ONE LIBERTY PROPERTIES INC (OLP) FY 2022 MD&A

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

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Overview

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We are a self-administered and self-managed REIT focused on acquiring, owning and managing a geographically diversified portfolio consisting primarily of industrial and retail 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, 2022, we own, in 31 states, 120 properties, including three properties owned by consolidated joint ventures and three properties owned through unconsolidated joint ventures.

Challenges and Uncertainties as a Result of the Volatile Economic Environment

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During 2022, economic uncertainty and stock market volatility increased due to a number of factors, including rising inflation, increasing interest rates, the continuing COVID-19 pandemic, and lingering supply chain disruptions. This uncertainty, volatility and the related causes may adversely impact us in the future. Most of our leases require the tenants to pay (or to reimburse us for) their pro rata share of operating expenses, including real estate taxes, insurance and common area maintenance, thereby reducing our exposure to increases in operating expenses resulting from inflation or other factors. Additionally, many of our leases include scheduled rent increases. In the event inflation causes increases in our real estate operating expense (to the extent such expense is not paid directly by or reimbursed to us by our tenants), general and administrative expenses, or higher interest rates on our floating rate debt increase our cost of doing business, such increased costs would not be passed through to tenants and could adversely affect our results of operations. Finally, due to these uncertain conditions, we anticipate that in the near-term we may reduce the number of properties we acquire. As a result, our ability, in the near term, to grow revenue and net income through acquisitions will be adversely affected.

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General Challenges and Uncertainties

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In addition to the challenges and uncertainties as also described under “Cautionary Note Regarding Forward-Looking Statements”, “Item 1A. Risk Factors”, and “— Challenges and Uncertainties as a Result of the Volatile Economic Environment”, we, among other things, face additional challenges and uncertainties, including the possibility we will not be able to: lease our properties on terms favorable to us or at all; collect amounts owed to us by our tenants; renew or re-let, on acceptable terms, leases that are expiring or otherwise terminating; acquire or dispose of properties on acceptable terms; or grow, through acquisitions or otherwise, our property portfolio so as to generate additional rental and net income. If we are unable to address these challenges successfully, we may be unable to sustain our current level of dividend payments.

We generally seek to manage the risk of our real property portfolio and the related financing arrangements by (i) diversifying among locations, tenants, scheduled lease expirations, mortgage maturities and lenders, and types of properties (although over the past several years, we have focused, and we continue to focus, on acquiring industrial properties), and (ii) minimizing our exposure to interest rate fluctuations. As a result, as of December 31, 2022:

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We monitor the risk of tenant non-payments through a variety of approaches tailored to the applicable situation. Generally, based on our assessment of the credit risk posed by our tenants, we monitor a tenant’s financial condition through one or more of the following actions: reviewing tenant financial statements or other financial information, obtaining other tenant related information, changes in tenant payment patterns, regular contact with tenant’s representatives, tenant credit checks and regular management reviews of our tenants. We may sell a property if the tenant’s financial condition is unsatisfactory.

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We monitor, on an ongoing basis, our expiring leases and generally approach tenants with expiring leases (including those subject to renewal options) at least a year prior to lease expiration to determine their interest in renewing their leases. During the three years ending December 31, 2025, 54 leases for 48 tenants at 39 properties representing $15.4 million, or 21.5%, of 2023 contractual rental income expire.

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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.

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We are sensitive to the risks facing the retail industry as a result of the growth of e-commerce. Over the past several years, we have been addressing our exposure to the retail industry by focusing on acquiring industrial properties (including warehouse and distribution facilities) and properties that we believe capitalize on e-commerce activities – since September 2016, we have not acquired any retail properties and have sold 18 retail properties. As a result of the focus on industrial properties and the sale of retail properties, industrial properties generated 57.3% of rental income, net, in 2022, compared to 35.1% of rental income, net in 2017, and retail properties generated 25.7% of rental income, net, in 2022, compared to 43.7% of rental income, net, in 2017.

