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A Neglected REIT "Buy a Bond at under Par"

 When purchasing a REIT its important to look at the following Ten (10) main parameters in making your investment decision.

1. Stock price relationship to NAV
2. Free and Clear Return
3. Cost basis versus Enterprise Value
4. Implied Capitalization Rate
5. Return on Equity
6. Dividend Coverage Ratio
7. Interest Coverage Ratio
8. Mortgage Debt coming Due
9. Tenant Covenant
10. Tenant Square footage coming due (lease turnover) 

One Liberty Properties (NYSE:OLP)  is a REIT with approximately 19% of its shares held by the Fredric H. Gould family out of New York.  As a group, all of the insiders own or controll 26% of the outstanding shares.  The Gould family is a third generation REIT family.  They started in the early 70's operating a REIT called Gould Investors Trust, which they took private in around 1982.  I was a shareholder of that REIT.

Flash forward the Gould family, in the late 80's, bought into One Liberty Properties.  OLP is a collection of approximately 77 net leased properties, 98.6% leased/occupied,  throughout the United States. 

1. Stock Price relationship to NAV:
Assuming a capitalization rate of 8.125%, the current NAV for OLP is $18.76 .  This NAV is calculated after allowing for the Gould's G&A of 18%.  A normal G&A for a REIT or any portfolio manager would be 5%.  If you add back the excess G&A, the NAV would increase by $6.12 per share, to $24.88 per share. In the event of a liquidation, this would be important, but in the meantime, management is skimming a little off the top. In any event, the intrinsic value is just shy of $25. Therefore the stock is selling at approximately 70 cents on the dollar.

2. Free and Clear Return:
The Free and Clear return gives you an indication on the spread the REIT has on its NOI versus the current debt market.  It also tells you how well the management has been doing at acquiring properties over time.  What if every mortgage came due today?  In the case of OLP, their free and clear return (ie. return on gross historical cost before debt service) is 9.5%.  This gives them a lot of margin, even if they had to refinance. 

3. Cost basis versus Enterprise Value: 
 Based on the current stock price of $17.40, OLP is selling at 96.2% of what was originally paid for all of the properties over time.  Another way to look at this, is that OLP is trading at 107.5% of gross book value. 

4. Implied Capitalization Rate:
The implied capitalization rate at its current stock price is an 8.0% cap rate. 

6. Return on Equity:
Treating OLP like any real estate investment, you would want to know your ROE.  As a shareholder, you are earning 9.1% cash on cash.

7. Dividend Coverage Ratio:
OLP has a dividend coverage ratio of 1.41x .  In other words, OLP makes 41% more cash flow, than it pays out.  The current dividend is $1.20 or 6.9%.  The dividend in 2007 was $2.11, in 2006 it was $1.35, in 2005 the dividend was $1.32.  From the dividend coverage ratio, we know that there is room to increase the dividend and pay it from operating cash flow.

8. Interest Coverage Ratio:
OLP has an interest coverage ratio of 2.8X before its G&A.  Even after paying its excess G&A, its interest coverage ratio is 2.3x.  OLP is a cash cow. Its a conservatively capitalized net leased property REIT.

9.  Tenant Covenant:
The OLP portfolio is a real estate portfolio of primarily net leased properties.  The tenant mix based on covenant is pretty strong.  36% of the rentable s.f. is leased to tenants with over $1  Billion in Net Worth.
35% is leased to tenants with less than $1 billion and over $100 million. 4% are less than $100 million.  12% with unknown covenant. 11% with little or no covenant. Most of the tenants are publicly traded companies. 29% are in retail, 18% furniture retailers, 13% industrial, 11% office, 13% office retail, and 16% other.

10. Lease Expiration /Tenant square footage coming due:
OLP only has 0% of their leases coming due in 2010, and 7% in 2011, and 1% in 2012.  This is a very safe portfolio from a lease exposure. 

Overall, OLP is selling at less than its NAV, and offers an investor an opportunity to earn an above market yield.  The dividend coverage and free and clear returns, gives us the confidence that the dividend is safe and will continue to increase over time. As the cash flow increases, the NAV will increase.

I am a current stockholder in OLP. 


Disclosure: Long in OLP