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Realty Income Corp. 10-Q Summary: Period Ended September 30, 2009

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2009, and the nine months ended on that date. Realty Income Corporation is an equity real estate investment trust (REIT) focused on acquiring and leasing freestanding, single-tenant retail properties under long-term net leases. As of the reporting date, the company owned 2,334 properties across 49 states with an occupancy rate of 96.8%.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Total revenue for the nine months ended September 30, 2009, was essentially flat compared to the prior year ($246.18 million vs. $246.49 million). Rental revenue increased slightly by $226,000, driven by properties acquired in 2008 and same-store rent increases, offset by properties sold or vacant.
• Net Income: Net income available to common stockholders decreased by $1.7 million (2.2%) for the nine-month period compared to 2008. This decline was primarily due to a significant reduction in gains from the sale of investment properties ($4.3 million in 2009 vs. $9.4 million in 2008).
• Acquisitions: Acquisition activity slowed significantly. The company invested only $11.9 million in three new properties during the first nine months of 2009, compared to $188.5 million in 108 properties during the same period in 2008. Management cited unfavorable commercial real estate prices as the reason for pausing aggressive acquisition activity.
• Debt: Total notes payable decreased by $20 million to $1.35 billion following the redemption of $20 million in 8% notes in January 2009. The company has no debt maturities until March 2013.

Guidance, Outlook, and Risks

• Outlook: Management indicated they are beginning to see a more attractive investment environment and may resume acquisition activity in the remainder of 2009 if transactions are accretive. They anticipate selling unidentified investment properties for proceeds between $10 million and $35 million over the next 12 months.
• Distributions: The company increased its monthly common stock distribution to $0.1426875 per share in October 2009, marking the 48th consecutive quarterly increase. The annualized yield was approximately 7.2% based on the October 22, 2009 stock price.
• Risks: Key risks include continued volatility in credit markets, potential tenant defaults, and the impact of general economic conditions on retail tenants. The company maintains a conservative capital structure with a debt-to-total-market-capitalization ratio of approximately 32.4%.
• Discontinued Operations: Income from discontinued operations (primarily property sales and the Crest subsidiary) was significantly lower in 2009 ($4.7 million for nine months) compared to 2008 ($11.2 million), reflecting fewer property sales.

Investor Verification Checklist

• Acquisition Strategy: Verify if the company has resumed property acquisitions in subsequent quarters given the stated intent to invest when prices are favorable.
• Occupancy Trends: Monitor the 75 properties available for lease to ensure they are re-leased or sold within the expected timeframe to maintain the 96.8% occupancy rate.
• Debt Maturity Profile: Confirm the absence of near-term debt maturities (next maturity is March 2013) and the status of the $355 million credit facility, which remains undrawn.
• FFO Coverage: Review the ratio of FFO to distributions paid ($142.1 million FFO vs. $133.4 million distributions for the nine months) to ensure continued ability to fund monthly dividends.
• Discontinued Operations: Assess the impact of the reduced volume of property sales on GAAP net income volatility in future periods.