Realty Income Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also presents unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing.
Business context and portfolio
Realty Income is an equity REIT focused on freestanding commercial properties leased primarily under long-term, triple-net leases. Tenants generally pay rent and property taxes, insurance, and maintenance. The company’s stated objective is dependable monthly cash dividends supported by rental cash flows.
- At year-end, the portfolio comprised 3,896 properties, 98.2% occupied, with 3,826 leased and 70 available for lease.
- Properties covered 49 states and Puerto Rico, 205 tenants, and 47 industries; 3,807 single-tenant properties had an approximately 10.8-year weighted-average remaining lease term.
- Retail generated about 79.8% of annual rental revenue. Convenience stores represented 11.2% of annual rental revenue and 10.6% in the fourth quarter.
Financial and operating results
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $778.4 million | $482.8 million |
| Rental revenue | $747.6 million | $466.5 million |
| Income from continuing operations | $179.2 million | $140.7 million |
| Net income available to common stockholders | $203.6 million; $1.06 diluted per share | $114.5 million; $0.86 diluted per share |
| FFO available to common stockholders | $449.0 million; $2.34 diluted per share | $260.9 million; $1.96 diluted per share |
| Normalized FFO | $462.0 million; $2.41 diluted per share | $268.8 million; $2.02 diluted per share |
| AFFO | $463.1 million; $2.41 diluted per share | $274.2 million; $2.06 diluted per share |
| Net cash provided by operating activities | $518.9 million | $326.5 million |
| Cash and cash equivalents at year-end | $10.3 million | $5.2 million |
Revenue increased 61.2%; rental revenue increased 60.3%. Management attributed the rental growth principally to 2013 acquisitions, including ARCT, and to properties acquired in 2012. Same-store rents rose 1.4%. Income from continuing operations was about 23.0% of total revenue; net income was about 31.6%, but includes gains and results classified as discontinued operations. These are calculated ratios, not company-reported margin measures.
Unaudited fourth-quarter 2013 results: revenue was $215.7 million, income from continuing operations was $49.4 million, income from discontinued operations was $15.2 million, and net income available to common stockholders was $53.9 million, or $0.26 diluted per share.
Capital, debt, liquidity, and dividends
- Year-end total debt was $4.17 billion: $3.2 billion of senior notes and bonds, $754.5 million of mortgage principal, $70 million term loan, and $128 million drawn on the credit facility. Debt was approximately 33.2% of stated total market capitalization.
- The $1.5 billion unsecured credit facility had $1.372 billion of capacity available at year-end, subject to customary borrowing conditions; the company reported covenant compliance. Borrowings were variable-rate. On February 12, 2014, the balance was $583 million.
- All senior notes and bonds had fixed rates; their weighted-average rate was 4.9%. Ratings were BBB+ from Fitch and S&P and Baa1 from Moody’s, each with a stable outlook. Debt-service coverage was 3.6x and fixed-charge coverage was 3.0x.
- Operating cash flow was $518.9 million; investing activities used $1.332 billion and financing activities provided $818.1 million. The filing states that cash on hand, operating cash flow, and borrowing capacity were expected to meet liquidity needs for the next 12 months.
- Common distributions paid totaled $409.2 million, 88.4% of AFFO. The company paid $2.1475 per common share in 2013, 21.2% above 2012. The year-end declared monthly common dividend of $0.1821667 implies an annualized $2.186 per share; future dividends and increases are not assured.
Material changes, outlook, and risks
- Realty Income completed its approximately $3.2 billion acquisition of American Realty Capital Trust in January 2013, adding 515 fully leased properties and issuing approximately 45.6 million common shares. The company reported $4.67 billion invested in 974 new properties and properties under development or expansion during 2013.
- It also issued $750 million of 4.65% senior notes due 2023 and completed common-stock offerings in March and October. Total common shares outstanding rose to 207.5 million from 133.5 million at year-end 2012.
- Reported net income includes $64.7 million of gains on investment-property sales, versus $9.9 million in 2012. The company sold 75 properties for $134.2 million. Merger costs were $13.0 million in 2013; accelerated restricted-stock vesting added $3.7 million of compensation expense.
- John P. Case became CEO in September 2013, succeeding Tom A. Lewis, who retired. Management anticipated approximately $50 million of property sales in 2014, with proceeds intended for acquisitions if attractive opportunities were available; this was an expectation, not a guarantee.
- Key disclosed risks include tenant defaults or bankruptcies, leasing and renewal conditions, acquisition competition and execution, interest-rate and refinancing risk, access to capital markets, property impairments, environmental liabilities, and maintaining REIT status. Environmental insurance provided stated limits of $15 million per occurrence and $70 million in aggregate; management noted coverage may be insufficient. One ARCT-related shareholder action remained stayed; management did not expect it to materially affect results.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and no material weaknesses.
Important facts for investors to verify
- How much of the year-over-year growth in revenue, FFO, and AFFO reflects ARCT and other acquisitions versus recurring same-store performance, and how the share issuance affected per-share results.
- How much of 2013 common-stockholder net income depended on property-sale gains, and whether sale proceeds can be reinvested at attractive returns.
- Tenant credit quality and concentration, particularly convenience stores and the largest tenants; assess the impact of lease expirations and vacancies.
- Debt maturities, variable-rate exposure, mortgage prepayment costs, credit-facility utilization after year-end, and continued covenant and ratings compliance.
- Dividend coverage using cash flows and AFFO, while recognizing that FFO, normalized FFO, and AFFO are non-GAAP measures and are not measures of liquidity.