Realty Income Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; interim financial statements are unaudited. Realty Income is a REIT focused on long-term, primarily net-leased commercial properties. At quarter-end it owned 4,615 properties across 49 states and Puerto Rico.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total revenue | $267.1 million | $246.9 million; up 8.2% |
| Rental revenue | $256.8 million | $235.1 million; up 9.2% |
| Net income attributable to the Company | $70.2 million | $67.3 million |
| Net income available to common stockholders | $63.5 million | $60.5 million |
| Diluted GAAP earnings per share | $0.25 | $0.27 |
| FFO available to common stockholders | $170.6 million; $0.68 per diluted share | $152.9 million; $0.68 per diluted share |
| AFFO available to common stockholders | $175.9 million; $0.70 per diluted share | $152.1 million; $0.67 per diluted share |
| Cash from operating activities | $136.3 million | $117.9 million |
| Cash and cash equivalents | $8.7 million | $40.3 million at December 31, 2015 |
| Total debt borrowings | $5.13 billion | $5.02 billion at March 31, 2015 |
- Rental growth reflected acquisitions, including 2015 purchases, and 1.3% same-store rent growth. General and administrative expense was 4.8% of the company’s defined revenue base, versus 5.4% a year earlier; property expense net of tenant reimbursements was 2.3%, versus 1.7%.
- Investing activities used $294.7 million, including $313.2 million of real estate investment. Financing activities provided $126.8 million. Common distributions paid were $147.3 million; AFFO exceeded those distributions by $28.6 million.
- At March 31, debt comprised $3.65 billion of notes and bonds, $653.0 million drawn on the credit facility, $505.9 million of mortgages, and $320.0 million of term loans. The credit facility had $1.35 billion of available borrowing capacity. Reported debt/EBITDA was 5.3x; debt-service and fixed-charge coverage were 4.6x and 4.1x, respectively.
- Common equity increased to 251.1 million shares issued and outstanding from 250.4 million at year-end. The company raised $30.5 million through its ATM program and $3.5 million through its dividend reinvestment and stock purchase plan.
Material changes and portfolio developments
- Occupancy was 97.8%, down from 98.4% at year-end 2015; 101 properties were available for lease, compared with 71. Of 38 properties re-leased during the quarter, reported rent recapture was 112.1% overall and 102.1% excluding redevelopment-related re-leasing.
- The company invested $352.6 million in 103 new properties or properties under development or expansion, at a 6.6% initial weighted-average contractual lease rate and a 15.8-year weighted-average lease term. The properties were reported as 100% leased. Most investment was retail (85.7%, based on rental revenue).
- Eleven properties were sold for $11.0 million, generating $2.3 million in gains, compared with nine sales for $22.3 million and $7.2 million in gains in Q1 2015. Impairment provisions were $1.9 million, versus $2.1 million.
- Rental revenue growth did not translate into higher GAAP diluted EPS: common net income rose, but diluted EPS fell to $0.25 from $0.27. Weighted-average diluted common shares increased to 250.7 million from 225.8 million.
Outlook, commentary, and risks
- Management said operating cash flow, cash on hand, and borrowing capacity should meet liquidity needs for the next 12 months. It expects to use long-term or permanent capital for acquisitions and to repay future credit-facility borrowings; access to capital markets on acceptable terms is not assured.
- Management anticipated $50 million to $75 million of property sales in 2016 and intended to reinvest proceeds in acquisitions if attractive opportunities were available. No earnings or FFO guidance was provided in the filing text.
- The monthly common dividend was increased three times in 2016; the April rate was $0.199 per share, equivalent to an annualized $2.388. Q1 common distributions were 83.7% of AFFO. Management cautioned it cannot guarantee the dividend level or future increases.
- A non-cash $5.8 million loss from interest-rate-swap fair-value changes increased interest expense and reduced Q1 net income by about $0.02 per share. Management noted swap values are remeasured quarterly.
- Key disclosed risks include tenant defaults and vacancies, economic and real estate market conditions, competition, interest-rate changes, access to debt and equity capital, property impairment, environmental matters, natural disasters, and maintaining REIT qualification. A 1% interest-rate change on the credit-facility balance at quarter-end would change annual interest costs by approximately $6.5 million.
- The company reported investment-grade ratings with stable outlooks: Moody’s Baa1, S&P BBB+, and Fitch BBB+. It was in compliance with stated debt covenants. A $275 million note maturity was scheduled for September 2016.
- The top 20 tenants generated approximately 54% of annualized revenue; Walgreens was the largest listed tenant at 6.8%. Approximately 44% of annualized rent came from investment-grade tenants or their subsidiaries. Six properties with a $1.8 million carrying value were classified as held for sale.
Most important facts for investors to verify
- Whether occupancy stabilizes or improves after falling to 97.8%, and how vacancies, lease expirations, and tenant credit developments affect rent collection.
- Whether acquisition returns and lease terms support growth, including completion of preliminary purchase-price allocations for most Q1 acquisitions.
- Refinancing plans and terms for the $275 million September 2016 note maturity, and the company’s ongoing access to capital at acceptable costs.
- Dividend coverage and sustainability, considering AFFO, cash distributions, acquisition funding needs, and REIT distribution requirements.
- The effect of swap valuation changes, variable-rate borrowings, and interest-rate movements on reported earnings and cash interest expense.
- Tenant and industry concentration, particularly the contribution of the largest tenants and the reported 44% investment-grade rent share.