ONE LIBERTY PROPERTIES, INC. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. One Liberty Properties is a self-managed REIT owning 114 properties across 30 states, primarily retail, industrial, flex, and health and fitness assets. Portfolio occupancy was approximately 98.6% by square footage.
Financial performance and liquidity
- Revenue: $16.34 million, up 6.6% from $15.33 million. Rental income rose 8.4% to $15.06 million; tenant reimbursements increased to $1.29 million. The 2015 comparison included a $650,000 lease termination fee, with no such fee in 2016.
- Profit and margins: Operating income was $7.02 million, down 6.0%; operating margin was approximately 42.9%, versus 48.7%. Net income attributable to One Liberty was $3.29 million, versus $7.86 million; diluted EPS was $0.18 versus $0.48. The decline largely reflects lower property-sale gains and the absence of a prior-year purchase-price fair-value adjustment. Basic EPS was $0.19 versus $0.48.
- FFO and AFFO: NAREIT FFO was $6.88 million, or $0.40 per share, versus $6.88 million, or $0.42 per share. AFFO was $7.48 million, or $0.44 per share, versus $7.32 million, or $0.45 per share. These are non-GAAP measures and are not substitutes for cash flow or net income.
- Cash flow: Operating activities provided $5.59 million, down from $6.34 million. Investing used $4.65 million, compared with $25.13 million; financing used $3.14 million, versus providing $21.61 million. Cash declined $2.20 million to $10.54 million.
- Debt and liquidity: At March 31, gross mortgages were $325.2 million and gross credit-line borrowings were $29.85 million. Mortgage debt, after swaps, was fixed-rate, with a 4.60% weighted-average rate and 9.7-year weighted-average remaining term. The $75 million revolving facility matures December 2018; the company was covenant-compliant. Available liquidity at May 2 was approximately $57.1 million, including $49.6 million of facility availability and $7.5 million of cash net of the required deposit balance. Scheduled mortgage amortization and maturities for April 2016 through 2019 total $70.0 million.
- Distributions: The declared quarterly dividend rose to $0.41 per share from $0.39. Q1 AFFO per share exceeded the declared dividend, while FFO per share was below it.
Material changes and notable items
- The company acquired two adjacent, fully occupied multi-tenant industrial properties in Greenville, South Carolina for $17.05 million. Management estimated quarterly rental income of $314,000 beginning April 1. The leases expire from 2017 through 2021; purchase-price allocations remained preliminary.
- In February, it sold eight retail properties in Louisiana and Mississippi for $13.75 million, recording a $787,000 gain and paying off $7.80 million of related mortgage debt. The sale also generated debt prepayment costs.
- Gross mortgage financing and refinancing proceeds were $23.4 million; the debt had a 3.5% weighted-average rate and 13.3-year weighted-average remaining term.
- Rental income and reimbursements increased, but operating expenses rose 18.7% to $9.33 million, including higher depreciation and real estate expenses. Interest expense increased 9.0% to $4.08 million.
- Other comprehensive loss was $4.00 million, primarily reflecting losses on interest-rate derivatives. The reported derivative liability was $8.20 million; the estimated early-termination liability was approximately $8.75 million.
Outlook, risks, and contingencies
- No formal full-year earnings or FFO guidance is provided. Contractual rental income for 2016 was approximately $58.5 million, subject to lease expirations, options, tenant performance, and other adjustments. This excludes $450,000 of base rent from Sports Authority and the company’s share of unconsolidated joint-venture rent.
- Sports Authority filed for Chapter 11 bankruptcy in March. The company recorded $153,000 of bad-debt expense, is seeking a replacement tenant, and reported no impairment charge at quarter-end. A separate former Pathmark supermarket property remained vacant following the tenant’s bankruptcy and lease rejection.
- A contract to sell a Killeen, Texas property for approximately $3.0 million net of closing costs became non-terminable without penalty on April 20. The company expected a Q2 closing and an approximately $1.0 million gain; this was an expectation, not a completed sale at filing.
- Key risks include tenant defaults and vacancies, lease renewals and re-leasing, acquiring properties on accretive terms, refinancing or extending upcoming mortgage maturities, and retail-sector exposure to e-commerce. Management stated that it intends to refinance or extend 2016–2019 maturities where feasible, with no assurance of success.
- Ground-lease positions in Sandy Springs, Georgia and Lakemoor, Illinois are subordinate to approximately $60.1 million of tenant/operator mortgage debt. The company reported maximum exposure to loss of $16.1 million, primarily the land carrying value.
- Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the company replaces the Sports Authority tenant and collects rent or incurs further impairment or leasing costs.
- Execution and expected gain on the Killeen sale, and the performance of the newly acquired Greenville properties.
- Refinancing plans and liquidity available for the $70.0 million of scheduled mortgage amortization and maturities through 2019.
- Tenant and lease concentration, including the 2022 lease-expiration concentration of 23.1% of 2016 contractual rental income, and renewal-option assumptions.
- Dividend sustainability against recurring cash generation; assess FFO and AFFO alongside GAAP cash flows, capital needs, and debt service.
- Potential effects of derivative valuations and settlement terms, and the risks associated with the subordinated ground-lease investments.