ONE LIBERTY PROPERTIES, INC. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. The company is a self-managed REIT with 118 properties in 30 states; occupancy was approximately 98.9% by square footage. Unless noted, dollar amounts below are in millions.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $19.57 | $19.14 | $58.86 | $56.02 |
| Net income attributable to One Liberty | $10.15 | $7.11 | $20.52 | $19.94 |
| Diluted EPS | $0.52 | $0.38 | $1.06 | $1.07 |
| NAREIT FFO per share | $0.48 | $0.50 | $1.50 | $1.44 |
| AFFO per share | $0.53 | $0.53 | $1.61 | $1.56 |
Q3 revenue growth was 2.3%; nine-month growth was 5.1%. Nine-month rental income rose 3.4%, and tenant reimbursements rose 13.9%. Operating expenses increased 6.0% in Q3 and 1.8% year to date. Operating income includes property-sale gains, so it is not a measure of recurring rental profitability. No conventional operating margin is stated.
Property-sale gains were $4.59 in Q3 and $6.99 for nine months, versus $3.27 and $9.84 in the comparable 2017 periods. Q3 also included a $1.99 share of a gain on an unconsolidated joint venture property sale. The 2018 Q3 results included a $0.37 lease termination fee and an $0.80 noncash rental-income benefit from writing off a lease liability after the tenant buyout. The Texas tenant allowance reduced rental income by $1.44.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $29.63, compared with $30.14 in 2017. Investing activities used $7.01; financing activities used $19.48. Cash, cash equivalents and restricted cash ended the period at $17.80.
- At September 30, gross mortgage debt was $407.01 ($402.98 net of financing costs), compared with $396.95 gross at year-end 2017. The revolving credit line had no balance at quarter-end; the company reported $4.0 outstanding on November 2.
- Mortgages bore fixed rates of 3.02%–5.88% after swaps, with a 4.24% weighted average rate and 8.5-year weighted average remaining maturity. The $100 million revolving facility matures December 31, 2019; the company was in covenant compliance.
- Management reported $104.6 of available liquidity at November 2, including $8.6 of cash net of the facility’s required deposit and up to $96.0 available under the revolver, subject to borrowing-base requirements.
- Cash distributions declared were $0.45 per share for Q3 and $1.35 per share for the first nine months. FFO and AFFO are non-GAAP supplemental measures, not substitutes for cash flow or net income.
Changes, outlook and key risks
- Q3 attributable net income increased, while nine-month diluted EPS edged down. The difference reflects, in part, timing and amounts of property-sale gains and higher weighted-average shares. FFO per share rose year to date, but declined in Q3.
- The company acquired two industrial properties for a combined $18.18 during the first nine months. After quarter-end, it acquired properties in Colorado for $12.8 and New Jersey for $7.35, with initial lease terms of 12 years and 9.5 years, respectively.
- Management expects operating cash flow to fund operating needs, debt service and dividends, and expects to fund $0.96 of committed L-3 property improvements from available sources. A possible significant redevelopment of a New Jersey shopping center is under consideration; no cost or firm commitment is provided. No specific earnings guidance is presented.
- Tenant risks include a Texas tenant with financial difficulties: the company reserved the full $1.44 unbilled-rent receivable, although the tenant had paid rent through October 31. The property had $13.6 of mortgage debt. A financially troubled Ohio multifamily ground-lease operator had not paid rent after its September payment; the company was discussing a rent reduction and escrow security. The company’s $13.9 land position is subordinate to the operator’s $67.4 mortgage.
- Kmart was in bankruptcy, but had renewed the company’s Clemmons, North Carolina lease through 2023 and had not sought to reject it as of the filing. Retail exposure, tenant defaults, lease renewals, refinancing and interest rates remain relevant risks. Retail represented approximately 38.6% of contractual rental income.
- The company’s maximum exposure on the two multifamily ground-lease VIEs was $24.4, subordinate to $106.9 of tenant/operator mortgage debt. Management stated it did not expect this off-balance-sheet exposure to materially affect liquidity or capital resources.
Most important facts to verify
- Whether the Texas and Ohio tenant situations have changed, including collection, lease amendments, collateral and any impairment or foreclosure exposure.
- Whether reported liquidity remains available under borrowing-base and covenant terms, and how the company will address mortgage maturities and its December 2019 revolver maturity.
- Whether the Colorado and New Jersey post-quarter acquisitions closed on the disclosed terms and produce the expected rent.
- How much reported earnings and FFO depend on nonrecurring property-sale gains, lease-related write-offs and other unusual items, and how distributions compare with recurring cash generation.
- Whether the proposed New Jersey redevelopment proceeds and what capital contributions or financing it would require.