Business context and reporting period
Realty Income Corporation is a REIT that owns and leases primarily single-tenant commercial properties under long-term net leases. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. At quarter-end, the company owned 6,588 properties, was 98.6% occupied, and had a weighted-average remaining lease term of approximately 9.0 years.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $404.6m | $374.2m | $1,233.5m | $1,094.1m |
| Net income available to common stockholders | $22.9m | $101.0m | $277.6m | $307.2m |
| Diluted net income per share | $0.07 | $0.32 | $0.81 | $0.98 |
| FFO available to common stockholders | $283.0m | $262.0m | $848.4m | $759.2m |
| Diluted FFO per share | $0.82 | $0.82 | $2.48 | $2.43 |
| AFFO available to common stockholders | $282.5m | $265.4m | $875.0m | $768.0m |
| Diluted AFFO per share | $0.81 | $0.83 | $2.55 | $2.46 |
Revenue rose 8.1% in Q3 and 12.7% year to date, primarily reflecting acquisitions. Same-store rents declined 4.4% in Q3 and 1.5% year to date; management says those calculations include certain deferred and uncollected rent. The company did not present a conventional operating-margin measure. General and administrative expenses were 4.3% of revenue excluding tenant reimbursements in Q3 and 4.5% year to date, versus 4.6% and 4.8% in 2019.
GAAP earnings fell sharply, mainly because impairment charges and rent reserves increased. Q3 impairment expense was $105.1m versus $13.5m; nine-month expense was $123.4m versus $31.2m. Rental revenue reserves were $24.1m in Q3 and $34.4m year to date, compared with $0.4m and $2.7m in 2019. Q3 also included a $13.7m gain on real estate sales. FFO and AFFO are non-GAAP supplemental measures and should not be treated as cash flow or liquidity measures.
Operating cash flow for the first nine months was $809.8m versus $777.7m. Investing used $1,111.8m, principally for real estate investment; financing provided $968.8m. Cash and cash equivalents were $724.8m at September 30, 2020, versus $54.0m at year-end 2019.
Total borrowings were approximately $8.45bn, including $7.01bn of notes and bonds, $856.1m of credit-facility and commercial-paper borrowings, a $250m term loan, and $334.7m of mortgages. The company reported $2.4bn available under its $3.0bn revolving facility; commercial paper outstanding was $300m. Notes and bonds had a 3.7% weighted-average rate and 8.2-year weighted-average remaining maturity. The company reported compliance with debt covenants and a 5.2x debt-service coverage ratio under its note covenants. Nine-month dividends paid were $716.5m, or 81.9% of AFFO. These figures are not a substitute for reviewing the debt maturity schedule and covenant definitions.
Material changes and unusual items
- COVID-19-related rent reserves and asset impairments materially affected reported earnings. Q3 impairment included $79.0m on 12 theater properties. The company reserved $17.2m of receivables for 37 of 78 theater properties and shifted those leases to cash-basis accounting; theater exposure was 5.7% of annualized contractual rental revenue.
- Reported rent collections through October 31 were 92.9% for October and 93.1% for Q3 overall; investment-grade tenants were reported at 100% for the periods shown. Collection figures exclude percentage rents and tenant reimbursements and are not necessarily indicative of future collections.
- The company acquired 167 properties for $1.276bn in the first nine months, compared with 227 properties for $1.990bn in 2019. Acquisitions and 13 U.S. properties under development totaled $1.299bn.
- Common shares outstanding increased to 350.6m from 333.6m at year-end 2019. The company raised approximately $1.2bn from common-stock issuance in the first nine months.
- Debt actions included issuance of $950m of 3.25% notes due 2031, early redemption of $250m of 5.75% notes due 2021 (resulting in a $9.8m extinguishment loss), and repayment at maturity of a $250m term loan.
- The monthly dividend was increased five times in 2020; the October-declared dividend was $0.234 per share. In October, the company also issued £400m of 1.625% notes due 2030, with proceeds used partly to repay Sterling borrowings and settle a currency swap.
Outlook, commentary, and risks
No specific earnings or acquisition guidance is provided. Management cautioned that revenue could decline in the foreseeable future and that pandemic impacts could intensify. It expects available cash, operating cash flow, and borrowing capacity to meet liquidity needs for the next 12 months, and expected compliance with unsecured-debt and credit-facility covenants over that period based on conditions at September 30.
Key risks include tenant defaults, further rent deferrals or abatements, tenant bankruptcy or lease rejection, additional impairments, difficulty re-leasing vacant properties, capital-market access and financing costs, interest- and foreign-exchange-rate movements, and the uncertain duration and economic effects of COVID-19. Management noted that rent collections to date may not predict future collections. The company also recorded a $3.5m former-CFO severance charge in Q1; a successor CFO was appointed in October for an effective date in January 2021.
Most important facts for investors to verify
- Whether theater and other stressed tenants resume paying rent, and whether receivable reserves or impairment charges increase.
- Subsequent rent collections, concessions, and repayment of deferred rent; the reported collection percentages are measured through October 31.
- Liquidity and refinancing capacity, including commercial-paper repayment/backstop arrangements, scheduled maturities, and covenant headroom.
- Per-share FFO/AFFO trends after considering share issuance and the limits of these non-GAAP measures.
- Dividend coverage and sustainability if collections, occupancy, or operating performance weaken.