Realty Income Corporation — FY2017 Form 10-K
Business context and reporting period. Realty Income is an equity REIT focused primarily on freestanding commercial properties leased under long-term net leases. This annual report covers the fiscal year ended December 31, 2017; fourth-quarter results are also shown. At year-end, the portfolio comprised 5,172 properties, 98.4% occupied, across 49 states and Puerto Rico, with 249 major commercial tenants in 47 industries. The weighted-average remaining lease term for leased single-tenant properties was approximately 9.5 years.
Financial performance and position
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Total revenue | $1,215.8 million | $1,103.2 million | +$112.6 million, about 10.2% |
| Net income | $319.3 million | $316.5 million | +$2.8 million |
| Net income available to common stockholders | $301.5 million | $288.5 million | +$13.0 million |
| Diluted net income per common share | $1.10 | $1.13 | Down $0.03, or 2.7% |
| Funds from operations (FFO), available to common stockholders | $772.7 million | $735.4 million | Up 5.1% |
| Diluted FFO per common share | $2.82 | $2.88 | Down 2.1% |
| Adjusted funds from operations (AFFO), available to common stockholders | $838.6 million | $736.4 million | Up 13.9% |
| Diluted AFFO per common share | $3.06 | $2.88 | Up 6.3% |
| Net cash provided by operating activities | $875.9 million | $799.9 million | Up $76.0 million |
Rental revenue rose to $1,166.2 million from $1,057.4 million. Same-store rents increased 1.0%; acquisitions were the principal growth driver. The filing does not present a clear headline operating-margin measure.
Fourth quarter: revenue was $310.7 million versus $287.8 million in Q4 2016; net income was $61.0 million versus $92.7 million; and diluted net income per share was $0.22 versus $0.33. The 2017 quarter included the debt-extinguishment loss described below.
Cash flow and investment: net cash used in investing activities was $1,254.5 million, including $1,413.3 million of real estate investment, partly offset by $167.0 million of property-sale proceeds. Net cash provided by financing activities was $375.1 million. Cash and cash equivalents were $6.9 million at year-end; total assets were $14.06 billion and total equity was $7.39 billion.
Debt and liquidity: total debt was $6.11 billion at year-end, compared with $5.84 billion a year earlier; debt was approximately 27.4% of market capitalization. Debt included $5.25 billion of fixed-rate notes and bonds, $445.9 million of term loans, $320.3 million of mortgages and $110.0 million drawn on the revolving facility. The $2.0 billion unsecured revolver had $1.89 billion of capacity available, and the company reported covenant compliance. Debt to annualized quarterly Adjusted EBITDA was 5.5x, versus 5.7x in 2016. Moody’s rated senior unsecured debt A3 (stable); S&P rated it BBB+ (positive); and Fitch rated it BBB+ (stable).
Material changes versus the prior comparable period
- Revenue increased 10.2%, while diluted GAAP earnings per share and diluted FFO per share declined; diluted AFFO per share increased 6.3%.
- Operating cash flow increased by $76.0 million. The portfolio expanded from 4,944 properties at year-end 2016 to 5,172 at year-end 2017, while occupancy rose from 98.3% to 98.4%.
- FY2017 acquisitions and development totaled $1.52 billion across 303 properties or projects, at an estimated initial weighted-average contractual lease rate of 6.4%; comparable 2016 investment was $1.86 billion across 505 properties or projects, at 6.3%.
- Debt increased, with substantial new note issuance, while the company repaid $175.0 million of notes and redeemed $550.0 million of 6.75% notes due 2019 early. It also redeemed all 16.35 million Class F preferred shares in April 2017.
- Cash distributions paid to common stockholders rose to $689.3 million from $610.5 million. Dividends paid per common share were $2.527 for 2017 versus $2.3915 for 2016.
Outlook, commentary, risks and unusual items
- Management said the portfolio continued to perform well and described rental income as supporting monthly dividends. It expected cash on hand, operating cash flow and borrowing capacity to cover liquidity needs for the next twelve months.
- No quantified earnings or FFO guidance is provided in the supplied filing text. For 2018, the company anticipated $75–$100 million of property sales and expected to reinvest proceeds in acquisitions if attractive opportunities were available; neither sales nor reinvestment was assured.
- The monthly dividend was increased five times in 2017 and twice in early 2018. The February 2018 monthly dividend of $0.219 represented an annualized $2.628 per share. Future dividends remain at the Board’s discretion and are not guaranteed.
- Common-stock distributions in 2017 were 82.2% of AFFO. Total cash distributions to preferred and common stockholders were $695.5 million, or approximately 132.9% of estimated taxable income; the filing cautions that taxable income is not a measure of liquidity or operating performance.
- The early redemption of the 2019 notes caused a $42.4 million loss on extinguishment of debt ($0.15 per diluted share). Preferred-share redemption resulted in a separate non-cash $13.4 million charge ($0.05 per diluted share). Property-sale gains were $40.9 million in 2017, compared with $22.0 million in 2016; impairment provisions were $14.8 million versus $20.7 million.
- Key risks include tenant default or bankruptcy, leasing and acquisition competition, interest-rate and capital-market conditions, real-estate valuation and liquidity, environmental liabilities, natural disasters and changing tax laws. The company identified the effects of 2017 U.S. tax legislation as still under evaluation. It also noted potential disruption from a new enterprise resource planning system implemented in 2018.
- Ordinary-course legal claims were not expected by management to have a material aggregate effect. KPMG gave unqualified opinions on the financial statements and internal control over financial reporting; management reported effective disclosure controls and no material control weaknesses.
Most important facts for investors to verify
- Reconcile the decline in GAAP earnings and FFO per share with share issuance, the $42.4 million debt-redemption loss and the $13.4 million preferred redemption charge; assess AFFO adjustments and definitions against other REITs.
- Review the maturity schedule and post-year-end repayments: the $350 million 2.0% notes due January 2018 and the $125.9 million acquisition note were repaid in January 2018; assess remaining 2018 obligations and refinancing needs.
- Test dividend coverage against operating cash flow, AFFO, debt service and REIT distribution requirements; do not treat estimated taxable income as available cash.
- Evaluate tenant and industry exposure, particularly drug stores (10.6% of 2017 rental revenue), lease expirations, occupancy and the sustainability of re-leasing rents.
- Confirm acquisition returns, disposition proceeds and management’s stated 2018 sales expectations against realized results; contractual lease rates are estimates and do not assure actual returns.