Realty Income Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet figures are as of March 31, 2018 unless otherwise noted. Interim financial statements are unaudited. Realty Income is a REIT focused on long-term net-leased commercial properties.
Business context and portfolio
The company owned 5,326 properties across 49 states and Puerto Rico, leased to 254 major commercial tenants in 47 industries. Occupancy was 98.6%, up from 98.4% at December 31, 2017; the portfolio had 90.3 million leasable square feet and a weighted average remaining lease term of approximately 9.4 years for leased single-tenant properties. About 51% of annualized rental revenue came from investment-grade tenants or their subsidiaries.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $318.3 million | $298.0 million |
| Net income | $83.3 million | $89.0 million |
| Net income available to common stockholders | $83.2 million | $71.6 million |
| Diluted net income per share | $0.29 | $0.27 |
| FFO available to common stockholders | $224.9 million; $0.79 per diluted share | $187.2 million; $0.71 per diluted share |
| AFFO available to common stockholders | $224.6 million; $0.79 per diluted share | $201.3 million; $0.76 per diluted share |
| Cash provided by operating activities | $213.5 million | $216.0 million |
| Cash used in investing activities | $492.8 million | $347.1 million |
- Revenue increased 6.8%, principally reflecting acquisitions and same-store rent growth of 0.96%. Net income declined as impairment provisions rose to $14.2 million from $5.4 million and gains on property sales fell to $3.2 million from $10.5 million. Common-stockholder net income increased partly because Q1 2017 included a $13.4 million non-cash preferred-stock redemption charge.
- Depreciation and amortization was $131.1 million, interest expense $59.4 million, and total expenses $238.2 million. The filing does not provide a directly comparable operating-margin measure in the presented statements.
- At quarter-end, total assets were $14.47 billion, total liabilities $7.18 billion, and cash and cash equivalents $20.6 million. Total borrowings were approximately $6.61 billion; debt was 31.0% of total market capitalization and debt/annualized quarterly Adjusted EBITDAre was 5.8x, versus 5.5x in Q1 2017.
- The $2.0 billion unsecured revolving facility had $1.082 billion drawn and $918 million of borrowing capacity available. The company reported compliance with facility and debt covenants. Its initial facility term expires in June 2019, with two optional six-month extensions.
- Common distributions paid were $185.6 million, or 82.6% of Q1 AFFO. Monthly dividends paid in the quarter totaled $0.6505 per share, up 4.3% from Q1 2017. The April-declared monthly dividend was $0.2195 per share, equivalent to a $2.634 annualized rate.
Material changes and notable items
- Realty Income invested $509.8 million in 174 new properties and properties under development or expansion, versus $370.7 million in 60 properties in Q1 2017. The 2018 acquisitions were 100% leased, with a 14-year weighted average lease term and a 6.2% initial weighted average contractual lease rate; all were retail by rental revenue.
- Same-store rents rose 0.96%. The company re-leased 55 properties at a 100.4% rent recapture rate. Occupancy improved from year-end as available properties fell from 83 to 75.
- Cash distributions to common stockholders increased to $185.6 million from $162.5 million. Operating cash flow was broadly stable, while property investment spending increased.
- Debt balances shifted during the quarter: the company repaid $350 million of 2.0% notes at maturity and a $125.9 million short-term note, while credit-facility borrowings rose from $110 million at year-end to $1.082 billion.
- In April 2018, after quarter-end, the company issued $500 million of 3.875% senior notes due 2025, receiving approximately $493 million net to repay credit-facility borrowings, fund investments, and for general purposes.
- The company adopted the new revenue recognition standard on January 1, 2018; management said adoption had no material impact. It planned to adopt the new lease standard effective January 1, 2019.
Outlook, risks, and contingencies
- Management anticipated approximately $200 million of property sales during 2018 and expected to reinvest proceeds in acquisitions when attractive opportunities were available; it cautioned that sales and reinvestment were not assured. No specific earnings or FFO guidance is stated in the provided filing text.
- Management said existing cash, operating cash flow, and available borrowing capacity were sufficient for liquidity needs over the next 12 months. It also expects to use long-term or permanent capital to fund acquisitions and repay future facility borrowings.
- Key stated risks include tenant defaults, economic and real-estate market conditions, competition, interest-rate changes, access to capital markets, property impairment, environmental exposure, natural disasters, and maintaining REIT qualification. A 1% rate change on the quarter-end credit-facility balance would change annual interest costs by approximately $10.8 million.
- Twenty-one properties with a carrying value of $30.0 million were held for sale. The company recorded $14.2 million of impairments in Q1. It had $58.0 million committed under construction contracts and $15.3 million of property improvement and re-leasing commitments. Routine legal matters were not expected by management to materially affect financial position or results.
- Management reported effective disclosure controls. An enterprise resource planning system was implemented in January 2018, with related updates to internal controls.
Important facts for investors to verify
- Whether acquisition yields and rent growth remain adequate relative to funding costs, particularly as credit-facility borrowing increased substantially during the quarter.
- Liquidity and refinancing plans around the facility’s June 2019 expiration and the $70 million term loan maturity in July 2018, including any extensions or replacement financing.
- Tenant credit quality and concentration: the top 20 tenants contributed approximately 54% of annualized revenue; Walgreens alone contributed 6.7%.
- Whether the elevated impairment provisions, property dispositions, occupancy, and rent recapture trends persist.
- Dividend sustainability: compare future distributions with AFFO and cash flow, while noting that FFO and AFFO are non-GAAP measures and are not measures of liquidity.
- The assumptions behind the $200 million expected 2018 property sales and the use of proceeds, as well as the effect of the post-quarter $500 million note issuance on debt and facility usage.