One Liberty Properties: The 8.65% Yield Is Protected, Robust Upside Potential (NYSE:OLP)

Introduction

It has been three years since I final mentioned One Liberty Properties (NYSE:OLP) and lots has occurred since. In my authentic article, which was printed in the summertime of 2020, I argued there was a possible 50% upside potential whereas the REIT paid a ten% dividend yield. And that focus on was successfully reached. Lower than 18 months after the article, the share worth was buying and selling at twice the extent it was at in August 2020 and the REIT continued to pay a quarterly dividend of $0.45.

Because the REIT has been hit by the fears of upper rates of interest and compressed earnings, the share worth is now buying and selling across the $20 mark, which is simply 15% larger than three years in the past, and I needed to check out the REIT to see if this is a chance to get again in.

OLP’s FFO and AFFO stay robust

One Liberty nonetheless affords a sexy diversification, however it’s attention-grabbing and inspiring to see the burden of the commercial properties within the portfolio has continued to extend. The 49 industrial properties the REIT had a short while in the past had been additional boosted to 54 properties, which now account for in extra of 63% of the rental earnings, as you’ll be able to see under.

The REIT stays a fairly lively dealer in its property, and this helps the REIT to safe the absolute best efficiency for its unitholders. Whereas the earnings assertion is considerably irrelevant for REIT buyers, I nonetheless have a tendency to love taking a look at it, primarily to find out the Web Working Earnings in addition to seeing the evolution of the curiosity bills.

As you’ll be able to see above, One Liberty – as a web lease REIT – reported a complete rental earnings of $23M and reported about $4.2M in actual property bills and taxes. The web working earnings on the asset degree was roughly $18.75M, which represents about $75M on an annualized foundation.

The web earnings of $5.4M clearly was the place to begin of the FFO and AFFO calculations and as you’ll be able to see above, the entire FFO got here in at $10.1M whereas the AFFO was a decent $10.8M. That’s a small improve in comparison with the $10.65M in AFFO generated within the first quarter of 2022 regardless of having to cope with the next web curiosity expense.

As there are presently 20.55M shares excellent, the entire AFFO/share got here in at $0.525/share (the REIT experiences the AFFO/share of $0.50 on a totally diluted foundation, whereas I take advantage of the present share rely).

Based mostly on the present a number of of simply 10 instances the AFFO/share, One Liberty Properties seems to be fairly engaging and the present quarterly dividend of $0.45 per share stays totally coated.

As of the top of Q1, One Liberty Properties had about $418M in gross debt and about $7M in money and $2.8M in properties out there on the market. On a professional forma foundation, this implies the online debt degree was roughly $408M. Whereas this implies the debt ratio is sort of 60% based mostly on the e-book worth of the property of roughly $697M, let’s take into accout this already contains about $175M in amassed depreciation.

This implies the LTV ratio based mostly on the acquisition value is a extra respectable 46.7%. And contemplating the NOI in Q1 was $18.75M, and we are able to count on a full-year NOI of $75M (I’m anticipating the NOI to return in larger however to err on the aspect of being cautious I’ll simply use the annualized outcome from Q1), one may argue the truthful worth of the property is even larger than the acquisition prices. Making use of a cap charge of 6.75% on the commercial properties and eight% on the opposite property, the market worth of the property would truly exceed $1B and are available in at near $1.05B, by which case the LTV ratio would drop under 40%.

And once more, I count on the full-year NOI to return in larger than the $75M I used. Among the acquisitions and lease extensions will solely come into play all through this yr. I’ve highlighted some parts under (sourced from the 2022 annual report):

These are simply three examples, however this implies a rise within the rental earnings of $1M on an annual foundation. And because the direct working bills gained’t be impacted, the overwhelming majority of that further million {dollars} will stream via to the FFO and AFFO.

One ingredient to regulate are the leasing spreads OLP will be capable to generate in 2023 and 2024 because it should renew about 14% of its annual rental earnings.

Can we must be fearful about the price of debt?

So, OLP seems to be good from an earnings a number of perspective, whereas I’m not fearful concerning the debt ranges both. The one remaining query that must be answered is how properly can and can the REIT cope with the rising rates of interest.

As of the top of 2022, the typical remaining time period of the mortgage debt (which represents nearly 100% of the entire debt excellent) was 6.5 years, with a median rate of interest of 4.10%. The picture under reveals that about half of the mortgage debt solely matures after 2028 which implies that the subsequent few years I count on the rate of interest will increase to be very manageable.

A rise of 200bp would add $0.5M in curiosity bills based mostly on the 2023 principal funds, simply $1.2M per yr in 2024 and $0.85M in 2025. That’s $2.5M in further curiosity bills between now and the top of 2025. Which means that a rise of the online working earnings by 4% (lower than 1.5% per yr) would totally cowl the elevated curiosity bills. Moreover, the price of debt could also be decrease than what I’m utilizing in my calculations. About 40% of the mortgage debt that must be refinanced in 2024 already has a 4.70% rate of interest, so we probably gained’t see a 200bp mark-up on that refinancing.

Funding thesis

Making use of a cap charge of 6.75% for industrial property and eight% for the opposite property, I estimate the truthful worth of the true property property to return in between $1B and $1.05B. This implies the entire fairness worth attributable to the shareholders of One Liberty is probably going nearer to $600M than to the $315M reported e-book worth. At $600M, the NAV/share is roughly $29.25, and that’s roughly 40% larger than the present share worth and this clearly reveals the upside potential as I don’t assume the cap charges I’ve used are extreme.

This implies I believe the 8.7% dividend is secure, as I anticipate the payout ratio will likely be decrease than 90% this yr. I additionally don’t count on the AFFO to be hit too laborious by rising curiosity bills within the subsequent 2.5 years, as anticipated NOI will increase must be ample to completely compensate for the upper curiosity bills.

I will likely be trying to re-initiate a protracted place in One Liberty Properties within the close to future.