Realty Income Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless stated otherwise. Realty Income is a REIT focused on long-term net-leased commercial properties. At quarter-end it owned 6,662 properties across the U.S., Puerto Rico and the U.K.; occupancy was 98.0%, with an approximately 8.9-year weighted-average remaining lease term.
Financial results and position
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Total revenue | $442.8 million | $414.3 million; up 6.9% |
| Net income available to common stockholders | $95.9 million; $0.26 diluted per share | $146.8 million; $0.44 per share |
| FFO available to common stockholders | $267.7 million; $0.72 per diluted share | $277.1 million; $0.82 per share |
| AFFO available to common stockholders | $318.2 million; $0.86 per diluted share | $297.2 million; $0.88 per share |
| Net cash from operating activities | $266.5 million | $265.2 million |
| Cash used in investing activities | $993.7 million | $351.4 million |
| Cash and cash equivalents at quarter-end | $184.0 million | $824.5 million at December 31, 2020 |
Revenue growth primarily reflected acquisitions; same-store rental revenue declined 0.8%, including COVID-related rent reserves. GAAP net income fell 34.7%, principally reflecting a $46.5 million loss from early redemption of $950 million of 3.25% notes due 2022. The comparable 2020 quarter included a $9.8 million debt-extinguishment loss. FFO declined 3.4%; AFFO increased 7.1%, while diluted AFFO per share fell 2.3% as weighted-average shares increased.
Real estate held for investment, net, was $18.18 billion; total assets were $20.98 billion and total liabilities $9.41 billion at March 31. Debt comprised approximately $7.36 billion of notes and bonds, $675 million of commercial paper, a $250 million term loan and $282 million of mortgages—about $8.57 billion in total borrowings. Net debt to annualized quarterly Adjusted EBITDAre was 5.3x. The company reported compliance with debt covenants. Its $3.0 billion revolving facility had no borrowings and was available as a liquidity backstop; management said cash, operating cash flow and borrowing capacity were sufficient for liquidity needs over the next 12 months.
Material developments and changes
- Invested approximately $1.03 billion in Q1, including 89 acquisitions and 21 U.S. properties under development. Acquisitions totaled $969.9 million and carried a 5.3% initial average cash lease yield.
- Issued 12.075 million common shares in January, generating $669.6 million net proceeds, primarily for acquisitions and general corporate purposes. Outstanding common shares rose to 373.5 million at quarter-end.
- Redeemed $950 million of 3.25% notes in January. Notes and bonds payable declined from $8.27 billion at year-end to $7.33 billion; commercial paper borrowings increased from zero to $675 million.
- Operating cash flow was nearly unchanged year over year, while investing outflow rose with higher property investment. Cash, cash equivalents and restricted cash declined by $657.3 million during the quarter.
- Q1 cash distributions to common stockholders were $260.7 million, equal to 81.9% of AFFO. The monthly dividend rose to $0.235 per share in April 2021, or $2.82 annualized.
Outlook, risks and unusual items
- COVID-19 and rent collection: Q1 contractual rent collection was 94.1% overall, 100% from investment-grade clients and 14.0% from theater clients. The theater industry represented 5.6% of annualized contractual rent. The company recorded $8.8 million of rental revenue reserves, including $7.4 million for theater properties. It cautioned that collections and concessions may worsen and that current collections may not predict future results.
- Deferred and uncollected rent: At March 31, $22.3 million of rent was uncollected under COVID-related deferrals and $69.8 million was uncollected without a granted concession. Management stated collection of substantially all future lease payments remained probable based on information then available, but the assessment could change.
- VEREIT transaction: On April 29, 2021, after quarter-end, Realty Income agreed to acquire VEREIT in a stock-based merger, with VEREIT common shares generally converting into 0.705 Realty Income shares. The parties also planned an office-property spin-off into a separate REIT, or potentially a sale of some or all of that business. Closing requires customary conditions, including shareholder approvals; completion, timing and spin-off arrangements are uncertain. The filing describes potential transaction costs, integration and execution risks, litigation, and termination payments.
- Funding and market risks: Commercial paper maturities of $675 million fell due in April and May 2021 and were supported by the revolving facility. The company depends on continued access to debt and equity markets; refinancing conditions, interest rates, foreign exchange rates and credit ratings may affect funding costs. Most long-term notes and mortgages carry fixed rates; commercial paper is variable-rate.
- Other matters: The company reported $90.1 million of construction-contract commitments and $6.9 million of property-related commitments. It reported no material adverse effect expected from routine legal proceedings. No specific earnings or FFO guidance was provided in the supplied filing text.
Important facts for investors to verify
- Progress, shareholder approvals, closing conditions, costs and final structure of the VEREIT merger and planned office spin-off.
- Subsequent theater and broader portfolio rent collections, rent concessions, receivable recoverability and any changes to reserves.
- Repayment or refinancing of the $675 million commercial paper balance and continued availability of the revolving credit facility.
- Acquisition returns, occupancy, same-store rent trends and whether growth in AFFO translates into per-share growth after equity issuance.
- Dividend sustainability and coverage; FFO and AFFO are non-GAAP supplemental measures and are not substitutes for operating cash flow or liquidity measures.