How did the ARCT acquisition change Realty Income's financial profile?

The January 2013 acquisition of American Realty Capital Trust added 515 properties for approximately $3.2 billion, funded with about 45.6 million shares of common stock issued to ARCT holders plus assumed mortgages and repaid ARCT debt. Total assets rose from $5.4 billion to $9.9 billion, total revenue rose 61%, and FFO per share grew 19% on a normalized basis, which management attributes to accretion from the acquisition. Investors should note that share count rose from about 133 million to 207 million, which diluted per-share comparisons in part.

Is the dividend safe given the payout relative to cash flow?

On a cash basis the common dividend was covered, with distributions of $409.2 million representing 88.4% of AFFO of $463.1 million. Management also reported cash distributions to all stockholders of 161.4% of estimated taxable income, which reflects non-cash depreciation. The company states it expects to continue monthly dividends but explicitly does not guarantee the current level or the pattern of increases. The coverage margin is moderate, so sustained growth in AFFO and disciplined leverage are important to maintaining the payout.

How much of the dividend is taxed as ordinary income versus return of capital?

For 2013, roughly 38.7% of common distributions were classified as return of capital for federal income tax purposes, and the remainder was largely ordinary income. Management estimates that 15% to 30% of 2014 distributions may be classified as return of capital. Return of capital reduces the stockholder's tax basis rather than being taxed immediately, but it may create a taxable capital gain once basis is exhausted.

What are the main risks to tenant rent collection and portfolio value?

The company's risk factors highlight tenant bankruptcies and defaults, concentration in convenience stores (10.6% of Q4 2013 rental revenue), and exposure to middle-market tenants with limited resources. Environmental liabilities from fuel-station and automotive tenants, interest rate exposure on the variable-rate credit facility and some mortgages, and the potential impact of rising rates on the stock and debt markets are also disclosed. Many risks are mitigated by tenant indemnities, net lease structures, and insurance, but these protections may not fully cover losses.

What is the outlook for 2014 acquisitions and dispositions?

Management planned to continue investing in net-leased properties and expected to sell about $50 million of properties in 2014 to recycle capital into higher-return acquisitions when attractive opportunities arise. The company also indicated plans to relocate its corporate headquarters to San Diego in the second half of 2014, having purchased the property for $45.4 million in 2013. Future growth depends on access to capital markets, cost of capital, and the availability of suitable acquisitions at attractive yields.

O 10-K FY2013 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 14, 2014. Cited figures are marked; the original filing is the authoritative source.

Realty Income Corporation (NYSE: O), the self-described 'Monthly Dividend Company,' closed 2013 with a substantially larger portfolio following its $3.2 billion^a acquisition of American Realty Capital Trust (ARCT) in January 2013.

At December 31, 2013, the company owned 3,896 properties across 49 states and Puerto Rico, 98.2% leased, with 205 tenants in 47 industries and a weighted average remaining lease term of about 10.8 years on single-tenant properties. Total revenue rose to $778.4 million^b from $482.8 million, net income available to common stockholders rose to $203.6 million ($1.06 per diluted share), and normalized FFO per diluted share grew 19.3% to $2.41. Including ARCT, the company invested $4.67 billion in 974 properties during 2013, and the common dividend paid per share rose 21.2% to $2.147, the largest annual increase in company history.

The balance sheet grew materially, with total assets up to $9.9 billion^c from $5.4 billion and total debt of about $4.2 billion, representing roughly 33.2% of total market capitalization. Management characterizes the capital structure as conservative, citing investment-grade ratings (BBB+/Baa1/BBB+ with stable outlooks), an unsecured $1.5 billion credit facility with $1.372 billion available at year-end, and note covenant compliance with substantial headroom (total debt at 41.5% of adjusted assets versus a 60% limit). Dividend coverage remains solid, with common distributions of $409.2 million representing 88.4% of AFFO of $463.1 million.

For investors, the key considerations are the strong growth in scale and FFO, the high dividend yield (about 5.9%^d on the year-end share price), and the leverage and integration risk that come with a large acquisition. Dividend coverage by AFFO is adequate but not wide, and a return-of-capital portion of 38.7% in 2013 with an estimated 15% to 30% for 2014 shows that part of the distribution is not covered by taxable earnings. The company also disclosed a 10.6% exposure to convenience stores and a 2% to 4% typical unleased share of the portfolio.

