01—Abstract
Summary
Summary of the 10-K filed February 13, 2012. Cited figures are marked; the original filing is the authoritative source.
Realty Income Corporation (NYSE: O), 'The Monthly Dividend Company,' closed 2011 with a larger, more diversified net-lease REIT.
It owned 2,634 properties in 49 states with 96.7% occupancy, leased to 136 tenants across 38 industries. Rental revenue rose 22.3% to $419.4 milliona, and FFO per diluted share grew 8.2% to $1.98, while AFFO per share rose 8.1% to $2.01. Growth was driven by $1.02 billion of 2011 acquisitions at a 7.8% initial weighted average contractual lease rate, funded largely through equity and bond issuance.
Total assets reached $4.42 billionb, and debt totaled $2.06 billion, about 29.1% of total market capitalization. The filing flags tenant credit risk as the main near-term concern. Friendly's and Buffets, both casual dining operators, filed for Chapter 11 in early 2012.
Management expects to recover about 80% of Friendly's $16.1 millionc annualized rent and about 65% of Buffets' $18.2 million, and it warned that other tenants representing roughly 2% to 3% of annualized rent may also file in 2012. Convenience stores (17.2% of Q4 rental revenue) and casual dining restaurants are the most concentrated exposures. Balance sheet actions in early 2012 were significant.
The company issued 14.95 million shares of 6.625% Class F preferred stock (net proceeds about $361.7 milliond), will redeem the 7.375% Class D preferred on March 1, 2012, and repaid its $237.4 million credit facility on February 7, 2012. Management reports 2011 distributions of $1.74 per common share, about 87.9% of FFO, and a monthly dividend of $0.1455 (about 5.0% yield on the December 31, 2011 price of $34.96).
02—Key points
Key Highlights
- Rental revenue up 22.3% to $419.4M in 2011; total revenue $421.1M, net income available to common stockholders $132.8M ($1.05 per diluted share).
- FFO per diluted share rose 8.2% to $1.98 (FFO $249.4M); AFFO per diluted share rose 8.1% to $2.01 (AFFO $253.4M).
- Invested $1.02B in 164 new properties at a 7.8% initial weighted average contractual lease rate, with 13.4-year average lease term.
- Portfolio of 2,634 properties in 49 states at 96.7% occupancy; 136 tenants across 38 industries, with no single industry above 17.2% of Q4 rental revenue.
- Friendly's (Chapter 11, emerged Jan 2012) and Buffets (Chapter 11, Jan 2012) represent significant tenant credit risk; estimated recovery of ~80% and ~65% of their annualized rent, respectively.
- Balance sheet: total assets $4.42B, total debt $2.06B (29.1% of market cap); investment-grade ratings BBB+/Baa1/BBB with stable outlooks; $425M credit facility repaid in February 2012.
- Monthly distribution raised to $0.1455/share (annualized $1.746, ~5.0% yield); 57th consecutive quarterly increase; 2011 distributions were ~87.9% of FFO.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 13, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $421.06M$343.49M | +22.6% |
| Operating Income | $139.62M$115.20M | +21.2% |
| Interest Expense | $108.30M$93.24M | +16.2% |
| Net Income | $157.03M$130.78M | +20.1% |
| EPS (Basic) | $1.05$1.01 | +4.0% |
| EPS (Diluted) | $1.05$1.01 | +4.0% |
| Shares Outstanding (Basic) | 126.14M105.87M | +19.1% |
| Shares Outstanding (Diluted) | 126.19M105.94M | +19.1% |
05—Questions
Frequently Asked Questions
How strong is Realty Income's dividend coverage?
In 2011, common distributions of $219.3 million equaled about 87.9% of FFO available to common stockholders ($249.4 million), and AFFO of $253.4 million exceeded distributions by about $34 million. Distributions were about 127.7% of estimated REIT taxable income of $190.8 million, a measure that reflects non-cash depreciation. About 20.6% of 2011 distributions were classified as return of capital. Management says it expects to continue monthly distributions, but explicitly does not guarantee the current level or continued increases.
How much exposure does Realty Income have to the Friendly's and Buffets bankruptcies?
Friendly's was paying $16.1 million of annualized rent before its filing, and Buffets represented about $18.2 million, or 3.9% of annualized rental revenue. Friendly's rejected 19 leases (about $1.8 million of annual rent) and Buffets rejected seven properties (about $1.8 million). Management estimates it will recover roughly 80% of Friendly's rent and 65% of Buffets' rent post-bankruptcy, and expects to re-lease vacated properties within about 18 months. Management cautions that there is no assurance of re-leasing or continued rent payments on accepted leases, and it identified other tenants representing 2% to 3% of annualized rent that may also file in 2012.
Is the growth funded sustainably, and how is leverage trending?
The 2011 acquisitions were funded mainly through common stock offerings (about $489 million net in 2011), senior unsecured bonds (a $150 million reopening of the 2035 bonds), and the credit facility. Total debt rose to $2.06 billion, or about 29.1% of total market capitalization, and interest coverage was 3.5x (Adjusted EBITDA basis) with fixed charge coverage of 2.9x. Management states a long-term goal of common equity forming the majority of capital. Note covenant headroom appears comfortable (debt at 40.7% of adjusted assets versus a 60% limit). Issuance of Class F preferred in February 2012 raised about $361.7 million and was used to redeem Class D and repay the credit facility, which will reduce floating-rate exposure.
What are the main risks to the portfolio beyond tenant bankruptcies?
Key concentrations include convenience stores (17.2% of Q4 2011 rental revenue) and casual dining restaurants (about 10.9%), whose downturn could affect tenant creditworthiness. Environmental liability is a risk because many properties house petroleum-related or waste-handling tenants, though tenants generally indemnify the company and an environmental insurance policy is in place. The company is also expanding into non-retail property types (distribution, office, manufacturing) and outside its historical focus, which the filing notes brings new operating and industry risks. Interest-rate risk is limited, as nearly all notes are fixed-rate, but the $237.4 million credit facility balance was floating (2.15% at year-end) before its repayment in February 2012.
What is the 2012 outlook for asset sales and acquisitions?
Management plans more active dispositions in 2012 to improve portfolio credit quality, anticipating $25 million to $60 million of proceeds from selling properties not yet identified. Sale proceeds are intended to be reinvested in acquisitions if attractive opportunities arise, but the filing explicitly notes there is no guarantee of sales or reinvestment. The company also expects to file a new universal shelf registration before the existing one expires in March 2012, giving it flexibility to issue common stock, preferred stock, or debt as needed.
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