Business Context and Reporting Period
Realty Income Corporation, an equity REIT focused on long-term net-leased commercial properties, reported unaudited results for the three months ended March 31, 2012, compared with the same period in 2011. At quarter-end, it owned 2,631 properties across 49 states; occupancy was 96.6%, with 137 tenants in 38 industries.
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 / prior period |
|---|---|---|
| Total revenue | $114.7 million | $97.3 million; up 17.9% |
| Rental revenue | $114.5 million | $97.1 million; up 17.9% |
| Net income | $39.3 million | $36.0 million |
| Net income available to common stockholders | $26.1 million; $0.20 diluted per share | $29.9 million; $0.25 diluted per share |
| FFO available to common stockholders | $60.7 million; $0.46 diluted per share | $56.8 million; $0.48 diluted per share |
| AFFO available to common stockholders | $66.3 million; $0.50 diluted per share | $58.2 million; $0.49 diluted per share |
| Operating cash flow | $50.3 million | $41.5 million |
| Cash and cash equivalents | $5.2 million at March 31, 2012 | $4.2 million at December 31, 2011 |
| Total assets / stockholders’ equity | $4.40 billion / $2.46 billion | $4.42 billion / $2.25 billion at December 31, 2011 |
Net income available to common stockholders included a $3.7 million charge from redeeming Class D preferred shares. FFO and AFFO are non-GAAP measures; the company cautions that they are not substitutes for GAAP earnings or cash-flow measures. Cash distributions to common stockholders were $58.2 million, equal to 95.9% of FFO and 87.8% of AFFO.
Material Changes and Capital Position
- Rental revenue growth mainly reflected properties acquired in 2011. Same-store rents declined 1.1%; excluding leases with Friendly’s and Buffets, same-store rents increased 1.1%.
- Depreciation and amortization increased to $35.3 million from $26.6 million, and interest expense rose to $29.0 million from $25.1 million. Average outstanding debt balances were higher, partly offset by lower average interest rates.
- Net cash used in investing activities was $9.3 million, compared with $155.7 million used in Q1 2011, when property investment was substantially higher. Financing activities used $40.0 million, including $58.2 million of common distributions and $8.2 million of preferred dividends.
- In February, the company raised $360.9 million net through 14.95 million Class F preferred shares; it used $127.5 million to redeem all Class D preferred shares and the balance primarily to repay credit-facility borrowings. The redemption also generated the $3.7 million charge to common earnings.
- At March 31, total borrowings were approximately $1.85 billion: $1.75 billion of notes and bonds, $56.9 million of mortgages, and $43.0 million drawn on the credit facility. The credit facility had $382.0 million of available capacity. The company reported compliance with debt covenants and investment-grade ratings with stable outlooks.
- Quarter-end diluted FFO per share fell to $0.46 from $0.48 despite higher aggregate FFO; diluted AFFO per share rose to $0.50 from $0.49. Common shares outstanding increased year over year.
Outlook, Commentary, Risks, and Unusual Items
- Management said cash on hand, operating cash flow, and borrowing capacity were sufficient for foreseeable liquidity needs. It did not provide specific earnings, FFO, or AFFO guidance in the supplied filing text.
- The company expected to pursue more property dispositions, estimating $25 million to $60 million of proceeds over the next 12 months, subject to market conditions and available reinvestment opportunities.
- In April, the company announced acquisitions or agreements to acquire approximately 250 properties for about $514 million. Some transactions remained subject to customary closing conditions; expected funding included credit-facility borrowings or possible securities issuances.
- Friendly’s rejected 19 of its 121 leases, representing about $1.8 million of annualized rent; Realty Income estimated it would recover approximately 80% of Friendly’s pre-bankruptcy annualized rent. Buffets rejected seven of 86 leases, also representing about $1.8 million of annualized rent; estimated recovery was approximately 65%. Three of the combined 26 rejected properties had been re-leased by March 31. Management identified other tenants representing an estimated 2% to 3% of year-end 2011 annualized rents as potential bankruptcy risks.
- Other stated risks include tenant defaults, interest-rate changes, access to capital, real estate market and liquidity conditions, impairment, environmental exposure, natural disasters, and REIT qualification. Management reported no material change in risk factors from its 2011 Form 10-K and no Q1 impairment provision.
- The monthly common distribution was raised in April to $0.1458125 per share, an annualized rate of $1.74975. Management cautioned that future distributions and increases are not assured. Disclosure controls were assessed as effective; no material weaknesses were reported.
Important Facts for Investors to Verify
- Review the tenant concentration and bankruptcy exposure, especially the final lease outcomes, rent concessions, and re-leasing progress for Friendly’s and Buffets.
- Confirm completion, funding, and expected returns of the approximately $514 million of announced second-quarter acquisitions.
- Assess the sustainability of common distributions against AFFO, operating cash flow, required preferred dividends, and the company’s acquisition and financing needs.
- Examine debt maturities, variable-rate exposure, covenant headroom, and access to capital markets; the filing estimates a 1% rate change would alter annual credit-facility interest cost by $430,000 at the quarter-end balance.
- Track occupancy, same-store rent trends, and planned property sales and reinvestment. The filing reports a 96.6% occupancy rate and 1.1% same-store rent decline overall for the quarter.