01—Abstract
Summary
Summary of the 10-K filed February 11, 2016. Cited figures are marked; the original filing is the authoritative source.
Realty Income Corporation (NYSE: O), The Monthly Dividend Company, closed 2015 with a portfolio of 4,538 properties in 49 states and Puerto Rico, 98.4%a occupied, leased to 240 commercial tenants across 47 industries, with a weighted average remaining lease term of about 10.0 years on single-tenant leases.
Rental revenue rose 9.3% to $976.9 millionb, total revenue reached $1,023.3 million, and net income available to common stockholders was $256.7 million ($1.09 per diluted share). Management reports FFO of $2.77 per diluted share (up 7.4%) and AFFO of $2.74 (up 6.6%). Common distributions paid totaled $533.2 million, or 82.4% of AFFO, indicating a reasonable payout cushion.
The company invested $1.26 billionc in 286 new properties at a weighted average initial contractual lease rate of 6.6%, funded largely through its ATM program, DRSPP, and common equity offerings, with a new $2.25 billion unsecured credit facility (of which $1.76 billion was available at year end). Total debt was $4.85 billion, about 26.6% of total market capitalization, and the company holds investment-grade ratings (Baa1/BBB+/BBB+). Dividends were increased seven times across 2015 and early 2016, with the monthly dividend now $0.1985 (annualized $2.382, about a 4.3% yield at the stated price).
Key risks include rising interest rate exposure on the variable-rate credit facility and term loans, concentration in drug stores (about 10.9%d of rental revenue), tenant credit risk, and the possibility that future distributions could be reduced. The company also expects 20% to 35% of 2016 distributions to be a return of capital.
02—Key points
Key Highlights
- Rental revenue increased 9.3% to $976.9 million; total revenue rose to $1,023.3 million.
- FFO per diluted share rose 7.4% to $2.77; AFFO per diluted share rose 6.6% to $2.74.
- Net income available to common stockholders was $256.7 million, or $1.09 per diluted share, up from $1.04.
- Invested $1.26 billion in 286 new properties at a 6.6% weighted average initial lease rate, with 100% leased and a 16.5-year weighted average lease term.
- Portfolio of 4,538 properties was 98.4% occupied; 4,448 single-tenant leases averaged roughly 10.0 years of remaining term; rent recapture on re-leased properties was 100.9%.
- Common distributions covered 82.4% of AFFO, and the monthly dividend was raised to $0.1985, marking the 84th increase since the 1994 NYSE listing.
- Total debt of $4.85 billion equals about 26.6% of total market capitalization, with investment-grade credit ratings and $1.76 billion of credit facility availability at year end.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 11, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Operating Income | $284.86M$269.14M | +5.8% |
| Interest Expense | $233.08M$216.37M | +7.7% |
| Net Income | $283.77M$270.63M | +4.9% |
| EPS (Basic) | $1.09$1.04 | +4.8% |
| Shares Outstanding (Basic) | 235.77M218.39M | +8.0% |
| Shares Outstanding (Diluted) | 236.21M218.77M | +8.0% |
05—Questions
Frequently Asked Questions
How much did Realty Income pay in dividends and is the payout sustainable?
Common stock distributions paid in 2015 totaled $533.2 million, or about $2.27 per share, and represented 82.4% of AFFO of $647.0 million, leaving a cushion. The company also paid $27.1 million in preferred dividends. Management says it expects to continue monthly dividends but explicitly does not guarantee the current level or future increases.
What is the main source of revenue and how concentrated is the tenant base?
Substantially all revenue is rental revenue from net leases, where tenants pay property taxes, insurance, and maintenance. Retail properties represent about 79% of rental revenue. Drug stores are the largest industry at about 10.9% of rental revenue, and the top 20 tenants account for about 55% of annualized revenue. No single tenant represented 10% or more of total revenue.
How is the company financed and what are the key debt risks?
At year end, debt consisted of $3.65 billion of fixed-rate senior notes and bonds, $320 million of term loans (partly hedged with swaps), $238 million drawn on the $2.0 billion revolver, and $637.7 million of mortgages. Investors should note exposure to variable rates: a 1% rate increase would raise annual interest costs by about $2.4 million on the revolver balance. Debt covenants limit distributions in default scenarios.
How much of 2016 distributions could be taxed as return of capital?
Management estimates that between 20% and 35% of 2016 distributions may be classified as a return of capital for federal income tax purposes, which reduces stockholder basis rather than being taxed as ordinary income in the year received. In 2015, about 23.8% of common distributions were classified this way.
06—Continue