How safe is the monthly dividend, and how much cushion does it have?

In 2009 common distributions totaled $178.0M, about 93.5% of FFO ($190.4M), so FFO covered the payout with a modest cushion. Distributions were about 130.5% of estimated REIT taxable income, which is typical for REITs because depreciation is non-cash. Management says it expects to continue monthly payments and recent increases, but explicitly does not guarantee future increases. Covenants on the credit facility and notes could limit distributions if results deteriorate.

What are the biggest concentration risks in the tenant base?

Restaurants (21.3% of 2009 rental revenue) and convenience stores (17.0%) are the largest industries, and the top 30 industries are each at most 21.3%. No individual tenant accounted for more than 10% of revenue. Management notes that downturns in restaurants or convenience stores could materially affect results, and that many tenants are middle-market chains with more limited resources.

Why was revenue flat, and what drives future growth?

Rental revenue was $326.1M in 2009 versus $325.9M in 2008. Growth from 2009 and 2008 acquisitions and a 0.4% same-store rent increase was offset by roughly $3.7M of net declines from vacancies, property sales, development properties and lease terminations, plus lower straight-line rent. Future growth depends on contractual rent escalators (91.9% of leased properties have them), re-leasing or selling vacant properties, and new acquisitions, which management plans to step up in 2010.

How much refinancing and liquidity risk does the company face?

Debt is almost all unsecured, fixed-rate senior notes, and the company has no maturities until March 2013 (the $100M 5.375% notes), with the credit facility expiring in May 2011 (with two one-year extensions). Cash was only $10M at year-end, but the revolver had $350.4M of availability and the company has investment-grade ratings. Risks include the ability to refinance at acceptable rates and the possibility that a credit facility lender could fail to fund.

What portion of distributions is taxable, and what should investors expect?

About 24.1% of 2009 common distributions were classified as return of capital, which is generally not taxed currently but reduces the stock basis. The remainder was mostly ordinary income, with a small capital gain component. Preferred dividends (Class D at 7.375% and Class E at 6.75%) are also paid monthly and were current at year-end. Management cannot predict the return-of-capital share of future distributions.

O 10-K FY2009 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 11, 2010. Cited figures are marked; the original filing is the authoritative source.

Realty Income (NYSE: O) closed 2009 with a resilient, conservatively financed retail net-lease portfolio.

At December 31, 2009 it owned 2,339 retail properties (96.8% occupied) leased to 118 chains across 30 industries in 49 states, with a weighted average remaining lease term of about 11.2 years on single-tenant leases. Net income available to common stockholders was $106.9 million^a ($1.03 per diluted share), essentially flat versus 2008, while FFO rose 2.6% to $190.4 million ($1.84 per share). Rental revenue was flat at $326.1 million, reflecting limited acquisitions in 2008-2009 ($57.9 million invested in 16 properties in 2009 versus $189.6 million in 108 properties in 2008) and modest same-store rent growth of 0.4%.

Balance sheet and liquidity are a key part of the story. Total debt of $1.355 billion^b (notes and credit facility) represented about 30.8% of total market capitalization, with no maturities until March 2013, fixed-rate senior notes (weighted average 6.10%), and investment-grade ratings from all three major agencies. Cash was only $10 million, but the $355 million credit facility had $350.4 million available.

Common distributions of $178.0 million^c equaled 93.5% of FFO, and the monthly dividend was raised to $0.143 in January 2010 (an annualized yield of about 6.7% at $25.74). Management signaled renewed acquisition activity in 2010 after a cautious 2008-2009.

Key risks for investors include tenant concentration in restaurants (21.3%^d of rental revenue) and convenience stores (17.0%), exposure to middle-market retailers with limited resources, rising vacancy (75 properties available for lease versus 70 a year earlier), dependence on REIT qualification, and refinancing and credit-market risk. Distributions exceed REIT taxable income (130.5% coverage), and about 24.1% of 2009 common distributions were a return of capital.

