2023-04-19 14:54:22 ET
Summary
- At its current valuation, the company is paying a dividend yield of 8.05%, which is significantly higher compared to its 4-year average and sector median.
- The growth of e-commerce can also be a game changer to boost the demand for industrial space in the future.
- Currently, the company is trading below its sector median and 5-year average P/FFO ratio, which I think is enough to conclude that OLP is undervalued.
Investment Thesis
One Liberty Properties ( OLP ) is a real estate investment trust that focuses on acquiring and managing industrial and retail properties and further leasing them to various sectors. The company has a high dividend payout, making it an attractive investment opportunity for risk-averse investors. I believe the company can sustain the high dividend yield in the coming years with the help of a market catalyst.
About OLP
OLP is a real estate investment trust that deals in owning, acquiring, and managing a geographically diverse portfolio of retail and industrial properties. Its portfolio mainly consists of net leases for the long term and currently has an occupancy level of 97.9%. It performs property acquisitions based on fundamental real estate analysis and tenant credit evaluation. The company currently owns 121 properties covering total square footage of 10.9 million. These properties are classified under categories such as Industrial, Retail, Restaurants, Health & Fitness, and Others , and each of these categories represents 40.49%, 40.49%, 12.39%, 2.49%, 1.65%, and 2.49% of the company's portfolio respectively. The company's industrial properties generate 56.4% of total contractual rental income, while retail properties earn 28.5% of total contractual rental income. OLP's restaurant properties contribute 5%, Health & Fitness properties generate 3%, and Theater properties contribute 3.1% to the total contractual rental income.
These are located in 31 states, including New York, Texas, South Carolina, New Jersey, and Pennsylvania. The company's top tenants include Havertys Furniture, FedEx, LA Fitness, Northern Tool & Equipment, and Narda Holdings. In 2022, it completed the acquisition of six industrial properties worth $56.5 million and sold seven properties which included four restaurants, two retail, and one industrial property worth $16.8 million.
Rental Contribution by State (Investor Presentation: Slide No 8)
Financial Trend & Market Catalysts
Rental Income History (Investor Presentation: Slide No: 16)
The company's revenue has increased from $62.8 million in FY2015 to $92.59 million in FY2022, resulting in a 7-year CAGR of 5.7%. As we can observe in the above chart, the company has maintained stable revenue growth in the last seven years. Even during the pandemic period, the company's revenue did not decrease significantly, which shows that OLP is likely immune to economic slowdowns to a great extent. The company's portfolio is diversified geographically and includes long-term leased properties, which have helped it to maintain its steady rental income over the years. OLP has managed to maintain stable FFO growth in the last 5-year. The company's FFO per share has increased from $2.02 in FY2018 to $2.34 in FY2022, resulting in a 5-year CAGR of 3%. I think this stable FFO growth provides the safety of a stable dividend payment to investors.
Industrial leasing activities experienced a slight setback during the global Covid-19 pandemic due to remote working requirements to ensure physical distancing. However, the industry bounced back after the pandemic and has experienced robust demand over the past few months. Even the average rent for industrial space has increased significantly. In February, the average rent for industrial space leases nationwide increased by 6.9% and now stands at $7.12 per square foot. Despite the current economic slowdown, this tremendous demand and rising rent for industrial space have significantly created opportunities for leasing companies. In addition, the company has an industry-leading tenant base, including companies such as FedEx (FDX), which is currently on a growth spree. I think as these companies grow, they will require more space, which can create significant opportunities for OLP and increase its cash flows.
As per my analysis, the growth of e-commerce can also be a game changer to boost the demand for industrial space in the future, as the demand for warehouse space will increase with the rise in online shopping. Over the three years from 2017 to 2019, there was an average 14.5% increase in e-commerce sales in the United States. There is a ton of space for growth as, according to JLL Partners, e-commerce sales are predicted to increase by at least 30% in the coming years. Considering all these healthy market fundamentals, I believe the company is well-positioned to cater to the rapidly increasing demand as it only acquires properties after analyzing their use, location, and local demographics which has historically helped the company to maintain the tenants for the long-term and earn stable revenue income. After considering all these factors, I think investors can expect steady growth in the company's income, which can help it to sustain a high dividend payout.
Dividend Yield
Dividend Payment History of OLP (Seeking Alpha)
The company has a long track record of consistent dividend pay-outs despite the slowdown during the pandemic, which signals its good positioning in the market. The company has maintained a dividend payment of $1.80 per share for the last five years. In the current year, it distributed a cash dividend of $0.45 in the first quarter, which indicates that the company is planning to maintain its annual dividend payment of $1.80 or a dividend yield of 8.05% compared to the current share price. After analyzing the healthy positioning of the company and market catalysts, I believe it can sustain this high dividend payment in the coming quarters.
At the current valuation, the dividend yield of 8.05% is very attractive as it is 5.5% above the company's 4-year average dividend yield of 7.63%. The dividend yield of 8.05% is also significantly above the sector median dividend yield of 5.03%. Therefore, I think this dividend payout makes the company an attractive investment opportunity for risk-averse and yield-hungry investors.
What is the Main Risk Faced by OLP?
The company's portfolio is highly illiquid. Therefore, it might be unable to reconfigure its real estate portfolio in response to economic fluctuations. If tenants vacate either at the end of their lease or otherwise, the company may have difficulty disposing of its property. Many factors may affect the ability of the company to sell any of its properties and the prices it receives when it sells these properties, including the number of potential buyers, the number of competing properties, and other market conditions, as well as whether the property is leased and the terms of the lease if it is leased. The company would therefore be unable to sell its properties without incurring a loss, which can adversely affect its liquidity and profit margins. If OLP cannot sell its property above its above buying price, it can adversely affect the company's cash flow and financial condition.
Valuation
The company has huge growth potential due to industrial tailwinds in the leasing business. I believe the company can grow steadily due to its attractive portfolio dynamics and industrial growth opportunities. According to the data found on Seeking Alpha, the company's FFO for FY2023 might be $1.95. The FFO of $1.95 gives the forward P/FFO ratio of 11.45x. After comparing the forward P/FFO ratio of 11.45x with the sector median of 12.58x, I think the company is undervalued. The company's 5-year average P/FFO ratio is 13.38x which is 16.9% more than its forward P/FFO ratio. Currently, the company is trading below its sector median and 5-year average P/FFO ratio, which I think is enough to conclude that OLP is undervalued.
Conclusion
My final thought on One Liberty Properties is that the stock is currently undervalued as it is trading significantly below its sector median and 5-year average P/FFO ratio. The company is currently facing industrial tailwinds, which have led to a tremendous need for industrial space. The company is well-positioned to capture the additional demand as it only acquires properties after analyzing their use, location, and local demographics which has historically helped the company to maintain the tenants for the long term and earn stable revenue income. All these growth factors can help the company sustain its high dividend payout, making the company an attractive investment opportunity for risk-averse investors. After analyzing all the above factors, I assign a buy rating to OLP.
For further details see:
One Liberty Can Maintain 8.05% Dividend Yield With Rising Demand