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At December 31, 2022, we have variable rate mortgage debt in the principal amount of $41.9 million that bear interest equal to 30-day LIBOR plus a negotiated spread. This mortgage debt is hedged through interest rate swaps. The authority regulating LIBOR announced it intends to stop compelling banks to submit rates for the circulation of LIBOR after June 2023. As all of this mortgage debt and the related notional amount of the interest rate swaps mature after June 2023, there is uncertainty as to how the interest rate on this variable rate debt and the related swaps will be determined when LIBOR is unavailable.

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Challenges and Uncertainties Facing Certain Properties and Tenants

Set forth below is a description of the challenges and uncertainties facing certain tenants or properties. If these challenges, and in particular, the challenges faced by Regal Cinemas, The Vue and the Manahawkin Property, are not resolved in a satisfactory manner, we will be adversely affected.

Regal Cinemas

Regal Cinemas, or Regal, is a tenant at three properties, including a property owned by an unconsolidated joint venture in which we have a 50% equity interest. Regal’s parent, Cineworld Group plc, filed for Chapter 11 bankruptcy protection in September 2022. At December 31, 2022, Regal is obligated to pay us (and with respect to the unconsolidated joint venture, our 50% share of), (i) through December 31, 2023, $2.8 million, including $634,000 of COVID-19 rent deferral repayments, and (ii) from January 1, 2024 through 2035, an aggregate of $21.7 million of base rent (collectively, the “Obligated Amount”). During 2022, we collected $996,000 of deferred rent and $2.0 million of base rent, representing 91.7% of the deferred rent and base rent payable by Regal. Through March 6, 2023, we collected an aggregate of (i) $808,000 representing 100% of the base rent and deferred rent due through March 2023 and (ii) $67,000 representing 24.9% of the base rent and deferred rents due from 2022. (Because the collection of amounts owed by Regal is deemed to be less than probable, we have not accrued Regal’s base rent or deferred rent and since October 2020, have been reporting same on a cash basis). We and Regal are discussing significant modifications to the terms of these leases, including the cancellation of deferred rent, the reduction of base rent and shortened lease terms. We anticipate that the amounts we collect will be significantly reduced from the Obligated Amount and there is uncertainty as to whether we will be required to take an impairment with respect to these properties. We can provide no assurance that we will reach an agreement with Regal and that even if an agreement is reached, that it will be approved by any third parties, such as the bankruptcy court, whose approvals are required. If an agreement is not reached or third party approvals not obtained, it will be difficult and costly (due, among other things, to the unique configuration of theater properties) to find a replacement tenant. We summarize below certain information about these properties.

1.Consolidated Properties

At December 31, 2022, our Indianapolis, Indiana property had mortgage debt, intangible lease liabilities and intangible lease assets of approximately $3.8 million, $569,000 and $595,000, respectively. There is no mortgage debt, intangible lease liabilities or intangible lease assets at the Greensboro, North Carolina property at which we lease the underlying fee and in turn lease the property to Regal. We estimate that the carrying costs for these two properties for the twelve months ending December 31, 2023, are approximately $1.3 million, including ground lease rent of $464,000 (which sum has historically been paid directly by Regal to the owner of the Greensboro property), real estate taxes of approximately $249,000, and debt service of $425,000 (including $109,000 of deferred interest payments). Regal is the primary obligor with respect to $456,000 of these carrying costs and we are responsible with respect to such amount if it is not paid by Regal.

2.Unconsolidated Property

Regal is a tenant at the Manahawkin Property and which is owned by an unconsolidated joint venture. Our 50% share of the base rent paid by Regal at this property during 2022 and 2021 was $217,000 and $139,000, respectively, representing 15.3% and 10.4%, respectively, of our share of the total base rent payable by all tenants at the Manahawkin Property, respectively. (Our 50% share of the deferred rent paid by Regal at this property during 2022 was $111,000 and is excluded from the base rent payments described in the immediately preceding sentence). At December 31, 2022, our share of the mortgage debt at this property was approximately $10.7 million.

