How well is the monthly dividend covered by the company's cash flow?

In 2002, common distributions totaled $78.0 million, or 82.1% of FFO of $95.1 million, and net cash from operating activities was $124.8 million. The company reported that its 2002 distributions were about 106.9% of estimated REIT taxable income, which is slightly above the 100% level, so it is paying out a bit more than taxable income while remaining well within FFO and operating cash flow. Management cannot guarantee future distribution levels or the continued pattern of increases.

What is the risk from tenant concentration?

Child care operators accounted for 20.8% of 2002 rental revenue and restaurants for 13.5%, and the largest tenant, Children's World Learning Centers, produced 10.7% of rental revenue. Any downturn in those industries, or in that tenant specifically, could materially affect rental income and the company's ability to pay distributions. Management notes that middle-market retailers generally have more limited resources than upper-market chains.

How much debt does Realty Income carry and when does it come due?

At March 1, 2003, the company had $107.1 million outstanding on its $250 million credit facility (about 2.43% weighted average rate, expiring October 2005) and $230 million in senior notes: $110 million of 7.75% notes due 2007, $100 million of 8.25% Monthly Income Senior Notes due 2008, and $20 million of 8.0% notes due 2009. The company has no mortgage debt on its properties and reported compliance with its note covenants.

Why did net income grow faster than FFO or revenue would suggest, and is that growth sustainable?

Net income available to common stockholders rose $11.2 million, but property sale gains are volatile, and 2002 gains ($6.3 million) were $4.2 million lower than in 2001. Excluding gains on sales of investment properties, net income available to common stockholders increased 32.6%, which reflects growth from 2001 and 2002 acquisitions and contractual rent increases. Investors should view sales gains as non-recurring and focus on FFO and AFFO, which grew about 22% in 2002.

What is the company's plan for growth going forward?

Management intends to keep acquiring freestanding retail properties under long-term net leases, funded by the credit facility and then refinanced with equity or debt. The company expects to receive $15 million to $30 million from property sales over the next 12 months and reinvest those proceeds in acquisitions. It also has a $500 million shelf registration available and expects its majority of future securities issuances to be common stock, though it cannot assure access to capital markets on acceptable terms.

O 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 5, 2003. Cited figures are marked; the original filing is the authoritative source.

Realty Income Corporation (NYSE: O), 'The Monthly Dividend Company,' closed 2002 with a diversified portfolio of 1,197 freestanding, single-tenant retail properties in 48 states, 97.7%^a occupied and leased to 79 regional and national chains.

Total revenue rose 13.8% to $141.0 million^b, and net income available to common stockholders increased 19.2% to $69.0 million ($2.03 per share). Funds from operations (FFO) grew 22.2% to $95.1 million, and AFFO rose 22.0% to $95.8 million. Common distributions of $78.0 million were 82.1% of FFO, leaving a comfortable coverage cushion for the monthly dividend, which was raised to $0.195 per share in January 2003 (an annualized $2.34, about a 6.8% yield at the March 1, 2003 price of $34.66).

The balance sheet remains conservative. Total assets were $1.08 billion^c, with debt of $339.7 million, and total borrowings plus notes equaled about 20.4% of a $1.65 billion market capitalization. The company replaced its prior credit lines with a $250 million facility at LIBOR plus 90 basis points, and it filed a $500 million universal shelf registration that had not been used as of March 1, 2003.

Management also reported 2002 acquisitions of 108 properties for $133.3 million^d at an estimated initial unleveraged yield of 10.4%. Investors should weigh several risks. Child care (20.8% of rental revenue) and restaurants (13.5%) are concentrated exposures, and Children's World Learning Centers alone produced 10.7% of rental revenue.

Part of 2002 earnings growth came from property sales gains, which were lower in 2002 than in 2001 ($6.3 million versus $10.5 million). Mortgage-free balance sheet aside, the company's rate exposure rises with its variable-rate credit line, which stood at $109.7 million at year-end. Overall, the filing portrays a steadily growing, well-covered monthly distribution backed by a diversified net-lease portfolio.

02—Key points

Key Highlights

FFO rose 22.2% to $95.1 million ($2.80 per diluted share implied on 33.99 million diluted shares), and distributions to common stockholders were 82.1% of FFO, indicating solid dividend coverage.
Portfolio of 1,197 single-tenant retail properties in 48 states, 97.7% leased, with a weighted average remaining lease term of about 10.9 years and 94.6% of leases providing contractual rent escalators.
Net income available to common stockholders grew 19.4% to $68.9 million ($2.03 per share), though the 2002 gain on property sales ($6.3 million) was $4.2 million below 2001.
The monthly common dividend was increased to $0.195 per share in January 2003, the 21st consecutive quarterly increase, for an annualized $2.34 and an approximate 6.8% yield.
Conservative capital structure: total debt of $337.1 million equals about 20.4% of a $1.65 billion total market capitalization, with investment grade ratings (BBB/Baa2/BBB-) and a new $250 million credit facility priced at LIBOR plus 90 basis points.
Concentration risk: child care tenants generated 20.8% of 2002 rental revenue and restaurants 13.5%, with the largest tenant, Children's World Learning Centers, at 10.7%.
Acquisition activity was $133.3 million across 108 properties at an estimated initial unleveraged return of 10.4%, and a $500 million universal shelf registration was declared effective in January 2003 with no issuance as of March 1, 2003.

03—Questions

Frequently Asked Questions

How well is the monthly dividend covered by the company's cash flow?
In 2002, common distributions totaled $78.0 million, or 82.1% of FFO of $95.1 million, and net cash from operating activities was $124.8 million. The company reported that its 2002 distributions were about 106.9% of estimated REIT taxable income, which is slightly above the 100% level, so it is paying out a bit more than taxable income while remaining well within FFO and operating cash flow. Management cannot guarantee future distribution levels or the continued pattern of increases.
What is the risk from tenant concentration?
Child care operators accounted for 20.8% of 2002 rental revenue and restaurants for 13.5%, and the largest tenant, Children's World Learning Centers, produced 10.7% of rental revenue. Any downturn in those industries, or in that tenant specifically, could materially affect rental income and the company's ability to pay distributions. Management notes that middle-market retailers generally have more limited resources than upper-market chains.
How much debt does Realty Income carry and when does it come due?
At March 1, 2003, the company had $107.1 million outstanding on its $250 million credit facility (about 2.43% weighted average rate, expiring October 2005) and $230 million in senior notes: $110 million of 7.75% notes due 2007, $100 million of 8.25% Monthly Income Senior Notes due 2008, and $20 million of 8.0% notes due 2009. The company has no mortgage debt on its properties and reported compliance with its note covenants.
Why did net income grow faster than FFO or revenue would suggest, and is that growth sustainable?
Net income available to common stockholders rose $11.2 million, but property sale gains are volatile, and 2002 gains ($6.3 million) were $4.2 million lower than in 2001. Excluding gains on sales of investment properties, net income available to common stockholders increased 32.6%, which reflects growth from 2001 and 2002 acquisitions and contractual rent increases. Investors should view sales gains as non-recurring and focus on FFO and AFFO, which grew about 22% in 2002.
What is the company's plan for growth going forward?
Management intends to keep acquiring freestanding retail properties under long-term net leases, funded by the credit facility and then refinanced with equity or debt. The company expects to receive $15 million to $30 million from property sales over the next 12 months and reinvest those proceeds in acquisitions. It also has a $500 million shelf registration available and expects its majority of future securities issuances to be common stock, though it cannot assure access to capital markets on acceptable terms.

04—Continue

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