One Liberty Properties, Inc. — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. This is an annual report; fourth-quarter results are also provided below.
Business context
One Liberty is a self-managed REIT focused on owning and managing U.S. retail, industrial, flex, and health and fitness properties, many under long-term net or ground leases. At year-end it owned 114 properties and had interests in joint ventures owning five more, across 30 states and approximately 10.1 million square feet. Owned-property occupancy was 97.3%, down from 98.4% in 2015; joint venture occupancy was 97.9%.
Financial and operating metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $70.6 million | $65.7 million |
| Rental income, net | $64.2 million | $59.0 million |
| Operating income | $31.7 million | $32.7 million |
| Net income attributable to One Liberty | $24.4 million | $20.5 million |
| Diluted earnings per share | $1.39 | $1.22 |
| FFO / diluted share | $1.90 | $1.97 |
| AFFO / diluted share | $1.99 | $1.92 |
| Cash provided by operating activities | $31.4 million | $34.5 million |
| Cash and cash equivalents at year-end | $17.4 million | $12.7 million |
| Gross mortgage debt | $399.2 million | $334.4 million |
| Credit facility balance, gross | $10.0 million | $18.3 million |
Revenue increased 7.4%, including an 8.8% rise in net rental income, mainly reflecting acquisitions. Operating expenses rose 17.7% to $38.9 million, including higher depreciation, general and administrative costs, and real estate expenses. Operating margin was approximately 44.9%, versus 49.7% in 2015; the prior-year comparison included $2.9 million in lease termination fees. Net income increased 19.0%, aided by a $10.1 million gain on real estate sales versus $5.4 million in 2015. No property impairment was recorded in 2016.
FFO was $33.3 million, compared with $32.7 million, while FFO per diluted share declined to $1.90 from $1.97. AFFO rose to $34.8 million from $32.0 million, and AFFO per diluted share increased to $1.99 from $1.92. These are non-GAAP supplemental measures and do not represent cash available for all obligations or distributions.
Fourth quarter: Revenue was $19.0 million and net income was $4.4 million; net income attributable to One Liberty was $4.4 million. In fourth-quarter 2015, revenue was $18.5 million and net income attributable to One Liberty was $5.2 million.
At year-end, total assets were $733.4 million, total liabilities $441.5 million, and total equity $291.9 million. Mortgage debt had a 4.27% weighted-average interest rate and 9.3-year weighted-average remaining term; substantially all mortgage debt was fixed-rate or hedged. Mortgage principal payments scheduled for 2017–2021 total $89.3 million, including $19.1 million in 2017. The credit facility was expanded to $100 million and extended to December 31, 2019. As of March 2, 2017, reported available liquidity was approximately $101.2 million: $6.2 million of cash net of the required deposit balance and $95.0 million of facility availability.
Cash distributions were $1.66 per share in 2016, up from $1.58 in 2015. The quarterly dividend was raised to $0.43 per share, and a further $0.43 dividend was declared in March 2017.
Material changes and unusual items
- Acquired 11 properties for approximately $118.6 million, including $25.6 million of acquisition mortgage debt; the properties represent $9.1 million of 2017 contractual rental income.
- Sold 12 properties, including eight convenience stores, generating $10.1 million of reported net gains. Sales generated $42.3 million of net cash proceeds; $137.6 million of gross mortgage financing proceeds were received during the year.
- Issued approximately 1.08 million shares through its at-the-market program for net proceeds of $25.8 million.
- Operating cash flow declined by $3.1 million, partly because 2015 included lease termination receipts. Investing cash outflow increased to $80.9 million, principally due to property acquisitions; financing cash flow was $54.2 million.
- Tenant reimbursements grew 66.8% to $6.4 million, with corresponding real estate expenses recognized. Real estate expenses rose 47.7% to $8.9 million.
- A partial condemnation at the vacant Greenwood Village, Colorado property generated $509,000 in total proceeds, including $356,000 recorded as other income and a $116,000 gain on land.
Outlook, risks and contingencies
The filing provides no formal earnings or FFO guidance. Management expects operating cash flow to fund most operating needs, debt service, dividends, and estimated building expansion and tenant-improvement costs of $13.2 million. It expects to refinance or extend 2017–2019 mortgage maturities where feasible, but gives no assurance this will be successful. The company was in compliance with credit facility covenants at year-end.
- Leasing and tenant risk: Retail tenants account for 49.1% of 2017 contractual rental income. Five tenants account for 23.4%; Haverty Furniture is the largest at 7.1%. Management cited announced Kmart store closures, hhgregg’s March 2017 Chapter 11 filing and planned store closure, and Savers’ planned closure at a company property. Tenant closure does not itself end rent obligations, but nonpayment or bankruptcy could reduce collections.
- Vacancies and proposed sale: Three properties were vacant at year-end, and the filing estimates approximately $78,000 per month in carrying costs, including operating and interest costs, while they remain vacant or unsold. A sale of the vacant Greenwood Village property was expected by September 30, 2017, with an anticipated $5–$7 million gain; completion and gain recognition were not assured.
- Debt, rates and liquidity: Refinancing access, interest rates, lender requirements and covenant compliance could affect cash available for operations and dividends. Debt maturities and property values could necessitate refinancing, asset sales or new equity. A 100-basis-point increase in the credit facility rate was estimated to add about $100,000 of annual interest cost.
- Ground-lease exposure: Three apartment-related ground lease positions had a combined $34.0 million carrying value and were subordinate to approximately $150.7 million of tenant/operator mortgage debt. Rent may be deferred if specified property performance tests are not met.
- Other exposures: Risks include e-commerce pressure on retail tenants, geographic concentration (Texas represents 13.0% of 2017 contractual rent), property impairment, environmental and casualty liabilities, REIT qualification and related-party service arrangements. The filing reports no material pending legal proceeding; routine legal matters are described as not expected to have a material adverse effect.
The company said it expects ASU 2017-01, if it acquires properties, to favorably affect reported net income, FFO and AFFO because many acquisitions may be treated as asset acquisitions and related costs capitalized. It was evaluating the effect of other new lease and revenue accounting standards.
Important facts for investors to verify
- Collection and lease status at properties exposed to Kmart, hhgregg and Savers, including the timing and cost of re-leasing vacant space.
- Whether the Greenwood Village sale closed and whether the anticipated gain was realized.
- Capacity to refinance upcoming mortgage maturities while funding planned improvements and maintaining dividend distributions.
- Tenant concentration, 2022 lease expirations (18.4% of 2017 contractual rent), and the durability of occupancy and rental income.
- Cash available for distributions relative to the dividend; FFO and AFFO are supplemental measures, not substitutes for GAAP cash flow.
- Exposure and protections related to subordinate apartment ground leases, joint ventures, and transactions with affiliated service providers.