One Liberty Properties, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. One Liberty is a self-managed REIT with 123 properties in 30 states and approximately 97.9% occupancy. Its portfolio is weighted toward industrial properties (46.0% of contractual rental income) and retail (36.7%).
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Rental income, net | $21.2 million | $19.5 million |
| Operating expenses | $11.9 million | $11.0 million |
| Operating income | $9.2 million | $11.0 million, including a $2.4 million property-sale gain |
| Net income attributable to One Liberty | $4.0 million | $5.9 million |
| Diluted EPS | $0.19 | $0.30 |
| NAREIT FFO / diluted share | $9.4 million / $0.48 | $9.6 million / $0.50 |
| AFFO / diluted share | $10.0 million / $0.51 | $10.1 million / $0.53 |
| Cash provided by operating activities | $8.1 million | $9.9 million |
| Cash, cash equivalents and restricted cash | $13.7 million at March 31 | $16.7 million at December 31, 2018 |
| Debt, gross | $443.5 million mortgages; $6.0 million credit line | $423.1 million mortgages; $30.0 million credit line at December 31, 2018 |
Rental income increased 8.3%, reflecting 2018 acquisitions net of dispositions and a $456,000 increase at same-store properties. Operating expenses rose 8.9%, including higher real estate expenses and general and administrative costs. Interest expense increased 13.0% to $4.9 million, mainly due to higher average debt balances and credit-line rates. The prior-year period included a $2.4 million sale gain; excluding that gain, Q1 2018 operating income was approximately $8.6 million.
Gross mortgage debt carried a weighted average rate of 4.28% after swaps and an 8.5-year weighted average remaining term. Scheduled mortgage amortization and maturities total $97.2 million from April 2019 through 2022, including $46.4 million in 2022. The $100 million revolving facility matures December 31, 2019; $6.0 million was drawn at quarter-end, and the company was in covenant compliance. At May 2, liquidity was reported as $98.1 million, including $7.1 million cash net of the required facility deposit and $91.0 million of borrowing availability, subject to borrowing-base requirements.
The company declared a $0.45-per-share quarterly dividend, approximately $8.8 million in total, paid April 5, 2019. The dividend exceeded Q1 GAAP earnings per share; the filing does not provide a dividend-coverage forecast.
Outlook, risks and unusual items
- Management expects operating needs, debt service and dividends to be funded principally from operating cash flow. It expects $1.5 million of property expansion and improvement costs and estimates its share of Manahawkin redevelopment capital expenditures at $10–15 million; funding may include venture cash, partner contributions and the credit facility. No earnings or FFO guidance is provided.
- Management plans to refinance, extend or repay mortgages maturing through 2022, but gives no assurance refinancing will be available on acceptable terms. Facility availability is subject to borrowing-base tests and the line matures at year-end 2019.
- The Round Rock, Texas assisted-living tenant filed for bankruptcy and rejected its lease. The company reports no expected future rent from that tenant and estimates carrying costs above $1.0 million during the remaining nine months of 2019, excluding principal payments and legal fees. Sale or reletting is constrained by licensing requirements and local competition.
- The Vue apartment complex’s occupancy was 70.7%; 2019 annual ground rent was reduced to $783,000 from $1.6 million in 2018. The company’s $13.9 million land position is subordinate to the owner/operator’s $67.4 million mortgage.
- The Kmart Clemmons lease was assigned to and assumed by an ESL affiliate as of May 2019; rent was paid through May, but continued payment is not assured. A Crystal Lake retail property remains vacant. Manahawkin redevelopment occupancy was 51.8%, with potential cash-flow shortfalls to be funded by venture cash or partner contributions.
- Two ground-lease owner/operators are VIEs that the company does not consolidate. The company’s maximum exposure is the $24.4 million land carrying value, subordinated to $106.9 million of tenant mortgage debt. This exposure and tenant distress could result in lost rent, carrying costs, foreclosure or impairment.
- Interest-rate swaps hedge variable-rate mortgages; their aggregate early-termination liability was approximately $1.1 million. A 100-basis-point rate move was estimated to change the swaps’ fair value by about $5.2–5.5 million, without affecting net income or cash. A 100-basis-point change on the quarter-end credit-line balance would change annual interest costs by about $60,000.
- Adoption of the new lease accounting standard on January 1, 2019 had no material financial-statement impact; it resulted in recognition of a $4.4 million ground-lease right-of-use asset and liability.
Key investor verification points
- Assess lease collection, vacancy and recovery prospects at Round Rock, The Vue, Kmart and Crystal Lake, and the cost and funding needs of Manahawkin redevelopment.
- Verify the refinancing plan and available borrowing capacity ahead of the December 2019 credit-facility maturity and the stated mortgage maturities.
- Reconcile dividend sustainability with operating cash flow, FFO/AFFO, capital spending and debt amortization.
- Monitor whether rent growth and acquisitions can offset higher operating and interest expenses; compare results excluding the prior-year property-sale gain.
- Review tenant and ground-lease concentration risks, including subordinated land interests and the $24.4 million maximum exposure to the two ground-lease VIEs.