-purpose or re-let the property, we may seek to renegotiate the terms of the mortgage, or to the extent that the loan is non-recourse and the terms of the mortgage cannot be satisfactorily renegotiated, forfeit the property by conveying it to the mortgagee and writing off our investment.

Declines in the value of our properties could result in impairment charges.

        If we are presented with indications of an impairment in the value of a particular property or group of properties, we will be required to evaluate any such property or properties. If we determine that any of our properties at which indicators of impairment exist have a fair market value below the net book value of such property, we will be required to recognize an impairment charge for the difference between the fair value and the book value during the quarter in which we make such determination; such impairment charges may then increase in subsequent quarters. This evaluation may lead us to write off any straight-line rent receivable and lease intangible balances recorded with respect to such property. In addition, we may incur losses from time to time if we dispose of properties for sales prices that are less than our book value.

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The concentration of our properties in certain states may make our revenues and the value of our portfolio vulnerable to adverse changes in local economic conditions.

        Many of the properties we own are located in the same or a limited number of geographic regions. Approximately 40.7% of our 2018 contractual rental income will be derived from properties located in five states—Texas (11.9%), South Carolina (8.3%), New York (7.9%), Pennsylvania (6.4%) and North Carolina (6.2%). At December 31, 2017, approximately 43.1% of the net book value of our real estate investments was located in five states—Texas (11.3%), South Carolina (9.6%), Pennsylvania (9.3%), Tennessee (7.2%) and Maryland (5.7%). As a result, a decline in the economic conditions in these states or in 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 of our rental income and/or impairment charges.

If interest rates increase or credit markets tighten, it may be more difficult for us to secure financing, which may limit our ability to finance or refinance our real estate properties, reduce the number of properties we can acquire, sell certain properties, and decrease our stock price.

        An increase in interest rates could reduce the amount investors are willing to pay for our common stock. Because REIT stocks are often perceived as high-yield investments, investors may perceive less relative benefit to owning REIT stocks as interest rates and the yield on government treasuries and other bonds increase.

        Increases in interest rates or reduced access to credit markets may make it difficult for us to obtain financing, refinance mortgage debt, limit the mortgage debt available on properties we wish to acquire and limit the properties we can acquire. Even in the event that we are able to secure mortgage debt on, or otherwise finance our real estate properties, due to increased costs associated with securing financing and other factors beyond our control, we may be unable to refinance the entire outstanding loan balance or be subject to unfavorable terms (such as higher loan fees, interest rates and periodic payments) if we do refinance the loan balance. In addition, an increase in interest rates could decrease the amount third parties are willing to pay for our assets, thereby limiting our ability to reposition our portfolio promptly in response to changes in economic or other conditions.

        While interest rates have been at historically low levels the past several years, they have recently been increasing and become increasingly volatile. At December 29, 2017 and February 28, 2018, the interest rate on the 10-year treasury note was 2.40% and 2.87%, respectively. If we are required to refinance mortgage debt that matures over the next several years at higher interest rates than such mortgage debt currently bears, the funds available for dividends may be reduced. The following table sets forth, as of December 31, 2017, the principal balance of the mortgage payments due at maturity on our properties and the weighted average interest rate thereon (dollars in thousands):

Year
  Principal
Balances
Due at Maturity
  Weighted
Average Interest
Rate Percentage
 

2018

  $ 10,260     4.26  

2019

    3,485     3.88  

2020

         

2021

    8,463     4.13  

2022

    31,539     3.92  

2023 and thereafter

    214,048     4.20  

        We manage a substantial portion of our exposure to interest rate risk by accessing debt with staggered maturities, obtaining fixed rate mortgage debt and through the use of interest rate swap agreements. However, no amount of hedging activity can fully insulate us from the risks associated with changes in interest rates. Swap agreements involve risk, including that counterparties may fail to honor

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their obligations under these arrangements, and that these arrangements may cause us to pay higher interest rates on our debt obligations than would otherwise be the case. Failure to hedge effectively against interest rate risk could adversely affect our results of operations and financial condition.

If our borrowings increase, the risk of default on our repayment obligations and our debt service requirements will also increase.

        The terms of our revolving credit facility limit our ability to incur indebtedness, including limiting the total indebtedness that we may incur to an amount equal to 70% of the total value (as defined in the credit facility) of our properties. 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 pay dividends.

If a significant number of our tenants default or fail to renew expiring leases, or we take impairment charges against our properties, a breach of our revolving credit facility could occur.

        Our revolving credit facility includes covenants that require us to maintain certain financial ratios and comply with other requirements. If our tenants default under their leases with us or fail to renew expiring leases, generally accepted accounting principles may require us to recognize impairment charges against our properties, and our financial position could be adversely affected causing us to be in breach of the financial covenants contained in our credit facility.

        Failure to meet interest and other payment obligations under our revolving credit facility or a breach by us of the covenants to maintain the financial ratios would place us in default under our credit facility, and, if the banks called a default and required us to repay the full amount outstanding under the credit facility, we might be required to rapidly dispose of our properties, which could have an adverse impact on the amounts we receive on such disposition. If we are unable to dispose of our properties in a timely fashion to the satisfaction of the banks, the banks could foreclose on that portion of our collateral pledged to the banks, which could result in the disposition of our properties at below market values. The disposition of our properties at below our carrying value would adversely affect our net income, reduce our stockholders' equity and adversely affect our ability to pay dividends.

Certain of our net leases and our ground leases require us to pay property related expenses that are not the obligations of our tenants.

        Under the terms of substantially all of our net leases, 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, under the provisions of certain net and ground leases, we are required to pay some expenses, such as the costs of environmental liabilities, roof and structural repairs, insurance premiums, certain non-structural repairs and maintenance. If our properties incur significant expenses that must be paid by us under the terms of our leases, our business, financial condition and results of operations will be adversely affected and the amount of cash available to meet expenses and pay dividends 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.

        Most 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 be insufficient (i) to pay the full replacement cost of the improvements at the property following a casualty event or (ii) if coverage is provided pursuant to a blanket policy and the tenant's other properties are subject to insurance claims. In addition, the rent loss coverage under the policy may not extend for the full period

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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, 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 coverage available in the market, and changes in the type, capacity and sophistication of building systems. Approximately 40.2% and 37.1% of our 2018 contractual rental income is from retail and industrial tenants, respectively, and we are vulnerable to economic declines that negatively impact these sectors of the economy, which 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, leasehold 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. The occurrence of any of these events could adversely impact our results of operations, liquidity and financial condition.

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.

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We have been, and in the future will be, subject to significant competition and we may not be able to compete successfully for investments.

        We have been, and in the future will be, subject to significant competition for attractive investment opportunities from other real estate investors, many of which have greater financial resources than us, including publicly-traded REITs, non-traded REITs, insurance companies, commercial and investment banking firms, private institutional funds, hedge funds, private equity funds and other investors. We may not be able to compete successfully for investments. If we pay higher prices for investments, our returns may be lower and the value of our assets may not increase or may decrease significantly below the amount we paid for such assets. If such events occur, we may experience lower returns on our investments.

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 is distributed. This, along with other factors, will enable us to qualify for the tax benefits accorded to a REIT under the Internal Revenue Code of 1986, as amended, which we refer to as the "Code". 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 on Form 10-K. All distributions will be made at the discretion of our board of directors and will depend on our earnings (including taxable income), our financial condition, maintenance of our REIT status and such other factors as our board of directors may deem relevant from time to time.

If we reduce our dividend, the market value of our common stock may decline.

        The level of our common stock dividend is established by our board of directors from time to time based on a variety of factors, including our cash available for distribution, funds from operations, adjusted funds from operations and maintenance of our REIT status. Various factors could cause our board of directors to decrease our dividend level, including insufficient income to cover our dividends, tenant defaults or bankruptcies resulting in a material reduction in our funds from operations or a material loss resulting from an adverse change in the value of one or more of our properties. If our board of directors determines to reduce our common stock dividend, the market value of our common stock could be adversely affected.

Our current and future investments in joint ventures could be adversely affected by the lack of sole decision making authority, reliance on joint venture partners' financial condition or insurance coverage, disputes that may arise between our joint venture partners and us and our reliance on one significant joint venture partner.

        A number of properties in which we have an interest are owned through consolidated and unconsolidated joint ventures. We may continue to acquire properties through joint ventures and/or contribute some of our properties to joint ventures. Investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved, including the possibility that joint venture partners might file for bankruptcy protection, fail to fund their share of required capital contributions or obtain insurance coverage pursuant to a blanket policy as a result of which claims with respect to other properties covered by such policy and in which we have no interest could reduce or eliminate the coverage available with respect to the joint venture properties. Further, joint venture partners may have conflicting business interests or goals, and as a result there is the potential risk of impasses on decisions, such as a sale and the timing thereof. Any disputes that may arise between joint venture partners and us may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by or disputes with joint venture partners might result in subjecting properties owned by the joint venture to additional risk. With respect to our (i) consolidated joint ventures, we own, with two

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joint venture partners and their respective affiliates, five properties that account for 5.1% of 2018 contractual rental income (and we own one property, of which our share of the annual base rent in 2018 is $1.4 million, with one of these joint venture partners through an unconsolidated joint venture), and (ii) unconsolidated joint ventures, we own, with one joint venture partner and its affiliates, three properties which account for our $326,000 share of 2018 base rent payable. We may be adversely affected if we are unable to maintain a satisfactory working relationship with these joint venture partners or if any of these partners becomes financially distressed.

Compliance with environmental regulations and associated costs could adversely affect our results of operations and 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, the remediation costs could have a material adverse impact upon our results of operations, liquidity and financial condition.

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.

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 Matthew J. Gould, chairman of our board of directors, Fredric H. Gould, vice chairman of our board of directors, Patrick J. Callan, Jr., our president and chief executive officer, Lawrence G. Ricketts, Jr., our executive vice president and chief operating officer, David W. Kalish, our senior vice president and chief financial officer and Karen Dunleavy, our vice president—financial, and other members of our senior management to carry out our business and investment strategies. Only three of our senior officers, Messrs. Callan and Ricketts, and Ms. Dunleavy, devote all of their business time to us. The remainder of our senior management provides services to us on a part-time, as-needed basis. The loss of the services of any of our senior management or other key

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personnel, the inability or failure of the members of senior management providing services to us on a part-time basis to devote sufficient time or attention to our activities or our inability to recruit and retain qualified personnel in the future, could impair our ability to carry out our business and investment strategies.

Our transactions with affiliated entities involve conflicts of interest.

        From time to time we have entered into transactions with persons and entities affiliated with us and with certain of our officers and directors. Such transactions involve a potential conflict of interest, and entail a risk that we could have obtained more favorable terms if we had entered into such transaction with an unaffiliated third party. Our policy for transactions with affiliates is to have these transactions approved by our audit committee. We entered into a compensation and services agreement with Majestic Property effective as of January 1, 2007. Majestic Property is wholly-owned by the vice chairman of our board of directors and it provides compensation to certain of our part-time senior executive officers and other individuals performing services on our behalf. Pursuant to the compensation and services agreement, we pay an annual fee to Majestic Property which provides us with the services of all affiliated executive, administrative, legal, accounting and clerical personnel that we use on a part time basis, as well as property management services, property acquisition, sales and leasing and mortgage brokerage services. In 2017, pursuant to the compensation and services agreement, we paid Majestic Property a fee of $2.7 million and an additional $216,000 for our share of all direct office expenses, including rent, telephone, postage, computer services, supplies, and internet usage. We also obtain our property insurance in conjunction with Gould Investors L.P., our affiliate, and in 2017, reimbursed Gould Investors $790,000 for our share of the insurance premiums paid by Gould Investors. Gould Investors beneficially owns approximately 9.5% of our outstanding common stock and certain of our senior executive officers are also executive officers of the managing general partner of Gould Investors. See Note 12 of our consolidated financial statements for information regarding equity awards to individuals performing services on our behalf pursuant to the compensation and services agreement.

