ONE LIBERTY PROPERTIES, INC. — 2012 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. One Liberty Properties is a self-managed REIT owning and operating a geographically diversified portfolio, primarily under long-term net leases. At quarter-end, it owned 91 properties and had interests in six properties held by unconsolidated joint ventures; the portfolio spanned 29 states and was approximately 98.8% occupied by square footage.
Financial results and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Rental income | $11.792 million | $10.755 million | $34.570 million | $32.309 million |
| Operating income | $6.564 million | $5.856 million | $19.123 million | $18.081 million |
| Operating margin | 55.7% | 54.5% | 55.3% | 56.0% |
| Net income attributable to One Liberty | $18.414 million | $2.765 million | $27.386 million | $10.639 million |
| Basic EPS | $1.24 | $0.19 | $1.85 | $0.75 |
| Cash from operations | — | $15.085 million | $15.935 million |
Q3 net income included $15.050 million of gains on property sales; nine-month net income included $17.254 million of such gains. Continuing-operations income was $3.106 million in Q3 and $9.543 million for the nine months. Cash distributions declared were $0.33 per share quarterly and $0.99 per share for the nine months, unchanged from 2011.
At September 30, 2012, cash was $15.434 million; mortgages and loan payable were $210.545 million and the line of credit balance was $6.350 million. Total liabilities were $232.555 million and total equity was $236.503 million. Net cash provided by operating activities was $15.085 million; investing activities provided $8.265 million, including real estate sale proceeds, while financing activities used $20.584 million. Ending cash increased by $2.766 million from year-end 2011.
Material changes versus prior period
- Nine-month rental income increased 7.0%, mainly from acquisitions made since July 2011; the Plano, Texas property contribution to a joint venture partly offset the increase. Q3 rental income rose 9.6%.
- Nine-month operating expenses increased 8.6%, below the 7.0% increase in revenue only narrowly when viewed as a whole; operating income rose 5.8%. Interest expense increased 2.2% for the nine months, principally reflecting higher average mortgage and credit-line balances.
- Property-sale gains drove most of the increase in reported earnings. The company sold three properties during the first nine months for net proceeds of $24.823 million and aggregate gains of $17.254 million. A fourth property sold October 18, after quarter-end, for $5.0 million; the company estimated a gain of approximately $1.65 million.
- Unconsolidated joint-venture investments increased to $17.312 million from $5.093 million at year-end 2011, including the Plano contribution.
Outlook, liquidity, risks and unusual items
- No quantitative earnings or revenue guidance was provided. Management expects operating cash flow to meet substantially all operating needs, including dividends; otherwise it may use cash or draw on the credit facility.
- The amended revolving facility permits up to $75 million of borrowings, subject to its borrowing base, and expires March 31, 2015. Its interest-rate floor was lowered to 4.75%. The company reported covenant compliance at September 30. At October 31, it reported approximately $83.3 million of available liquidity, including $11.1 million cash and $72.2 million available under the facility; this amount includes $6 million required to be maintained with lenders.
- Mortgage debt was approximately $210.5 million, secured by 57 properties. Rates ranged from 3.2% to 8.8%, with a 5.34% weighted average; maturities ran from 2013 to 2037. Approximately $49.3 million was payable through 2014, including $30.9 million of principal due at maturity in 2014. Management expects to refinance maturity balances, but warns that unsuccessful refinancing could require additional borrowing, equity issuance or property sales on unfavorable terms.
- In September, the company refinanced approximately $22.85 million of maturing debt on 11 Haverty Furniture properties with a $25 million mortgage at 5.125%, maturing in 2032, subject to the lender’s option to call it after 2022.
- The August 2012 at-the-market offering authorizes up to $50 million in aggregate sales. Through September, 120,844 shares were sold, generating $2.296 million net of commissions, before $143,000 of offering costs.
- Risk factors include tenant inability to pay rent, leasing or re-leasing properties on favorable terms, and debt refinancing. Interest-rate swaps expose the company to fair-value changes; management estimated that a 1% increase or decrease in forward rates would change swap fair value by approximately $(0.9) million or $1.3 million, respectively, without affecting net income or cash.
- Other notable items include a $199,000 insurance settlement relating to a claim against the former president, a $319,000 gain associated with the Plano joint-venture contribution, and a 2011 $1.240 million gain on settlement of debt that did not recur in 2012.
Important facts for investors to verify
- Underlying recurring earnings and cash generation apart from the substantial property-sale gains, including the contribution of acquisitions and joint ventures.
- The refinancing plan and available funding for the $49.3 million of mortgage principal payable through 2014, especially the 2014 maturities.
- Whether tenant occupancy, rent collection and lease renewals remain strong; management identifies tenant credit and re-leasing as key risks.
- The actual proceeds, costs and gain from the October 2012 property sale, which was subsequent to quarter-end and estimated in the filing.
- The effect of future share issuance under the $50 million ATM program on per-share results and distributions.