One Liberty Properties, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. One Liberty is a self-managed REIT with 113 properties in 30 states; reported occupancy was approximately 99.2%. Financial amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $15.19 | $12.97 | $45.25 | $36.81 |
| Operating income | $7.01 | $6.58 | $23.00 | $19.03 |
| Net income attributable to One Liberty | $2.62 | $3.21 | $10.53 | $14.40 |
| Diluted EPS | $0.16 | $0.20 | $0.64 | $0.93 |
| FFO | $7.46 | $6.26 | $22.79 | $18.59 |
| AFFO | $7.79 | $6.48 | $22.59 | $19.65 |
Revenue increased 17.1% in Q3 and 22.9% for the nine-month period, primarily from properties acquired in 2013–14. Operating income rose 6.4% and 20.9%, respectively; approximate operating margins were 46.1% and 50.8%, versus 50.8% and 51.7% in the comparable periods. Net income and EPS declined, reflecting higher interest costs and, for the nine-month comparison, the absence of 2013 joint-venture sale gains. Q3 also included a $1.09 million impairment charge. Nine-month revenue included a $1.27 million lease termination fee.
Operating cash flow was $23.40 million, compared with $19.41 million in the prior-year period. Investing activities used $28.39 million, mainly for property purchases; financing activities provided $2.62 million. Cash and cash equivalents were $14.26 million at quarter-end. The company declared distributions of $0.37 per share for Q3, up from $0.35; nine-month distributions were $1.11 per share versus $1.05.
Financial position, debt and liquidity
- At September 30, total assets were $590.74 million, total liabilities $340.79 million and total equity $249.95 million.
- Mortgages payable were $293.75 million, up from $278.05 million at year-end 2013; the revolving credit balance was $21.25 million, down from $23.25 million. Mortgages had a reported weighted-average rate of 5.07% after swaps and a 9.1-year weighted-average remaining term.
- The $75 million revolving facility matures March 31, 2015. The company was negotiating a replacement facility; renewal was not assured. It reported compliance with facility covenants at September 30.
- Management reported approximately $72.8 million of available liquidity at November 3, after the subsequent property sale and acquisitions: approximately $18.0 million of cash net of the required deposit balance and $54.8 million available on the credit facility.
- Mortgage amortization and maturities due from October 2014 through 2016 totaled $56.64 million, including $40.43 million due at maturity. Management intended generally to refinance or extend maturities, but gave no assurance it could do so.
Material changes, outlook and risks
- During the first nine months, the company acquired properties for approximately $33.2 million, including a Georgia apartment-complex land interest leased under a long-term triple-net ground lease and an industrial property acquired through a 95%-owned joint venture.
- After quarter-end, it sold its Parsippany, New Jersey property for approximately $38.6 million net of closing costs, recording an approximately $10 million financial-statement gain. It repaid the associated approximately $13.4 million mortgage and incurred a $1.58 million prepayment penalty. The company was pursuing possible Section 1031 tax deferral.
- After quarter-end, it also acquired an Indianapolis theater for $9 million and a Philadelphia supermarket for $7.7 million, partly financed with a $4.64 million mortgage. Aggregate annual base rent at acquisition was approximately $1.28 million.
- A tenant did not renew the Morrow, Georgia lease, and re-leasing efforts were unsuccessful. With the non-recourse mortgage matured November 1, the company recorded a $1.09 million impairment and intended to surrender the property to the mortgagee. Its adjusted net book value at September 30 was $1.47 million.
- Contractual rental income for 2014 was approximately $54.7 million at September 30. Leases representing 7.5% of that amount were scheduled to expire in 2015 and 16.8% in 2022; the schedule assumes tenants do not exercise renewal options and included the subsequently sold Parsippany property.
- Interest expense rose 24.0% in Q3 and 26.3% for the nine months, mainly because of higher average borrowings. Management highlighted risks from tenant payment or renewal failures, difficulty acquiring accretive properties, retail-sector e-commerce changes, refinancing and interest-rate movements. Most mortgage debt was fixed-rate or swapped to fixed rates; the revolving facility remained variable-rate.
- The company uses interest-rate swaps as cash-flow hedges. A 100-basis-point change in forward rates was estimated to change swap fair value by approximately $4.7–$4.8 million, with no stated impact on net income or cash. The filing estimated $1.73 million of accumulated hedge losses would be reclassified to interest expense over the next 12 months.
- Related-party arrangements include management and property services provided by an entity owned by the board’s vice chairman, and the sale of BRT Realty Trust shares to a related party. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether the company secures a replacement credit facility before the March 2015 maturity and meets near-term mortgage maturities.
- Execution and financial impact of the Parsippany sale, including the reported gain, prepayment penalty and any Section 1031 deferral.
- Outcome of the Morrow property surrender and any remaining obligations or costs.
- Tenant retention, re-leasing prospects and actual rent exposure as significant lease expirations approach.
- Whether acquisition-driven revenue growth translates into sustainable per-share earnings and cash available for distributions, given higher interest expense and the dividend level.