Realty Income Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparison with the corresponding 2018 periods. Realty Income is a REIT focused on long-term, primarily single-tenant net leases and monthly dividends.
Business context and portfolio
- Owned 5,951 properties across 49 U.S. states, Puerto Rico and the U.K., with 98.3% occupancy and a 9.4-year weighted-average remaining lease term.
- Completed 187 acquisitions in the first half for $1.590 billion, including its first 12 U.K. properties; total investment including development projects was $1.614 billion. The acquired properties were 100% leased.
- Same-store rent increased 1.4% in Q2 and 1.5% in the first half. Second-quarter re-leasing recaptured 100.4% of prior rent; first-half recapture was 102.2%.
Financial performance
| Metric | Q2 2019 | First half 2019 |
|---|---|---|
| Total revenue | $365.5 million, up 11.1% | $719.8 million, up 11.2% |
| Net income available to common stockholders | $95.2 million; diluted EPS $0.31 | $206.1 million; diluted EPS $0.67 |
| FFO per diluted share | $0.81, up 2.5% | $1.62, up 2.5% |
| AFFO per diluted share | $0.82, up 2.5% | $1.63, up 2.5% |
| Operating cash flow | Not provided separately in the filing text | $489.7 million, versus $477.3 million |
Q2 net income available to common stockholders fell 1.2% and diluted EPS declined 8.8% year over year, while first-half net income rose 14.8% and diluted EPS rose 6.3%. The larger share count following equity issuance contributed to the difference between total FFO growth and per-share growth.
- First-half cash distributions to common stockholders were $413.4 million, or 82.2% of AFFO; AFFO exceeded distributions by $89.3 million.
- Cash used in investing activities was $1.575 billion, primarily reflecting real estate investment. Cash and cash equivalents were $27.1 million at June 30; cash, cash equivalents and restricted cash totaled $39.9 million.
- Depreciation and amortization was $287.9 million and interest expense was $142.5 million for the first half. Q2 impairment expense increased to $13.1 million from $4.0 million; first-half impairment was $17.7 million versus $18.2 million.
Debt, liquidity and capital
- Total borrowings were approximately $7.1 billion; debt was approximately 24.4% of reported market capitalization. Weighted-average debt interest rate was 3.9%; notes and bonds had an 8.8-year weighted-average remaining maturity.
- The $3.25 billion unsecured revolving facility had $8 million drawn and approximately $3.0 billion available. The company reported compliance with its debt covenants and believed cash, operating cash flow and borrowing capacity were sufficient for the next 12 months.
- Issued $500 million of 3.25% notes due 2029 and £315 million of 2.73% notes due 2034. In May, issued 12.65 million common shares, raising $845.1 million net; first-half equity offerings raised about $1.0 billion.
- Senior unsecured debt ratings were Moody’s A3, S&P A- and Fitch BBB+, all with stable outlooks. Debt-service coverage was 4.4x against a 1.5x covenant minimum.
Changes, outlook, risks and unusual items
- Revenue growth reflected acquisitions, including properties purchased in 2018 and the U.K. entry. Rental revenue excluding tenant reimbursements rose 10.8% in Q2 and 10.3% in the first half; same-store rent growth was more modest.
- Management anticipated approximately $75 million to $100 million of property sales for the remainder of 2019 and intended to reinvest proceeds when attractive opportunities were available. The filing provides no earnings or FFO guidance.
- The monthly dividend increased four times in 2019. The July 2019 dividend was $0.2265 per share, equivalent to an annualized $2.718; future increases and the dividend level are not assured.
- In 2019, Realty Income began U.K. operations and used cross-currency swaps to hedge foreign-currency exposure. It also adopted the new lease-accounting standard: tenant reimbursements and related property expenses are presented gross, with no effect on operating results; prior-period presentation was adjusted for comparability.
- Key disclosed risks include tenant defaults, property impairments, interest- and currency-rate movements, access to capital markets, real-estate and credit-market conditions, environmental liabilities, natural disasters, and maintaining REIT qualification. Inflation may outpace contractual rent increases, although net leases generally pass property expenses to tenants.
- Management reported routine legal matters not expected to materially affect financial position or results. It also reported $24.2 million of construction commitments and $9.6 million of property-related commitments at quarter-end.
Important facts for investors to verify
- Whether acquisition volume and rental growth translate into sustained per-share FFO/AFFO growth, given equity issuance and financing costs.
- Tenant credit quality and concentration: the top 20 tenants generated 54.5% of rental revenue; the largest industry, convenience stores, represented 11.9%.
- Occupancy and leasing performance, including the increase to 102 available properties from 80 at year-end 2018.
- Debt maturities, refinancing access, interest-rate exposure and the company’s use and performance of hedges, including U.K. currency hedges.
- Dividend coverage and sustainability; FFO and AFFO are non-GAAP supplemental measures and are not substitutes for cash flow or liquidity measures.