Realty Income Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; balance-sheet amounts are as of March 31, 2011. Financial statements are unaudited. Realty Income is an equity REIT focused on long-term net-leased commercial properties and monthly distributions.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 or prior-period comparison |
|---|---|---|
| Total revenue | $97.8 million | $82.6 million; up 18.3% |
| Income from continuing operations | $35.6 million | $29.2 million |
| Net income available to common stockholders | $29.9 million; $0.25 diluted per share | $24.1 million; $0.23 diluted per share |
| FFO available to common stockholders | $56.6 million; $0.48 diluted per share | $46.7 million; $0.45 diluted per share |
| AFFO available to common stockholders | $58.2 million; $0.49 diluted per share | $47.6 million; $0.46 diluted per share |
| Net cash provided by operating activities | $41.5 million | $36.5 million |
| Cash and cash equivalents | $129.7 million | $17.6 million at Dec. 31, 2010 |
| Notes payable | $1.6 billion | Unchanged from Dec. 31, 2010 |
Rental revenue rose 18.3%, mainly reflecting acquisitions made in 2010 and 2011; same-store rent increased 1.1%. Interest expense increased to $25.1 million from $21.4 million, primarily due to $250 million of notes issued in June 2010. The filing reports interest coverage of 3.5x in both periods and fixed-charge coverage of 2.8x versus 2.7x.
Investing cash outflow was $155.7 million, largely reflecting $118.6 million of property acquisitions and improvements and $32.1 million of acquired intangibles. Financing cash inflow was $226.3 million, including $285.5 million net proceeds from a March common-stock offering. The resulting increase in cash primarily reflects that equity issuance; it is not solely operating cash generation.
Common distributions paid were $51.1 million, equal to 90.3% of Q1 FFO. Total liabilities were $1.66 billion and stockholders’ equity was $2.11 billion. The company had no credit-facility borrowings and reported $425 million of available capacity. Its $1.6 billion of notes are unsecured and fixed-rate; their estimated fair value was $1.72 billion. The company reported compliance with debt covenants.
Portfolio, changes, and transactions
- At quarter-end, Realty Income owned 2,519 properties across 49 states, with 96.8% occupancy, 125 tenants in 31 industries, and more than 22.5 million leasable square feet. Single-tenant properties represented 99.4% of the portfolio.
- During Q1, the company invested $150.7 million in 26 properties and properties under development. These were reported as 100% leased, with a 7.9% initial weighted-average contractual lease rate and 16.6-year average lease term.
- The company had definitive agreements to acquire 33 properties for approximately $544 million. Thirteen had been acquired by March 31; the remaining acquisitions were expected to close over the next four to six months. In April, the company invested a further $103 million in five properties.
- The March stock offering issued 8.625 million shares at $34.81 per share and raised approximately $285.5 million net. Proceeds were intended to fund a substantial portion of the announced acquisitions and, if available, general corporate needs. Common shares outstanding increased to 126.8 million from 118.1 million at year-end.
- Occupancy improved from 96.6% at Dec. 31, 2010; 81 properties were available for lease at quarter-end, versus 84 at year-end. The company sold three properties for $1.1 million, realizing a $129,000 gain, compared with $703,000 of gains in Q1 2010.
Outlook, risks, and unusual items
- Management said cash on hand, operating cash flow, and unused credit capacity were expected to meet liquidity needs for the foreseeable future. It intended to use additional capital sources for acquisitions and to repay future facility borrowings.
- Management reported an April increase in the monthly common distribution to $0.1445625 per share, equivalent to an annualized $1.73475. It cautioned that future distributions and increases are not guaranteed and remain subject to Board discretion and business, cash-flow, capital, and REIT requirements.
- The $544 million acquisition program remained subject to completion; management noted expected closings over the following four to six months. It also anticipated $10 million to $35 million of property-sale proceeds over the next 12 months, but said sales and reinvestment were not assured.
- Principal disclosed risks include tenant defaults, economic and real estate market conditions, competition, interest-rate movements, access to capital, property illiquidity, environmental matters, natural disasters, impairment, REIT qualification, tax-law changes, and litigation. The filing reported no material change to the risk factors in the 2010 Form 10-K.
- Q1 included a $164,000 impairment provision on one property still held for investment and a $36,000 provision on a property sold during the quarter. Nine investment properties were classified as held for sale, with a reported carrying amount of approximately $4.1 million.
- The company disclosed $9.1 million of construction-contract commitments and $922,000 of contingent tenant-improvement and leasing-cost payments. It reported routine legal proceedings that management did not expect to materially affect financial position or results.
Most important facts for investors to verify
- Whether and when the remaining properties in the approximately $544 million acquisition program closed, and the resulting financing and returns.
- Whether operating cash flow and FFO/AFFO sustain distributions as the portfolio and share count grow; FFO and AFFO are non-GAAP measures and are not substitutes for cash-flow or liquidity analysis.
- Tenant credit quality, lease expirations, occupancy, and concentration in convenience stores and restaurants, which together contributed 38.8% of reported rental revenue.
- Debt maturities, covenant headroom, and refinancing costs, particularly as interest rates or credit ratings change.
- Whether impairment, leasing, and property-sale activity changes materially from the quarter’s reported levels.