01—Abstract
Summary
Summary of the 10-K filed February 23, 2017. Cited figures are marked; the original filing is the authoritative source.
Realty Income Corporation (NYSE: O), 'The Monthly Dividend Company', reported strong 2016 results in its 10-K filed February 23, 2017.
Net income available to common stockholders rose 12.4% to $288.5 milliona ($1.13 per diluted share), while FFO grew 12.7% to $735.4 million ($2.88 per diluted share) and AFFO grew 13.8% to $736.4 million. The company invested $1.86 billion in 505 new properties at a 6.3% initial weighted average contractual lease rate, while maintaining 98.3% portfolio occupancy across 4,944 properties in 49 states and Puerto Rico. The balance sheet grew materially, with total assets of $13.15 billion and total debt of $5.84 billion, which the company describes as about 27.6% of total market capitalization.
Credit ratings are investment grade (Baa1 / BBB+ / BBB+), and the company issued $600 millionb of 3.000% notes due 2027 and raised $572.7 million through common equity during the year. Cash distributions to common stockholders of $610.5 million equaled 82.9% of AFFO, and the monthly dividend was raised to $0.2105 per share in February 2017, an annualized yield of about 4.2% at the $59.63 reference price.
Key risk factors include tenant concentration in the drug store industry (about 11.4% of 2016 rental revenue), a top-20 tenant concentration of about 53% of annualized revenue, roughly 47% of rent from investment-grade tenants, and rising leverage (Debt/EBITDA of 5.7x in Q4 2016 versus 5.1x in Q4 2015). Management expects 2017 property dispositions of $75 to $100 millionc and continued return of capital classification for 15-25% of distributions.
02—Key points
Key Highlights
- Net income available to common stockholders of $288.5 million in 2016, up 12.4%; diluted EPS of $1.13 versus $1.09 in 2015
- FFO of $735.4 million ($2.88 per diluted share), up 12.7%; AFFO of $736.4 million ($2.88 per diluted share), up 13.8% year over year
- Invested $1.86 billion in 505 new properties at a 6.3% initial weighted average contractual lease rate, with a 14.7-year weighted average lease term
- Portfolio of 4,944 properties, 98.3% occupied, leased to 248 tenants across 47 industries; 9.8-year weighted average remaining lease term on single-tenant properties
- Monthly dividend increased to $0.2105 per share in February 2017 (90 increases since 1994); 2016 common dividends paid totaled $2.392 per share, up 5.3%
- Investment-grade balance sheet with credit ratings of Baa1 (positive), BBB+ (positive), and BBB+ (stable); $880 million available on the $2.0 billion revolving credit facility
- Key risks: drug store industry concentration (11.4% of rent), top-20 tenants at about 53% of revenue, and Debt/EBITDA rising to 5.7x in Q4 2016 from 5.1x
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 23, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $1.10B— | — |
| Operating Income | $316.48M$284.86M | +11.1% |
| Interest Expense | $219.97M$233.08M | −5.6% |
| Net Income | $315.57M$283.77M | +11.2% |
| EPS (Basic) | $1.13$1.09 | +3.7% |
| Shares Outstanding (Basic) | 255.07M235.77M | +8.2% |
| Shares Outstanding (Diluted) | 255.62M236.21M | +8.2% |
05—Questions
Frequently Asked Questions
How sustainable is the dividend, given the payout ratios disclosed?
Cash distributions to common stockholders in 2016 totaled $610.5 million, representing 82.9% of AFFO of $736.4 million, and management states it believes FFO is sufficient to support current distributions. Distributions equaled about 129.2% of estimated taxable income of $493.4 million, which is consistent with REIT distribution requirements. The company cannot guarantee it will maintain its current dividend level or its pattern of increases.
How concentrated is the tenant base?
Each individual tenant accounted for less than 10% of 2016 rental revenue. Walgreens is the largest tenant at 7.0% of rental revenue, followed by FedEx at 5.5% and Dollar General at 4.2%. The top 20 tenants represent roughly 53% of annualized revenue, and about 47% of annualized rent comes from investment-grade rated companies or their subsidiaries. Drug store tenants account for about 11.4% of rental revenue, which the company flags as a specific industry risk.
How is the company financing its growth and what is its leverage profile?
Total debt was $5.84 billion at year-end 2016, about 27.6% of total market capitalization of $21.26 billion. The company issued $600 million of 3.000% senior notes due 2027 and raised $572.7 million in common equity, including ATM and DRSPP proceeds. Debt-to-EBITDA rose to 5.7x in Q4 2016 from 5.1x a year earlier. Note covenants were in compliance, with total debt at 41.9% of adjusted assets versus a 60% limit.
What is the outlook for property dispositions and portfolio quality?
Management expects $75 to $100 million of property sales in 2017 and intends to reinvest proceeds into acquisitions if attractive opportunities arise. Occupancy has not dropped below 96% at any year-end since 1970, although the company cannot assure that this will continue. At year-end 2016, 84 properties were available for lease and 15 properties with a $26.6 million carrying amount were classified as held for sale.
What portion of distributions is taxable, and what are the 2017 tax expectations?
In 2016, about 21.5% of common distributions were classified as return of capital for federal income tax purposes. The company estimates that between 15% and 25% of 2017 distributions may be classified as return of capital. Distributions are generally taxed as ordinary income unless they qualify as capital gains or qualified dividend income, and the qualified dividend income rate applies only in limited circumstances for REIT dividends.
06—Continue