Business context and reporting period
One Liberty Properties, Inc. (NYSE: OLP) is a self-managed REIT that owns and manages a diversified portfolio, primarily under long-term net leases. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019; comparisons are with the same 2018 periods. At quarter-end, OLP owned 126 properties in 31 states and reported approximately 96.5% occupancy by square footage.
Financial performance and position
Amounts below are in millions, except per-share data and where noted.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $20.4 | $19.6 | $62.3 | $58.9 |
| Operating income | $10.5 | $12.7 | $29.5 | $32.5 |
| Net income attributable to OLP | $5.1 | $10.1 | $13.2 | $20.5 |
| Diluted EPS | $0.25 | $0.52 | $0.64 | $1.06 |
| Operating cash flow | Not presented by quarter | $27.9 | $29.6 | |
| NAREIT FFO per share | $0.41 | $0.48 | $1.35 | $1.50 |
| AFFO per share | $0.47 | $0.53 | $1.46 | $1.61 |
- Rental income rose 6.3% in Q3 and 6.5% for the nine-month period. Same-store rental income was nearly flat in Q3 (+0.3%) and up 0.4% year to date.
- Operating expenses increased 8.7% in Q3 and 9.2% year to date. Real estate expenses rose 38.3% and 31.7%, respectively, with Round Rock legal and property tax costs among the cited drivers.
- Interest expense increased 16.9% in Q3 and 14.0% year to date, reflecting higher average debt balances and, to a lesser extent, higher borrowing rates.
- At September 30, total assets were $785.1 million, cash and cash equivalents $10.9 million, and total equity $292.0 million. Mortgage debt was $439.4 million gross; gross credit-line borrowings were $19.5 million. Cash, cash equivalents and restricted cash totaled $11.2 million for cash-flow reporting purposes.
- At November 4, management reported $84.0 million of available liquidity: $6.6 million of cash net of the required credit-facility deposit and $77.4 million of borrowing availability, subject to borrowing-base requirements.
- Cash distributions to common stockholders were $26.5 million for the nine months. The quarterly dividend was $0.45 per share; AFFO per share was $0.47 in Q3 and $1.46 year to date.
Material changes versus the prior comparable period
- Net income attributable to OLP fell 49.6% in Q3 and 35.7% year to date. Lower gains on real estate sales and the absence of 2018 gains from sales of unconsolidated joint-venture property were significant factors; higher operating and interest expenses also weighed on results.
- Real estate sale gains were $2.5 million in Q3 2019 versus $4.6 million in Q3 2018, and $3.6 million for the first nine months of 2019 versus $7.0 million in 2018.
- Acquisitions contributed to rental growth, while property sales reduced rental income compared with 2018. OLP acquired six industrial properties for approximately $39.9 million during the nine months and sold three properties for aggregate gross proceeds of $23.6 million.
- Operating cash flow declined to $27.9 million from $29.6 million. Investing cash outflow increased to $20.4 million from $7.0 million, principally reflecting higher real estate purchases. Cash, cash equivalents and restricted cash decreased $5.5 million during the 2019 period.
- Gross mortgage debt increased from $423.1 million at December 31, 2018 to $439.4 million at September 30, 2019; gross line-of-credit borrowings declined from $30.0 million to $19.5 million.
Outlook, commentary, risks and unusual items
- OLP reported approximately $71.1 million of contractual rental income for the 12 months ending September 30, 2020, based on leases in effect at quarter-end and after specified adjustments. Industrial properties represented 49.6% of contractual rental income. No formal earnings guidance was provided.
- The credit facility was amended to extend maturity to December 31, 2022; it allows borrowings up to $100 million subject to borrowing-base requirements. OLP said it was in compliance with covenants at September 30, 2019. Management expects to fund operating needs and dividends principally from operations, available liquidity, equity issuance and, where available, credit-facility borrowings.
- Mortgage debt had a weighted-average interest rate of 4.26% after swaps and an eight-year weighted-average remaining term. OLP stated it generally intends to refinance, extend or repay maturities coming due in 2021–2022, but gave no assurance of success. A 100-basis-point increase in the credit-line rate was estimated to add about $195,000 to interest costs over the next 12 months, based on the September 30 balance.
- Tenant/property challenges include the Round Rock, Texas assisted-living property: its tenant filed for bankruptcy and rejected the lease but continued to occupy the property. OLP incurred $1.5 million in mortgage interest, legal fees and taxes in the first nine months, settled its claim against the tenant for $584,000 after quarter-end, and had a $16.6 million sale contract subject to conditions. Litigation against lease guarantors remained ongoing.
- The owner/operator of The Vue apartments in Beachwood, Ohio received reduced ground rent for 2019. OLP’s $13.9 million land position is subordinate to the operator’s $67.4 million mortgage, and OLP identified the carrying value of the land as its maximum exposure to loss.
- Other property risks include redevelopment and vacancies at the Manahawkin, New Jersey joint-venture shopping center, a long-vacant Crystal Lake, Illinois retail property, and a Philadelphia supermarket tenant that intends to cease operations. OLP wrote off $380,000 of Philadelphia unbilled rent receivable and excluded $420,000 of that property’s contractual rent from its stated contractual rental income.
- Interest-rate swaps had a $3.6 million aggregate termination liability at September 30. OLP estimated that $555,000 of accumulated derivative losses would be reclassified to interest expense during the following 12 months. The filing states that rate-driven changes in swap fair value would not affect net income or cash at the measurement date.
- After quarter-end, OLP acquired two industrial properties, sold the Houston property classified as held for sale, and agreed to terminate a Newark lease for a $400,000 fee while entering into a new lease. These transactions are expected to affect subsequent-period results.
- Management concluded disclosure controls and procedures were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Round Rock’s proposed sale closes, the final proceeds and costs, and the outcome of the guarantor litigation.
- Philadelphia tenant departure, reletting prospects and any further rent-receivable write-offs; also monitor The Vue’s rent and mortgage-payment position.
- Manahawkin redevelopment spending, funding needs and stabilization timeline, which management estimated to be after 2022.
- Debt maturities, refinancing availability, credit-facility borrowing capacity and compliance with loan covenants.
- Whether cash flow and AFFO continue to cover the dividend, while accounting for capital needs, debt amortization and any return-of-capital component.
- Lease expirations, especially 2022, when leases representing 19.9% of contractual rental income were scheduled to expire, assuming tenants do not exercise renewal or termination options.