ONE LIBERTY PROPERTIES, INC. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited consolidated results. One Liberty is a self-managed REIT focused on geographically diversified commercial real estate, much of it under long-term net leases. At quarter-end it owned 119 properties across 30 states, with approximately 99.1% occupancy by square footage.
Financial results
Amounts below are in millions, except per-share data.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $19.5 | $18.5 |
| Operating income | $8.6 | $7.2 |
| Net income attributable to One Liberty | $5.9 | $2.9 |
| Diluted EPS | $0.30 | $0.15 |
| NAREIT FFO per share | $0.50 | $0.47 |
| AFFO per share | $0.53 | $0.51 |
| Cash distributions declared per share | $0.45 | $0.43 |
Revenue increased 5.7%, while operating expenses fell 2.5%; operating margin was approximately 43.9%, compared with 39.2% a year earlier. Net income included a $2.4 million gain on a property sale. Excluding that gain, income before the gain was $4.2 million, versus $2.9 million in Q1 2017. The filing does not provide a separate net-profit margin measure.
Cash provided by operations was $9.9 million, versus $9.9 million. Investing activities used $9.2 million, mainly for a $12.9 million property acquisition and $5.2 million of improvements, partly offset by $9.0 million of sale proceeds. Financing activities used $0.9 million. Cash, cash equivalents and restricted cash totaled $14.5 million at quarter-end.
At March 31, gross mortgages were $393.1 million and gross line-of-credit borrowings were $20.9 million. The $100 million revolving facility matures December 31, 2019 and is subject to borrowing-base requirements; the company reported covenant compliance. At May 2, available liquidity was $90.8 million, including $6.1 million of cash net of the required deposit balance and $84.7 million of facility availability. Mortgage debt had an 8.7-year weighted-average remaining term and a 4.24% weighted-average fixed rate after swaps.
Changes and significant items
- Rental income rose 4.5%, primarily reflecting 2017 acquisitions and same-store growth; tenant reimbursements rose 18.6%.
- The January sale of a Texas property generated $9.0 million of net proceeds and a $2.4 million gain; the related $4.4 million mortgage was repaid. The gain included $776,000 attributable to non-controlling interests.
- The March acquisition was a $12.9 million Pennsylvania industrial sale-leaseback, leased to two seller-affiliated tenants through 2028. Management estimated quarterly rent of approximately $239,000 beginning April 1.
- Interest expense declined 2.0% to $4.3 million, mainly from lower average mortgage balances and rates; credit-line interest rose as rates and average borrowings increased.
- Derivative-related other comprehensive income was $2.75 million, versus $0.61 million. This primarily reflected unrealized gains on interest-rate swaps and did not increase reported net income.
- Management reported contractual rental income of approximately $68.4 million for the 12 months ending December 31, 2018, based on leases in effect at quarter-end. Lease expirations are concentrated in 2022 (21.0% of contractual rent) and 2028 and later (28.2%).
Outlook, risks and contingencies
No specific earnings or FFO guidance was provided. Management expects to fund operating needs, debt service and dividends principally from operating cash flow. Approximately $7.8 million is contractually required through 2018 for expansion and improvements at the L-3-tenanted property in Hauppauge; $5.3 million had been spent by March 31, and management expected the remaining roughly $2.5 million to be funded from available sources. A significant redevelopment of a New Jersey shopping center was under consideration; timing and cost were not specified.
Management highlighted risks relating to tenant credit and lease renewals, acquiring properties on acceptable terms, retail exposure to e-commerce, refinancing maturities and interest rates. Mortgage principal and scheduled amortization totaling $61.1 million were due from April 2018 through 2021. The company stated it generally intends to refinance, extend or repay maturities, but gave no assurance of success. A 100-basis-point increase in the credit-facility rate was estimated to add approximately $209,000 to interest cost over the next 12 months.
Three residential ground-lease positions had a $34.0 million carrying amount and maximum loss exposure, subordinated to $158.2 million of owner/operator mortgage debt; the company reported $1.0 million of related Q1 rental income. The filing also discloses related-party service arrangements, including payments to Majestic Property Management Corp., which is owned by the vice-chairman.
Important facts for investors to verify
- Whether the company can refinance or otherwise meet the stated $61.1 million of mortgage amortization and maturities through 2021, and maintain adequate facility availability.
- Tenant concentration, credit quality and renewal/reletting prospects, particularly around the 2022 and 2028-and-later lease-expiration concentrations.
- Execution, funding and expected returns for the Hauppauge improvements and any proposed Manahawkin redevelopment.
- The performance and financial condition of the residential ground-lease owner/operators, given the subordinated land interests and disclosed maximum exposure.
- Dividend coverage: the declared $0.45 quarterly distribution was below reported AFFO of $0.53 per share, but exceeded diluted GAAP EPS of $0.30, which included the property-sale gain.
- Related-party fees and governance oversight, as well as the sensitivity of swap fair values to interest-rate changes.