Business context and reporting period
One Liberty Properties, Inc. (OLP) is a self-managed REIT focused primarily on industrial and retail properties, many under long-term net leases. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022. OLP owned 118 properties in 31 states and reported 98.4% occupancy by square footage.
Financial performance and position
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $21.5 | $20.4 | $64.5 | $61.7 |
| Net income attributable to OLP | $7.2 | $6.1 | $33.3 | $32.4 |
| Diluted EPS | $0.34 | $0.28 | $1.57 | $1.55 |
| NAREIT FFO per share | $0.44 | $0.47 | $1.63 | $1.25 |
| AFFO per share | $0.48 | $0.48 | $1.47 | $1.44 |
| Cash distributions per share | $0.45 | $0.45 | $1.35 | $1.35 |
Rental income rose 5.5% in Q3 and 5.1% for the nine months, with same-store rental income up 3.8% and 5.0%, respectively. Operating expenses increased 11.0% in Q3 and 5.6% year to date; Q3 real estate expenses rose 24.1%, partly reflecting taxes accrued for Regal Cinemas properties.
Net cash provided by operating activities was $34.8 million for the first nine months, compared with $36.6 million a year earlier. Cash and cash equivalents were $11.6 million at September 30. Investing activities used $12.7 million, including $39.9 million of property purchases and $30.3 million of property-sale proceeds; financing activities used $26.8 million.
At September 30, mortgages payable were $406.2 million gross and the credit line balance was $11.0 million gross. Mortgage debt carried a 4.11% weighted-average rate after swaps and a 6.7-year weighted-average remaining maturity. The $100 million credit facility was floating-rate, bore 4.51% at September 30, and matured December 31, 2022. OLP reported covenant compliance. Available liquidity at November 1 was $94.2 million, comprising $8.0 million cash and $86.2 million available on the facility. Mortgage amortization and maturities due in 2023–2025 total $131.9 million.
Material changes versus the prior comparable period
- Q3 net income attributable to OLP increased to $7.2 million from $6.1 million, helped by a $4.1 million gain on sale of a vacant retail property. Nine-month net income increased modestly; real estate sale gains were lower, at $16.8 million versus $22.8 million.
- Nine-month FFO rose 31.5% to $34.6 million, principally reflecting a $5.4 million litigation settlement, higher rental income, lower debt prepayment costs and lower interest expense. AFFO rose 2.8% to $31.2 million; it excludes the litigation settlement and other specified items.
- OLP acquired four properties for $39.3 million and sold seven properties for $31.6 million during the nine months. Mortgage proceeds and repayments increased substantially compared with the prior-year period.
- Cash distributions remained $0.45 per share quarterly. OLP repurchased about 208,000 shares year to date for approximately $5.2 million and authorized a repurchase program of up to $7.5 million.
Outlook, commentary, risks and unusual items
- Regal/Cineworld: Cineworld, Regal’s parent, filed for Chapter 11 in September 2022. OLP did not accrue Regal’s September rent or deferred rent because collection was considered less than probable; the amounts were paid in October. OLP is discussing lease modifications that could cancel deferred rent, reduce rent and shorten lease terms, and expects future collections to be significantly below contractual amounts. Management noted possible adverse cash-flow effects and uncertainty about impairment.
- The Vue ground lease: No ground-lease rent had been collected since October 2020. OLP’s land carrying value was $16.1 million and was subordinate to the tenant’s $65.1 million mortgage; OLP had discretion to fund specified operating shortfalls and capital costs. A late-October settlement in litigation involving the tenant was expected to provide OLP an estimated $3.5–$4.5 million in Q4, subject to uncertainty and certain expenses.
- Economic and portfolio outlook: Management cited inflation, rising interest rates, COVID-19 and supply-chain disruption, and said it expected to be especially cautious about near-term acquisitions. It warned that shifting from higher-yielding retail assets to lower-yielding industrial properties can pressure cash flow and dividend sustainability. No formal earnings or FFO guidance is provided in the filing text.
- Leasing: Subsequent to quarter-end, Shutterfly extended its lease through 2033, with base rent scheduled to increase about 67% from June 2023 levels and annual increases of at least 3%; OLP agreed to provide up to $1.0 million for tenant improvements. Power Distributors extended for seven years, with a 10% rent increase effective November 2023 and 3% annual increases thereafter.
- Other unusual items: The nine-month results included the $5.4 million Round Rock litigation settlement and $0.9 million of final hurricane-insurance recovery. OLP’s swaps had a $1.9 million fair-value asset at quarter-end and no swap liabilities; substantially all mortgage debt was fixed-rate or hedged.
Most important facts for investors to verify
- Progress and final terms of Regal lease negotiations, rent collections, and any resulting impairment or property costs.
- Whether and when OLP receives the estimated net proceeds from The Vue settlement, and whether it must continue funding property shortfalls or capital needs.
- Renewal, extension or refinancing of the credit facility that matured December 31, 2022, and funding plans for $131.9 million of mortgage amortization and maturities due in 2023–2025.
- Whether operating cash flow and AFFO continue to support the $0.45 quarterly dividend, given the identified tenant and portfolio risks.
- Acquisition and disposition returns, including the effect of portfolio rotation toward industrial assets and the reported valuation gap between mortgage fair value and carrying value.