One Liberty Properties, Inc. — Q2 2022 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2022; comparisons are to the same 2021 periods. One Liberty is a self-managed REIT focused primarily on industrial and retail properties, many under long-term net leases. At quarter-end it owned 119 properties in 31 states, with occupancy of approximately 97.6% by square footage.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Total revenue | $21.5 million | $20.4 million | $43.0 million | $41.2 million |
| Net income attributable to One Liberty | $16.8 million | $23.3 million | $26.1 million | $26.3 million |
| Diluted EPS | $0.79 | $1.12 | $1.23 | $1.26 |
| NAREIT FFO per share | $0.69 | $0.37 | $1.19 | $0.79 |
| AFFO per share | $0.49 | $0.48 | $0.99 | $0.96 |
| Cash distributions per common share | $0.45 | $0.45 | $0.90 | $0.90 |
For the first half, operating cash flow was $23.8 million, versus $27.1 million a year earlier. Investing activities used $19.3 million, compared with $29.1 million provided in 2021; financing activities used $3.1 million, versus $53.1 million used. Cash, cash equivalents and restricted cash totaled $18.0 million at June 30.
At June 30, gross mortgages were $402.8 million and gross line-of-credit borrowings were $27.5 million; mortgage debt had a 4.07% weighted-average fixed rate after swaps and a 6.4-year weighted-average remaining term. Total assets were $780.7 million and total liabilities $464.6 million. At August 1, the company reported $92.5 million of available liquidity, including $10.0 million cash and $82.5 million available under its credit facility.
Material changes versus prior comparable periods
- Revenue rose 5.1% in Q2 and 4.3% in the first half, primarily reflecting higher same-property rents and acquisitions, partly offset by properties sold.
- Q2 net income and diluted EPS declined despite higher rental revenue. Real-estate sale gains fell to $8.1 million from $21.5 million. In the first half, sale gains were $12.7 million versus $21.5 million.
- First-half net income was nearly unchanged year over year. It included a $5.4 million litigation settlement and $0.9 million in insurance recovery income; both are unusual items. The settlement is excluded from AFFO.
- First-half FFO and AFFO per share increased year over year, but FFO growth included the litigation settlement and should not be read as recurring operating growth. AFFO, a non-GAAP measure, increased 4.5% in total.
- The company acquired four industrial properties for $39.3 million in the first half and sold six properties for $23.3 million gross proceeds. A further Columbus, Ohio property was classified as held for sale; management expected an approximately $4.0 million gain on its anticipated August sale.
Outlook, commentary, risks and unusual items
- No quantified full-year earnings, FFO or AFFO guidance is provided. Management said it expects to fund operating needs, debt service and anticipated dividends primarily through operating cash flow, available cash and borrowings; property sales, mortgage financing and equity issuance may support investment and financing needs.
- The $100 million credit facility matures December 31, 2022, bears a LIBOR-based floating rate and had $27.5 million outstanding at June 30. Management intends to refinance, extend or repay upcoming mortgage maturities, but gives no assurance of successful refinancing. The company reported covenant compliance at quarter-end.
- Management described a strategic shift from retail toward industrial properties. Industrial represented approximately 60.5% of 2022 contractual base rent. It cautioned that industrial investments may yield less than the retail properties being sold, which could make the current dividend harder to sustain.
- Regal Cinemas is paying current rent and deferred rent as scheduled, but the company records its rent on a cash basis because collection is not deemed probable for straight-line accrual. Approximately $1.1 million of deferred rent remained due through June 2023, and $24.9 million of base rent was scheduled through 2035. The filing notes financial and litigation challenges at Regal’s parent, Cineworld.
- The Vue Apartments ground lease generated no rent during the first half. The company’s $16.0 million land position is subordinated to the tenant’s $65.4 million mortgage, and the company may fund operating shortfalls and capital expenditures; it contributed $343,000 during the first half of 2022.
- COVID-era deferred rents other than Regal’s were 97.1% collected by June 30. Regal deferred-rent collections were 33.3% complete; $966,000 remained scheduled for collection through June 2023.
- Other disclosed risks include tenant defaults and bankruptcies, lease renewals and re-leasing, interest-rate and capital-market changes, acquisition and reinvestment returns, and broader economic and real-estate conditions. The company had 18 interest-rate swaps; its variable-rate credit facility remains exposed to rate increases.
Important facts for investors to verify
- Whether the credit facility is refinanced or replaced before its December 2022 maturity, and the terms and cost of that financing.
- Regal’s ability to meet current and deferred rent obligations, and any changes in collectability assessments.
- Progress and funding needs for the Vue Apartments ground-lease property and the Manahawkin redevelopment; the redevelopment budget and timeline were not provided.
- Completion and actual proceeds from the held-for-sale Columbus property, versus management’s anticipated sale price and gain.
- Recurring AFFO and dividend coverage after excluding litigation, property-sale, insurance and other nonrecurring items; assess the company’s non-GAAP FFO and AFFO reconciliations alongside GAAP cash flows.
- Upcoming mortgage maturities, tenant lease expirations and the effect of shifting the portfolio toward potentially lower-yielding industrial assets.