Realty Income Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; interim financial statements are unaudited. Realty Income is a REIT focused on long-term net-leased commercial properties. At quarter-end it owned 5,062 properties across 49 states and Puerto Rico, with 98.3% occupancy.
Financial performance
- Revenue: Q3 revenue was $306.9 million, up 10.7% year over year; nine-month revenue was $905.1 million, up 11.0%. Rental revenue increased 10.6% in Q3 and 10.9% for the nine-month period. Same-store rent rose 0.95% in Q3 and 1.0% year to date.
- Profit: Q3 net income attributable to common stockholders was $87.9 million, or $0.32 per diluted share, versus $70.3 million, or $0.27, a year earlier. Nine-month amounts were $240.7 million and $0.89 per diluted share, versus $202.8 million and $0.80.
- REIT operating measures: Q3 FFO was $211.2 million, or $0.77 per diluted share; AFFO was $213.6 million, or $0.77. Nine-month FFO was $601.7 million, or $2.22 per share, and AFFO was $623.3 million, or $2.30. These are non-GAAP measures and are not substitutes for cash flow or GAAP earnings.
- Cash flow: Nine-month operating cash flow was $640.1 million, compared with $579.2 million in 2016. Investing used $913.7 million, including $964.7 million of real estate investment, partly offset by $69.5 million of property-sale proceeds. Financing provided $267.4 million. Cash ended at $3.2 million.
- Margins and expenses: The filing does not present a conventional operating-margin measure. G&A was 5.0% of revenue excluding tenant reimbursements for the first nine months, versus 4.9% in 2016; property expenses net of reimbursements were 2.1%, versus 1.8%.
- Debt and liquidity: Total borrowings were approximately $5.81 billion, about 26.5% of market capitalization. Debt to annualized quarterly Adjusted EBITDA was 5.2x, compared with 5.3x. The company had $658.0 million drawn on its $2.0 billion unsecured revolver and $1.34 billion of remaining borrowing capacity. Management said available cash, operating cash flow, and borrowing capacity were sufficient for needs over the next 12 months. Credit and note covenants were reported in compliance.
Material changes versus 2016
- Q3 FFO increased 12.2% and AFFO 14.5%; per-share growth was slower, at 5.5% and 6.9%, respectively, amid a larger share count. Nine-month FFO and AFFO increased 12.3% and 14.7%.
- Growth reflected acquisitions and modest same-store rent gains. Nine-month acquisitions totaled $956.9 million for 177 properties, compared with $1.1 billion for 236 properties in 2016; acquired properties were 100% leased with a 14.9-year weighted-average lease term.
- Interest expense rose to $185.9 million from $171.0 million for the first nine months, principally due to new note issuance and preferred-stock redemption-related dividends, partly offset by mortgage repayments.
- In April, the company redeemed all 16.35 million Class F preferred shares. A $13.4 million non-cash redemption charge reduced nine-month common earnings and FFO by approximately $0.05 per share.
Outlook, risks and unusual items
- Management anticipated $125–$175 million of property sales in 2017 and intended to reinvest proceeds in acquisitions if attractive opportunities were available. No earnings or FFO guidance was provided in the filing.
- The monthly common dividend increased five times during 2017; the October rate was $0.212 per share. Nine-month common cash distributions of $510.0 million were 81.8% of AFFO. Future distributions remain at the board’s discretion.
- Key risks identified include tenant defaults, economic and competitive conditions, interest-rate changes, access to capital, real-estate illiquidity and impairment, environmental matters, natural disasters, and maintaining REIT qualification. The top 20 tenants generated approximately 53% of annualized revenue; approximately 46% came from investment-grade tenants or their subsidiaries.
- There were $8.8 million of property improvement and leasing commitments and $78.9 million of construction commitments expected to be paid within 12 months. Management said routine legal proceedings were not expected to materially harm financial position or results.
- The company reported $8.1 million of impairment provisions for the first nine months, down from $17.0 million in 2016. It also recorded $17.7 million of gains on property sales. Management cautioned that impairments, sale gains, and swap fair-value changes can affect GAAP earnings.
Investor verification checklist
- Review the 2018 maturities, including $350 million of notes and the $70 million term loan, and the company’s refinancing plans.
- Assess acquisition returns, tenant credit quality, lease rollover exposure, and whether occupancy and same-store rent growth remain stable.
- Reconcile GAAP earnings with FFO and AFFO, including the preferred-stock redemption charge, and monitor the dividend payout relative to recurring cash generation.
- Track equity issuance, leverage, revolver usage, interest-rate exposure, and compliance with debt covenants.
- Check subsequent filings for actual 2017 property sales, acquisition activity, dividend actions, and any material changes to outlook or risks.