One Liberty Properties, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Dollar amounts below are in millions unless stated otherwise. One Liberty is a REIT owning 125 properties in 31 states, primarily industrial and retail assets; 96.9% of its portfolio was occupied as of November 2, 2020.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Rental income, net | $21.1 | $20.4 | $63.2 | $62.3 |
| Operating expenses | $13.1 | $12.5 | $38.2 | $36.5 |
| Gain on real estate sales | $10.3 | $2.5 | $14.6 | $3.6 |
| Net income attributable to One Liberty | $13.7 | $5.1 | $23.8 | $13.2 |
| Diluted earnings per share | $0.67 | $0.25 | $1.17 | $0.64 |
| NAREIT FFO per share | $0.47 | $0.41 | $1.34 | $1.35 |
| AFFO per share | $0.49 | $0.47 | $1.46 | $1.46 |
Net income rose substantially, driven largely by property-sale gains, especially the July sale of the Knoxville property. Rental income increased 3.2% in Q3 and 1.4% year to date; Q3 same-store rental income rose 1.9%, while nine-month same-store income declined 0.5%. Q3 included a $0.43 million casualty impairment, offset by a $0.43 million insurance recovery recorded in other income.
- Cash flow: Nine-month operating cash flow was $25.7 million, versus $27.9 million a year earlier. Investing used $3.6 million, compared with $20.4 million, reflecting lower real estate purchases net of sales. Financing used $19.2 million, including $22.5 million of cash distributions to stockholders. Cash and equivalents were $14.2 million at quarter-end; cash including restricted cash was $14.8 million.
- Debt and liquidity: At September 30, mortgages were $437.1 million gross ($433.1 million net of financing costs) and the credit line was $17.2 million gross ($16.7 million net). Mortgage debt carried a 4.19% weighted-average rate after swaps and a 7.4-year weighted-average remaining term. Management reported $72.2 million of available liquidity as of November 2, comprising $8.6 million of cash and $63.6 million available on the credit facility. The company was in compliance with credit-facility covenants at September 30.
- Debt maturities: Scheduled mortgage principal payments and maturities total $23.1 million in 2021, $46.2 million in 2022 and $30.3 million in 2023. The credit facility matures December 31, 2022.
Material changes and capital allocation
- The company acquired two industrial properties for $28.3 million and sold two properties for $25.1 million during the first nine months. The Knoxville sale generated a $10.3 million gain; the Onalaska sale generated a $4.3 million gain.
- Cash distributions fell to $0.338 per share for Q3, with an additional $0.112 per share paid in stock, maintaining a total distribution of $0.45 per share. Management said the board would reassess the amount and form of future distributions quarterly.
- The July credit-facility amendment temporarily increased the operating-expense borrowing cap to $20 million through February 28, 2021; the cap reverts to $10 million on March 1, 2021, and any excess must then be repaid immediately.
Outlook, risks and unusual items
- Management expected the pandemic and governmental responses to continue adversely affecting operations and cash flow, with impacts dependent on uncertain developments. It said it did not anticipate near-term acquisitions.
- COVID-related concessions included $3.5 million of rent deferred and $1.4 million of rent abatements during the six months through September, before offsets from lease extensions. Deferred rent reduces cash available even where it does not reduce net income, FFO or AFFO. In Q3, the company collected 95.5% of base rent due before concessions and 98.5% after concessions.
- Regal Cinemas announced in October that it intended to close all theaters for an unspecified period. It had not paid $314,000 of September and October rent at two consolidated properties; the company also reported unpaid rent at a theater held through an unconsolidated venture. Four other tenants leasing across ten properties had filed for bankruptcy protection. These tenants continued operating and paying rent through October 31, but future payments were uncertain.
- The Beachwood, Ohio ground-lease tenant did not pay October rent, and management did not expect payments to resume. The company’s $13.9 million land carrying value is subordinate to the tenant’s $67.4 million mortgage; management expected the property to operate at a negative cash flow for the foreseeable future.
- Hurricane Laura damaged part of a Louisiana property. The company recorded a $0.43 million impairment and insurance receivable, received a $0.15 million advance, and estimated that a further $0.45 million recovery might be recognized.
- Interest-rate swaps had a $5.6 million balance-sheet liability at quarter-end and an approximately $6.0 million termination liability. Management estimated $1.6 million would be reclassified from accumulated other comprehensive loss to interest expense over the following 12 months.
Guidance: The filing provides no specific earnings, FFO or AFFO guidance.
Investor verification priorities
- Track rent collections, concession extensions and repayment of deferred rent, especially from Regal and tenants in bankruptcy.
- Verify the Beachwood tenant’s rent and mortgage payments and any resulting funding obligations or impairment risk.
- Monitor liquidity, covenant compliance, the 2021 operating-expense borrowing-cap reset, and refinancing plans for 2021–2023 maturities.
- Assess the sustainability and cash-versus-stock mix of distributions relative to operating cash flow and AFFO.
- Separate recurring property performance from gains on sales, casualty accounting and other unusual items when evaluating earnings growth.