Realty Income Corporation — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; fourth-quarter results are also noted where provided. Realty Income is an equity REIT focused on long-term, primarily single-tenant net leases and monthly shareholder distributions.
Business context and portfolio
- At year-end, the company owned 2,496 properties in 49 states, leased to 122 commercial enterprises across 32 industries. Occupancy was 96.6%: 2,412 properties occupied and 84 available for lease or sale.
- Of 2,485 single-tenant properties, 2,402 were leased; their weighted-average remaining lease term was approximately 11.4 years. Tenants generally pay property operating expenses under net leases.
- Restaurants and convenience stores were the largest industry exposures, at 20.4% and 17.1% of 2010 rental revenue, respectively. Diageo became the largest tenant by rental revenue following a major acquisition.
Key financial metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total revenue | $345.0 million | $325.2 million |
| Rental revenue | $344.1 million | $323.8 million |
| Income from continuing operations | $121.4 million | $120.8 million |
| Net income | $130.8 million | $131.1 million |
| Net income available to common stockholders | $106.5 million; $1.01 diluted per share | $106.9 million; $1.03 diluted per share |
| FFO available to common stockholders | $193.7 million; $1.83 diluted per share | $190.4 million; $1.84 diluted per share |
| AFFO available to common stockholders | $197.3 million; $1.86 diluted per share | $192.7 million; $1.86 diluted per share |
| Net cash provided by operating activities | $243.4 million | $226.7 million |
| Cash and cash equivalents at year-end | $17.6 million | $10.0 million |
| Total assets | $3.54 billion | $2.91 billion |
| Senior unsecured notes | $1.60 billion | $1.35 billion |
Interest expense was $93.2 million, up from $85.5 million. The company reported a 3.3x interest coverage ratio and a 2.7x fixed-charge coverage ratio. All notes and bonds carried fixed rates; the credit facility was variable-rate. There were no facility borrowings at year-end, and $425 million of capacity was available. The company reported no mortgage debt or off-balance-sheet financing.
Material changes versus the prior comparable period
- Revenue increased 6.1%, primarily reflecting acquisitions; same-store rents rose 0.6% across 2,131 properties. Acquisitions generated $15.9 million of 2010 rent, while 2009 acquisitions added $5.1 million more rent than in the prior year.
- Net income available to common shareholders declined slightly, and diluted GAAP EPS fell from $1.03 to $1.01. FFO rose 1.7% in total but fell $0.01 per diluted share; AFFO rose 2.4% in total while remaining $1.86 per diluted share.
- Property investment accelerated: $713.5 million was invested in 186 properties, compared with $57.9 million in 16 properties in 2009. The acquired properties were 100% leased, with a 7.9% initial weighted-average contractual lease rate and a 15.7-year average lease term.
- Major purchases included $304.1 million of winery and vineyard properties leased to Diageo and $247.6 million of SuperAmerica convenience stores. Convenience-store rental revenue increased to $58.9 million from $55.1 million; wine-and-spirits revenue was $10.3 million, versus none reported in 2009.
- The company issued $250 million of 5.75% senior notes due 2021 and raised approximately $432.6 million net through two common-stock offerings of 13.6 million shares combined. Common shares outstanding increased from 104.3 million to 118.1 million.
- Cash distributions paid to common shareholders increased to $182.5 million from $178.0 million. The 2010 common distribution was $1.721625 per share; the filing reports an annualized current rate of $1.731 per share as of early 2011.
Outlook, commentary, risks and unusual items
- Management said cash, operating cash flow and available borrowing capacity were sufficient for foreseeable liquidity needs. It expected to use the credit facility for acquisitions and other corporate purposes, but gave no specific earnings, FFO or acquisition guidance.
- Management expected to continue monthly distributions, but stated that future amounts and increases are not guaranteed and remain subject to board discretion, operating results, cash flow, capital needs, debt service and REIT requirements.
- Common distributions paid were 94.2% of FFO available to common shareholders; FFO exceeded those distributions by $11.2 million. Total cash distributions were $206.8 million, approximately 136.3% of estimated REIT taxable income, which includes non-cash depreciation deductions.
- Investment-property sales produced $8.7 million of gains in 2010, compared with $8.1 million in 2009. Gains can materially affect GAAP net income. Realty Income sold 28 properties for $26.6 million; it also reported $213,000 of impairment provisions on four properties. Crest recorded $807,000 of impairment provisions on three held-for-investment properties.
- Key risks include tenant default or bankruptcy, lease renewals and reletting vacant properties, restaurant and convenience-store concentration, interest rates, access to capital markets, property valuations and impairments, environmental exposure, insurance limits, and continued qualification as a REIT. Legal claims in the ordinary course were not expected by management to have a material aggregate effect.
- For the fourth quarter, revenue was $92.2 million and net income available to common shareholders was $31.8 million, or $0.28 per share. The filing’s audited financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Tenant credit quality and rent collection, especially for the Diageo and SuperAmerica acquisitions and the restaurant and convenience-store industries.
- Whether acquisitions deliver durable cash rents and returns near the reported contractual rates, and how the increased share count affects per-share FFO and AFFO.
- Debt maturities, covenant headroom, credit ratings and the effect of variable-rate facility borrowing or refinancing conditions.
- Distribution coverage using cash flow as well as FFO and AFFO, and the distinction between distributions paid, declared and annualized.
- Vacancy, lease expirations, impairment assumptions, property-sale proceeds and environmental or other contingencies.