01—Abstract
Summary
Summary of the 10-K filed February 18, 2015. Cited figures are marked; the original filing is the authoritative source.
Realty Income Corporation (NYSE: O) closed 2014 with 4,327 properties in 49 states and Puerto Rico, 98.4%a occupied, leased to 234 commercial tenants across 47 industries, with a weighted average remaining lease term of about 10.2 years on single-tenant properties.
The company invested $1.4 billionb in 506 new properties at a 7.1% initial weighted average contractual lease rate, and net income available to common stockholders rose to $227.6 million. Diluted net income per share slipped to $1.04 from $1.06 due to a $6.0 million preferred redemption charge, while FFO grew 21.8% to $562.9 million, or $2.58 per diluted share, and AFFO reached $561.7 million, or $2.57 per diluted share. The balance sheet remains conservatively positioned, with total debt of $4.93 billion representing roughly 30.6% of total market capitalization of $16.11 billion.
Management reports 43.8% total debt to adjusted assets against a 60% covenant limit, a 3.8x debt service coverage ratio, and investment-grade ratings (Baa1/BBB+/BBB+). Cash distributions to common stockholders of $479.3 millionc equaled 85.3% of AFFO, and the monthly dividend was raised to $0.189 per share in February 2015, an annualized yield of about 4.2% at the $54.31 share price on January 31, 2015.
Key risks flagged in the filing include dependence on tenant credit (top 20 tenants are about 53% of annualized revenue), the expectation that 20% to 35% of 2015 distributions may be a return of capital, exposure to variable-rate borrowings, and REIT qualification requirements. The company also plans about $50 milliond in property dispositions during 2015 and expects its $1.5 billion credit facility, which matures in May 2016 with a one-year extension option, to fund acquisitions.
02—Key points
Key Highlights
- Portfolio of 4,327 properties, 98.4% leased, with 234 commercial tenants across 47 industries and roughly 70.7 million square feet of leasable space
- Invested $1.4 billion in 506 new properties in 2014 at a 7.1% initial weighted average contractual lease rate, with 100% leased and a 12.8-year weighted average lease term
- FFO rose 21.8% to $562.9 million ($2.58 per diluted share); AFFO rose 21.3% to $561.7 million ($2.57 per diluted share)
- Diluted net income per share fell to $1.04 from $1.06, mainly due to a $6.0 million non-cash charge on redeemed Class E preferred stock
- Monthly dividend increased to $0.189 in February 2015 (annualized $2.268, about 4.2% yield), the 79th increase since the 1994 NYSE listing
- Conservative capitalization: total debt about 30.6% of $16.11 billion market capitalization, with 43.8% debt to adjusted assets versus a 60% covenant limit and investment-grade ratings
- Top 20 tenants account for about 53% of annualized revenue, and 46% of annualized rent comes from investment-grade companies or subsidiaries
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 18, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Operating Income | $269.14M$180.61M | +49.0% |
| Interest Expense | $216.37M$181.44M | +19.2% |
| Net Income | $270.63M$245.56M | +10.2% |
| EPS (Basic) | $1.04$1.06 | −1.9% |
| Shares Outstanding (Basic) | 218.39M191.75M | +13.9% |
| Shares Outstanding (Diluted) | 218.77M191.78M | +14.1% |
05—Questions
Frequently Asked Questions
How secure is the monthly dividend, and how much of it is covered by cash flow?
In 2014 cash distributions to common stockholders totaled $479.3 million, or 85.3% of AFFO of $561.7 million, and total preferred and common distributions were about 154.6% of estimated taxable income. Management says it expects to maintain its monthly policy but cannot guarantee the current dividend level or continued annual increases. About 20% to 35% of 2015 distributions may be classified as return of capital.
What drove the decline in diluted earnings per share, and is the underlying business weaker?
Diluted net income per share fell $0.02 to $1.04 because of a $6.0 million non-cash charge on the Class E preferred redemption (about $0.03 per share) and lower 2014 gains on property sales ($42.1 million versus $64.7 million in 2013). Operating metrics improved, with FFO per diluted share up 7.1% to $2.58 and same-store rent up 1.5%, so the decline reflects one-time and non-operating items rather than core weakness.
How concentrated is the tenant base, and what are the main credit risks?
No single tenant exceeded 10% of total revenue in 2014. The largest tenants are Walgreens (5.4%), FedEx (5.1%) and Dollar General (4.9%), and the top 20 tenants total about 53% of annualized revenue. Retail is about 78.5% of rental revenue by property type, and convenience stores, dollar stores and drug stores each represent roughly 9% to 10% of retail rent. Tenant bankruptcies or weak sector performance could reduce rent collections.
How is the company financing growth, and what debt obligations come due soon?
Growth is funded through the $1.5 billion unsecured credit facility, which had $223.0 million drawn and $1.28 billion available at year-end, along with periodic equity and senior unsecured notes. The company issued $350 million of 3.875% notes due 2024 and $250 million of 4.125% notes due 2026 in 2014. Near-term maturities include $150 million of 5.5% notes due November 2015 and the credit facility in May 2016, with $245.9 million of fixed-rate debt maturing in 2015.
What is the outlook for 2015 dispositions and portfolio management?
Management expects roughly $50 million of property sales in 2015, with proceeds reinvested in new acquisitions when attractive opportunities arise. Eight properties with a carrying value of $14.8 million were held for sale at year-end, and management anticipates approximately 2% to 4% of the portfolio will be unleased at any time. The company cannot guarantee sales at estimated values or that proceeds can be redeployed into new properties.
06—Continue