One Liberty Properties, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited consolidated results. One Liberty Properties (OLP) is a self-managed REIT with 119 properties in 30 states; occupancy was approximately 97.3% by square footage.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Total revenue | $18.472 million | $16.344 million; up 13.0% |
| Operating income | $7.235 million | $7.018 million; up 3.1% |
| Operating margin | 39.2% | 42.9% |
| Net income attributable to OLP | $2.865 million; $0.15 diluted EPS | $3.287 million; $0.18 diluted EPS |
| NAREIT FFO / diluted share | $8.606 million / $0.47 | $6.883 million / $0.40 |
| AFFO / diluted share | $9.408 million / $0.51 | $7.477 million / $0.44 |
| Cash from operating activities | $9.743 million | $6.012 million |
| Cash and cash equivalents | $13.241 million at March 31 | $17.420 million at December 31, 2016 |
| Debt | $396.641 million gross mortgages and $5.0 million gross line-of-credit borrowings | Gross mortgages were $399.192 million and line borrowings $10.0 million at December 31, 2016 |
| Common dividend declared | $0.43 per share | $0.41 per share |
At May 2, 2017, reported available liquidity was approximately $99.6 million: $4.6 million in cash, net of the required facility deposit, plus up to $95 million available under the revolving facility, subject to borrowing-base requirements. The $100 million facility matures December 31, 2019; OLP reported compliance with its covenants at March 31. Mortgage debt had a 4.3% weighted-average rate after swaps and a 9.0-year weighted-average remaining term.
Changes versus the prior-year quarter
- Revenue growth primarily reflected 11 properties acquired in 2016, a new lease commencement, and percentage rent. These gains were partly offset by 2016 property sales, vacancies, and a $263,000 write-off of hhgregg straight-line rent.
- Operating expenses rose 20.5%, led by higher depreciation and amortization, including a $646,000 write-off of hhgregg tenant origination costs, and increased real estate expenses.
- Interest expense increased 7.7% to $4.389 million as higher average mortgage balances outweighed a lower average mortgage rate. Operating income grew more slowly than revenue, and operating margin declined.
- Net income and EPS were lower partly because Q1 2016 included a $787,000 property-sale gain. That quarter also included $423,000 of debt prepayment costs; neither item occurred in Q1 2017.
- Operating cash flow increased, while investing cash use fell to $0.301 million; financing cash use was $13.621 million, including a $5 million line-of-credit repayment and cash distributions to shareholders.
Outlook, risks, and notable items
- Management gave no specific full-year earnings or FFO guidance in the provided filing text. It expected operating cash requirements, including debt service and dividends, to be funded principally from operations. It estimated approximately $11 million of building expansions and improvements, including a contractual $7.8 million for the L-3 Communications property in Hauppauge through 2018.
- Management reported approximately $65.1 million of 2017 contractual rental income under leases in effect at March 31. Retail tenants represented approximately 43.1% of contractual rental income; management cited e-commerce and tenant credit as risks.
- hhgregg filed for Chapter 11 in March 2017; it leased two OLP properties and contributed less than 1.5% of rental income in each comparison period. OLP recorded $296,000 of bad debt expense, the $263,000 rent-receivable write-off, and the $646,000 tenant-cost write-off. Management said no impairment was then required for those properties.
- Payless ShoeSource filed for bankruptcy in April 2017. The filing also discusses other financially troubled or former tenants, including Kmart, Sports Authority, and Pathmark, and the risk of rent loss or extended vacancies.
- On May 8, 2017, OLP sold its vacant former Sports Authority property in Greenwood Village, Colorado, for approximately $9.1 million net of closing costs. Management anticipated a gain of approximately $6.5 million in Q2 2017.
- Mortgage amortization and maturities totaled $66.225 million for April 2017 through 2020, including $26.224 million due at maturity. OLP intended generally to refinance, extend, or repay maturing loans, but gave no assurance of success.
- Three ground-lease positions had a $34.0 million carrying value and maximum exposure to loss, subordinate to $150.7 million of tenant/operator mortgage debt. OLP reported $888,000 of ground-lease rental income for Q1.
- OLP’s interest-rate swaps hedge variable-rate mortgages. A 100-basis-point move in forward rates would change swap fair value by an estimated $8.7 million to $9.4 million, with no stated impact on net income or cash. A 100-basis-point increase in the revolving-facility rate would raise estimated next-12-month interest costs by about $50,000.
- Related-party arrangements include a services agreement with Majestic Property Management Corp., which is owned by OLP’s vice-chairman. OLP paid Majestic $665,000 in Q1 2017, plus $54,000 for its share of direct office expenses; the filing describes review and approval by board committees and independent directors.
Investor verification priorities
- Track rent collection, lease status, and re-leasing prospects for hhgregg, Payless, and other troubled or vacant tenant locations.
- Verify completion and funding of the Colorado property sale and whether the anticipated Q2 gain is realized.
- Assess refinancing capacity and covenant headroom against the disclosed 2017–2020 mortgage maturities and 2019 credit-facility maturity.
- Monitor the estimated $11 million improvement program, including the L-3 expansion and the conditional $3 million Regal Cinemas reimbursement obligation.
- Review the ground-lease subordination exposure and the adequacy of liquidity if tenant/operator mortgage or property conditions deteriorate.
- Compare recurring cash generation and FFO/AFFO with distributions; these non-GAAP REIT measures do not equal GAAP cash flow or establish that all capital and dividend needs are funded.