Business context and reporting period
Realty Income Corporation (NYSE: O) filed its Form 10-K for the fiscal year ended December 31, 2019; this is an annual report, not a standalone fourth-quarter filing. The REIT owns commercial properties leased primarily under long-term net leases. At year-end it had 6,483 properties, 98.6% occupancy, 301 major tenants across 50 industries, and a weighted-average remaining lease term of about 9.2 years.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $1.492 billion | $1.328 billion | +12.3% |
| Net income available to common stockholders | $436.5 million | $363.6 million | +20.0% |
| Diluted net income per share | $1.38 | $1.26 | +9.5% |
| FFO per diluted share | $3.29 | $3.12 | +5.4% |
| AFFO per diluted share | $3.32 | $3.19 | +4.1% |
| Operating cash flow | $1.069 billion | $940.7 million | +13.6% |
Q4 2019 revenue was $397.5 million and net income available to common stockholders was $129.3 million, versus $342.6 million and $85.1 million, respectively, in Q4 2018.
Rental revenue excluding tenant reimbursements increased 11.1% to $1.416 billion. Same-store rents rose 1.6%. The company reported $40.2 million of impairment provisions, up from $26.3 million, and $30.0 million of gains on real estate sales. Depreciation and amortization was $594.0 million; interest expense was $291.0 million. The filing does not provide a conventional operating-margin measure; GAAP net income was about 29.3% of total revenue.
Year-end cash and cash equivalents were $54.0 million; total debt was approximately $7.90 billion, up from $6.50 billion. Debt was about 24.4% of reported market capitalization. The $3.0 billion unsecured revolving facility had $704.3 million drawn and $2.3 billion available; the company said cash, operating cash flow and borrowing capacity were sufficient for the next 12 months. Debt-service coverage was 5.0x, and the company reported compliance with debt covenants. Net cash used in investing was $3.502 billion; net cash provided by financing was $2.493 billion.
Material changes and developments
- Invested $3.659 billion in 771 acquisitions, including 18 U.K. properties, and spent a further $56.6 million on U.S. properties under development. The 2019 portfolio included the acquisition of 444 properties from CIM for approximately $1.2 billion; seven additional properties were acquired in January 2020.
- Raised approximately $2.2 billion through common-stock sales at a weighted-average price of $72.40 per share. Year-end common shares outstanding increased to 333.6 million from 303.7 million.
- Issued $500 million of 3.25% notes due 2029 and £315 million of 2.73% notes due 2034. In August, the revolving credit facility was amended to permit borrowing in multiple currencies.
- Tenant reimbursements began appearing gross in revenue and expenses following adoption of lease accounting Topic 842; the filing says this presentation change did not affect operating results.
Outlook, commentary and risks
Management planned approximately $200–$225 million of property sales in 2020, with proceeds to be reinvested if attractive acquisition opportunities were available. No numerical earnings or acquisition guidance is stated in the provided filing text. The monthly dividend was increased five times in 2019; the 2020 annualized rate cited was $2.79 per share. The 2019 dividend of $2.7105 per share represented 81.2% of AFFO. The board retains discretion over future distributions.
Key disclosed risks include tenant defaults or bankruptcies, industry and tenant concentration (convenience stores were 11.9% of rental revenue), acquisition competition, access to capital, interest-rate and foreign-exchange exposure, property impairments, environmental liabilities, and REIT qualification. Nearly half of annualized rent came from investment-grade tenants or their affiliates. The company recorded $40.2 million in impairments and had 23 properties, with a $96.8 million carrying value, classified as held for sale. It disclosed routine legal claims that management did not expect to materially affect results.
Subsequent events included January 2020 redemption of $250 million of 5.75% notes due 2021, expected to result in a $9.8 million first-quarter 2020 extinguishment loss, and the announced departure of the CFO, with a successor search underway. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether acquisition growth continues to support per-share FFO and AFFO growth after substantial equity issuance.
- Tenant credit quality, rent collections, and exposure to convenience stores and other concentrated industries.
- Debt maturities, refinancing needs, variable-rate exposure, and covenant headroom; management cited LIBOR transition risk.
- Dividend coverage and sustainability, including the board’s discretion and the REIT’s distribution requirements.
- Assumptions behind the increased impairment provisions, purchase-price allocations, and planned 2020 property sales.
- U.K. investment performance, currency hedging effectiveness, and the CFO transition.