One Liberty Properties, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited consolidated financial statements. One Liberty is a self-managed REIT owning 126 properties in 31 states; occupancy was approximately 96.6% by square footage.
Financial performance and position
- Revenue: Q2 rental income, net, rose 4.9% to $20.7 million; first-half revenue rose 6.6% to $41.9 million. Growth reflected acquisitions, partly offset by dispositions and softer same-store fixed rents.
- Profit and EPS: Q2 net income attributable to One Liberty was $4.1 million, or $0.20 per diluted share, versus $4.5 million and $0.23 a year earlier. First-half attributable income was $8.1 million, or $0.39 per diluted share, versus $10.4 million and $0.53.
- Funds from operations: Q2 NAREIT FFO was $9.0 million ($0.45 per share), versus $9.9 million ($0.51); AFFO was $9.5 million ($0.48 per share), versus $10.5 million ($0.54). First-half FFO was $18.4 million ($0.93 per share) and AFFO was $19.5 million ($0.98 per share), down from $19.5 million ($1.01) and $20.6 million ($1.07), respectively.
- Cash flow: First-half operating cash flow was $18.3 million, compared with $18.8 million. Investing used $24.0 million, mainly for $27.0 million of property purchases, partly offset by sale proceeds. Financing provided $7.0 million; cash, cash equivalents and restricted cash ended at $18.1 million.
- Expenses and margins: Q2 operating expenses increased 10.0% to $12.1 million, faster than revenue; real estate expenses rose 35.5%, partly due to Round Rock legal and property-tax costs. Interest expense increased 12.1% to $5.0 million. The filing text does not provide a clear operating-margin metric.
- Debt and liquidity: June 30 mortgage debt was $438.5 million gross and the credit-line balance was $32.2 million gross. Mortgages had a 4.28% weighted-average fixed rate after swaps and an 8.2-year weighted-average remaining term. The $100 million credit facility was amended July 1 to mature December 31, 2022; the company was covenant-compliant at quarter-end. At August 2, reported available liquidity was $74.2 million, including $4.5 million cash net of the required deposit balance and $69.7 million available under the facility, subject to borrowing-base requirements.
- Dividend: The company declared a $0.45-per-share quarterly dividend, approximately $8.9 million in total, paid July 9, 2019.
Material changes and transactions
- Rental income growth reflected eight properties acquired in 2018 and four industrial properties acquired in Q2 2019 for approximately $27.0 million. A property was sold in Clemmons, North Carolina, producing $5.3 million net proceeds and a $1.1 million gain; the related $1.7 million mortgage was repaid.
- Same-store lease revenues were nearly flat in Q2, down 0.6%: fixed lease revenues fell 1.2%, while variable lease revenues increased 2.8%. The Round Rock tenant’s unpaid rent and The Vue ground lease rent reduction contributed to lower fixed rents.
- Other comprehensive income included a $4.1 million first-half unrealized derivative loss, versus a $3.8 million gain in the comparable 2018 period. The filing says these fair-value changes do not affect net income or cash.
Outlook, risks and unusual items
- Management reported approximately $72.0 million of contractual rental income for the 12 months ending June 30, 2020 under leases in place at quarter-end. This is not earnings guidance. Management intends to fund operating needs and dividends principally with operating cash flow and available financing; no formal earnings forecast is provided.
- Round Rock, Texas: The assisted-living tenant filed for bankruptcy and rejected the lease but remained in the property. The company reported unpaid rent and use-and-occupancy payments, continuing legal and carrying costs, and litigation against the tenant and guarantors. A potential sale was under negotiation, but there is no assurance of a sale or successful recovery.
- The Vue, Ohio: 2019 annual base rent was reduced to $783,000 from $1.6 million after occupancy weakness. June occupancy was 77.0%; the company’s land position is subordinate to $67.4 million of owner/operator mortgage debt.
- Manahawkin, New Jersey: The redevelopment property was approximately 52.4% occupied. The company estimated its share of required capital expenditures at $10–12 million and expects redevelopment and stabilization after 2022; funding may require joint-venture cash and partner contributions.
- A Philadelphia supermarket tenant advised in late July it intended to cease operations. A Crystal Lake, Illinois retail property had been vacant for two years. Management cautioned that tenant defaults, foreclosures, distressed sales or impairment charges could adversely affect results.
- Other exposures include interest-rate sensitivity on the variable-rate credit facility and potential swap termination liabilities. A 100-basis-point rate increase would raise estimated annual credit-line interest by approximately $322,000. The company also disclosed related-party service arrangements with Majestic Property Management, affiliated with the vice-chairman and certain executives.
Important facts for investors to verify
- Progress and costs associated with the Round Rock bankruptcy, litigation and prospective sale, including whether rent or use-and-occupancy payments resume.
- The Vue owner/operator’s rent and mortgage-payment performance, given the reduced ground rent and the subordinate land position.
- Manahawkin redevelopment timeline, leasing, capital needs and joint-venture funding commitments.
- Replacement leasing or other outcomes for the Philadelphia supermarket and Crystal Lake vacant property.
- Credit-facility borrowing-base availability, covenant compliance, debt maturities and financing costs following the July amendment.
- Whether operating cash flow and AFFO support the dividend and planned acquisitions, while noting that FFO and AFFO are non-GAAP supplemental measures.