One Liberty Properties, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet figures are as of March 31, 2012. Dollar amounts below are in millions unless stated otherwise. One Liberty is a self-managed REIT focused on diversified commercial real estate, much of it under long-term net leases. It owned 92 properties and held interests in six properties through unconsolidated joint ventures; the portfolio spanned 29 states and was approximately 97.6% occupied by square footage.
Financial performance and condition
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Rental revenue | $11.641 | $11.103; up 4.8% |
| Operating income | $6.436 | $6.463; down 0.4% |
| Net income attributable to One Liberty | $3.223 | $2.732; up 18.0% |
| Diluted earnings per share | $0.21 | $0.21; continuing-operations EPS was $0.21 vs. $0.20 |
| Operating margin | 55.3% | 58.2% |
| Net cash from operating activities | $4.983 | $5.258 |
| Cash and cash equivalents | $17.197 | $12.668 at Dec. 31, 2011 |
| Mortgages and loan payable | $213.252 | $205.849 at Dec. 31, 2011 |
| Revolving credit outstanding | $27.100 | $20.000 at Dec. 31, 2011 |
| Total assets / total equity | $474.201 / $218.329 | $460.736 / $218.947 at Dec. 31, 2011 |
Net income included a $319,000 gain from contributing the Plano, Texas property to a joint venture. Q1 2011 included $180,000 of income from discontinued operations, related to a property sold in May 2011. Cash used in investing activities was $10.571 million, primarily reflecting $10.989 million of real estate purchases; financing activities provided $10.117 million. The company declared a $0.33-per-share quarterly distribution, unchanged from Q1 2011.
Available liquidity at March 31 was approximately $45.1 million, comprising $17.2 million cash and $27.9 million available under the credit facility, before giving effect to the facility’s required $6 million deposit balance. The company reported covenant compliance. Mortgages and loan payable had a 5.5% weighted-average fixed rate and maturities from 2012 to 2037. The filing estimates their fair value at $223.1 million, about $9.8 million above carrying value.
Material changes and management commentary
- Rental revenue rose mainly because of properties acquired since January 2011; this was partly offset by the February 2012 contribution of Plano, which ended its rental income to the company after January.
- Operating expenses increased 12.2% to $5.205 million. General and administrative expense rose 18.1%, including higher compensation and related-party costs; real estate expense also included legal costs for the Plano joint venture.
- Interest expense fell 6.2% to $3.416 million, reflecting lower average credit-line balances and rates, and lower average mortgage balances and rates. Deferred-financing-cost amortization also declined.
- The company acquired four properties for approximately $9.8 million. The acquisitions were cash-funded, fully occupied, and leased to single tenants under long-term net leases.
- In February, the company contributed its Plano site to a joint venture with Trammell Crow Company for a 90% interest; the partner contributed $1.5 million for 10%. The venture contemplates redeveloping the site into up to two Class A office buildings. The company recorded a $319,000 gain and reported $12.083 million invested, its stated maximum exposure to loss.
Outlook, risks and contingencies
- No earnings or revenue guidance was provided. Management said operating needs, including dividends, are expected to be funded substantially from operating cash flow; results for the quarter are not necessarily indicative of full-year results.
- The $55 million revolving facility matures March 31, 2013. The company was discussing an extension with its lenders but gave no assurance it would succeed. At March 31, $27.1 million was drawn; the stated rate was the greater of 90-day LIBOR plus 3% or 5.5%.
- Mortgage principal of $73.3 million was scheduled to be payable from April 2012 through 2014, including $22.8 million due at maturity in 2012. Management expected to address maturity balances primarily through refinancing; failure to refinance could require additional borrowing, equity issuance, or property sales, potentially on unfavorable terms.
- Tenant nonpayment, leasing and lease-expiration risks remain. The allowance for doubtful accounts was $352,000, versus $335,000 at year-end; Q1 bad-debt expense was $17,000, compared with $311,000 a year earlier.
- Interest-rate swaps had a reported fair-value liability of $934,000. Management estimated that a 1% increase in forward rates would reduce swap fair value by about $1.5 million and a 1% decrease would increase it by about $1.1 million; it said these changes would not affect net income or cash. Estimated $505,000 of hedge losses was expected to be reclassified into interest expense over the next 12 months.
- The company stated it had no off-balance-sheet arrangements, and reported effective disclosure controls with no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Whether the credit facility was extended beyond its March 2013 maturity and on what terms.
- How the company refinances or repays mortgage maturities, particularly the $22.8 million due in 2012 and the scheduled 2013–2014 balances.
- Whether operating cash flow can sustain the $0.33 quarterly distribution; reported diluted EPS was $0.21 per share, and the filing does not provide a funds-from-operations dividend coverage figure here.
- Progress, costs, financing and execution risks for the Plano redevelopment, including the company’s $12.083 million maximum exposure to loss in that venture.
- Tenant credit, occupancy and lease rollover trends, and the eventual purchase-price allocations for the Q1 acquisitions, which were preliminary.