Business context and reporting period
Realty Income Corporation is a REIT focused primarily on long-term net leases of commercial properties. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023, compared with the corresponding 2022 periods. At quarter-end, the company owned or held interests in 13,282 properties across the U.S. and Europe, with 98.8% occupancy, a 9.7-year weighted-average remaining lease term and $3.87 billion of annualized contractual rent.
Financial results and key metrics
Unless otherwise noted, figures are U.S. dollars. Revenue and cash flow figures are in millions; balance-sheet and debt figures are as of September 30, 2023.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $1,039.1 | $837.3 | $3,002.7 | $2,455.0 |
| Net income | $233.9 | $220.3 | $657.2 | $644.1 |
| Net income available to common stockholders | $233.5 | $219.6 | $653.9 | $642.1 |
| Diluted GAAP net income per share | $0.33 | $0.36 | $0.96 | $1.06 |
| Diluted FFO per share | $1.04 | $0.97 | $3.09 | $2.99 |
| Diluted AFFO per share | $1.02 | $0.98 | $2.99 | $2.92 |
- Q3 total revenue increased 24.1%; nine-month revenue increased 22.3%. Same-store rental revenue grew 2.2% in Q3 and 1.6% for the nine months.
- Q3 net income rose 6.2%, but diluted GAAP earnings per share fell 8.3%, reflecting substantially more weighted-average shares. For the nine months, net income rose 2.0% while diluted GAAP earnings per share fell 9.4%.
- Q3 diluted FFO per share increased 7.2% and AFFO per share increased 4.1%; nine-month increases were 3.3% and 2.4%, respectively. These are non-GAAP measures and may not be comparable across REITs.
- GAAP net income was approximately 22.5% of revenue in Q3 versus 26.3% in Q3 2022; for the nine months, approximately 21.9% versus 26.2%. Higher interest and depreciation costs, impairment provisions and lower real-estate sale gains affected comparisons.
- Nine-month operating cash flow was $2.20 billion, up from $1.93 billion. Investing activities used $6.64 billion, principally for real estate investment; financing activities provided $4.64 billion. Cash and cash equivalents were $344.1 million at quarter-end.
Debt, liquidity and distributions
- Total borrowings were approximately $20.4 billion, with a 3.8% weighted-average interest rate, 5.8-year weighted-average maturity and approximately 93% fixed-rate debt. Total debt to market capitalization was 36.0%; net debt to annualized Adjusted EBITDAre was 5.3x.
- Liquidity was reported at $4.5 billion, including cash, $749.3 million of unsettled ATM forward equity and revolving-credit availability. The company said available cash, operating cash flow and borrowing capacity should meet liquidity needs for the next 12 months.
- Interest expense increased to $184.1 million in Q3 from $117.4 million, and to $522.1 million for the nine months from $333.9 million, primarily due to higher average debt and interest rates. The company reported compliance with its debt covenants.
- The company paid $1.56 billion in common-stockholder distributions during the first nine months. Distributions were $2.283 per share, or 76.4% of diluted AFFO per share. The monthly dividend increased five times in 2023; the October-declared rate was $0.256 per share.
Material changes versus the prior comparable period
- The company invested $6.8 billion in 1,187 acquired or development properties during the nine months, at a 6.9% initial weighted-average cash lease yield. Real-estate investment cash outflow increased from $5.0 billion in the prior-year period.
- Interest expense and depreciation and amortization increased materially, reflecting higher debt costs and portfolio growth. Nine-month impairment provisions rose to $59.8 million from $16.4 million.
- Common shares outstanding at quarter-end increased to 723.9 million from 660.3 million at December 31, 2022. The company raised $3.85 billion net through common-stock offerings during the nine months; 13.3 million forward-sale shares remained unsettled at quarter-end.
- Property-sale proceeds fell to $92.8 million for the nine months from $414.7 million, while gains on sales fell to $19.7 million from $93.6 million.
Outlook, commentary, risks and unusual items
- The filing provides no formal earnings or acquisition guidance. Management stated that liquidity should be sufficient for the next 12 months, while noting that capital-market access and financing terms cannot be assured.
- Management identified inflation, interest and currency-rate volatility, client solvency and defaults, capital-market conditions, property impairments and real-estate market volatility as risks. Inflation may increase financing and operating costs and weaken clients’ ability to pay rent; net leases reduce, but do not eliminate, exposure to rising property expenses.
- After quarter-end, Realty Income agreed to acquire Spirit Realty Capital in a stock merger. Spirit common shares would generally convert into 0.762 Realty Income shares, subject to agreement terms and closing conditions, including Spirit stockholder approval. The filing highlights dilution, transaction costs, integration challenges and the possibility the merger will not close.
- In October, the company completed a $950 million investment in a joint venture holding a 95% interest in the Bellagio Las Vegas real estate: approximately $300 million for an indirect 21.9% property interest and $650 million in preferred equity with an expected 8.1% return.
- Also after quarter-end, Cineworld agreed to long-term leases on 28 of 35 properties and short-term leases on seven. The long-term leases recapture 75% of prior base rent; deferred-rent amendments had no net receivable impact after reserves.
- The company had $903.6 million of construction-contract commitments and $19.5 million of other property-related commitments at quarter-end. Management said routine legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the Spirit merger receives required approvals and closes on the disclosed terms, and the resulting share dilution, financing needs and integration costs.
- Whether acquisition yields and same-store rent growth remain sufficient to offset higher interest expense, debt maturities and refinancing costs.
- Progress on the $903.6 million development commitments, occupancy, lease renewals and the Cineworld restructuring, including actual rent collections.
- The extent to which ATM and other equity issuance continues to fund growth, and its effect on per-share results.
- Dividend coverage and liquidity, bearing in mind that FFO and AFFO are non-GAAP measures and are not substitutes for cash flows or liquidity measures.