Realty Income Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2014. Interim financial statements are unaudited. Realty Income is a REIT focused on long-term net-leased commercial properties and monthly distributions.
Business context and portfolio
At quarter-end, the company owned 4,378 properties across 49 states and Puerto Rico, with 71.6 million leasable square feet. Occupancy was 98.0% (4,292 properties leased), down from 98.4% at year-end 2014. The portfolio served 508 tenants across 47 industries; approximately 48% of annualized rent was from investment-grade-rated companies or subsidiaries. Weighted-average remaining lease term for leased single-tenant properties was approximately 10.1 years.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Total revenue | $246.9 million | $221.6 million |
| Rental revenue | $235.1 million | $214.1 million |
| Net income attributable to company | $67.3 million | $57.7 million |
| Net income available to common stockholders | $60.5 million; $0.27 per diluted share | $47.2 million; $0.23 per diluted share |
| FFO available to common stockholders | $152.9 million; $0.68 per diluted share | $134.5 million; $0.65 per diluted share |
| AFFO available to common stockholders | $152.1 million; $0.67 per diluted share | $132.7 million; $0.64 per diluted share |
| Net cash from operating activities | $117.9 million | $114.2 million |
| Net cash used in investing activities | $163.8 million | $593.1 million |
| Net cash from financing activities | $54.3 million | $482.8 million |
Revenue increased 11.4%; rental revenue rose 9.8%, including 1.4% same-store rent growth. FFO and AFFO per diluted share increased 4.6% and 4.7%, respectively. GAAP earnings included a $7.2 million property-sale gain, versus $3.9 million in Q1 2014; therefore, net income growth also reflects changes in disposition gains and other items. The filing does not present a single operating-margin measure.
At March 31, total assets were $11.09 billion, total liabilities $5.42 billion, and cash and equivalents $12.2 million. Debt comprised approximately $3.79 billion of notes, $799 million of mortgages (net), $370 million drawn on the credit facility, and a $70 million term loan. Total borrowings were approximately $5.02 billion, or 29.2% of reported market capitalization. The company reported $1.13 billion of remaining credit-facility capacity at quarter-end and compliance with debt covenants; debt-service coverage was 3.9x and fixed-charge coverage 3.4x.
Common-stock distributions paid were $126.7 million, 83.3% of quarterly AFFO; AFFO exceeded distributions by $25.4 million. Cash distributions per common share were approximately $0.561, up 2.6% year over year. Management stated that cash, operating cash flow, and borrowing capacity were sufficient for liquidity needs over the next 12 months.
Material changes and notable items
- Q1 2015 investment in 83 new, development, or expansion properties was $209.9 million, compared with $656.7 million in 337 properties in Q1 2014. The 2015 investments were 100% leased, with a 15.5-year weighted-average lease term and a 6.9% initial weighted-average contractual lease rate. The stated rate is estimated and does not assure realized returns.
- Same-store rents increased 1.4%. Of 64 lease expirations, 43 properties were re-leased; annual rent on those leases was 99.2% of prior rent. Occupancy declined from 98.4% at December 31, 2014 to 98.0% at March 31, 2015.
- Interest expense rose to $58.5 million from $51.7 million, primarily reflecting 2014 note issuances. Average borrowing costs were reported at 4.52%, broadly similar to 4.51% in Q1 2014.
- Investment in real estate fell to $202.8 million of cash outflow from $604.0 million. Property sales generated $22.3 million proceeds and a $7.2 million gain; nine investment properties were sold.
- Share issuance increased: the dividend reinvestment and stock purchase plan raised $102.2 million in Q1 2015, versus $2.3 million in Q1 2014. In April 2015, the company issued 5.5 million shares for net proceeds of $276.3 million, used to repay credit-facility borrowings; reported available capacity rose to approximately $1.4 billion after that repayment.
Outlook, risks, and contingencies
Management anticipated approximately $50 million of property sales for full-year 2015 and intended to reinvest proceeds where attractive acquisition opportunities were available. No earnings or FFO guidance was provided. The monthly dividend was increased three times during 2015; the April rate of $0.1895 per share equates to an annualized $2.274, but the company cautioned that future dividend levels and increases are not assured.
Key risks identified include tenant defaults and vacancies, economic and competitive conditions, interest-rate changes, access to debt and equity markets, real-estate valuation and impairment, environmental exposure, natural disasters, and maintaining REIT qualification. The company recorded $2.1 million of impairments in Q1 2015. It reported $54.5 million of construction-contract commitments and $2.0 million of tenant-improvement and leasing commitments, expected to be paid within 12 months. Routine legal proceedings were not expected by management to have a material adverse effect. Notes and bonds included $150 million due in 2015 and mortgages included $68.4 million scheduled to mature in 2015; the credit facility’s initial term expires in May 2016, with a one-year extension option.
Important facts for investors to verify
- Whether occupancy, tenant credit quality, and rent recapture remain resilient, particularly given the quarter’s occupancy decline.
- Whether acquisition yields and development returns are realized as estimated, and whether planned property sales and reinvestment occur on expected terms.
- Debt maturities, credit-facility renewal or extension, interest-rate exposure, and continued covenant compliance.
- Dividend coverage using cash generation and AFFO, while recognizing FFO and AFFO are non-GAAP measures and are not substitutes for cash-flow analysis.
- The effect of equity issuance and share-count growth on per-share results and future distribution requirements.