One Liberty Properties, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Amounts are in millions unless stated otherwise. One Liberty is a self-managed REIT with 121 properties in 31 states and a portfolio occupancy rate of approximately 97.2%.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $18.4 | $17.2 | $36.9 | $33.6 |
| Operating income | $7.7 | $7.6 | $14.9 | $14.6 |
| Net income attributable to One Liberty | $10.0 | $12.4 | $12.8 | $15.7 |
| Diluted EPS | $0.54 | $0.72 | $0.69 | $0.91 |
| NAREIT FFO per share | $0.47 | $0.47 | $0.94 | $0.87 |
| AFFO per share | $0.52 | $0.50 | $1.03 | $0.93 |
- Revenue rose 6.8% in Q2 and 9.9% for the first half, mainly reflecting acquisitions. Operating income grew only 0.7% and 1.8%, respectively, as operating costs increased. Operating margin was approximately 41.6% in Q2 and 40.4% for the first half, compared with 44.1% and 43.6% a year earlier.
- Net income and EPS declined primarily because gains on property sales were lower: $6.6 million in the first half of 2017 versus $9.7 million in 2016. First-half net income before property-sale gains increased to $6.3 million from $6.0 million.
- First-half operating cash flow was $20.2 million, up from $12.2 million. Investing used $26.8 million, chiefly for property purchases; financing provided $3.5 million. Cash and equivalents ended June at $14.4 million, down from $17.4 million at year-end.
- At June 30, gross mortgage debt was $399.2 million and gross credit-line borrowings were $26.5 million. The $100 million revolving facility matures December 2019; its average rate for the first half was 2.67%. Mortgages, after swaps, had a 4.29% weighted-average rate and 8.8-year weighted-average remaining term. The company reported compliance with facility covenants.
- At August 2, available liquidity was $95.3 million, including $9.7 million of cash (net of the required facility deposit) and $85.6 million of facility availability, subject to borrowing-base requirements. First-half cash distributions were $0.86 per share; Q2 distribution declared was $0.43 per share.
Changes, outlook and key risks
- During the first half, the company acquired three industrial properties for $35.2 million and sold a vacant Colorado property for net proceeds of approximately $9.2 million, recognizing a $6.6 million gain. It classified two retail properties as held for sale at June 30. The Kansas City property sold in July; the company expected the Niles, Illinois sale to close in Q3.
- Management expected operating needs, including debt service and dividends, to be funded principally from operating cash flow. It estimated approximately $10.4 million of building expansion and improvement spending at several properties. No formal earnings guidance was provided.
- Management cited tenant credit and leasing risks, including bankruptcy or financial distress among Payless ShoeSource, Joe’s Crab Shack, hhgregg, Kmart and Pathmark. Vacancies can reduce rent while leaving the company responsible for debt service and property costs. Retail exposure was 40.7% of contractual rental income; management noted e-commerce as an industry risk and said it was selective in retail acquisitions while pursuing industrial properties.
- Contractual rental income for the twelve months ending June 30, 2018 was approximately $66.6 million. Scheduled expirations represent 12.1% of that amount in 2022 and 13.9% in 2023; figures assume tenants do not exercise renewal or termination options.
- Ground-lease investments in three apartment properties had a $34.0 million carrying value and maximum exposure to loss, subordinated to $150.7 million of owner/operator mortgage debt. Other commitments include approximately $7.8 million for L-3 property improvements through 2018 and a conditional $3.0 million reimbursement to Regal Cinemas.
- Interest-rate swaps hedge variable-rate mortgages; the company disclosed approximately $2.8 million of aggregate swap termination liability. A 100-basis-point rise in the credit-facility rate was estimated to increase annual interest costs by approximately $265,000. A $243,000 former-tenant dispute settlement and a $118,000 accelerated swap-related interest charge were notable first-half items.
Important facts for investors to verify
- Whether the Niles property sale closed as expected and the gains and debt repayments recorded after quarter-end.
- Rent collections, vacancy and re-leasing progress at properties affected by tenant bankruptcies, particularly retail tenants.
- Liquidity, borrowing-base availability, covenant compliance and the plan for $64.1 million of scheduled mortgage amortization and maturities through 2020.
- Whether operating cash flow and AFFO support the quarterly dividend alongside property improvements and debt service.
- Progress and final costs for the L-3 and Regal commitments, and exposure associated with the subordinated ground-lease investments.