One Liberty Properties, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. Unless otherwise noted, amounts are in U.S. dollars; financial statement amounts below are in millions. One Liberty is a self-managed REIT owning 120 properties in 31 states, with approximately 98.2% occupancy by square footage. Its portfolio includes retail, industrial, flex, health and fitness, and other properties, many under long-term net leases.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $16.11 | $15.19 | $47.22 | $45.25 |
| Operating income | $7.67 | $7.01 | $23.06 | $23.00 |
| Net income attributable to One Liberty | $3.79 | $2.62 | $15.33 | $10.53 |
| Diluted EPS | $0.22 | $0.16 | $0.92 | $0.64 |
| FFO per diluted share | $0.50 | $0.46 | $1.39 | $1.42 |
| AFFO per diluted share | $0.51 | $0.48 | $1.43 | $1.40 |
Operating margin was approximately 47.6% in Q3 2015 versus 46.1% a year earlier, and 48.8% for the first nine months versus 50.8%. Revenue growth reflected acquired properties and higher tenant reimbursements. Nine-month GAAP earnings benefited from a $5.39 million property-sale gain and a $0.96 million purchase-price fair-value adjustment; these items, among others, make reported earnings less representative of recurring operations. The company declared cash distributions of $0.39 per share for Q3, versus $0.37 a year earlier; nine-month distributions were $1.17 per share versus $1.11.
Cash flow, debt and liquidity
- Cash flow: Nine-month operating cash flow was $23.32 million, compared with $23.40 million in 2014. Investing used $72.23 million, primarily for real estate purchases, improvements and joint-venture investments; financing provided $42.46 million. Cash and cash equivalents ended the period at $13.90 million, down from $20.34 million at year-end 2014.
- Investments: The company reported $67.55 million of real estate purchases in investing cash flows. Acquisition disclosures list property and joint-venture interest purchases with aggregate contract prices of $73.59 million; amounts differ because of financing, accounting and transaction structure.
- Debt: At September 30, mortgages payable were $325.60 million and the revolving credit balance was $35.75 million. Mortgage debt, after swaps, carried fixed rates of 3.13%–7.81% (4.76% weighted average) and a 9.1-year weighted-average remaining term. Mortgage and line-of-credit carrying debt totaled approximately $361.35 million. Scheduled mortgage amortization and maturities through 2019 total $102.01 million, including $66.21 million due at maturity.
- Liquidity: As of November 2, management reported approximately $58.3 million available: $6.5 million of cash net of the required deposit balance and $51.8 million available on the $75 million revolving facility. The facility matures December 31, 2018; its average interest rate for the first nine months was approximately 1.93%. The company reported compliance with its covenants at September 30.
- Interest-rate exposure: Twenty-four company mortgage swaps had $117.4 million aggregate notional value; swaps converted variable-rate mortgage obligations to fixed rates. A 100-basis-point increase in the credit-line rate would increase annual interest cost by about $357,500 at the September 30 balance. Management stated that hypothetical swap-value changes would not affect net income or cash.
Material changes and notable items
- Rental income increased 5.0% in Q3 and 4.4% year to date, principally from properties acquired in 2014 and 2015. Total revenue increased 6.1% in Q3 and 4.3% year to date.
- Nine-month operating income was nearly flat despite revenue growth, as depreciation and amortization, general and administrative, and real estate expenses increased. Interest expense declined 4.3% year to date, mainly reflecting lower credit-line rates.
- The company acquired several properties and a joint-venture interest during the first nine months. It also acquired its partner’s 50% interest in a Lincoln, Nebraska property, obtained control, and recognized the $0.96 million fair-value adjustment.
- A consolidated joint venture sold its Cherry Hill, New Jersey property in January for net proceeds of $16.03 million, producing the $5.39 million gain. Debt payoff and swap termination resulted in $0.57 million of prepayment costs and related financing-cost write-offs.
- A Pathmark supermarket tenant filed for Chapter 11, rejected its lease and vacated a Philadelphia property in September. The tenant represented approximately 1.3% of nine-month rental income; the property had $4.5 million of mortgage debt. Management was seeking a replacement tenant and reported no impairment charge was then required.
- After quarter-end, the company received a $1.29 million retail lease termination fee in October and reported that substantially all of the space had been re-leased. The fee and a $179,000 rent-receivable write-off were to be recognized in Q4.
Outlook, risks and contingencies
No formal earnings or FFO guidance is provided in the filing. Management expected operating cash flow to fund substantially all operating needs, including dividends and mortgage amortization, while noting that shortfalls could require use of cash or credit-line borrowings. It generally intended to refinance or extend mortgages maturing in 2016–2017, but gave no assurance it would do so. Contractual rental income for 2015 was approximately $56.9 million, excluding straight-line rent, lease-intangible amortization and the company’s share of unconsolidated joint-venture rent. Lease expirations are concentrated in 2022 (20.6% of contractual rent) and 2025 and thereafter (33.9%), assuming tenants do not exercise renewal options.
Key risks include tenant defaults and difficulty re-leasing space, acquisition availability and pricing, retail-sector exposure to e-commerce, refinancing and interest-rate risk, and compliance with REIT requirements. The company’s land positions underlying ground leases in Sandy Springs, Georgia, and Lakemoor, Illinois, are subordinated to the owner/operators’ mortgages; the disclosed maximum exposure to loss was $16.53 million. Management also estimated $2.27 million of swap losses would be reclassified from accumulated other comprehensive income as higher interest expense over the following 12 months. The filing states there were no material off-balance-sheet arrangements other than the matters described for those ground-lease properties.
Important facts for investors to verify
- Whether the vacated Pathmark space is re-leased, on what terms, and whether the property requires impairment or additional investment.
- Progress refinancing or extending the $66.21 million of mortgage principal due at maturity through 2019, particularly the 2016–2017 maturities.
- Recurring property-level performance apart from the property-sale gain, fair-value adjustment and lease termination fees; compare GAAP results with FFO/AFFO definitions and cash flow.
- Actual liquidity after the required facility deposit, credit-line availability and covenant headroom, including subsequent borrowings and repayments.
- Lease rollover exposure, tenant concentration and occupancy, including the large 2022 and 2025-and-later expiration buckets.
- Final purchase-price allocations for 2015 acquisitions, which the filing says remain preliminary, and subsequent results of the new properties and joint ventures.