01—Abstract
Summary
Summary of the 10-K filed February 19, 2004. Cited figures are marked; the original filing is the authoritative source.
Realty Income Corporation (NYSE: O), 'The Monthly Dividend Company,' reported a strong 2003 as a net-lease REIT.
Net income available to common stockholders rose 11.2% to $76.7 milliona ($2.15 diluted per share, versus $2.03 in 2002), and FFO increased 11.0% to $104.0 million. Total revenue grew to $156.1 million. The portfolio stood at 1,404 retail properties, 98.1% occupied, leased to 85 chains across 28 industries in 48 states, with a weighted average remaining lease term of about 11.8 years for single-tenant properties.
The company invested $371.6 millionb in 302 properties during 2003, including the 86-property National Tire & Battery sale-leaseback and the 114-property Pantry convenience store portfolio, which lifted convenience stores to the largest industry exposure at year-end. The balance sheet was strengthened through the year. Realty Income issued $100 million of 5-3/8% notes due 2013 and $150 million of 5-1/2% notes due 2015, plus about $110.8 million of common equity.
Management reports total debt of $493 millionc, roughly 22% of total market capitalization, with no mortgage debt. Credit ratings were upgraded by Moody's (Baa2) and S&P (BBB) during 2003, and the company carries stable-outlook investment-grade ratings. Distributions were raised four times to $0.20 per month by January 2004, an annualized $2.40 per share.
Key risks flagged in the filing include tenant concentration (The Pantry and Children's World were the largest tenants at year-end at 7.8%d and 7.3% of annualized rent), exposure to middle-market retailers with limited resources, and the dependence of distributions on REIT qualification and capital market access. Distributions were 80.6% of FFO and about 108% of estimated REIT taxable income, leaving limited retained cash flow to fund growth.
02—Key points
Key Highlights
- Net income available to common stockholders of $76.7M ($2.15 diluted EPS), up 11.2% from $69.0M in 2002
- FFO rose 11.0% to $104.0M; common distributions equaled 80.6% of FFO in 2003
- Portfolio of 1,404 properties, 98.1% occupied, across 85 retail chains in 28 industries and 48 states
- Invested $371.6M in 302 new properties in 2003, including the 86-property NTB and 114-property Pantry acquisitions
- Total debt of $493M is about 22% of market capitalization; no mortgage debt; $250M credit facility with $237M available
- Credit ratings upgraded in 2003 (S&P to BBB, Moody's to Baa2); monthly distribution raised to $0.20 (annualized $2.40)
- Concentration risk: convenience stores (15.9%) and child care (15.3%) of annualized rent; largest tenant The Pantry at 7.8%
03—Questions
Frequently Asked Questions
How did Realty Income perform financially in 2003?
Total revenue rose to $156.1M from $137.7M in 2002. Net income available to common stockholders was $76.7M, or $2.15 per diluted share, compared with $2.03 in 2002. FFO grew 11.0% to $104.0M, helped by acquisitions and gains on sales of properties.
Is the monthly dividend sustainable?
Common distributions of $2.3625 per share were paid in 2003 and equaled about 80.6% of FFO, which provides coverage. However, they were about 108% of estimated REIT taxable income, so the company must keep distributing most of its taxable income. The board may change distributions, and the company does not guarantee future increases.
What are the main concentration risks for investors?
Convenience stores (15.9% of annualized rent) and child care (15.3%) are the largest industries. The Pantry (7.8%) and Children's World (7.3%) are the largest tenants. The filing notes that most tenants are middle-market chains with limited financial resources, so a downturn in these sectors could hurt rent collections and distributions.
How is the company financing its growth?
Growth is funded through a $250M unsecured revolving credit facility, 10-year and 12-year senior unsecured notes issued in 2003, and common stock offerings. Management says it prefers to issue common equity over the long term and aims to keep debt conservative, with about $493M of debt outstanding as of February 2004.
What is the company's exposure to the Crest Net Lease subsidiary?
Crest Net Lease held $53.3M of properties held for sale at year-end 2003, up from $4.6M a year earlier. It contributed $4.6M of FFO in 2003. Management expects this contribution to vary based on acquisition and sale timing, and the subsidiary is subject to federal and state income taxes.
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