For investors who want to go beyond the headlines and into what will drive a company in the future, there's no better investor tool than the quarterly conference calls. Realty Income (NYSE:O) had its first-quarter call last Thursday, and here are the five most important things the company wants you to know.
1. The portfolio is in good shape
Realty Income owns a portfolio of 4,378 predominately retail-focused properties that they rent to businesses. According to the company's CEO, John Case, "Our portfolio continues to be diversified by tenant, industry, [and] geography," Case added, "Diversification contributes to the predictability of our cash flow."
Realty Income's top tenants remains largely unchanged from the previous quarter with one notable exception. As you see above, Couche-Tard's acquisition of The Pantry last December combines the two gas station and convenience store companies into "The Pantry/Circle K." This bumped the U.S. Government into Realty Income's top 20 tenants. With that change, 10 of the company's top 20 tenants have an investment-grade rating, which is regarded as a sign of stability.
2. The strategy remains the same
Realty Income's strategy also remains largely the same with, again, one notable exception. Today, industrial and distribution properties make up 10% of rental revenue, compared with 1.4% just three years ago. This change represents a small deviation from Realty Income's traditional strategy -- and will therefore be worth watching -- but the big picture, as Case suggested, is still much the same:
"We continue to focus on retail properties leased to tenants with a service non-discretionary and or low price point component to their business. [...] More than 90% of our retail revenue comes from businesses with these characteristics, which better positions them to successfully operate in a variety of economic environments and to compete with e-commerce."
Realty Income's strategy is simple, but it has been -- and I expect will continue to be -- extremely effective.
3. There's plenty of capital to work with
To implement this simple strategy, Realty Income needs to raise a ton of money. This is because, as a real estate investment trust, Realty Income is required by law to pay out 90% of its taxable income to shareholders -- and this leaves little organically generated capital left over for acquisitions.
To that end, Case said, Realty Income has "raised $379 million in equity capital [...] to fund our acquisition activity." Furthermore, CFO Paul Meurer said the company has made "two recent bond offerings: the $350 million 10-year notes we issued last June, and $250 million 12-year notes issued in September." Realty Income also has $1.1 billion in revolving credit available -- a type of short-term funding used for acquisitions.
4. Discipline pays off
Despite having plenty of available funds, Case said, "We're being very selective." Some of that approach, he explained, is a product of increased competition and higher prices. Realty Income had more than $9 billion in acquisition opportunities come across its desk in the first quarter, yet according to Chief Investment Officer Sumit Roy, it captured only $210 million.
Of course, discipline won't do much to grow the business. The good news is that Case believes there are ample opportunities to take advantage of and that the company will fall toward the high end of its acquisition guidance of $700 million to $1 billion for 2015. Following the close of the quarter, Case said, the company added $302 million in new acquisitions. That level of activity makes his prediction about hitting guidance seem more likely.
5. The Dollar Tree and Walgreen situations are under control
When Dollar Tree announced its acquisition of Family Dollar last July, it was clear that the Federal Trade Commission would require some store closures to uphold fair competition. Both names are major tenants in Realty Income's portfolio, but as Case said, "We continue to expect no financial impact on our rental revenue, given the minimal portfolio overlap that our Family Dollar locations have with Dollar Tree and the long leased duration of our locations."
A similar situation popped up this April, when Realty Income's top tenant, Walgreens, announced that it will close 200 stores. Case was quick to shoot down any concern:
Our average lease term with Walgreens is 14 years, and we have good performing stores. We only have about five coming due in the next three or four years, and those are all strong performers. If they were to close one of our stores, of course, they would be responsible for paying rent through the term of the lease.
In summary, Case said, "We're not expecting any impact from that at all. We continue to like that business quite a bit, as you know."
What it all means
I like to think of Realty Income as a duck. Beneath the surface management is working hard for shareholders as they kick their legs a million miles an hour to raise new funds and acquire new properties, yet, on the surface, water effortlessly rolls of their back, and the end project is a graceful glide across pond.
With the added benefit of a 5% yield, I believe Realty Income is a solid income investment, and is a great buy today.