Realty Income Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; filed November 5, 2019. Realty Income is a REIT focused on long-term net-leased commercial properties and monthly dividends. At quarter-end it owned 5,964 properties across 49 U.S. states, Puerto Rico and the U.K.; occupancy was 98.3%, with a weighted-average remaining lease term of approximately 9.3 years.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Total revenue | $374.2 million | $338.1 million | $1,094.1 million | $985.3 million |
| Net income available to common stockholders | $101.0 million | $99.0 million | $307.2 million | $278.5 million |
| Diluted GAAP EPS | $0.32 | $0.34 | $0.98 | $0.97 |
| FFO per diluted share | $0.82 | $0.81 | $2.43 | $2.39 |
| AFFO per diluted share | $0.83 | $0.81 | $2.46 | $2.40 |
- Q3 revenue increased 10.7%; common net income increased 2.0%, while diluted GAAP EPS declined 5.9%, reflecting a larger weighted-average share count as well as period-specific earnings items.
- For the first nine months, revenue rose 11.0%, common net income 10.3%, FFO per share 1.7% and AFFO per share 2.5%.
- Same-store rents increased 1.2% in Q3 and 1.4% for the nine-month period. Management attributed revenue growth primarily to acquired properties and same-store rent growth.
- Q3 net income included $13.5 million of impairment provisions versus $6.9 million a year earlier; nine-month provisions were $31.2 million versus $25.0 million. Property-sale gains were lower: $1.7 million in Q3 versus $7.8 million, and $15.8 million for nine months versus $18.8 million.
- FFO and AFFO are non-GAAP supplemental measures, not substitutes for GAAP income or cash flow. Q3 2019 AFFO available to common stockholders was $265.4 million, compared with $216.2 million of distributions paid; the nine-month figures were $768.0 million and $629.7 million, respectively.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $777.7 million, up from $689.8 million. Investing activities used $1.970 billion, chiefly for $2.020 billion of real estate investment. Financing activities provided $1.431 billion; cash and restricted cash ended the period at $259.3 million, including $236.1 million of unrestricted cash and equivalents.
- Total assets were $17.180 billion and total liabilities $7.862 billion at September 30. Debt principal outstanding was approximately $7.07 billion: $6.287 billion of notes and bonds, $500 million of term loans and $278.9 million of mortgages. Notes and bonds had a 3.9% weighted-average rate and 8.5-year weighted-average remaining maturity.
- The $3.0 billion revolving credit facility was undrawn at quarter-end. The company reported compliance with debt covenants, a 4.7x trailing debt-service coverage ratio, and a 5.0x net-debt-to-annualized-Adjusted-EBITDAre ratio. Management said cash, operating cash flow and borrowing capacity were sufficient for liquidity needs over the next 12 months.
- Debt was approximately 22.0% of total market capitalization. The company reported investment-grade ratings with stable outlooks: Moody’s A3, S&P A- and Fitch BBB+.
Material developments and outlook
- During the first nine months, Realty Income acquired 227 properties for $1.990 billion and had 14 U.S. properties under development with $36.0 million invested. Acquisitions totaled $2.026 billion including development, versus $1.465 billion in the prior-year period. The portfolio expanded into the U.K. with 13 acquired properties; U.K. grocery stores represented 1.9% of Q3 rental revenue.
- In September, the company agreed to acquire 454 single-tenant retail properties from CIM Real Estate Finance Trust for approximately $1.25 billion in cash and expects to assume approximately $131 million of existing mortgage debt. Closing was expected in tranches, mostly during 2019, subject to customary conditions.
- The company issued $500 million of 3.25% notes due 2029 and £315 million of 2.73% notes due 2034. It also raised $845.1 million net in a May common-stock offering and $689.6 million net through its ATM program during the first nine months. These financings supported debt repayment and investment activity.
- Management targeted approximately $75–$100 million of property sales for the remainder of 2019, with proceeds intended for acquisitions if attractive opportunities were available. This is transaction activity guidance, not earnings or FFO guidance; the filing provides no clear formal earnings forecast.
- The monthly dividend was increased five times in 2019. The October 2019 declared dividend was $0.227 per share, or $2.724 annualized. Management cautioned that future distributions and increases are not assured.
- Occupancy was 98.3%, down from 98.6% at December 31, 2018 and 98.8% at September 30, 2018. The company noted that vacant-property levels could rise and future occupancy is not guaranteed.
- New lease-accounting guidance adopted January 1, 2019 resulted in recognition of ground-lease right-of-use assets and liabilities, including $132.0 million recorded at adoption. Gross presentation of tenant reimbursements and related expenses changed presentation but, according to the company, did not affect operating results.
Risks, contingencies and notable items
- Key disclosed risks include tenant defaults, property-value impairment, economic and real-estate market conditions, access to debt and equity markets, interest-rate and foreign-currency changes, competition, environmental matters, natural disasters, litigation and continued REIT qualification.
- The U.K. investment activity exposes the company to sterling fluctuations. It uses sterling-denominated borrowings and cross-currency swaps to mitigate currency risk; derivatives also involve counterparty and valuation risks.
- Ground-lease payments totaled $163.9 million in undiscounted future minimum payments, including $25.5 million paid directly by Realty Income and $138.4 million generally paid by tenants. The company remains primarily responsible if tenants fail to pay those tenant-paid ground rents.
- Commitments included $23.5 million under construction contracts and $9.8 million for property improvements and re-leasing costs. Management said routine legal proceedings were not expected to materially adversely affect financial position or results.
Most important facts for investors to verify
- Whether the CIM acquisition closed as expected, its final cost and financing, and its effect on leverage and per-share returns.
- Acquisition yields, tenant credit quality and the lower investment-grade share of year-to-date acquired rental revenue (approximately 25%, versus 67% for comparable 2018 acquisitions).
- Whether occupancy and leasing performance stabilize, and whether impairment charges remain elevated.
- How share issuance and debt funding affect per-share FFO/AFFO growth, debt maturities and refinancing costs.
- Dividend coverage and cash generation: AFFO coverage is a non-GAAP measure and does not equal cash available after all investing and financing needs.
- U.K. currency exposure, cross-currency hedge performance, and potential sensitivity to interest rates, capital-market access and tenant credit conditions.