Realty Income Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Realty Income is a REIT focused on long-term net-leased commercial properties. Results reflect the November 2021 VEREIT merger; the prior-year quarter did not include VEREIT’s results.
Business context and portfolio
At March 31, 2022, the company owned 11,288 properties across the U.S., Puerto Rico, the U.K. and Spain, with approximately 213.9 million leasable square feet and an 8.9-year weighted-average remaining lease term. Occupancy was 98.6% (11,132 properties leased). No industry represented more than 9.1% of annualized contractual rent. Approximately 43% of portfolio rent was from investment-grade clients or their subsidiaries or affiliates.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $807.3 million | $442.3 million |
| Net income available to common stockholders | $199.4 million | $95.9 million |
| Diluted EPS | $0.34 | $0.26 |
| FFO per diluted share | $1.01 | $0.72 |
| Normalized FFO per diluted share | $1.02 | $0.72 |
| AFFO per diluted share | $0.98 | $0.86 |
| Cash from operating activities | $513.5 million | $266.5 million |
Revenue rose 82.5%; management attributed the increase primarily to the VEREIT merger and acquisitions. Same-store rental revenue increased $24.6 million year over year; management said growth would have been 4.4% excluding rent deferrals and uncollected rent included in its calculation. Net income and FFO comparisons also benefited from the prior-year $46.5 million debt-extinguishment loss. AFFO increased 82.3% in total but 14.0% per diluted share, reflecting the larger share base as well as the expanded portfolio.
Total expenses were $608.8 million, including $403.8 million depreciation and amortization, $106.4 million interest expense and $6.5 million merger and integration costs. General and administrative expense was 4.3% of revenue excluding reimbursable rent (4.9% in the prior-year quarter); non-reimbursable property expense was 1.1% (1.6%). These ratios are not overall operating margins.
Operating cash flow was $513.5 million; investing activities used $1.418 billion, including $1.526 billion of real estate investment, while financing activities provided $821.1 million. Cash, cash equivalents and restricted cash ended at $242.9 million; balance-sheet cash and cash equivalents were $151.6 million.
Total assets were $44.1 billion and total liabilities $18.5 billion. Debt included $12.86 billion of notes and bonds, $1.07 billion of mortgages, $250 million of term loans, $569.6 million drawn on the revolving facility and $950 million of commercial paper. Management reported net debt of $15.63 billion and net debt/annualized Adjusted EBITDAre of 5.4x. It stated that cash, operating cash flow and available borrowing capacity were sufficient for liquidity needs over the next 12 months. At quarter-end, $2.43 billion of capacity remained on the then-current $3.0 billion revolving facility; the company was in compliance with its debt covenants.
Material changes and developments
- The VEREIT merger materially expanded the portfolio and results. Q1 2022 revenue included $258.3 million attributable to VEREIT Operating Partnership operations. Preliminary acquisition accounting included approximately $3.70 billion of goodwill; valuations remained subject to finalization.
- The company invested $1.424 billion in 160 property acquisitions and $131.3 million in properties under development during the quarter. Initial average cash lease yield was 5.6% across acquisitions and development.
- Common shares outstanding increased to 601.6 million from 591.3 million at year-end. The company issued about 10.1 million shares through its ATM program for approximately $660.2 million gross proceeds.
- Quarterly distributions were $0.7395 per share, up 5.1% from $0.7035. Cash distributions to common stockholders were $438.3 million, or 75.6% of AFFO.
- In April 2022, the company amended its revolving facility, increasing capacity to $4.25 billion and extending the initial maturity to June 2026. It also agreed to a proposed £600 million private placement of notes, with a stated weighted-average fixed rate of 3.22%; issuance was expected in Q2.
Outlook, risks and unusual items
The filing provides no specific earnings or FFO guidance. Management expects to continue monthly dividends, but says future amounts and increases are not guaranteed. It expects to fund near-term obligations through operating cash flow, equity or debt issuance, and credit-facility and commercial-paper borrowings. Approximately $2.1 billion of obligations were due through the rest of 2022.
The company announced a $1.7 billion sale-leaseback agreement for Encore Boston Harbor, expected to close in Q4 2022, subject to closing conditions; there is no assurance it will close on the stated terms or timetable. Construction-contract commitments were $485.7 million, expected to be paid over the next 12 months, in addition to $55.0 million of property-related commitments.
Key risks include access to capital and refinancing, interest-rate and foreign-exchange movements, tenant defaults and economic weakness, property impairments, inflation outpacing lease escalators, COVID-19 effects and uncertainties in realizing VEREIT merger benefits. The company noted that some rent increases are capped and may not keep pace with inflation. COVID-related concessions or collection assessments could affect future periods. Integration was ongoing, with two ERP systems operating in parallel and planned consolidation. The filing reported no material change to previously disclosed risk factors and described routine litigation as not expected to materially affect results or financial position.
Unusual or period-comparison items include $6.5 million of merger/integration costs in Q1 2022, $7.0 million of real estate impairment provisions (versus $2.7 million), and $10.2 million of gains on property sales. Q1 2021 included the $46.5 million debt-extinguishment loss.
Important facts for investors to verify
- How much of reported and per-share growth represents durable same-store performance versus the VEREIT merger, acquisitions, prior-year debt costs and share issuance.
- Final VEREIT purchase-price allocation, including goodwill and acquired asset and liability valuations.
- Tenant collections, rent deferrals, occupancy, leasing outcomes and the sustainability of same-store rent growth.
- Ability to refinance near-term commercial paper and other maturities on acceptable terms, while managing leverage, rates and currency exposure.
- Completion, funding and economics of the Encore Boston Harbor transaction and the proposed sterling-note placement.
- Dividend coverage and the difference between non-GAAP FFO/AFFO measures and cash available for distributions or debt service.