One Liberty Properties, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This annual report also provides unaudited quarterly data, including fourth-quarter results.
Business context
One Liberty is a self-managed REIT that owns and manages a geographically diversified portfolio of primarily long-term, net-leased retail, industrial, office, flex, and other properties. At year-end it owned 89 properties, including one vacant property and a 50% tenancy-in-common interest, and held interests in five unconsolidated joint ventures owning five properties. The portfolio spanned 29 states. Company-owned properties were 97.6% occupied; joint-venture properties were 100% occupied. Weighted average remaining lease terms were 8.3 years for company properties and 8.4 years for joint-venture properties.
Key financial and operating metrics
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $45.24 million | $40.98 million |
| Operating income | $25.50 million | $22.53 million |
| Income from continuing operations | $12.51 million | $8.19 million |
| Net income attributable to One Liberty | $13.72 million | $9.31 million |
| Diluted earnings per share | $0.96 | $0.81 |
| Funds from operations (FFO) | $22.83 million; $1.61 per diluted share | $18.16 million; $1.58 per diluted share |
| Adjusted FFO (AFFO) | $21.43 million; $1.51 per diluted share | $17.03 million; $1.48 per diluted share |
| Net cash provided by operating activities | $21.80 million | $18.91 million |
| Cash and cash equivalents at year-end | $12.67 million | $7.73 million |
| Total assets | $460.74 million | $444.62 million |
| Mortgages payable | $205.85 million | $215.31 million |
| Line of credit | $20.00 million | $36.20 million |
| Total liabilities | $241.79 million | $265.44 million |
| Cash distributions per common share | $1.32 | $1.23 |
Operating margin was approximately 56.4% of revenue in 2011, compared with 55.0% in 2010. The filing cautions that FFO and AFFO are supplemental performance measures, not substitutes for GAAP net income or cash flow and not measures of liquidity.
Fourth quarter: 2011 revenue was $11.75 million and net income was $3.09 million, versus $10.44 million and $1.64 million, respectively, in fourth-quarter 2010.
Year-end available liquidity was reported as approximately $48.1 million, consisting of $12.7 million in cash, $396,000 in available-for-sale securities, and $35 million of unused credit-facility capacity. The $55 million revolving facility matures March 31, 2013; $20 million was drawn at year-end. Its interest rate was the greater of 90-day LIBOR plus 3% or 5.5%. The company reported compliance with facility covenants at year-end.
Company mortgage debt was non-recourse subject to standard carve-outs, with stated rates of 4.5%–8.8%. Scheduled principal maturities were $33.5 million in 2012, $9.8 million in 2013, and $36.1 million in 2014. Joint ventures had approximately $18.9 million of mortgage debt, including $13.6 million maturing in 2015. Management expected to refinance or extend debt due in 2012–2014 but gave no assurance of success.
Material changes versus 2010
- Revenue increased 10.4%, primarily from rent on properties acquired since February 2010 and tenant reimbursements. Management cited partial offsets from the former Robb & Stucky property and lease amendments.
- Net income attributable to the company increased 47.5%; continuing-operations income rose 52.8%. Results included a $1.24 million gain from settling an $8.89 million mortgage balance for $7.63 million. Thus, reported earnings growth includes a non-recurring debt-settlement gain.
- Operating expenses increased 6.9% to $19.74 million. General and administrative expense rose 10.7%, including higher fees under the related-party services agreement; depreciation and amortization increased with acquisitions.
- Interest expense declined 6.2% to $13.68 million, chiefly as lower credit-line balances and mortgage rates offset higher financing-cost amortization.
- Operating cash flow rose to $21.80 million. Investing activities used $18.44 million, including $29.41 million for real estate and improvements, partly offset by $11.54 million of sale proceeds. Financing activities provided $1.58 million, including net proceeds from a $40.57 million common-stock offering; cash increased $4.94 million.
