10-QPeriod: Q2 FY2008

REALTY INCOME CORP Quarterly Report for Q2 Ended Jun 30, 2008

Filed July 31, 2008For Securities:O

Summary

Realty Income Corporation's (O) Q2 2008 report shows a mixed financial picture. The company demonstrated revenue growth driven by strategic property acquisitions in the preceding periods. However, net income available to common stockholders and Funds From Operations (FFO) per share saw a decline compared to the same period last year, influenced by increased interest expenses and a shift in property sales mix. Despite these pressures, Realty Income continued its policy of monthly dividend payments, increasing the common stock dividend in July. The company successfully secured a new, larger acquisition credit facility, highlighting its access to capital. However, the report also details a significant tenant bankruptcy (Buffets Holdings) which led to lease rejections and rent modifications for remaining properties, impacting revenue but also demonstrating the company's ability to renegotiate and retain tenants. Impairments were noted within the subsidiary Crest Net Lease, Inc., primarily on properties held for sale.

Key Highlights

  • 1Revenue increased by 17.5% year-over-year for the quarter, driven by property acquisitions in 2007 and 2008.
  • 2Net income available to common stockholders decreased by $3.9 million to $27.0 million in Q2 2008 compared to Q2 2007.
  • 3Diluted FFO per common share decreased by $0.02 to $0.47 in Q2 2008 compared to $0.49 in Q2 2007.
  • 4Interest expense increased significantly due to higher outstanding debt balances and interest rates, particularly from new notes issued in September 2007.
  • 5A new $355 million acquisition credit facility was secured in May 2008, replacing the previous $300 million facility.
  • 6The company reported impairments of $953,000 by Crest (subsidiary) on one property held for sale in Q2 2008.
  • 7Realty Income continued its monthly dividend payout, increasing the common stock dividend in July 2008 and maintaining its policy of consistent increases.

Frequently Asked Questions

Total rental revenue increased by 17.5% to $82.4 million in the second quarter of 2008 compared to the same period in 2007, driven by recent property acquisitions. However, net income available to common stockholders decreased by $3.9 million to $27.0 million, and diluted FFO per share declined by $0.02 to $0.47, largely due to higher interest expenses and changes in property sales.

Buffets Holdings filed for Chapter 11 bankruptcy. While they rejected 14 leases (owned by Realty Income and Crest), an agreement was reached in July 2008 to assume remaining 105 leases. Rents for 104 of Realty Income's properties will be modified from $22.4 million annually to $19.4 million, with a 2% annual increase. This tenant will remain the largest, representing approximately 5.9% of annualized lease revenue.

Realty Income has secured a new $355 million acquisition credit facility maturing in May 2011, providing ample borrowing capacity. The company has $39.4 million in cash and cash equivalents. Its total outstanding debt (notes and credit facility) was $1.47 billion, representing approximately 34.0% of its market capitalization, indicating a conservative capital structure. All outstanding notes carry fixed interest rates.

Yes, Realty Income's subsidiary, Crest Net Lease, Inc., recorded provisions for impairment totaling $953,000 in the second quarter of 2008 on one property held for sale, which was leased to a subsidiary of Buffets. This was part of a larger $3.3 million in impairments recorded by Crest in the first six months of 2008 on properties affected by the Buffets situation.