One Liberty Properties, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited consolidated results. One Liberty is a self-managed REIT that owned 119 properties in 31 states, with approximately 98% occupancy by square footage.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $19.1 million | $18.0 million | $56.0 million | $51.6 million |
| Operating income | $8.3 million | $8.2 million | $23.2 million | $22.8 million |
| Net income attributable to One Liberty | $7.1 million | $4.3 million | $19.9 million | $20.0 million |
| Diluted earnings per share | $0.38 | $0.24 | $1.07 | $1.15 |
| NAREIT FFO per share | $0.50 | $0.51 | $1.44 | $1.39 |
| AFFO per share | $0.53 | $0.53 | $1.56 | $1.46 |
- Revenue increased 6.2% in Q3 and 8.6% for the first nine months, primarily from properties acquired in 2016 and 2017. Operating income grew more slowly than revenue; the approximate operating margin declined to 43.4% from 45.5% in Q3 and to 41.4% from 44.2% year to date.
- Q3 net income rose year over year largely because the quarter included $3.3 million of property-sale gains versus $0.1 million a year earlier. Nine-month net income was nearly unchanged; property-sale gains were also similar year over year at $9.8 million.
- Operating cash flow was $30.1 million, up from $22.5 million. Investing used $13.4 million and financing used $19.3 million; cash and equivalents ended the period at $14.9 million, down $2.5 million from year-end 2016.
- At September 30, total assets were $737.6 million and equity was $296.9 million. Mortgages were $401.1 million gross ($397.1 million net of financing costs); the credit line was $6.4 million gross ($5.7 million net). The mortgage weighted-average rate, after swaps, was 4.22%, with an 8.9-year weighted-average remaining term.
- Management reported $99.3 million of available liquidity at November 3, including $12.7 million in cash net of the required facility deposit and $86.6 million available under the revolving facility, subject to borrowing-base requirements. The facility matures December 31, 2019; the company reported covenant compliance.
- Declared distributions were $0.43 per share for Q3 and $1.29 per share for the first nine months. These compare with AFFO per share of $0.53 and $1.56, respectively; FFO and AFFO are non-GAAP measures and are not cash-flow measures.
Material changes and notable items
- 2017 acquisitions totaled $35.2 million across three industrial properties. Property sales generated $24.1 million of net proceeds; the three properties sold had gross sale prices totaling $24.8 million.
- Revenue growth was partly offset by tenant distress, vacancies, and property sales. Payless ShoeSource and Joe’s Crab Shack filed for bankruptcy in 2017; hhgregg also filed for bankruptcy. The company recorded $310,000 of bad-debt expense and wrote off lease-related balances. A $153,000 impairment was recorded for the former Joe’s Crab Shack property in Ann Arbor, which was under contract to be sold after quarter-end.
- Mortgage interest expense rose 6.2% year to date, principally because average mortgage debt was higher, despite a lower average mortgage rate. A $118,000 interest expense resulted from repaying debt and terminating a swap in connection with a property sale.
- Subsequent to quarter-end, the company acquired a Memphis distribution facility for $8 million under a 10-year lease, expected to generate approximately $627,000 in annual rent. It also leased its previously vacant Philadelphia property on a 20-year net lease, with annual rent of approximately $473,000 beginning October 1, 2017.
Outlook, risks, and commitments
- No formal earnings or FFO guidance is provided. Management expects operating cash flow to fund operating needs, debt service, and dividends; it estimated approximately $11.0 million of building expansions and improvements would be funded through operating cash, available cash, and, if available, the credit facility.
- Contractual rental income under leases in effect at September 30 was approximately $67.3 million for the following 12 months. Lease expirations include 20.4% of contractual rent in the 12 months ending September 30, 2022; the schedule assumes tenants do not exercise renewal or termination options.
- Management identifies tenant credit, lease renewals and reletting, property acquisition terms, and retail-sector disruption from e-commerce as key risks. Several tenants have experienced financial difficulty, and vacant properties can continue to incur debt service and operating expenses. Approximately 41% of contractual rental income came from retail tenants.
- Three ground-lease arrangements involving apartment operators had $34.0 million of carrying value and maximum exposure to loss, subordinate to $150.7 million of operator mortgage debt. The company reported $2.8 million of related ground-lease income for the first nine months.
- Contractual property commitments include approximately $7.8 million through 2018 for L-3 Communications improvements (of which $1.9 million had been spent), a potential $3.0 million reimbursement to Regal Cinemas, and up to $2.05 million for Huttig Building Products improvements by July 2018.
- Interest-rate swaps hedge variable-rate mortgages. A 100-basis-point increase or decrease in facility rates was estimated to change annual credit-line interest cost by approximately $64,000. Management stated that a 100-basis-point move in forward rates would change swap fair value by approximately $8.0–$8.6 million, without an impact on net income or cash.
Important facts for investors to verify
- Whether bankrupt or financially distressed tenants resume rent payments, and the occupancy, reletting prospects, and carrying costs of affected properties.
- Progress and completion costs for committed expansions and tenant improvements, including the L-3 project and the post-quarter Memphis acquisition.
- Liquidity, refinancing plans, and covenant headroom as mortgage principal and amortization payments come due, particularly through 2020.
- Dividend sustainability relative to recurring property cash flows; reported FFO and AFFO are supplemental, company-defined measures rather than substitutes for GAAP earnings or cash flow.
- The ground-lease operators’ ability to service their debt and meet lease obligations, given the land positions’ subordination and disclosed maximum exposure.