01—Abstract
Summary
Summary of the 10-K filed February 10, 2011. Cited figures are marked; the original filing is the authoritative source.
Realty Income Corporation (NYSE: O), 'The Monthly Dividend Company', closed 2010 with a portfolio of 2,496 properties in 49 states, 96.6%a occupied, leased to 122 retail and commercial tenants across 32 industries.
The portfolio is net-leased, primarily to middle-market tenants, with initial terms of 15 to 20 years and a weighted average remaining lease term of about 11.4 years on single-tenant properties. The company invested $713.5 millionb in 186 new properties in 2010 at an initial weighted average lease rate of 7.9%, including the $304.1 million Diageo winery acquisition, which made Diageo the largest tenant by rental revenue, and 135 SuperAmerica convenience stores for $247.6 million. Growth was funded through common equity offerings of about $432.6 million net, a $250 million 5.75% note due 2021, and a new $425 million unsecured credit facility.
Financial performance was steady. Total revenue rose to $345.0 millionc from $325.2 million, and net income available to common stockholders was $106.5 million, or $1.01 per diluted share, versus $1.03 in 2009. FFO rose 1.7% to $193.7 million ($1.83 per share), and AFFO rose 2.4% to $197.3 million ($1.86 per share).
Common distributions paid were $182.5 milliond, or 94.2% of FFO, and the monthly dividend was raised to $0.14425 per share, the 53rd consecutive quarterly increase. Leverage remains conservative, with senior unsecured notes at 26.7% of total market capitalization and interest coverage of 3.3x. Risks to note include tenant concentration in restaurants (19.1% of Q4 rent) and convenience stores (17.4%), and the fact that about 27% of 2010 distributions were a return of capital.
02—Key points
Key Highlights
- Portfolio of 2,496 properties in 49 states, 96.6% leased, with a weighted average remaining lease term of about 11.4 years on single-tenant properties
- Invested $713.5 million in 186 new properties in 2010 at a 7.9% initial weighted average contractual lease rate, the largest acquisition year in the filing's period
- FFO grew 1.7% to $193.7 million ($1.83/share); AFFO grew 2.4% to $197.3 million ($1.86/share), supporting distributions
- Common distributions of $182.5 million were 94.2% of FFO, and the monthly dividend was increased for the 53rd consecutive quarter, to $0.14425/share (about a 5.1% yield at $34.20)
- Conservative balance sheet: $1.6 billion of unsecured notes at about 26.7% of total market capitalization, with a new $425 million unsecured credit facility at LIBOR + 185 bps, and no mortgage debt
- Concentration risk: restaurants (19.1%) and convenience stores (17.4%) of Q4 2010 rental revenue; Diageo became the largest tenant after the $304.1 million winery acquisition
- Net income available to common stockholders was $106.5 million ($1.01/diluted share), essentially flat versus 2009, with 2010 gains on property sales of $8.7 million
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 10, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $343.49M$322.55M | +6.5% |
| Operating Income | $115.20M$116.08M | −0.8% |
| Interest Expense | $93.24M$85.53M | +9.0% |
| Net Income | $130.78M$131.13M | −0.3% |
| EPS (Basic) | $1.01— | — |
| EPS (Diluted) | $1.01— | — |
| Shares Outstanding (Basic) | 105.87M103.58M | +2.2% |
| Shares Outstanding (Diluted) | 105.94M103.58M | +2.3% |
05—Questions
Frequently Asked Questions
Is the monthly dividend safe, and how well is it covered?
Distributions appear well covered. Common distributions paid in 2010 were $182.5 million, about 94.2% of FFO ($193.7 million) and below AFFO ($197.3 million). The company also has a REIT requirement to distribute at least 90% of taxable income. Its 2010 cash distributions were about 136% of estimated REIT taxable income, and management says FFO is more than sufficient to cover current distributions. The company cautions that it cannot guarantee future increases or the current level of distributions.
How much tenant concentration risk does Realty Income face?
Concentration is meaningful but managed. Restaurants accounted for about 19.1% of Q4 2010 rental revenue and convenience stores about 17.4%. Diageo became the largest tenant by rental revenue after the $304.1 million winery acquisition, though no individual tenant exceeded 10% of total revenue in 2010. Each of the 32 industry segments individually represented no more than 19.1% of rental revenue. A downturn in restaurants or convenience stores could materially affect results.
How did the company fund its 2010 growth, and how is its debt structured?
Growth was funded mainly by equity and unsecured debt. The company issued about $432.6 million of net common equity in September and December 2010 and $250 million of 5.75% notes due 2021 in June 2010, and it used its credit facility for short-term acquisition financing. At year-end it had $1.6 billion of fixed-rate senior unsecured notes (weighted average rate 6.05%), no balance on its $425 million credit facility, and no mortgage debt. Covenant compliance was strong, with debt at 38.2% of adjusted assets against a 60% limit and interest coverage of 3.3x.
What is the quality of earnings, given that FFO and net income are both reported?
Net income available to common stockholders was $106.5 million in 2010, roughly flat versus 2009, and includes property sale gains of $8.7 million, which vary year to year. FFO, a non-GAAP measure, adds back real estate depreciation and removes gains, and rose to $193.7 million. Some of the gains are excluded from FFO. Investors should note that about 26.8% of 2010 distributions were classified as return of capital, and the company cannot predict that portion for future years.
What growth outlook does management indicate for 2011?
The filing describes a strategy of acquiring single-tenant, net-leased retail and commercial properties, primarily with middle-market tenants, and actively managing the portfolio through re-leasing and selective sales. Management expects to sell $10 million to $35 million of investment properties over the next 12 months and reinvest the proceeds if attractive opportunities arise. Its credit facility can be increased by up to $200 million to $625 million, subject to bank approval. The filing does not provide specific guidance, and it notes that acquisitions, sales, and financing depend on market conditions.
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