01—Abstract
Summary
Summary of the 10-K filed February 21, 2007. Cited figures are marked; the original filing is the authoritative source.
Realty Income Corporation (NYSE: O), 'The Monthly Dividend Company,' closed 2006 with a portfolio of 1,955 single-tenant retail properties (98.7% occupied) leased to 103 chains across 29 industries in 48 states, plus 60 held-for-sale properties ($137.5 milliona) held by its taxable REIT subsidiary Crest Net Lease.
Total revenue rose to $240.1 millionb from $196.0 million, and FFO reached $155.8 million, or $1.73 per diluted share, up 6.8% per share. Growth was driven by $769.9 million of acquisitions in 2006, including $349 million for 144 Buffets/Ryan's restaurants, funded largely through equity issuances of roughly $0.7 billion and a $275 million 10-year note. The balance sheet strengthened over the year: total assets grew to $2.55 billion and stockholders' equity to $1.58 billion, while the credit facility was fully repaid and senior notes stood at $920 million with no mortgage debt.
Management reported an 80.9% service-oriented tenant mix, an 89.1% share of leases with rent escalators, and investment-grade ratings with positive outlooks from Moody's and S&P. Monthly common distributions were raised to $0.1265c per share (about a 5.2% yield at $29.09), and 2006 distributions were covered by FFO at roughly 83%. Key watch items include tenant concentration in convenience stores (16.1% of rent), restaurants (11.9%) and child care (10.3%), the 9.9% return-of-capital portion of distributions, and the reliance on acquisition-driven growth.
02—Key points
Key Highlights
- Revenue grew 22.5% to $240.1 million in 2006, while FFO rose 20.2% to $155.8 million ($1.73 per diluted share, up 6.8%).
- Acquired $769.9 million of properties in 2006, including $349 million for 144 Buffets/Ryan's restaurants, with a weighted average initial lease term of 17.1 years.
- Portfolio of 1,955 properties was 98.7% occupied, leased to 103 chains in 29 industries across 48 states, with a weighted average remaining lease term of 12.9 years on single-tenant properties.
- Balance sheet strengthened: total stockholders' equity rose to $1.58 billion, the credit facility was undrawn at year-end, and there is no mortgage debt; senior notes total $920 million, with a 31.6% debt-to-assets covenant ratio versus a 60% limit.
- Investment-grade ratings (Baa2/BBB/BBB+) with positive outlooks from Moody's and S&P; the 2016 notes were issued at a 5.985% effective yield.
- Monthly distributions raised to $0.1265 per share (37th consecutive quarterly increase), an annualized yield of about 5.2%; 2006 distributions were 83.2% of FFO.
- Concentration risk: convenience stores (16.1%), restaurants (11.9%) and child care (10.3%) were the largest sources of rental revenue, and 9.9% of 2006 distributions were classified as return of capital.
03—Questions
Frequently Asked Questions
How did Realty Income perform financially in 2006?
Total revenue increased to $240.1 million from $196.0 million, net income available to common stockholders was $99.4 million ($1.11 per diluted share), and FFO rose 20.2% to $155.8 million ($1.73 per diluted share). Part of the growth reflects the higher-acquisition pace and the 2006 Buffets/Ryan's purchase.
Is the dividend safe?
Distributions are paid monthly and the company raised its monthly dividend 37 consecutive quarters. In 2006, common cash distributions of $129.7 million equaled 83.2% of FFO and about 113% of estimated REIT taxable income, so the payout exceeds taxable income, which is typical for REITs but the company cannot guarantee future increases. Distributions depend on the Board's discretion, results, and debt covenants.
What are the main risks to tenant rent collections?
Rent depends on tenant credit, so exposure is concentrated in convenience stores, restaurants and child care, and most tenants are middle-market chains that may have limited resources in a downturn. The company also faces environmental liability (including from underground tanks at convenience and auto service sites), a 12.9-year average remaining lease term, and the risk that about 1% to 3% of the portfolio is unleased at any time.
How is the company funding growth, and what are the financing risks?
Growth is funded mainly through common and preferred equity offerings (about $402.7 million in common and $214.0 million in preferred in 2006) plus unsecured notes, with the $300 million unsecured credit facility used for short-term acquisition financing. Risks include variable-rate exposure if the facility is drawn (a 1% rate change on $50 million is about $0.5 million per year), refinancing of the $100 million 2008 notes and $20 million 2009 notes, and dilution from additional equity issuance.
What does the company's portfolio look like geographically and by property type?
The portfolio is spread across 48 states, with Texas (13.9% of rent), Florida (8.1%) and California (5.8%) as the largest markets. Properties are mostly freestanding, single-tenant retail sites on long-term net leases of typically 15 to 20 years, where tenants pay property taxes, insurance and maintenance, and rent escalators are tied to CPI or fixed increases.
04—Continue