Realty Income Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Realty Income is a REIT focused on long-term net-leased commercial properties. At quarter-end it owned 6,541 properties across 50 industries, with 98.5% occupancy and a weighted-average remaining lease term of approximately 9.0 years.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $414.6 million | $365.5 million | $829.0 million | $719.8 million |
| Net income available to common stockholders | $107.8 million | $95.2 million | $254.7 million | $206.1 million |
| Diluted net income per share | $0.31 | $0.31 | $0.75 | $0.67 |
| FFO per diluted share | $0.84 | $0.81 | $1.66 | $1.62 |
| AFFO per diluted share | $0.86 | $0.82 | $1.74 | $1.63 |
- Q2 revenue increased 13.4% year over year, mainly from properties acquired in 2019 and 2020. Same-store rent declined 0.4%; management’s calculation included deferred rent and uncollected rent. Excluding those amounts, the reported same-store decrease would have been 14.1% for Q2.
- Q2 total expenses rose to $308.4 million from $277.1 million, including higher depreciation and interest. Six-month interest expense was $153.8 million, up from $142.5 million.
- Six-month operating cash flow was $514.6 million, versus $489.7 million. Investing activities used $803.1 million, including $632.2 million invested in real estate and a $300 million short-term investment; financing activities provided $350.0 million. Cash, cash equivalents and restricted cash totaled $130.3 million at period-end.
- At June 30, total debt was approximately $7.91 billion; the weighted-average interest rate on notes and bonds was 3.8%, with 8.3 years’ weighted-average remaining maturity. Debt was approximately 27.8% of market capitalization. The $3.0 billion revolving facility had $628.6 million drawn and $2.4 billion of borrowing capacity available. Cash and cash equivalents were $35.3 million, and a $300 million term deposit matured July 24, 2020.
- Six-month common distributions were $474.3 million, or 80.1% of AFFO. The monthly dividend rose to $0.2335 per share, declared in July and payable in August.
Material changes and unusual items
- Q2 net income available to common stockholders rose 13.2%, while diluted EPS was unchanged at $0.31. Six-month diluted EPS increased 11.9%.
- Six-month results included a $9.8 million loss on early redemption of the 5.75% notes due 2021 and a $3.5 million severance charge related to the former CFO’s March departure. Six-month real estate sale gains were $39.8 million, versus $14.2 million in 2019.
- COVID-19-related rent revenue reserves were $8.5 million in Q2 and $10.2 million for the first half, compared with $0.4 million and $2.4 million, respectively, in 2019. The company recorded $13.9 million of Q2 impairment provisions, including $8.2 million on eight held-for-investment properties assessed as not recoverable in light of the pandemic.
- In May, Realty Income issued $600 million of 3.25% notes due 2031. It also raised net proceeds of $728.9 million in a March common-stock offering and approximately $95.7 million through its ATM program during the first half. In July, it issued an additional $350 million of the 2031 notes.
Outlook, risks and management commentary
- The filing provides no specific earnings or FFO guidance. Management warned that second-half 2020 revenue could decline relative to the first half, with further deterioration possible if pandemic impacts persist.
- Rent collections across the portfolio were 88.4% for April, 84.9% for May, and 86.1% for June; Q2 aggregate collections were 86.5%. July collections reached 91.5% as of July 31. Investment-grade tenant collections were 99.1% for Q2 and 100.0% for July; top-20 tenant collections were 82.5% for Q2 and 90.7% for July. Management cautioned that these collections may not predict future collections.
- Most Q2 concessions were rent deferrals with lease terms unchanged. Management considered collection of substantially all future lease payments probable at June 30, but noted that continuing tenant discussions and evolving conditions could change that assessment. Rent deferrals and uncollected Q2 rent included in reported results totaled $60.2 million under the AFFO reconciliation disclosure.
- The company stated it expected to remain in compliance with financial covenants over the next 12 months and believed available cash, operating cash flow and borrowing capacity were sufficient for liquidity needs during that period. It was in compliance with debt covenants at June 30.
- Key risks include tenant nonpayment, lease concessions or termination, bankruptcies, lower occupancy or rents, additional impairments, limited access to capital markets, and potential effects on dividends and debt covenant compliance. The portfolio’s retail exposure includes theaters, health and fitness, restaurants and other businesses affected by restrictions and reduced customer traffic. The filing also identifies interest-rate and foreign-currency exposure.
Most important facts for investors to verify
- Whether deferred and unpaid rent is ultimately collected, and how future concessions affect rental revenue and receivable write-offs.
- Rent-collection trends by tenant and industry, particularly theaters, health and fitness, restaurants, and other pandemic-sensitive tenants.
- Whether impairment charges, occupancy and same-store rent trends worsen as pandemic and economic conditions evolve.
- Liquidity and refinancing capacity, debt maturities, covenant headroom, and the effects of further debt or equity issuance.
- Dividend sustainability relative to AFFO and cash flow, while noting that FFO and AFFO are non-GAAP measures and are not substitutes for cash flow or liquidity measures.