How much income is the company generating and is it growing?

1995 total revenue was $51.6 million versus $48.9 million in 1994, and net income rose to $25.6 million from $15.2 million. The 1994 comparison is distorted by $11.2 million of Consolidation costs; excluding those, 1994 net income was $26.4 million, so underlying 1995 earnings were slightly lower on a reported basis. FFO grew modestly to $40.4 million from $39.1 million.

Is the dividend safe, and how attractive is the yield?

The current $0.155 monthly distribution annualizes to $1.86 per share, about an 8.6% yield at the February 27, 1996 price. Management says it expects to continue monthly payments but gives no assurance the level will be maintained. The 1995 total of $2.215 per share included a one-time $0.23 special distribution required for REIT compliance, so it should not be treated as a recurring run rate. Distributions are constrained by REIT rules (95% of taxable income) and by covenants in the credit facility.

What are the main risks to tenant rent collections?

Rent depends heavily on a few tenants and industries: child care (about 44% of rental revenue from Children's World and La Petite Academy combined) and restaurants and auto service chains. Tenants face competition that could hurt their results. Management reports that over 98% of contractual rent has been collected historically, and 1996 contractual lease payments are about $50.8 million. Only four properties were vacant at year-end, and 16 were available for sublease, mostly with current tenants.

How is the company financing growth, and how levered is it?

Growth is financed through a $130 million unsecured revolving acquisition facility (about $118 million available as of February 9, 1996, at roughly 6.9%) and periodic equity offerings. The company intends to refinance borrowings with permanent capital once they reach $50 to $100 million. Leverage is low, with debt at about 4.9% of total assets. Remaining obligations include the $12.6 million notes being redeemed in March 1996 and a $6 million line balance at year-end 1995.

What changed structurally in 1995 and what should investors watch next?

The Advisor merger on August 17, 1995 converted the external management arrangement into an internally managed REIT, removing the advisory fee structure (advisor fees fell to $3.7 million from $5.4 million) but adding goodwill of about $22.6 million and a pension plan obligation that was terminated in January 1996 at an expected cost of about $1.7 million. Investors should watch whether acquisitions continue at the reported 11.3% initial unleveraged yields, whether the company keeps issuing equity to fund growth, and whether tenant concentration in child care and restaurants becomes a larger issue.

O 10-K FY1995 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 21, 1996. Cited figures are marked; the original filing is the authoritative source.

Realty Income Corporation (NYSE: O) reported 1995 results that reflect a company transitioning from a partnership-based structure to a fully integrated, self-managed REIT.

At February 1, 1996, the company owned 686 freestanding, single-tenant retail properties across 42 states (about 4.7 million leasable square feet), with over 99% leased, and 1995 total revenue of $51.6 million^a and net income of $25.6 million, up from $15.2 million in 1994 (which was depressed by $11.2 million of one-time Consolidation costs). Net income per share was $1.27 on 20.2 million weighted average shares. Funds from operations (FFO) rose to $40.4 million from $39.1 million, and total distributions declared for 1995 were $2.215 per share, a figure inflated by a $0.23 special distribution needed to eliminate acquired earnings and profits from the Advisor merger.

The current monthly distribution of $0.155 annualizes to $1.86^b, or roughly an 8.6% yield at the February 27, 1996 price. The balance sheet is conservative, with total indebtedness at about 4.9% of total assets at year-end 1995 and stockholders' equity of $381.4 million. Growth was funded through a $130 million unsecured acquisition credit facility (LIBOR + 1.25%, extended to November 1998) and a 2.54 million share offering in late 1995 at $19.625 that netted $46.6 million.

