Realty Income Corp. (NYSE: O) is a stalwart in the real estate business. As a high-quality operator, it has turned years of accretive acquisitions into a stable and growing dividend for investors.
The third-quarter earnings report revealed that this REIT is still on track for solid performance.
Here are five metrics that should put a smile on the faces of shareholders:
1. Rental rates increased 1.3%
Realty Income reported same-store rental increases of 1.3% over the year-ago period. It prices its leases so that rents increase over time, usually by a step-up agreement based on the tenant's sales or the rate of inflation.
Because Realty Income doesn't pay for maintenance or property taxes on its real estate, most of each marginal dollar in rental revenue falls straight to the bottom line. Management was optimistic on the earnings call about the potential for the same or larger rental increases in 2014.
2. Property expenses are just 2.2% of revenue
Realty Income's microscopic property costs deserve more attention. The company spent only $5.9 million on property expenses during the quarter, forecasting just $18 million for the full year 2013, and $20 million in 2014.
Property expenses are just 2.2% of total revenue projected revenue of $805 million, a tip of the hat to the low-cost, triple-net leasing model.
3. Funds from operation per share grew 15.4%
Adjusted funds from operation (funds that can be used to pay a dividend) rocketed 15.4% year over year to $0.60 per share in the third quarter.
Because Realty Income issues stock to pay for portfolio acquisitions, watching the per-share changes in adjusted funds from operation allows us to see how much shareholder value Realty Income creates by adding new properties to its portfolio. When per-share AFFO rises, we know total AFFO is growing faster than the share count, creating value for investors.
4. Revenue from riskier restaurant properties fell 4%
Realty Income reported that it has continued to divest from properties it finds riskier than average. In particular, the company has used asset sales and new acquisitions to reduce the role of restaurant properties in its portfolio. Restaurants now make up just 9.2% of revenue, down from 13.2% in the year-ago period.
5. 81% of acquisitions were in the core retail business
Realty Income has traditionally been a retail-focused REIT, as it buys single-tenant buildings from their existing owner and occupant to be leased back at an attractive return. Recently, it has diverged slightly into office and industrial asset, which are less attractive on the basis of earnings quality but offer higher yields.
In the most recent quarter, 81% of Realty Income's acquisitions were in the retail segment. A higher proportion of office purchases were described as onetime events, mostly due to a large deal with an existing customer who wanted to cash out of an office property. Investors will want to continue to watch the company's asset mix carefully as non-retail properties have much lower occupancy rates across the country.
The Foolish bottom line
Realty Income isn't a company you'd expect to post big earnings surprises. Buying and leasing property on long-term contracts is a very predictable model that results in consistent income. As one of the largest REITs and the second-largest triple-net lease, Realty Income is the benchmark against which all other REITs are measured. This quarter exemplifies why so many income-focused investors own its shares.
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