Realty Income Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Realty Income is a REIT focused on long-term net-leased commercial properties. At quarter-end it owned 7,018 properties across the U.S., Puerto Rico, the U.K. and Spain, with 98.8% occupancy and an 8.8-year weighted-average remaining lease term.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $491.9 million | $404.6 million | $1,399.0 million | $1,233.5 million |
| Net income available to common stockholders | $135.0 million | $22.9 million | $355.4 million | $277.6 million |
| Diluted GAAP EPS | $0.34 | $0.07 | $0.94 | $0.81 |
| FFO per diluted share | $0.85 | $0.82 | $2.41 | $2.48 |
| Normalized FFO per diluted share | $0.89 | $0.82 | $2.49 | $2.48 |
| AFFO per diluted share | $0.91 | $0.81 | $2.64 | $2.55 |
- Revenue and portfolio: Q3 revenue rose 21.6% year over year, primarily reflecting acquisitions. Same-store rental revenue increased 6.0%; management said growth would have been 8.5% excluding deferred and uncollected rent included in its calculation.
- Profit and unusual items: Q3 net income increased sharply as impairment charges fell to $11.0 million from $105.1 million a year earlier. Nine-month results included $30.1 million of VEREIT merger costs and a $50.5 million loss on debt extinguishment, primarily from redeeming $950 million of notes early. Nine-month impairment charges were $31.0 million versus $123.4 million.
- Cash flow: Nine-month operating cash flow was $970.1 million, compared with $809.8 million. Investing activities used $3.60 billion, mainly for real estate investment; financing activities provided $2.33 billion. Cash and cash equivalents were $517.0 million at quarter-end, down from $824.5 million at December 31, 2020.
- Debt and liquidity: Outstanding borrowings were approximately $9.29 billion, including $8.35 billion of notes and bonds, $405 million of commercial paper, a $250 million term loan and $285.6 million of mortgages. The $3.0 billion revolver was undrawn; management reported covenant compliance and said available cash, operating cash flow and borrowing capacity were sufficient for expected needs over the next 12 months. Debt was 26.1% of market capitalization; net debt to annualized adjusted EBITDAre was 5.0x.
- Distributions: The monthly dividend reached $0.2360 per share in October 2021, equivalent to $2.832 annualized. Nine-month cash distributions were $797.8 million, or 79.6% of AFFO.
Material changes and developments
- Real estate investment totaled $3.78 billion for the first nine months, versus $1.30 billion in 2020; 486 properties were acquired, plus 50 properties under development. Acquisitions generated an initial average cash lease yield of 5.5%.
- Common shares outstanding increased to 404.2 million from 361.3 million at year-end, with significant equity raised through public offerings and the at-the-market program.
- On November 1, 2021, after quarter-end, Realty Income completed its VEREIT acquisition. Former VEREIT holders received approximately 162 million Realty Income shares. The company expected to distribute Orion Office REIT shares to stockholders at one Orion share per ten Realty Income shares, with distribution expected November 12, 2021.
- Portfolio occupancy improved from 97.9% at December 31, 2020 to 98.8% at September 30, 2021. Re-leasing rent recapture was 105.5% for the first nine months.
Outlook, risks and contingencies
- No specific earnings or acquisition guidance is provided in the filing. Management expects to continue monthly dividends but cautions that future distributions and increases are not guaranteed.
- COVID-19 remains a risk to client credit and rent collection. Portfolio contractual rent collection was 99.5% in Q3, but health and fitness collections were 95.0%. At quarter-end, theater properties represented 5.2% of annualized contractual rent; receivables for 79 theater properties were $72.8 million, net of $39.0 million in reserves.
- Management identifies exposure to inflation, interest and currency rates, capital-market access, client defaults, real-estate impairments and broader economic conditions. Rent escalators may not keep pace with inflation, and higher client operating costs could weaken tenants.
- Merger-related litigation included 13 lawsuits challenging merger disclosures. The company considered a loss reasonably possible but expected any loss not to be material; no accrual was recorded. Approximately $19 million of merger success fees was expected, subject to conditions. Construction commitments were $211.9 million.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether VEREIT integration, the share issuance and planned Orion distribution deliver the expected strategic and financial benefits; the filing said initial purchase accounting and pro forma disclosures were not yet available.
- Subsequent rent collections, tenant credit quality and reserve adequacy, particularly for theater and health and fitness clients.
- Acquisition returns relative to the cost of equity and debt funding, alongside dilution from share issuance.
- Debt maturities, refinancing access, interest-rate exposure and compliance with debt covenants.
- Whether AFFO growth and dividend coverage persist; FFO, Normalized FFO and AFFO are non-GAAP measures and are not substitutes for operating cash flow or liquidity.