ONE LIBERTY PROPERTIES INC annual report, FY2015

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One Liberty Properties, Inc. — FY 2015 Form 10-K

Reporting period: Fiscal year ended December 31, 2015. One Liberty is a self-managed REIT owning a geographically diversified portfolio of mostly long-term net- and ground-leased retail, industrial, flex, and health and fitness properties. At year-end it reported 107 directly owned properties and interests in five unconsolidated joint-venture properties across 30 states.

Financial and operating performance

  • Revenue: $65.7 million, up 8.7% from $60.5 million in 2014. Net rental income rose 4.1% to $59.0 million; tenant reimbursements were $3.9 million. Revenue also included $2.9 million of lease termination fees, versus $1.3 million in 2014.
  • Profit: Net income attributable to One Liberty was $20.5 million, down from $22.1 million. Diluted EPS fell to $1.22 from $1.37; income from continuing operations was $21.9 million versus $22.2 million. Operating income rose 8.0% to $32.7 million, while operating expenses rose 9.3% to $33.1 million.
  • REIT supplemental measures: FFO increased to $32.7 million, or $1.97 per diluted share, from $28.2 million, or $1.75. AFFO increased to $32.0 million, or $1.92 per diluted share, from $29.7 million, or $1.84. These non-GAAP measures are not substitutes for GAAP income or cash flow.
  • Cash flow and distributions: Operating cash flow was $33.9 million, up from $31.8 million. Investing activities used $73.5 million, principally for property acquisitions and joint-venture investments; financing activities provided $32.0 million. Cash and equivalents ended the year at $12.7 million, down from $20.3 million. Cash distributions were $1.58 per share, versus $1.50; the quarterly dividend was raised to $0.41 per share late in 2015.
  • Assets, debt, and liquidity: Total assets were $650.4 million and total liabilities $388.0 million. The balance sheet reports $334.4 million of mortgage payables and $18.3 million drawn on the $75 million revolving facility. Separately, the filing cites $326.6 million of mortgage debt for its debt statistics; investors should reconcile the differing reported amounts and bases. Mortgage debt had a 4.71% weighted-average interest rate and 9.1-year weighted-average remaining term. At March 9, 2016, reported available liquidity was approximately $61.5 million, including $56.5 million available on the credit facility and $5.0 million in cash net of its required deposit balance.
  • Portfolio: Direct-property occupancy was 98.4%, versus 98.3% a year earlier; joint-venture occupancy was 97.6%, versus 100%. Contractual rental income for 2016 was $57.3 million, with an 8.1-year weighted-average remaining lease term.

Material changes and notable items

  • Seven property acquisitions, including the purchase of a joint-venture partner’s interest, totaled $73.5 million; management attributed $6.7 million of 2016 contractual rent to those acquisitions. A separate 50%-owned joint venture acquired a New Jersey retail center for $43.5 million.
  • The Cherry Hill, New Jersey property sale generated a $5.4 million gain, partly offset by debt prepayment and financing-cost charges. Lower property-sale gains than in 2014 contributed to the year-over-year decline in net income.
  • One Liberty issued 295,000 shares through its at-the-market offering program for approximately $6.5 million net proceeds. It also obtained mortgage financing and refinancing proceeds during the year.
  • In February 2016, the company sold eight Louisiana and Mississippi retail properties for $13.8 million and repaid their $7.8 million mortgage. It expected a $785,000 gain and $380,000 mortgage prepayment expense in the first quarter of 2016.
  • The filing reports increased acquisition-related depreciation and real estate expenses. It also reports a $960,000 purchase-price fair-value adjustment on obtaining control of a previously unconsolidated investment.

Outlook, risks, and contingencies

  • No formal earnings or FFO guidance is provided. Management expects operating cash flow to fund substantially all operating needs, dividends, and mortgage amortization, and generally intends to refinance or extend maturities where appropriate. It estimated approximately $103.8 million of company mortgage debt would mature in 2016–2020; refinancing or repayment capacity is a material consideration.
  • Tenant credit and lease rollover are key risks. Retail accounts for 53.8% of 2016 contractual rent; five tenants account for 26.7%. Leases representing 23.6% of 2016 contractual rent are scheduled to expire in 2022. Pathmark rejected its lease and vacated a Philadelphia property in 2015; Sports Authority filed for Chapter 11 in March 2016, with $452,000 of 2016 contractual rent attributable to the affected property.
  • Other stated risks include retail competition from e-commerce, property and geographic concentration, interest-rate and refinancing risk, credit-facility covenant compliance, property impairment, environmental and casualty exposures, joint-venture partner risks, REIT qualification, and the relatively illiquid nature of real estate.
  • All reported mortgage debt is described as non-recourse subject to customary carve-outs. The revolving facility matures December 31, 2018; the company reported covenant compliance at year-end. Interest-rate swaps hedge variable-rate mortgage exposure; their year-end liability was $4.3 million on the balance sheet, with a stated early-termination liability of approximately $4.6 million.
  • Potential conflicts warrant attention: the company paid affiliate Majestic Property Management approximately $2.3 million in 2015, plus $196,000 of office expenses, and reimbursed affiliate Gould Investors $520,000 for insurance. A revised property-management fee structure took effect January 1, 2016.
  • Management and the auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. The filing says ordinary-course legal matters are not expected to have a material adverse effect.

Investor verification priorities

  • Reconcile mortgage debt figures of $334.4 million and $326.6 million, including what each measure includes, and verify the full maturity and amortization schedule.
  • Track the outcomes of the Pathmark vacancy and Sports Authority bankruptcy, including reletting costs, rent recovery, and any impairment assessment.
  • Assess refinancing of near-term maturities, facility availability and covenant headroom, and the effect of the 2016 refinancing and debt payoffs disclosed after year-end.
  • Evaluate dividend coverage using operating cash flow and AFFO alongside required debt service and property investment needs; FFO and AFFO are not GAAP cash-flow measures.
  • Review the 2016 property sale, its realized gain and prepayment cost, and ongoing related-party fees and approval safeguards.