Business context and reporting period
Realty Income Corporation, a REIT focused on long-term net-leased commercial properties, reported unaudited results for the quarter and six months ended June 30, 2015. At quarter-end it owned 4,452 properties in 49 states and Puerto Rico; occupancy was 98.2%, with a weighted average remaining lease term of about 10.3 years for leased single-tenant properties.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $253.9 million | $228.6 million | $500.7 million | $450.2 million |
| Net income available to common stockholders | $59.3 million | $51.4 million | $119.8 million | $98.6 million |
| Diluted net income per share | $0.25 | $0.23 | $0.52 | $0.46 |
| FFO available to common stockholders | $159.5 million | $142.4 million | $312.4 million | $276.9 million |
| AFFO available to common stockholders | $159.1 million | $141.2 million | $311.2 million | $273.8 million |
- For the six months, rental revenue rose 9.3% to $476.6 million; same-store rents increased 1.4%. Q2 rental revenue grew 8.8%, while same-store rents increased 1.5%.
- Six-month operating cash flow was $321.7 million, versus $298.8 million. Investing used $875.2 million, mainly for real estate investment of $924.5 million. Financing provided $568.4 million. Cash ended the period at $18.7 million.
- At June 30, total assets were $11.73 billion and total liabilities were $5.74 billion. Debt comprised $3.79 billion of notes, $769.5 million of mortgages, $430 million drawn on the revolving facility and $320 million of term loans. Management reported total borrowings of $5.31 billion, or 32.8% of market capitalization.
- Cash and available capacity under the new credit facility were $18.7 million and $1.57 billion, respectively. Management said liquidity was sufficient for the next 12 months. Debt-service and fixed-charge coverage were 4.0x and 3.6x.
- Common distributions paid in the first half were $258.3 million, equal to 83.0% of AFFO. The monthly common dividend was increased to $0.19 per share in July; the filing gives no earnings or AFFO forecast.
Material changes versus prior comparable period
- Revenue and earnings increased, reflecting acquisitions and modest same-store rent growth. Six-month diluted net income per share rose 13.0%; diluted AFFO per share rose 6.3%.
- Interest expense increased to $117.1 million for the first half from $104.4 million, primarily following 2014 note issuances. Depreciation and amortization also increased with portfolio growth.
- Six-month acquisition investment was $931.2 million for 166 properties, compared with $1.06 billion for 402 properties in 2014. The 2015 acquisitions were 100% leased, with a 17.5-year weighted average lease term and a 6.4% initial weighted average contractual lease rate.
- The occupancy rate declined to 98.2% from 98.4% at December 31, 2014. The company re-leased 124 properties during the first half, at a 102.5% rent recapture rate.
- Property-sale gains increased to $10.9 million for the first half from $5.8 million. Impairment provisions also increased, to $5.3 million from $2.2 million.
Outlook, commentary, risks and unusual items
- Management anticipated approximately $50 million of property sales for full-year 2015 and intended to reinvest proceeds in acquisitions if attractive opportunities were available; it cautioned that neither sales nor reinvestment was assured.
- In June, the company replaced its prior facility with a $2.0 billion unsecured revolving credit facility, maturing in June 2019 with two optional six-month extensions, plus a $1.0 billion accordion feature. It also entered a $250 million term loan due 2020; a swap fixes its rate at 2.67%.
- Interest-rate exposure remains relevant: a 1% rate change on the $430 million revolver balance would change annual interest cost by about $4.3 million. The company cited tenant defaults, property impairments, capital-market access, interest-rate changes, economic conditions, and real-estate illiquidity among key risks.
- Q2 impairment provisions were $3.2 million on five properties; first-half provisions were $5.3 million. Q2 property-sale gains were $3.7 million. These items affect GAAP earnings; FFO and AFFO are non-GAAP measures and are not substitutes for cash flow or liquidity measures.
- Ten properties with a $9.0 million carrying value were held for sale. The company reported ordinary-course legal proceedings that it did not expect to materially adversely affect its financial position or results.
- First-half acquisitions included $720 million of preliminary purchase-price allocations subject to change. Management said the 2015 accounting update on debt issuance-cost presentation was not expected to have a material impact.
Most important facts for investors to verify
- Whether acquisition yields and rent growth translate into sustainable per-share AFFO growth, given acquisition funding and share issuance.
- Tenant and industry concentration, credit quality, lease expirations, occupancy, and the performance of recently acquired properties.
- Debt maturities and refinancing needs, revolver usage, interest-rate sensitivity, covenant headroom, and access to equity and debt markets.
- Dividend coverage and sustainability, including the effects of capital spending, acquisition funding, and REIT distribution requirements.
- The effect of property impairments, sale gains, and final purchase-price allocations on reported results.