02—Key points

Key Highlights

Total revenue grew 61% to $778.4 million in 2013, driven primarily by the ARCT acquisition (515 properties, $3.2 billion) and $1.51 billion of other 2013 investments in 459 properties.
Normalized FFO per diluted share rose 19.3% to $2.41 and AFFO per diluted share rose 17.0% to $2.41, reflecting accretive growth from the ARCT portfolio.
Common dividends paid per share increased 21.2% to $2.147, the largest annual increase in the company's history, and the monthly dividend was raised to $0.1821667 for January 2014, the 65th consecutive quarterly increase.
Portfolio occupancy was 98.2% across 3,896 properties with a weighted average remaining lease term of approximately 10.8 years on single-tenant properties; no single tenant accounted for 10% or more of revenue.
Total debt was about $4.2 billion (33.2% of total market capitalization) with investment-grade ratings of BBB+/Baa1/BBB+, a $1.5 billion credit facility with $1.372 billion available, and covenants in compliance.
Common distributions of $409.2 million were 88.4% of AFFO, and 38.7% of 2013 distributions were classified as return of capital, with management estimating 15% to 30% for 2014.
Tenant concentration is notable, with FedEx at 5.2% and Walgreens at 5.0% of portfolio rental revenue, and convenience stores at 10.6% of Q4 2013 rental revenue.

03—One dollar

04—Financials

Financial Highlights

10-KFY2013filed February 14, 2014

Net Income$245.56M EPS (Diluted)$1.06 Total Assets$9.92B Free Cash Flow$518.91M

Financial Statements

FY2013 against FY2012

Line item	FY2013FY2012	FY2012	Change
Operating Income	$180.61M$141.90M	$141.90M	+27.3%
Interest Expense	$181.44M$123.14M	$123.14M	+47.3%
Net Income	$245.56M$159.15M	$159.15M	+54.3%
EPS (Basic)	$1.06$0.86	$0.86	+23.3%
EPS (Diluted)	$1.06$0.86	$0.86	+23.3%
Shares Outstanding (Basic)	191.75M132.82M	132.82M	+44.4%
Shares Outstanding (Diluted)	191.78M132.88M	132.88M	+44.3%

05—Questions

Frequently Asked Questions

How did the ARCT acquisition change Realty Income's financial profile?
The January 2013 acquisition of American Realty Capital Trust added 515 properties for approximately $3.2 billion, funded with about 45.6 million shares of common stock issued to ARCT holders plus assumed mortgages and repaid ARCT debt. Total assets rose from $5.4 billion to $9.9 billion, total revenue rose 61%, and FFO per share grew 19% on a normalized basis, which management attributes to accretion from the acquisition. Investors should note that share count rose from about 133 million to 207 million, which diluted per-share comparisons in part.
Is the dividend safe given the payout relative to cash flow?
On a cash basis the common dividend was covered, with distributions of $409.2 million representing 88.4% of AFFO of $463.1 million. Management also reported cash distributions to all stockholders of 161.4% of estimated taxable income, which reflects non-cash depreciation. The company states it expects to continue monthly dividends but explicitly does not guarantee the current level or the pattern of increases. The coverage margin is moderate, so sustained growth in AFFO and disciplined leverage are important to maintaining the payout.
How much of the dividend is taxed as ordinary income versus return of capital?
For 2013, roughly 38.7% of common distributions were classified as return of capital for federal income tax purposes, and the remainder was largely ordinary income. Management estimates that 15% to 30% of 2014 distributions may be classified as return of capital. Return of capital reduces the stockholder's tax basis rather than being taxed immediately, but it may create a taxable capital gain once basis is exhausted.
What are the main risks to tenant rent collection and portfolio value?
The company's risk factors highlight tenant bankruptcies and defaults, concentration in convenience stores (10.6% of Q4 2013 rental revenue), and exposure to middle-market tenants with limited resources. Environmental liabilities from fuel-station and automotive tenants, interest rate exposure on the variable-rate credit facility and some mortgages, and the potential impact of rising rates on the stock and debt markets are also disclosed. Many risks are mitigated by tenant indemnities, net lease structures, and insurance, but these protections may not fully cover losses.
What is the outlook for 2014 acquisitions and dispositions?
Management planned to continue investing in net-leased properties and expected to sell about $50 million of properties in 2014 to recycle capital into higher-return acquisitions when attractive opportunities arise. The company also indicated plans to relocate its corporate headquarters to San Diego in the second half of 2014, having purchased the property for $45.4 million in 2013. Future growth depends on access to capital markets, cost of capital, and the availability of suitable acquisitions at attractive yields.

06—Continue

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