Realty Income Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Realty Income is a REIT focused on long-term, net-leased commercial properties and monthly dividends. Financial statements are unaudited.
Business context and portfolio
At quarter-end, the company owned 5,694 properties across 49 states and Puerto Rico, with 92.7 million leasable square feet and 98.8% occupancy. Properties were leased to 260 major commercial tenants across 48 industries; approximately 51% of annualized rent came from investment-grade tenants or their subsidiaries. The portfolio’s weighted-average remaining lease term for leased single-tenant properties was about 9.3 years.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $338.1 million | $306.9 million | $985.3 million | $905.1 million |
| Net income available to common stockholders | $99.0 million | $87.9 million | $278.5 million | $240.7 million |
| Diluted GAAP earnings per share | $0.34 | $0.32 | $0.97 | $0.89 |
| FFO per diluted share | $0.81 | $0.77 | $2.39 | $2.22 |
| AFFO per diluted share | $0.81 | $0.77 | $2.40 | $2.30 |
Quarterly revenue increased 10.2% and diluted EPS increased 6.3% year over year. Nine-month revenue rose 8.9% and diluted EPS 9.0%. Same-store rent increased 1.0% in Q3 and 0.9% for the first nine months. FFO and AFFO are non-GAAP measures; the company cautions they are not substitutes for GAAP earnings or cash flow.
For the first nine months, operating cash flow was $689.8 million, compared with $641.5 million a year earlier. Investing activities used $1.368 billion, principally reflecting real estate investment; financing activities provided $681.4 million. Cash, cash equivalents and restricted cash ended at $15.7 million, including amounts not immediately available. Cash and cash equivalents on the balance sheet were $6.7 million.
Debt, liquidity and distributions
Total borrowings were approximately $6.8 billion at September 30, comprising $5.4 billion of notes and bonds, $774 million on the credit facility, $320 million of term loans and $306 million of mortgages. Debt was about 28.8% of reported total market capitalization; debt to annualized quarterly Adjusted EBITDAre was 5.5x, versus 5.2x a year earlier. Debt-service coverage was 4.6x, and the company reported compliance with applicable debt covenants.
Approximately $1.2 billion of capacity remained on the then-current revolving facility. Management said cash, operating cash flow and borrowing capacity were sufficient for liquidity needs over the next 12 months. In October, the company replaced the facility with a $3.25 billion unsecured arrangement, including a $3.0 billion revolver maturing in 2023 and a $250 million term loan due 2024. The new revolver’s stated all-in drawn pricing was 0.90% over LIBOR. S&P upgraded the company to A- with a stable outlook in August.
Nine-month common distributions were $564.7 million, or 82.1% of AFFO. The monthly dividend increased five times during 2018; the October-declared rate was $0.2205 per share, or $2.646 annualized. The company stated that future distributions remain subject to board discretion and business and financial conditions.
Material changes and unusual items
- Acquisitions totaled $1.47 billion for the first nine months, covering 591 properties and developments; initial weighted-average contractual lease rate was 6.3%, and weighted-average lease term was 14.4 years. Investment was substantially higher than the $956.9 million reported for the comparable 2017 period.
- Common stock issuance raised approximately $595.8 million in the first nine months, primarily through the ATM program. Outstanding common shares increased to 295.1 million from 284.2 million at year-end 2017.
- Nine-month impairment provisions rose to $25.0 million from $8.1 million. Q3 impairment was $6.9 million versus $0.4 million in Q3 2017. Property-sale gains were $18.8 million for nine months, compared with $17.7 million.
- 2017 comparative nine-month common earnings and FFO included a $13.4 million non-cash charge related to redemption of Class F preferred stock; there were no preferred dividends in 2018.
- Management reported 166 property re-leases during the first nine months and a 105.6% rent recapture rate. Seventy-four properties, with a carrying value of $65.4 million, were classified as held for sale at quarter-end.
Outlook, risks and contingencies
No specific earnings or FFO guidance was provided in the supplied filing text. Management anticipated approximately $150 million of property sales in the remainder of 2018, with proceeds intended for acquisitions if attractive opportunities were available; neither sales nor reinvestment was assured. Management also stated an expectation to continue monthly dividends but did not guarantee their level or continued increases.
Key disclosed risks include tenant defaults, occupancy and re-leasing conditions, real estate impairment, interest-rate changes, access to capital markets, market volatility, inflation outpacing contractual rent increases, environmental matters, natural disasters and legal proceedings. A 1% change in rates was estimated to alter annual interest costs by $7.7 million based on the quarter-end credit-facility balance. Legal actions were described as routine and not expected to materially adversely affect results. The company had $26.8 million of construction commitments and $8.1 million of property improvement and leasing commitments.
Subsequent events included the October credit-facility refinancing and appointment of Sumit Roy as CEO, succeeding John P. Case. The company planned to adopt the new lease accounting standard effective January 1, 2019 and was evaluating its impact, particularly for ground leases.
Important facts for investors to verify
- Whether acquisition growth and rent increases translate into durable same-store growth and AFFO per share, considering share issuance and financing costs.
- How the elevated impairment provisions and held-for-sale properties develop, and whether expected 2018 dispositions close at anticipated values.
- Debt maturities, variable-rate exposure, leverage and covenant headroom following the October refinancing; quarter-end cash alone was limited.
- Dividend sustainability against AFFO, operating cash flow, capital needs and required REIT distributions; AFFO is non-GAAP and not a liquidity measure.
- Tenant and industry concentration, including convenience stores at 12.1% of quarterly rental revenue and the top 20 tenants at approximately 54% of annualized revenue.