One Liberty Properties, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited consolidated results. One Liberty is a self-managed REIT owning 116 properties in 30 states, with approximately 98.1% occupancy by square footage.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $17.2M | $15.8M | $33.6M | $31.1M |
| Operating income | $7.6M | $7.9M | $14.6M | $15.4M |
| Net income attributable to One Liberty | $12.4M | $3.7M | $15.7M | $11.5M |
| Diluted EPS | $0.72 | $0.22 | $0.91 | $0.70 |
| FFO per share | $0.47 | $0.47 | $0.87 | $0.88 |
| AFFO per share | $0.50 | $0.47 | $0.93 | $0.92 |
- Revenue growth reflected acquisitions and higher tenant reimbursements. Q2 operating margin was approximately 44%, down from 50% a year earlier; six-month margin was approximately 44%, versus 49%.
- GAAP earnings rose sharply, primarily because of real estate sale gains: $8.9M in Q2 and $9.7M for the first half. Excluding those gains, operating income declined year over year. Six-month 2015 also included a $650,000 lease termination fee and a $960,000 purchase-price fair-value adjustment.
- Six-month operating cash flow was $11.6M, down from $14.5M. Investing used $9.0M versus $35.0M; financing provided $20.2M versus $17.3M. Cash and equivalents ended June at $35.6M, compared with $12.7M at year-end 2015.
- At June 30, gross mortgage debt was $355.8M and gross line-of-credit borrowings were $25.4M. Mortgages had a 4.48% weighted-average fixed rate after swaps and a 9.8-year weighted-average remaining term. Total assets were $681.8M; total liabilities were $415.7M.
- At August 2, reported available liquidity was approximately $79.7M: $6.7M in cash net of the facility’s required deposit and $73.0M of unused revolving credit capacity. The $75M credit facility matures December 2018; the company reported compliance with its covenants.
- Cash distributions declared were $0.41 per share for Q2 and $0.82 per share for the first half. The quarterly dividend was paid July 7.
Changes, outlook and risks
- During the first half, the company acquired seven properties for $47.3M and sold 11 properties for $40.5M, recording $9.7M in net gains. It obtained $63.7M in gross mortgage financing and refinancing proceeds and raised $5.8M through its at-the-market share program.
- Management estimated acquired properties would generate $829,000 of rental income per quarter beginning July 1. No full-year earnings or FFO guidance was provided.
- After quarter-end, the company bought land in Wheaton, Illinois, for $10.5M and entered a ground lease expected to produce approximately $1.1M of annual rent. Its land is collateral for the operator’s $39.4M mortgage and is subordinate to that debt. Management also expected an August closing on a Minnesota shopping center for $14.2M, subject to customary conditions.
- Sports Authority filed for bankruptcy and vacated the company’s Colorado property on June 30. The property was being marketed for sale or lease; management recorded bad-debt expense and said no impairment was then required. A $466,000 state transportation payment was received in July for a potential partial land taking; additional compensation was uncertain, and some proceeds might be needed to adapt the property for a replacement tenant.
- Key exposures include tenant default and lease rollover, the retail sector’s e-commerce pressures, refinancing needs, and interest-rate movements on the variable-rate credit facility. The company said mortgage debt was fixed-rate after swaps. Swap liabilities had a reported fair value of $10.5M and an early-termination amount of approximately $11.3M; rate-driven fair-value changes would not affect net income or cash under the sensitivity described.
- Lease concentration warrants attention: 26.1% of 2016 contractual rent was associated with leases expiring in 2022, and 27.3% with leases expiring in 2026 and thereafter. Contractual rent figures assume tenants do not exercise renewal options.
Investor verification priorities
- Separate recurring property performance from sale gains when assessing the increase in GAAP earnings; compare with FFO and AFFO trends.
- Track tenant replacement, rent loss, and any impairment or repurposing costs at the former Sports Authority and Pathmark properties.
- Review upcoming mortgage maturities, refinancing plans, credit-facility availability and covenant headroom.
- Assess the risks of the Lakemoor and Wheaton ground-lease structures, including the land’s subordination to the operators’ mortgages.
- Monitor the 2022 lease-expiration concentration and whether the declared dividend remains supported by recurring cash generation.