One Liberty Properties, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited. One Liberty is a REIT with 126 properties in 31 states, primarily industrial, retail, restaurant, health and fitness, and theater properties. Portfolio occupancy was 96.9% at June 30 and August 3, 2020.
Financial results and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Rental income, net | $20.861m | $20.719m | $42.100m | $41.874m |
| Operating income | $8.228m | $9.754m | $21.287m | $18.971m |
| Net income attributable to One Liberty | $2.284m | $4.112m | $10.110m | $8.083m |
| Diluted EPS | $0.10 | $0.20 | $0.49 | $0.39 |
| NAREIT FFO | $8.206m | $8.984m | $17.455m | $18.419m |
| AFFO | $9.469m | $9.466m | $19.649m | $19.477m |
| Operating cash flow | — | $18.119m | $18.311m |
Q2 rental income increased 0.7%, while same-store rental income fell 2.6%; first-half rental income increased 0.5%, while same-store income declined 1.7%. Acquisitions supported reported revenue, offset by same-store weakness and dispositions. Q2 net income and FFO fell year over year; first-half net income benefited from a $4.252m property-sale gain, while first-half FFO declined. Q2 operating income also reflected the absence of the prior-year $1.099m sale gain.
- Assets and liquidity: Total assets were $799.6m at June 30, versus $774.6m at year-end 2019. Cash and cash equivalents were $18.6m; cash, cash equivalents and restricted cash totaled $19.3m. Management reported $74.6m of available liquidity as of August 3, including $10.0m cash and $64.6m undrawn credit-facility availability.
- Debt: Mortgages were $448.7m gross and the credit line was $30.9m gross at June 30. Mortgage debt after swaps carried a 4.19% weighted-average rate and a 7.6-year weighted-average remaining term. The credit facility rate was 1.93% at June 30; its average rate for H1 was 2.86%. The company reported covenant compliance at June 30.
- Cash flows and investment: H1 investing activities used $21.4m, including $28.5m for real estate purchases, partly offset by $7.1m net sale proceeds. Financing activities provided $10.7m. Cash increased $7.4m during the period.
- Equity and distributions: Total equity was $282.9m, down from $292.0m at year-end. The declared quarterly dividend was $0.45 per share; half was paid in cash and half in stock. The company temporarily suspended the dividend reinvestment feature of its plan in June.
Material developments, outlook and risks
- COVID-19 rent relief: In Q2, the company deferred and accrued $3.145m of rent and permanently forgave $81,000 under its elected concession accounting policy; it separately forgave $582,000 of payments treated as lease modifications. A further $304,000 forgiveness was under negotiation, subject to definitive documentation. Management estimated net rental-income reductions from agreed abatements, after lease-extension effects, of $406,000 for Q2 and $23,000 for H2 2020.
- Collections and tenant stress: Q2 rent collections were $14.0m, or 77.1% of rent due before and 97.2% after deferrals and abatements. July base-rent collections were 92.7% before and 96.6% after relief. Four tenants filed for bankruptcy protection from May through early August, covering ten properties; their scheduled H2 2020 base rent was approximately $1.1m. Management warned that additional relief, tenant failures and weaker cash flows remain possible.
- Property transactions: The company sold an Onalaska, Wisconsin retail property in February for net proceeds of $7.093m and recognized a $4.252m gain. A Knoxville, Tennessee property sold July 1 for $18.0m; management expected a $10.3m gain before swap-termination costs. Proceeds were used in part to repay its $8.5m mortgage and reduce credit-facility borrowings.
- Funding and capital allocation: A July 8 credit-facility amendment temporarily increased the operating-expense borrowing limit from $10m to $20m through February 28, 2021. Excess above $10m outstanding for this purpose must be repaid by March 1, 2021. No mortgage maturity was scheduled in 2020; $8.5m was due in 2021. Management estimated its share of Manahawkin redevelopment costs at approximately $15m and was evaluating funding sources.
- Unusual items and exposure: H1 debt prepayment costs were $1.065m, including $775,000 from accelerated recognition related to a Knoxville-property interest-rate swap. Swap liabilities were $6.788m on the balance sheet at June 30; termination liability including accrued interest was approximately $7.223m. Management estimated another $1.633m would be reclassified from accumulated other comprehensive loss to interest expense over the following 12 months.
- Other risks and guidance: Management provided no specific earnings or FFO guidance. It said the pandemic was expected to negatively affect operations and cash flows in the coming months, with uncertain longer-term effects. Risks include tenant defaults and lease vacancies, retail-sector disruption, access to capital, covenant compliance, interest rates and the ability to maintain dividends. The filing also discloses ongoing Round Rock guaranty litigation; claimed mitigated damages exceed $14m, but recovery is uncertain and legal costs will continue.
Important facts for investors to verify
- Subsequent rent collections, actual repayment of deferred rent, and the status and outcomes of the bankrupt tenants.
- Whether the reported 96.9% occupancy and rent-collection levels hold, and whether further abatements or deferrals are granted.
- Dividend policy and cash-versus-stock mix, including the financial and tax effects of stock distributions.
- Credit-facility availability, covenant headroom, March 2021 operating-borrowing repayment requirement, and upcoming mortgage maturities.
- Final Knoxville sale proceeds, gain and swap-termination accounting, and funding needs for the Manahawkin redevelopment.
- Progress and potential recovery in the Round Rock guaranty litigation, for which the filing gives no assurance of a recovery.