The company acquired 58 properties for $65.4 million^c in 1995, and the 63 properties acquired since the 1994 Consolidation were reported at an estimated unleveraged initial return of 11.3%. Key risks include tenant concentration (Children's World, La Petite Academy, Golden Corral, and Northern Automotive accounted for roughly 65% of rental revenue), reliance on child care and restaurant tenants, lease rollover (about 9.2 years average remaining term), and REIT qualification requirements. Management also redeemed the 7.44% variable rate senior notes due 2001 on March 29, 1996, and terminated the pension plan, with a roughly $1.7 million obligation expected in the second half of 1996.

02—Key points

Key Highlights

Portfolio of 686 single-tenant, triple-net leased retail properties in 42 states, over 99% leased as of February 1, 1996, with an average remaining lease term of about 9.2 years.
1995 net income of $25.6 million ($1.27 per share), up from $15.2 million in 1994, which was reduced by $11.2 million of one-time Consolidation costs; FFO grew to $40.4 million from $39.1 million.
Monthly distribution raised 3.3% to $0.155 per share in August 1995, an annualized $1.86 and an approximate 8.6% yield; 1995 declared distributions totaled $2.215 per share, including a $0.23 special distribution.
Low leverage: total indebtedness was about 4.9% of total assets at year-end 1995, and stockholders' equity was $381.4 million.
Growth engine: 58 properties acquired for $65.4 million in 1995, funded by a $130 million acquisition credit facility and a $46.6 million net equity offering at $19.625 per share.
Tenant concentration risk: the four largest tenants (Children's World, La Petite Academy, Golden Corral, Northern Automotive) generated about 65% of 1995 rental revenue.
Internalization completed: the external advisor was merged into the company on August 17, 1995 in exchange for 990,704 shares, making Realty Income fully self-managed; the variable rate senior notes are being redeemed at par on March 29, 1996.

03—Questions

Frequently Asked Questions

How much income is the company generating and is it growing?
1995 total revenue was $51.6 million versus $48.9 million in 1994, and net income rose to $25.6 million from $15.2 million. The 1994 comparison is distorted by $11.2 million of Consolidation costs; excluding those, 1994 net income was $26.4 million, so underlying 1995 earnings were slightly lower on a reported basis. FFO grew modestly to $40.4 million from $39.1 million.
Is the dividend safe, and how attractive is the yield?
The current $0.155 monthly distribution annualizes to $1.86 per share, about an 8.6% yield at the February 27, 1996 price. Management says it expects to continue monthly payments but gives no assurance the level will be maintained. The 1995 total of $2.215 per share included a one-time $0.23 special distribution required for REIT compliance, so it should not be treated as a recurring run rate. Distributions are constrained by REIT rules (95% of taxable income) and by covenants in the credit facility.
What are the main risks to tenant rent collections?
Rent depends heavily on a few tenants and industries: child care (about 44% of rental revenue from Children's World and La Petite Academy combined) and restaurants and auto service chains. Tenants face competition that could hurt their results. Management reports that over 98% of contractual rent has been collected historically, and 1996 contractual lease payments are about $50.8 million. Only four properties were vacant at year-end, and 16 were available for sublease, mostly with current tenants.
How is the company financing growth, and how levered is it?
Growth is financed through a $130 million unsecured revolving acquisition facility (about $118 million available as of February 9, 1996, at roughly 6.9%) and periodic equity offerings. The company intends to refinance borrowings with permanent capital once they reach $50 to $100 million. Leverage is low, with debt at about 4.9% of total assets. Remaining obligations include the $12.6 million notes being redeemed in March 1996 and a $6 million line balance at year-end 1995.
What changed structurally in 1995 and what should investors watch next?
The Advisor merger on August 17, 1995 converted the external management arrangement into an internally managed REIT, removing the advisory fee structure (advisor fees fell to $3.7 million from $5.4 million) but adding goodwill of about $22.6 million and a pension plan obligation that was terminated in January 1996 at an expected cost of about $1.7 million. Investors should watch whether acquisitions continue at the reported 11.3% initial unleveraged yields, whether the company keeps issuing equity to fund growth, and whether tenant concentration in child care and restaurants becomes a larger issue.

04—Continue

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