REALTY INCOME CORP quarterly report, Q3 FY2014

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Realty Income Corporation — Q3 2014 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2014; unaudited. Realty Income is a net-lease REIT focused on monthly dividend income. At quarter-end, it owned 4,284 properties across 49 states and Puerto Rico, with 98.3% occupancy and a weighted average remaining single-tenant lease term of approximately 10.4 years.

Financial performance and position

  • Revenue: Q3 total revenue was $235.7 million, up 16.6% from $202.1 million; rental revenue rose 16.1% to $226.8 million. Nine-month revenue was $685.9 million, up 21.6%; rental revenue increased 22.0% to $662.8 million.
  • Profit and EPS: Q3 net income attributable to the Company was $73.3 million; net income available to common stockholders was $57.9 million, or $0.26 per diluted share, versus $41.1 million and $0.21 a year earlier. Nine-month common net income was $156.5 million, or $0.72 per diluted share, versus $149.8 million and $0.80.
  • REIT operating measures: Q3 FFO was $142.3 million ($0.64 diluted per share), up 22.6% in total and 8.5% per share. Nine-month FFO was $419.2 million ($1.93 per share), up 24.2% and 7.8%, respectively. AFFO was $142.4 million ($0.64 per share) for Q3 and $416.3 million ($1.92 per share) for nine months. FFO and AFFO are non-GAAP supplemental measures, not substitutes for GAAP results or cash flow.
  • Cash flow: Nine-month operating cash flow was $440.1 million, compared with $345.7 million. Investing used $1.054 billion, including $1.076 billion of net real estate investment; financing provided $621.0 million. Common distributions paid were $356.7 million.
  • Margins and property operations: Same-store rent grew 1.4% in Q3 and 1.5% for nine months. The filing does not present a conventional operating-margin measure. General and administrative expense was 4.8% of the company’s defined revenue base in Q3, versus 8.4% a year earlier.
  • Debt and liquidity: Debt comprised $3.785 billion of notes and bonds, $862.2 million of mortgages, a $70 million term loan and $45 million drawn on the credit facility. Including $220 million of mandatorily redeemable preferred stock, obligations totaled about $4.98 billion, or 34.3% of reported market capitalization. Cash was $16.9 million; available capacity under the $1.5 billion facility was $1.46 billion. Management said resources were sufficient for liquidity needs over the next 12 months. Debt-service coverage was 3.7x and fixed-charge coverage 3.3x; stated covenants were met.

Changes versus the prior comparable period

  • Revenue growth primarily reflected acquisitions: properties acquired in 2014 and 2013 added rental revenue, while same-store rent growth was more modest. Q3 occupancy was 98.3%, versus 98.2% at year-end 2013 and 98.1% a year earlier.
  • Q3 net income available to common stockholders increased, while nine-month diluted EPS declined despite higher total common net income. The nine-month comparison is affected by 2013’s unusually large property-sale gains ($50.5 million versus $16.8 million in 2014), the 2013 ARCT merger costs, and a 2014 $6.0 million non-cash preferred-stock redemption charge.
  • Debt and total assets increased from year-end 2013; common shares outstanding rose to 222.7 million from 207.5 million, including an April 2014 issuance of 13.8 million shares that raised $528.6 million net.

Outlook, commentary, and risks

  • Management anticipated approximately $100 million of property sales for full-year 2014 and intended to reinvest proceeds in acquisitions where attractive opportunities were available. No earnings or FFO guidance was provided in the supplied filing text.
  • The company invested $1.24 billion in 439 properties and developments during the first nine months, with a 7.1% initial weighted average contractual lease rate and a 12.6-year weighted average lease term. These are contractual estimates and actual returns are not assured.
  • Common monthly dividends increased four times in 2014. The October rate of $0.1831042 per share represented an annualized $2.1972504; management cautioned it could not guarantee dividend levels or continued increases. Nine-month common distributions were 85.7% of AFFO.
  • In September, Realty Income gave notice to redeem all 8.8 million Class E preferred shares for $25 per share plus accrued dividends; redemption occurred in October. The notice triggered a $220 million liability reclassification and a $6.0 million non-cash charge. The company issued $250 million of 4.125% notes due 2026 in September; proceeds partly repaid credit-facility borrowings.
  • Accounting presentation changed after early adoption of ASU 2014-08: disposals not representing a major strategic shift generally remain in continuing operations. This affects comparability of discontinued operations and property-sale results.
  • Risks include tenant defaults and credit deterioration, interest-rate changes, access to debt and equity markets, real-estate valuation and impairment, property illiquidity, inflation outpacing lease increases, environmental or disaster exposure, REIT qualification, and potential disruption from activist stockholders. Management reported effective disclosure controls and no material control changes or weaknesses during the quarter.

Important facts for investors to verify

  • Whether acquisition-driven rent and FFO growth translates into sustained per-share growth after equity issuance and higher financing costs.
  • Tenant credit quality and concentration: the top 20 tenants represented approximately 54% of annualized revenue; Walgreens was 5.4%, FedEx 5.1%, and Dollar General 4.9%.
  • Debt maturities, variable-rate exposure, refinancing access, and compliance with facility and note covenants; the credit facility’s initial term expires in May 2016, with an optional one-year extension.
  • Dividend coverage using operating cash flow and AFFO, and the effect of the Class E redemption and continuing Class F preferred dividends.
  • Execution of the stated 2014 property-sale plan, acquisition yields, occupancy and re-leasing outcomes, and final purchase-price allocations for recent acquisitions, which included preliminary valuations.
  • Effects of the revised discontinued-operations presentation and the unusual 2013 sale gains and merger-related costs when comparing periods.