OLP

Business Context and Reporting Period

Company: One Liberty Properties, Inc. (OLP)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: OLP is a self-administered, self-managed Real Estate Investment Trust (REIT) incorporated in Maryland. It acquires, owns, and manages a geographically diversified portfolio of retail, industrial, office, flex, and health/fitness properties, primarily under long-term net or ground leases. As of December 31, 2009, the company owned 71 properties (plus one 50% tenancy in common interest) and participated in five joint ventures owning five additional properties, totaling approximately 5.4 million square feet across 27 states.

Key Financial Metrics

Occupancy Rate: 98.6% (excluding joint ventures) as of December 31, 2009.
2010 Contractual Rental Income: Approximately $39.8 million.

Material Changes vs. Prior Period

• Revenue Growth: Rental revenues increased 8.3% to $39.0 million, driven primarily by $3.4 million in revenue from twelve properties acquired in 2008. This was partially offset by reduced rent from tenants affected by the recession and a lease termination.
• Net Income Surge: Net income increased significantly to $19.6 million from $4.9 million in 2008. This was largely due to a $7.3 million income from discontinued operations (compared to a $5.1 million loss in 2008), which included a $5.8 million gain on the sale of two properties and a $0.9 million gain from a troubled debt restructuring involving the conveyance of five Circuit City properties to the mortgagee.
• Discontinued Operations: The company reclassified eight properties to discontinued operations. Five properties formerly leased to Circuit City were conveyed to the mortgagee in July 2009 via deeds-in-lieu of foreclosure, releasing the company from $8.7 million in debt obligations.
• Debt Reduction: Total mortgage indebtedness decreased by approximately $35 million year-over-year due to payoffs and the extinguishment of debt via the Circuit City conveyance.
• Acquisition Activity: No properties were acquired in 2009 due to unfavorable prices and a lack of traditional mortgage financing. However, a community shopping center was acquired on February 24, 2010, for $23.5 million.

Guidance, Outlook, Risks, and Unusual Items

Outlook and Guidance

• 2010 Contractual Income: Expected to be approximately $39.8 million, including income from the February 2010 shopping center acquisition.
• Dividend Policy: The company intends to distribute at least 90% of taxable income to maintain REIT status. In 2009, dividends consisted of 90% stock and 10% cash to conserve capital. A quarterly cash dividend of $0.30 per share was declared in March 2010.
• Acquisition Strategy: Growth is currently constrained by the credit environment. The company relies on its credit facility to fund acquisitions, which are then refinanced with long-term mortgages.

Material Risks

• Credit Facility Maturity: The $62.5 million revolving credit facility matures on March 31, 2010, with $27 million outstanding. The company has negotiated a modification to extend the facility to 2012 but reduce capacity to $40 million and increase interest rates. Failure to finalize this could force asset sales.
• Tenant Concentration: Approximately 59% of 2010 contractual rental income is derived from retail tenants. Five tenants (Haverty Furniture, Office Depot, Ferguson Enterprises, DSM Nutritional Products, and L-3 Communications) account for a significant portion of income. The bankruptcy of Circuit City in 2008 highlighted the risk of retail tenant defaults.
• Refinancing Risk: Approximately $64.9 million of mortgage debt matures between January 2010 and December 2014. Tight credit markets may force the company to sell properties at disadvantageous terms or convey them to lenders if refinancing is unavailable.
• Impairment Risk: Declines in real estate values could trigger additional impairment charges, reducing net income and equity.

Unusual Items

• Settlement with Former President: In November 2009, the company settled civil litigation against its former president, receiving $900,000 in cash and stock valued at $51,000, recorded as income.
• Lease Termination Fee: Received a $1.9 million fee from a retail tenant in 2009, net of write-offs, recorded as lease termination fee income.

Investor Verification Checklist

• Credit Facility Status: Verify the final execution of the credit facility modification and extension agreed upon with the lending syndicate, given the March 31, 2010 maturity date.
• Debt Maturities: Confirm the refinancing status of the $4.5 million mortgage that matured on March 1, 2010, and the $9 million mortgage due in April 2010.
• Tenant Financial Health: Monitor the financial stability of major tenants, particularly Haverty Furniture (10.8% of 2010 income) and Office Depot (11.1% of 2010 income), given the recessionary impact on retail.
• Dividend Composition: Review future dividend declarations to determine if the company will continue the 90% stock/10% cash distribution model or shift to all-cash, impacting liquidity and share count.
• Impairment Indicators: Assess the company's quarterly reviews for indicators of impairment, especially regarding properties in economically distressed areas or with tenants facing financial distress.