Realty Income Corporation — FY2021 Form 10-K
Reporting period: Year ended December 31, 2021; comparison is primarily with FY2020. The VEREIT merger closed November 1, 2021, so reported 2021 results include VEREIT only from the closing date. The company is a net-lease REIT whose rental cash flows support monthly dividends.
Business and portfolio
At year-end, Realty Income owned 11,136 properties across the U.S., Puerto Rico, the U.K. and Spain, with 98.5% occupancy and a 9.0-year weighted-average remaining lease term. Retail generated 83.4% of annualized contractual rent and industrial 14.6%. No industry exceeded 9.1% of rent; the top 20 clients accounted for 43.1%.
Financial performance and liquidity
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Total revenue | $2.080 billion | $1.647 billion | +26.3% |
| Net income available to common stockholders | $359.5 million | $395.5 million | -9.1% |
| Diluted net income per share | $0.87 | $1.14 | -23.7% |
| FFO per diluted share | $2.99 | $3.31 | -9.7% |
| Normalized FFO per diluted share | $3.39 | $3.31 | +2.4% |
| AFFO per diluted share | $3.59 | $3.39 | +5.9% |
| Cash from operating activities | $1.322 billion | $1.116 billion | +18.5% |
Revenue growth mainly reflected acquisitions, including VEREIT; same-store rental revenue increased 2.8%. Reported results also included $167.4 million of merger and integration costs, $97.2 million of debt-extinguishment losses, $39.0 million of impairment charges, and $14.7 million of net rent reserves. FY2020 included $147.2 million of impairments and $52.5 million of rent reserves. Normalized FFO excludes merger and integration costs; FFO and AFFO are non-GAAP measures and are not substitutes for cash flow or GAAP income.
Investing cash outflow was $6.438 billion, including $6.313 billion of real-estate investment; financing cash inflow was $4.577 billion. Year-end cash and cash equivalents were $258.6 million. Debt and borrowings totaled about $15.26 billion, or 26.5% of stated market capitalization. This included $12.26 billion of notes and bonds, $1.11 billion of mortgages, $650 million drawn on the revolver and $901.4 million of commercial paper. The $3.0 billion revolver had $2.35 billion of capacity available; management said cash, operating cash flow and borrowing capacity were sufficient for the next 12 months. Debt-service coverage was 5.6x and net debt/pro forma Adjusted EBITDAre was 5.3x.
Cash distributions to common stockholders were $1.169 billion, or 78.5% of AFFO, versus 82.2% in 2020. The monthly dividend was raised five times in 2021; the December 2021 rate was $0.2460 per share, with $0.2465 declared for January 2022.
Material changes and notable items
- Acquired VEREIT for consideration of approximately $12.1 billion, issuing about 162 million Realty Income shares. VEREIT contributed $176.3 million of revenue and a $36.7 million net loss after closing in 2021. Purchase accounting remained preliminary; approximately $3.66 billion of goodwill was recorded.
- Spun off substantially all office assets into Orion Office REIT in November. Orion paid Realty Income $425.0 million and reimbursed $170.2 million for mortgage redemptions; the distribution removed $1.74 billion of net assets.
- Completed $6.17 billion of property acquisitions, excluding VEREIT assets, and invested $243.3 million in development. Acquisitions were primarily in the U.S. and Europe, at a stated initial weighted-average cash lease yield of 5.5%.
- Raised $4.51 billion from common-stock sales during 2021, in addition to shares issued in the merger. The resulting increase in share count contributed to lower per-share comparisons.
- Re-leases achieved a 103.4% rent recapture rate for FY2021. Theater clients represented 3.4% of annualized contractual rent; year-end theater receivables were $71.0 million, net of $38.1 million of reserves.
Outlook, commentary and risks
No specific earnings or acquisition guidance is provided. Management said it intends to continue property dispositions in 2022 and reinvest proceeds where attractive opportunities exist; it also expects to maintain monthly dividends but cannot guarantee the amount or continued increases. Management reported contractual rent collections of 99.5% for the quarter ended December 31, 2021, while cautioning that collections may not predict future results.
Key risks include continued COVID-19 effects on tenants and retail activity; tenant defaults, bankruptcies and lease renewals; integration of VEREIT, anticipated synergies and systems conversion; access to capital and refinancing short-term commercial paper; variable-rate exposure and the LIBOR transition; currency, inflation and climate risks; and real-estate impairments or environmental liabilities. The company was in compliance with debt covenants at year-end. Merger-related stockholder suits were voluntarily dismissed after supplemental disclosures. KPMG issued unqualified opinions on the financial statements and internal controls, but VEREIT controls associated with $17.7 billion of assets and $176.3 million of revenue were excluded from the year-end controls assessment; two ERP systems remained in use pending planned integration.
Investor verification checklist
- Separate organic and same-store performance from the effects of the VEREIT merger, Orion divestiture, acquisitions and share issuance.
- Review final VEREIT purchase accounting, including the $3.66 billion preliminary goodwill balance and any measurement-period adjustments.
- Assess rent collections, deferred/uncollected rent, theater exposure and the adequacy of reserves as conditions evolve.
- Check the maturity and refinancing profile of commercial paper, mortgages and the revolver, as well as covenant headroom and interest-rate exposure.
- Evaluate AFFO definitions and dividend coverage, and confirm the cash-versus-stock distribution and tax treatment of the Orion distribution.
- Monitor delivery of integration synergies and ERP consolidation, and whether 2022 dispositions and reinvestment plans proceed as described.