Realty Income Corporation — Q2 2016 Form 10-Q
Business context and reporting period. The unaudited filing covers the quarter and six months ended June 30, 2016; balance-sheet comparisons are to December 31, 2015. Realty Income is a REIT focused on long-term, primarily single-tenant net leases. At quarter-end, it owned 4,646 properties across 49 states and Puerto Rico, with 98.0% occupancy and 79.0 million leasable square feet.
Financial performance and position
- Revenue: Q2 total revenue was $271.0 million, up 6.8% from $253.9 million; rental revenue rose 7.7% to $260.1 million. Six-month total revenue was $538.2 million, up 7.5%; rental revenue increased 8.5% to $516.9 million. Same-store rents grew 1.4% in Q2 and 1.3% for the six months.
- Profit: Q2 net income attributable to the Company was $75.8 million; net income available to common stockholders was $69.0 million, or $0.27 diluted per share, versus $59.3 million and $0.25 a year earlier. Six-month common income was $132.5 million, or $0.53 per diluted share, versus $119.8 million and $0.52.
- REIT operating measures: Q2 FFO was $176.6 million ($0.70 per diluted share), up 10.7% in total but 1.4% per share. Q2 AFFO was $180.9 million ($0.71 per share), up 13.7% in total and 4.4% per share. Six-month FFO was $347.3 million ($1.38 per share) and AFFO was $356.8 million ($1.42 per share), up 11.2% and 14.7% in total, respectively. FFO and AFFO are non-GAAP measures.
- Cash flow: Six-month operating cash flow was $361.4 million, compared with $321.7 million. Investing used $591.1 million, including $618.3 million of real-estate investment; financing provided $209.8 million. Cash ended at $20.4 million, down from $40.3 million at year-end.
- Debt and liquidity: Total borrowings were approximately $4.97 billion, about 21.3% of stated market capitalization; debt/annualized quarterly EBITDA was 5.1x, versus 5.9x a year earlier. The $2.0 billion unsecured revolver had $512.0 million drawn and $1.49 billion available. The company reported covenant compliance, 4.7x debt-service coverage and 4.2x fixed-charge coverage. A $275 million, 5.95% note matured in September 2016, and management expected to repay it.
- Dividends: Common distributions paid in the first half totaled $298.6 million, 83.7% of AFFO. The monthly common dividend was raised to $0.1995 per share for July 2016; a further increase to $0.2015 was declared for September. Preferred dividends were current.
Changes, outlook and risks
- Rental growth reflected acquisitions, prior-year acquisitions contributing a larger run-rate, and same-store rent gains. Six-month acquisitions totaled $662.9 million across 153 properties, versus $931.2 million across 166 properties in the prior-year period. New acquisitions were 100% leased, with a 14.8-year weighted-average lease term and a 6.5% initial contractual lease rate.
- Occupancy declined to 98.0% from 98.4% at December 31, 2015; 95 properties were available for lease. The six-month rent recapture rate on 75 re-leased properties was 103.2%.
- Impairment provisions increased to $6.3 million in Q2 from $3.2 million, and to $8.2 million for the first half from $5.3 million. Q2 property-sale gains rose to $8.7 million from $3.7 million; first-half gains were $10.9 million in both years. Fair-value losses on interest-rate swaps were $2.1 million in Q2 and $7.9 million for the first half, reducing reported earnings and FFO.
- Management anticipated $50–$75 million of property sales in 2016, with proceeds intended for acquisitions if attractive opportunities were available. No specific earnings or FFO guidance was provided. Management said available cash, operating cash flow and revolver capacity should meet liquidity needs for the next 12 months, while noting reliance on capital markets for longer-term financing.
- Key risks include tenant defaults and vacancies, real-estate impairments, interest-rate changes, access to debt and equity markets, credit-market volatility, environmental and natural-disaster exposure, competition, and continued REIT qualification. A 1% interest-rate change on the revolver balance would change annual interest cost by approximately $5.1 million. The company reported routine legal proceedings and did not expect them to materially affect results; it had $32.2 million of construction commitments and $1.4 million of property-related commitments.
- The common-stock offering in May raised $383.5 million net; ATM and other share issuance contributed to dilution. Swap fair-value movements and property-sale gains or impairments make GAAP earnings period-sensitive. The interim financial statements were unaudited.
Important facts for investors to verify
- Whether acquisition volume and same-store rent growth can sustain per-share FFO and AFFO growth as the share count expands.
- Occupancy, tenant credit quality and concentration: the top 20 tenants represented about 54% of annualized revenue; Walgreens was the largest at 6.6% of rental revenue.
- Funding and repayment plans for the September 2016 $275 million note maturity, and continued access to affordable capital.
- Dividend sustainability against AFFO, debt service, capital needs and REIT distribution requirements; dividends remain subject to Board discretion.
- Progress on planned property sales, lease-up of vacant properties, and final purchase-price allocations for acquisitions still subject to preliminary valuation.