The failure of any bank in which we deposit our funds could have an adverse impact on our financial condition.

        We have diversified our cash and cash equivalents between several banking institutions in an attempt to minimize exposure to any one of these entities. However, the Federal Deposit Insurance Corporation only insures accounts in amounts up to $250,000 per depositor per insured bank. We currently have cash and cash equivalents deposited in certain financial institutions significantly in excess of federally insured levels. If any of the banking institutions in which we have deposited funds ultimately fails, we may lose our deposits over $250,000. The loss of our deposits may have an adverse effect on our financial condition.

Breaches of information technology systems could materially harm our business and reputation.

        We collect and retain on information technology systems, certain financial, personal and other sensitive information provided by third parties, including tenants, vendors and employees. We also rely on information technology systems for the collection and distribution of funds. There can be no assurance that we will be able to prevent unauthorized access to sensitive information or the unauthorized distribution of funds. Any loss of this information or unauthorized distribution of funds as a result of a breach of information technology systems may result in loss of funds to which we are entitled, legal liability and costs (including damages and penalties), as well as damage to our reputation, that could materially and adversely affect our business.

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We are dependent on third party software for our billing and financial reporting processes.

        We are dependent on third party software, and in particular Yardi's property management software, for generating tenant invoices and financial reports. If the software fails (including a failure resulting from such parties unwillingness or inability to maintain or upgrade the functionality of the software), our ability to bill tenants and prepare financial reports could be impaired which would adversely affect our business.

Risks Related to the REIT Industry

Legislative, regulatory or administrative changes could adversely affect us or our stockholders.

        The tax laws or regulations governing REITs or the administrative interpretations thereof may be amended at any time. We cannot predict if or when any new or amended law, regulation or administrative interpretation will be adopted, promulgated or become effective, and any such change may apply retroactively. We and our stockholders may be adversely affected by any new or amended law, regulation or administrative interpretation.

        On December 22, 2017, the Tax Cuts and Jobs Act, which we refer to as the "Tax Act", was enacted. The Tax Act enacted significant changes to the U.S. federal income tax rules for taxation of individuals and corporations, generally effective for taxable years beginning after December 31, 2017. Most of the changes applicable to individuals are temporary and apply only to taxable years beginning after December 31, 2017 and before January 1, 2026. The Tax Act makes numerous large and small changes to the tax rules that do not affect REITs directly but may affect our stockholders and may indirectly affect us.

        While the changes in the Tax Act generally appear to be favorable with respect to REITs, the extensive changes to non-REIT provisions in the Code may have unanticipated effects on us or our stockholders. Investors are urged to consult with their tax advisors with respect to the status of the Tax Act and any other regulatory or administrative developments and proposals and their potential effect on investment in our capital stock.

Failure to qualify as a REIT could result in material adverse tax consequences and could significantly reduce cash available for distributions.

        We operate so as to qualify as a REIT under the Code. 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 to pay dividends.

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

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(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 and state corporate tax on our undistributed taxable income.

        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 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 to pay dividends.

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 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 an adverse impact on our results of operations and financial condition.

Item 1B.    Unresolved Staff Comments.

        None.

Item 2.    Properties.

        As of December 31, 2017, we own 113 properties with an aggregate net book value of $660.0 million. Our occupancy rate, based on square footage, was 99.6% and 97.3% as of December 31, 2017 and 2016, respectively.

        We also participate in joint ventures that own five properties and at December 31, 2017, our investment in these unconsolidated joint ventures is $10.7 million. The occupancy rate of our joint venture properties, based on square footage, was 97.6% and 97.9% as of December 31, 2017 and 2016, respectively.

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Table of Contents

Our Properties

        The following table details, as of December 31, 2017, certain information about our properties:

Location
  Type of Property   Percentage
of 2018
Contractual
Rental Income
  Approximate
Square Footage
of Building
  2018
Contractual
Rental Income
per Square Foot
 

Fort Mill, SC

  Industrial     4.2     701,595   $ 4.02  

Baltimore, MD

  Industrial     3.5     367,000     6.39  

Royersford, PA(1)

  Retail     3.2     194,600     11.48  

Round Rock, TX

  Assisted Living Facility     3.0     87,560     23.27  

Lebanon, TN

  Industrial     3.0     540,200     3.73  

Hauppauge, NY

  Industrial     2.6     149,870     11.87  

El Paso, TX

  Industrial     2.6     419,821     4.21  

Beachwood, OH(2)

  Apartments     2.4     349,999     4.68  

Greensboro, NC

  Theater     2.3     61,213     25.92  

W. Hartford, CT

  Retail—Supermarket     2.3     47,174     32.97  

Littleton, CO(3)

  Retail     2.1     101,596     14.45  

St. Louis, MO(4)

  Industrial     2.1     339,094     4.17  

Secaucus, NJ

  Health & Fitness     2.0     44,863     30.40  

El Paso, TX(5)

  Retail     1.9     110,179     12.22  

McCalla, AL

  Industrial     1.8     294,000     4.18  

Lincoln, NE

  Retail     1.8     112,260     10.75  

Brooklyn, NY

  Office     1.8     66,000     18.15  

Wheaton, IL(2)

  Apartments     1.7     300,104     3.88  

Knoxville, TN

  Retail     1.7     35,330     32.84  

St. Louis Park, MN(4)

  Retail     1.7     131,710     8.50  

Fort Mill, SC

  Industrial     1.7     303,188     3.69  

Joppa, MD

  Industrial     1.6     258,710     4.08  

Ankeny, IA(4)

  Industrial     1.5     208,234     4.96  

Tucker, GA

  Health & Fitness     1.4     58,800     16.67  

Pittston, PA

  Industrial     1.4     249,600     3.73  

Lakemoor, IL(2)

  Apartments     1.2     480,684     1.70  

Saco, ME

  Industrial     1.2     131,400     6.12  

Cedar Park, TX

  Retail—Furniture     1.1     50,810     14.71  

Hamilton, OH

  Health & Fitness     1.1     38,000     19.38  

Columbus, OH

  Retail—Furniture     1.1     96,924     7.40  

Indianapolis, IN

  Theater     1.0     57,688     12.25  

Indianapolis, IN

  Industrial     1.0     125,622     5.43  

Lake Charles, LA(6)

  Retail     1.0     54,229     12.23  

Greenville, SC(7)

  Industrial     0.9     142,200     4.39  

Ft. Myers, FL

  Retail     0.9     29,993     20.17  

Ronkonkoma, NY(4)

  Industrial     0.9     90,599     6.61  

Huntersville, NC

  Industrial     0.9     78,319     7.50  

Kennesaw, GA

  Retail     0.8     32,138     17.90  

Memphis, TN

  Industrial     0.8     224,749     2.56  

Wichita, KS

  Retail—Furniture     0.8     88,108     6.35  

Greenville, SC(7)

  Industrial     0.8     128,000     4.35  

Champaign, IL(4)

  Retail     0.8     50,530     10.78  

Chicago, IL

  Retail—Office Supply     0.8     23,939     22.16  

New Hope, MN

  Industrial     0.8     122,461     4.33  

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Table of Contents

Location
  Type of Property   Percentage
of 2018
Contractual
Rental Income
  Approximate
Square Footage
of Building
  2018
Contractual
Rental Income
per Square Foot
 

Clemmons, NC

  Retail     0.8     96,725     5.40  

Melville, NY

  Industrial     0.8     51,351     10.06  

Tyler, TX

  Retail—Furniture     0.7     72,000     6.75  

Athens, GA(8)

  Retail     0.7     41,280     11.63  

Fayetteville, GA

  Retail—Furniture     0.7     65,951     6.97  

Louisville, KY

  Industrial     0.7     125,370     3.60  

Onalaska, WI

  Retail     0.7     63,919     7.00  

Cary, NC

  Retail—Office Supply     0.7     33,490     13.29  

Highlands Ranch, CO

  Retail     0.6     43,480     10.12  

New Hyde Park, NY

  Industrial     0.6     38,000     10.99  

Houston, TX

  Retail     0.6     25,005     16.70  

Richmond, VA

  Retail—Furniture     0.6     38,788     10.53  

Amarillo, TX

  Retail—Furniture     0.6     72,027     5.64  

Deptford, NJ

  Retail     0.6     25,358     15.90  

Virginia Beach, VA

  Retail—Furniture     0.6     58,937     6.82  

Lexington, KY

  Retail—Furniture     0.6     30,173     12.48  

Eugene, OR

  Retail—Office Supply     0.5     24,978     14.88  

Duluth, GA

  Retail—Furniture     0.5     50,260     7.29  

Newark, DE

  Retail     0.5     23,547     15.40  

Newport News, VA

  Retail—Furniture     0.5     49,865     7.09  

Woodbury, MN

  Retail     0.5     49,406     7.00  

El Paso, TX

  Retail—Office Supply     0.5     25,000     13.81  

Columbus, OH

  Industrial     0.5     105,191     3.25  

Houston, TX

  Retail     0.5     20,087     16.00  

Durham, NC

  Industrial     0.5     46,181     6.95  

Greensboro, NC

  Retail     0.4     12,950     23.00  

Hyannis, MA

  Retail     0.4     9,750     30.07  

Selden, NY

  Retail     0.4     14,555     20.00  

Gurnee, IL

  Retail—Furniture     0.4     22,768     12.21  

Bluffton, SC

  Retail—Furniture     0.4     35,011     7.92  

Naples, FL

  Retail—Furniture     0.4     15,912     17.00  

Pinellas Park, FL

  Industrial     0.4     53,064     5.03  

Carrollton, GA

  Restaurant     0.4     6,012     43.87  

Batavia, NY

  Retail—Office Supply     0.4     23,483     11.09  

Philadelphia, PA

  Retail—Supermarket     0.4     57,653     4.51  

Hauppauge, NY

  Restaurant     0.4     7,000     36.65  

Cartersville, GA

  Restaurant     0.4     5,635     44.16  

Richmond, VA

  Restaurant     0.3     9,367     25.07  

Greensboro, NC

  Restaurant     0.3     6,655     35.13  

W. Hartford, CT(9)

  Retail     0.3          

Myrtle Beach, SC

  Restaurant     0.3     6,734     31.83  

Somerville, MA

  Retail     0.3     12,054     17.42  

Kennesaw, GA

  Restaurant     0.3     4,051     50.43  

Bolingbrook, IL

  Retail     0.3     33,111     6.10  

Concord, NC

  Restaurant     0.3     4,749     42.23  

Cape Girardeau, MO

  Retail     0.3     13,502     14.71  

Lawrenceville, GA

  Restaurant     0.3     4,025     48.64  

Everett, MA

  Retail     0.3     18,572     10.39  

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Table of Contents

Location
  Type of Property   Percentage
of 2018
Contractual
Rental Income
  Approximate
Square Footage
of Building
  2018
Contractual
Rental Income
per Square Foot
 

Marston Mills, MA

  Retail     0.3     8,775     20.75  

Miamisburg, OH

  Industrial     0.2     35,707     4.57  

Monroeville, PA

  Retail     0.2     6,051     25.30  

Reading, PA

  Restaurant     0.2     2,754     52.00  

Reading, PA

  Restaurant     0.2     2,551     54.79  

West Palm Beach, FL

  Industrial     0.2     10,361     13.17  

Gettysburg, PA

  Restaurant     0.2     2,944     43.42  

Hanover, PA

  Restaurant     0.2     2,702     46.74  

Houston, TX

  Retail     0.2     12,000     10.50  

Palmyra, PA

  Restaurant     0.2     2,798     44.43  

Trexlertown, PA

  Restaurant     0.2     3,004     40.55  

Cuyahoga Falls, OH

  Retail     0.2     6,796     17.21  

South Euclid, OH

  Retail     0.2     11,672     9.94  

Hilliard, OH

  Retail     0.2     6,751     15.55  

Lawrence, KS

  Retail     0.2     8,600     12.21  

Port Clinton, OH

  Retail     0.1     6,749     15.19  

Indianapolis, IN

  Restaurant     0.1     12,820     6.43  

Rosenberg, TX

  Retail     0.1     8,000     8.79  

Seattle, WA

  Retail     0.1     3,053     16.00  

Louisville, KY

  Industrial     0.1     9,642     4.02  

Crystal Lake, IL(10)

  Vacant         32,446      

        100.0     9,428,251        

(1)
This property, a community shopping center, is leased to eleven tenants. Contractual rental income per square foot excludes 3,850 vacant square feet. Approximately 27.9% of the square footage is leased to a supermarket.

