01—Abstract
Summary
Summary of the 10-K filed February 22, 2018. Cited figures are marked; the original filing is the authoritative source.
Realty Income Corporation (NYSE: O) reported solid 2017 results as a REIT focused on monthly dividends backed by a diversified net lease portfolio of 5,172 properties (98.4%a occupied, 249 tenants, 47 industries, 49 states plus Puerto Rico).
Total revenue rose 10.2% to $1.22 billionb, net income available to common stockholders was $301.5 million ($1.10 per diluted share), and FFO and AFFO per diluted share were $2.82 and $3.06, respectively. The company invested $1.52 billion in 303 new properties at an initial weighted average contractual lease rate of 6.4%, funded largely through $1.4 billion of common equity and $2.0 billion of notes. The balance sheet remains conservative by the company's own measures, with total debt of $6.1 billion, debt-to-annualized Adjusted EBITDA of 5.5x, and investment grade ratings (A3/BBB+/BBB+).
Common distributions of $689.3 millionc equaled 82.2% of AFFO, and the dividend was raised to $0.219 monthly in early 2018, an annualized $2.628 per share. Investors should note the $42.4 million loss on early debt extinguishment and $13.4 million preferred redemption charge in 2017, plus the expectation that 15%-25% of 2018 distributions will be return of capital.
Key considerations include the concentration in drug stores (10.6% of rental revenue) and convenience stores, the 2017 tax legislation's uncertain effects on REITs, and reliance on continued access to capital markets to sustain external growth. Rent recapture on re-leased properties was 105.5%, and the company expects $75 to $100 milliond of dispositions in 2018.
02—Key points
Key Highlights
- Total revenue of $1,215.8 million in 2017, up 10.2% from $1,103.2 million in 2016
- Diluted FFO of $2.82 per share (down 2.1%) and diluted AFFO of $3.06 per share (up 6.3%), with AFFO up 13.9% in total dollars to $838.6 million
- Invested $1.52 billion in 303 new properties at a 6.4% initial weighted average contractual lease rate; raised $1.4 billion of common equity
- Dividend increased five times in 2017 and twice in early 2018; current monthly dividend of $0.219 ($2.628 annualized, ~4.6% yield at $57.02)
- Debt-to-annualized Adjusted EBITDA of 5.5x; total debt of $6.1 billion with 27.4% of total market capitalization
- Portfolio 98.4% leased with 83 vacant properties; rent recapture of 105.5% on 259 re-leased properties; 46% of annualized rent from investment grade tenants
- Net income per diluted share fell to $1.10 from $1.13, impacted by a $42.4 million debt extinguishment loss and a $13.4 million preferred redemption charge
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 22, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $1.22B$1.10B | +10.2% |
| Interest Expense | $247.41M$219.97M | +12.5% |
| Net Income | $318.80M$315.57M | +1.0% |
| EPS (Basic) | $1.10$1.13 | −2.7% |
| Shares Outstanding (Basic) | 273.47M255.07M | +7.2% |
| Shares Outstanding (Diluted) | 273.94M255.62M | +7.2% |
05—Questions
Frequently Asked Questions
How safe is the monthly dividend?
Cash distributions to common stockholders in 2017 totaled $689.3 million, or 82.2% of AFFO, which the company views as covered by operating cash flow. Management has a 49-year record of monthly payments and has increased the dividend 95 times since its 1994 NYSE listing. However, the company explicitly states it cannot guarantee future dividend levels or continued increases, and its credit facility includes covenants that could restrict distributions in a default scenario.
What are the main concentration risks in the portfolio?
Drug stores represent 10.6% of 2017 rental revenue, the largest single industry, and no other industry exceeds 10%. Top 20 tenants account for about 54% of annualized revenue, led by Walgreens at 6.5% of rental revenue. Convenience stores and dollar stores are also significant. A downturn in these sectors or changes in prescription drug legislation could materially affect results.
How is the company financing its growth?
Realty Income uses its $2.0 billion unsecured revolving credit facility for short-term acquisition financing and then refinances with long-term debt or equity. In 2017 it issued $2.0 billion of senior notes and raised $1.4 billion through common stock offerings including its ATM program, DRSPP, and a March 2017 offering. Its debt is almost entirely fixed-rate, and a 1% rise in interest rates would increase annual costs on the $110 million credit facility balance by only $1.1 million.
What did the 2017 Tax Legislation mean for the company and its investors?
The company is still evaluating the full impact. Notable changes include a 20% deduction for qualified REIT dividends for non-corporate taxpayers from 2018 through 2025, a reduced individual top rate of 37%, and an 80% limit on NOL deductions. The company estimates that 15% to 25% of 2018 distributions may be treated as return of capital, compared with 21.7% of 2017 distributions.
What is the outlook for property dispositions and occupancy?
For 2018, management expects $75 to $100 million in property sales, with proceeds intended for new acquisitions when attractive opportunities arise. The company has maintained occupancy at or above 96% at each year-end since 1970, though it does not guarantee future levels. Management notes that roughly 1% to 4% of the portfolio is typically unleased at any given time.
06—Continue