One Liberty Properties, Inc. — Q2 2011 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2011, compared with the same periods in 2010; balance-sheet comparisons are with December 31, 2010. One Liberty is a self-managed REIT with a diversified portfolio of primarily net-leased properties. At June 30, it owned 84 properties, including three vacant properties and one 50% tenancy-in-common interest; its joint ventures owned five properties. The portfolio spanned 29 states and occupancy was approximately 95.6%.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Rental income | $11.241 million | $10.323 million | $22.343 million | $20.079 million |
| Operating income | $6.243 million | $5.589 million | $12.706 million | $11.021 million |
| Net income | $5.142 million | $2.399 million | $7.874 million | $4.820 million |
| Basic EPS | $0.36 | $0.21 | $0.57 | $0.42 |
| Operating margin | 55.5% | 54.1% | 56.9% | 54.9% |
Rental income increased 8.9% in Q2 and 11.3% in the first half, primarily from properties acquired since February 2010. Operating income rose 11.7% and 15.3%, respectively. Net income included a $1.24 million gain from settling mortgage debt and, in discontinued operations, a $932,000 gain on a property sale. These unusual gains materially contributed to the increase in reported earnings.
Cash flow: First-half operating cash flow was $9.789 million, versus $8.880 million in 2010. Investing activities provided $8.286 million, largely from $11.544 million of net property-sale proceeds, compared with $11.667 million used in 2010. Financing activities used $14.360 million. Cash increased $3.715 million to $11.447 million.
Debt and liquidity: At June 30, mortgages payable were $198.174 million, down from $215.308 million at year-end; the line of credit was $4.5 million, down from $36.2 million. Mortgage debt carried a 6% weighted-average fixed rate and matured from 2012 to 2037. The $55 million revolving facility matures March 31, 2013; its rate is the greater of 90-day LIBOR plus 3% or 6%. Management reported approximately $62.5 million of available liquidity, comprising cash, securities and unused facility capacity, without giving effect to the $6 million deposit balance required by the facility. The company reported covenant compliance.
Material changes, outlook and risks
- In February 2011, the company issued 2.7 million shares for net proceeds of approximately $40.569 million. Proceeds helped repay two mortgages and reduce the credit-line balance; the offering increased shares outstanding.
- In May, the company sold an Office Depot-leased California property for net proceeds of $11.544 million and recognized a $932,000 gain. It also acquired an Illinois retail property for $2.325 million. A joint venture acquired a property in March for $3.2 million.
- Robb & Stucky filed for bankruptcy in February and vacated its property at the end of June. The company recorded first-half bad-debt expense of $508,000, versus $79,000 in 2010, and said it would receive no future rent from that tenant. It paid off the related $8.893 million mortgage for $7.634 million, recognizing a $1.24 million gain.
- First-half cash distributions declared were $0.66 per share, versus $0.60 in 2010. The board declared a $0.33 quarterly dividend, paid July 6.
- Management expects operating cash flow to meet substantially all operating needs, including dividends. Approximately $48.5 million of mortgage debt comes due through 2013; repayment is expected to rely primarily on operating cash flow, cash and mortgage financings/refinancings. Failure to refinance could require additional borrowing, equity issuance or property sales on unfavorable terms.
- Key risks include tenant defaults, vacancies and the ability to re-lease properties, refinancing and interest-rate exposure. The company disclosed no off-balance-sheet arrangements. It gave no specific earnings or revenue guidance. On July 29, after quarter-end, it acquired a FedEx shipping-center property in North Carolina for $3.975 million cash.
Important facts for investors to verify
- How much of earnings growth is sustainable after excluding the debt-settlement and property-sale gains.
- The leasing plan and expected downtime or costs for the property vacated by Robb & Stucky, and any further tenant-credit deterioration.
- Sources and terms for refinancing approximately $48.5 million of mortgage maturities through 2013, including available liquidity after required facility deposits.
- Whether property acquisitions, debt reduction and the dividend level can be supported by recurring operating cash flow.
- Potential effects of the expanded share count on per-share results and distributions.