) Do you have an opinion on Realty Income (O, $39.26, -0.41, Spy)?
A) As a quick refresher, Realty Income ("RI") is a REIT that owns and manages a portfolio of more than 3,600 commercial properties located in 49 states and Puerto Rico. Most of the properties are leased under long-term agreements with local, regional, and national retail chains. The company's leases typically range in length from 15 to 20 years and provide stable income streams. RI has focused on renting to middle-market retailers who provide what it calls "basic human needs goods and services," such as restaurants, child care providers, auto parts, and convenience stores.
The long-term, triple-net leases RI signs assign the responsibility for property taxes, insurance, and maintenance of the properties to the tenants, so RI's expenses are low as it doesn't need to spend a lot on maintenance. The leases contain regular rent increases, which help to support the increased dividend payouts.
The REIT reported its Q2 results at the end of July.
Q2 net income was $44.2 million, or 23 cents a share, compared with $33.0 million, also 25 cents a share, in the year-ago period when it had fewer shares.
Revenue increased by 63% to $184.3 million, while same-store rents rose 1.1% to $109.9 million.
Funds from operations (FFO) jumped 82% to $118.5, while FFO per share rose 22% to 60 cents. Adjusted Funds from Operations (AFFO) soared 74% to $115.6 million, while AFFO per share increased by 18.0% to 59 cents.
"Relative to occupancy, we ended the quarter at 98.2% with 68 properties available for lease out of the 3,681 we own," then-CEO Thomas A. Lewis said on the conference call. "That occupancy is up 50 basis points from the first quarter and up 90 basis points from the same quarter a year ago and really is a function of very good progress on leasing during the quarter. And I would say looking forward here in the third quarter, we think occupancy should remain at this level or perhaps up a bit more, and overall occupancy is very strong."
During the quarter, Realty Income invested $738.1 million in 190 new properties and properties under development or expansions. It sold sold 17 properties for $23.7 million.
Looking ahead, AFFO per share for 2013 is expected to range from $2.35 to $2.41 per share, which would represent an increase of 14-17%.
The firm named a new CEO in September, with CIO John P. Case taking over the top spot from the retiring Lewis.
BMR Take: Realty Income is a well-run REIT and even with its long-time CEO retiring, we don't see that changing. The firm has done a good job of expanding and diversifying its portfolio, and with a solid credit rating and low interest rates, its cost of capital is pretty low at this point. Meanwhile, income-oriented investors have to like its monthly dividend, which the firm has done a good job of growing over the years.
Risks to the stock include higher interest rates and a weak consumer environment, especially if a big client goes into bankruptcy. However, the company is well diversified and its largest clients are well-established names.
Overall, we think Realty Income is a solid company, although the sector is generally unloved given that higher interest rates are a negative for the group.
I hate to sound like those spammers, but I do subscribe to this newsletter. Besides their recommendations, they respond to questions from subscribers about other companies. This was in today's report. A good overview I think.