ONE LIBERTY PROPERTIES, INC. — Q1 2015 Form 10-Q
Business context and reporting period. One Liberty Properties is a self-managed REIT focused on diversified commercial real estate, much of it under long-term net leases. For the three months ended March 31, 2015, it owned 116 properties in 30 states; portfolio occupancy was approximately 99.1%. The financial statements are unaudited, and management cautions that quarterly results are not necessarily indicative of full-year results. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Total revenue | $15.326 | $14.402; up 6.4% |
| Operating income | $7.467 | $7.337; up 1.8% |
| Operating margin | 48.7% | 51.0% |
| Net income attributable to One Liberty | $7.856 | $3.273 |
| Diluted EPS | $0.48 | $0.20 |
| FFO / AFFO | $6.875 / $7.322; $0.42 / $0.45 per diluted share | $6.897 / $7.224; $0.43 / $0.45 per diluted share |
| Cash from operations | $6.335 | $7.245 |
| Cash and cash equivalents at period-end | $23.153 | $20.344 at Dec. 31, 2014 |
| Mortgages / credit line at period-end | $304.808 / $28.250 | $292.049 / $13.250 at Dec. 31, 2014 |
| Common dividend declared | $0.39 per share | $0.37 per share |
Q1 revenue included a $0.650 lease termination fee. Operating expenses increased 11.2% to $7.859, faster than revenue, including higher real estate, acquisition, and general and administrative costs. Net income also included a $5.392 gain on sale of real estate and a $0.960 purchase-price fair-value adjustment. FFO excludes these items; AFFO was flat per diluted share year over year.
Investing activities used $25.132, principally for real estate purchases and joint-venture investment; financing activities provided $21.606. At May 4, 2015, reported available liquidity was approximately $57.4, including $6.7 of cash net of the required deposit balance and $50.7 available under the revolving facility.
Material changes and significant transactions
- Acquired four property interests for an aggregate stated purchase price of $37.5, including two properties financed with $14.5 of mortgage debt and the purchase of a joint-venture partner’s 50% interest in a Nebraska property. These acquisitions contributed $0.181 of Q1 rental income; management estimated approximately $1.1 of quarterly rental income from them beginning April 1, 2015.
- Sold a Cherry Hill, New Jersey property in January for net proceeds of approximately $16.025, recording a $5.392 gain. Related debt payoff, swap termination, and financing-cost write-off generated reported costs, including $0.568 of prepayment costs and $0.249 of deferred financing-cost write-off.
- A Georgia property was acquired by its mortgagee through foreclosure in January; the filing does not provide a separate quantified operating impact.
- Mortgage interest expense declined 5.4% to $3.642 despite higher average mortgage debt, reflecting lower weighted-average mortgage rates. Credit-line interest fell to $0.097, partly following an amendment that reduced its rate from 4.75% to approximately 1.92% in Q1.
Outlook, risks, and other disclosures
- Management reported 2015 contractual rental income of approximately $56.5 under leases in effect at March 31, excluding certain straight-line rent, lease-intangible amortization, and unconsolidated joint-venture rent. This is a contractual base-rent measure, not earnings guidance.
- The $75 revolving credit facility matures December 31, 2018. The company reported compliance with its covenants at March 31. Management expects operating cash flow to cover substantially all operating needs, including dividends and scheduled mortgage amortization, and generally intends to refinance or extend mortgages maturing in 2015–2017; no assurance was given.
- Mortgage debt was $304.8 across 60 loans secured by 83 properties. Scheduled amortization and maturities total $81.3 through 2017, including $60.8 due at maturity. Management intends to use operating cash flow for amortization and refinancing, cash, or credit availability for amounts not refinanced.
- Lease rollover is a key exposure: leases representing 19.5% of 2015 contractual rent expire in 2022, and 30.1% expire in 2025 or later, assuming tenants do not exercise renewal options. Management also cited tenant credit, reletting, acquisition economics, and retail e-commerce as risks.
- Ground-lease land in Sandy Springs, Georgia and Lakemoor, Illinois is collateral for the owner/operators’ mortgages, subordinating the company’s land positions to those loans. The disclosed maximum exposure to loss for these variable-interest entities was $16.337.
- Interest-rate swaps hedge variable-rate mortgages; their $3.851 fair-value liability was recorded in accrued liabilities. Management estimated a 100-basis-point increase in rates would raise annual interest cost on the $28.3 credit-line balance by approximately $0.283. It also estimated swap fair-value sensitivity of roughly $5.2–$5.4 for a 100-basis-point rate move, with no effect on net income or cash from that sensitivity.
- The company had no material off-balance-sheet arrangements, apart from disclosures concerning the ground-lease properties. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the sharp increase in GAAP net income reflects the Cherry Hill sale gain and Nebraska fair-value remeasurement, rather than recurring property operations.
- Whether acquired assets deliver the estimated $1.1 of quarterly rent, and how acquisition financing, expenses, and lease terms affect returns.
- Coverage of the $0.39 quarterly dividend by recurring cash flow, especially given Q1 operating cash flow of $6.335 and cash distributions of approximately $6.320.
- Refinancing plans and covenant headroom for the $81.3 of mortgage amortization and maturities due through 2017, as well as use of the revolving facility.
- Tenant credit and lease-renewal prospects, including the significant 2022 and 2025-and-later expirations and the risks attached to subordinated ground-lease land.