01—Abstract
Summary
Summary of the 10-K/A filed March 1, 2019. Cited figures are marked; the original filing is the authoritative source.
Realty Income Corporation (NYSE: O) filed this Amendment No. 1 to its 10-K for fiscal 2018 solely to correct an immaterial EDGARization error in Schedule III of its audited financial statements; the amended filing restates the full Original Form 10-K (filed February 22, 2019) and updates the Section 302/906 certifications.
The underlying financials are unchanged: 2018 revenue of $1.33 billiona, net income available to common stockholders of $363.6 million ($1.26 per diluted share), and FFO of $3.12 and AFFO of $3.19 per diluted share, up 10.6% and 4.2% respectively. The company ended 2018 with 5,797 properties, a 98.6% occupancy rate, 262 commercial tenants across 48 industries, and a weighted average remaining lease term of about 9.2 years on single-tenant properties. The company is positioned as a conservative, investment-grade REIT.
Total debt was $6.5 billionb, about 25.4% of total market capitalization of $25.7 billion, and debt to annualized Adjusted EBITDAre was 5.3x, down from 5.5x in 2017. Credit ratings are A3 (Moody's), A- (S&P), and BBB+ (Fitch), all stable, and S&P upgraded the company to A- in August 2018. In October 2018 the company replaced its $2.25 billion credit facility with a $3.25 billion facility, and it raised $1.1 billion of common equity through its at-the-market programs at an average price of $58.77 per share.
Leadership and governance changed in 2018: Sumit Roy succeeded John Case as CEO in October 2018 after Case's departure, which carried an incremental severance charge of $18.7 millionc (about $0.06 per share). Monthly dividends were raised seven times across 2018 and early 2019, to $0.2255 per share, an annualized $2.706 and a yield of about 4.3% at the December 31, 2018 closing price of $63.04. Investors should note that 2019 guidance on property sales of $75 to $100 million, the expiry of the 2019 maturities, and the potential for 15% to 25% of 2019 distributions to be classified as return of capital are all relevant considerations.
02—Key points
Key Highlights
- Monthly dividend increased to $0.2255 per share (annualized $2.706, ~4.3% yield at $63.04), extending a streak of 100 dividend increases since the 1994 NYSE listing
- 2018 AFFO of $924.6 million ($3.19 per diluted share, up 4.2%) and FFO of $903.3 million ($3.12 per diluted share, up 10.6%) vs. 2017; AFFO payout ratio about 82.4%
- Portfolio of 5,797 properties, 98.6% occupied, with a weighted average remaining lease term of ~9.2 years; 95% of retail rent from service, non-discretionary, or low-price-point tenants
- Invested $1.8 billion in 764 new properties at a 6.4% initial weighted average lease rate; raised $1.1 billion of common equity via ATM programs at $58.77 per share
- Balance sheet: total debt $6.5 billion (25.4% of market capitalization), Debt/Adjusted EBITDAre of 5.3x, new $3.25 billion unsecured credit facility maturing in 2023, and S&P upgrade to A-
- Net income available to common stockholders of $363.6 million ($1.26 per diluted share) vs. $1.10 in 2017, including an $18.7 million severance charge for the former CEO
- Amendment No. 1 was filed only to correct an immaterial EDGARization error in Schedule III; no financial results were changed
03—One dollar
04—Financials
Financial Highlights
Figures from 10-K/AFY2018filed March 1, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $1.33B$1.22B | +9.2% |
| Interest Expense | $266.02M$247.41M | +7.5% |
| Net Income | $364.60M$318.80M | +14.4% |
| EPS (Basic) | $1.26$1.10 | +14.5% |
| EPS (Diluted) | $1.26— | — |
| Shares Outstanding (Basic) | 289.43M273.47M | +5.8% |
| Shares Outstanding (Diluted) | 289.92M273.94M | +5.8% |
05—Questions
Frequently Asked Questions
Why was this 10-K amended, and does it change the reported financial results?
The amendment was filed solely to correct an inadvertent, immaterial EDGARization error in Schedule III (Real Estate and Accumulated Depreciation) of the audited financial statements. It restates the full original 10-K and updates the Sarbanes-Oxley Section 302 and 906 certifications, but does not change reported 2018 results, FFO, AFFO, or any other disclosure.
How well covered is the dividend, and what might risk a cut?
In 2018 cash distributions to common stockholders of $761.6 million were about 82.4% of AFFO of $924.6 million, and they were about 133.5% of estimated taxable income, which is the basis for the REIT distribution requirement. Management expects to continue monthly dividends and sees FFO as sufficient, but it explicitly does not guarantee the current dividend level or future increases. Key risks include tenant defaults and bankruptcies, a downturn in convenience store or drug store tenants (11.2% and 10.2% of 2018 rental revenue), rising interest rates, and capital market access.
How concentrated is the tenant base and industry exposure?
The portfolio is diversified across 262 commercial tenants and 48 industries, and no single industry accounted for more than 12.4% of 2018 rental revenue. The top 20 tenants represented about 54% of annualized revenue, and the largest single tenant, Walgreens, contributed 6.3% of rental revenue. About 51% of annualized rent comes from investment-grade tenants or their subsidiaries.
What drove the 2018 change in leadership and related costs?
Sumit Roy, previously COO and President, was appointed CEO in October 2018, succeeding John P. Case. The severance arrangement with Case totaled $28.3 million, but after netting accrued CEO compensation, the incremental charge recorded in general and administrative expense was $18.7 million, equal to $0.06 per diluted share.
What is the company's near-term debt and liquidity profile?
At December 31, 2018, the company had $252.0 million drawn on a revolver with $2.75 billion available, $570.0 million of term loans, $298.4 million of mortgages, and $5.4 billion of senior unsecured notes at a weighted average rate of about 4.0%. The $70 million ARCT term loan was repaid in January 2019, and the company had about $10.4 million of cash on hand. Management believes its liquidity is sufficient for the next twelve months.
06—Continue