Realty Income Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; interim financial statements are unaudited. Realty Income is a REIT focused on long-term net-leased commercial properties. At quarter-end it owned 4,980 properties in 49 states and Puerto Rico, with 98.3% occupancy and a weighted average remaining single-tenant lease term of approximately 9.7 years.
Financial performance and position
- Revenue: $298.0 million, up 11.6% from $267.1 million. Rental revenue rose 11.3% to $285.8 million; same-store rents increased 1.6%.
- Profit: Net income was $89.0 million versus $70.5 million. Net income available to common stockholders was $71.6 million, or $0.27 per diluted share, versus $63.5 million, or $0.25. Results included a $13.4 million non-cash charge related to the announced preferred-stock redemption and a $10.5 million gain on property sales.
- REIT operating measures: FFO was $187.2 million ($0.71 per diluted share), up 9.7%; AFFO was $201.3 million ($0.76 per diluted share), up 14.4%. Both are non-GAAP measures. Common distributions paid were $162.5 million, or 80.7% of AFFO.
- Cash flow: Operating activities provided $213.1 million, compared with $136.3 million. Investing used $365.3 million, principally for property investment; financing provided $170.4 million. Cash ended the quarter at $27.6 million.
- Debt and liquidity: Total borrowings and mandatorily redeemable preferred shares were approximately $5.86 billion; debt/annualized EBITDA was 5.5x versus 5.3x a year earlier. The $2.0 billion revolver was undrawn at quarter-end, and the company reported compliance with its covenants. Management said available cash, operating cash flow and borrowing capacity should meet liquidity needs for the next 12 months.
- Portfolio and dividends: The company invested $370.7 million in 60 properties and development or expansion projects, with a 6.1% initial weighted average contractual lease rate and a 16.4-year weighted average lease term. First-quarter common distributions were $0.6235 per share, up 6.1% year over year.
Material changes versus Q1 2016
- Revenue growth primarily reflected acquisitions made in 2016 and 2017, alongside 1.6% same-store rent growth. Depreciation and amortization increased to $121.1 million from $107.9 million as the portfolio expanded.
- Interest expense declined to $59.3 million from $60.7 million, despite higher average debt; the comparison included a $1.3 million swap gain in 2017 versus a $5.8 million swap loss in 2016.
- Impairment provisions increased to $5.4 million from $1.9 million. Property-sale gains rose to $10.5 million from $2.3 million.
- March financing included $700 million of senior notes and a common-stock offering that raised $705.0 million net. Proceeds were used primarily to repay revolver borrowings and support general corporate purposes and investment opportunities.
- The company gave notice in March to redeem all 16.35 million Class F preferred shares for $25 per share plus accrued dividends; redemption occurred in April 2017. At March 31, $408.8 million was classified as a liability.
Outlook, commentary and risks
- Management anticipated $75–$100 million of property sales in 2017 and planned to reinvest proceeds in acquisitions when attractive opportunities were available. No earnings or FFO guidance was provided in the supplied filing text.
- Management described the portfolio as performing well and reported a 103.6% rent recapture rate on 49 properties re-leased during the quarter. It cautioned that acquisition yields and occupancy are not assured.
- Risks identified include tenant defaults, economic and real estate market conditions, competition, interest-rate changes, access to capital, property impairments, environmental matters, natural disasters, legal proceedings and continued REIT qualification. Inflation may outpace contractual rent increases and may pressure tenants.
- Commitments included $67.1 million under construction contracts, expected to be paid within 12 months, and $5.0 million for property improvements and leasing costs. Routine legal proceedings were not expected by management to materially affect results.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Review the composition and timing of acquisition spending, and whether new investments achieve expected contractual returns.
- Assess debt maturities, refinancing needs and sensitivity to rates; the filing estimates a 1% rate change would alter annual interest costs by $5.0 million on a hypothetical $500 million revolver balance.
- Track tenant and industry concentration: the top 20 tenants represented approximately 53% of annualized revenue; Walgreens was the largest at 6.8%.
- Separate recurring operating performance from property-sale gains, impairments, swap fair-value changes and the $13.4 million preferred-redemption charge; compare FFO and AFFO with their GAAP reconciliations.
- Confirm the April 2017 preferred-stock redemption and subsequent dividend declarations, and monitor occupancy, lease expirations and the expected property dispositions.