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The Vue – Beachwood, Ohio

A multi-family complex, which we refer to as The Vue, ground leases from us the underlying land located in Beachwood, Ohio. Since 2018, the property has faced, and we anticipate that the property will continue to face, occupancy and financial challenges, and our tenant has not paid rent since October 2020 (i.e., an aggregate of $3.0 million that would have been due had it generated specified levels of positive operating cash flow), and we anticipate that it will not pay rent for an extended period. After giving effect to debt service, the property is operating on a negative cash flow basis, and we anticipate that such trend will continue for an extended period. Since 2021 (through March 6, 2023), we provided The Vue with an aggregate of $2.9 million to cover, among other things, operating cash flow shortfalls and capital expenditures, and we estimate that in the balance of 2023, we will provide approximately $538,000 in funding for this property. At December 31, 2022, (i) there are no unbilled rent receivables, intangibles or tenant origination costs associated with this property and (ii) the net book value of our land subject to this ground lease is $16.5 million and is subordinate to $64.8 million of mortgage debt incurred by the owner/operator. Our cash flow will be adversely impacted by our funding of additional capital expenditures and operating expense shortfalls at the property (including our payment of the tenant’s debt service obligations) and the tenant’s continuing non-payment of rent. We may incur a substantial impairment charge with respect to this property if we determine that the property is impaired. See Note 6 to our consolidated financial statements.

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See “— Receipt of Settlement Proceeds from Litigation involving The Vue” for information regarding the settlement of litigation involving this property.

The Manahawkin Property

We are exploring various alternatives with respect to the Manahawkin Property, which is owned by an unconsolidated joint venture in which we have a 50% equity interest. For the past several years, we had pursued a re-development of this property. As a result, the income and cash flow from this property is significantly less than it was several years ago and at December 31, 2022, the occupancy rate was 52.8%. In 2022, the property’s operating cash flow (including debt service payments) exceeded the property’s carrying costs by approximately $639,000 (after giving effect to an aggregate of $657,000 of rent and deferred rent collected from Regal Cinemas) and in 2021, the property’s carrying costs exceeded the property’s operating cash flow by approximately $142,000. We are pursuing, as an alternative to the re-development, the possible sale of the 112,000 square foot untenanted parcel formerly tenanted by Kmart, which we refer to as the Sale Parcel, with a view to selling to a buyer that we believe will serve as a strong anchor to the Manahawkin Property. We have not entered into a contract to sell the Sale Parcel, and we anticipate that if we do enter into such a contract, the closing of the sale will be subject to the satisfaction of various conditions and that it will take approximately 18 months to two years from the date the contract is signed to complete the sale. During this period, it may be difficult to maintain or improve the occupancy at the portion of the Manahawkin Property that we retain (the “Retained Property”) as prospective tenants may be unwilling to lease, and current tenants may be unwilling to stay, until the sale is completed. We can provide no assurance that a contract for the sale of the Sale Parcel will be signed, that if signed, that this sale will be completed, or that if completed, that the operations at the Retained Property will improve. If we are unable to complete this sale on acceptable terms, we may resume our re-development efforts. To date, no construction has begun in connection with the re-development, and there is significant uncertainty as to whether a re-development, if pursued, would be successful. As of December 31, 2022, our share of the capitalized costs (primarily soft costs), related to the re-development is $577,000. Our net income, cash flow and financial condition will be adversely affected if significant tenants at the Manahawkin Property or the Retained Property, such as Regal Cinemas, cease paying rent or pay less rent or if we are unable, whether as a result of a sale, a re-development, or some other transformative transaction, improve the operations of the Manahawkin Property or the Retained Property.

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LA Fitness

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LA Fitness, a health and fitness tenant that leases a 38,000 square foot building located in Hamilton, Ohio, has advised that it does not intend to renew this lease when it expires in November 2023. This property accounted for (i) $915,000 of rental income in 2022 and accounts for 1.0% of 2023 contractual rental income and (ii) in 2022, $197,000, $170,000 and $210,000 of interest expense, real estate operating expense and depreciation and amortization expense, respectively, at this property. At December 31, 2022, the mortgage debt, unbilled rent receivable and tenant origination cost with respect to this property was $4.1 million, $41,000 and $34,000, respectively. Due to the limited number of health and fitness operators, and the presence nearby of another health and fitness facility, it may be difficult to re-lease this property to another such operator, and if we are unable to re-lease this property to such an operator, it may be costly to reconfigure the space for another tenant.

