01—Abstract
Summary
Summary of the 10-K filed February 15, 2008. Cited figures are marked; the original filing is the authoritative source.
Realty Income Corporation (NYSE: O), a 38-year-old REIT, closed 2007 with a diversified portfolio of 2,270 retail properties that were 97.9%a occupied and leased to 115 chains across 30 industries in 49 states.
Revenue rose to $296.5 millionb and FFO grew 21.8% to $189.7 million, or $1.89 per diluted share, while net income available to common stockholders was $116.2 million ($1.16 per share). Growth was driven by $533.7 million of 2007 acquisitions, funded largely by a $550 million 6.75% senior notes offering in September 2007. Restaurants (24.2% of rent) and convenience stores (14.1%) are the largest tenant concentrations, so industry downturns are the key risk to monitor.
Balance sheet leverage is moderate for a REIT. Total debt of $1.47 billionc was about 33.7% of total market capitalization at February 1, 2008, all of it fixed-rate unsecured notes, with no mortgage debt and $300 million of undrawn credit capacity. Investment-grade ratings were upgraded by Moody's in April 2007 and the company was added to the S&P MidCap 400.
Cash distributions to common holders totaled $157.7 milliond, or 83.1% of FFO, and the monthly dividend was raised to $0.13675, an annualized yield of about 6.5%. Investors should note that the company has 1.47 billion of notes, including $100 million due November 2008 and $20 million due January 2009, that must be refinanced or repaid.
The filing also flags a concentration and credit event: Buffets, Inc., which leases 119 properties, filed for Chapter 11 on January 22, 2008. Management says lease payments are current and expects no material impact, but this is the most important near-term tenant risk in the report.
02—Key points
Key Highlights
- FFO rose 21.8% to $189.7 million ($1.89 per diluted share) in 2007, up from $1.73 in 2006.
- Net income available to common stockholders was $116.2 million ($1.16 per share), versus $99.4 million in 2006.
- Acquired $533.7 million of new properties in 2007 at an initial weighted average lease yield of 8.6% (Realty Income portion), with 100% leased and an average lease term of 19.3 years.
- Issued $550 million of 6.75% senior unsecured notes due 2019 in September 2007; total notes outstanding were $1.47 billion, all fixed-rate.
- Monthly dividend raised to $0.13675 (41st consecutive quarterly increase), an annualized yield of about 6.5% at a $25.15 share price; 2007 distributions were 113.6% of estimated REIT taxable income.
- Buffets, Inc. (119 properties) filed for Chapter 11 on January 22, 2008; company says rent is current and does not expect a material impact.
- Restaurants (24.2%) and convenience stores (14.1%) are the largest rent concentrations; 48 properties were available for lease at year-end.
03—Questions
Frequently Asked Questions
Is the monthly distribution safe, given payout levels?
Common cash distributions were $157.7 million in 2007, or 83.1% of FFO, which leaves a reasonable cushion. However, distributions were 113.6% of estimated REIT taxable income, and management explicitly states it cannot guarantee the current distribution level or continued increases.
How exposed is Realty Income to the Buffets bankruptcy?
The company owns 116 Buffets properties directly and three through Crest, all leased to Buffets subsidiaries and guaranteed by Buffets. Management believes the Chapter 11 filing will not have a material adverse effect, based on its location analysis and current rent payments as of February 12, 2008. The exposure is notable, but the filing does not describe a quantified rent impact.
How much debt does the company need to refinance soon?
The $100 million 8.25% notes mature in November 2008 and the $20 million 8% notes mature in January 2009. The $300 million credit facility expires in October 2008, though it can be extended one year. Management plans to pay these from cash, the credit facility, or new securities issuance.
What is the company's leverage and credit profile?
Total debt equaled about 33.7% of total market capitalization at February 1, 2008. Note covenants showed total debt at 41.9% against a 60% limit and a debt service coverage ratio of 4.2x against a 1.5x minimum. Ratings are investment grade: Baa1 from Moody's, BBB+ from Fitch, and BBB from S&P on senior notes.
What drove growth in 2007, and is the acquisition pipeline sustainable?
Growth came mainly from acquisitions, with rental revenue up 22.2% to $290.2 million. The company also plans to sell $10 to $35 million of properties over the next 12 months to recycle into new acquisitions. Future acquisitions depend on access to capital markets and on credit conditions, which the filing describes as recently disrupted.
04—Continue