Business context and reporting period
Realty Income Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The REIT owns long-term, primarily net-leased commercial properties and pays monthly common dividends. At quarter-end it owned 5,028 properties across 49 states and Puerto Rico, leased to tenants in 47 industries.
Financial and operating performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $300.2m | $271.0m | $598.2m | $538.2m |
| Net income | $81.3m | $76.1m | $170.3m | $146.6m |
| Net income available to common stockholders | $81.1m | $69.0m | $152.7m | $132.5m |
| Diluted net income per share | $0.30 | $0.27 | $0.57 | $0.53 |
| FFO per diluted share | $0.75 | $0.70 | $1.46 | $1.38 |
| AFFO per diluted share | $0.76 | $0.71 | $1.53 | $1.42 |
Quarterly rental revenue rose 10.7% to $288.0m; same-store rents increased 0.4%. For the first six months, rental revenue grew 11.0% to $573.9m and same-store rents increased 1.0%. Growth chiefly reflected properties acquired in 2016 and 2017. FFO and AFFO are non-GAAP measures and should be considered alongside GAAP results and cash flows.
- Cash flow: Six-month operating cash flow was $460.6m, compared with $361.4m. Investing activities used $665.3m, including $696.1m of real estate investment and $44.0m of property-sale proceeds. Financing activities provided $206.2m. Cash at June 30 was $10.9m.
- Distributions: Common distributions paid totaled $335.4m for the six months, or 81.9% of AFFO. The monthly common dividend increased to $0.2115 per share in July; the filing reports a $2.538 annualized rate.
- Margins and expenses: Q2 G&A was 5.5% of revenue excluding tenant reimbursements, versus 5.4% a year earlier. Property expense net of reimbursements was 1.6% of the stated revenue base, versus 1.4%. Depreciation and amortization and interest expense increased with portfolio growth and financing activity.
- Portfolio: Occupancy was 98.5% (4,952 properties leased), versus 98.3% at year-end 2016 and 98.0% a year earlier. The weighted-average remaining lease term on leased single-tenant properties was approximately 9.6 years.
Debt, liquidity and capital
Total borrowings were approximately $6.02bn, or 28.4% of reported total market capitalization. Debt to annualized quarterly Adjusted EBITDA was 5.6x, compared with 5.1x a year earlier. The weighted-average rate on combined borrowings was 4.1%; notes and bonds had a 4.4% weighted-average rate and 7.9 years’ weighted-average remaining maturity. Cash and available revolving-credit capacity were $10.9m and $1.35bn, respectively. Management said cash, operating cash flow and borrowing capacity should meet liquidity needs for the next 12 months.
In March, the company issued $700m of unsecured notes due 2026 and 2047, generating approximately $705.2m net proceeds, and issued 11.85m common shares for $704.9m net. In April, it redeemed all 16.35m Class F preferred shares for $408.75m plus accrued dividends. The credit facility and debt covenants were reported in compliance. Credit ratings were investment grade, with positive outlooks from Moody’s and S&P and a stable outlook from Fitch.
Changes, outlook, risks and unusual items
- During the first half, the company invested $691.9m in 126 properties and development or expansion projects. These were 100% leased, with a 14.8-year weighted-average lease term and a 6.3% initial weighted-average contractual lease rate. Actual returns are not guaranteed.
- Management anticipated $75m–$100m of property sales in 2017 and intended to reinvest proceeds where attractive opportunities were available. No earnings guidance was provided in the filing text.
- Management reported that the portfolio was performing well and supported monthly dividends, but cautioned that dividend levels and future increases are not assured. The July dividend was declared after quarter-end.
- Six-month common earnings and FFO included a $13.4m noncash preferred-share redemption charge (about $0.05 per share). The charge related to original issuance costs; the preferred shares were redeemed in April.
- Other period items included $13.4m of gains on first-half property sales, $7.7m of impairment provisions and a $10.7m insurance receivable recorded for two damaged buildings.
- Key risks cited include tenant defaults and concentration, interest-rate changes, access to debt and equity markets, property-price and credit-market volatility, real estate illiquidity, impairments, environmental matters, natural disasters, REIT qualification and legal proceedings. The top 20 tenants represented about 53% of annualized revenue; Walgreens represented 6.7%.
- The company reported routine legal proceedings that it did not expect to materially adversely affect financial position or results. It had $64.3m of construction-contract commitments and $5.2m of property improvement and leasing commitments.
Important facts for investors to verify
- Reconcile reported earnings growth with acquisition-driven revenue, share-count growth and the $13.4m preferred redemption charge; assess FFO/AFFO adjustments against GAAP cash flows.
- Review debt maturities and refinancing needs, especially the $175m notes due September 2017, the $350m notes due January 2018 and the $70m term loan due January 2018.
- Assess tenant and industry exposure, lease expirations, occupancy and the sustainability of same-store rent growth and the dividend.
- Check whether acquisitions achieve expected contractual returns and whether anticipated property sales and reinvestment occur on favorable terms.
- Monitor variable-rate exposure: the filing estimated a 1% rate change would alter annual interest cost on the credit-facility balance by $6.5m.