Realty Income Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet figures are as of March 31, 2023. Realty Income is a REIT focused on commercial properties leased primarily under long-term net leases. It reported one operating segment.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Total revenue | $944.4 million | $807.3 million; up 17.0% |
| Net income available to common stockholders | $225.0 million | $199.4 million; up 12.8% |
| Diluted GAAP EPS | $0.34 | $0.34 |
| FFO per diluted share | $1.03 | $1.01; up 2.0% |
| Normalized FFO per diluted share | $1.04 | $1.02; up 2.0% |
| AFFO per diluted share | $0.98 | $0.98 |
| Cash provided by operating activities | $731.2 million | $513.5 million |
| Cash used in investing activities | $1.68 billion | $1.42 billion |
| Cash provided by financing activities | $949.8 million | $821.1 million |
- Rental revenue excluding reimbursements rose $110.1 million, including $130.4 million from properties acquired during 2023 and 2022. Same-store rental revenue increased 0.2% year over year.
- Interest expense increased $47.7 million to $154.1 million, primarily reflecting higher debt balances, new note and term-loan issuances, and higher borrowing rates. Depreciation and amortization rose $47.7 million, mainly with portfolio growth.
- At quarter-end, total assets were $51.1 billion, total liabilities $21.7 billion, and cash and cash equivalents $164.6 million. Total debt was approximately $18.7 billion; net debt was $18.6 billion.
- Available capacity under the $4.25 billion revolving credit facility was $3.1 billion. Management said cash, operating cash flow, and borrowing capacity were sufficient for liquidity needs over the next 12 months.
- Net debt to annualized Adjusted EBITDAre was 5.5x, versus 5.4x a year earlier. Senior-note covenant measures included 40.6% total debt to adjusted assets, 4.6x debt-service coverage, and 252.8% unencumbered assets to unsecured debt; the company reported compliance with applicable covenants.
Portfolio, distributions, and changes
- The portfolio included 12,492 properties, with 99.0% occupancy, across 84 industries and the U.S., U.K., Spain, and Italy. Weighted-average remaining lease term was approximately 9.4 years.
- Q1 acquisitions totaled 217 properties for $1.44 billion; an additional 122 properties under development represented $235.6 million of investment. Combined investment was $1.67 billion, at a reported initial weighted-average cash lease yield of 7.0%.
- Re-leasing activity produced a 101.7% rent recapture rate. The company reported collecting all contractual rent across its theater portfolio from January through April 2023; Cineworld-related reserves were $33.0 million at March 31.
- Quarterly distributions were $0.7515 per share, up 1.6% year over year. Management reported this equaled 76.7% of diluted AFFO per share. The monthly dividend was increased three times during 2023; the April-declared dividend was $0.2550 per share.
- Common shares outstanding increased to 673.2 million from 660.3 million at year-end 2022. The company raised $796.2 million net through ATM issuances in the quarter and had unsettled ATM forward sales expected to produce approximately $1.2 billion net as of March 31.
Outlook, risks, and notable items
- No specific earnings or acquisition guidance is provided in the supplied filing text. Management expects to fund operations, distributions, acquisitions, and debt service through operating cash flow, borrowing capacity, and securities offerings; it expects to use longer-term capital for acquisitions and to refinance short-term funding.
- Approximately $1.2 billion of obligations were due during 2023. Management expected to address them using cash, operating cash flow, equity or debt issuance, and revolving-credit borrowings.
- In January, Realty Income issued $1.1 billion of notes with coupons of 5.05% due 2026 and 4.85% due 2030, and entered into a multicurrency term-loan facility. In April, after quarter-end, it issued $1.0 billion of additional notes due 2028 and 2033 at coupons of 4.70% and 4.90%.
- Key risks identified include interest-rate and currency movements, inflation and its effects on tenants and financing costs, access to capital markets, tenant defaults or bankruptcies, property impairments, real-estate market volatility, and risks associated with COVID-19 and future disruptions. Management noted that lease rent escalators may not keep pace with inflation and that tenant cost pressures could impair rent payment ability.
- Commitments included $509.5 million under construction contracts and $14.9 million primarily for property improvements and re-leasing costs. Management said ordinary-course legal matters were not expected to have a material adverse effect.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its 2022 Form 10-K.
Important facts for investors to verify
- Review the maturity schedule and refinancing needs, including 2024 debt maturities and the short initial maturity of the new term loans, alongside the April 2023 note issuance.
- Assess the cost and dilution implications of ATM equity issuance and unsettled forward-sale agreements, and confirm proceeds and settlement timing.
- Monitor interest expense and variable-rate exposure: the filing estimates a 1% rate change on the revolving-credit balance would affect annual interest costs by $11.5 million.
- Track Cineworld receivables and reserves, tenant credit quality, rent collections, and occupancy; reported contractual rent collection does not guarantee future collections.
- Compare dividend growth with AFFO and cash flow. FFO, Normalized FFO, and AFFO are non-GAAP measures, are defined by the company, and are not substitutes for cash-flow analysis.
- Consider the concentration of annualized rent among the top 20 clients (40.5%) and the retail share of portfolio rent (82.0%), as well as the sensitivity of tenant finances to inflation and economic conditions.