ONE LIBERTY PROPERTIES, INC. — Q1 2014 Form 10-Q
Business context and period. This unaudited report covers the three months ended March 31, 2014, compared with Q1 2013. One Liberty is a self-managed REIT owning 109 properties in 29 states, primarily under long-term net leases. Occupancy was approximately 98% at quarter-end; management expected approximately 99% by May 15, assuming a new tenant took possession as planned.
Financial performance and position
- Revenue: Rental income was $14.402 million, up 21.4% from $11.862 million. Management attributed most of the increase to properties acquired in 2013 and 2014.
- Profit: Operating income rose 17.8% to $7.337 million. Net income attributable to One Liberty was $3.273 million, versus $3.450 million; diluted EPS was $0.20 versus $0.22. FFO increased to $6.897 million ($0.43 per diluted share) from $6.344 million ($0.42); AFFO rose to $7.224 million ($0.45 per diluted share) from $6.778 million ($0.44). FFO and AFFO are non-GAAP supplemental measures.
- Costs and margins: Operating expenses increased 25.4% to $7.065 million, faster than rental income; operating margin was approximately 51.0%, compared with 52.5% in Q1 2013. Interest expense rose 27.4% to $3.953 million, primarily reflecting higher average debt balances.
- Cash flow: Operating cash flow was $7.248 million, up from $6.544 million. Investing activities provided $0.034 million, including $5.177 million of net property-sale proceeds and $5.109 million of property purchases. Financing used $7.745 million; cash declined $0.463 million to $16.168 million.
- Debt and liquidity: At March 31, mortgages payable were $284.903 million and the credit-line balance was $12.850 million. The $75 million revolving facility matures March 31, 2015; its rate was the greater of 90-day LIBOR plus 3% or 4.75%. The company reported covenant compliance. Available liquidity at May 5 was approximately $68.3 million, including $6.1 million of cash net of the required deposit balance and $62.2 million of facility availability.
- Other balance-sheet data: Total assets were $567.380 million and total equity was $249.137 million. The quarterly dividend declared was $0.37 per share, up from $0.35 in Q1 2013.
Material changes and developments
- Rental income growth was supported by acquisitions, tenant reimbursements, and newly leased expanded space, partly offset by lease expirations.
- Two Michigan properties were sold on February 3 for $5.177 million net of closing costs. Their Q1 discontinued-operations income was $13,000, versus $136,000 in the prior-year quarter.
- Q1 acquisitions totaled $5.109 million: a Total Wine & More store and a Chuck E. Cheese restaurant. Both were single-tenant net leases expiring in 2017 or 2018; purchase-price allocations were preliminary.
- Mortgage debt increased year over year as the company financed acquisitions and other properties. Mortgage maturities and scheduled amortization from April 2014 through 2016 totaled $63.092 million, including $43.112 million due at maturity.
- The company amended its at-the-market equity offering program, allowing sales of up to approximately $38.36 million. It sold shares during the quarter and additional shares through April 4.
Outlook, risks, and unusual items
- Management reported 2014 contractual rental income of approximately $53.8 million, excluding specified straight-line rent, lease-intangible amortization, and joint-venture rent. No earnings or FFO guidance was provided.
- Management expected to meet substantially all operating cash needs, including dividends and mortgage amortization, from operating cash flow. It generally intends to refinance or extend 2014–2016 mortgage maturities, but gave no assurance it will succeed.
- Lease rollover is a key exposure: leases representing 16.2% of 2014 contractual rent expire in 2022, and 39.4% expire in 2023 or later; renewal options are excluded from the schedule. The company also cited acquisition, tenant-payment, renewal/reletting, and retail e-commerce risks.
- Q1 expenses included higher snow-removal costs from the harsh winter and costs at a property whose tenant lease expired in January. A new tenant was expected to assume rent and expenses around May 15.
- Interest-rate swaps hedge variable-rate mortgages. The company estimated that a 100-basis-point change in forward rates would change swap fair value by approximately $4.19 million, with no effect on net income or cash from that sensitivity. It estimated $1.639 million would be reclassified from accumulated other comprehensive income/loss to increase interest expense over the following 12 months.
- Management identified no off-balance-sheet arrangements and stated that disclosure controls were effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the expected tenant occupancy by May 15 occurred and whether the portfolio reached the projected approximately 99% occupancy.
- Refinancing or repayment plans for the $63.092 million of mortgage amortization and maturities through 2016, and renewal or leasing outcomes for major expirations, particularly in 2022 and thereafter.
- Whether acquisition-driven rental growth and operating cash flow can support debt costs, dividends, and future property investment.
- The credit-facility renewal or replacement plan before its March 31, 2015 maturity, along with continued covenant compliance and available borrowing capacity.
- Related-party management fees: the agreement provides for $3.3 million in 2014 and $3.465 million in 2015, with the property manager wholly owned by the board vice chairman.
- Share-count changes and equity issuance: the balance sheet reported 15.422 million shares at March 31, while 15,978,064 shares were outstanding as of May 2.