Realty Income Corporation — Q2 2018 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2018. Realty Income is a REIT focused on long-term net-leased commercial properties and monthly dividends. At quarter-end, it owned 5,483 properties across 49 states and Puerto Rico; occupancy was 98.7%, with a weighted-average remaining lease term of approximately 9.3 years for leased single-tenant properties.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $328.9 million | $300.2 million | $647.2 million | $598.2 million |
| Net income attributable to common stockholders | $96.4 million | $81.1 million | $179.5 million | $152.7 million |
| Diluted net income per share | $0.34 | $0.30 | $0.63 | $0.57 |
| Diluted FFO per share | $0.79 | $0.75 | $1.58 | $1.46 |
| AFFO per share | $0.80 | $0.76 | $1.59 | $1.53 |
- Q2 revenue increased 9.6% year over year; six-month revenue rose 8.2%. Same-store rent increased 1.0% in Q2 and 0.9% for the first half.
- For the first six months, operating cash flow was $477.3 million, versus $461.8 million a year earlier. Investing used $790.2 million, primarily for property investment; financing provided $345.6 million. Cash, cash equivalents and restricted cash ended the period at $44.8 million; balance-sheet cash and cash equivalents were $30.7 million.
- At June 30, total debt was approximately $6.56 billion, about 29.6% of reported market capitalization. Notes and bonds totaled $5.4 billion, with a 4.0% weighted-average rate and 9.2-year weighted-average remaining maturity. Debt/annualized quarterly Adjusted EBITDAre was 5.5x, versus 5.6x a year earlier.
- The $2.0 billion unsecured revolver had $534 million drawn and approximately $1.5 billion of borrowing capacity available. Its initial term expires in June 2019, with two optional six-month extensions. Management said cash, operating cash flow and borrowing capacity were sufficient for the next 12 months; the company was in compliance with debt covenants.
- Common distributions paid in the first half totaled $373.0 million, 82.6% of first-half AFFO. The monthly dividend was raised to $0.22 per share, or a $2.64 annualized rate, declared in June and paid in July.
Material changes versus the prior comparable period
- Q2 FFO increased 11.2% in total and 5.3% per diluted share; first-half FFO increased 15.5% in total and 8.2% per diluted share. AFFO per share rose 5.3% in Q2 and 3.9% for the first half.
- First-half acquisitions totaled $856.8 million across 358 properties, compared with $691.9 million across 126 properties in the first half of 2017. Acquired assets were 100% leased, with a 13.8-year weighted-average lease term and a 6.3% initial weighted-average contractual lease rate.
- First-half impairment provisions increased to $18.2 million from $7.7 million. Interest expense rose to $126.0 million from $123.0 million, while depreciation and amortization increased to $265.1 million from $244.2 million.
- In April 2018, the company issued $500 million of 3.875% notes due 2025. First-half ATM share issuance raised approximately $298 million; the company issued 5.6 million shares under the program.
- First-half 2017 common-stockholder results included a $13.4 million non-cash charge related to redemption of Class F preferred stock; no preferred dividends were paid in first-half 2018.
Outlook, commentary and risks
- Management anticipated approximately $200 million of property sales during the remainder of 2018 and intended to reinvest proceeds if attractive acquisition opportunities were available. This is an expectation, not a guarantee; the filing gives no earnings or FFO-per-share guidance.
- Management reported 102 properties re-leased in the first half at a 104.7% rent recapture rate. It described portfolio performance as solid, while noting occupancy could fall below historical levels.
- Key disclosed risks include tenant defaults and credit deterioration, interest-rate changes, access to and cost of debt and equity capital, property impairments, real estate market conditions, legal and environmental matters, and natural disasters. A 1% change in rates on the revolver balance outstanding at June 30 would change annual interest costs by approximately $5.3 million.
- Other notable items: 74 properties with a $70.0 million carrying amount were held for sale; first-half property impairments were elevated versus 2017. The company adopted the revenue recognition standard in 2018 without material impact and planned to adopt the new lease standard on January 1, 2019; it was evaluating effects, including recognition of ground-lease obligations and right-of-use assets.
Important facts for investors to verify
- Track occupancy, tenant credit quality, lease expirations and rent recapture; the top 20 tenants generated approximately 54% of annualized revenue, and Walgreens was the largest tenant at 6.6% of rental revenue.
- Assess acquisition yields against financing costs and monitor whether planned property sales and reinvestment occur on expected terms.
- Review the June 2019 revolver expiry, January 2019 term-loan maturity, debt maturities, refinancing access and sensitivity to variable rates.
- Examine the causes and possible persistence of higher impairments, and distinguish gains on property sales and other variable items from recurring performance.
- Compare dividends with operating cash flow and AFFO, recognizing that FFO and AFFO are non-GAAP measures and are not substitutes for cash flow or liquidity measures.