Business context and reporting period
Realty Income Corporation, a net-lease REIT focused on monthly dividends, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The business owned 3,681 properties in 49 states and Puerto Rico, with 98.2% occupancy and approximately 11.0 years of weighted-average remaining lease term for leased single-tenant properties.
The major development was the January 22, 2013 acquisition of American Realty Capital Trust (ARCT) for approximately $3.2 billion. It added 515 fully leased properties and materially increased the scale and diversity of the portfolio. Results are therefore not directly comparable with 2012 without accounting for acquisitions.
Financial performance and position
Amounts below are in millions of dollars except per-share data. The filing reports no explicit operating-margin measure.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $184.3 | $113.1 | $355.5 | $224.9 |
| Income from continuing operations | $50.8 | $38.2 | $83.0 | $75.1 |
| Net income | $54.7 | $43.4 | $126.6 | $82.7 |
| Net income available to common stockholders | $44.2 | $33.0 | $105.5 | $59.0 |
| Diluted net income per common share | $0.23 | $0.25 | $0.57 | $0.44 |
| Diluted FFO per common share | $0.60 | $0.49 | $1.15 | $0.95 |
| Diluted normalized FFO per common share | $0.61 | $0.49 | $1.22 | $0.95 |
| AFFO per common share | $0.59 | $0.50 | $1.19 | $1.00 |
For Q2, revenue rose 62.1% and common-stockholder net income rose 34.1%, while diluted GAAP earnings per share declined from $0.25 to $0.23, reflecting a substantially larger share count. FFO per share increased 22.4%. For the first six months, revenue rose 57.2%, common-stockholder net income rose 78.8%, and diluted FFO per share increased 21.1%. Management attributed most rental growth to acquired properties; same-store rent increased 1.1% in Q2 and 1.3% year to date.
Six-month operating cash flow was $221.4, versus $155.9 a year earlier. Investing used $699.4, primarily for property acquisitions, and financing provided $495.3, including $755.1 net proceeds from a common-stock offering. Cash at June 30 was $22.6. Common distributions paid were $191.7 and preferred dividends were $21.0. Common distributions were 87.3% of six-month AFFO, according to the company.
At June 30, total assets were $9.42 billion, total liabilities $4.31 billion, and total equity $5.11 billion. Debt consisted of $701.0 on the credit facility, $827.1 in mortgages, a $70.0 term loan and $2.45 billion of notes and bonds. Combined outstanding borrowings were approximately $4.05 billion, or 31.4% of stated market capitalization. The company reported covenant compliance, 4.1x debt-service coverage and 3.3x fixed-charge coverage. It had $299.0 of credit-facility capacity available at quarter end.
Material changes, outlook and risks
- ARCT acquisition and other property purchases drove substantial increases in revenue, assets, debt, depreciation and amortization. The purchase-price allocations remained preliminary; management said final valuations could differ significantly.
- Six-month merger costs were $12.6, with total ARCT transaction costs expected to be approximately $21.0. Six-month discontinued-operations income included $44.3 of property-sale gains, versus $4.0 in 2012, and $3.0 of impairment provisions.
- In July 2013, Realty Income issued $750 million of 4.65% notes due 2023. Proceeds repaid all credit-facility borrowings on July 16; remaining proceeds were for general corporate purposes and working capital, potentially including acquisitions.
- Management expected to continue property dispositions and anticipated exceeding $100 million of property sales in 2013, with proceeds intended for acquisitions if attractive opportunities were available. No earnings or FFO guidance was provided.
- The monthly common dividend increased to $0.1815417 per share in July, equivalent to an annualized $2.1785 per share. Management cautioned that future dividends and increases were not assured.
- Key stated risks include tenant defaults and concentration, acquisition integration and valuation, property impairment, interest-rate changes, access to debt and equity markets, real-estate and credit-market conditions, REIT qualification, environmental exposure, natural disasters and litigation. Top 15 tenants generated about 43% of annualized revenue; approximately 38% of annualized rent came from investment-grade tenants or their subsidiaries. A 1% rate change on the quarter-end credit-facility balance would change annual interest cost by about $7.0, before its subsequent repayment.
Important facts for investors to verify
- How much of the reported growth reflects ARCT and other acquisitions versus same-store rent growth, and whether acquisition returns meet the stated investment assumptions.
- Final ARCT and other acquisition purchase-price allocations, including acquired lease intangibles, assumed debt and any resulting depreciation or amortization effects.
- Post-quarter debt and liquidity after the $750 million note issuance and repayment of the credit facility, including future borrowing needs and covenant headroom.
- Dividend coverage using operating cash flow and AFFO, while recognizing that FFO and AFFO are non-GAAP measures and are not substitutes for cash-flow analysis.
- Tenant credit quality, concentration and lease expirations, alongside the effect of property sales, impairments and gain volatility on reported earnings.