- The company acquired six properties for a total of $28 million and sold an Office Depot property for net proceeds of $11.54 million, recognizing a $932,000 gain. The February 2011 offering of 2.7 million shares raised approximately $40.6 million net; proceeds helped repay $7.7 million of mortgages and reduce the credit-line balance by $26.2 million.
- Occupancy of company properties eased to 97.6% from 98.5%. The company’s common shares outstanding increased from 11.21 million at year-end 2010 to 14.21 million at year-end 2011.
Outlook, risks, contingencies, and unusual items
- Management’s stated objective is to grow cash available for stockholder distributions through acquisitions, financing, active portfolio management, leasing, and selective property sales. The filing provides no quantified earnings or FFO guidance.
- 2012 contractual rental income was approximately $45.2 million, excluding straight-line rent, certain lease-intangible amortization, and the company’s share of joint-venture rent. About 60.7% was expected from retail tenants; approximately 90.7% was covered by leases providing for periodic or CPI-based rent increases.
- Tenant and sector concentration remain important risks: retail tenants generated approximately 61.7% of 2011 rental revenue. Five tenants—Haverty Furniture, Office Depot, Ferguson Enterprises, DSM Nutritional Products, and L-3 Communications—represented approximately 32.9% of 2011 rental revenue. Haverty’s master-lease portfolio represented 9.8% of 2012 contractual rent, and its related $23.3 million mortgage matures in September 2012. Management expected to refinance it, but success was not assured.
- Lease expirations create rollover exposure: leases representing 13.7% of 2012 contractual rent expire in 2014 and 10.5% in 2018; 43.6% is associated with leases expiring in 2021 and thereafter. Tenant defaults, rent relief, bankruptcy, weaker retail demand, online competition, and difficulty re-leasing vacant space could reduce income and distributions.
- Other principal risks include refinancing and credit-market access, credit-facility covenant compliance, interest-rate exposure, property-value impairment, geographic concentration in Texas and New York, redevelopment execution, environmental and casualty liabilities, joint-venture dependence, related-party conflicts, and maintaining REIT tax qualification. The company reported no real-estate impairment charges in 2011 or 2010.
- In February 2012, the company contributed its Plano, Texas site to a joint venture for a 90% interest; an affiliate of Trammell Crow contributed $1.5 million for 10%. The contemplated redevelopment into up to two Class A office buildings depends on financing, tenant commitments, and approvals. In March 2012, a consolidated joint venture entered into a loan facility of up to approximately $7.0 million for the Cherry Hill, New Jersey redevelopment. The company also acquired three Atlanta-area Applebee’s locations for approximately $8.6 million in March 2012.
- The board declared a quarterly dividend of $0.33 per share in March 2012. The company said dividend decisions remain at the board’s discretion and depend on cash flow, earnings, financial condition, and REIT requirements.
- The filing reports related-party payments to Majestic Property Management, owned by the chairman: a $2.725 million annual fee plus $175,000 for direct office expenses in 2011, as well as separate chairman and vice-chairman fees. The filing states the fee is reviewed and approved by independent directors.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor reported effective controls and no identified material weaknesses. Legal proceedings were described as not applicable in the business section; the notes state ordinary-course legal actions were not expected to have a material adverse effect.
Most important facts for investors to verify
- Progress, pricing, and lender terms for refinancing the $33.5 million of 2012 mortgage maturities, especially the $23.3 million Haverty loan.
- Tenant credit, rent collections, lease renewals, and re-leasing prospects, particularly for retail tenants and the five largest rent contributors.
- Whether reported earnings growth is sustained by operations after excluding the $1.24 million debt-settlement gain and the $932,000 property-sale gain; compare GAAP cash flow with FFO, AFFO, and distributions.
- Execution, capital needs, approvals, leasing, and expected returns for the Plano and Cherry Hill redevelopment projects.
- Dividend coverage, dilution from equity issuance and reinvestment-plan shares, and compliance with credit-facility covenants as debt matures and the 2013 facility deadline approaches.
- Related-party service fees and governance safeguards, plus any changes in REIT qualification, impairment indicators, or material contingencies.