(2)
This property is ground leased to a multi-unit apartment complex owner/operator. Reflects contingent rent that may be received subject to the satisfaction of performance requirements. See Notes 4 and 7 of our consolidated financial statements.

(3)
This property, a community shopping center, is leased to 27 tenants. Contractual rental income per square foot excludes 2,570 vacant square feet.

(4)
This property has two tenants.

(5)
This property has four tenants. Contractual rental income per square foot excludes 2,395 vacant square feet.

(6)
This property has three tenants. Approximately 43.4% of the square footage is leased to a retail office supply operator.

(7)
This property has three tenants.

(8)
This property has two tenants. Approximately 48.4% of the square footage is leased to a retail office supply operator.

(9)
This property provides additional parking for the W. Hartford, CT, retail supermarket.

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Table of Contents

(10)
This property was operated as a hhgregg. The tenant filed for Chapter 11 bankruptcy protection, rejected the lease and in late May 2017, vacated the property. At December 31, 2017, the property is vacant.

    Properties Owned by Joint Ventures

        The following table sets forth, as of December 31, 2017, information about the properties owned by joint ventures in which we are a venture partner:

Location
  Type of
Property
  Percentage of
Base Rent Payable
in 2018
Contributed by
the Applicable
Joint Venture(1)
  Approximate
Square Footage
of Building
  2018
Base Rent
per Square Foot
 

Manahawkin, NJ(2)

  Retail     59.4     319,349   $ 9.92  

Milwaukee, WI

  Industrial     27.1     750,300     1.75  

Savannah, GA

  Retail     7.4     45,973     7.77  

Savannah, GA

  Retail     5.1     101,550     2.44  

Savannah, GA

  Retail     1.0     7,959     5.93  

        100.0     1,225,131        

(1)
Represents the base rent payable in 2018 with respect to such joint venture property, expressed as a percentage of the aggregate base rent payable in 2018 with respect to all of our joint venture properties.

(2)
This property, a community shopping center, is leased to 25 tenants. Base rent per square foot excludes 29,068 vacant square feet.

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Table of Contents

    Geographic Concentration

        As of December 31, 2017, the 113 properties owned by us are located in 30 states. The following table sets forth information, presented by state, related to our properties as of December 31, 2017:

State
  Number of
Properties
  2018
Contractual
Rental
Income
  Percentage of
2018
Contractual
Rental
Income
  Approximate
Building
Square Feet
 

Texas

    11   $ 8,043,732     11.9     902,489  

South Carolina

    6     5,610,987     8.3     1,316,728  

New York

    8     5,317,586     7.9     440,858  

Pennsylvania

    10     4,316,651     6.4     524,657  

North Carolina

    8     4,193,700     6.2     340,282  

Ohio

    9     4,037,748     6.0     657,789  

Georgia

    9     3,774,291     5.6     268,152  

Tennessee

    3     3,750,286     5.5     800,279  

Illinois

    7     3,538,228     5.2     943,582  

Maryland

    2     3,402,779     5.0     625,710  

Minnesota

    3     1,994,870     2.9     303,577  

Colorado

    2     1,871,008     2.8     145,076  

Connecticut

    2     1,779,365     2.6     47,174  

New Jersey

    2     1,766,818     2.6     70,221  

Missouri

    2     1,611,325     2.4     352,596  

Indiana

    3     1,471,540     2.2     196,130  

Virginia

    4     1,398,944     2.1     156,957  

Florida

    4     1,278,657     1.9     109,330  

Alabama

    1     1,228,353     1.8     294,000  

Nebraska

    1     1,207,188     1.8     112,260  

Iowa

    1     1,033,122     1.5     208,234  

Massachusetts

    4     878,252     1.3     49,151  

Kentucky

    3     866,722     1.3     165,185  

Maine

    1     803,670     1.1     131,400  

Kansas

    2     664,617     1.0     96,708  

Louisiana

    1     663,125     1.0     54,229  

Other

    4     1,230,593     1.7     115,497  

    113   $ 67,734,157     100.0     9,428,251  

        The following table sets forth information, presented by state, related to the properties owned by our joint ventures as of December 31, 2017:

State
  Number of
Properties
  Our Share
of the
Base Rent
Payable in 2018
to these
Joint Ventures
  Approximate
Building
Square Feet
 

New Jersey

    1   $ 1,439,770     319,349  

Wisconsin

    1     657,844     750,300  

Georgia

    3     325,958     155,482  

    5   $ 2,423,572     1,225,131  

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Table of Contents

Mortgage Debt

        At December 31, 2017, we had:

    69 first mortgages secured by 86 of our 113 properties; and

    $392.5 million of mortgage debt outstanding with a weighted average interest rate of 4.22% and a weighted average remaining term to maturity of approximately 8.8 years. Substantially all of such mortgage debt bears fixed interest at rates ranging from 3.02% to 6.59% and contains prepayment penalties.

        The following table sets forth scheduled principal mortgage payments due on our properties as of December 31, 2017 (dollars in thousands):

YEAR
  PRINCIPAL
PAYMENTS DUE
 

2018

  $ 20,448  

2019

    14,610  

2020

    11,901  

2021

    20,742  

2022

    43,771  

Thereafter

    281,051  

Total

  $ 392,523  

        At December 31, 2017, our joint ventures had first mortgages on four properties with outstanding balances aggregating approximately $35.0 million, bearing interest at rates ranging from 3.49% to 5.81% with a weighted average interest rate of 4.07% and a weighted average remaining term to maturity of 6.1 years. Substantially all of 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, 2017 (dollars in thousands):

YEAR
  PRINCIPAL
PAYMENTS DUE
 

2018

  $ 4,272  

2019

    877  

2020

    911  

2021

    948  

2022

    7,189  

Thereafter

    20,850  

Total

  $ 35,047  

        The mortgages on our properties are generally non-recourse, subject to standard carve-outs. The term "standard carve-outs" refers to recourse items to an otherwise non-recourse mortgage and are customary to mortgage financing. While carve-outs vary from lender to lender and transaction to transaction, the carve-outs may include, among other things, voluntary bankruptcy filings, environmental liabilities, the sale, financing or encumbrance of the property in violation of loan documents, damage to property as a result of intentional misconduct or gross negligence, failure to pay valid taxes and other claims which could create liens on property and the conversion of security deposits, insurance proceeds or condemnation awards.

Item 3.    Legal Proceedings.

        Not applicable.

Item 4.    Mine Safety Disclosures.

        Not applicable.

25


Table of Contents


Part II

Item 5.    Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

        Our common stock is listed on the New York Stock Exchange under the symbol "OLP." The following table sets forth for the periods indicated, the high and low prices for our common stock as reported by the New York Stock Exchange and the per share distributions declared on our common stock.

 
  2017   2016  
Quarter Ended
  High   Low   Dividend
Declared
Per Share(1)
  High   Low   Dividend
Per Share(1)
 

March 31

  $ 25.45   $ 21.96   $ .43   $ 22.96   $ 18.80   $ .41  

June 30

    25.24     22.21     .43     24.90     21.65     .41  

September 30

    24.81     22.67     .43     25.85     23.50     .41  

December 31

    27.70     23.61     .45     25.89     22.43     .43  

(1)
The dividends in the fourth quarter of 2017 and 2016 were distributed on January 5, 2018 and January 5, 2017, respectively.

        As of March 7, 2018, there were approximately 294 holders of record 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 stockholders at least 90% of our annual ordinary taxable income. The amount and timing of future distributions will be at the discretion of our board of directors and will depend upon our financial condition, earnings, business plan, cash flow and other factors. We intend to make 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.

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Table of Contents

Stock Performance Graph

        The following graph compares the five year cumulative return of our common stock with the Standard and Poor's 500 index (the "S&P Index") and the FTSE-NAREIT Equity REITs, a peer group index (the "Peer Group Index"). The graph assumes $100 was invested on December 31, 2012 in our common stock, the S&P Index and the Peer Group Index and assumes the reinvestment of dividends.

GRAPHIC

 
  December 31,  
 
  2012   2013   2014   2015   2016   2017  

OLP

  $ 100.00   $ 105.80   $ 133.05   $ 129.41   $ 162.39   $ 180.11  

S&P 500

    100.00     132.39     150.51     152.59     170.84     208.14  

FTSE NAREIT Equity REITs Index

    100.00     102.47     133.35     137.61     149.33     157.14  

Issuer Purchases of Equity Securities

        We did not repurchase any shares of our outstanding common stock in 2017.

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Table of Contents

Item 6.    Selected Financial Data.

        The following table sets forth on a historical basis our selected financial data. This information should be read in conjunction with our consolidated financial statements and "Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations" appearing elsewhere in this Annual Report on Form 10-K.

 
  As of and for the Year Ended December 31,
(Dollars in thousands, except per share data)
 
 
  2017   2016   2015   2014   2013  

OPERATING DATA

                               

Total revenues

  $ 75,916   $ 70,588   $ 65,711 (1) $ 60,477 (1) $ 50,979  

Gain on sale of real estate, net

    9,837     10,087     5,392     10,180     4,705  

Equity in earnings of unconsolidated joint ventures

    826     1,005     412     533     651  

Income from continuing operations

    24,249     24,481     21,907     22,197     17,409  

Income from discontinued operations

                13     515  

Net income attributable to One Liberty Properties, Inc. 

    24,147     24,422     20,517     22,116     17,875  

Weighted average number of common shares outstanding:

                               

Basic

    17,944     16,768     15,971     15,563     14,948  

Diluted

    18,047     16,882     16,079     15,663     15,048  

Net income per common share—basic

  $ 1.29   $ 1.40   $ 1.23   $ 1.37   $ 1.15  

Net income per common share—diluted

  $ 1.28   $ 1.39   $ 1.22   $ 1.37   $ 1.14  

Cash distributions declared per share of common stock

  $ 1.74   $ 1.66   $ 1.58   $ 1.50   $ 1.42  

BALANCE SHEET DATA

   
 
   
 
   
 
   
 
   
 
 

Real estate investments, net

  $ 666,374   $ 651,213   $ 562,257   $ 504,850   $ 496,187  

Unamortized intangible lease assets, net

    30,525     32,645     28,978     27,387     26,035  

Investment in unconsolidated joint ventures

    10,723     10,833     11,350     4,907     4,906  

Cash and cash equivalents

    13,766     17,420     12,736     20,344     16,631  

Total assets

    742,586     733,445     646,499     587,162     568,693  

Mortgages payable, net of deferred financing costs

    393,157     394,898     331,055     288,868     275,319  

Due under line of credit, net of deferred financing costs

    8,776     9,064     17,744     13,154     22,772  

Unamortized intangible lease liabilities, net

    17,551     19,280     14,521     10,463     6,917  

Total liabilities

    444,084     441,518     384,073     331,258     318,603  

Total equity

    298,502     291,927     262,426     255,904     250,090  

OTHER DATA(2)

   
 
   
 
   
 
   
 
   
 
 

Funds from operations

  $ 36,193   $ 33,256   $ 32,717   $ 28,248   $ 25,740  

Funds from operations per common share:

                               

Basic

  $ 1.95   $ 1.91   $ 1.98   $ 1.76   $ 1.67  

Diluted

  $ 1.94   $ 1.90   $ 1.97   $ 1.75   $ 1.66  

Adjusted funds from operations

  $ 39,065   $ 34,848   $ 31,997   $ 29,703   $ 27,094  

Adjusted funds from operations per common share:

                               

Basic

  $ 2.10   $ 2.01   $ 1.94   $ 1.85   $ 1.76  

Diluted

  $ 2.09   $ 1.99   $ 1.92   $ 1.84   $ 1.75  

(1)
Includes lease termination fees of $2.9 million and $1.3 million for 2015 and 2014, respectively.

