ONE LIBERTY PROPERTIES, INC. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Amounts below are in millions except per-share data, percentages, and where stated otherwise. The interim financial statements are unaudited.
Business context
One Liberty is a self-managed REIT with a diversified portfolio of primarily net-leased retail, industrial, office, flex, and other properties. At June 30, 2014, it owned 113 properties in 30 states, including joint-venture properties, and reported approximately 99.3% occupancy by square footage.
Financial performance
| Metric | Q2 2014 | Q2 2013 | H1 2014 | H1 2013 |
|---|---|---|---|---|
| Rental income | $14.396 | $11.981 | $28.798 | $23.843 |
| Total revenue | $15.665 | $11.981 | $30.067 | $23.843 |
| Operating income | $8.659 | $6.218 | $15.996 | $12.444 |
| Net income attributable to One Liberty | $4.640 | $7.736 | $7.913 | $11.186 |
| Diluted EPS | $0.29 | $0.50 | $0.49 | $0.73 |
| FFO | $8.427 | $5.988 | $15.324 | $12.331 |
| AFFO | $7.574 | $6.386 | $14.798 | $13.164 |
- Revenue increased 30.7% in Q2 and 26.1% in H1. Management attributed most of the rental-income increase to 17 properties acquired in 2013 and 2014.
- Operating income rose 39.3% in Q2 and 28.5% in H1. Calculated operating margin was approximately 55.3% in Q2 2014 versus 51.9% in Q2 2013, and 53.2% in H1 2014 versus 52.2% in H1 2013.
- GAAP net income declined year over year, principally reflecting the absence of $4.705 million of gains on joint-venture property and interest sales recorded in H1 2013, as well as higher interest expense. H1 2014 also included a $1.269 million lease termination fee and a $0.134 million related-party securities-sale gain.
- Interest expense increased 27.8% in Q2 and 27.6% in H1, mainly because average mortgage and credit-line debt increased. Weighted-average mortgage rates were lower year over year, partly offsetting the effect of higher balances.
- FFO and AFFO increased despite lower GAAP earnings. H1 FFO per diluted share was $0.96 and AFFO per diluted share was $0.92, compared with $0.80 and $0.86, respectively, in H1 2013. These are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
Cash flow, liquidity, and debt
- H1 operating cash flow was $16.584 million, up from $13.073 million. Investing activities used $28.357 million, chiefly reflecting $33.165 million of property purchases. Financing activities provided $13.480 million. Cash and cash equivalents ended June at $18.338 million, up from $16.631 million at year-end 2013.
- At June 30, mortgages payable were $284.373 million and the revolving credit-line balance was $36.850 million. The $75 million credit facility matures March 31, 2015; its rate is the greater of 90-day LIBOR plus 3% or 4.75%. The company reported covenant compliance at June 30.
- Management reported approximately $47.4 million of available liquidity at August 1, 2014: $7.8 million of cash, net of the required deposit-maintenance balance, plus $39.6 million available under the revolver. The facility balance was $35.450 million on that date.
- Mortgage debt had a weighted-average remaining term of 9.2 years and a 5.12% weighted-average fixed rate after swaps. Scheduled amortization and maturities total $16.038 million for the remainder of 2014, $12.364 million in 2015, and $32.910 million in 2016. Management generally intends to refinance or extend 2014–2016 maturities, but gave no assurance it can do so.
- Cash distributions declared were $0.37 per common share for Q2 and $0.74 for H1, versus $0.35 and $0.70 in the comparable 2013 periods.
Material changes, outlook, and risks
- H1 acquisitions included five properties, including retail locations, an industrial building acquired through a 95%-owned joint venture, and land under a long-term ground lease. Total reported purchase price was approximately $32.9 million. The company also sold two Michigan properties in February for net proceeds of $5.177 million.
- A retail tenant paid a $1.269 million lease-buyout fee in June; the property was simultaneously re-leased. The company wrote off $0.150 million of related unbilled rent and lease-intangible balances.
- Management highlighted a tenant whose lease expires in October 2014 and who does not intend to renew. The tenant represented 1.1% of 2013 rental income; the property had $2.6 million of net book value and $1.5 million of mortgage principal, with the mortgage maturing in November 2014. The company may surrender the property to the lender and could record an impairment if it cannot relet or dispose of it satisfactorily.
- Lease expirations represent 16.4% of 2014 contractual rent in 2022 and 30.5% in 2024 and thereafter, assuming tenants do not exercise renewal options. Contractual rental income for 2014 was approximately $54.7 million.
- The Sandy Springs ground-lease structure includes a $6.516 million land carrying value pledged as collateral for the operator’s $16.230 million mortgage on the buildings. The company reported maximum exposure of approximately $6.540 million, including rent receivable. It received $1.894 million of restricted cash for renovations and other reserves.
- Interest-rate swaps hedge variable-rate mortgages. A 100-basis-point move in forward rates was estimated to change swap fair value by approximately $4.2 million, without affecting net income or cash under the filing’s sensitivity analysis. The company estimated $1.572 million would be reclassified from accumulated other comprehensive income or loss to interest expense over the following 12 months.
- Management cited acquisition availability, tenant credit and lease renewals, retail-sector exposure to e-commerce, refinancing, and REIT qualification requirements as business risks. It stated that it seeks e-commerce-related properties such as distribution and warehouse facilities. No numerical earnings or FFO guidance was provided.
- The compensation and services agreement with a company affiliated with the board’s vice chairman calls for fees of $3.3 million in 2014 and $3.465 million in 2015; the 2014 amount increased $0.4 million from 2013. Management said an independent compensation consultant’s report supported the increases.
Important facts for investors to verify
- Progress on reletting or otherwise resolving the October 2014 tenant vacancy and the property’s November 2014 mortgage maturity.
- Execution and terms of refinancing or extension plans for the stated 2014–2016 mortgage maturities, and the March 2015 credit-facility maturity.
- Whether acquisition-driven rental growth and occupancy are sustained, including tenant credit quality and upcoming lease expirations.
- Cash available for dividends after debt service, property investment, and required reserves; compare distributions with GAAP cash flow and the company’s non-GAAP FFO/AFFO measures.
- Final purchase-price allocations for recent acquisitions, the Sandy Springs collateral and reserve arrangements, and related-party fees and transactions.