One Liberty Properties, Inc. — Q3 2013 Form 10-Q
Business context and period. This unaudited filing covers the three and nine months ended September 30, 2013. One Liberty is a self-managed REIT focused on owning and managing geographically diversified commercial properties, many under long-term net leases. It reported 107 properties in 29 states and approximately 99.6% occupancy by square footage.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Rental income, net | $13.214 million | $11.333 million | $37.542 million | $33.193 million |
| Operating income | $6.792 million | $6.186 million | $19.649 million | $17.987 million |
| Income from continuing operations | $3.228 million | $3.001 million | $14.429 million | $9.228 million |
| Net income attributable to One Liberty | $3.211 million | $18.414 million | $14.397 million | $27.386 million |
| Basic/diluted EPS | $0.20/$0.20 | $1.24/$1.23 | $0.93/$0.93 | $1.85/$1.84 |
Margins. Operating income was approximately 51.4% of rental income in Q3 2013 versus 54.6% a year earlier, and 52.3% for the first nine months versus 54.2%. These ratios are calculated from reported figures.
Cash flow and liquidity. Nine-month operating cash flow was $19.530 million, compared with $15.090 million in 2012. Investing activities used $84.256 million, chiefly reflecting $101.314 million of real estate purchases; financing provided $69.052 million. Cash increased to $18.903 million from $14.577 million at year-end 2012. Management reported available liquidity of approximately $69.5 million at November 4, 2013, including $15 million cash and $54.5 million available under the revolving facility, subject to required deposit balances.
Debt and distributions. At September 30, mortgages payable were $276.805 million and the credit-line balance was $23.5 million, versus $225.971 million and no line balance at December 31, 2012. The $75 million revolving facility matures March 31, 2015; its rate is the greater of 90-day LIBOR plus 3% or 4.75%. The company was covenant-compliant. Mortgage principal and scheduled amortization due in 2014 totaled $36.433 million; management generally intends to refinance or extend 2014–2015 maturities, but gives no assurance. Common distributions declared were $0.35 per share for Q3 and $1.05 per share for the first nine months.
Material changes and drivers
- Rental income increased 16.6% in Q3 and 13.1% year to date, primarily from acquired properties and tenant expense reimbursements. Operating income rose 9.8% and 9.2%, respectively.
- 2013 acquisitions totaled nine properties for a contract purchase price of $101.509 million. The properties were reported 100% occupied; most were single-tenant, long-term net leases. Acquisition-related depreciation, real estate expenses, and transaction costs also increased.
- 2013 nine-month continuing income included $2.807 million gain on disposition of a property held through an unconsolidated joint venture and $1.898 million gain on sale of a joint-venture interest. The company also sold its 90% interest in a Plano, Texas joint venture and its interest in a Los Angeles tenant-in-common property.
- The large year-over-year decline in total net income reflects 2012 discontinued operations, including $17.254 million of sale gains and $18.171 million total discontinued-operations income in the first nine months of 2012. There were no discontinued operations in 2013; continuing income improved.
- For 2014, management estimated contractual rental income of $52.4 million, up $6.6 million, or 14.4%, from 2013, after accounting for expected tenant departures. This is a contractual-rent estimate, not earnings guidance.
Outlook, risks, and unusual items
Tenants at four properties, representing 299,325 square feet and approximately $1.3 million of nine-month 2013 rental income, notified the company that they expected to vacate at lease expirations in December 2013 or January 2014. The company was negotiating replacement leases for two properties and had contracted to sell the other two Michigan properties for $5.5 million after quarter-end; completion and favorable terms were not assured. Lease expirations, tenant credit and renewals, and the availability of accretive acquisitions remain key risks.
The filing provides no formal earnings or dividend guidance. Management expects operating cash flow to cover substantially all operating needs, including dividends, but may also rely on cash, equity issuance, credit-line borrowings, refinancing, or property sales. Mortgage maturities and variable-rate credit-line exposure are relevant financing risks. Interest-rate swaps hedge mortgage exposure; the company estimated that a 100-basis-point move in forward rates would change swap fair value by roughly $3.28–$3.29 million, without affecting net income or cash. A swap was entered into after quarter-end to fix the rate on a $6.7 million variable-rate mortgage at 5.105%.
Other notable items include no doubtful-account allowance at September 30, 2013, versus $132,000 at year-end 2012, and no bad-debt expense in the 2013 periods. Purchase-price allocations for 2013 acquisitions remained preliminary. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the two replacement leases and the $5.5 million Michigan property sale are completed, and the actual rent impact of the four tenant departures.
- Whether the $52.4 million 2014 contractual-rent estimate is achieved and how it translates into cash flow after vacancies, expenses, and financing costs.
- Refinancing or repayment plans for the $36.433 million of mortgage payments due in 2014 and the additional 2015 maturities; the filing reports no assurance of refinancing.
- Acquisition performance, preliminary lease-intangible allocations, and the effect of increased debt and share issuance on per-share results.
- Dividend coverage from recurring operating cash flow and the company’s ability to maintain required credit-facility covenants and deposit balances.