Realty Income Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. Amounts are in U.S. dollars. Realty Income is a REIT focused on long-term, primarily single-tenant net-lease properties.
Business context and portfolio
- Owned 5,876 properties across 49 states and Puerto Rico, with 95.2 million leasable square feet and 261 major commercial tenants in 48 industries.
- Occupancy was 98.3% (5,774 properties leased), down from 98.6% at December 31, 2018. Weighted average remaining lease term for leased single-tenant properties was approximately 9.2 years.
- Invested $519.5 million in 105 new, development, or expansion properties during the quarter. These were 100% leased, with a 17.0-year weighted-average lease term and a 6.7% initial weighted-average contractual lease rate.
Financial and operating results
- Revenue: $354.4 million, up 11.3% from $318.3 million. Rental revenue excluding tenant reimbursements rose to $336.7 million from $306.5 million. Same-store rents increased 1.5%.
- Net income: $111.2 million, compared with $83.3 million. Net income available to common stockholders was $110.9 million, or $0.37 per diluted share, versus $83.2 million, or $0.29. Results included $7.3 million of property-sale gains and $4.7 million of impairment charges.
- FFO and AFFO: FFO was $245.7 million, or $0.81 per diluted share, up 9.2% and 2.5% per share, respectively. AFFO was $248.7 million, or $0.82 per diluted share, up 10.7% and 3.8% per share.
- Expenses and interest: Total expenses were $250.4 million versus $238.2 million. Interest expense rose to $70.0 million from $59.4 million, reflecting higher borrowings, prior debt issuance, and swap losses. Depreciation and amortization increased to $137.5 million. Impairments declined from $14.2 million in Q1 2018.
- Cash flow: Operating activities provided $212.0 million, versus $213.5 million. Investing used $498.5 million, mainly for real estate investment; financing provided $287.8 million. Cash, cash equivalents, and restricted cash totaled $22.3 million at quarter-end; unrestricted balance-sheet cash was $3.0 million.
- Distributions: Cash distributions to common stockholders were $204.5 million. That was 82.2% of quarterly AFFO. The quarterly per-share distributions totaled $0.672, 3.2% above the prior-year quarter; the monthly dividend declared for April was $0.226 per share.
Debt and liquidity
- Total borrowings were approximately $7.04 billion: $5.4 billion of notes and bonds, $838.0 million drawn on the revolving credit facility, $500.0 million of term loans, and $297.1 million of mortgage principal.
- The $3.25 billion unsecured revolving facility had approximately $2.2 billion of borrowing capacity available and matures in March 2023, subject to extension options. The weighted-average rate on facility borrowings was 3.3%.
- Weighted-average rates were 4.0% on notes and bonds and 5.1% on mortgages; the combined borrowing rate was approximately 3.9%. Debt was 23.9% of reported total market capitalization, and debt/annualized Adjusted EBITDAre was 5.5x, compared with 5.8x a year earlier.
- Management said cash on hand, operating cash flow, and borrowing capacity were sufficient for liquidity needs over the next 12 months. The company reported compliance with credit-facility, mortgage, and note covenants. Credit ratings were investment grade with stable outlooks.
Material changes, outlook, and risks
- Revenue growth primarily reflected acquisitions, including properties acquired in 2018, and 1.5% same-store rent growth. Interest expense increased as average debt balances and borrowing costs rose.
- The company adopted the new lease accounting standard on January 1, 2019. It recognized ground-lease right-of-use assets and liabilities and changed tenant reimbursements and related property expenses to gross presentation; management said the presentation change did not affect results of operations.
- Management anticipated approximately $75–$100 million of property sales for the remainder of 2019, with proceeds intended for acquisitions if attractive opportunities were available. No specific earnings or FFO guidance was provided in the supplied filing text.
- Subsequent to quarter-end, Realty Income announced an agreement to acquire 12 U.K. properties for £429 million, subject to customary closing conditions, and said it intended to fund part of the purchase with approximately £300 million of 15-year unsecured debt.
- Key risks cited include tenant defaults, economic and real-estate market conditions, access to and cost of capital, interest-rate changes, property impairments, environmental matters, and the ability to maintain REIT status and dividends. A 1% interest-rate change on the quarter-end credit-facility balance would change annual interest costs by approximately $8.4 million. Management cautioned that dividends and future occupancy are not assured.
- Legal proceedings were described as routine and not expected to materially affect financial position or results. The filing reported no material control changes and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether acquisition-driven revenue and AFFO growth continue to translate into per-share growth, while monitoring higher interest expense and leverage.
- Whether occupancy recovers from 98.3%, and whether re-leasing performance and rent recapture remain favorable; first-quarter rent recapture was 104.7% on 71 re-leased properties.
- How the announced U.K. acquisition closes, is financed, and performs, including foreign-currency and tenant-credit exposure.
- Whether cash distributions remain covered by AFFO and whether management’s expected property-sale range is achieved.
- The effects of debt maturities, variable-rate borrowings, capital-market access, and potential tenant or property impairments on liquidity and dividend capacity.