01—Abstract
Summary
Summary of the 10-K filed February 12, 2009. Cited figures are marked; the original filing is the authoritative source.
Realty Income Corporation (NYSE: O), 'The Monthly Dividend Company,' reported 2008 results that remained stable despite a difficult commercial real estate backdrop.
Revenue rose to $330.2 milliona from $294.3 million, driven largely by the 325 properties acquired in 2007 and same-store rent growth. Net income available to common stockholders fell to $107.6 million ($1.06 per diluted share) from $116.2 million ($1.16) in 2007, mainly because 2007 included larger property-sale gains. FFO per diluted share declined 3.2% to $1.83 from $1.89, and common stock distributions were covered at about 91.5% of FFO.
Acquisition activity slowed sharply to $189.6 millionb across 108 properties, with most of it completed in the first quarter, which management attributed to uncertainty in the commercial real estate market. The balance sheet is conservative. Notes payable totaled $1.37 billion at year-end, with no maturities until 2013 after the January 2009 redemption of the $20 million 8% notes.
Debt represented about 35.5% of total market capitalization at February 9, 2009. The $355 millionc unsecured credit facility was undrawn, and the company held investment-grade ratings (BBB+/Baa1/BBB). Interest coverage was 3.2x and fixed charge coverage was 2.6x, both down from 2007.
Tenant credit is a key watch item: restaurants (20.8% of rental revenue) and convenience stores (16.4%) are the largest industries, and Buffets Holdings, which filed for Chapter 11 in January 2008, remains the largest tenant at roughly 6.0% of annualized lease revenue after rent concessions. For investors, the central questions are the sustainability of the monthly dividend (currently $0.14175d per share, about an 8.4% yield at $20.19), the pace of acquisitions if capital markets stay tight, and tenant credit as the economy weakens. The company's 39-year record of monthly distributions and its diversified portfolio of 2,348 properties in 49 states, 97.0% occupied, support the thesis, while lower FFO growth, higher interest costs, and the Buffets exposure are the principal risks.
02—Key points
Key Highlights
- Revenue grew 12.2% to $330.2 million in 2008, while net income available to common stockholders declined 7.4% to $107.6 million ($1.06 per diluted share) because 2007 included larger property-sale gains.
- FFO per diluted share fell 3.2% to $1.83 (from $1.89); common distributions of $169.7 million were about 91.5% of FFO, and the monthly dividend was raised to $0.14175 (annualized $1.701, roughly 8.4% yield at $20.19).
- Acquisitions slowed to $189.6 million in 108 properties (initial lease rate 8.7%), with $181.4 million completed in Q1 2008, as management cited commercial real estate market uncertainty.
- Portfolio of 2,348 retail properties in 49 states was 97.0% occupied, leased to 119 retail chains; restaurants (20.8% of rental revenue) and convenience stores (16.4%) are the largest industry concentrations.
- Balance sheet is conservative: $1.37 billion of fixed-rate senior notes, no maturities until 2013 after January 2009 repayment, undrawn $355 million credit facility, debt ~35.5% of market capitalization, and investment-grade ratings (BBB+/Baa1/BBB).
- Coverage metrics weakened: interest coverage 3.2x (4.1x in 2007) and fixed charge coverage 2.6x (3.1x in 2007), though well above the note covenant minimums.
- Buffets Holdings (Chapter 11 in January 2008) remains the largest tenant at ~6.0% of annualized lease revenue after rent cuts from $22.4 million to $19.4 million on 104 leases.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 12, 2009Financial Statements
| Revenue | $325.04M |
| Operating Income | $110.30M |
| Interest Expense | $93.96M |
| Net Income | $131.84M |
| Shares Outstanding (Basic) | 101.18M |
| Shares Outstanding (Diluted) | 101.21M |
05—Questions
Frequently Asked Questions
Is the monthly dividend safe, given the decline in FFO?
Distributions are covered by FFO, with common distributions at about 91.5% of 2008 FFO ($169.7 million paid vs. $185.5 million FFO). Coverage is adequate but thinner than in 2007, when FFO exceeded distributions by $32 million. The company has increased the distribution 52 times since its 1994 NYSE listing, but management explicitly says it cannot guarantee future increases or even the current level, so the dividend depends on continued tenant rent collection and access to capital.
Why did net income fall in 2008 even though revenue grew?
Most of the decline reflects lower gains on property sales. Net income available to common stockholders was $107.6 million in 2008 versus $116.2 million in 2007, and the 2008 total included $13.6 million of gains on investment property sales against $3.6 million in 2007 (Crest sales gains were $4.6 million versus $12.3 million). Interest expense also rose sharply to $94.0 million from $64.3 million, driven by the $550 million of 6.75% notes issued in September 2007.
How much debt does Realty Income carry, and when does it come due?
Senior unsecured notes totaled $1.37 billion at December 31, 2008, falling to $1.35 billion after the January 2009 repayment of $20 million of 8% notes. The next maturity is $100 million in March 2013, followed by larger tranches from 2015 to 2019 and a $100 million bond due in 2035. The company has no mortgage debt, and its $355 million credit facility was undrawn at February 2009. Its weighted average note rate is about 6.1%.
What are the main risks to the tenant base?
Concentration in restaurants (20.8% of rental revenue) and convenience stores (16.4%) exposes the company to sector downturns. Middle-market retail chains, which make up much of the portfolio, have fewer resources to weather a recession. Buffets Holdings' bankruptcy shows the risk: rent on 104 leases was reduced to 87% of prior levels. Management notes that no single tenant exceeded 10% of revenue in 2008, and that tenants are generally required to pay property taxes, insurance and maintenance under net leases.
Will the company keep growing through acquisitions?
Acquisition volume dropped sharply, with $181.4 million of the $189.6 million invested in Q1 2008, and management said it would acquire properties only when deals are accretive to shareholders. The $355 million credit facility gives capacity for about $355 million of additional purchases, and the company expects to sell $10 million to $35 million of properties over the next 12 months to recycle capital. Growth in 2009 therefore depends on property pricing, lease rates, and the availability of capital at acceptable cost.
06—Continue