01—Abstract
Summary
Summary of the 10-K filed February 22, 2019. Cited figures are marked; the original filing is the authoritative source.
Realty Income (NYSE: O) reported solid 2018 results in its 10-K filed February 22, 2019.
The company ended 2018 with 5,797 properties, a 98.6% occupancy rate, and 262 commercial tenants across 48 industries. Its monthly dividend has been raised 100 times since its 1994 NYSE listing, and it is an S&P 500 member. Net income available to common stockholders rose 20.6% to $363.6 milliona ($1.26 per diluted share), while diluted FFO grew 16.9% to $903.3 million ($3.12 per share) and AFFO grew 10.3% to $924.6 million ($3.19 per share).
Distributions paid of $761.6 millionb equaled 82.4% of AFFO, a payout the company describes as well covered. The balance sheet reflects a strategy of growing through acquisitions funded by capital markets. Realty Income invested $1.8 billion in 764 new properties at a 6.4% initial weighted average lease yield, and raised $1.1 billion in common equity via at-the-market programs.
Total debt was $6.5 billionc, about 25.4% of total market capitalization, and debt to annualized Adjusted EBITDAre was 5.3x, down from 5.5x a year earlier. In October 2018 the company upgraded its credit facility to $3.25 billion and S&P raised its rating to A-.
Investors should note several items: CEO John Case departed in October 2018 with a severance charge of $18.7 milliond ($0.06 per share), Sumit Roy became CEO, and a significant share of rent comes from convenience stores (about 11.2%) and drug stores (about 10.2%), which the filing flags as concentration risks. The company expects 15%-25% of 2019 distributions to be return of capital.
02—Key points
Key Highlights
- Net income available to common stockholders increased to $363.6M ($1.26/diluted share) in 2018, up from $301.5M ($1.10) in 2017.
- FFO rose 16.9% to $903.3M ($3.12/share) and AFFO rose 10.3% to $924.6M ($3.19/share), with distributions covering roughly 82% of AFFO.
- Invested $1.8B across 764 new properties at a 6.4% initial weighted average lease rate, with 100% leased and a 14.8-year weighted average lease term.
- Portfolio of 5,797 properties, 98.6% occupied, across 49 states and Puerto Rico, with 262 commercial tenants in 48 industries; top 20 tenants are about 54% of annualized revenue.
- Raised $1.1B of common equity through ATM programs at a $58.77 average price, and upgraded to A- by S&P in August 2018.
- Leverage improved: debt to annualized Adjusted EBITDAre fell to 5.3x from 5.5x; total debt is about 25.4% of total market capitalization.
- Leadership transition: CEO John Case departed in October 2018 ($18.7M incremental severance); Sumit Roy was named CEO.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 22, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $1.33B$1.22B | +9.2% |
| Interest Expense | $266.02M$247.41M | +7.5% |
| Net Income | $364.60M$318.80M | +14.4% |
| EPS (Basic) | $1.26$1.10 | +14.5% |
| EPS (Diluted) | $1.26— | — |
| Shares Outstanding (Basic) | 289.43M273.47M | +5.8% |
| Shares Outstanding (Diluted) | 289.92M273.94M | +5.8% |
05—Questions
Frequently Asked Questions
Is the monthly dividend covered by cash flow?
Yes, according to the filing. Cash distributions to common stockholders of $761.6M in 2018 equaled 82.4% of AFFO of $924.6M, and the company states it believes FFO supports its current distribution level. The filing also notes that future dividends are at the Board's discretion and that the company cannot guarantee it will maintain or increase the dividend.
How concentrated is the tenant base by industry?
Concentration is meaningful but diversified. Convenience stores accounted for 12.4% of Q4 2018 rental revenue (11.2% for the full year), drug stores for about 9.8%, and dollar stores about 7.4%. The company says no single industry exceeded 12.4% of rental revenue, and no individual tenant exceeded 10% of total revenue in 2018.
What is the company's debt profile and cost of capital?
Total debt was $6.5B, primarily senior unsecured notes ($5.4B at a weighted average rate of 4.0%), along with a $252M credit facility balance at 3.2%, $570M in term loans, and $298M in mortgages. Realty Income reports it was in compliance with its debt covenants, with a debt service coverage ratio of 4.4x against a 1.5x requirement. Interest rate risk is limited, as all notes and bonds carry fixed rates.
What drove the 2018 net income increase, and what were the one-time items?
Net income growth was driven by property acquisitions and rent growth, with 2018 rental revenue up about 9.3%. The results were reduced by a $28.3M total severance cost for the former CEO, net to $18.7M ($0.06/share) after prior accruals. 2017 results had been hurt by a $42.4M loss on early debt extinguishment and a $13.4M preferred stock redemption charge.
What is the outlook for dispositions and 2019 distributions?
The company plans $75M to $100M of property sales in 2019 and will reinvest proceeds into acquisitions if attractive opportunities arise. It expects 15% to 25% of 2019 distributions to be classified as return of capital, and the current monthly dividend is $0.2255 per share, an annualized $2.706, or about a 4.3% yield at the December 31, 2018 closing price of $63.04.
06—Continue