Realty Income Corporation — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also presents unaudited fourth-quarter results. Realty Income is an equity REIT focused on freestanding commercial properties, primarily under long-term net leases, and monthly distributions.
Business context and portfolio
- At year-end, Realty Income owned 2,634 properties across 49 states, leased to 136 enterprises in 38 industries. Occupancy was 96.7%; the weighted-average remaining lease term for leased single-tenant properties was approximately 11.3 years.
- In 2011, the company invested $1.02 billion in 164 properties and properties under development. These were reported as 100% leased, with a 13.4-year average lease term and an initial weighted-average contractual lease rate of 7.8%.
Key financial metrics
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $421.1 million | $343.5 million |
| Net income | $157.0 million | $130.8 million |
| Net income available to common stockholders | $132.8 million | $106.5 million |
| Diluted net income per common share | $1.05 | $1.01 |
| FFO available to common stockholders (non-GAAP) | $249.4 million; $1.98 per diluted share | $193.9 million; $1.83 per diluted share |
| AFFO available to common stockholders (non-GAAP) | $253.4 million; $2.01 per diluted share | $197.3 million; $1.86 per diluted share |
| Net cash provided by operating activities | $299.0 million | $243.4 million |
| Cash and cash equivalents at year-end | $4.2 million | $17.6 million |
| Total debt at year-end | $2.06 billion | $1.60 billion |
For Q4 2011, unaudited total revenue was $114.0 million, net income available to common stockholders was $34.9 million and diluted EPS was $0.26. Q4 2010 figures were $92.2 million, $31.8 million and $0.28, respectively. The filing does not provide a clear standard profit-margin measure.
- 2011 cash distributions to common stockholders were $219.3 million, or 87.9% of common FFO. Common distributions paid were $1.736625 per share for the year. The then-current monthly distribution of $0.1455 implied an annualized $1.746 per share and approximately 5.0% yield based on the December 31 share price.
- Year-end debt comprised $1.75 billion of fixed-rate senior notes and bonds, $237.4 million drawn on the variable-rate revolving credit facility and $67.8 million of mortgages. Debt was approximately 29.1% of reported market capitalization. Interest coverage was 3.5x and fixed-charge coverage was 2.9x, both company-calculated supplemental measures.
- Cash used in investing activities was $934.9 million; financing activities provided $622.5 million. Year-end total assets were $4.42 billion, total liabilities $2.16 billion and stockholders’ equity $2.25 billion.
Material changes versus comparable periods
- Revenue rose 22.6% year over year; rental revenue increased 22.3%. Management attributed most of the rental growth to properties acquired in 2010 and 2011; same-store rents increased 1.3%.
- FFO increased 28.6% and AFFO increased 28.4%; diluted per-share growth was more modest at 8.2% and 8.1%, respectively, alongside a substantial increase in weighted-average common shares following equity offerings.
- Operating cash flow increased $55.6 million. Debt rose about $455 million, while year-end cash declined about $13.4 million.
- Rent on 89 properties re-leased during 2011 was $9.6 million versus $10.4 million previously, indicating lower aggregate rent on those renewals.
- Realty Income issued 14.925 million common shares in 2011, generating $489.2 million net proceeds, and issued $150 million additional 2035 bonds. The 2011 common-share count at year-end was 133.2 million versus 118.1 million in 2010.
Outlook, commentary, risks and unusual items
- No specific revenue, EPS, FFO or AFFO guidance is stated. Management expected to continue monthly distributions but cautioned that the level and future increases are not guaranteed. It planned more active property dispositions and estimated $25 million to $60 million in proceeds over the next 12 months, subject to market and reinvestment opportunities.
- After year-end, Friendly’s bankruptcy reorganization resulted in 19 rejected leases and concessions or term reductions on some retained leases; management estimated recovery of about 80% of its pre-bankruptcy annualized rent. Buffets filed for Chapter 11, rejected seven leases and was negotiating other concessions; estimated rent recovery was about 65%. Management identified other tenants representing an estimated 2%–3% of annualized rent as potentially at risk of similar filings in 2012.
- Casual dining represented a material exposure, including Friendly’s and Buffets; convenience stores accounted for 17.2% of Q4 rental revenue. Re-leasing rejected locations and the estimates of rent recovery are uncertain.
- In February 2012, the company issued 14.95 million Class F preferred shares at a 6.625% rate, with approximately $361.7 million net proceeds. It planned to redeem Class D preferred shares on March 1, 2012 and reported that the issuance proceeds had repaid all credit-facility borrowings by February 7, 2012.
- Other risks include tenant defaults and lease renewals, interest rates and capital-market access, property values and impairment estimates, environmental or casualty liabilities, and continued REIT qualification. Ordinary-course litigation was not expected by management to have a material aggregate effect. The auditors gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Track the post-bankruptcy rent collections, lease concessions and re-leasing outcomes for Friendly’s and Buffets, and monitor the additional tenant exposure management identified.
- Reconcile FFO and AFFO to GAAP results and assess distribution coverage using cash flows as well as the company’s non-GAAP measures.
- Review the effects of the 2011 equity and debt funding on per-share growth, leverage, preferred dividends and the planned Class D redemption.
- Check debt maturities, variable-rate exposure and covenant headroom; the filing reports $100 million of notes due in 2013 and the revolving facility’s initial term ending in 2014.
- Assess occupancy, near-term lease expirations and renewal economics, including the reported lower rent on 2011 re-leases, and validate the assumptions behind planned dispositions and acquisition returns.