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Bed Bath and Beyond

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Bed Bath & Beyond (“BBBY”) leases, through 2027, a 32,138 square foot property located in Kennesaw, Georgia. This tenant’s lease expires in 2027 and through the stated expiration of this lease, BBBY was obligated to pay us an aggregate of $2.5 million of base rent. BBBY has been experiencing significant financial difficulty. This property accounted for (i) $629,000 of rental income in 2022 and accounts for 0.8% of 2023 contractual rental income and (ii) in 2022, $168,000, $56,000 and $218,000 of interest expense, real estate operating expense, and depreciation and amortization expense, respectively. At December 31, 2022, the mortgage debt and unbilled rent receivable with respect to this property was $4.6 million and $142,000, respectively.

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Party City

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Party City, a tenant that leases 11,248 square feet at a 54,229 square foot multi-tenant property located in Lake Charles, Louisiana, filed for Chapter 11 bankruptcy protection in January 2023. This tenant’s lease expires in 2031 and through the stated expiration of this lease, this tenant was obligated to pay us an aggregate of $1.5 million base rent. This tenant accounted for (i) $209,000 of rental income in 2022 and accounts for 0.2% of 2023 contractual rental income and (ii) in 2022, (solely based on its pro rata share of the square footage at the property) $27,109 and $72,000 of real estate operating expense and depreciation expense, respectively, at such property. At December 31, 2022, the unbilled rent receivable balance with respect to this tenant was $33,000.

Settlement of Round Rock Guaranty Litigation

On April 15, 2022, we received $5.4 million in connection with the settlement of the lawsuit captioned OLP Wyoming Springs, LLC, Plaintiff, v. Harden Healthcare, LLC, Defendant, v Benjamin Hanson, Intervenor, which sum is recognized as Income on settlement of litigation on our consolidated statement of income for the year ended December 31, 2022.

Receipt of Settlement Proceeds from Litigation involving The Vue

Our ground lease tenant at The Vue - Beachwood, Ohio, was a plaintiff/claimant in various legal proceedings (the “Proceedings”) against, among others, the developer of such apartment complex alleging, among other things, that the building’s construction was flawed. The Proceedings were settled in the quarter ended December 31, 2022 and although we were not a party to the Proceedings, pursuant to the lease with the tenant we received, in early January 2023, $4.6 million from the settlement. This sum is included as Escrow, deposits and other assets and receivables on our consolidated balance sheet as of December 31, 2022 and reflected as Rental income, net on our consolidated statement of income for the year ended December 31, 2022.

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2022 and Recent Developments

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In 2022, we:

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●entered into, amended or extended 19 leases with respect to approximately 1.1 million square feet, including a:

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Subsequent to December 31, 2022, we:

●sold in February 2023, a restaurant property in Hauppauge, New York for $4.2 million. We anticipate recognizing a gain on sale of real estate, net, of approximately $1.5 million during the three months ending March 31, 2023. This property generated $220,000 of rental income in 2022.

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Comparison of Years Ended December 31, 2022 and 2021

Results of Operations -

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Revenues

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The following table compares total revenues for the periods indicated:

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Rental income, net.

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The following table details the components of rental income, net, for the periods indicated:

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Changes due to acquisitions and dispositions

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The year ended December 31, 2022 reflects a $3.8 million increase generated by nine properties acquired in 2021 and 2022 (including $1.3 million from the three properties acquired in 2021). This increase was offset by a $3.0 million decrease due to the inclusion, in 2021, of rental income from properties sold during 2021 and 2022 (including $1.1 million from four properties sold in 2021).

Changes at same store properties

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The increase is due to:

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Lease termination fees.

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In 2021, we recognized $560,000 in connection with the exercise by three tenants of early lease termination options.

Operating Expenses

The following table compares operating expenses for the periods indicated:

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Depreciation and amortization. The increase is due primarily to:

The increase was offset by:

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General and administrative. The increase in 2022 is primarily due to increases of (i) $548,000 of compensation expense primarily due to higher levels of compensation and additional employees, and (ii) $171,000 in professional fees related to various matters, none of which was individually significant.

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Real estate expenses.