(2)
See "—Funds from Operations and Adjusted Funds from Operations" for a discussion of the limitations on such data and a reconciliation of such data to our financial information presented in accordance with GAAP.

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Funds from Operations and Adjusted Funds from Operations

        We compute funds from operations, or FFO, in accordance with the "White Paper on Funds From Operations" issued by the National Association of Real Estate Investment Trusts ("NAREIT") and NAREIT's related guidance. FFO is defined in the White Paper as net income (computed in accordance with generally accepting accounting principles), excluding gains (or losses) from sales of property, plus real estate depreciation and amortization (including amortization of deferred leasing costs), plus impairment write-downs of depreciable real estate 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. We compute adjusted funds from operations, or AFFO, by adjusting from FFO for our straight-line rent accruals and amortization of lease intangibles, deducting lease termination fees and gain on extinguishment of debt and adding back amortization of restricted stock compensation, amortization of costs in connection with our financing activities (including our share of our unconsolidated joint ventures) and debt prepayment costs. Since the NAREIT White Paper does not provide guidelines for computing AFFO, the computation of AFFO may vary from one REIT to another.

        We believe that FFO and AFFO are useful and standard supplemental measures of the operating performance for equity REITs and are used frequently by securities analysts, investors and other interested parties in evaluating equity REITs, many of which present FFO and AFFO when reporting their operating results. FFO and AFFO are intended to exclude GAAP historical cost depreciation and amortization of real estate assets, which assumes that the value of real estate assets diminish predictability over time. In fact, real estate values have historically risen and fallen with market conditions. As a result, we believe that FFO and AFFO provide a performance measure that when compared year over year, should reflect the impact to operations from trends in occupancy rates, rental rates, operating costs, interest costs and other matters without the inclusion of depreciation and amortization, providing a perspective that may not be necessarily apparent from net income. We also consider FFO and AFFO to be useful to us in evaluating potential property acquisitions.

        FFO and AFFO do not represent net income or cash flows from operations as defined by GAAP. FFO and AFFO and should not be considered to be an alternative to net income as a reliable measure of our operating performance; nor should FFO and AFFO be considered an alternative to cash flows from operating, investing or financing activities (as defined by GAAP) as measures of liquidity. FFO and AFFO do not measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization, capital improvements and distributions to stockholders.

        Management recognizes that there are limitations in the use of FFO and AFFO. In evaluating our performance, management is careful to examine GAAP measures such as net income and cash flows from operating, investing and financing activities.

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        The table below provides a reconciliation of net income in accordance with GAAP to FFO and AFFO for each of the indicated years (dollars in thousands):

 
  2017   2016   2015   2014   2013  

GAAP net income attributable to One Liberty Properties, Inc

  $ 24,147   $ 24,422   $ 20,517   $ 22,116   $ 17,875  

Add: depreciation and amortization of properties

    20,674     17,865     16,150     14,494     11,891  

Add: our share of depreciation and amortization of unconsolidated joint ventures

    872     893     634     374     517  

Add: impairment loss

    153             1,093     62  

Add: amortization of deferred leasing costs

    319     299     234     168     152  

Add: our share of amortization of deferred leasing costs of unconsolidated joint ventures

                    8  

Add: Federal excise tax relating to gain on sale

        6     174     302     45  

Deduct: gain on sale of real estate

    (9,837 )   (10,087 )   (5,392 )   (10,180 )    

Deduct: purchase price fair value adjustment

            (960 )        

Deduct: net gain on sale of real estate of unconsolidated joint ventures

                    (4,705 )

Adjustments for non-controlling interests

    (135 )   (142 )   1,360     (119 )   (105 )

NAREIT funds from operations applicable to common stock

    36,193     33,256     32,717     28,248     25,740  

Deduct: straight-line rent accruals and amortization of lease intangibles

    (1,329 )   (2,991 )   (1,605 )   (1,756 )   (1,274 )

Add (deduct): our share of straight-line rent accruals and amortization of lease intangibles of unconsolidated joint ventures

    36     49     7     (1 )   91  

Deduct: lease termination fee income

            (2,886 )   (1,269 )    

Add: amortization of restricted stock compensation

    3,133     2,983     2,334     1,833     1,440  

Add: prepayment costs on debt

        577     568     1,581     171  

Add: amortization and write-off of deferred financing costs

    977     904     1,023     1,038     891  

Add: our share of amortization and write-off of deferred financing costs of unconsolidated joint ventures

    25     25     23     17     25  

Adjustments for non-controlling interests

    30     45     (184 )   12     10  

Adjusted funds from operations applicable to common stock

  $ 39,065   $ 34,848   $ 31,997   $ 29,703   $ 27,094  

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        The table below provides a reconciliation of net income per common share (on a diluted basis) in accordance with GAAP to FFO and AFFO:

 
  2017   2016   2015   2014   2013  

GAAP net income attributable to One Liberty Properties, Inc

  $ 1.28   $ 1.39   $ 1.22   $ 1.37   $ 1.14  

Add: depreciation and amortization of properties

    1.12     1.02     .98     .90     .78  

Add: our share of depreciation and amortization of unconsolidated joint ventures

    .05     .05     .04     .02     .03  

Add: impairment loss

    .01             .07     .01  

Add: amortization of deferred leasing costs

    .02     .02     .02     .01     .01  

Add: our share of amortization of deferred leasing costs of unconsolidated joint ventures

                     

Add: Federal excise tax relating to gain on sale

            .01     .02      

Deduct: gain on sale of real estate

    (.53 )   (.57 )   (.32 )   (.63 )    

Deduct: purchase price fair value adjustment

            (.06 )        

Deduct: net gain on sale of real estate of unconsolidated joint ventures

                    (.30 )

Adjustments for non-controlling interests

    (.01 )   (.01 )   .08     (.01 )   (.01 )

NAREIT funds from operations per share of common stock

    1.94     1.90     1.97     1.75     1.66  

Deduct: straight-line rent accruals and amortization of lease intangibles

    (.07 )   (.16 )   (.10 )   (.10 )   (.07 )

Add: our share of straight-line rent accruals and amortization of lease intangibles of unconsolidated joint ventures

                     

Deduct: lease termination fee income

            (.17 )   (.08 )    

Add: amortization of restricted stock compensation

    .17     .17     .14     .11     .09  

Add: prepayment costs on debt

        .03     .03     .10     .01  

Add: amortization and write-off of deferred financing costs

    .05     .05     .06     .06     .06  

Add: our share of amortization and write-off of deferred financing costs of unconsolidated joint ventures

                     

Adjustments for non-controlling interests

            (.01 )        

Adjusted funds from operations per share of common stock

  $ 2.09   $ 1.99   $ 1.92   $ 1.84   $ 1.75  

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

        We are a self-administered and self-managed real estate investment trust. We are focused on acquiring, owning and managing a geographically diversified portfolio of industrial, retail (including furniture stores and supermarkets), restaurant, health and fitness and theater properties, many of which are subject to long-term leases. Most of our leases are "net leases" under which the tenant, directly or indirectly, is responsible for paying the real estate taxes, insurance and ordinary maintenance and repairs of the property. As of December 31, 2017, we own 113 properties and our joint ventures own five properties. These 118 properties are located in 30 states.

        We face a variety of risks and challenges in our business. As more fully described under "Item 1A. Risk Factors", we, among other things, face the possibility we will not be able to acquire accretive properties on acceptable terms, lease our properties on terms favorable to us or at all, our tenants may not be able to pay their rental and other obligations and we may not be able to renew or relet, on acceptable terms, leases that are expiring or otherwise terminating.

        We seek to manage the risk of our real property portfolio and the related financing arrangements by diversifying among types of properties, industries, locations, tenants, scheduled lease expirations, mortgage maturities and lenders, and by seeking to minimize our exposure to interest rate fluctuations. As a result, as of December 31, 2017:

    our 2018 contractual rental income is derived from the following property types: 40.2% from retail, 37.1% from industrial, 4.7% from restaurant, 4.5% from health and fitness, 3.4% from theater and 10.1% from other properties,

    properties in only one state (i.e., Texas, 11.9%) account for 10% or more of 2018 contractual rental income,

    no tenant accounts for more than 7.1% of our 2018 contractual rental income,

    through 2026, there is only one year in which the percentage of our contractual rental income represented by expiring leases exceeds 10% of our 2018 contractual rental income (i.e., 21.3% in 2022)—approximately 36.4% of our 2018 contractual rental income is represented by leases expiring in 2027 and thereafter,

    after giving effect to interest rate swap agreements, substantially all of our mortgage debt bears interest at fixed rates,

    until 2022, not more than 6% of our total scheduled principal mortgage payments is due in any year,

    there are seven different counterparties to our portfolio of interest rate swaps: three counterparties, rated A- or better by a national rating agency, account for 72.3%, or $103.7 million, of the notional value of our swaps; and two counterparties, rated BB or better by a national rating agency, account for 21.7%, or $31.1 million, of the notional value of such swaps, and

    we have 18 different mortgage lenders (including with respect to the mortgage debt of our unconsolidated joint ventures): four different lenders account for 30.0%, 15.9%, 14.8% and 10.3% of such debt.

        We monitor the risk of tenant non-payments through a variety of approaches tailored to the applicable situation. Generally, based on our assessment of the credit risk posed by our tenants, we monitor a tenant's financial condition through one or more of the following actions: reviewing tenant financial statements or other financial information, obtaining other tenant related information, regular

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contact with tenant's representatives, tenant credit checks and regular management reviews of our tenants. We may sell a property if the tenant's financial condition is unsatisfactory.

        In acquiring properties, we balance an evaluation of the terms of the leases and the credit of the existing tenants with a fundamental analysis of the real estate to be acquired, which analysis takes into account, among other things, the estimated value of the property, local demographics and the ability to re-rent or dispose of the property on favorable terms upon lease expiration or early termination.

        We are sensitive to the risks facing the retail industry as a result of the growth of e-commerce. We are addressing our exposure to the retail industry by seeking to acquire industrial properties that we believe capitalize on e-commerce activities, such as e-commerce distribution and warehousing facilities, and by being especially selective in acquiring retail properties. As a result, retail properties generated 43.3%, 46.1% and 49.5%, of rental income, net, in 2017, 2016 and 2015 respectively, and industrial properties generated 34.1%, 30.8% and 27.3% of rental income, net, in 2017, 2016, 2015, respectively .

