Realty Income Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Realty Income is a REIT focused on long-term net-leased commercial properties. At quarter-end it owned 6,761 properties across the U.S., Puerto Rico and the U.K., with 98.5% occupancy and an 8.8-year weighted-average remaining lease term.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $464.3 million | $414.6 million | $907.1 million | $829.0 million |
| Net income available to common stockholders | $124.5 million | $107.8 million | $220.4 million | $254.7 million |
| Diluted GAAP EPS | $0.33 | $0.31 | $0.59 | $0.75 |
| FFO per diluted share | $0.84 | $0.84 | $1.56 | $1.66 |
| Normalized FFO per diluted share | $0.88 | $0.84 | $1.60 | $1.66 |
| AFFO per diluted share | $0.88 | $0.86 | $1.73 | $1.74 |
Quarterly revenue grew 12.0%; six-month revenue grew 9.4%. Growth was principally acquisition-driven: same-store rental revenue increased 0.5% in Q2 and 0.1% for the first half. The company reported Q2 GAAP net income growth of 15.5%, but first-half net income fell 13.5%, reflecting, among other items, a $46.5 million early-debt-redemption loss and $13.3 million in merger costs. FFO, Normalized FFO and AFFO are non-GAAP measures and may not be comparable across REITs.
- Cash flow: First-half operating cash flow was $581.1 million, compared with $514.6 million a year earlier. Investing activities used $2.03 billion, primarily for real estate investment; financing activities provided $861.8 million. Cash and cash equivalents were $231.2 million at June 30, down from $824.5 million at year-end 2020.
- Assets and debt: Total assets were $22.0 billion and total liabilities $10.1 billion. Debt borrowings were approximately $9.2 billion, including $7.36 billion of notes and bonds, $1.29 billion of revolving-credit and commercial-paper borrowings, a $250 million term loan and $299.9 million of mortgages. Notes and bonds had a 3.4% weighted-average rate and 8.5-year weighted-average remaining maturity.
- Liquidity and leverage: The $3.0 billion revolving facility had $635.3 million drawn and $2.4 billion available; commercial paper outstanding was $650 million and matured in July 2021. Management said available cash, operating cash flow and borrowing capacity should meet liquidity needs for the next 12 months. Debt-service coverage was 6.0x; net debt to annualized Adjusted EBITDAre was 5.4x. The company reported compliance with debt covenants.
- Distributions: First-half cash distributions to common stockholders were $524.1 million, or 81.1% of first-half AFFO. The monthly dividend increased three times in 2021; the July 2021 rate was $0.2355 per share, equivalent to $2.826 annualized. Future dividends are not guaranteed.
Material changes and operating developments
- Acquisitions totaled $2.16 billion for the first half: 214 properties acquired and 40 U.S. properties under development. Initial average cash lease yield was 5.5%, versus 6.1% for the comparable 2020 period. The portfolio added substantial U.K. exposure.
- Portfolio occupancy was 98.5%, up from 97.9% at December 31, 2020. First-half re-leases achieved a 104.0% rent recapture rate.
- First-half rental revenue reserves were $17.0 million, compared with $10.2 million in 2020. As of June 30, the company disclosed $40.5 million of uncollected rent deferred under concessions and $61.2 million of uncollected rent without concessions.
- Theater properties represented 5.4% of annualized contractual rent. Collections from theater clients were 38.3% for Q2; outstanding theater receivables totaled $77.9 million, net of $40.0 million of reserves. Investment-grade clients paid 100% of contractual rent in each month reported.
- The January 2021 redemption of $950 million of 3.25% notes due 2022 produced a $46.5 million extinguishment loss. In July, after quarter-end, the company raised $594.1 million from a common-stock offering and issued £750 million of notes due 2027 and 2033 at a combined effective yield of 1.48%.
Merger, outlook and risks
Realty Income agreed to acquire VEREIT in a stock transaction, with each eligible VEREIT common share generally converting into 0.705 Realty Income shares, subject to the merger agreement. The companies proposed a related office-property spin-off, but could instead sell or retain some or all of those properties, and the spin-off could be abandoned. Closing was subject to shareholder approvals and other conditions. Twelve VEREIT-stockholder lawsuits and one Realty Income-stockholder lawsuit challenged merger disclosures; the company said the claims lacked merit, but noted that litigation could affect timing or the ability to close. Approximately $18 million of success-based fees were expected if specified transaction conditions were met and had not been accrued at quarter-end.
Management described COVID-19 effects on clients and rent collection as evolving and cautioned that collections and concessions to date may not predict future results. Other stated risks include client defaults, economic and real-estate-market conditions, access to capital, interest and currency-rate changes, asset impairments, and merger execution. Inflation may outpace contractual rent increases, although net leases generally shift many property operating costs to clients. No specific earnings or FFO guidance is provided in the supplied filing text. Management stated that it expected liquidity to be sufficient for the next 12 months, while noting dependence on capital markets for longer-term funding.
Investor verification priorities
- Track VEREIT merger and proposed office spin-off approvals, closing conditions, litigation and transaction costs.
- Monitor rent collections, concession recoverability and reserves, especially theater exposure and other financially stressed tenants.
- Assess acquisition yields and growth against financing costs, share issuance and per-share FFO/AFFO performance.
- Review commercial-paper repayment and refinancing, available revolver capacity, debt maturities, currency exposure and covenant headroom.
- Evaluate dividend coverage using recurring cash generation; FFO and AFFO are supplemental non-GAAP measures, not substitutes for cash flow or liquidity analysis.