Realty Income Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Realty Income is a REIT focused on long-term, net-leased commercial properties. At quarter-end it owned 6,525 properties across 51 industries, with 98.5% occupancy and a 9.2-year weighted-average remaining lease term.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $414.3 million | $354.4 million | +16.9% |
| Net income available to common stockholders | $146.8 million | $110.9 million | +32.4% |
| Diluted net income per share | $0.44 | $0.37 | +18.9% |
| FFO available to common stockholders | $277.1 million | $245.7 million | +12.8% |
| Diluted FFO per share | $0.82 | $0.81 | +1.2% |
| AFFO available to common stockholders | $297.2 million | $248.7 million | +19.5% |
| Diluted AFFO per share | $0.88 | $0.82 | +7.3% |
Rental revenue growth primarily reflected properties acquired in 2019 and Q1 2020; same-store rents increased 0.2%. Net income also benefited from $38.5 million of real estate sale gains, compared with $7.3 million a year earlier. Q1 included a $9.8 million debt-extinguishment loss and $3.5 million of former CFO severance costs. FFO and AFFO are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
Operating cash flow was $265.2 million, versus $212.0 million in Q1 2019. Investing activities used $351.4 million, including $473.2 million of real estate investment, partly offset by $126.2 million of sale proceeds. Financing activities provided $155.3 million. Cash distributions to common stockholders were $233.8 million; AFFO exceeded those distributions by $63.4 million.
Balance sheet, debt and liquidity
- Total assets were $18.80 billion and total liabilities $8.38 billion at March 31, 2020. Stockholders’ equity was $10.39 billion.
- Total borrowings were approximately $7.56 billion: $6.04 billion of notes and bonds, $500 million of term loans, $406.7 million of mortgages and $615.2 million drawn on the revolving credit facility. Notes and bonds had a 3.8% weighted-average rate and 8.3-year weighted-average remaining maturity.
- Quarter-end cash and cash equivalents were $41.8 million; cash, cash equivalents and restricted cash totaled $137.2 million. The company reported $2.4 billion of remaining revolver capacity at quarter-end.
- On April 9, the company borrowed an additional $1.2 billion under its revolver, intending to raise cash to $1.25 billion as a precaution. As of May 1, revolver borrowings were $1.9 billion and remaining capacity was $1.1 billion.
- Debt was 30.6% of total market capitalization. Net debt to annualized quarterly Adjusted EBITDAre was 5.0x. The company reported compliance with debt covenants; trailing-twelve-month debt service coverage was 5.5x.
Material developments, outlook and risks
- COVID-19 had not materially affected Q1 financial statements as of March 31, but management warned that tenant disruption, rent nonpayment or deferrals, impairment charges, weaker leasing, and reduced access to capital could adversely affect results, liquidity and dividends.
- As of May 1, the company had collected 82.9% of April contractual rent overall, including 82.9% from its 20 largest tenants and 99.9% from investment-grade tenants. Theater tenants had paid none of their April contractual rent by that date. Rent-deferral discussions were ongoing; management cautioned that April collections might not predict future collections.
- On April 9, the company withdrew its 2020 guidance, citing uncertainty, and said it was not providing revised guidance. It warned that Q2 revenue could decline from Q1, with further declines possible while pandemic effects persist.
- The monthly dividend was increased to $0.233 per share, declared in March and paid in April. The Q1 distributions totaled $0.6925 per share, up 3.1% year over year. Future distributions remain subject to board discretion and business conditions.
- The company issued 9.69 million shares in a March public offering, receiving approximately $728.5 million net, primarily to repay revolver borrowings and support investment and general corporate needs. It also redeemed $250 million of 5.75% notes due 2021 early, recording the related $9.8 million loss.
- Former CFO Paul Meurer departed in March; the company had begun a search for a new CFO. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Subsequent rent collections, deferral agreements and tenant defaults, especially among theater, fitness, dining and other disrupted industries.
- Updated guidance, if issued, and actual Q2 revenue, cash flow, impairments and rent collections versus management’s stated risks.
- Liquidity after the April revolver draw, upcoming debt maturities and covenant compliance as conditions evolve.
- Whether AFFO continues to cover distributions and whether the dividend level is maintained.
- Effects of equity issuance and acquisition activity on per-share growth, leverage and portfolio concentration.