Realty Income Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. Realty Income is a net-lease REIT focused on monthly dividends. On January 22, 2013, it completed its approximately $3.2 billion acquisition of American Realty Capital Trust (ARCT). At quarter-end, the portfolio comprised 3,525 properties in 49 states and Puerto Rico, with 97.7% occupancy and an approximately 11.1-year weighted-average remaining lease term on leased single-tenant properties.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Total revenue | $171.7 million | $112.3 million; up 52% |
| Income from continuing operations | $32.3 million | $37.0 million |
| Net income attributable to the company | $71.8 million | $39.3 million |
| Net income available to common stockholders | $61.3 million; $0.36 diluted per share | $26.1 million; $0.20 diluted per share |
| FFO / normalized FFO | $92.9 million / $104.9 million; $0.54 / $0.61 per diluted share | $60.7 million / $60.7 million; $0.46 per diluted share |
| AFFO | $104.0 million; $0.60 diluted per share | $66.3 million; $0.50 diluted per share |
| Operating cash flow | $56.3 million | $50.3 million |
- Rental revenue increased 51.9%, driven principally by acquired properties; same-store rents rose 1.5%. Depreciation and amortization increased to $69.8 million from $34.6 million, and interest expense rose to $41.5 million from $29.0 million.
- Net income included $38.6 million of gains from property sales, versus $0.6 million a year earlier, and $12.0 million of ARCT merger costs. Continuing-operations income declined despite revenue growth. The filing does not present a single operating-margin measure.
- At March 31, total assets were $8.76 billion, total liabilities $3.62 billion, and equity $5.14 billion. Cash was $4.2 million. Debt included $2.45 billion of notes, $764.1 million of mortgages, $116.6 million drawn on the $1 billion credit facility, and a $70 million term loan. Revolver availability was $883.4 million.
- Debt was approximately 26.3% of stated total market capitalization. Reported interest coverage was 3.7x and fixed-charge coverage 3.0x. The company reported compliance with debt covenants.
- Common distributions paid were $85.0 million; management reported this as 81.7% of AFFO. The quarterly common dividend increased during the period; the April-declared monthly rate was $0.1812292 per share.
Material changes versus the prior comparable period
- ARCT added 515 properties, diversifying the portfolio and substantially increasing assets, revenue, debt and common shares outstanding. The acquisition was funded through stock issuance, assumed mortgages and other financing.
- Q1 property investment totaled approximately $3.3 billion, including ARCT. Realty Income also issued 17.25 million common shares for net proceeds of $755.5 million and repaid $100 million of notes due in March.
- FFO increased 53.0%; normalized FFO rose 72.8%, reflecting the acquisition and exclusion of merger costs. AFFO increased 56.9%. Per-share growth was lower than aggregate growth amid the larger share count.
- Property sales rose to 17 properties for $60.0 million, producing $38.6 million of gains, versus five properties sold for $3.6 million and $0.6 million of gains in Q1 2012.
Outlook, commentary, risks and unusual items
- No specific full-year earnings or FFO guidance is provided. Management said it expected to pursue additional acquisitions and planned more active dispositions; it estimated $50–$75 million of sale proceeds over the next 12 months, subject to market conditions and available reinvestment opportunities.
- Management stated that cash, operating cash flow and borrowing capacity should meet liquidity needs for the next 12 months. It also expects to use additional capital sources for acquisitions and future credit-facility repayment.
- Management estimated total ARCT merger costs of approximately $20 million; $12.0 million was recorded in Q1 2013. The acquisition purchase-price allocation remained preliminary and could change materially.
- Key disclosed risks include integration and performance of ARCT, tenant defaults, economic and property-market conditions, interest rates, access to debt and equity markets, real-estate impairments, and continued REIT qualification. The company noted that inflation-driven expense increases may outpace contractual rent increases.
- Q1 included $456,000 of impairment provisions on four sold properties and one held-for-sale property. The company had $21.0 million of construction-contract commitments and $1.3 million of contingent tenant-improvement and leasing-cost payments. No material changes to previously disclosed legal proceedings or risk factors were reported.
Important facts for investors to verify
- Track post-acquisition occupancy, tenant credit quality, integration costs and the final ARCT purchase-price allocation.
- Assess recurring performance apart from property-sale gains and merger costs; FFO, normalized FFO and AFFO are non-GAAP measures and may not be comparable across REITs.
- Review the effect of share issuance and debt assumed or raised on per-share cash generation, leverage and dividend coverage.
- Monitor debt maturities, variable-rate exposure, refinancing access and covenant headroom; most debt is fixed-rate, but the credit facility and some mortgage debt are variable-rate.
- Evaluate whether planned property dispositions and reinvestment can be completed on the estimated terms, and whether the dividend remains supported by ongoing cash flows.