5 Things Realty Income Corporation's Management Wants You to Know

One of the best investor sources for getting inside information is a company conference call. On Oct. 30, Realty Income (O 1.94%) conducted its third-quarter conference call, and here are five of the most important things management wants you to know.

1. Improved earnings and dividend
Revenue increased 16.6% to $235.7 million, and adjusted funds from operations per share -- or AFFO, a metric used for indicating cash generated from operations -- increased 6.7% to $0.64 compared with the third quarter of 2013.

More importantly, the improved earnings allow Realty Income to increase its monthly dividend to $0.183 per share, marking the 68th consecutive quarterly dividend increase. It also brings Realty Income's payout ratio -- the percentage of AFFO being used for paying the dividend -- to 85.5% year to date. For most companies, this number would be extremely high, but for real estate investment trusts, or REITs, it's well within a reasonable range, and the company should have no problem continuing to pay the dividend. 

2. Huge year for acquisitions
"During the quarter, we invested $182 million in 49 properties located in 26 states ... with a weighted average lease term of 11.2 years."
-- Sumit Roy, chief operating officer and chief investment officer

Including the third quarter, Realty Income completed $1.24 billion in acquisitions in 2014. But the year isn't over yet, and the company expects to finish the year with $1.4 billion in purchases. If so, it would make 2014 the second strongest year for acquisitions in the company's history.

According to CEO John Case, the investment environment has been one of the most attractive in its history, and he believes that trend will continue into 2015. Management is currently projecting between $500 million and $800 million in acquisitions in 2015.

Realty Income has a history of patient and disciplined investing. However, it should be noted that Realty Income beat its 2014 guidance by 40%, so if the attractive investment environment continues, we could see continued aggressive acquisition growth in 2015.

3. Strengthened balance sheet
"[I]n mid-September, we raised $250 million of 12-year bonds priced at a yield of 4.178%."
-- Paul Meurer, chief financial officer

Acquisitions aren't the only way Realty Income can improve shareholder value. Because the company pays out the vast majority of its income in dividends, its ability to borrow at better prices can play a huge role in returns. The bond issuance Meurer mentioned replaced a similar debt with an interest rate of 6.75%. According to Case, "this transaction resulted in annual cash expense savings of almost $5.7 million."

The company also continues to strengthen its historically stable balance sheet. Realty Income's debt-to-equity ratio is less than 1-to-1, and that's a good sign that it isn't taking on more debt than it can handle. The debt is long-term, and the majority of it has a fixed rate, which helps avoid rising interest rates that could affect borrowing costs. Lastly, Realty Income has "$1.2 billion available on the [credit line] to support future acquisitions," Case said, "so we continue to have excellent liquidity."

Ultimately, Realty Income continues to have a fortress-like balance sheet.

4. Release of 81 properties
"The third quarter was our most active quarter this year for lease rollover activity in the portfolio, with leases expiring on 81 properties."
-- Case

Realty Income focuses on long-term leases. However, eventually these leases will end, and the company's ability to re-lease these properties quickly and efficiently is a testament to its industry expertise. The third quarter was just another great example. As Case said, "Of these assets, we released 70 to existing tenants [and] seven to new tenants and sold four properties, recapturing 100% of expiring rents on the properties we released."

Again, this isn't new. The re-leasing of properties is something Realty Income has shown it can do time and time again. In fact, the company has executed over 1,700 lease rollovers in its history, and Case suggested that the company has recaptured "nearly 100% of the expiring rent."

5. More diversification
Being diverse in terms of tenants, property type, and geography is critically important for REITs, because that creates more predictable cash flow, as well as a more predictable dividend.

Representing 10% of rental revenue, convenience stores are the company's largest industry. However, this number has been declining for 14 straight quarters. Dollar stores, its second largest industry, are down 0.2% to 9.6% from last quarter. Also, in the third quarter, the company added four new tenants to its list of more than 200. All of these are good signs of continued expansion and diversification into other retail and non-retail properties. 

Realty Income is also continuing to focus on investment-grade tenants, renting to more reliable tenants with stronger credit quality. Investment-grade tenants make up 46% of rental revenue, up 40% from the same time in 2013.

The company's continuing focus on diversification and more reliable tenants should help Realty Income maintain its reputation as one of the industry's most stable and predictably strong REITs.