One Liberty Properties, Inc. (NYSE:OLP) expects to receive demand for its industrial spaces thanks to the growth of the e-commerce industry. Additionally, the recent acquisitions, like a multi-tenant shopping center in Manahawkin, New Jersey, are expected to lower the total amount of debt. Besides, considering the current stock repurchase plans and recent acquisition of shares, I believe we could expect further demand for the stock. There are obviously some risks from defaults of tenants and the effect of competitors. However, in my view, OLP could be trading more expensively.
One Liberty stands out for its self-managed approach to a diversified portfolio of industrial and commercial properties, primarily under long-term net leases. With 118 owned properties and participation in joint ventures with three additional properties, they span 31 states.
The company’s focus on net leases means that tenants assume key financial responsibilities. This structure, along with the varied geographic location, strengthens the stability and diversification of the portfolio, positioning the REIT solidly in the real estate market.
Most leases incorporate periodic increases either contractual or linked to the consumer price index. Some include minimum rents with additional payments based on property sales. The preference is to acquire properties with existing long-term leases or negotiate new long-term leases.
The Company Trades At Close To 0.5x Its Real Estate Investments
As of September 30, 2023, the company noted real estate investments of about $700 million. Given the current market capitalization, the company appears to be trading at 0.5x its real estate investments. I believe that we can see some undervaluation here. Total assets are $767 million, and the asset/liability is larger than 1x. The balance sheet appears stable.
I am not really worried about the total amount of debt because One Liberty appears to deliver positive FFO. Mortgages payable stands at $416 million, with line of credit of $11 million, and total liabilities worth $464 million.
I Assumed That More Acquisitions Of Single-tenant Industrial Properties Will Most Likely Bring Further Business Growth
Under my base case scenario, I assumed that One Liberty will successfully identify and acquire strategic properties, efficiently managing the portfolio, obtaining favorable debt, and sustaining dividend growth. In my view, prioritizing single-tenant industrial properties with long-term net leases will most likely ensure stable income.
The Sale Of A Multi-tenant Shopping Center To Be Completed In The Quarter Ending December 31, 2023 Could Enhance FFO
One Liberty expects to close the sale of a property by the end of the year. As a result, the company expects to use the proceeds to pay down some of its debts. Lower debt obligations may enhance the P/FFO and the stock valuation.
We anticipate that the transaction will be completed in the quarter ending December 31, 2023, subject to the satisfaction of customary closing conditions, and that the net proceeds to us from the sale will be used to pay down our credit facility indebtedness. Source: 10-Q
The Rise Of E-commerce Could Enhance Funds From Operations As One Liberty Is Buying Industrial Space
While historically it included commercial properties, the current focus is on industrial properties to capitalize on the rise of e-commerce. If we take a look at the recent acquisitions reported by One Liberty, more acquisitions include industrial property and sale of retail properties.
A number of experts out there are noting that e-commerce businesses are expected to invest significantly in industrial space. As a result, growth in this segment is expected to reach double digits. In my view, the company will most likely benefit from growth in the e-commerce space.
With e-commerce sales expected to grow at 15 percent annually, reaching 14.8 percent of retail sales by 2023, the number of product returns will increase too, requiring more industrial space.
From 2019 to 2023, we expect the demand for an additional 850 million square feet of industrial real estate in the United States, led by e-commerce. Source: DI_Future-of-industrial-real-estate
Recent Acquisition Of A New Property And The Sale Of A Restaurant Included Interest Rate Of 4.6% And Real Estate Gains
I believe that the recent negotiation of the acquisition of a property in Blythewood, South Carolina, and the debt rates obtained are appealing. Given the current FED rates, in my view, the interest rate obtained by the company appears beneficial. In my view, if management continues to receive good financing for acquisitions, the cost of debt may lower, which could bring better implied stock valuation.
On July 13, 2023, we acquired a multi-tenant industrial property located in Blythewood, South Carolina for a purchase price of $13.4 million, including the assumption of $4.3 million of mortgage debt with an interest rate of 4.60% and maturing in June 2029. Source: 10-Q
It is also worth noting that One Liberty continues to report real estate gains. In September 2023, the company reported a gain in the sale of a restaurant in North Carolina. Given previous gains on sale of real estate, One Liberty appears to know well what to buy and when. I assumed that the knowledge of the market will most likely bring further gains in the coming years.
I Assumed That The Stock Repurchase Plan Will Likely Bring Demand For The Stock
It is also worth noting that One Liberty continues to buy its own shares, which may bring further demand for the stock and the interest of other investors. In my view, managers would not buy shares in the open market if the stock price is not convenient.