02—Key points

Key Highlights

Portfolio: 2,339 retail properties, 96.8% occupied, 118 retail chains, 30 industries, 49 states, 19.1 million sq. ft.; 2,254 net-leased single-tenant properties with ~11.2-year weighted average remaining term.
Earnings: Net income available to common stockholders $106.9M ($1.03/share) vs. $107.6M in 2008; gains on property sales were $8.1M vs. $13.6M.
FFO: Rose 2.6% to $190.4M ($1.84/diluted share) from $185.5M ($1.83), with common distributions at 93.5% of FFO.
Dividend: Monthly distribution raised to $0.143/share in January 2010 (49th consecutive quarterly increase); annualized yield about 6.7% at $25.74.
Leverage: Total debt $1.355B, about 30.8% of $4.40B total market capitalization; no debt maturities until March 2013; fixed-rate notes at 6.10% weighted average.
Liquidity: $350.4M available on the $355M unsecured credit facility at December 31, 2009; investment-grade ratings (BBB+/Baa1/BBB) on senior notes, all stable outlooks.
Growth outlook: Acquisitions slowed to $57.9M in 2009 (16 properties at a 9.7% initial weighted average lease rate), with management signaling expanded acquisitions in 2010 as market conditions improved.

03—One dollar

04—Financials

Financial Highlights

10-KFY2009filed February 11, 2010

Revenue$322.55M Net Income$131.13M40.7% Net Margin Total Assets$2.91B Free Cash Flow$226.71M

Financial Statements

FY2009 against FY2008

Line item	FY2009FY2008	FY2008	Change
Revenue	$322.55M$325.04M	$325.04M	−0.8%
Operating Income	$116.08M$110.30M	$110.30M	+5.2%
Interest Expense	$85.53M$93.96M	$93.96M	−9.0%
Net Income	$131.13M$131.84M	$131.84M	−0.5%
Shares Outstanding (Basic)	103.58M101.18M	101.18M	+2.4%
Shares Outstanding (Diluted)	103.58M101.21M	101.21M	+2.3%

05—Questions

Frequently Asked Questions

How safe is the monthly dividend, and how much cushion does it have?
In 2009 common distributions totaled $178.0M, about 93.5% of FFO ($190.4M), so FFO covered the payout with a modest cushion. Distributions were about 130.5% of estimated REIT taxable income, which is typical for REITs because depreciation is non-cash. Management says it expects to continue monthly payments and recent increases, but explicitly does not guarantee future increases. Covenants on the credit facility and notes could limit distributions if results deteriorate.
What are the biggest concentration risks in the tenant base?
Restaurants (21.3% of 2009 rental revenue) and convenience stores (17.0%) are the largest industries, and the top 30 industries are each at most 21.3%. No individual tenant accounted for more than 10% of revenue. Management notes that downturns in restaurants or convenience stores could materially affect results, and that many tenants are middle-market chains with more limited resources.
Why was revenue flat, and what drives future growth?
Rental revenue was $326.1M in 2009 versus $325.9M in 2008. Growth from 2009 and 2008 acquisitions and a 0.4% same-store rent increase was offset by roughly $3.7M of net declines from vacancies, property sales, development properties and lease terminations, plus lower straight-line rent. Future growth depends on contractual rent escalators (91.9% of leased properties have them), re-leasing or selling vacant properties, and new acquisitions, which management plans to step up in 2010.
How much refinancing and liquidity risk does the company face?
Debt is almost all unsecured, fixed-rate senior notes, and the company has no maturities until March 2013 (the $100M 5.375% notes), with the credit facility expiring in May 2011 (with two one-year extensions). Cash was only $10M at year-end, but the revolver had $350.4M of availability and the company has investment-grade ratings. Risks include the ability to refinance at acceptable rates and the possibility that a credit facility lender could fail to fund.
What portion of distributions is taxable, and what should investors expect?
About 24.1% of 2009 common distributions were classified as return of capital, which is generally not taxed currently but reduces the stock basis. The remainder was mostly ordinary income, with a small capital gain component. Preferred dividends (Class D at 7.375% and Class E at 6.75%) are also paid monthly and were current at year-end. Management cannot predict the return-of-capital share of future distributions.

06—Continue

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