ONE LIBERTY PROPERTIES, INC. — Q2 2013 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2013; interim financial statements are unaudited. One Liberty is a self-managed REIT that owns and manages net-leased commercial real estate. At quarter-end it owned 94 properties, with five more held by unconsolidated joint ventures; the 99 properties were located in 28 states. Occupancy was approximately 99.5% by square footage.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Rental income | $12.2 million | $11.1 million | $24.3 million | $21.9 million |
| Operating income | $6.4 million | $6.0 million | $12.9 million | $11.8 million |
| Operating margin | 52.6% | 54.2% | 52.8% | 54.0% |
| Net income attributable to One Liberty | $7.7 million | $5.8 million | $11.2 million | $9.0 million |
| Diluted earnings per share | $0.50 | $0.39 | $0.73 | $0.60 |
| Cash distributions declared per common share | $0.35 | $0.33 | $0.70 | $0.66 |
For the six months, operating cash flow was $13.1 million, compared with $10.0 million a year earlier. Investing activities provided $11.9 million, mainly reflecting $13.4 million of proceeds from selling a joint-venture interest and $5.3 million of return-of-capital distributions, partly offset by property purchases and improvements. Financing activities provided $1.4 million. Cash and cash equivalents were $40.9 million at June 30, up from $14.6 million at year-end 2012.
At June 30, total assets were $495.8 million, total liabilities $245.3 million, and total equity $250.6 million. Mortgages payable were $227.9 million. The $75 million revolving credit facility had no outstanding balance; the facility matures March 31, 2015, and the company reported covenant compliance. Management reported approximately $94.6 million of available liquidity at August 7, after four subsequent property purchases, comprising $19.6 million cash and the $75 million facility, subject to required deposit balances.
Material changes versus the prior comparable period
- Rental income rose 10.1% in Q2 and 11.3% for the first half, primarily from acquired properties and tenant reimbursements.
- Operating expenses increased 14.1% in both periods, faster than rental income; operating margin consequently declined. Depreciation, general and administrative costs, real estate expenses, and taxes increased. The first-half period included a $126,000 federal excise tax accrual not present in the comparable 2012 period.
- Reported 2013 income included $4.7 million of gains from joint-venture transactions: a $2.8 million gain on the sale of a tenant-in-common property and a $1.9 million gain on the sale of the company’s 90% interest in its Plano, Texas joint venture. Q2 2012 included $2.5 million of discontinued-operations income, including a $2.2 million sale gain; those properties had been sold in 2012.
- Mortgage interest expense increased $164,000 in Q2 and $369,000 for the first half as average mortgage debt rose, partly offset by lower average rates. Average mortgage debt was up 12.4% in Q2 and 14.8% for the first half year over year; weighted average mortgage rates were lower.
- The company issued common shares through its at-the-market offering, receiving approximately $7.8 million net during Q2. Mortgage debt stood at $227.9 million, versus $226.0 million at December 31, 2012.
Outlook, risks, contingencies, and unusual items
The filing provides no quantified earnings or acquisition guidance. Management expects operating cash flow to cover substantially all operating requirements, including dividends, and intends generally to refinance or extend mortgage maturities in 2013–2015; it cautions that refinancing success is not assured. Scheduled amortization and maturities from July 2013 through December 2015 totaled $53.8 million, including $35.4 million due in 2014.
Management identifies risks including failure to acquire suitable properties on acceptable terms, difficulty leasing properties, and tenants’ inability to pay rent. The company monitors tenant credit and seeks diversification by property type, industry, geography, tenant, and lease expiry. It intends to maintain REIT status, which requires distributing at least 90% of ordinary taxable income. The company stated it had no off-balance-sheet arrangements.
Four acquisitions closed after quarter-end for an aggregate purchase price of approximately $42.8 million, with annual base rent at acquisition of approximately $3.1 million: a Shutterfly-leased facility, two restaurant properties, and an assisted-living facility. Two were partly mortgage-financed. These are subsequent events and were not included in June 30 results.
Interest-rate swaps hedged eight company mortgages, with approximately $36.2 million aggregate notional amount. The filing estimates a 100-basis-point increase in forward rates would raise swap fair value and the related net unrealized derivative gain by about $1.52 million; a 100-basis-point decrease would reduce them by about $1.37 million, with no impact on net income or cash. Management estimated $604,000 would be reclassified from other comprehensive income as additional interest expense over the following 12 months.
Important facts for investors to verify
- Separate recurring rental and operating performance from the $4.7 million of joint-venture-related gains when assessing reported earnings growth.
- Review the company’s refinancing plans and liquidity against $53.8 million of scheduled mortgage amortization and maturities through 2015, including $35.4 million in 2014.
- Assess the credit quality and lease terms of tenants, including those at the four post-quarter acquisitions, and confirm subsequent acquisition financing and rent assumptions.
- Evaluate dividend coverage using operating cash flow and the REIT distribution requirement; declared distributions were $0.70 per share for the first half.
- Review the full filing and the company’s 2012 Form 10-K risk factors; management cautions that interim results are not necessarily indicative of full-year results.