2017 Highlights

        In 2017:

    our rental income, net, increased by $4.1 million, or 6.4%, from 2016.

    we acquired four properties for an aggregate purchase price of $43.2 million. The acquired properties account for $3.1 million or 4.6%, of our 2018 contractual rental income.

    we sold four properties, three of which were vacant (i.e. properties formerly tenanted by hhgregg—Niles, Illinois, Sports Authority and Joe's Crab Shack) for a net gain on sale of real estate of $9.8 million. The properties sold accounted for 0.5% and 2.6% of 2017 and 2016 rental income net, respectively.

    we obtained proceeds of $21.2 million from mortgage financings, all of which relate to properties acquired in 2017.

    we increased our quarterly dividend by 4.7% to $0.45 per share, commencing with the dividend declared in December 2017 and paid in January 2018.

    we raised net proceeds of approximately $5.6 million from the issuance of 231,000 shares of common stock pursuant to our at-the-market equity offering program.

    we re-leased four vacant properties or portions thereof (i.e., properties formerly tenanted by Pathmark, Philadelphia, PA; Quality Bakery, Columbus, OH; Payless Shoe Source, Seattle, WA; and a portion of a property located in Ronkonkoma, NY) . In 2017, we incurred an aggregate of approximately $739,000 of real estate operating expenses in carrying such properties. In 2018, we will generate an aggregate of $1.2 million of rental income from such properties and in the future, will not be responsible for the related operating expenses.

Challenges Facing Certain Retail Tenants

        Four tenants at four retail properties have ceased operations (or have advised they intend to cease operations prior to the expiration of their lease) and continue to pay rent. At December 31, 2017, the unbilled rent receivable balance, tenant origination costs and unamortized intangible lease liabilities associated with these properties were $195,000, $972,000, and $4.5 million, respectively. These properties account for $2.3 million, or 3.4%, of our contractual rental income and the weighted average remaining lease term for these tenants at these properties is 3.1 years.

        We own interests in three properties tenanted by Kmart Holdings Corp. and its subsidiaries. Kmart and its parent, Sears Holding Corporation, have experienced financial difficulties for several years. During 2017, Kmart closed two stores owned by our unconsolidated joint ventures at properties located

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in Savannah, Georgia and Manahawkin, New Jersey. Our share of the aggregate annual base rent at those two properties is $510,000 and the leases expire in November 2018 and July 2019. The 2018 contractual rental income associated with our third Kmart property is $522,000, and the lease at this property, which Kmart recently extended, expires in 2023.

        In light of the difficulties these retail tenants are experiencing, it is possible that they may cease paying rent and/or we may not be able to re-lease the property on a timely basis. Though a tenant may close a store prior to lease expiration, such closure, without a bankruptcy or similar filing, does not relieve it of its obligation to pay rent. If these tenants stop paying rent, and we are unable to re-lease these properties on an as favorable and a timely basis, we may be adversely effected.

New Accounting Standards

        We (i) have determined that the adoption of the New Revenue Recognition Standards, as such term is used in Note 2 of our consolidated financial statements, will not have a material impact on our consolidated financial statements and (ii) are evaluating the impact on our consolidated financial statements, if any, resulting from the guidance issued by the Financial Accounting Standards Board in February 2016 with the respect to the treatment of leases. See Note 2 of our consolidated financial statements.

Transaction Subsequent to December 31, 2017

        On January 30, 2018, we sold a multi-tenant retail property located in Fort Bend, Texas, in which we held an 85% interest, with an aggregate of 42,446 square feet for gross proceeds of $9.2 million and paid off the $4.4 million mortgage. In the quarter ending March 31, 2018, we anticipate recognizing a gain on this sale of approximately $2.4 million. The non-controlling interest's share of the gain from the transaction will be approximately $800,000. In 2017, this property accounted for $732,000 of rental income and an aggregate of $448,000 of real estate operating expenses (net of tenant reimbursements), depreciation and amortization and interest expense.

Changes to Federal Tax Laws

        On December 22, 2017, the Tax Act was enacted. The Tax Act makes significant changes to the U.S. federal income tax rules for taxation of individuals and corporations, generally effective for taxable years beginning after December 31, 2017. While the changes in the Tax Act generally appear to be favorable with respect to REITs, the extensive changes to non-REIT provisions in the Code may have unanticipated effects on us or our stockholders.

Results of Operations

Comparison of Years Ended December 31, 2017 and 2016

Revenues

        The following table compares total revenues for the periods indicated:

 
  Year Ended
December 31,
   
   
 
 
  Increase
(Decrease)
   
 
(Dollars in thousands)
  2017   2016   % Change  

Rental income, net

  $ 68,244   $ 64,164   $ 4,080     6.4  

Tenant reimbursements

    7,672     6,424     1,248     19.4  

Total revenues

  $ 75,916   $ 70,588   $ 5,328     7.5  

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        Rental income, net.    The increase is due to:

    $5.2 million from properties acquired in 2016,

    $1.6 million from properties acquired in 2017,

    $267,000 of rental income from a tenant whose lease commenced April 1, 2016 at our Joppa, Maryland property, and

    $201,000 of annual percentage rent income received from three tenants.

        Offsetting the increases are decreases of:

    $1.2 million representing the 2016 rental income from properties sold during 2016,

    $1.3 million representing the 2016 rental income from properties sold during 2017,

    $496,000 representing the 2016 rental income from a property formerly tenanted by Quality Bakery, which lease expired November 2016, and is now re-tenanted, and

    $277,000 relating to a property formerly tenanted by hhgregg (that is vacant) and a property formerly tenanted by Payless ShoeSource (that has re-leased).

        Tenant reimbursements.    Real estate tax and operating expense reimbursements increased due primarily to reimbursements of approximately $855,000 and $377,000 from properties acquired in 2016 and 2017, respectively. Tenant reimbursements generally relate to real estate expenses incurred in the same period.

Operating Expenses

        The following table compares operating expenses for the periods indicated:

 
  Year Ended
December 31,
   
   
 
 
  Increase
(Decrease)
   
 
(Dollars in thousands)
  2017   2016   % Change  

Operating expenses:

                         

Depreciation and amortization

  $ 20,993   $ 18,164   $ 2,829     15.6  

General and administrative

    11,279     10,693     586     5.5  

Real estate expenses

    10,736     8,931     1,805     20.2  

Real estate acquisition costs

        596     (596 )   (100.0 )

Federal excise and state taxes

    481     203     278     136.9  

Leasehold rent

    308     308          

Impairment loss

    153         153     n/a  

Total operating expenses

    43,950     38,895     5,055     13.0  

Operating income

  $ 31,966   $ 31,693   $ 273     0.9  

        Depreciation and amortization.    The increase is due primarily to increases of: (i) $1.6 million and $761,000 of depreciation and amortization expense on the properties acquired in 2016 and 2017, respectively, and (ii) an aggregate $884,000 of write-offs of tenant origination costs related to the hhgregg and Joe's Crab Shack properties. The increase was offset by $433,000 due to the sales of properties in 2016 and 2017. We estimate that depreciation and amortization in 2018 related to the properties acquired in 2017 will be approximately $1.5 million.

        General and administrative.    The increase is due primarily to increases of: (i) $278,000 in compensation expense primarily due to higher compensation levels; (ii) $166,000 in non-cash

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compensation expense related to the accelerated vesting of restricted stock due to the retirement of a non-management director; and (iii) $142,000 for other miscellaneous expenses.

        Real estate expenses.    The increase is due primarily to an increase of $1.3 million from properties acquired in 2016 and 2017; substantially all these expenses are rebilled to tenants and are included in Tenant reimbursements. Also contributing to the increase are: (i) $435,000 related to properties formerly tenanted by Quality Bakery and hhgregg-Crystal Lake, Illinois; and (ii) $245,000 related to the hhgregg-Niles, Illinois property that we sold. The increase was offset by a decrease of $197,000 of expenses related to the vacant property formerly tenanted by Sports Authority, which was sold in May 2017.

        Real estate acquisition costs.    The expense in 2016 primarily relates to properties purchased that year. As a result of the adoption of ASU 2017-01 in January 2017, asset acquisition costs of $387,000 in 2017 were capitalized to the related real estate assets.

        Federal excise and state taxes.    The increase primarily relates to an annual state franchise tax resulting from the 2016 and 2017 purchase of two properties located in Tennessee.

        Impairment loss.    In 2017, we recorded an impairment loss of $153,000 with respect to our property formerly tenanted by Joe's Crab Shack, which was sold in November 2017. There was no similar loss in the prior year.

Other Income and Expenses

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

 
  Year Ended
December 31,
   
   
 
 
  Increase
(Decrease)
   
 
(Dollars in thousands)
  2017   2016   % Change  

Other income and expenses:

                         

Equity in earnings of unconsolidated joint ventures

  $ 826   $ 1,005   $ (179 )   (17.8 )

Prepayment costs on debt

        (577 )   (577 )   (100.0 )

Other income

    407     435     (28 )   (6.4 )

Interest:

                         

Expense

    (17,810 )   (17,258 )   552     3.2  

Amortization and write-off of deferred financing costs

    (977 )   (904 )   73     8.1  

Income before gain on sale of real estate, net

    14,412     14,394     18     0.1  

        Equity in earnings of unconsolidated joint ventures.    The 2016 income includes our 50% share, or $146,000, of income obtained for permanent utility easements granted at two properties. There was no such income during 2017.

        Prepayment costs on debt.    These costs were incurred in connection with the property sales and the payoff, prior to the stated maturity, of the related mortgage debt in 2016, primarily relating to the sales of several properties.

        Other income.    Other income in 2017 includes $243,000 paid to us by a former tenant in connection with the resolution of a dispute, and $74,000 that we received for easements on a property sold in 2017. Other income in 2016 includes $356,000 that we received for such easements.

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

 
  Year Ended
December 31,
   
   
 
 
  Increase
(Decrease)
   
 
(Dollars in thousands)
  2017   2016   % Change  

Interest expense:

                         

Credit facility interest

  $ 478   $ 590   $ (112 )   (19.0 )

Mortgage interest

    17,332     16,668     664     4.0  

Total

  $ 17,810   $ 17,258   $ 552     3.2  

    Credit facility interest

        The decrease in 2017 is due to the $11.2 million decrease in the weighted average balance outstanding under our line of credit. The decrease was offset by an increase of 64 basis points in the average interest rate due to the increase in the one month LIBOR rate and an increase of $81,000 in the unused facility fee primarily resulting from the $25.0 million increase in our borrowing capacity under the facility.

    Mortgage interest

        The following table reflects the average interest rate on the average principal amount of outstanding mortgage debt during the applicable year:

 
  Year Ended
December 31,
   
   
 
 
  Increase
(Decrease)
   
 
(Dollars in thousands)
  2017   2016   % Change  

Average interest rate on mortgage debt

    4.31 %   4.61 %   (.30 )%   (6.5 )

Average principal amount of mortgage debt

  $ 399,086   $ 361,645   $ 37,441     10.4  

        The increase is due primarily to the increase in the average principal amount of mortgage debt outstanding, offset by a decrease in the average interest rate on outstanding mortgage debt. The increase in the average balance outstanding is due substantially to mortgage debt of $72.9 million incurred in connection with properties acquired in 2016 and 2017 and the financing or refinancing of $51.5 million of mortgage debt, net of refinanced amounts, in connection with properties acquired prior to 2016. The decrease in the average interest rate is due to the financing (including financings effectuated in connection with acquisitions) or refinancing in 2017 and 2016 of $158.8 million of gross mortgage debt (including $34.4 million of refinanced amounts) with an average interest rate of approximately 3.7%.

        We estimate that in 2018, the mortgage interest expense associated with the properties acquired in 2017 will be approximately $973,000. Interest expense for these properties in 2017 was $374,000.

    Gain on sale of real estate, net.

        The following table compares gain on sale of real estate, net:

 
  Year Ended
December 31,
   
   
 
 
  Increase
(Decrease)
   
 
(Dollars in thousands)
  2017   2016   % Change  

Gain on sale of real estate, net

  $ 9,837   $ 10,087   $ (250 )   (2.5 )

        The gain in 2017 was realized from the sales of the Greenwood Village, Colorado property, the Kohl's property in Kansas City, Missouri, and the former hhgregg property in Niles, Illinois. See "—Comparison of Years Ended December 31, 2016 and 2015—Other Income and Expenses" for information regarding the gain on sale in 2016.

