ONE LIBERTY PROPERTIES, INC. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; comparisons are primarily with FY 2017. This is an annual filing, not a standalone fourth-quarter report. One Liberty is a self-managed REIT focused on leased commercial real estate. At year-end it owned 119 properties and held interests in joint ventures owning four more, across 30 states.
Financial and operating results
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Total revenue | $79.1 million | $75.9 million | +4.2% |
| Net rental income | $70.3 million | $68.2 million | +3.0% |
| Operating income | $36.3 million | $41.8 million | −13.1% |
| Net income attributable to One Liberty | $20.7 million | $24.1 million | −14.4% |
| Diluted GAAP earnings per share | $1.05 | $1.28 | −18.0% |
| FFO per diluted share | $2.02 | $1.94 | +4.1% |
| AFFO per diluted share | $2.13 | $2.09 | +1.9% |
| Cash distributions declared per share | $1.80 | $1.74 | +3.4% |
Operating income includes gains on real estate sales: $5.3 million in 2018 versus $9.8 million in 2017. FY 2018 also included $2.1 million of the company’s share of gains on sales by unconsolidated joint ventures. FFO and AFFO are non-GAAP supplemental measures and are not substitutes for net income or cash flow.
- Cash flow: Operating activities provided $42.6 million, down from $44.4 million. Investing activities used $59.7 million; financing activities provided $19.1 million. Cash, cash equivalents and restricted cash totaled $16.7 million at year-end.
- Balance sheet: Total assets were $780.9 million; total liabilities $482.3 million; and total equity $298.6 million. Net real estate investments were $705.5 million.
- Debt: Gross mortgage debt was $423.1 million, with a 4.26% weighted-average interest rate and 8.7-year weighted-average remaining term. The $30.0 million revolving facility balance brought reported debt to $453.1 million before deferred financing costs. Most mortgage debt was fixed-rate, including through swaps.
- Debt maturities: Scheduled mortgage principal payments were $16.0 million in 2019, $13.8 million in 2020, $22.7 million in 2021, $45.8 million in 2022 and $41.0 million in 2023. The revolving credit facility matures December 31, 2019.
- Liquidity: Management reported approximately $94.7 million of available liquidity as of March 8, 2019, including approximately $7.2 million of cash net of the facility’s required deposit and up to $87.5 million of facility availability, subject to borrowing-base requirements.
- Portfolio: Occupancy was 99.2% by square footage, versus 99.6% a year earlier. Industrial properties generated 46.1% of 2019 contractual rental income and retail 36.6%. Weighted-average remaining lease term was 7.7 years; 75.8% of 2019 contractual rent was covered by leases with scheduled or CPI-linked increases.
Material changes and notable items
- The company acquired eight industrial properties for $79.5 million; those assets were expected to contribute $5.6 million, or 8.1%, of 2019 contractual rental income. It sold three properties, reporting a net gain of $5.3 million, down from $9.8 million in 2017.
- Higher revenue reflected acquired properties and tenant reimbursements, partly offset by property sales and tenant-related setbacks. Operating expenses rose 9.3% to $48.1 million, including higher depreciation and amortization and general and administrative costs.
- The assisted-living tenant at Round Rock, Texas, filed for Chapter 11 in December 2018. One Liberty recorded approximately $4.9 million of write-offs associated with the property, including tenant origination costs and unbilled rent. The tenant paid rent through February 2019; management was seeking a licensed replacement operator and cautioned that recovery from guarantors was uncertain.
- Kmart filed for bankruptcy and its lease at the Manahawkin, New Jersey joint-venture property expired in November 2018. The joint venture’s property occupancy fell to 59.3% from 97.6%. One Liberty expected its share of the property’s annual base rent to decline to about $1.3 million in 2019 from about $1.8 million in 2018 and estimated its share of redevelopment capital needs at $10 million–$15 million through 2022.
- The Vue ground-lease operator faced lower occupancy and cash flow. A lease amendment reduced 2019 annual base rent to $783,000 from $1.6 million in 2018, with staged increases to approximately $1.3 million beginning in April 2021. One Liberty’s land is subordinate to the operator’s $67.4 million mortgage.
- Other challenged assets included a Kmart-leased property in Clemmons, North Carolina, whose lease remained in effect as of March 13, 2019, and vacant retail properties in Crystal Lake, Illinois and Houston, Texas.
Outlook, risks and contingencies
The filing does not provide earnings or FFO guidance. Management’s stated objective is to maintain and increase cash available for distributions through acquisitions, financing, portfolio management and selective sales. It expected operating cash flow to fund operating needs, debt service and anticipated dividends, while using available liquidity and financing sources for capital needs. The board declared a $0.45-per-share quarterly dividend in March 2019.
- Key risks include tenant defaults or non-renewals, retail exposure to e-commerce, geographic and sector concentration, refinancing and interest-rate risk, credit-facility renewal, and compliance with facility covenants. Approximately $139.3 million of mortgage debt was scheduled to mature from 2019 through 2023.
- The $100 million revolving facility was due to expire at year-end 2019; the company gave no assurance it would be renewed on acceptable terms. It reported compliance with facility covenants at December 31, 2018.
- Management estimated $10 million–$15 million for its share of Manahawkin redevelopment costs, an important funding and execution exposure. Joint-venture occupancy and the project’s leasing, permitting, cost and timing outcomes remain material uncertainties.
- Ground-lease investments at Wheaton, Illinois and Beachwood, Ohio had a combined carrying value and maximum exposure to loss of approximately $24.4 million; the land positions were subordinate to approximately $106.9 million of operator mortgage debt.
- The company reported no material legal proceedings. Ordinary-course legal matters were described as not expected to have a material adverse effect. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether the revolving credit facility was renewed or replaced, and the terms and availability of financing after its December 2019 maturity.
- Actual rent collections, replacement-operator or re-leasing progress, and any further impairment or carrying costs at the Round Rock, Clemmons and vacant retail properties.
- Manahawkin redevelopment spending, leasing, occupancy and rent recovery compared with management’s estimates; also monitor The Vue operator’s rent payments and financial condition.
- Mortgage refinancing plans and maturities, covenant headroom, interest-rate exposure and the effect of any changes in borrowing costs on cash available for distributions.
- Whether growth in rental income, FFO and AFFO translates into sustainable operating cash flow after debt amortization, capital spending and dividends; confirm the assumptions behind these non-GAAP measures.
- Dividend coverage and REIT distribution requirements, given the $1.80 annual distribution declared per share and the company’s significant tenant and property-level risks.