Realty Income Corporation — Q1 2014 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013. Realty Income is a net-lease REIT focused on monthly dividends. At quarter-end it owned 4,208 properties in 49 states and Puerto Rico, with 98.3% occupancy and approximately 10.8 years of weighted-average remaining lease term for leased single-tenant properties.
Financial and operating performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $221.6 million | $175.5 million |
| Rental revenue | $214.1 million | $167.8 million |
| Income from continuing operations | $54.9 million | $33.4 million |
| Net income attributable to the Company | $57.7 million | $73.2 million |
| Net income available to common stockholders | $47.2 million; $0.23 diluted per share | $62.7 million; $0.36 diluted per share |
| FFO available to common stockholders | $134.5 million; $0.65 per diluted share | $103.7 million; $0.60 per diluted share, normalized for merger costs |
| AFFO available to common stockholders | $132.7 million; $0.64 per diluted share | $104.0 million; $0.60 per diluted share |
| Net cash from operating activities | $114.2 million | $56.3 million |
Revenue rose 26.2%, principally reflecting properties acquired in 2013 and 2014; same-store rents increased 1.5%. Total expenses were $167.9 million, including $90.0 million depreciation and amortization and $51.7 million interest expense. Cash distributions to common stockholders were $113.4 million, or 85.5% of reported AFFO. FFO and AFFO are non-GAAP measures and are not substitutes for GAAP earnings or cash flows.
At March 31, total assets were $10.48 billion, total liabilities $5.13 billion, and total equity $5.35 billion. Cash and cash equivalents were $14.1 million. Outstanding debt was approximately $4.82 billion: $3.20 billion notes and bonds, $822.3 million mortgages (including premiums), $740.1 million credit-facility borrowings, and a $70 million term loan. The $1.5 billion credit facility had $759.9 million available at quarter-end; availability was approximately $1.29 billion after the subsequent April equity offering and repayment. The company reported covenant compliance. Total debt was approximately 34.5% of market capitalization; fixed-charge coverage was 3.2x.
Material changes versus the prior comparable period
- FFO increased 29.7% and AFFO increased 27.6%; diluted FFO per share rose 8.3% and diluted AFFO per share rose 6.7%.
- Common-stockholder net income fell 24.7%, and diluted EPS declined 36.1%. The comparison was affected by $38.6 million of property-sale gains in Q1 2013 versus $3.9 million in Q1 2014. Q1 2013 also included $12.0 million of ARCT merger costs. The 2013 quarter included the acquisition of ARCT, which added 515 properties; Q1 2014 acquisitions were $656.7 million across 337 properties.
- Operating cash flow increased, while investing cash outflow rose to $593.1 million, primarily reflecting $604.0 million of net property acquisitions. Financing cash inflow was $482.8 million, including increased net credit-facility borrowing.
- Credit-facility borrowings increased from $128.0 million at year-end 2013 to $740.1 million. Interest expense increased to $51.7 million from $41.6 million.
- The company early adopted new discontinued-operations guidance, changing presentation for certain property disposals and held-for-sale properties. This limits direct comparison of some continuing and discontinued results.
Outlook, commentary, risks and unusual items
- Management anticipated approximately $75 million in property sales for 2014 and intended to reinvest proceeds where attractive acquisition opportunities existed; neither sales nor reinvestment was assured.
- Management said cash on hand, operating cash flow and borrowing capacity were sufficient for liquidity needs over the next 12 months. The April 2014 issuance of 13.8 million shares generated $528.5 million net proceeds, used to repay the acquisition credit facility.
- The monthly common dividend increased to $0.1824792 per share in April 2014, equivalent to an annualized $2.1897504. Management stated it expected to continue monthly dividends but gave no assurance of maintaining or increasing them.
- Key disclosed risks include tenant defaults, economic and property-market conditions, interest-rate changes, access to debt and equity markets, real-estate impairments, environmental matters, natural disasters, REIT qualification, and legal proceedings. A 1% change in rates on the quarter-end credit-facility balance would change annual interest cost by approximately $7.4 million.
- Q1 2014 included $1.7 million of impairment charges. Acquisitions totaling $403.8 million had preliminary purchase-price allocations subject to change. Construction commitments were $22.3 million, with an additional $4.2 million in contingent tenant-improvement and leasing-cost payments.
- No material changes to reported risk factors or legal proceedings were disclosed. Management concluded disclosure controls were effective; no material internal-control changes or weaknesses were reported.
Important facts for investors to verify
- Whether acquisition growth and same-store rent increases sustain AFFO and per-share growth after considering equity issuance and dilution.
- Tenant credit quality and concentration: the top 15 tenants generated approximately 46% of annualized revenue; Walgreens, FedEx, Dollar General and Family Dollar were the largest listed tenants.
- Debt maturities, variable-rate exposure, refinancing access, and credit-facility availability following the April repayment.
- Dividend coverage using operating cash flow and AFFO, while recognizing these measures do not equal cash available for distribution.
- Final fair-value allocations for recent acquisitions, property impairments, occupancy and lease renewals, and execution of the expected 2014 dispositions.