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Comparison of Years Ended December 31, 2016 and 2015

Revenues

        The following table compares total revenues for the periods indicated:

 
  Year Ended
December 31,
   
   
 
 
  Increase
(Decrease)
   
 
(Dollars in thousands)
  2016   2015   % Change  

Rental income, net

  $ 64,164   $ 58,973   $ 5,191     8.8  

Tenant reimbursements

    6,424     3,852     2,572     66.8  

Lease termination fees

        2,886     (2,886 )   (100.0 )

Total revenues

  $ 70,588   $ 65,711   $ 4,877     7.4  

        Rental income, net.    The increase is due primarily to (i) $4.4 million earned from 11 properties acquired in 2016 and $2.7 million from seven properties acquired in 2015; (ii) the $530,000 write-off against rental income in 2015 of the entire balance of unbilled rent receivable and the intangible lease asset related to the 2015 lease termination fees described below; and (iii) $383,000 from three replacement tenants that leased vacant space at one of our El Paso, Texas properties.

        Offsetting the increase are decreases of (i) $2.1 million due to the 2016 sale of 12 properties (the "2016 Sold Properties"), including a portfolio of eight convenience stores (the "Pantry Portfolio"); and (ii) $909,000 from three vacant properties which were leased to Pathmark, Sports Authority and Quality Bakery (the "Vacant Properties"). During 2016, Pathmark did not generate rental income and Sports Authority and Quality Bakery generated an aggregate of $751,000 of rental income.

        Tenant reimbursements.    Real estate tax and operating expense reimbursements in 2016 increased by (i) $781,000 and $644,000 from the properties acquired in 2016 and 2015, respectively, and (ii) $1.1 million from other properties in our portfolio. We recognized an equivalent amount of real estate expense for these tenant reimbursements.

        Lease termination fees.    In 2015, we received lease termination fees of $2.9 million in lease buy-out transactions and re-leased substantially all of such premises simultaneously with the lease terminations. There were no such fees in 2016.

Operating Expenses

        The following table compares operating expenses for the periods indicated:

 
  Year Ended
December 31,
   
   
 
 
  Increase
(Decrease)
   
 
(Dollars in thousands)
  2016   2015   % Change  

Operating expenses:

                         

Depreciation and amortization

  $ 18,164   $ 16,384   $ 1,780     10.9  

General and administrative

    10,693     9,527     1,166     12.2  

Real estate expenses

    8,931     6,047     2,884     47.7  

Real estate acquisition costs

    596     449     147     32.7  

Federal excise and state taxes

    203     343     (140 )   (40.8 )

Leasehold rent

    308     308          

Total operating expenses

    38,895     33,058     5,837     17.7  

Operating income

  $ 31,693   $ 32,653   $ (960 )   (2.9 )

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        Depreciation and amortization.    Approximately $1.5 million and $932,000 of the increase is due to depreciation expense on the properties acquired in 2016 and 2015, respectively, approximately $365,000 of the increase is due to depreciation on property improvements and approximately $94,000 is due to amortization of leasing commissions. Offsetting these increases are decreases in 2016 of (i) $440,000 of expenses related to the 2016 Sold Properties and (ii) $657,000 of amortization and write-offs of intangibles and lease commissions. The $657,000 includes a $380,000 write-off of tenant origination costs in 2015 related to the Pathmark property and the balance relates primarily to the write-off of intangibles and lease commissions with respect to leases that expired or terminated in 2015 and 2016.

        General and administrative.    Contributing to the increase were increases of: (i) $649,000 in non-cash compensation expense primarily related to the increase in the number of shares of restricted stock granted in 2016 and the higher fair value of the awards granted in 2016 in comparison to the awards granted in 2011 that vested in 2016; (ii) $286,000 for third party audit and audit related services; and (iii) $97,000 in compensation expense payable to our full and part time personnel, primarily due to higher levels of compensation.

        Real estate expenses.    The increase in 2016 is due primarily to increases of $1.4 million from properties acquired in 2015 and 2016 and $719,000 from other properties in our portfolio. Most of these increases are rebilled to tenants and are included in Tenant reimbursement revenues. Also contributing to the increase in 2016 are $587,000 of expenses related to taxes and maintenance of the Vacant Properties and $165,000 due to the change in which property management fees are determined pursuant to the Compensation and Services Agreement.

        Real estate acquisition costs.    The increase is due to increased acquisition activity in 2016.

        Federal excise and state taxes.    We incurred Federal excise tax of $174,000 in 2015 and $6,000 in 2016 because profitable property sales resulted in calendar year distributions to stockholders being less than the amount required to be distributed during such year. In 2016, we deferred a $6.8 million taxable gain on a property sale through an IRC Section 1031 exchange.

Other Income and Expenses

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

 
  Year Ended
December 31,
   
   
 
 
  Increase
(Decrease)
   
 
(Dollars in thousands)
  2016   2015   % Change  

Other income and expenses:

                         

Equity in earnings of unconsolidated joint ventures

  $ 1,005   $ 412   $ 593     143.9  

Purchase price fair value adjustment

        960     (960 )   (100.0 )

Prepayment costs on debt

    (577 )   (568 )   9     1.6  

Other income

    435     108     327     302.8  

Interest:

                         

Expense

    (17,258 )   (16,027 )   1,231     7.7  

Amortization and write-off of deferred financing costs

    (904 )   (1,023 )   (119 )   (11.6 )

Income before gain on sale of real estate, net

    14,394     16,515     (2,121 )   (12.8 )

        Equity in earnings of unconsolidated joint ventures.    The increase in 2016 is due primarily to an increase of $633,000 in our share of income from the Manahawkin, New Jersey retail center which was acquired in June 2015. The year ended December 31, 2015 included our $400,000 share of acquisition expenses associated with the purchase of this center.

        Purchase price fair value adjustment.    In connection with the acquisition of our joint venture partner's 50% interest in a property located in Lincoln, Nebraska, we recorded this adjustment,

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representing the difference between the book value of the preexisting equity investment on the purchase date of March 31, 2015 and the fair value of the investment.

        Prepayment costs on debt.    These costs were incurred primarily in connection with property sales and the payoff, prior to the stated maturity, of the related mortgage debt. In 2016, these costs related primarily to the sales of the Tomlinson, Pennsylvania property and the Pantry Portfolio. In 2015, these costs related primarily to the sale of the Cherry Hill, New Jersey property.

        Other income.    As a result of a partial condemnation of land and easements obtained by the Colorado Department of Transportation ("CDOT") at our Greenwood Village, Colorado property, we received $509,000 from CDOT, of which $356,000 is attributable to easements and is included in Other income in 2016. See "—Gain on sale of real estate, net" below for the gain resulting from the balance.

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

 
  Year Ended
December 31,
   
   
 
 
  Increase
(Decrease)
   
 
(Dollars in thousands)
  2016   2015   % Change  

Interest expense:

                         

Credit facility interest

  $ 590   $ 594   $ (4 )   (.7 )

Mortgage interest

    16,668     15,433     1,235     8.0  

Total

  $ 17,258   $ 16,027   $ 1,231     7.7  

    Credit facility interest

        The decrease in 2016 is due to the $3.8 million decrease in the weighted average balance outstanding under our line of credit, offset by an increase of 28 basis points in the average interest rate from 1.95% to 2.23%, as well as an increase in the unused fee resulting from a $25.0 million increase in our borrowing capacity in connection with the November 2016 amendment and restatement of the credit facility.

    Mortgage interest

        The following table reflects the average interest rate on the average principal amount of outstanding mortgage debt during the applicable year:

 
  Year Ended
December 31,
   
   
 
 
  Increase
(Decrease)
   
 
(Dollars in thousands)
  2016   2015   % Change  

Interest rate on mortgage debt

    4.61 %   4.96 %   (.35 )%   (7.1 )

Principal amount of mortgage debt

  $ 361,645   $ 310,991   $ 50,654     16.3  

        The increase in mortgage interest expense is due to the increase in the average principal amount of mortgage debt outstanding, offset by a decrease in the average interest rate on outstanding mortgage debt. The increase in the average balance outstanding is substantially due to the incurrence of mortgage debt of $89.5 million in connection with properties acquired in 2015 and 2016 and the financing or refinancing of $85.2 million of mortgage debt, net of refinanced amounts, in connection with properties acquired prior to 2015. The decrease in the average interest rate is due to the financing (including financings effectuated in connection with acquisitions) or refinancing in 2016 and 2015 of $217.2 million of gross mortgage debt (including $42.6 million of refinanced amounts) with an average interest rate of approximately 3.8%.

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        Amortization and write-off of deferred financing costs.    The decrease in 2016 is primarily due to the write-off in 2015 of $249,000 relating to the sale of the Cherry Hill, New Jersey property. This decrease was offset by the write-off and increased amortization in 2016 of $66,000 relating to the new line of credit and other write-offs of $57,000 relating to property sales.

    Gain on sale of real estate, net.

        The following table compares gain on sale of real estate, net,:

 
  Year Ended
December 31,
   
   
 
 
  Increase
(Decrease)
   
 
(Dollars in thousands)
  2016   2015   % Change  

Gain on sale of real estate, net

  $ 10,087   $ 5,392   $ 4,695     87.1  

        The gain for 2016 was realized from (i) the sales of 12 properties, including the Pantry Portfolio and (ii) a $116,000 gain on the partial condemnation of land at our former Sports Authority property in Greenwood Village, Colorado. The 2015 gain was realized from the January 2015 sale of the Cherry Hill, New Jersey property. The minority partner's share of the gain on the Cherry Hill, New Jersey property was $1.3 million, which is the primary reason for the decrease in net income attributable to non-controlling interests for 2016 as compared to 2015.

Liquidity and Capital Resources

        Our sources of liquidity and capital include cash flow from operations, cash and cash equivalents, borrowings under our revolving credit facility, refinancing existing mortgage loans, obtaining mortgage loans secured by our unencumbered properties, issuance of our equity securities and property sales. In 2017, we obtained $21.2 million of proceeds from mortgage financings, $5.6 million of net proceeds from the sale of our common stock pursuant to our at-the-market equity offering program and $5.9 million from a fixed rent payment, which is deferred over the lease term, received from a ground lease tenant in connection with its obtaining supplemental mortgage financing. See Note 7 to our consolidated financial statements. Our available liquidity at March 5, 2018 was approximately $102.8 million, including approximately $6.7 million of cash and cash equivalents (net of the credit facility's required $3.0 million deposit maintenance balance) and, subject to borrowing base requirements, up to $96.1 million available under our revolving credit facility.

    Liquidity and Financing

        We expect to meet our (i) operating cash requirements (including debt service and dividends) principally from cash flow from operations and (ii) capital requirements of $4.2 million of building expansion and improvements at our property tenanted by L-3 located in Hauppauge, NY, from cash flow from operations, our available cash and cash equivalents, proceeds from the sale of our common stock and, to the extent permitted, our credit facility. We and our joint venture partner are also contemplating a significant redevelopment of our multi-tenant shopping center in Manahawkin, New Jersey—we anticipate that the capital expenditures that may be incurred if such property is redeveloped will be funded by the foregoing sources as well as equity contributions from us and our joint venture partner.

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        The following table sets forth, as of December 31, 2017, information with respect to our mortgage debt that is payable from January 2018 through December 31, 2020 (excluding our unconsolidated joint ventures):

(Dollars in thousands)
  2018   2019   2020   Total  

Amortization payments

  $ 10,188   $ 11,125   $ 11,901   $ 33,214  

Principal due at maturity

    10,260     3,485         13,745  

Total

  $ 20,448   $ 14,610   $ 11,901   $ 46,959  

        At December 31, 2017, our unconsolidated joint ventures had first mortgages on four properties with outstanding balances aggregating approximately $35.0 million, bearing interest at rates ranging from 3.49% to 5.81% (i.e., a 4.07% weighted average interest rate) and maturing between 2018 and 2025 (i.e., a weighted average remaining term to maturity of 6.1 years).

