Business context and reporting period
Realty Income Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2022. The REIT owns and leases commercial properties, primarily under long-term net leases. Its November 2021 merger with VEREIT materially expanded the portfolio and affects comparisons with 2021 reported results.
At quarter-end, the company owned 11,427 properties across the U.S., Puerto Rico, the U.K. and Spain, with 98.9% occupancy, approximately 218.5 million leasable square feet and a weighted-average remaining lease term of 8.8 years. Management reorganized the business into one reportable segment during the quarter.
Financial and operating highlights
| Metric | Q2 2022 | Comparable period |
|---|---|---|
| Total revenue | $810.4 million | $463.3 million in Q2 2021; reported growth of 74.9% |
| Net income available to common stockholders | $223.2 million; $0.37 diluted per share | $124.5 million; $0.33 per share in Q2 2021 |
| FFO available to common stockholders | $608.8 million; $1.01 per diluted share | $314.4 million; $0.84 per share in Q2 2021 |
| Normalized FFO | $611.5 million; $1.02 per diluted share | $327.7 million; $0.88 per share in Q2 2021 |
| AFFO | $583.7 million; $0.97 per diluted share | $327.6 million; $0.88 per share in Q2 2021 |
Because VEREIT was not included in Q2 2021 reported results, reported growth is not like-for-like. On the filing’s unaudited pro forma basis, Q2 2021 revenue was $765.3 million and net income was $186.7 million, compared with $810.4 million and $223.8 million in Q2 2022; pro forma diluted EPS was $0.35 versus $0.37.
- Six-month revenue was $1.618 billion, versus $905.6 million; net income available to common stockholders was $422.6 million, versus $220.4 million. Six-month diluted EPS was $0.71 versus $0.59.
- Same-store rental revenue increased 2.0% for the quarter and 3.0% for the six-month period. Excluding specified deferred and uncollected rent, the respective increases would have been 2.6% and 3.5%.
- Quarter-end portfolio occupancy was 98.9%, up from 98.5% at December 31, 2021. Six-month rent recapture on re-leased units was 105.9%.
- Six-month operating cash flow was $1.257 billion. Investing activities used $2.920 billion, including $3.166 billion invested in real estate; financing activities provided $1.630 billion. Cash, cash equivalents and restricted cash totaled $273.7 million at period-end; balance-sheet cash and equivalents alone were $172.8 million.
- Quarter-end total assets were $44.952 billion, total liabilities $18.549 billion and total equity $26.403 billion. Debt balances on the balance sheet included $13.589 billion of notes, $947 million of mortgages, $1.169 billion of credit-line/commercial-paper borrowings and a $250 million term loan.
- Management reported $15.82 billion of outstanding borrowings, equal to approximately 27.3% of market capitalization. Net debt to annualized Adjusted EBITDAre was 5.3x (5.2x on a pro forma basis).
- Common-stock distributions paid in the first half were $884.1 million, or 76.0% of AFFO. The monthly dividend rose to $0.2475 per share beginning with the July 2022 payment.
Material changes, outlook and risks
- Revenue and earnings rose substantially year over year, primarily reflecting VEREIT and property acquisitions. Higher depreciation and interest expense also reflected the larger portfolio and its financing. Q2 merger and integration costs were $2.7 million; the prior-year quarter included $13.3 million. Six-month 2021 results also included a $46.5 million debt-extinguishment loss.
- During the first half, Realty Income invested $3.23 billion in acquisitions and development, including 340 acquisitions and 83 properties under development. The total initial weighted-average cash lease yield was 5.7%. It raised $1.7 billion gross through its ATM stock program and issued sterling-denominated notes.
- In April, the company replaced its $3.0 billion revolving facility with a $4.25 billion multicurrency facility maturing in June 2026, with extension options. Available capacity at June 30 was $4.03 billion. The company reported compliance with its debt covenants; its senior unsecured ratings were A3 and A-, both with stable outlooks.
- Management stated that cash, operating cash flow and borrowing capacity should meet liquidity needs for the next 12 months. Approximately $1.9 billion of obligations were due in the remainder of 2022. The filing provides no specific earnings or FFO guidance.
- Subsequent to quarter-end, the U.S. commercial-paper limit was increased to $1.5 billion and a new European commercial-paper program with a $1.5 billion limit was established. In July, six of seven properties in industrial partnerships were sold; the gross price was $905 million and estimated Realty Income net proceeds were approximately $120 million.
- The company had agreed to acquire the Encore Boston Harbor resort and casino for $1.7 billion under a 30-year net lease, with closing expected in Q4 2022. The transaction remained subject to closing conditions and was not assured.
- Development-construction commitments were $678.6 million, expected to be paid over the following 12 months; additional property-related commitments were $49.0 million. The VEREIT purchase-price allocation remained preliminary, including approximately $3.72 billion of goodwill, and could change.
- Risks cited include interest-rate and foreign-exchange movements, access to capital, tenant defaults and economic conditions, inflation potentially outpacing contractual rent increases, real-estate impairment, COVID-19 impacts and whether VEREIT merger benefits are realized. Management said disclosure controls were effective; it also integrated the two ERP systems during the quarter.
Important facts for investors to verify
- Assess acquisition-driven reported growth against pro forma and same-store trends, and note that FFO, Normalized FFO and AFFO are non-GAAP measures with company-specific definitions.
- Review debt maturities, variable-rate exposure and refinancing needs, especially commercial paper maturing between July 2022 and January 2023, alongside available revolving capacity and covenant headroom.
- Track cash distributions relative to AFFO and operating cash flow, and the effect of ATM share issuance on per-share growth and dilution.
- Confirm completion, proceeds and accounting effects of the industrial partnership sales and the proposed Wynn transaction; neither the latter’s closing nor its terms were assured.
- Monitor the final VEREIT acquisition accounting, tenant collections, rent escalation versus inflation, and the substantial committed development spending.