The increase is primarily due to:

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The increase was offset due primarily to (i) the inclusion of $189,000 in litigation expense (the “Round Rock Litigation”) related to our former assisted living facility in Round Rock, Texas, with respect to which we received a $5.4 million settlement payment (see Note 13 to our consolidated financial statements), and (ii) a $126,000 decrease related to properties sold in 2021 and 2022.

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A substantial portion of real estate expenses are rebilled to tenants and are included in Rental income, net, on the consolidated statements of income, other than the expenses related to the Round Rock litigation.

Gain on sale of real estate, net

The following table compares gain on sale of real estate, net for the periods indicated:

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The following table lists the sold properties and related gains, net for the periods indicated:

(1) Includes the related parking lot.

(2) The non-controlling interest’s share of the gain is $130.

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Other Income and Expenses

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

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Equity in earnings of unconsolidated joint ventures. The increase in 2022 is due to an increase at our Manahawkin Property resulting primarily from an increase of $188,000 (our 50% share) in rental income, including $111,000 of deferred rent from 2020 and 2021, that we received from Regal Cinemas, a tenant for which we are recording rental income on a cash basis (see “—Challenges and Uncertainties Facing Certain Tenants and Properties”).

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Equity in earnings from sale of unconsolidated joint venture property. The 2021 results represent a gain of $805,000 from the sale of a portion of a joint venture’s property in Savannah, Georgia.

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Prepayment costs on debt. The 2021 expense includes $799,000 incurred in connection with the sale of the West Hartford, Connecticut property. There were no such costs in 2022.

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Income on settlement of litigation. In April 2022, we received $5.4 million pursuant to the settlement of the Round Rock Litigation.

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Other income. Included in 2022 and 2021 are $918,000 and $695,000, respectively, representing the final property insurance recoveries related to our Lake Charles, Louisiana property damaged in an August 2020 hurricane. Additionally, 2021 includes a $100,000 fee obtained in connection with an assignment of a lease.

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

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Mortgage interest

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

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The decrease in 2022 is due primarily to the decrease in the average principal amount of mortgage debt outstanding which resulted from mortgage payoffs (generally, as they matured or in connection with property sales) and scheduled amortization payments. The decrease was offset by financings effectuated in connection with acquisitions and refinancings.

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Credit facility interest

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

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The change is due to the increases on the credit line (i) in the weighted average interest rate, and (ii) of $6.0 million in the weighted average balance outstanding.

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Amortization and write-off of deferred financing costs. The increase in 2022 includes an increase of $209,000 related to the write-off of deferred costs related to the mortgages on the eleven Havertys properties that were paid off in June 2022. Offsetting the increase was $101,000 related to write-offs of deferred costs in connection with the sales of properties in 2021, of which $67,000 was related to the sale of our West Hartford, Connecticut properties.

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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 (calculated in accordance with GAAP), excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control, impairment write-downs of certain real estate assets and investments in entities where the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis. In computing FFO, we do not add back to net income the amortization of costs in connection with our financing activities or depreciation of non-real estate assets.

We compute adjusted funds from operations, or AFFO ,by adjusting from FFO for straight-line rent accruals and amortization of lease intangibles, deducting from income additional rent from ground lease tenant, income on settlement of litigation, income on insurance recoveries from casualties, lease termination and assignment fees, and adding back amortization of restricted stock and restricted stock unit compensation expense, amortization of costs in connection with its financing activities (including its share of its unconsolidated joint ventures), debt prepayment costs and amortization of lease incentives and mortgage intangible assets. Since the NAREIT White Paper does not provide guidelines for computing AFFO, the computation of AFFO varies from one REIT to another.

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

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

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

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The following tables provide a reconciliation of net income and net income per common share (on a diluted basis) in accordance with GAAP to FFO and AFFO for the years indicated (dollars in thousands, except per share amounts):

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(a) The weighted average number of diluted common shares used to compute FFO and AFFO applicable to common stock includes unvested restricted shares that are excluded from the computation of diluted EPS.

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The $13.6 million, or 37.6%, increase in FFO is due primarily to:

Offsetting the increase is:

See “—Comparison of Years Ended December 31, 2022 and 2021” for further information regarding these changes.

