One Liberty Properties, Inc. — 2017 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2017. One Liberty Properties is a self-managed REIT that owns and manages a geographically diversified portfolio of primarily net-leased industrial, retail, restaurant, fitness, theater and other properties. At year-end it owned 113 properties and had interests in joint ventures owning five properties, across 30 states. Portfolio occupancy was 99.6%; weighted average remaining lease term was 8.4 years.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $75.9 million | $70.6 million | +7.5% |
| Net rental income | $68.2 million | $64.2 million | +6.4% |
| Operating income | $32.0 million | $31.7 million | +0.9% |
| Income before property-sale gains | $14.4 million | $14.4 million | Approximately flat |
| Net income attributable to One Liberty | $24.1 million | $24.4 million | -1.1% |
| Diluted earnings per share | $1.28 | $1.39 | -7.9% |
| FFO per diluted share | $1.94 | $1.90 | +2.1% |
| AFFO per diluted share | $2.09 | $1.99 | +5.0% |
| Cash from operating activities | $44.6 million | $31.4 million | +$13.2 million |
Net income included a $9.8 million net gain on real estate sales, compared with $10.1 million in 2016. Operating expenses rose 13.0% to $44.0 million, including higher depreciation and real estate expenses. The company recorded a $153,000 impairment loss on a property sold during the year. The annual dividend declared was $1.74 per share, up from $1.66; the quarterly dividend was increased to $0.45 per share beginning with the December 2017 declaration.
At December 31, 2017, total assets were $742.6 million, cash and cash equivalents were $13.8 million, and total equity was $298.5 million. Mortgage debt was $392.5 million gross, with a 4.22% weighted average interest rate and 8.8-year weighted average remaining term; the company also had $9.4 million outstanding on its revolving credit facility. Management reported compliance with facility covenants. Cash used in investing was $23.4 million and cash used in financing was $24.8 million. Cash declined by $3.7 million during the year.
Material changes versus the prior comparable period
- Revenue growth reflected acquisitions, including four properties purchased for $43.2 million in 2017, and higher tenant reimbursements. Four properties were sold, generating a $9.8 million net gain.
- Net income attributable to the company edged lower despite revenue growth; diluted EPS fell from $1.39 to $1.28, while FFO and AFFO per diluted share increased. Weighted-average diluted shares rose to 18.0 million from 16.9 million.
- Operating cash flow increased to $44.6 million from $31.4 million. Investing outflow narrowed substantially, largely because real estate purchases were lower than in 2016.
- Mortgage interest expense increased 3.2% as average debt outstanding rose, partly offset by a lower average mortgage rate. Mortgage debt at year-end was broadly stable versus 2016.
- Management re-leased four vacant properties or portions of properties. It reported approximately $739,000 of 2017 carrying expenses for these spaces and expected about $1.2 million of rental income from them in 2018.
Outlook, risks, contingencies and unusual items
- Contractual base rent for 2018 was approximately $67.7 million, with an 8.4-year weighted average remaining lease term. This is contractual rent under leases in effect at year-end, not a company earnings forecast; it excludes certain straight-line rent, intangibles and joint-venture rent.
- As of March 5, 2018, reported available liquidity was approximately $102.8 million, including $6.7 million of cash net of the required facility deposit and up to $96.1 million of revolver availability, subject to borrowing-base requirements. The $100 million credit facility matures December 31, 2019.
- Scheduled company mortgage principal payments total approximately $111.4 million for 2018–2022, including $20.4 million in 2018 and $43.8 million in 2022. Management expects to refinance, extend or repay maturities using operating cash, financing, available cash and the credit facility, but gives no assurance of successful refinancing.
- Retail exposure remains significant: retail tenants account for 40.2% of 2018 contractual rental income. Five tenants together account for 22.9%; Haverty Furniture is the largest at 7.1%. The filing highlights e-commerce competition, tenant distress, lease renewals and vacancy/re-leasing costs as risks.
- Kmart closed two stores at joint-venture properties; the company’s share of their annual base rent was $510,000, with leases expiring in 2018 and 2019. Four other retail tenants had ceased or planned to cease operations while continuing to pay rent. Management warned that rent cessation or inability to re-let could adversely affect results.
- One Liberty sold a Fort Bend, Texas retail property on January 30, 2018 for gross proceeds of $9.2 million and repaid its $4.4 million mortgage. Management anticipated a roughly $2.4 million gain in first-quarter 2018, of which approximately $800,000 would be attributable to non-controlling interests.
- Other commitments include approximately $4.2 million of remaining expansion and improvement spending at the L-3 property in Hauppauge, New York; the company also paid a $3.0 million tenant-improvement reimbursement in January 2018. A contemplated redevelopment of its Manahawkin, New Jersey shopping center could require significant capital, but the filing provides no clear project budget.
- Three ground-leased apartment land parcels have a combined carrying value and maximum stated exposure of approximately $34.0 million, subordinated to $158.2 million of tenant/operator mortgage debt. Related-party arrangements include fees paid to Majestic Property Management, an affiliate of the vice chairman; 2017 fees were $2.7 million, plus $216,000 of office expenses.
- The Tax Cuts and Jobs Act was enacted in December 2017. Management stated that the effects of changes to non-REIT tax provisions could be unexpected. The company also noted possible exposure to interest-rate changes, geographic concentration, tenant defaults, environmental liabilities, and REIT qualification and distribution requirements.
Most important facts for investors to verify
- Review the source and sustainability of earnings: 2017 net income included substantial property-sale gains, while income before gains was nearly unchanged.
- Check tenant credit, concentration and lease rollover—especially retail exposure, Kmart-related leases, and the 2022 lease-expiration concentration of 21.3% of 2018 contractual rental income.
- Assess debt refinancing capacity and covenant headroom, focusing on the 2018–2022 mortgage schedule and the December 2019 revolver maturity.
- Compare dividends with recurring cash generation. AFFO is a non-GAAP measure and the company cautions it is not a substitute for operating cash flow or a complete measure of cash available for distributions.
- Track the expected 2018 Fort Bend sale gain, required L-3 capital spending, and any decision or financing plan for the Manahawkin redevelopment.
- Consider related-party service and insurance arrangements, as well as the ground-lease collateral structure and associated exposure.