        We intend to make debt amortization payments from operating cash flow and, though no assurance can be given that we will be successful in this regard, generally intend to refinance, extend or payoff the mortgage loans which mature in 2018 through 2020. We intend to repay the amounts not refinanced or extended from our existing funds and sources of funds, including our available cash, proceeds from the sale of our common stock and our credit facility (to the extent available).

        We continually seek to refinance existing mortgage loans on terms we deem acceptable to generate additional liquidity. Additionally, in the normal course of our business, we sell properties when we determine that it is in our best interests, which also generates additional liquidity. Further, since each of our encumbered properties is subject to a non-recourse mortgage (with standard carve-outs), if our in-house evaluation of the market value of such property is less than the principal balance outstanding on the mortgage loan, we may determine to convey, in certain circumstances, such property to the mortgagee in order to terminate our mortgage obligations, including payment of interest, principal and real estate taxes, with respect to such property.

        Typically, we utilize funds from our credit facility to acquire a property and, thereafter secure long-term, fixed rate mortgage debt on such property. We apply the proceeds from the mortgage loan to repay borrowings under the credit facility, thus providing us with the ability to re-borrow under the credit facility for the acquisition of additional properties.

Credit Facility

        Subject to borrowing base requirements, we can borrow up to $100.0 million pursuant to our revolving credit facility which is available to us for the acquisition of commercial real estate, repayment of mortgage debt, property improvements and general working capital purposes; provided, that if used for property improvements and working capital purposes, the amount outstanding for such purposes will not exceed the lesser of $15.0 million and 15% of the borrowing base and if used for working capital purposes, will not exceed $10.0 million. The facility matures December 31, 2019 and bears interest equal to the one month LIBOR rate plus the applicable margin. The applicable margin ranges from 175 basis points if our ratio of total debt to total value (as calculated pursuant to the facility) is equal to or less than 50%, increasing to a maximum of 300 basis points if such ratio is greater than 65%. The applicable margin was 175 basis points for 2016 and 2017. There is an unused facility fee of 0.25% per annum on the difference between the outstanding loan balance and $100.0 million. The credit facility requires the maintenance of $3.0 million in average deposit balances. For 2017, the average interest rate on the facility was approximately 2.87% and as of March 6, 2018, the rate on the facility was 3.33%.

        The terms of our revolving credit facility include certain restrictions and covenants which limit, among other things, the incurrence of liens, and which require compliance with financial ratios relating

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to, among other things, the minimum amount of tangible net worth, the minimum amount of debt service coverage, the minimum amount of fixed charge coverage, the maximum amount of debt to value, the minimum level of net income, certain investment limitations and the minimum value of unencumbered properties and the number of such properties. Net proceeds received from the sale, financing or refinancing of properties are generally required to be used to repay amounts outstanding under our credit facility. At December 31, 2017, we were in compliance in all material respects with the covenants under this facility.

Contractual Obligations

        The following sets forth our contractual obligations as of December 31, 2017:

 
  Payment due by period  
(Dollars in thousands)
  Less than
1 Year
  1 - 3 Years   4 - 5 Years   More than
5 Years
  Total  

Contractual Obligations

                               

Mortgages payable—interest and amortization

  $ 26,833   $ 53,376   $ 52,190   $ 110,928   $ 243,327  

Mortgages payable—balances due at maturity

    10,260     3,485     40,002     214,048     267,795  

Credit facility(1)

        9,400             9,400  

Purchase obligations(2)

    7,520     6,425     5,895         19,840  

Total

  $ 44,613   $ 72,686   $ 98,087   $ 324,976   $ 540,362  

(1)
Represents the amount outstanding at December 31, 2017. We may borrow up to $100.0 million under such facility.

(2)
Assumes that (i) $2.9 million will be payable annually during the next five years pursuant to the compensation and services agreement and (ii) $4.2 million will be spent in contractually required building expansion and tenant improvements at the L-3, Hauppauge, New York property in 2018. Excludes $3.0 million for tenant improvements at our Greensboro, North Carolina property, which obligation was satisfied in January 2018.

        As of December 31, 2017, we had $392.5 million of mortgage debt outstanding (excluding mortgage indebtedness of our unconsolidated joint ventures), all of which is non-recourse (subject to standard carve-outs). We expect that mortgage interest and amortization payments (excluding repayments of principal at maturity) of approximately $80.2 million due through 2020 will be paid primarily from cash generated from our operations. We anticipate that principal balances due at maturity through 2020 of $13.7 million will be paid primarily from cash and cash equivalents and mortgage financings and refinancings. If we are unsuccessful 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 debt obligations when payments become due, and we may need to issue additional equity, obtain long or short-term debt, or dispose of properties on unfavorable terms.

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    Statement of Cash Flows

        The following discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be a comprehensive discussion of the changes in our cash flows for the years presented.

 
  For the Years ended December 31,  
(Dollars in thousands)
  2017   2016   2015  

Cash flow provided by operating activities

  $ 44,557   $ 31,405   $ 34,484  

Cash flow used in investing activities

    (23,444 )   (80,911 )   (73,498 )

Cash flow (used in) provided by financing activities

    (24,767 )   54,190     31,406  

Net (decrease) increase in cash and cash equivalents

    (3,654 )   4,684     (7,608 )

Cash and cash equivalents at beginning of year

    17,420     12,736     20,344  

Cash and cash equivalents at end of year

  $ 13,766   $ 17,420   $ 12,736  

        Our principal source of operating cash flow is the net funds generated from the operation of our properties. Our properties provide a relatively consistent stream of cash flow that provides us with resources to pay operating expenses, debt service and fund quarterly dividend requirements.

        The decrease in cash used in investing activities during 2017 compared to 2016 is due primarily to the decrease in purchases of real estate in 2017, offset by the decrease in net proceeds from sales of real estate in 2017.

        The increase in cash flow used in financing activities during 2017 compared to 2016 is due primarily to the net decrease of $65.6 million in financings/repayments of mortgages payable and to a lesser extent, the net increase of $7.7 million in repayments (net of proceeds from drawdowns) on the credit facility in 2017. The increase in cash flow used in financing activities also resulted from a $20.2 million decrease in net proceeds from the sale of our common stock in 2017.

    Cash Distribution Policy

        We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. Accordingly, to qualify as a REIT, we must, among other things, 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. It will continue to be our policy to make sufficient distributions to stockholders in order for us to maintain our REIT status under the Internal Revenue Code.

        Our board of directors reviews the dividend policy regularly to determine if any changes to our dividend should be made.

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    Off-Balance Sheet Arrangements

        We are not a party to any off-balance sheet arrangements other than with respect to land parcels owned by us and located in Lakemoor, Illinois, Wheaton, Illinois and Beachwood, Ohio. These parcels are improved by multi-family complexes and we ground leased the parcels to the owner/operators of such complexes. These ground leases generated $3.7 million of rental income, net, during 2017. At December 31, 2017, our maximum exposure to loss with respect to these properties is $34.0 million, representing the carrying value of the land; our leasehold positions are subordinate to an aggregate of $158.2 million of mortgage debt incurred by our tenants, the owner/operators of the multi-family complexes. These owner/operators are affiliated with one another. We do not believe that this type of off-balance sheet arrangement has been or will be material to our liquidity and capital resource positions. See Notes 4 and 7 to our consolidated financial statements for additional information regarding these arrangements.

    Critical Accounting Policies

        Our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K. 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 critical accounting policies include the following, discussed below.

    Purchase Accounting for Acquisition of Real Estate

        The fair value of real estate acquired is allocated to 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, building and building improvements) is determined by valuing the property as if it were vacant, and the "as-if-vacant" value is then allocated to land, building and building improvements based on our determination of relative fair values of these assets. We assess fair value of the lease intangibles based on estimated cash flow projections that utilize appropriate discount rates and available market information. The fair values associated with below-market rental renewal options are determined based on our experience and the relevant facts and circumstances that existed at the time of the acquisitions. The portion of the values of the leases associated with below-market renewal options that we deem likely to be exercised are amortized to rental income over the respective renewal periods. The allocation made by us may have a positive or negative effect on net income and may have an effect on the assets and liabilities on the balance sheet.

    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 non-cancellable 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 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 and the financial condition of the tenant. In the event that the collectability of an unbilled rent receivable is in doubt, we are required to take a reserve against the receivable or a direct write-off of the receivable, which has an adverse effect on net income for the year in which the reserve or direct write-off is taken, and will decrease total assets and stockholders' equity.

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    Carrying Value of Real Estate Portfolio

        We review our real estate portfolio on a quarterly basis to ascertain if there are any indicators of impairment to the value of any of our real estate assets, including deferred costs and intangibles, to determine if there is any need for an impairment charge. In reviewing the portfolio, we examine the type of asset, the current financial statements or other available financial information of the tenant, 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, we perform a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the asset to its carrying amount. If the undiscounted cash flows are less than the asset's carrying amount, an impairment loss is recorded to the extent that the estimated fair value is less than the asset's carrying amount. The estimated fair value is determined using a discounted cash flow model of the expected future cash flows through the useful life of the property. 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. We generally do not obtain any independent appraisals in determining value but rely on our own analysis and valuations. Any impairment charge 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 any impairment charge, but it will not affect our cash flow or our distributions until such time as we dispose of the property.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.

        Our primary market risk exposure is the effect of changes in interest rates on the interest cost of draws on our revolving variable rate credit facility and the effect of changes in the fair value of our interest rate swap agreements. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.

        We use interest rate swaps to limit interest rate risk on variable rate mortgages. These swaps are used for hedging purposes-not for speculation. We do not enter into interest rate swaps for trading purposes. At December 31, 2017, our aggregate liability in the event of the early termination of our swaps was $1.6 million.

        At December 31, 2017, we had 30 interest rate swap agreements outstanding (including two held by three of our unconsolidated joint ventures). The fair market value of the interest rate swaps is dependent upon existing market interest rates and swap spreads, which change over time. As of December 31, 2017, if there had been an increase of 100 basis points in forward interest rates, the fair market value of the interest rate swaps would have increased by approximately $7.5 million and the net unrealized gain on derivative instruments would have increased by $7.5 million. If there were a decrease of 100 basis points in forward interest rates, the fair market value of the interest rate swaps would have decreased by approximately $8.1 million and the net unrealized gain on derivative instruments would have decreased by $8.1 million. These changes would not have any impact on our net income or cash.

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

        Our variable rate credit facility is sensitive to interest rate changes. At December 31, 2017, a 100 basis point increase of the interest rate on this facility would increase our related interest costs by approximately $94,000 per year and a 100 basis point decrease of the interest rate would decrease our related interest costs by approximately $94,000 per year.

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        The fair market value of our long-term debt is estimated based on discounting future cash flows at interest rates that our management believes reflect the risks associated with long term debt of similar risk and duration.

        The following table sets forth our debt obligations by scheduled principal cash flow payments and maturity date, weighted average interest rates and estimated fair market value at December 31, 2017:

 
  For the Year Ended December 31,  
(Dollars in thousands)
  2018   2019   2020   2021   2022   Thereafter   Total   Fair
Market
Value
 

Fixed rate:

                                                 

Long-term debt

  $ 20,448   $ 14,610   $ 11,901   $ 20,742   $ 43,771   $ 281,051   $ 392,523   $ 397,103  

Weighted average interest rate

    4.32 %   4.24 %   4.35 %   4.27 %   4.05 %   4.23 %   4.22 %   4.25 %

Variable rate:

                                                 

Long-term debt(1)

      $ 9,400                   $ 9,400      

(1)
Our credit facility matures on December 31, 2019 and bears interest at the 30 day LIBOR rate plus the applicable margin. The applicable margin varies based on the ratio of total debt to total value. See "Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations—Liquidity and Capital Resources—Credit Facility."