In October 2023, we repurchased, pursuant to the 2022 Repurchase Plan, approximately 62,000 shares of common stock for approximately $1.1 million. Source: 10-Q
Expectations From Other Analysts, My Income Statement Expectations Based On Previous Assumptions And Previous Financial Results
In my view, it is worth having a look at the expectations of other analysts. They expect net sales growth, and 2025 net sales of $96 million. My numbers are in line with those of other investment analysts.
My expectations include 2030 rental income close to $139 million, with lease termination fees lower than -$1 million, and total revenues of $139 million. Besides, with depreciation and amortization worth $27 million, general and administrative expenses close to $21 million, and real estate expenses of $23 million, total operating expenses stood at $72 million.
Also, including a gain on sale of real estate worth $3 million, I obtained operating income close to $70 million. Finally, 2030 net income would not be far from $60 million.
I tried to be as conservative as possible, and took a look at the previous net income growth, net sales growth, D&A, and operating income growth. With that, I believe that investors always have to do their own due diligence on the figures offered by other financial analysts. The chart below includes some information about figures from the past.
My Cash Flow Expectations Based On Previous Financial Figures, And My Assumptions
My cash flow statement projections include 2030 net income close to $60 million, increase in net amortization of unbilled rental income of about -$8 million, amortization and write-off of intangibles relating to leases worth -$2 million, and an equity in earnings of unconsolidated joint ventures of about -$2 million.
Also, with equity in earnings from sale of unconsolidated joint venture properties of about $1 million, distributions of earnings from unconsolidated joint ventures of about -$2 million, and depreciation and amortization close to $27 million, I also included amortization and write-off of deferred financing costs close to $1 million.
Finally, with payment of leasing commissions worth -$6 million, changes in other assets and receivables of close to $13 million, and increase in accrued expenses and other liabilities of $3 million, net cash provided by operating activities would be $95 million. Finally, with purchase of real estate of -$28 million, 2030 FCF would be $67 million, and funds from operations would stand at $84 million.
Financial Model Based On Funds From Operations, And P/FFO Close To 9x-13x
For the assessment of the cost of debt and cost of capital, I took a look at the weighted average interest rate paid by One Liberty. I saw interest rates close to 3.42% and 4.6% in the last annual report and the last quarterly report. The fixed interest rates range from 3.02% to 5.50%, maturing between 2023 and 2047, with a weighted average rate of 4.10%. With all these figures in mind, I believe that a WACC of more than 4.6% would make sense.
With the previous assumptions, a WACC of 4.6%-7.1%, and exit P/FFO of about 9x-12x, the implied equity valuation would be between $1264 million and $885 million, with median close to $1.077 billion. The sector median P/FFO is close to 12x.
Now, using the current share count, I obtained a target price close to $42-$60, with a median around $47-$51 per share. Besides, the maximum internal rate of return would be about 15%-28%, with a median close to 21%. Other financial analysts may come with different assumptions about the cost of capital, the exit multiples, and net sales forecasts. However, I believe that most professionals would agree that One Liberty could trade a bit more expensively.
The company has a reliance on retail tenants such as Havertys Furniture, FedEx, LA Fitness, Northern Tool, and NARDA Holdings, exposing the portfolio to significant risks. Significant contractual revenues come from tenants with weighted average lease terms, but insolvency, default, or a decision not to renew contracts could result in significant losses, disruptions to revenues, and the assumption of operating expenses. The resulting vacancy would negatively impact income and property values, posing a substantial risk to the REIT’s operations and financial condition.
Besides, increasing competition from e-commerce retailers threatens demand for brick-and-mortar retail space, negatively impacting leasing and revenue-generating capacity.
In my opinion, the company faces intense competition in the US commercial real estate investment market, especially industrial properties. It faces rivalry from various entities dedicated to the acquisition, development, and operation of properties, such as public and private REITs, private equity companies, institutional funds, insurance companies, and individuals. This competition involves fighting over a limited supply of properties and financing. Although the company competes with actors that have greater financial resources and the ability to take more risks, it cannot guarantee success in its activities. Efficiency in competition will be a key to achieving objectives in the real estate market.
I believe that the effect of the e-commerce industry in the industrial space, further opportunistic sale of properties, and successful negotiation of debt terms could bring FFO growth. Additionally, the sale of a multi-tenant shopping center in Manahawkin, New Jersey, is expected to bring some cash to lower the debt obligations. Yes, I believe that One Liberty faces considerable risks due to reliance on retail tenants, however the stock should be trading more expensively in my view.