Business context and reporting period
Realty Income Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2023. The REIT owns or holds interests in 13,118 commercial properties across the U.S. and Europe, primarily leased under long-term net leases. Portfolio occupancy was 99.0%, with a 9.6-year weighted-average remaining lease term and $3.76 billion of annualized contractual rent.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $1,019.2 million | $810.4 million | $1,963.6 million | $1,617.8 million |
| Net income available to common stockholders | $195.4 million | $223.2 million | $420.4 million | $422.6 million |
| Diluted GAAP earnings per share | $0.29 | $0.37 | $0.63 | $0.71 |
| Diluted FFO per share | $1.02 | $1.01 | $2.05 | $2.02 |
| Diluted AFFO per share | $1.00 | $0.97 | $1.98 | $1.94 |
Q2 GAAP net margin was approximately 19.3%, versus 27.6% a year earlier; this measure is affected by real estate depreciation and other items. For the first half, operating cash flow was $1.47 billion, investing cash flow was negative $4.65 billion, and financing cash flow was positive $3.25 billion. Cash, cash equivalents and restricted cash totaled $314.9 million at period-end; unrestricted cash and cash equivalents were $253.7 million.
At June 30, total borrowings were approximately $19.5 billion, with a 3.79% weighted-average interest rate, 5.9-year weighted-average maturity and approximately 92% fixed-rate debt. Total debt to market capitalization was 31.5%. The company reported approximately $3.5 billion of liquidity, including cash and revolving-credit availability. It was in compliance with debt covenants; its unsecured-note debt-service coverage ratio was 4.6x.
Material changes versus the prior comparable period
- Revenue rose 25.8% year over year in Q2 and 21.4% in the first half, supported by acquisitions and portfolio growth. Same-store rental revenue increased 2.0% in Q2 and 1.1% year to date.
- Q2 net income available to common stockholders fell about 12.5%, while diluted GAAP EPS declined from $0.37 to $0.29. Higher depreciation, interest expense and impairment charges more than offset revenue growth. Q2 interest expense rose $73.7 million year over year; first-half interest expense rose $121.5 million.
- FFO per share and AFFO per share increased modestly. First-half AFFO per share was $1.98, up from $1.94; distributions of $1.5165 per share equaled 76.6% of diluted AFFO per share.
- The company invested $4.8 billion in 997 acquisitions and development or expansion properties in the first half, at a 6.9% initial weighted-average cash lease yield. It raised $2.98 billion net through common-stock offerings, including ATM forward settlements; shares outstanding increased to 708.8 million from 660.3 million at year-end 2022.
- First-half real estate impairment provisions increased to $43.0 million from $14.7 million. Property-sale gains declined to $12.1 million from $50.7 million.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings or acquisition guidance. Management said cash, operating cash flow and borrowing capacity should meet liquidity needs for the next 12 months. Approximately $1.1 billion of obligations were due through the remainder of 2023.
- Management cited inflation, higher financing costs, credit-market volatility, capital-market access, tenant credit and bankruptcies, property impairments, foreign-exchange movements and natural disasters among key risks. Net leases reduce direct exposure to rising property costs, but tenants may face pressure if their costs outpace revenues.
- Cineworld’s Chapter 11 proceedings remained a focus: 35 properties represented 1.1% of annualized contractual rent. Realty Income collected approximately 99% of contractual rent across its theater portfolio in Q2 and reported $31.4 million of cumulative Cineworld reserves, with $12.9 million of net receivables. Management expected to resolve lease matters in 2023.
- Construction contracts totaled $764.9 million at June 30, with expected rent commencement dates from July 2023 through July 2024. Management announced the planned CFO transition effective January 1, 2024.
- Subsequent to quarter-end, the company issued €1.1 billion of senior notes due 2030 and 2034, with stated coupons of 4.875% and 5.125%. It also declared a $0.2555-per-share dividend for payment in August.
Important facts for investors to verify
- Whether acquisition growth and modest same-store rent increases can sustain AFFO per share growth as interest costs and share issuance affect results.
- The company’s refinancing needs, especially $850 million of notes and $740.5 million of mortgage principal due in 2024, plus its access to debt and equity markets.
- Progress on Cineworld lease negotiations, recoveries and any additional reserves or property re-leasing costs.
- Cash returns from the acquisition and development pipeline compared with funding costs, including the timing and completion of projects.
- Dividend coverage, tenant credit quality and concentration: the top 20 clients represented 40.8% of annualized contractual rent, while investment-grade clients represented 39.7%.