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The $1.1 million, or 2.6%, increase in AFFO is due to the increase in FFO as described above, offset by the exclusion from AFFO in 2022 of:

AFFO for 2022 and 2021 exclude lease termination fee income of $25,000 and $560,000, respectively.

See “—Comparison of Years Ended December 31, 2022 and 2021” for further information regarding these changes.

Diluted per share FFO and AFFO were impacted negatively in the year ended December 31, 2022 by an average increase from December 31, 2021 of approximately 200,000 in the weighted average number of shares of common stock outstanding as a result of stock issuances pursuant to the equity incentive, at-the-market equity offering and dividend reinvestment programs, offset by the Company’s repurchase of shares during 2022.

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Comparison of Years Ended December 31, 2021 and 2020

As we qualify as a smaller reporting company, this comparison is omitted in accordance with Instruction 1 to Item 303(a) of Regulation S-K.

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Liquidity and Capital Resources

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Our sources of liquidity and capital include cash flow from operations, cash and cash equivalents, borrowings under our credit facility, refinancing existing mortgage loans, obtaining mortgage loans secured by our unencumbered properties, issuance of our equity securities and property sales. In 2022, we obtained approximately $28.7 million of net proceeds from property sales (after giving effect to $1.6 million of mortgage debt repayments), $48.9 million of proceeds from mortgage financings (after giving effect to $27.8 million of refinanced amounts) and $5.4 million from the settlement of a lawsuit involving our former assisted living facility in Round Rock, Texas. Our available liquidity at March 6, 2023 was approximately $94.9 million, including approximately $6.4 million of cash and cash equivalents (including the credit facility’s required $3.0 million average deposit maintenance balance) and, subject to borrowing base requirements, up to $88.5 million available under our credit facility.

Liquidity and Financing

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We expect to meet our short term (i.e., one year or less) and long term (i) operating cash requirements (including debt service and anticipated dividend payments) principally from cash flow from operations, our available cash and cash equivalents, proceeds from and, to the extent permitted and needed, our credit facility and (ii) investing and financing cash requirements (including an estimated aggregate of $3.8 million of capital and other expenditures) from the foregoing, as well as property financings, property sales and sales of our common stock. We and our joint venture partner have also pursued a re-development of the Manahawkin Property – however, as we may sell the Sale Parcel and not pursue a re-development, we are not providing an estimate of the re-development costs or the time frame within which a re-development would be completed, if pursued.

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The following table sets forth, as of December 31, 2022, information with respect to our mortgage debt that is payable from January 2023 through December 31, 2025 (excluding the mortgage debt of our unconsolidated joint venture):

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At December 31, 2022, an unconsolidated joint venture had a first mortgage on its property (i.e., the Manahawkin Property) with an outstanding balance of approximately $21.3 million, bearing interest at 4.0% per annum and maturing in July 2025.

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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 2023 through 2025. We intend to repay the amounts not refinanced or extended from our existing funds and sources of funds, including our available cash, proceeds from the sale of our common stock and our credit facility (to the extent available).

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We continually seek to refinance existing mortgage loans on terms we deem acceptable to generate additional liquidity. Additionally, in the normal course of our business, we sell properties when we determine that it is in our best interests, which also generates additional liquidity. Further, although we have done so infrequently and primarily in the context of a tenant default at a property for which we have not found a replacement tenant, if we believe we have negative equity in a property subject to a non-recourse mortgage loan, we may convey such property to the mortgagee to terminate our mortgage obligations, including payment of interest, principal and real estate taxes, with respect to such property.

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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.

