One Liberty Properties: This Diversified REIT Is Trading At An Attractive Valuation

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About: One Liberty Properties, Inc. (OLP)
by: Ploutos Investing
Summary

One Liberty Properties has diversified industrial and retail properties in 30 states in the U.S.

The REIT’s industrial portfolio should continue to enjoy strong demand.

Its retail portfolio should be more resilient to the rise of e-commerce than many other retail REITs.

One Liberty Properties is attractively valued and pays a 6.2%-yielding dividend.

Investment Thesis

One Liberty Properties (OLP) delivered a mixed quarter as the company saw its revenue increase year over year, but its occupancy rate declined. The company has a portfolio of industrial properties that should continue to enjoy favorable industry fundamentals. Its retail portfolio may continue to face some headwinds, but is generally more resilient to the rise of e-commerce. The company currently pays a 6.2%-yielding dividend and is trading at an attractive valuation. We believe it is a good candidate for investors seeking both dividend income and capital appreciation.

Chart Data by YCharts

Recent Developments: Q1 2019 Financial Highlights

One Liberty Properties increased its rental revenue by about 8.3% in Q1 2019. The increase was primarily due to its acquisition of eight properties in 2018 and a slight same-property rental rate increase. However, its stable occupancy rate declined to 96.5% in 2019 as several of its tenants filed for bankruptcy in Q4 2018. In the past quarter, the company has also made the move to pursue a redevelopment of a community shopping center located in Manahawkin, New Jersey. Once completed, it should also result in higher revenue and net operating income.

What we like about One Liberty Properties

A geographically diversified portfolio

One Liberty Properties has a geographically diversified portfolio. It currently owns 123 properties in 30 states with a focus in the eastern part of the U.S. Not only does the REIT have a geographically diversified portfolio, but its portfolio of properties are also diversified as it includes industrial, retail-general, and various specialty retail properties such as restaurants, fitness centers, and theaters.

Source: May 2019 Investor Presentation

Strong fundamentals for industrial properties

One Liberty Properties receives about 45% of its contractual rental income from its industrial properties. The rise of e-commerce and the demand for fast delivery have created strong demand for these industrial properties. As can be seen from the chart below, e-commerce sales in the past 10 years have grown at a compound annual growth rate of about 15% annually. The growth in e-commerce has resulted in strong demand for industrial properties as many businesses set up warehouse locations and distribution centers to meet the demand of shipping.

Source: Duke Realty Presentation

This is exactly what PwC’s latest report states:

With increased need for last-mile delivery and e-commerce facilities, logistics and fulfillment continue to be a major opportunity for creating value. As tenants look for increasingly larger spaces, vacancy rates are tightening and rents are rising.

Looking forward, demand for industrial properties will remain robust. This is because consumers increasingly demand quick delivery once they ordered their products online (e.g. within 24 hours). In order to satisfy the demand, the need for more warehouse and distribution centers closer to customers will not diminish anytime soon. As an article published by National Real Estate Investor states:

We are likely still in the middle stages of building out the necessary infrastructure to continue to meet growing consumer demand and thus the industrial sector likely continues to expand (albeit at a much slower pace) even in the face of a minor recession.

This should provide some tailwinds for One Liberty Properties as demand should remain robust.

One Liberty Properties’ retail portfolio appears to be more resilient to the rise of e-commerce

While the rise of e-commerce has impacted the brick-and-mortar retail sector negatively, One Liberty Properties’ retail portfolio should be less impacted. This is because its retail portfolio has a high exposure to specialty retail sub-sectors that are less impacted by e-commerce. As can be seen from the table below, these e-commerce resilient sub-sectors include furniture stores, supermarkets, offices, restaurants, health & fitness centers, and theaters. In fact, only 22% of its total portfolio may be impacted by the rise of e-commerce. This is significantly lower than many retail REITs.

Source: May 2019 Investor Presentation

A strong balance sheet

The company has a strong balance sheet with total debt to gross assets ratio of 51%. This is comparable to its peers. It has a debt service coverage ratio of about 2.2x. The company has a credit facility of about $100 million. It has no significant debts maturing before 2023. This means it does not need to worry too much about refinancing its debts in the near-term. The balance sheet should help support its strategy to grow its portfolio by acquisition.

Source: May 2019 Investor Presentation

Risks and Challenges

Supply and demand risk

While One Liberty Properties’ industrial properties will enjoy favorable supply and demand trend, investors need to understand that light industrial properties are not difficult to build. Hence, a lengthy period of short supply may trigger lots of development activities. This may result in excessive supply in future years.

Economic recession

If an economic recession happens, consumer confidence will drop, and this may result in lower consumer spending. Although we do not believe a recession is imminent, if one happens, it may affect the entire retail sector as consumers cut their spending. This will eventually result in occupancy ratio decline. In such an environment, it will be difficult to raise rental rates.

Valuation

We estimate One Liberty Properties to generate AFFO of $2.15 per share in 2019. Using our estimate, its price to 2019 AFFO ratio is about 13.5x. This is significantly below industrial REITs that trade above 20x. Its P/AFFO ratio is comparable to other retail REITs. Given One Liberty Properties’ exposure to industrial properties, we believe it should trade at several multiples higher than its current level.

Dividend Analysis

The company currently pays a quarterly dividend of $0.45 per share. This is equivalent to a dividend yield of 6.2%. As can be seen from the chart below, its current dividend yield is towards the low end of its yield range in the past 10 years. The company has frequently raised its dividend since 2010 and has a sustainable dividend with a dividend payout ratio of 85% in 2018 (based on its 2018 AFFO per share).

Chart Data by YCharts

Investor Takeaway

One Liberty Properties has a diversified portfolio of industrial and retail properties. It also has a sustainable dividend. Although its retail portfolio may continue to face some headwinds, we think it deserves a higher valuation given its exposure to industrial properties. It currently pays a 6.2%-yielding dividend. We think this REIT is suitable for investors seeking dividend income and some capital appreciation.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.