ONE LIBERTY PROPERTIES, INC. — Q1 2013 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. One Liberty is a self-managed REIT with a diversified portfolio of net-leased properties. At quarter-end, it owned 94 properties, and unconsolidated joint ventures owned seven, across 29 states. Occupancy was approximately 98.4% by square footage.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Rental income | $12.102 million | $10.758 million; up 12.5% |
| Operating income | $6.429 million | $5.783 million; up 11.2% |
| Net income attributable to One Liberty | $3.450 million | $3.223 million; up about 7% |
| Income from continuing operations | $3.449 million | $2.962 million; up about 16% |
| Basic / diluted EPS | $0.22 / $0.22 | $0.22 / $0.21 |
| Operating cash flow | $6.544 million | $5.051 million |
| Cash and cash equivalents | $16.385 million | $14.577 million at Dec. 31, 2012 |
| Mortgages payable | $226.402 million | $225.971 million at Dec. 31, 2012 |
| Revolving credit outstanding | $3.500 million | None at Dec. 31, 2012 |
| Total assets / total liabilities | $486.512 million / $248.065 million | $481.166 million / $243.107 million at Dec. 31, 2012 |
| Quarterly dividend declared per share | $0.35 | $0.33 |
Operating margin was approximately 53.1%, compared with 53.8% a year earlier. The filing does not provide a conventional net interest margin. Mortgage debt had a 5.29% weighted-average rate after swaps, with maturities from 2013 to 2037. The company reported $98.8 million of available liquidity as of May 1, 2013, comprising $23.8 million of cash and $75 million of credit availability, subject to required deposit balances.
Material changes and notable items
- Rental income increased primarily because of twelve properties acquired since February 2012, along with rent commencing on another property and tenant reimbursements.
- Operating expenses rose 14.0% to $5.673 million, including higher depreciation, real estate expenses, and acquisition costs. Acquisition costs increased to $151,000 from $43,000.
- Mortgage interest expense rose to $3.118 million from $2.913 million as average mortgage debt increased; the weighted-average mortgage rate declined to 5.53% from 6.05%. Lower credit-line interest offset much of the mortgage-interest increase.
- Q1 2012 included $319,000 of real estate sale gain and $264,000 of income from discontinued operations; neither was recorded in Q1 2013. Accordingly, continuing-operations income is a more comparable indicator than total net income.
- In March 2013, a 90%-owned consolidated joint venture acquired a North Carolina retail property for $4.64 million. It is fully net-leased to Kmart through 2018.
- After quarter-end, the company completed the sale of its 90% interest in a Plano, Texas joint venture for $13.5 million on April 16, 2013, and estimated a gain of approximately $1.9 million.
Liquidity, outlook, and risks
Management expects operating cash flow to fund substantially all operating needs, including dividends, with cash and the credit facility available as needed. The $75 million revolving facility matures March 31, 2015, bears interest at the greater of 90-day LIBOR plus 3% or 4.75%, and had no balance outstanding as of May 3, 2013. The company reported compliance with its covenants at March 31.
Mortgage principal of approximately $57.2 million, including scheduled amortization, is payable from April 2013 through 2015. Management generally intends to refinance or extend loans maturing in that period, but gave no assurance it will do so successfully. The filing provides no earnings or acquisition guidance.
Key risks include acquiring properties on acceptable terms, leasing properties, tenant payment capacity, refinancing debt maturities, and interest-rate exposure. The company uses interest-rate swaps as hedges; it estimated that a 100-basis-point change in forward rates would change swap fair value by approximately $1.32 million to $1.46 million, without affecting net income or cash. A further $593,000 was expected to be reclassified from other comprehensive income as increased interest expense over the following 12 months.
Investor verification priorities
- Confirm the completion economics and realized gain on the April 2013 Plano joint-venture sale; the approximately $1.9 million gain was an estimate in this filing.
- Review maturities and refinancing progress for the $57.2 million of mortgage principal payable through 2015, particularly stated 2014 and 2015 balloon amounts.
- Assess tenant and lease exposure, including Kmart’s lease expiration in 2018 and the reported 98.4% occupancy rate.
- Reconcile available liquidity with credit-facility deposit requirements and covenant limits, and monitor the facility’s March 2015 maturity.
- Evaluate dividend coverage against operating cash flow and the REIT requirement to distribute at least 90% of ordinary taxable income.