Business context and reporting period
Realty Income Corporation, an equity REIT focused on long-term net-leased commercial properties, reports the quarter and nine months ended September 30, 2011, compared with the same 2010 periods. At quarter-end it owned 2,600 properties in 49 states; occupancy was 97.7%, with 59 properties available for lease.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $107.3 million | $86.8 million | $307.6 million | $251.6 million |
| Net income available to common stockholders | $34.7 million; $0.27 diluted/share | $25.6 million; $0.25 diluted/share | $97.8 million; $0.79 diluted/share | $74.7 million; $0.72 diluted/share |
| FFO, diluted/share | $63.4 million; $0.50 | $47.8 million; $0.46 | $180.9 million; $1.46 | $141.2 million; $1.36 |
| AFFO, diluted/share | $64.2 million; $0.51 | $48.6 million; $0.47 | $184.8 million; $1.49 | $143.9 million; $1.39 |
| Operating cash flow | Not separately stated for the quarter | $199.2 million | $156.8 million |
- Quarterly revenue rose 23.6% and nine-month revenue 22.3%; rental revenue increased 23.2% and 22.1%, respectively. Management attributed growth primarily to acquisitions, with same-store rents up 1.8% for the quarter and 1.5% year to date.
- Quarterly and nine-month net income available to common stockholders increased 35.7% and 30.9%, respectively. Gains on property sales contributed to net income; gains in discontinued operations were $3.1 million for the quarter and $4.3 million year to date.
- Interest expense was $28.6 million in Q3 and $79.3 million for nine months, versus $25.1 million and $68.1 million in 2010. Depreciation and amortization was $31.9 million and $87.5 million, respectively.
- For the first nine months, investing cash outflow was $756.5 million, including $766.1 million for acquisitions; financing cash inflow was $545.2 million. Cash was $5.5 million at September 30, 2011, down from $17.6 million at year-end 2010.
- Total assets were $4.27 billion and total liabilities $2.00 billion at September 30, 2011. Outstanding notes and bonds were $1.75 billion, credit-facility borrowings $96.6 million, and assumed mortgages $68.2 million. Total borrowings were approximately 29.2% of market capitalization.
- The $425 million unsecured revolver had $328.4 million of availability; the company reported compliance with debt covenants. Adjusted EBITDA interest coverage was 3.4x for Q3 and 3.5x for nine months; fixed-charge coverage was 2.8x and 2.9x.
Material changes versus the prior period
- Acquisition investment reached $826.4 million for 125 properties and properties under development in the first nine months of 2011, compared with $302.9 million for 23 properties in the comparable 2010 period. The 2011 additions were 100% leased, with an average lease term of 11.3 years and a 7.9% initial weighted average contractual lease rate.
- Common shares issued and outstanding increased to 133.2 million from 118.1 million at year-end 2010. March and September offerings generated net proceeds of $285.6 million and $203.6 million. The company also issued $150 million of 5.875% bonds due 2035.
- Occupancy improved to 97.7% from 96.6% at December 31, 2010. In the first nine months, rents on 69 leases renewed or re-let totaled $7.3 million, versus prior rent of $8.0 million.
- Debt increased, and interest expense rose year over year, mainly reflecting additional notes and bonds and credit-facility costs.
Outlook, commentary, and risks
- Management said available cash, operating cash flow, and revolver capacity were sufficient for foreseeable liquidity needs. It planned to continue acquisitions when opportunities were attractive and anticipated $15 million to $35 million of property-sale proceeds over the next 12 months, subject to market conditions and execution.
- The October 2011 monthly common distribution was raised to $0.1451875 per share, an annualized $1.74225. Management said FFO exceeded common distributions; nine-month distributions were 89.2% of FFO. Future distributions and increases are not guaranteed.
- Friendly’s filed for Chapter 11 in October 2011. It leased 121 properties representing 3.6% of rental revenue and rejected 15 leases, representing approximately $1.3 million of annualized rent. Management did not expect a material impact but noted there was no assurance Friendly’s would continue paying rent on remaining locations.
- Key risks include tenant defaults, economic and real estate market conditions, interest-rate changes, capital-market access, asset impairments, and REIT qualification. A 1% rate change on the September 30 revolver balance would change annual interest costs by approximately $966,000.
- Property-sale gains and FFO/AFFO are important but variable measures; FFO and AFFO are non-GAAP and should not be treated as substitutes for operating cash flow or liquidity. The filing reported no material change in previously disclosed risk factors, no material control weaknesses, and effective disclosure controls.
Important facts for investors to verify
- Track Friendly’s rent payments, lease rejections, re-leasing outcomes, and any changes in tenant concentration.
- Compare acquisition returns and same-store rent growth with the cost of debt and equity funding, including the impact of share issuance on per-share results.
- Review debt maturities, revolver availability, covenant headroom, and exposure to floating interest rates.
- Assess whether FFO and AFFO growth and distribution coverage translate into sustainable operating cash flow after acquisitions, property improvements, and financing needs.
- Confirm whether planned property sales and acquisitions occur as expected and whether subsequent leasing or impairment developments affect portfolio performance.