ONE LIBERTY PROPERTIES, INC. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Financial statements are unaudited; amounts below are in millions except per-share data. One Liberty is a self-managed REIT focused on retail, industrial, flex, and health and fitness properties, many under long-term leases. It owned 120 properties in 30 states, with approximately 98.4% occupancy.
Financial performance
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $18.0 | $16.1 | $51.6 | $47.2 |
| Operating income | $8.2 | $7.7 | $22.8 | $23.1 |
| Operating margin | 45.5% | 47.6% | 44.2% | 48.8% |
| Net income attributable to One Liberty | $4.3 | $3.8 | $20.0 | $15.3 |
| Diluted earnings per share | $0.24 | $0.22 | $1.15 | $0.92 |
| NAREIT FFO per share | $0.51 | $0.50 | $1.39 | $1.39 |
| AFFO per share | $0.53 | $0.51 | $1.46 | $1.43 |
For the nine months, rental income rose 6.4% and total revenue rose 9.3%. Higher acquisition-related income and tenant reimbursements supported growth, while operating expenses increased 19.1%; operating income consequently declined 1.0%. Q3 operating income increased 7.0%, while the operating margin narrowed.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $21.9, down from $23.3 in 2015. Investing used $81.9, principally for real estate purchases; financing provided $65.0. Cash and cash equivalents were $17.6 at period-end, compared with $12.7 at year-end 2015.
- Gross mortgages were $400.8 at September 30, 2016, compared with $334.4 at December 31, 2015; the credit facility balance was $22.8, versus $18.3. Mortgage debt was fixed-rate after swaps, with a 4.36% weighted-average rate and 9.7-year weighted-average remaining maturity. Mortgage principal and scheduled amortization totaling $64.0 were due from October 2016 through 2019.
- The $75.0 revolving credit facility matures December 2018. The company reported covenant compliance at September 30. Available liquidity at November 3 was approximately $56.1, including $3.9 of cash net of required deposits and $52.2 of undrawn facility capacity.
- Nine-month cash distributions declared were $1.23 per common share, versus $1.17 in 2015. The Q3 dividend was $0.41 per share.
Material changes and notable items
- During the first nine months, the company acquired properties for approximately $118.6 and sold properties for gross proceeds of $40.6, recognizing $9.8 of net real estate gains. Acquisitions were funded through mortgage financings, equity issuance, and credit-facility activity.
- Q3 acquisitions totaled $71.3. Management estimated these four properties would generate $1.6 of rental income per quarter beginning October 1, alongside quarterly depreciation of $0.393 and mortgage interest of $0.197. This is an estimate, not full-year company guidance.
- Nine-month earnings included $9.8 of property-sale gains and $0.356 of easement income from a Colorado Department of Transportation matter; a further $0.116 gain related to partial land condemnation. The company may seek additional compensation, with no assurance of recovery.
- Sports Authority filed for bankruptcy and vacated a property in June 2016; the company recorded $0.190 of related bad-debt expense for the nine months. The former Pathmark property also remained vacant following the tenant’s bankruptcy and lease rejection. No impairment was recorded for either property as of September 30.
- Interest-rate swaps had a reported liability fair value of $9.5 and an early-termination liability estimate of approximately $10.3. Nine-month other comprehensive loss was $5.3, primarily reflecting derivative valuation changes. Management estimated that $2.168 of accumulated hedge losses would be reclassified into interest expense over the following 12 months.
Outlook, risks, and contingencies
Management expects operating cash flow to fund substantially all operating needs, including dividends and mortgage amortization, but may use cash, credit borrowings, refinancing, equity issuance, or property sales if cash flow is insufficient. Management generally intends to refinance, extend, or repay mortgages maturing in 2017–2019, but provides no assurance of success. Contractual rental income for the 12 months after September 30 was approximately $65.9, excluding specified straight-line rent, lease-intangible amortization, and the company’s share of unconsolidated venture rent.
Risks include tenant creditworthiness, vacancies and lease renewals, acquisition availability and pricing, and retail-sector exposure to e-commerce. Retail tenants represented approximately 49.4% of contractual rental income. Lease expirations are concentrated in 2022 (24.3% of contractual rent) and 2027 and thereafter (28.6%). Three ground-lease investments carried a $34.0 maximum exposure to loss and were subordinate to $150.7 of owner/operator mortgage debt. The filing also discloses related-party service and property-management arrangements. All mortgage debt was fixed-rate after swaps, but the variable-rate credit facility remains exposed to interest-rate changes.
Important facts for investors to verify
- Whether acquisitions, occupancy, and leasing at the former Sports Authority and Pathmark properties support future rental growth.
- Debt maturities, refinancing plans, credit-facility availability, and covenant compliance, particularly for 2017–2019 maturities.
- Cash flow available for dividends after debt service, property investment, and other capital needs; FFO and AFFO are supplemental, non-GAAP measures and are not substitutes for cash flow.
- Tenant concentration and lease-expiration exposure, including the 2022 and 2027-and-later periods.
- Potential losses tied to subordinated ground-lease investments, interest-rate swaps, and the unresolved Colorado compensation matter.