One Liberty Properties, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. One Liberty is a self-managed REIT with 120 properties in 30 states and approximately 99.1% occupancy by square footage.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $19.752m | $18.413m | $39.286m | $36.885m |
| Operating income | $8.787m | $7.658m | $17.363m | $14.893m |
| Net income | $4.546m | $9.993m | $11.199m | $12.879m |
| Net income attributable to One Liberty | $4.517m | $9.972m | $10.368m | $12.837m |
| Diluted EPS | $0.23 | $0.54 | $0.53 | $0.69 |
| NAREIT FFO per share | $0.51 | $0.47 | $1.01 | $0.94 |
| AFFO per share | $0.54 | $0.52 | $1.07 | $1.03 |
Q2 operating margin was approximately 44.5%, compared with 41.6% a year earlier; six-month operating margin was approximately 44.2%, versus 40.4%. The net-income comparison is affected by property-sale gains: 2017 included a $6.568m gain, while 2018 included a $2.408m gain in the first half (none in Q2).
- Revenue drivers: Q2 rental income rose 6.0% and tenant reimbursements 20.1% year over year. For the first half, they increased 5.2% and 19.4%, respectively. Growth reflected acquisitions, re-tenanting and reimbursements, partly offset by properties sold.
- Cash flow: Six-month operating cash flow was $18.799m, down from $20.259m. Investing activities used $15.485m, including $18.452m for acquisitions and $5.991m for property improvements, partly offset by $8.958m of sale proceeds. Financing activities used $4.244m. Cash, cash equivalents and restricted cash ended at $13.738m.
- Assets and debt: Total assets were $751.902m at June 30, 2018. Mortgages payable were $395.357m gross ($391.599m net of financing costs); the credit facility balance was $20.300m gross ($19.832m net). Mortgage debt had a 4.25% weighted-average rate after swaps and an 8.5-year weighted-average remaining term. The company reported compliance with facility covenants.
- Liquidity: At August 2, available liquidity was reported as $99.2m: $2.5m cash net of the facility’s required deposit and up to $96.7m available on the revolving facility, subject to borrowing-base requirements. The facility matures December 31, 2019. Its average rate was 3.54% for the first half, versus 2.67% in 2017.
- Distributions: Cash distributions declared were $0.45 per share for Q2 and $0.90 per share for the first half, versus $0.43 and $0.86 in 2017. The Q2 dividend, totaling $8.652m, was paid July 6.
Material changes and transactions
- Acquired two industrial properties in the first half for total purchase prices of $18.175m, plus $0.277m of capitalized acquisition costs. The Plymouth, Minnesota facility acquired in June is leased through 2033.
- Sold a Fort Bend, Texas property in January for $8.958m net of closing costs, paid off its $4.410m mortgage and recorded a $2.408m gain.
- An unconsolidated joint venture sold part of a Savannah, Georgia property in April; One Liberty recorded $0.071m of its share of the gain.
- An unconsolidated joint venture sold its Milwaukee property on July 31 for approximately $12.8m net of closing costs and repaid its $6.97m mortgage. The filing estimates One Liberty’s share of the gain at approximately $2.0m.
- Accumulated other comprehensive income increased to $3.913m from $0.155m, primarily reflecting unrealized gains on interest-rate derivatives.
Outlook, risks and unusual items
- No formal earnings guidance is provided. Management said it expects to fund operating needs, debt service and dividends principally from operating cash flow. It anticipated approximately $1.5m of remaining 2018 expansion and improvement spending at its L-3-tenanted Hauppauge property; approximately $6.261m of the $7.8m contractual commitment had been spent through June 30.
- Management and its joint venture partner were considering a significant redevelopment of a multi-tenant shopping center in Manahawkin, New Jersey; the filing gives no finalized scope or cost.
- Key business risks include tenant payment or lease-renewal difficulties, inability to make accretive acquisitions or relet properties, retail-sector exposure to e-commerce, refinancing requirements and interest-rate changes. Approximately 39.0% of contractual rental income came from retail tenants.
- Three apartment-property ground-lease positions expose the company to a maximum loss of $34.0m; the land positions are subordinated to $158.2m of owner/operator mortgage debt. Management stated it did not expect this arrangement to materially affect liquidity or capital resources.
- Related-party arrangements include management and property services from Majestic Property Management, which is owned by the company’s vice-chairman; related-party fees and stock-based compensation are disclosed in the filing.
- Disclosure inconsistency: Note 7 says the expected approximately $2.0m Milwaukee-sale gain would be recognized in the three months ending September 30, 2018, while MD&A says September 30, 2019. The filing text does not provide a consistent recognition date.
Important facts for investors to verify
- Confirm the expected recognition period and final amount of the Milwaukee joint-venture sale gain, given the inconsistent dates in the filing.
- Track refinancing and maturity plans for mortgage principal payments of $57.520m scheduled from July 2018 through 2021, including $14.838m due at maturity.
- Assess whether operating cash flow can sustain dividends while funding capital spending, acquisitions and debt service; FFO and AFFO are non-GAAP supplemental measures, not cash available for all obligations.
- Monitor the Manahawkin redevelopment decision, projected funding needs and the remaining Hauppauge improvement commitment.
- Evaluate retail tenant concentration, lease expirations and tenant credit, including the filing’s assumption that tenants do not exercise renewal or termination options in its expiration schedule.