OLP

Business Context and Reporting Period

Company: One Liberty Properties, Inc. (OLP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: OLP is a self-administered and self-managed Real Estate Investment Trust (REIT) owning a geographically diversified portfolio of retail, industrial, office, and flex properties, primarily under long-term net leases. As of September 30, 2009, the Company owned 73 properties and participated in five joint ventures owning five additional properties, totaling 78 properties across 28 states.

Key Financial Metrics

Note: Total Debt includes $202,293 in mortgages payable, $9,069 in mortgages payable for properties held for sale, and $27,000 in line of credit outstanding.

Material Changes vs. Prior Period

• Revenue Growth: Rental income increased 12.3% ($3.2 million) for the nine months ended September 30, 2009, compared to the prior year, primarily driven by twelve properties acquired in 2008. This was partially offset by a decrease in rent from tenants affected by the recession.
• Discontinued Operations: Significant activity occurred in discontinued operations. The Company recognized an $897,000 gain on troubled mortgage restructuring resulting from the conveyance of five former Circuit City properties to the mortgagee via deeds-in-lieu of foreclosure in July 2009. This eliminated $8.7 million in debt obligations.
• Expense Increases: Real estate expenses increased 252% year-over-year for the nine-month period, largely due to taxes and utilities for vacant properties and a new lease structure requiring the Company to pay taxes on one property.
• Dividend Structure: To preserve cash, the Company reduced its quarterly dividend by 38.8% in January 2009 and adopted a policy of paying dividends partially in cash and partially in common stock shares.

Outlook, Risks, and Management Commentary

• Liquidity and Credit Facility: The Company's $62.5 million revolving credit facility matures on March 31, 2010, with $27 million currently outstanding. Management is negotiating a new facility but notes uncertainty regarding terms and availability due to the tight credit market. Failure to secure a new facility may require property sales to repay debt.
• Acquisition Strategy: Due to the lack of liquidity in the mortgage market, the Company has adopted a conservative acquisition strategy, relying on operating cash flow and the credit facility rather than new mortgage debt.
• Subsequent Events: In October 2009, the Company sold two properties for a total sales price of approximately $31.8 million, resulting in gains of approximately $5.8 million. These sales provided approximately $11 million in net cash.
• Market Risk: The Company utilizes interest rate swaps to manage exposure to variable rates on its credit facility. A 1% increase in interest rates would decrease annual net income by approximately $270,000 based on current outstanding balances.

Investor Verification Checklist

• Credit Facility Renewal: Verify the status of negotiations for the $62.5 million credit facility maturing March 31, 2010, and the likelihood of securing favorable terms.
• Discontinued Operations: Confirm the final accounting treatment and cash impact of the October 2009 property sales and the July 2009 Circuit City property conveyance.
• Dividend Sustainability: Assess the long-term viability of the reduced dividend policy and the mix of cash versus stock distributions in the current economic climate.
• Tenant Concentration: Review the impact of the recession on remaining tenants, particularly given the recent vacancy issues and bad debt expense increases.
• Debt Maturities: Examine the schedule of mortgage maturities ($1.7 million due in Q4 2009) and the Company's ability to refinance or repay without significant asset sales.