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Material Contractual Obligations

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The following sets forth our material contractual obligations as of December 31, 2022:

As of December 31, 2022, we had $409.2 million of mortgage debt outstanding (excluding mortgage debt of our unconsolidated joint venture), 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 $76.6 million due through 2025 will be paid primarily from cash generated from our operations. We anticipate that principal balances due at maturity through 2025 of $95.7 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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Credit Facility

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Our credit facility provides that subject to borrowing base requirements, we can borrow up to $100.0 million for the acquisition of commercial real estate, repayment of mortgage debt, and renovation and operating expense purposes; provided, that if used for renovation and operating expense purposes, the amount outstanding for such purposes will not exceed the lesser of $40.0 million and 40% of the borrowing base. See “—Liquidity and Capital Resources”. The facility matures December 31, 2026 and bears interest equal to 30-day SOFR plus the applicable margin. The applicable margin ranges from 175 basis points if our ratio of total debt to total value (as calculated pursuant to the facility) is equal to or less than 50%, increasing to a maximum of 275 basis points if such ratio is greater than 60%. The applicable margin was 175 basis points for each of 2022 and 2021. 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 2022, the weighted average interest rate on the facility was approximately 3.42% and as of February 28, 2023, the rate on the facility was 6.32%.

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The terms of our credit facility include certain restrictions and covenants which may limit, among other things, the incurrence of liens, and which require compliance with financial ratios relating to, among other things, the minimum amount of tangible net worth, the minimum amount of debt service coverage, the minimum amount of fixed charge coverage, the maximum amount of debt to value, the minimum level of net income, certain investment limitations and the minimum value of unencumbered properties and the number of such properties. Net proceeds received from the sale, financing or refinancing of properties are generally required to be used to repay amounts outstanding under our credit facility.

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Inflation

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We are exposed to inflation risk as income from long-term leases is the primary source of our cash flows from operations. Approximately 70% of our leases contain provisions intended to mitigate the impact of inflation. These provisions generally increase rental rates during the terms of the leases either at fixed rates or indexed escalations (based on the Consumer Price Index or other measures). In addition, many of our leases require the tenant to pay, or reimburse us for our payment of, all or a majority of the property’s operating expenses, including real estate taxes, utilities, insurance and building repairs, which may also mitigate our risks associated with rising costs. However, these rent escalation provisions may not adequately offset the effects of inflation.

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Inflation may also affect the overall cost of our unhedged debt (i.e., primarily debt incurred pursuant to our credit facility) and mortgage debt we may incur in the future. (The interest rate risk associated with substantially all of our current mortgage debt is either mitigated through long-term fixed interest rate loans and interest rate hedges). Increasing interest rates on acquisition mortgage debt limits the acquisition opportunities we can pursue and reduces the prices at which we sell our properties.

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Distribution Policy

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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. Although we qualify for federal taxation as a REIT, we are 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.

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It is our current 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.

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Our board of directors will continue to evaluate, on a quarterly basis, the amount and nature (i.e., cash, stock or a combination of the foregoing) of dividend payments based on its assessment of, among other things, our short and long-term cash and liquidity requirements, prospects, debt maturities, projections of our REIT taxable income, net income, funds from operations, and adjusted funds from operations.

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Critical Accounting Estimates

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Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as

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well as the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we reconsider and evaluate our estimates and assumptions.

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We base our estimates on historical experience, current trends and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could materially differ from any of our estimates under different assumptions or conditions. Our significant accounting policies are discussed in Note 2 of our consolidated financial statements in this report. We believe the accounting estimates listed below are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.

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Revenue Recognition

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Our main source of revenue is rental income from our tenants. Rental income primarily includes: (i) base rents 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 and (ii) reimbursements by tenants of certain real estate operating expenses. 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 collectable. 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 unlikely, we are required to write-off the receivable, which has an adverse effect on net income for the year in which the direct write-off is taken, and will decrease total assets and stockholders’ equity.

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Purchase Accounting for Acquisition of Real Estate

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The fair value of real estate acquired is allocated to acquired tangible assets (which includes land, building and building improvements) and identified intangible assets and liabilities (which include the value of above, below and at-market leases and origination costs associated with in-place leases and assumed mortgages) based in each case on their fair values. The fair value of the tangible assets of an acquired property 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 the relative fair values of these assets. We assess the fair value of the lease intangibles and assumed mortgages 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 reasonably certain to be exercised by the tenant 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.

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Carrying Value of Real Estate Portfolio

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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. Management’s assumptions and estimates include projected rental rates during the holding period and property capitalization rates in order to estimate undiscounted future cash flows. If the undiscounted cash flows are less than the asset’s carrying amount, an

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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.

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