One Liberty Properties, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing was signed March 16, 2020. The company is a self-managed REIT focused on long-term leased industrial, retail, restaurant, fitness, theater and other properties.
Business context and portfolio
- At year-end, the company owned 122 properties and held interests in joint ventures owning four more, across 31 states, with approximately 10.5 million square feet in total.
- Owned-property occupancy was 98.1%, down from 99.2% in 2018. Joint-venture property occupancy was 59.3%.
- Industrial properties provided 50.1% of 2020 contractual rental income; retail provided 33.9%. Contractual rental income for 2020 was approximately $72.0 million, with a 6.6-year weighted-average remaining lease term.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $84.7 million | $79.1 million | Up 7.1% |
| Net rental income | $83.8 million | $78.8 million | Up 6.4% |
| Operating income | $40.2 million | $36.3 million | Up 10.6% |
| Net income attributable to One Liberty | $18.0 million | $20.7 million | Down 12.8% |
| Diluted earnings per share | $0.88 | $1.05 | Down $0.17 |
| FFO / diluted share | $36.6 million / $1.84 | $38.9 million / $2.02 | FFO down 5.9% |
| AFFO / diluted share | $39.4 million / $1.98 | $41.1 million / $2.13 | AFFO down 4.1% |
- Reported operating margin was approximately 47.4% and net margin approximately 21.3%; operating income includes real-estate sale gains, so these are not measures of recurring property margins.
- Net cash from operations was $36.2 million, down from $42.6 million. Investing activities used $12.9 million, versus $59.7 million in 2018. Financing activities used $28.1 million; cash distributions to common stockholders were $35.4 million.
- Cash and cash equivalents were $11.0 million at year-end. As of March 5, 2020, reported available liquidity was approximately $67.7 million, including $7.3 million of cash net of the required facility deposit and up to $60.4 million available under the credit facility, subject to borrowing-base requirements.
- Gross mortgage debt was $440.3 million; the credit facility balance was $11.45 million. Mortgage debt had a 4.21% weighted-average rate and an 8.1-year weighted-average remaining term. Mortgages are generally non-recourse, subject to standard carve-outs. Mortgage debt-to-total-assets was 56.8%.
- Scheduled mortgage principal payments are $13.5 million in 2020, $23.0 million in 2021, $46.1 million in 2022, $30.2 million in 2023 and $62.8 million in 2024. The $100 million revolving facility matures December 31, 2022; $11.45 million was drawn at year-end. The company reported compliance with its covenants.
Material changes and unusual items
- Eight industrial properties were acquired in 2019 for $49.3 million. The company sold five properties or parcels, including an assisted-living facility, recording $4.3 million of net real-estate gains. Debt prepayment costs were $827,000.
- Acquisitions contributed $7.9 million to the year-over-year increase in rental income; dispositions reduced it by $2.7 million, while same-store rental income was nearly flat. The 2019 results also included $950,000 of lease-termination fees, versus $372,000 in 2018.
- Interest expense rose 11.0% to $19.8 million, primarily as average mortgage debt increased. Real-estate expenses rose 21.4% to $14.1 million. Equity earnings from unconsolidated joint ventures fell to $16,000 from $1.3 million; 2018 also included $2.1 million of gains from joint-venture property sales.
- Fourth-quarter 2019 revenue was $22.4 million and net income attributable to the company was $4.8 million, or $0.23 per diluted share. Fourth-quarter 2018 revenue was $20.3 million and attributable net income was $150,000, or a loss of $0.01 per share; that quarter included a $1.7 million property-sale loss.
- The company adopted lease-accounting guidance in 2019. Tenant reimbursements are included in rental income under the new presentation; this should be considered when comparing reported revenue and expenses across periods.
Outlook, commentary and risks
- Management expects to fund operating requirements, debt service and dividends primarily from operating cash flow, cash, equity proceeds and facility borrowings. No earnings or FFO guidance was provided.
- The company estimated its 50% share of Manahawkin, New Jersey redevelopment capital expenditures at $12–$15 million, with work expected to proceed through 2022. Occupancy and cash flow at the joint-venture property had declined; management expected cash and property cash flow to cover carrying costs and debt service but gave no assurance.
- In February 2020, the company acquired two industrial properties for a combined approximately $28.3 million, with leases expiring in 2027 and 2034. It also sold an Onalaska, Wisconsin retail property and anticipated a roughly $4.3 million gain before a $290,000 prepayment charge.
- Management identified COVID-19 as a risk that could disrupt tenants’ operations, sales and supply chains and reduce rent receipts. Other key risks include tenant defaults or non-renewals, retail competition from e-commerce, lease expirations, refinancing and interest-rate exposure, property-value impairment, geographic and tenant concentration, and redevelopment execution.
- At year-end, $107.7 million of debt referenced LIBOR; $96.2 million of mortgage exposure was hedged with swaps, while the facility borrowing was unhedged. Management cited uncertainty around LIBOR’s expected phaseout after 2021.
- The Vue ground-lease rent was reduced to $783,000 for 2019 from $1.6 million in 2018, with staged increases toward approximately $1.3 million from April 2021. The company’s $13.9 million land position is subordinate to the tenant/operator’s $67.4 million mortgage.
- The company is pursuing a lawsuit seeking more than $10 million from the Round Rock property lease guarantor; it warned of significant legal expense and gave no assurance of recovery. It also pays an affiliate-owned management company under a services agreement: $2.8 million in 2019, plus $216,000 in office expenses.
- Annual cash distributions were $1.80 per share, unchanged from 2018. Approximately 27% of 2019 distributions were characterized as return of capital for tax purposes. The board declared a $0.45 quarterly dividend in March 2020.
Important facts for investors to verify
- Tenant credit and renewal prospects, especially the 2022 and 2023 lease expirations, representing 19.8% and 11.4% of 2020 contractual rental income, respectively.
- Refinancing plans and available borrowing capacity for upcoming maturities, redevelopment spending and other capital needs.
- Manahawkin redevelopment costs, occupancy, leasing progress and joint-venture funding requirements.
- COVID-19 effects on tenant rent payments and the collectability of straight-line rent receivables.
- The sustainability of the dividend relative to operating cash flow and recurring capital requirements; FFO and AFFO are non-GAAP measures and do not equal cash available for distribution.
- Progress and potential costs or recoveries from the Round Rock litigation, and the financial condition of The Vue operator.
- Related-party service fees and other affiliated transactions, along with the effect of lease-accounting changes on period-to-period comparisons.