Realty Income Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; balance-sheet comparisons are against December 31, 2014. Realty Income is a REIT focused on long-term, primarily net-leased commercial properties. At quarter-end it owned 4,473 properties across 49 states and Puerto Rico, with 98.3% occupancy.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $258.9 million | $235.7 million | $759.6 million | $685.9 million |
| Net income | $67.8 million | $73.6 million | $201.7 million | $193.9 million |
| Net income available to common stockholders | $60.7 million | $57.9 million | $180.5 million | $156.5 million |
| Diluted earnings per common share | $0.26 | $0.26 | $0.78 | $0.72 |
| FFO per diluted share | $0.69 | $0.64 | $2.05 | $1.93 |
| AFFO per diluted share | $0.70 | $0.64 | $2.06 | $1.92 |
- Nine-month rental revenue increased 9.2%; same-store rents rose 1.3%. Management attributed growth chiefly to acquisitions and, to a lesser extent, same-store rent increases.
- Nine-month operating cash flow was $472.9 million, up from $440.1 million. Investing activities used $995.3 million, principally for real estate investment; financing activities provided $525.5 million. Cash at quarter-end was $7.1 million.
- At September 30, total assets were $11.74 billion and total liabilities were $5.67 billion. Debt comprised $439.0 million on the revolver, $320.0 million in term loans, $706.1 million in mortgages and $3.79 billion in notes and bonds.
- The company reported $1.56 billion of available capacity under its $2.0 billion revolving facility. Management said cash, operating cash flow and borrowing capacity should meet liquidity needs for the next 12 months.
- Combined borrowings were approximately 30.9% of market capitalization. Debt-service and fixed-charge coverage ratios were 4.1x and 3.7x, respectively; the company reported compliance with applicable debt covenants.
- Common distributions paid in the first nine months totaled $392.8 million, or 82.3% of AFFO. The monthly common dividend increased five times during 2015; the October 2015 rate was $0.1905 per share.
Material changes and notable items
- Revenue growth did not translate into higher quarterly GAAP net income: Q3 net income fell to $67.8 million from $73.6 million. Common-stockholder income rose because preferred dividends were lower following the October 2014 redemption of Class E preferred stock. For the nine-month period, common income and diluted EPS increased.
- Interest expense rose to $181.1 million for the first nine months from $157.2 million. The filing cites higher average borrowings and prior-year note issuances; Q3 2015 also included a $5.2 million loss on interest-rate swaps.
- Impairment provisions increased to $9.2 million for the first nine months from $2.7 million. Q3 2015 impairments were $3.9 million. Real-estate sale gains were $17.1 million for the nine months, versus $16.8 million.
- The company invested $1.1 billion in 195 properties or development/expansion projects in the first nine months, at an initial weighted-average contractual lease rate of 6.5% and a weighted-average lease term of 16.7 years. The comparable 2014 investment was $1.24 billion in 439 properties at 7.1% and 12.6 years.
- Occupancy was 98.3%, compared with 98.4% at year-end 2014. Of 221 properties re-leased in the first nine months, annual rent of $32.8 million compared with prior rent of $32.3 million, a 101.5% rent recapture rate.
Outlook, risks and contingencies
- No quantified earnings or FFO guidance is provided. Management expected approximately $65 million of property sales for full-year 2015 and intended to reinvest proceeds in acquisitions if attractive opportunities were available; neither sales nor reinvestment was assured.
- Management described the portfolio as performing well and stated that it intended to continue monthly dividends, while noting dividends and future increases are not guaranteed. The October 2015 common-stock offering raised net proceeds of $517.0 million; a portion was used to repay revolver borrowings and the remainder was available for general corporate purposes, potentially including acquisitions.
- Key stated risks include tenant defaults, economic and real-estate market conditions, competition, interest-rate changes, access to debt and equity markets, property impairments, environmental liability, natural disasters, REIT qualification and legal proceedings. A 1% change in rates on the $439.0 million revolver balance would change annual interest cost by approximately $4.4 million.
- At quarter-end, commitments included $58.4 million under construction contracts and $2.3 million for property improvements and leasing costs. Routine legal proceedings were not expected by management to materially affect financial position or results.
- FFO and AFFO are non-GAAP supplemental measures, not substitutes for GAAP results or cash-flow and liquidity measures; calculation methods may differ among REITs. The filing identifies preliminary purchase-price allocations for $117.2 million of 2015 investments, subject to change.
Important facts for investors to verify
- Whether acquisition yields and rent growth adequately compensate for the lower 6.5% initial contractual lease rate on 2015 investments and the company’s financing costs.
- Tenant and industry concentration, tenant credit quality, lease expirations, and the durability of the reported 98.3% occupancy and 101.5% rent recapture.
- Near-term refinancing needs, including $150 million of notes due in November 2015 and $225.6 million of mortgage maturities in 2016, plus access to capital markets and revolver capacity.
- How impairments, swap fair-value changes, property-sale gains and the non-GAAP FFO/AFFO adjustments affect recurring earnings and dividend coverage.
- Completion and final valuation of acquisitions with preliminary purchase-price allocations, and use of proceeds from the October 2015 equity offering.