How well is Realty Income's dividend covered by its cash flow?

Cash distributions to common stockholders totaled $108.6 million in 2005, or 83.8% of FFO of $129.6 million, which the company views as comfortable coverage. However, cash distributions were about 113% of estimated REIT taxable income of $104.2 million, and about 10.1% of distributions were classified as return of capital. Net cash from operating activities fell to $109.6 million in 2005 from $178.3 million in 2004, largely due to working-capital and Crest Net property inventory timing.

Why did net income stay flat even though FFO grew 9.6%?

Net income available to common stockholders fell slightly to $89.7 million from $90.2 million because gains on property sales dropped to $6.6 million from $12.7 million in investment property sales (plus $3.3 million from Crest Net sales versus $10.3 million in 2004). Net income is reduced by depreciation, which rose to $46.4 million, while FFO adds depreciation back and excludes those property sale gains, so FFO grew faster.

What are the main risks to Realty Income's rental income?

Rental income depends on tenant credit quality and industry health. Convenience stores (18.7% of rental revenue) and child care (12.7%) are the largest exposures, and a downturn in either could hurt tenants' ability to pay. Many tenants are middle-market chains with more limited resources. Other risks include environmental liabilities from fuel and underground storage tanks, the possibility of unleased properties (about 1-3% of the portfolio is typically vacant), and renewals at lower rents.

How exposed is the company to rising interest rates?

Most of the debt is fixed-rate notes and bonds with no near-term maturities beyond 2007-2008 ($110 million in 2007 and $100 million in 2008, plus the credit facility). The $300 million credit facility is variable-rate, with $131.6 million drawn at February 2006 at about 5.2%. Management estimates a 1% rise in rates would increase annual interest costs on the credit facility by about $1.4 million. Higher rates could also reduce the market value of the stock and the company's ability to refinance at attractive terms.

O 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 23, 2006. Cited figures are marked; the original filing is the authoritative source.

Realty Income Corporation (NYSE: O), 'The Monthly Dividend Company,' closed 2005 with a portfolio of 1,646 retail properties that were 98.5%^a occupied, leased to 101 regional and national retail chains across 48 states, with a weighted average remaining lease term of about 12.4 years on single-tenant properties.

The company reported net income available to common stockholders of $89.7 million^b ($1.12 per diluted share), essentially flat versus $90.2 million in 2004, while FFO rose 9.6% to $129.6 million ($1.62 per diluted share, up from $1.50). Growth was driven by $486.6 million of 2005 investments in 156 new properties at an initial weighted average lease yield of 8.4% (for Realty Income's own 135 acquisitions), funded largely by a $92.7 million common equity issuance and $275 million of new long-term unsecured notes and bonds. The balance sheet remains conservative by REIT standards: total debt of $886.6 million represented about 30.3% of total market capitalization, there is no mortgage debt, all notes carry fixed rates, and the company was in compliance with its note covenants.

Credit ratings were upgraded by Fitch in 2005 and Moody's outlook was raised to positive in February 2006. The company also raised its monthly common dividend for the 33rd consecutive quarter to $0.11625^c per share, an annualized $1.395 and roughly a 6.1% yield at the $22.78 share price, though distributions consumed about 83.8% of FFO and roughly 113% of estimated REIT taxable income.

Key risks for investors include tenant concentration in convenience stores (18.7% of rental revenue) and child care (12.7%), the variable-rate $300 million^d credit facility, interest-rate sensitivity of the market value of the stock and bonds, and the reliance on continued external capital to fund acquisitions. Net income was also flattered and then offset by gains on property sales that fluctuate from year to year.

02—Key points

Key Highlights

Portfolio of 1,646 properties at 98.5% occupancy, leased to 101 retail chains in 29 industries across 48 states, covering over 13.4 million sq. ft.
FFO rose 9.6% to $129.6 million ($1.62 per diluted share) vs. $118.2 million ($1.50) in 2004; net income available to common stockholders was $89.7 million ($1.12 per share), roughly flat year over year.
Invested $486.6 million in 156 new properties during 2005, with Realty Income's 135 acquisitions carrying an initial weighted average contractual lease rate of 8.4%.
Total debt of $886.6 million equals about 30.3% of total market capitalization; no mortgage debt, all notes fixed-rate, and covenants in compliance.
Monthly common distribution raised to $0.11625 (annualized $1.395, about 6.1% yield at $22.78), the 33rd consecutive quarterly increase; 2005 distributions were 83.8% of FFO.
Credit ratings upgraded: Fitch raised senior unsecured debt to BBB+ in September 2005, and Moody's outlook moved to positive in February 2006.
Tenant concentration: convenience stores (18.7%) and child care (12.7%) represent the largest industry exposures to rental revenue.

03—Questions

Frequently Asked Questions

How well is Realty Income's dividend covered by its cash flow?
Cash distributions to common stockholders totaled $108.6 million in 2005, or 83.8% of FFO of $129.6 million, which the company views as comfortable coverage. However, cash distributions were about 113% of estimated REIT taxable income of $104.2 million, and about 10.1% of distributions were classified as return of capital. Net cash from operating activities fell to $109.6 million in 2005 from $178.3 million in 2004, largely due to working-capital and Crest Net property inventory timing.
Why did net income stay flat even though FFO grew 9.6%?
Net income available to common stockholders fell slightly to $89.7 million from $90.2 million because gains on property sales dropped to $6.6 million from $12.7 million in investment property sales (plus $3.3 million from Crest Net sales versus $10.3 million in 2004). Net income is reduced by depreciation, which rose to $46.4 million, while FFO adds depreciation back and excludes those property sale gains, so FFO grew faster.
What are the main risks to Realty Income's rental income?
Rental income depends on tenant credit quality and industry health. Convenience stores (18.7% of rental revenue) and child care (12.7%) are the largest exposures, and a downturn in either could hurt tenants' ability to pay. Many tenants are middle-market chains with more limited resources. Other risks include environmental liabilities from fuel and underground storage tanks, the possibility of unleased properties (about 1-3% of the portfolio is typically vacant), and renewals at lower rents.
How exposed is the company to rising interest rates?
Most of the debt is fixed-rate notes and bonds with no near-term maturities beyond 2007-2008 ($110 million in 2007 and $100 million in 2008, plus the credit facility). The $300 million credit facility is variable-rate, with $131.6 million drawn at February 2006 at about 5.2%. Management estimates a 1% rise in rates would increase annual interest costs on the credit facility by about $1.4 million. Higher rates could also reduce the market value of the stock and the company's ability to refinance at attractive terms.

04—Continue

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