Item 8.    Financial Statements and Supplementary Data.

        This information appears in Item 15(a) of this Annual Report on Form 10-K, and is incorporated into this Item 8 by reference thereto.

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

        Not applicable.

Item 9A.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

        A review and evaluation was performed by our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") 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 disclosure controls and procedures, as designed and implemented as of December 31, 2017, were effective.

Changes in Internal Controls over Financial Reporting

        There have been no changes in our internal controls over financial reporting, as defined in in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, that occurred during the three months ended December 31, 2017 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Management's 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 Exchange Act 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,

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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:

    pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of a company;

    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

    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 transactions.

        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, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, our management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013).

        Based on its assessment, our management concluded that, as of December 31, 2017, our internal control over financial reporting was effective based on those criteria.

        Our independent registered public accounting firm, Ernst & Young LLP, have issued a report on management's assessment of the effectiveness of internal control over financial reporting. This report appears on page F-2 of this Annual Report on Form 10-K.

Item 9B.    Other Information.

        The following discussion supplements and updates the discussion (the "Prior Discussion") contained in our prospectus dated May 10, 2017 under the heading "Federal Income Tax Considerations" and supersedes the Prior Discussion to the extent the discussion below is inconsistent with the Prior Discussion. The Prior Discussion and the discussion below (collectively referred to as the "Tax Discussion") are subject to the qualifications set forth therein and below. The tax treatment of security holders will vary depending upon the holder's particular situation, and the Tax Discussion addresses only holders that hold securities as a capital asset and does not deal with all aspects of taxation that may be relevant to particular holders in light of their personal investment or tax circumstances. The Tax Discussion also does not deal with all aspects of taxation that may be relevant to certain types of holders, to which special provisions of the federal income tax laws apply, including:

    dealers in securities or currencies;

    traders in securities that elect to use a mark-to-market method of accounting for their securities holdings;

    banks and other financial institutions;

    tax-exempt organizations;

    certain insurance companies;

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    persons liable for the alternative minimum tax;

    persons that hold securities as a hedge against interest rate or currency risks or as part of a straddle or conversion transaction;

    non-U.S. individuals and foreign corporations; and

    holders whose functional currency is not the U.S. dollar.

        The statements in the Tax Discussion are based on the Code, its legislative history, current and proposed regulations under the Code, published rulings and court decisions. This summary describes the provisions of these sources of law only as they are currently in effect. All of these sources of law may change at any time, and any change in the law may apply retroactively. We cannot assure you that new laws, interpretations of law or court decisions, any of which may take effect retroactively, will not cause any statement in this discussion to be inaccurate.

        As supplemented and updated by this summary, and by the discussion in any applicable prospectus supplement, investors should review the discussion in the prospectus under the heading "Federal Income Tax Considerations" for a more detailed summary of the federal income tax consequences of the purchase, ownership, and disposition of our securities and our election to be subject to federal income tax as a REIT.

        PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE U.S. FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP, AND DISPOSITION OF OUR SECURITIES.

Enactment of Tax Act

        On December 22, 2017, the Tax Cuts and Jobs Act, which we refer to as the "Tax Act", was enacted. The Tax Act makes major changes to the Code, including a number of provisions of the Code that may affect the taxation of REITs and the holders of their securities. The most significant of these provisions are described below. The individual and collective impact of these changes on REITs and their security holders is uncertain and may not become evident for some period of time. Prospective investors should consult their tax advisors regarding the implications of the Tax Act on their investment.

Revised Individual Tax Rates and Deductions

        The Tax Act adjusted the tax brackets and reduced the top federal income tax rate for individuals from 39.6% to 37%. In addition, numerous deductions were eliminated or limited, including the deduction for state and local taxes being limited to $10,000 per year. These individual income tax changes are generally effective beginning in 2018, but without further legislation, they will sunset after 2025.

Pass-Through Business Income Tax Rate Lowered through Deduction

        Under the Tax Act, individuals, trusts, and estates generally may deduct 20% of "qualified business income" (generally, domestic trade or business income other than certain investment items) of a partnership, S corporation, or sole proprietorship. In addition, "qualified REIT dividends" (i.e., REIT dividends other than capital gain dividends and portions of REIT dividends designated as qualified dividend income eligible for capital gain tax rates) and certain other income items are eligible for the deduction. The deduction, however, is subject to complex limitations to its availability. As with the other individual income tax changes, the provisions related to the deduction are effective beginning in 2018, but without further legislation, they will sunset after 2025.

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Graduated Corporate Tax Rates Replaced With Single Rate; Elimination of Corporate Alternative Minimum Tax

        The Tax Act eliminated graduated corporate income tax rates with a maximum rate of 35% and replaced them with a single corporate income tax rate of 21%, and reduced the dividends received deduction for certain corporate subsidiaries. The 21% rate may also apply to (i) our net income for any taxable period in which we fail to qualify as a REIT, or (ii) our net income from nonqualifying assets during a period in which we fail to satisfy the REIT asset test but otherwise qualify as a REIT. The Tax Act also permanently eliminated the corporate alternative minimum tax. These provisions are effective beginning in 2018.

Net Operating Loss Modifications

        The Tax Act limited the net operating loss ("NOL") deduction to 80% of taxable income (before the deduction). The Tax Act also generally eliminated NOL carrybacks for individuals and non-REIT corporations (NOL carrybacks did not apply to REITs under prior law) but allows indefinite NOL carryforwards. The new NOL rules apply beginning in 2018.

Limitations on Interest Deductibility

        The Tax Act limits the net interest expense deduction of a business to 30% of the sum of adjusted taxable income, business interest, and certain other amounts. The Tax Act allows a real property trade or business to elect out of such limitation so long as it uses the alternative depreciation system which lengthens the depreciation recovery period with respect to certain property. The limitation with respect to the net interest expense deduction applies beginning in 2018.

Withholding Rate Reduced

        The Tax Act reduced the highest rate of withholding with respect to distributions to non-U.S. holders that are treated as attributable to gains from the sale or exchange of U.S. real property interests from 35% to 21%. These provisions are effective beginning in 2018.

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PART III

Item 10.    Directors, Executive Officers and Corporate Governance.

        Apart from certain information concerning our executive officers which is set forth in Part I of this Annual Report, additional information required by this Item 10 shall be included in our proxy statement for our 2018 annual meeting of stockholders, to be filed with the SEC not later than April 30, 2018, and is incorporated herein by reference.


EXECUTIVE OFFICERS

        Set forth below is a list of our executive officers whose terms expire at our 2018 annual board of directors' meeting. The business history of our officers, who are also directors, will be provided in our proxy statement to be filed pursuant to Regulation 14A not later than April 30, 2018.

NAME
  AGE   POSITION WITH THE COMPANY
Matthew J. Gould*     58   Chairman of the Board
Fredric H. Gould*     82   Vice Chairman of the Board
Patrick J. Callan, Jr.      55   President, Chief Executive Officer and Director
Lawrence G. Ricketts, Jr.      41   Executive Vice President and Chief Operating Officer
Jeffrey A. Gould*     52   Senior Vice President and Director
David W. Kalish**     70   Senior Vice President and Chief Financial Officer
Mark H. Lundy     55   Senior Vice President and Secretary
Israel Rosenzweig     70   Senior Vice President
Karen Dunleavy     59   Vice President, Financial
Alysa Block     57   Treasurer
Richard M. Figueroa     50   Vice President and Assistant Secretary
Isaac Kalish**     42   Vice President and Assistant Treasurer
Justin Clair     35   Vice President

*
Matthew J. Gould and Jeffrey A. Gould are Fredric H. Gould's sons.

**
Isaac Kalish is David W. Kalish's son.

        Lawrence G. Ricketts, Jr.    Mr. Ricketts has been our Chief Operating Officer since 2008, Vice President from 1999 through 2006 and Executive Vice President since 2006.

        David W. Kalish.    Mr. Kalish has served as our Senior Vice President and Chief Financial Officer since 1990 and as Senior Vice President, Finance of BRT Apartments Corp. since 1998. Since 1990, he has served as Vice President and Chief Financial Officer of the managing general partner of Gould Investors L.P., a master limited partnership involved primarily in the ownership and operation of a diversified portfolio of real estate assets. Mr. Kalish is a certified public accountant.

        Mark H. Lundy.    Mr. Lundy has served as our Secretary since 1993, as our Vice President since 2000 and as our Senior Vice President since 2006. Mr. Lundy has been a Vice President of BRT Apartments Corp. from 1993 to 2006, its Senior Vice President since 2006, a Vice President of the managing general partner of Gould Investors from 1990 through 2012 and its President and Chief Operating Officer since 2013. He is an attorney admitted to practice in New York and the District of Columbia.

        Israel Rosenzweig.    Mr. Rosenzweig has served as our Senior Vice President since 1997, as Chairman of the Board of Directors of BRT Apartments Corp. since 2013, as Vice Chairman of its Board of Directors from 2012 through 2013, and as its Senior Vice President from 1998 through 2012. He has been a Vice President of the managing general partner of Gould Investors since 1997.

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        Karen Dunleavy.    Ms. Dunleavy has been our Vice President, Financial since 1994. She served as Treasurer of the managing general partner of Gould Investors from 1986 through 2013. Ms. Dunleavy is a certified public accountant.

        Alysa Block.    Ms. Block has been our Treasurer since 2007, and served as Assistant Treasurer from 1997 to 2007. Ms. Block has also served as the Treasurer of BRT Apartments Corp. from 2008 through 2013, and served as its Assistant Treasurer from 1997 to 2008.

        Richard M. Figueroa.    Mr. Figueroa has served as our Vice President and Assistant Secretary since 2001, as Vice President and Assistant Secretary of BRT Apartments Corp. since 2002 and as Vice President of the managing general partner of Gould Investors since 1999. Mr. Figueroa is an attorney admitted to practice in New York.

        Isaac Kalish.    Mr. Kalish has served as our Vice President since 2013, Assistant Treasurer since 2007, as Assistant Treasurer of the managing general partner of Gould Investors from 2012 through 2013, as Treasurer from 2013, as Vice President and Treasurer of BRT Apartments Corp. since 2013, and as its Assistant Treasurer from 2009 through 2013. Mr. Kalish is a certified public accountant.

        Justin Clair.    Mr. Clair has been employed by us since 2006, served as Assistant Vice President from 2010 through 2014 and as Vice President since 2014.

Item 11.    Executive Compensation.

        The information concerning our executive compensation required by this Item 11 shall be included in our proxy statement for our 2018 annual meeting of stockholders, to be filed with the SEC not later than April 30, 2018, and is incorporated herein by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

        The information concerning our beneficial owners and management required by this Item 12 shall be included in our proxy statement for our 2018 annual meeting of stockholders, to be filed with the SEC not later than April 30, 2018 and is incorporated herein by reference.

Equity Compensation Plan Information

        As of December 31, 2017, the only equity compensation plan under which equity compensation may be awarded is our 2016 Incentive Plan, which was approved by our stockholders in June 2016. This plan permits us to grant stock options, restricted stock, restricted stock units and performance based awards to our employees, officers, directors, consultants and other eligible participants. The following

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table provides information as of December 31, 2017 about shares of our common stock that may be issued upon the exercise of options, warrants and rights under our 2016 Incentive Plan:

Plan Category
  Number of
securities
to be issued
upon exercise
of outstanding
options, warrants
and rights(1)
  Weighted-average
exercise price
of outstanding
options,
warrants
and rights
  Number of
securities
remaining available
for future issuance
under equity
compensation
plans (excluding
securities
reflected in
column(a))(2)
 
 
  (a)
  (b)
  (c)
 

Equity compensation plans approved by security holders

    76,250         533,750  

Equity compensation plans not approved by security holders

             

Total

    76,250         533,750  
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