01—Abstract
Summary
Summary of the 10-K filed February 14, 2013. Cited figures are marked; the original filing is the authoritative source.
Realty Income Corporation (NYSE: O) closed 2012 with 3,013 properties in 49 states, a 97.2% occupancy rate, and 2012 rental revenue of $473.7 milliona, up 15.9% year over year.
Growth was driven by $1.16 billionb of 2012 acquisitions (423 properties at a 7.2% initial weighted average contractual lease rate) and by a 0.1% same-store rent increase. Normalized FFO per diluted share rose 2.0% to $2.02, and AFFO per share rose 2.5% to $2.06. Common distributions of $1.78 per share were covered about 1.16x by AFFO (86.2% payout), and the company raised its monthly dividend in February 2013 to an annualized $2.171 per share, the 70th increase since its 1994 NYSE listing.
The most important post-period event is the January 22, 2013 acquisition of American Realty Capital Trust (ARCT), a transaction valued at about $3.1 billionc that added 515 properties. It assumed roughly $516 million of mortgages and used about $553 million to repay ARCT's credit facility and term loan. Total market capitalization rose above $12 billion, and management expects roughly $19 million of total merger costs.
Investors should weigh the larger, more diversified portfolio and the new industry exposures against higher leverage and integration risk. Eight shareholder lawsuits were filed in connection with the deal; the Maryland state action has an agreed settlement in principle and the federal case was dismissed. Balance-sheet leverage is moderate on a pre-ARCT basis: total debt was $2.88 billiond, about 32.5% of market capitalization, with fixed-rate unsecured notes making up most of it.
Covenant compliance is comfortable, with interest coverage of 3.6x and fixed charge coverage of 2.7x. Concentration is a key risk: convenience stores were 14.9% of Q4 2012 rental revenue, and casual dining restaurants were under pressure. Tenant concentration is expected to rise after ARCT, and the 2013 lease-expiration schedule is relatively light (3.0% of revenue), with 2025 the largest expiry year at 10.5%.
02—Key points
Key Highlights
- Portfolio of 3,013 properties with 97.2% occupancy (2,929 leased, 84 available), leased to 150 tenants across 44 industries and 49 states; weighted average remaining lease term of about 11.0 years on single-tenant properties.
- 2012 rental revenue rose 15.9% to $473.7 million; same-store rent was essentially flat at +0.1%, so growth came mainly from acquisitions.
- Normalized FFO per diluted share rose 2.0% to $2.02 (FFO $1.96 including $0.06 of merger costs); AFFO per diluted share rose 2.5% to $2.06.
- Acquired ARCT on January 22, 2013 for about $3.1 billion, adding 515 properties and assuming about $516 million of mortgages; merger costs are expected to total about $19 million.
- Monthly common dividend raised to $0.1809167 (annualized $2.171, about 5.0% yield at $43.40), the 70th increase since the 1994 NYSE listing; 2012 common distributions were 86.2% of AFFO.
- Conservative leverage pre-ARCT: $2.88 billion total debt, about 32.5% of market capitalization, with interest coverage of 3.6x and fixed charge coverage of 2.7x; investment-grade ratings of BBB+ (Fitch), Baa1 (Moody's, negative outlook) and BBB (S&P).
- Tenant concentration risk: convenience stores were 14.9% of Q4 2012 rental revenue, and the ARCT deal increases exposure to industries new to Realty Income.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 14, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Operating Income | $141.90M$139.62M | +1.6% |
| Interest Expense | $123.14M$108.30M | +13.7% |
| Net Income | $159.15M$157.03M | +1.4% |
| EPS (Basic) | $0.86$1.05 | −18.1% |
| EPS (Diluted) | $0.86$1.05 | −18.1% |
| Shares Outstanding (Basic) | 132.82M126.14M | +5.3% |
| Shares Outstanding (Diluted) | 132.88M126.19M | +5.3% |
05—Questions
Frequently Asked Questions
How did Realty Income perform financially in 2012?
Rental revenue rose 15.9% to $473.7 million and net income available to common stockholders fell to $114.5 million ($0.86 per diluted share) from $132.8 million ($1.05), mainly because of merger costs, a preferred stock redemption charge, and lower gains on sales. Normalized FFO per diluted share rose 2.0% to $2.02 and AFFO per diluted share rose 2.5% to $2.06.
What is the significance of the ARCT acquisition?
The January 2013 acquisition of American Realty Capital Trust for about $3.1 billion adds 515 properties and new industry exposures, but it also raises debt, adds integration risk, and increases tenant concentration. Management expects roughly $19 million in total merger costs, and the deal is expected to lift market capitalization above $12 billion.
Is the monthly dividend safe?
Common distributions of $1.78 per share in 2012 were about 86.2% of AFFO, which leaves some cushion. Management has said it expects to continue monthly dividends but cannot guarantee current levels or the pattern of increases. Dividend capacity could be affected by the ARCT integration, a rise in debt costs, or tenant credit problems.
What are the main risks to tenant income?
The largest risks are concentration in convenience stores (14.9% of Q4 2012 rental revenue) and casual dining restaurants, which the company says have been hurt by the economic downturn. Many tenants are middle-market companies with limited resources. About 2% to 4% of the portfolio is typically unleased at any time, and 2013 lease expirations are relatively modest at 3.0% of revenue.
How strong is the balance sheet?
Total debt was $2.88 billion at year end 2012, about 32.5% of total market capitalization. The company was in compliance with its credit facility and note covenants, with debt-to-adjusted-assets of 47.6% against a 60% limit and a trailing 12-month debt service coverage of 3.6x against a 1.5x minimum. Post-ARCT leverage will be higher, and the $1 billion credit facility had $842 million of availability at year end.
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