Realty Income (O -1.12%) released full-year results on Tuesday, and with a 6.6% improvement in earnings compared to 2013, it marks another strong year for the company.
But for investors hoping to get the inside scoop from the people who know the company best, there is no greater tool than the company conference call. Here are five of the most important comments from Realty Income's management on 2014 and the company's future.
1. Occupancy remains strong
Realty Income owns and leases a portfolio of over 4,300 predominately retail-focused properties, and keeping occupancy rates high has been central to its success. In 2014, Realty Income was able to improve its already outstanding occupancy rate to 98.4% from 98.2% at the end of 2013.
This was no simple feat, according to the company's CEO, John Case: "2014 has been one of our most active years ever for lease rollover activity with leases expiring on 220 properties." Of those properties, the majority were released to existing tenants, 30 to new tenants, and 17 properties were sold. This allowed Realty Income to recapture "99.3% of expiring rents on the properties that were released."
Because poorly located or low-quality properties are difficult to release, this is a testament to the quality of Realty Income's assets, as well as the abilities of management, and is a good sign for investors.
2. Raising acquisitions guidance
High occupancy is essential to keeping Realty Income's cash flows consistent; however, because the company expects rent increases on its existing properties to average about 1.5% a year, for the company to really grow it will need to rely on acquisitions.
During 2014, Realty Income made $1.4 billion in acquisitions, and according to Case, "This is our second most acquisitive year in the company's history." Even better, due the high volume of opportunities, Realty Income increased it's 2015 acquisition guidance from $500 million-$800 million to $700 million-$1 billion.
Despite the higher level of expected acquisitions, the company did not raise its earnings guidance for 2015. This is because Realty Income is predicting the purchases to pile up toward the back end of the year, and should have a greater impact in 2016.
3. Limited exposure to rising rates
Because Realty Income, along with fellow REITs, borrows to make investments, the potential for rising interest rates to have a negative impact on its borrowing costs, as well as earnings, has been a hot-button issue.
Case briefly commented on the topic: "Not including our credit facilities, the only variable rate debt exposure to rising interest rates that we have is just $39 million of mortgage debt." Of the company's $1.5 billion credit facility -- a type of short-term financing it can use when needed -- it currently has $382 million outstanding as of today.
Altogether, that works out to $421 million in variable rate debt -- debt that will get more expensive if interest rates rise -- compared to total liabilities of $5.4 billion. Ultimately, the company's low exposure to variable rate debt should help protect them from rising interest rates.
4. Impact from oil prices
The falling price of oil has been another hot-button topic, and because Realty Income owns gas station properties, it's fair to assume its tenants would be negatively affected by the change.
However, Case noted that Realty Income has actually seen the opposite. He said that profits from the sale of gasoline "is fairly fixed irrespective of price." Case also suggested that lower gas prices has put more money back into consumers pocket and "inside sales [at gas station convenience stores] have picked up, which is where their margin is, and where they make most of their money."
Moreover, Case said that more money in the hands of consumers is also benefiting Dollar Stores, which is Realty Income's second largest industry at 9.5% of rental revenue. All said, Case believes the company's tenants are as healthy as they have ever been.
5. Sticking to what works
One of the final questions during the conference call was: Why, with so much available opportunity, isn't Realty Income being more aggressive with acquisitions?
In my opinion, the answer is what makes the company so special, and such a great long-term investment. Here is what Case said:
Our consistent theme has been to remain disciplined with regard to our investment strategy. And so we are really pursing assets that fit our investment strategy. ... We are talking about 10, 15, 20 year leases and we want assets that are going to perform well over the long run, not necessarily just offering an attractive spread today, and potentially be an issue down the road.
Realty Income sticks to a very simple philosophy of finding well-located properties and leasing them to tenants who fill a need, or have a low-cost component to their businesses. This protects Realty Income from swings in the economy, and helps them better compete against e-commerce.
It is a philosophy that works today, and one I believe will work for a long time. For that reason -- a willingness to stick to a proven philosophy that benefits the company and shareholders -- I think Realty Income is a great company and worth your consideration today.
